Item 1. Business (a) General Development of Business
The Company, directly and through its subsidiaries, has been engaged in the business of manufacturing and marketing non-ferrous metal products, principally electrical resistance wire and insulated electrical wire and cable. The Company has incurred significant losses since 1991 primarily as a result of losses sustained by its Italian subsidiary.
On April 7, 1994 (effective March 18, 1994), the Company restructured its operations (the "Restructure") in order to solve its liquidity problems and strengthen its competitive position in the industry. Pursuant to the Restructure, the Company combined its overseas resistance wire operations with Harrison Alloys Inc. (Harrison) by (i) forming a holding company, HAI Holding Company Inc. (Holding), owned fifty percent by the Company and fifty percent by a corporation organized by the former common shareholders of Harrison; (ii) contributing the Company's overseas resistance wire manufacturing subsidiaries (subject to liens under existing bank loans) and its approximately 24% shareholding in Harrison to Holding; and (iii) causing Harrison to assume significant obligations of the Company as explained below. In conjunction with the Restructure, Harrison became a wholly owned subsidiary of Holding, which in turn transferred the Driver-Harris subsidiaries to Harrison. As a result of the Restructure, Harrison will conduct all of its operations located in Harrison and Somerset, NJ and Spartanburg, SC and the Driver-Harris operations located in Italy, France, the U.K., Spain and Australia.
As part of the foregoing transaction, Harrison assumed certain obligations of the Company and its U.S. operating subsidiary, Driver- Harris Alloys Inc. (Alloys), including approximately $1.8 million of debt incurred for investment in the Company's Italian subsidiary, $1,489,000 of loans of Alloys, all potential environmental obligations with respect to Alloys' U.S. manufacturing facilities, and the Company's commitment to share with Harrison the cost of health care and life insurance benefits for certain retirees. As additional consideration to Driver-Harris, Harrison was required to make aggregate cash payments of $300,000; it is also required to pay license fees and commissions totaling $500,000 per year from 1994 to 2003.
For further details of this transaction, reference is made to Note 3 to the consolidated financial statements.
On November 29, 1994, effective September 30, 1994, Alloys transferred substantially all of its assets to Harrison in exchange for the assumption by Harrison of an equivalent amount of liabilities (all assets and liabilities were taken into account at net book value). This transaction was the result of the exercise by Harrison on June 14, 1994 of an option granted in 1987. The transferred assets consist principally of inventory and equipment located at the Harrison and
Item 1. Business (Continued)
Somerset, NJ and Spartanburg, SC plants of Alloys as well as the land and factory building in Somerset, NJ. These assets constituted the U.S. portion of the Company's electrical resistance wire manufacturing business; the foreign portion had been transferred to Harrison in the foregoing restructuring.
After the transactions described above, the Company, in addition to its 50% ownership of Harrison, continues to own Irish Driver-Harris Co. Ltd., a producer of insulated electrical wire and cable, located in Ireland and the U.K., and Quality Heat Treatment Pty. Ltd., a company in the furnace manufacturing and heat treating business, located in Australia.
(b) Financial Information About Industry Segments
For the three years ended December 31, 1994, the Registrant operated in a single industry segment, metal products.
(c) Narrative Description of Business
(i) After giving effect to the transactions described in item 1(a), the principal products manufactured by the Registrant and its subsidiaries are insulated electrical wire and cable. These products are sold principally to the construction, appliance, and electrical equipment industries and are distributed through the Company's own sales staff. The Registrant also owns 50% of Harrison, which manufactures electrical resistance wire products.
The following represents a breakdown of the Registrant's total net sales for the last three fiscal years (in thousands):
(a) All of these companies were divested in 1994 - see 1(a).
(ii) No significant new products were introduced during the past fiscal year.
(iii) The principal sources of raw material for insulated electrical wire and cable products - copper wire conductor and PVC insulating materials - are refining and chemical companies, respectively. During the past fiscal year, availability of raw materials was satisfactory, although copper prices rose to some extent.
Item 1. Business (Continued)
(iv) The Company owns certain trademarks which are maintained internationally. As part of the March 1994 restructuring described in item 1(a), the Company granted Harrison an exclusive license to use certain trademarks in consideration for specified license fees.
There are no patents, licenses, franchises or concessions held that are material to the business of the Registrant or its subsidiaries.
(v) The business of the Registrant is not of a seasonal nature.
(vi) Following industry practice, the Registrant and its subsidiaries grant payment terms to their customers ranging from 60 days to 150 days depending on the countries where the companies do business. Inventory turn of insulated electrical wire and cable products is relatively rapid because of the Company's ability to respond quickly to customers' orders.
(vii) The Registrant and its subsidiaries are not dependent upon a single customer or very few customers for a material part of their business.
(viii) The following amounts represent the backlog of orders believed to be firm as of the end of each fiscal year; all were expected to be filled within the following fiscal year:
(ix) No material portion of the business of the Registrant and its subsidiaries is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.
(x) The Registrant's insulated wire and cable products are marketed primarily in Ireland, the U.K., the European continent, and the Mid and Far East. Such products are essentially similar to those of its competitors of which there are many, some substantially larger than the Company. The principal methods of competition are price, quality, and fast response to customers' orders.
(xi) The Registrant believes that the cost of research and development activities was not material during the past three fiscal years. No employees were engaged in such activities on a full-time basis during that period. All research and development projects are performed by engineering and production personnel in conjunction with other functions without separate accounting therefor.
Item 1. Business (Continued)
(xii) Pursuant to the agreement with Harrison described in item 1(a), the latter company has assumed all environmental obligations with respect to the Company's former U.S. plant facilities. Such obligations are estimated at approximately $200,000.
(xiii) The number of persons employed by the Registrant and its subsidiaries at the end of the last fiscal year was 131.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
(1) Information regarding foreign and domestic operations is provided in Note 12 to the consolidated financial statements.
(2) The Registrant depends heavily on foreign operations for the generation of earnings. The insulated wire and cable operations are located in Ireland and the U.K., while Harrison has facilities in Western Europe and Australia in addition to its U.S. operations. All of the foreign locations are in countries with relatively stable governments and present minimum political risk; nonetheless there is exposure to fluctuations in currency exchange rates and normal business risk.
(e) Executive Officers of the Registrant
Name Age Position Frank L. Driver III 64 Chairman and Chief Executive Officer Frank L. Driver IV 34 President and Chief Financial Officer Lavinia Z. Emery 50 Secretary and Assistant Treasurer
Officers are elected annually by the Board of Directors for one-year terms expiring in June.
Mr. Frank L. Driver III joined the Company in 1951 as a research engineer. In 1954 he became Assistant to the factory manager of the Harrison, N.J. plant and in 1957 he was elected Corporate Vice President Administration. In 1960 he became Executive Vice President, in 1962 he was elected President and in 1982 he was also elected Chairman of the Board. In September 1994 Mr. Driver resigned as President. Mr. Driver is the brother of Mr. David A. Driver, a Director of the Company, and the father of Mr. Frank L. Driver IV, the current President.
Mr. Frank L. Driver IV joined the Company in 1989 as Assistant Controller; in 1991 he was elected Vice President-Marketing and in 1993 he also became Vice President-Finance. In September 1994, he was elected President. Prior to joining the Company, he was a senior
Item 1. Business (Continued)
financial analyst with General Motors Corp. Mr. Driver is the son of Mr. Frank L. Driver III and the nephew of Mr. David A. Driver, a Director of the Company.
Mrs. Lavinia Z. Emery joined the Company in 1982 in an administrative capacity. In 1985 she was elected Assistant Secretary and Assistant Treasurer. In 1988 she was elected Secretary and Assistant Treasurer.
Item 2.
Item 2. Properties
After the divestitures described in item 1(a), the principal property of the Registrant and its subsidiaries is a wire insulating plant in Ireland. It was constructed in 1990 and is deemed adequate for the enterprise. It is owned by the Irish subsidiary and is subject to liens by a lender.
Item 3.
Item 3. Legal Proceedings
None of material nature.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None in the fourth quarter of 1994.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
(a) The Company's common stock is traded on the American Stock Exchange. The high and low sales prices for the stock were as follows:
(b) The approximate number of common shareholders as of March 20, 1995 was 300. This figure represents the sum of the number of shareholders of record, plus an estimate of the number of individual shareholders whose shares are held collectively by stockbrokers.
(c) The Company has not paid cash dividends during 1993 and 1994. The note payable to the Pension Benefit Guaranty Corporation (PBGC) prohibits the payment of cash dividends without permission of the PBGC (reference is made to Note 8 to the consolidated financial statements).
Item 6.
Item 6. Selected Financial Data
In 1994, the Company restructured its foreign electrical resistance wire operations and divested its U.S. operating company. See item 1(a) for a description of these transactions.
In 1993, the Company adopted SFAS 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions". This change increased the 1993 net loss by $180,000 ($.14 per share).
In 1992, the Company adopted SFAS 109 "Accounting for Income Taxes". This change had no effect on operating results.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition:
The Company, directly and through its subsidiaries, has been engaged in the business of manufacturing and marketing non-ferrous metal products, principally electrical resistance wire and insulated electrical wire and cable. The Company has incurred significant losses since 1991 primarily as a result of losses sustained by its Italian subsidiary.
Effective March 18, 1994, the Company restructured its operations (the "Restructure") in order to solve its liquidity problems and strengthen its competitive position in the industry. Pursuant to the Restructure, the Company combined its overseas resistance wire operations with Harrison Alloys Inc. (Harrison) by (i) forming a holding
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
company, HAI Holding Company Inc. (Holding), owned fifty percent by the Company and fifty percent by a corporation organized by the former common shareholders of Harrison; (ii) contributing the Company's overseas resistance wire manufacturing subsidiaries (subject to liens under existing bank loans) and its approximately 24% shareholding in Harrison to Holding; and (iii) causing Harrison to assume significant obligations of the Company as explained below. In conjunction with the Restructure, Harrison became a wholly owned subsidiary of Holding, which in turn transferred the Driver-Harris subsidiaries to Harrison.
As part of the foregoing transaction, Harrison assumed certain obligations of the Company and its wholly-owned subsidiary, Driver- Harris Alloys Inc. (Alloys), including $1.8 million of debt incurred for investment in the Company's Italian subsidiary, $1,489,000 of loans of Alloys, all potential environmental obligations with respect to Alloys' U.S. manufacturing facilities, and the Company's commitment to share with Harrison the cost of health care and life insurance benefits for certain retirees. As additional consideration to the Company, Harrison was required to make aggregate cash payments of $300,000; it is also required to pay license fees and commissions totaling $500,000 per year from 1994 to 2003.
For further details of this transaction reference is made to Note 3 to the financial statements.
In consummating the Restructure, Driver-Harris and Harrison expect the unified organization to benefit from economies and efficiencies in marketing, production, and product design available through a combination of the two businesses and from a potentially greater worldwide market share derived from a stronger market presence. However, these benefits are accompanied by certain risks, which are concentrated primarily on the highly leveraged debt structure of Harrison, a portion of which the Company is directly or contingently liable for. Harrison may also be exposed to major expenditures if it decides to rationalize certain manufacturing operations. Additionally, the Company will be dependent on Harrison for the major portion of its U.S. cash flow and the discharge of the aforementioned U.S. obligations or potential obligations.
Effective September 30, 1994, Alloys transferred substantially all of its assets to Harrison in exchange for the assumption by Harrison of an equivalent amount of liabilities (all assets and liabilities were transferred at net book value). This transaction was the result of the exercise by Harrison on June 14, 1994 of an option granted in 1987. The transferred assets consist principally of inventory and equipment located at the Harrison and Somerset, NJ and Spartanburg, SC plants of Alloys as well as the land and factory building in Somerset, NJ. These assets constituted the U.S. portion of the Company's resistance wire manufacturing business; the foreign portion had been transferred to
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Harrison in the March 1994 restructuring. No gain or loss resulted from this transaction. Since Alloys contractually operated at a break-even level, the foregoing asset transfer has no effect on future operating results.
As part of the Alloys divestiture, all agreements between Harrison, Alloys, and the Company, relating to the manufacture, financing, and distribution of products in the U.S., were terminated effective September 30, 1994.
Under the New Jersey Industrial Site Recovery Act certain clean-up procedures must be completed with respect to the New Jersey locations. Harrison has assumed all of the obligations and liabilities of the Registrant and Alloys under any federal and state environmental laws pursuant to the March 1994 restructuring.
After the foregoing transactions, the Company, in addition to its 50% ownership of Harrison, continues to own Irish Driver-Harris Co. Ltd., a producer of insulated electrical wire and cable, and Quality Heat Treatment Pty. Ltd., a company in the furnace manufacturing and heat treating business.
At December 31, 1994, the Company and its subsidiaries had available bank lines of credit of approximately $2,900,000, of which $1,762,000 was in use.
Results of Operations
The accompanying consolidated statements of operations for 1994, include the operations of subsidiaries which were divested during the year, to the approximate dates of their disposal. These are March 31, 1994 for the overseas resistance wire manufacturing companies and September 30, 1994 for Alloys. The pro-forma consolidated data for 1994 give effect to the aforementioned restructuring and the divestiture of the assets of Alloys, as if both transactions had occurred on January 1, 1994.
For 1994, net sales of operating units continuing as part of the Company throughout the entire year, rose 17.7% compared with the preceding year. This increase reflects principally higher unit volume. Prices on average were slightly higher than last year and foreign currency rates moved up somewhat.
Basic raw material costs of continuing companies rose during 1994. Selling prices, however, could not be raised in step with the higher costs. As a result, the gross profit was 3.0 percentage points lower than in 1993. Selling, general and administrative expenses of these units increased 6.6% in absolute terms; relative to sales, however, they decreased 1.6 percentage points. In addition, there were currency
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
exchange losses of $29,000 in 1994, compared with gains of $133,000 in 1993.
Sales to related company are to Harrison, a 50%-owned affiliate. Pursuant to an agreement with Alloys, selling prices are equal to the subsidiary's costs and expenses.
The Company's relationship with Harrison dates back to 1985 when Alloys was reorganized by transferring certain of its assets to the newly organized Harrison, in consideration for the assumption by the latter of a large portion of Alloys' bank debt which the Company guaranteed, and the issuance of certain non-voting Harrison capital stock to Alloys. Since then Harrison has provided the predominant share of debt service. While the combined Harrison and Alloys bank borrowings have been significantly reduced since 1985, Harrison and Driver-Harris Company have a common interest in managing the U.S. operations to maximize the cash flow available for debt service.
In 1993, net sales to unaffiliated customers dropped by 6.1% from the prior year's level. This change is a composite of higher unit volume, which was more than offset by (i) the effect of a stronger dollar on the translation of foreign financial data, and (ii) lower average selling prices.
During 1993 the price of nickel declined. This was reflected in lower average selling prices for the Company's products. However, the operating companies were able to lower production costs by more than the proportionate drop in sales prices. In addition, cost of sales was reduced $304,000 by virtue of a settlement with the Pension Benefit Guaranty Corporation of the Company's employer liability under three defined benefit pension plans terminated in 1985. As a result, the 1993 gross profit from sales to unaffiliated customers was 2.3 percentage points higher relative to net sales than in 1992. Selling, general and administrative expenses were lower in 1993 than in 1992, mainly due to the effect of a stronger U.S. dollar on the translation of foreign financial data. Also, in 1992 there were severance and other employment costs of $210,000 in connection with organizational changes. The large currency exchange loss in 1992 reflects primarily the impact of the European currency realignment in September 1992 on those foreign assets and liabilities which were denominated in other than the local currency of the respective operating units.
The Company generally incurs income taxes in operating units which generate earnings, while no tax benefits are available or can be anticipated in units experiencing losses. This is the principal reason for the disproportionate income tax provisions for the years 1992 through 1994.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The 1994, 1993, and 1992 operating results include utilization of approximately $14,000, $340,000 and $244,000, respectively of net operating loss carryforwards. The related tax benefits of $5,000, $128,000, and $88,000 have been netted against the provision for income taxes.
During the years 1994, 1993, and 1992 the Company's equity in the operating results of Harrison consisted of losses of $1,097,000, $359,000, and $265,000, respectively. The recognition of these losses has reduced the carrying amount of the Company's investment in Harrison to a negative balance (liability) of $1,701,000 at December 31, 1994. This amount combined with a deferred credit of $1,266,000 which originated from the March 1994 restructuring described above, is equal to the balance of a bank loan of Harrison ($2,967,000) which the Company has guaranteed (see Note 8). Under the Company's policy, losses from its investment in Harrison will be recognized only to the extent of the bank loan guaranty.
Item 8.
Item 8. Financial Statements and Supplementary Data
This information is submitted in a separate section of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
The Company's Irish subsidiary, Irish Driver-Harris Co. Ltd. changed its independent accountants during 1993. This matter has been reported on Form 8-K dated December 6, 1993.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The table listing this information with respect to directors of the Company, and the statement of compliance with Sec. 16(a) of the Exchange Act, included in the proxy statement dated May 3, 1995, is herein incorporated by reference. The information with respect to executive officers is included in Part I of this Form 10-K.
Item 11.
Item 11. Executive Compensation
The information with respect to officers and directors of the Company, included in the proxy statement dated May 3, 1995, is herein incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item, included in the proxy statement dated May 3, 1995, is herein incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item, included in the proxy statement dated May 3, 1995, is herein incorporated by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) and (2) - This portion of Item 14 is submitted in a separate section of this report.
(3) Listing of Exhibits
Exhibit 3. Certificate of Incorporation and By-Laws Exhibit 10. Material contracts Exhibit 21. Subsidiaries of the Registrant Exhibit 23. Consent of Independent Accountants Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
None filed in the fourth quarter of 1994.
(c) Exhibits Incorporated by Reference to SEC Form ---------------- Exhibit 3. Articles of Incorporation 8-K dated November and By-Laws 1, 1982
Amendments thereto 8-K dated June 17,
Exhibit 10. Material Contracts: Third Amended and Restated Loan Agreement with several banks, dated November 12, 1992; loan agreement with Textron Financial Corporation dated October 29, 1992, and related 10-Q dated Mortgage and Promissory Note dated September 30, 1992 November 12, 1992
Settlement Agreement with Pension 8-K dated Benefit Guaranty Corporation dated December 22, December 22, 1993 1993
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (Continued)
Amended and Restated Agreement between Harrison Alloys Inc., Driver-Harris Company, HAI Industries Inc., and HAI Holding Company Inc., dated 8-K dated March 18, 1994 April 7, 1994
Letter agreement amending the Third Amended and Restated Loan Agreement with several banks, dated as of 8-K dated March 18, 1994 April 7, 1994
Note Modification Agreement, Loan and Security Agreement Modification Agreement, and Release of Guaranty between Driver-Harris Alloys Inc., Harrison Alloys Inc., and Textron Financial Corporation, all dated 8-K dated February 25, 1994 April 7, 1994
Exhibit 21. Subsidiaries of the Registrant as of December 31,
SUBSIDIARIES OF THE REGISTRANT
Name Jurisdiction of Incorporation Driver-Harris Alloys Inc. New Jersey (Inactive corporation) Irish Driver-Harris Co. Ltd. Ireland Kingston Cable Distributors Ltd. United Kingdom (subsidiary of Irish Driver-Harris Co. Ltd.) Quality Heat Treatment Pty. Ltd. Australia
Exhibit 23. Consent of Independent Accountants
This exhibit is filed as an attachment to this report.
(d) Financial Statement Schedules -- This portion of Item 14 is submitted in a separate section of this report.
Financial Statements of HAI Holding Company Inc. - December 31, 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DRIVER-HARRIS COMPANY
April 13, 1995 Frank L. Driver IV - -------------------------- -------------------------------- Date Frank L. Driver IV President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Ralph T. Bartlett David A. Driver - -------------------------------- -------------------------------- Ralph T. Bartlett David A. Driver Director Director Date: April 13, 1995 Date: April 13, 1995
H. L. Biggerstaff Frank L. Driver III - -------------------------------- -------------------------------- H. L. Biggerstaff Frank L. Driver III Director Director, Chairman of Board Date: April 13, 1995 Chief Executive Officer Date: April 13, 1995
Frank L. Driver IV - ---------------------------------- Frank L. Driver IV Director, President and Chief Financial Officer Date: April 13, 1995
Annual Report on Form 10-K Item 8, Item 14(a)(1) and (2), (c) and (d)
List of Financial Statements and Financial Statement Schedules
Certain Exhibits
Financial Statement Schedules
Driver-Harris Company and Subsidiaries
December 31, 1994
Driver-Harris Company and Subsidiaries
Form 10-K-Item 14(a)(1) and (2)
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Driver-Harris Company and subsidiaries are included in Item 8:
Consolidated Balance Sheets-December 31, 1994 and 1993 Page 19
Consolidated Statements of Operations-Years ended December 31, 1994, 1993 and 1992 Page 21
Consolidated Statements of Stockholders' Equity-Years ended December 31, 1994, 1993 and 1992 Page 22
Consolidated Statements of Cash Flows-Years ended December 31, 1994, 1993 and 1992 Page 23
Notes to Consolidated Financial Statements Page 24
The following consolidated financial statement schedules of Driver- Harris Company and subsidiaries and financial statements of HAI Holding Company Inc. and subsidiaries are included in Item 14(d):
Schedule I-Condensed Financial Information of Registrant 39
Schedule II-Valuation and Qualifying Accounts 43
Financial Statements of HAI Holding Company Inc. and subsidiaries 44
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Auditors
Board of Directors Driver-Harris Company
We have audited the accompanying consolidated balance sheets of Driver- Harris Company and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedules listed as Item 14(a). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the financial statements of certain foreign consolidated subsidiaries which statements reflect total assets constituting 14% in 1994 and 4% in 1993, and total revenues constituting 7% in 1994, 4% in 1993 and 23% in 1992 of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for such subsidiaries, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Driver- Harris Company and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth herein.
As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed it method of accounting for postretirement benefits other than pensions.
March 10, 1995 ERNST & YOUNG LLP
AUDITORS' REPORT TO THE MEMBERS
OF
KINGSTON CABLE DISTRIBUTORS LIMITED
We have audited the accompanying balance sheet of Kingston Cable Distributors Limited as of 31 December 1994, and the related statements of profit and loss and cash flows for the thirteen months then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kingston Cable Distributors Limited as of 31 December 1994, and the results of its operations and its cash flows for the thirteen months then ended in conformity with generally accepted accounting principles.
15 March 1995 Signed: James, Stanley & Co. ----------------------------- Registered Auditor Chartered Accountants 1733 Coventry Road South Yardley Birmingham B26 1DT
Driver-Harris Company and Subsidiaries
Consolidated Balance Sheets
Dollar Amounts in Thousands
See accompanying notes.
Driver-Harris Company and Subsidiaries
Consolidated Statements of Operations
Dollar Amounts in Thousands, Except per Share Data
See accompanying notes.
Driver-Harris Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the three years ended December 31, 1994
Dollar Amounts in Thousands
See accompanying notes.
Driver-Harris Company and Subsidiaries
Consolidated Statements of Cash Flows
Dollar Amounts in Thousands
See accompanying notes.
Driver-Harris Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994 and 1993
1. Summary of Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Driver- Harris company (the "Company") and its majority controlled subsidiaries. Intercompany accounts, transactions and profits have been eliminated in consolidation. The financial statements of Irish Driver-Harris Company Ltd. and its subsidiary are included in consolidation for their years ended November 30, 1992 and 1993. During 1994, these subsidiaries changed to the calendar year. The net loss for the month of December 1993 ($107,000), was charged directly to retained earnings.
Harrison Alloys Inc. ("Harrison"), a fifty percent owned company, is recorded on the equity method of accounting. Transactions with, and the investment in Harrison are shown separately in the accompanying financial statements (see Note 3). The recognition of losses has reduced the carrying amount of the Company's investment in Harrison to a negative balance (liability) of $1,701,000 at December 31, 1994. This amount, combined with a deferred credit of $1,266,000 which originated from the March 1994 restructuring described in Note 3, is equal to the balance of a bank loan of Harrison ($2,967,000) which the Company has guaranteed (see Note 8). Under the Company's policy, losses from its investment in Harrison will be recognized only to the extent of the bank loan guaranty.
Inventories
Inventories are stated at the lower of cost or market. At December 31, 1994, cost was determined by the first-in, first-out (FIFO) method for all inventories. At December 31, 1993, a number of subsidiaries, which were subsequently divested, used the last-in, first-out (LIFO) method for certain inventories, which aggregated 47% of the consolidated total. Had the FIFO method of valuation been used in place of LIFO, inventories would have been $2,703,000 higher at December 31, 1993.
Property, Plant and Equipment
Depreciation has been provided principally by the straight-line method based upon estimated useful lives of the depreciable assets.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Revenue Recognition
Sales revenues are recognized at the time products are shipped. Sales returns are recognized generally upon the receipt of merchandise returns or the granting of price allowances.
Earnings per Common Share
Earnings per share of common stock are based on the average number of common shares and common share equivalents outstanding during each year (1,294,430 in 1994, 1,294,320 in 1993 and 1,284,472 in 1992). Common stock options are considered common share equivalents.
Financial Instruments
In the normal course of business, the Company may enter into forward contracts in order to limit its exposure to fluctuations in currency exchange rates or metals prices. As currency exchange rates or metals prices fluctuate, gains and losses on these contracts serve as hedges to the extent that they offset transactional losses and gains which would otherwise impact the Company's financial results. To the extent gains or losses on open forward contracts are covered by firm or anticipated sales or purchase commitments, the Company follows the practice of recognizing neither gains nor losses.
The predominant portion of the Company's customers are engaged in the construction, appliance and electrical equipment industries in Ireland and Great Britain. The Company grants credit to its customers on open account. One customer's outstanding balance represents 10.3% of consolidated receivables.
Foreign Currency Translation
Assets and liabilities of foreign operations with a functional currency other than the U.S. dollar are translated into U.S. dollars at year-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during the year. Translation adjustments are recorded as a separate component of equity. Changes in the equity account during 1994 and 1993 primarily resulted from such translation adjustments.
Change in Accounting Principle
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This standard requires companies to accrue for estimated future postretirement benefit expenses during the years employees are working and earning benefits for retirement. Previously, the Company expensed the costs of these benefits as current payments were made. This change had the effect of increasing the postretirement benefit expense of the Company for 1993 by approximately $180,000.
Pending Accounting Pronouncements
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value of financial instruments, including the methods and significant assumptions used to estimate these fair values. The standard is effective for the Company no later than 1995.
2. U.S. Manufacturing Operations
During 1985, the Company reorganized its U.S. operating subsidiary, Driver-Harris Alloys Inc. ("Alloys"), by transferring its accounts receivable and finished goods inventory to a newly-formed company, Harrison Alloys Inc. ("Harrison") in consideration for Harrison's assumption of a portion of Alloys' bank debt and the issuance to Alloys of shares of Harrison's (non-voting) common stock. Harrison is referred to herein as a "related company". Effective March 18, 1994, the Company and the shareholders of Harrison formed a holding company, consisting of the Harrison operations and the Company's overseas resistance wire manufacturing subsidiaries as more fully described in Note 3. Also, effective September 30, 1994, Alloys transferred substantially all of its assets to Harrison, as more fully described in Note. 4.
Until the September 30, 1994 divestiture of Alloys, under agreements between the parties, (i) Harrison was required to perform certain manufacturing and administrative functions for Alloys at an agreed pricing formula, (ii) Harrison was granted certain distribution rights for Alloys' products in the United States and Mexico, (iii) Harrison was required to purchase all of Alloys' production at prices equal to all of Alloys' costs, expenses and interest and (iv) Harrison provided certain financing to Alloys.
For the years ended December 31, 1994, 1993 and 1992, Harrison purchased $23,196,000, $27,295,000 and $27,594,000, respectively, of products from Alloys and billed Alloys $8,123,000, $9,427,000 and $8,308,000, respectively, for production and administrative functions.
3. Restructuring of Resistance Wire Operations
The Company, directly and through its subsidiaries, has been engaged in the business of manufacturing and marketing non-ferrous metal products, principally electrical resistance wire and insulated electrical wire and cable. The Company has incurred significant losses since 1991 primarily
as a result of losses sustained by its Italian subsidiary.
On April 7, 1994, effective March 18, 1994, the Company restructured its operations (the Restructure) in order to solve its liquidity problems and strengthen its competitive position in the industry. Pursuant to the Restructure, the Company combined its overseas resistance wire operations with Harrison Alloys Inc. (Harrison) by (i) forming a holding company, HAI Holding Company Inc. (Holding), owned fifty percent by the Company and fifty percent by a corporation organized by the former common shareholders of Harrison; (ii) contributing the Company's overseas resistance wire manufacturing subsidiaries located in Italy, France, the U.K., Spain and Australia (subject to liens under existing bank loans [see Note 8]) and its approximately 24% shareholding in Harrison to Holding; and (iii) causing Harrison to assume significant obligations of the Company as explained below. In conjunction with the Restructure, Harrison became a wholly-owned subsidiary of Holding, which in turn transferred the Driver-Harris subsidiaries to Harrison. The latter and Holding are referred to as "related company" or as "Harrison" in the accompanying consolidated financial statements.
As part of the foregoing transaction, Harrison assumed certain obligations of the Company and its U.S. subsidiary, Driver-Harris Alloys Inc. (Alloys), including approximately $1.8 million of debt incurred for investment in the Company's Italian subsidiary, $1,489,000 of loans of Alloys, all potential environmental obligations with respect to Alloys' U.S. manufacturing facilities, and the Company's commitment to share with Harrison the cost of health care and life insurance benefits for certain retirees. As additional consideration to the Company, Harrison was required to make aggregate cash payments of $300,000; it is also required to pay license fees and commissions totaling $500,000 per year from 1994 through 2003.
The foregoing transaction did not result in recognition of any immediate gain or loss. For financial reporting purposes, the restructuring was effected as of March 31, 1994. Deferred credits aggregating $1,489,000 arising from the restructure will be amortized over 5 years. Accordingly, $223,000 has been credited to operations for the year ended December 31, 1994.
4. Divestiture of Assets of Driver-Harris Alloys Inc.
On November 29, 1994, effective September 30, 1994, Driver-Harris Alloys Inc. (Alloys), a wholly-owned subsidiary of the Company, transferred substantially all of its assets to Harrison Alloys Inc. (Harrison), a corporation in which the Company indirectly owns a 50% interest (see Note 3), in exchange for the assumption by Harrison of an equivalent amount of liabilities (all assets were transferred at net book value). This transaction was the result of the exercise by Harrison on June 14, 1994 of an option granted in 1987. The transferred assets consist principally of inventory and equipment located at the Harrison and Somerset, New Jersey and Spartanburg, South Carolina plants of Alloys as well as the land and factory building in Somerset, New Jersey. These
assets constituted the U.S. portion of the Company's resistance wire manufacturing business; the foreign portion had been transferred to Harrison in the March 18, 1994 restructuring described in Note 3. The Alloys assets had an aggregate net book value of $7,424,000 and the liabilities assumed by Harrison consisted of $5,807,000 accounts payables and other current liabilities and a $1,617,000 obligation to Harrison. No gain or loss resulted from this transaction which was recorded as of September 30, 1994. Since Alloys contractually operated at a break-even level, the foregoing asset transfer has no effect on future operating results.
As part of the foregoing transaction, all agreements between Harrison, Alloys, and the Company, relating to the manufacture, financing, and distribution of products in the U.S., were terminated effective September 30, 1994.
Under the New Jersey Industrial Site Recovery Act certain clean-up procedures must be completed with respect to the New Jersey locations. Harrison has assumed all of the obligations and liabilities of the Company and Alloys under any federal and state environmental laws pursuant to the March 1994 restructuring.
After the Restructure described in Note 3 and the divestiture of the assets of Alloys, the Company, in addition to its 50% ownership of Harrison, continues to own Irish Driver-Harris Co. Ltd., a producer of insulated electrical wire and cable, and Quality Heat Treatment Pty. Ltd., a company in the furnace manufacturing and heat treating business.
5. Pro Forma Financial Information
The accompanying financial statements include a consolidated pro forma statement of operations for the year ended December 31, 1994, which gives effect to the restructure on March 18, 1994 (see Note 3) and the Alloys divestiture (see Note 4) as if both transactions had occurred on January 1, 1994.
6. Foreign Operations
Net assets which are located outside the United States and are included in the consolidated balance sheets are as follows (in thousands):
Net loss of the Company's foreign subsidiaries included in the accompanying financial statements amounted to approximately $144,000 in 1994, $1,407,000 in 1993 and $3,698,000 in 1992.
Because (i) the Company plans to continue to finance foreign expansion and operating requirements by reinvesting a substantial portion of the undistributed earnings of its foreign subsidiaries, and (ii) the availability of U.S. tax loss carryovers (see Note 10) to offset dividends from these subsidiaries, United States income taxes have not been provided on such earnings. Unremitted earnings of foreign subsidiaries at December 31, 1994 amounted to approximately $5,656,000.
7. Leases
Property, plant and equipment includes the following amounts related to capital leases (in thousands):
Amortization of the assets recorded under capital leases is included in depreciation expense.
The future minimum rental commitments for all operating leases as of December 31, 1994 are as follows (in thousands):
Total rent expense under operating leases for 1994, 1993 and 1992 was $483,000, $755,000 and $740,000, respectively.
8. Long-Term Debt and Lines of Credit
Long-term debt was as follows(in thousands):
In addition to the foregoing direct obligations at December 31, 1994, Driver-Harris Alloys Inc. ("Alloys") was jointly and severally liable with Harrison Alloys Inc. ("Harrison") (see Note 2) for a U.S. bank loan with an unpaid principal balance of $2,967,000 and a U.S. mortgage loan with an unpaid principal balance of $1,267,000. Both of these obligations are being reported as direct liabilities of Harrison.
The bank loan is guaranteed by the Company, which has pledged as collateral its shares of the capital stock of its Irish subsidiary as well as 200,000 shares of its own capital stock. No accounting recognition has been given to the issuance of these 200,000 shares since they can be disposed of only in the case of a default. The bank loan bears interest at the floating prime rate. Principal and accrued interest are due in 34 monthly payments of $77,000 until September 30, 1997, three annual payments of $50,000 from 1995 through 1997, and a final payment of the remaining balance on October 31, 1997.
The U.S. mortgage loan, as amended, is payable in monthly installments of varying amounts, with a final payment on December 1, 1995. With the lender's consent, the mortgaged assets were conveyed by Alloys to Harrison as part of the asset transfer effective September 30, 1994 (see Note 4).
The Company is obligated under a U.S. bank loan with an unpaid principal balance of $242,000 at December 31, 1994. This loan matures in monthly installments until March 31, 1997 with interest at 1 3/4% above the bank's prime rate. The loan is collateralized by the capital stock of the Irish subsidiary and that of the Company pledged under the foregoing bank loan guaranty.
The note payable to the Pension Benefit Guaranty Corporation (PBGC) is due September 30, 2000. Interest accrues at the rate of 7% per year compounded quarterly and is payable at maturity. The note and accrued interest may be prepaid at the Company's option. The PBGC has the right to convert the entire unpaid principal and accrued interest into common stock of the Company at a price of $7.875 per share, at any time after September 30, 1996 until maturity. Until the note is paid in full, the Company may not pay cash dividends on its capital stock without permission from the PBGC.
The Other Mortgage Loans, which are the liability of a subsidiary, bear interest at 10% per year and are due in monthly installments through 2000. These loans and the subsidiary's $2,300,000 general credit line are jointly collateralized by all of its assets with a net book value of $13,549,000.
Maturities of long-term debt at December 31, 1994 are as follows (in thousands):
At December 31, 1994, the Company and its subsidiaries had available short-term bank lines of credit in the aggregate amount of approximately $2,900,000, of which $1,762,000 was in use.
The weighted average interest rate on the short-term borrowings of the Company and its subsidiaries was 10.4% at December 31, 1994.
9. Postretirement Benefits - Pensions and Health Care
Pensions
Prior to the March 1994 restructuring (see Note 3), the Company had several defined benefit pension plans covering employees of certain foreign subsidiaries. In the aggregate, these plans were not considered significant. The cost thereof was $277,000 in 1993 and $287,000 in 1992.
After the restructuring, the Company's only defined benefit pension plans are those of a subsidiary. These cover substantially all of the latter's employees, who must contribute to the plan cost. Benefits are based on employees' years of service and generally final compensation. The subsidiary makes contributions to the plans in amounts that are intended to provide for current service and to fund past service liability.
The actuarial assumptions used for the pension plans of the continuing subsidiary for 1994 were as follows:
Discount rate 8% Annual rate of compensation increase 6 Long-term rate of return on plan assets 8
The funded status of the pension plans at December 31, 1994 was (in thousands):
Net pension expense for the Company's defined benefit pension plans for 1994 included the following components (in thousands):
In 1993, the Company settled a claim by the Pension Benefit Guaranty Corporation for employer liability under three defined benefit pension plans which were terminated in 1985. The settlement is in the form of a $781,000 note, due September 30,2000. The Company had previously made a $1,085,000 provision for this obligation and recorded a $304,000 gain from the settlement in 1993.
Health Care and Life Insurance
Postretirement health care and life insurance benefits are provided to certain U.S. employees and retirees. These benefits are provided through an insurance company whose premiums are based on benefits paid. Pursuant to the March 1994 restructuring (see Note 3) Harrison Alloys Inc. (Harrison) has assumed the cost for the pre-1986 retirees, effective January 1, 1994. Prior thereto, the cost was shared equally by the Company and Harrison. The accumulated postretirement benefit obligation for the foregoing retirees was $2,492,000 at December 31, 1994.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This standard requires companies to accrue for estimated future postretirement benefit expenses during the years employees are working and earning benefits for retirement. Previously, the Company expensed the costs of these benefits as current payments were made. The Company elected to amortize the estimated liability for postretirement benefits at January 1, 1993, over 14 years. For 1994, 1993 and 1992, the Company's portion of postretirement benefit costs aggregated $50,000, $293,000 and $141,000, respectively. The 1993 amount includes $180,000 as a result of the adoption of SFAS 106.
The following table sets forth the status of the plans, which are unfunded, reconciled with the accrued postretirement benefit cost included in the Company's consolidated balance sheet at December 31, 1994 (in thousands):
Postretirement benefit cost for 1994 included the following components (in thousands):
The following assumptions were used at December 31, 1994: a discount rate of 7.25% and a 1995 assumed health care cost trend rate of 12%, declining gradually to an ultimate cost trend rate of 5% for years after 2002.
A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated postretirement benefit obligation at December 31, 1994 by $31,000 and the aggregate service and interest cost components of postretirement benefit cost for 1994 by $6,000.
10. Income Taxes
Income tax expense (credit) is composed of the following (in thousands):
Pretax loss attributable to domestic and foreign operations is as follows (in thousands):
Following is a reconciliation of income tax expense (credit) to the amount based on the U.S. statutory rate of 35% (1994) and 34% (1993 and 1992) (in thousands):
In 1992, the Company implemented SFAS 109, "Accounting for Income Taxes", which requires companies to change the method of accounting for income taxes from the deferred method to the liability method. This change had no effect on the accompanying financial statements.
The components of deferred tax assets and liabilities at December 31, 1994 and 1993, were as follows (in thousands):
During 1994, the total valuation allowance and deferred assets decreased approximately $4,900,000. This amount is principally due to the companies divested in the March 1994 restructuring (see Note 3).
At December 31, 1994, the Company had approximately $6,000,000 of loss carryforwards available to offset future U.S. taxable income. Such carryforwards expire beginning in 1999. The Company also has investment tax credit carryforwards of approximately $148,000 expiring through 2000.
11. Employee Stock Options
The 1983 Driver-Harris Employee Incentive Stock Option Plan provided for the grant of stock options at 100% of market value on date of grant which are intended to qualify as "incentive stock options" under Section 422A of the Internal Revenue Code. Under this plan, which expired during 1993, 82,500 shares of stock were reserved for issuance at December 31, 1994. The following table summarizes the activity in the Plan:
Number of Shares Price Per Share ------------------------------ Outstanding January 1, 1992 67,500 4.00 to 8.50 Granted during 1992 34,000 5.25 and 5.775 Expired during 1992 (30,000) 4.40 and 6.875 ------- Outstanding December 31, 1992 71,500 4.00 to 8.50 Granted during 1993 11,000 5.775 ------- Outstanding December 31, 1993 and 1994 82,500 4.00 to 8.50 =======
12. Industry Segments and Geographic Areas
The Company and its subsidiaries operate in a single industry segment, the manufacture and sale of wrought non-ferrous metal products, principally insulated electrical wire and cable, and until the March 18, 1994 restructuring (see Note 3) electrical resistance wire, strip and ribbon.
Geographic Areas
Driver-Harris Company
Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheets
Dollar Amounts in Thousands
Driver-Harris Company
Schedule I - Condensed Financial Information of Registrant
Condensed Statements of Operations
Dollar Amounts in Thousands
Driver-Harris Company
Schedule I-Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
Driver-Harris Company
Schedule I-Condensed Financial Information of Registrant
Note to Condensed Financial Statements
1. Guarantees and Commitments
The Registrant has guaranteed borrowings of Harrison Alloys Inc. in the amount of $2,967,000 and an inactive U.S. subsidiary in the amount of $242,000.
HAI Holding Company Inc. and Subsidiaries
Form 10-K-Item 14(a) (1) and (2)
Consolidated Financial Statements
December 31, 1994
Contents
Report of Independent Auditors Page 45
Consolidated Balance Sheets Page 46
Consolidated Statements of Operations Page 48
Consolidated Statements of Stockholders' Equity Page 49
Consolidated Statements of Cash Flows Page 50
Notes to Consolidated Financial Statements Page 52
Report of Independent Auditors
Board of Directors HAI Holding Company Inc.
We have audited the accompanying consolidated balance sheets of HAI Holding Company Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HAI Holding Company Inc. and subsidiaries at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
April 11, 1995 ERNST & YOUNG LLP
HAI Holding Company Inc. and Subsidiaries
Consolidated Balance Sheets
See accompanying notes
HAI Holding Company Inc. and Subsidiaries
Consolidated Statements of Operations
See accompanying notes
HAI Holding Company Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
See accompanying notes
HAI Holding Company Inc. and Subsidiaries
Consolidated Statements of Cash Flows
See accompanying notes
HAI Holding Company Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1994
1. Transaction with Driver-Harris Company
On April 7, 1994, HAI Holding Company Inc. (Holding or the Company) was formed. Holding is owned fifty percent by Driver-Harris Company (DHCO) and fifty percent by a corporation organized by the former common shareholders of Harrison Alloys Inc. (Harrison). Simultaneously, effective March 18, 1994, Harrison signed various agreements with DHCO to combine its operations with DHCO's overseas resistance wire operations. DHCO contributed their overseas resistance wire manufacturing subsidiaries and its apprximately 24% shareholding in Harrison to Holding and Harrison assumed significant obligations of DHCO as explained below. In conjunction with this transaction, Harrison became a wholly-owned subsidiary of Holding, which in turn transferred the DHCO subsidiaries to Harrison. As a result of the transaction, Harrison will conduct all of its operations located in Harrison and Somerset, New Jersey and Spartanburg, South Carolina and DHCO operations located in Italy, France, the U.K., Spain and Australia. All of these businesses manufacture wrought non-ferrous metal products.
As part of the foregoing transaction, Harrison assumed certain obligations of DHCO and DHCO's wholly-owned U.S. subsidiary, Driver- Harris Alloys Inc. (Alloys) (see Note 3), including approximately $1.8 million of additional debt incurred for investment in DHCO's Italian subsidiary, $1,489,000 of loans of Alloys, all potential environmental obligations with respect to Alloys' U.S. manufacturing facilities, and DHCO's commitment to share with Harrison the cost of health care and life insurance benefits for certain retirees. As additional consideration to DHCO, Harrison was required to make aggregate cash payments of $300,000 during 1994; it is also required to pay license fees and commissions totaling $500,000 per year from 1994 to 2003.
For financial reporting purposes, DHCO's contributed overseas resistance wire manufacturing subsidiaries were accounted for as a purchase. The assets acquired and liabilities assumed were recorded at amounts approximating their net book value, with no goodwill arising from this transaction. The results of operations of these subsidiaries have been included since April 1, 1994. If this transaction would have occurred January 1, 1994, Holding's revenue and net loss for the twelve months ended December 31, 1994 would have been $72,687,000 and $3,698,000, respectively. Harrison, becoming a wholly-owned subsidiary of Holding, has been accounted for as a recapitalization which is similiar to the treatment of a pooling of interests. Their results of operations are included for all periods presented.
Outside financing for this transaction was derived essentially from two sources: (i) an increase of $1,100,000 in an asset-based revolving credit facility of Harrison; and (ii) an addition of $640,000 to a mortgage loan under which Harrison and Alloys are jointly and severally liable, discussed in Note 4. As collateral for these loans, Alloys granted to the lenders liens on its inventories and machinery and equipment with varying priorities (see Note 3); furthermore, two officers/directors of DHCO pledged their personal holdings of DHCO's capital stock.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of HAI Holding Company, Inc. and its majority-controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market. At December 31, 1994 and 1993, cost was determined by the last-in, first-out (LIFO) method for 76% and 87%, respectively, of the consolidated inventories shown on the balance sheet, with the remainder generally determined by the first-in, first-out (FIFO) method. Had the FIFO method of valuation been used in place of LIFO, inventories would have been $2,537,000 higher at December 31, 1994 and $430,000 lower at December 31, 1993. The LIFO method is used because it generally provides a better matching of current costs with current revenues.
Property, Plant and Equipment
Depreciation has been provided principally by the straight-line method based upon estimated useful lives of the depreciable assets.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Financial Instruments
In the normal course of business, the Company may enter into forward contracts in order to limit its exposure to fluctuations in currency exchange rates or metal prices. As currency exchange rates or metal prices fluctuate, gains and losses on these contracts serve as hedges to the extent that they offset transactional losses and gains which would otherwise impact the Company's financial results. To the extent gains or losses on forward contracts are covered by firm or anticipated sales or purchase commitments, the Company follows the practice of recognizing neither gains nor losses.
The Company's customers are engaged in the home appliance, automotive, electric heating and industrial controls industries within North America, Europe, Asia, South America and Australia. Because of the diversified nature and geographic dispersion of its customer base, the Company believes that credit risk on trade receivables is minimized.
At December 31, 1994, Harrison had entered into fixed price purchase commitments for nickel aggregating $10,284,000 through 1996 and fixed price sales commitments relating to the nickel content of inventory aggregating $11,582,000 through 1996.
Foreign Currency Translation
Assets and liabilities of foreign operations with a functional currency other than the U.S. dollar are translated into U.S. dollars at year-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during the year. Translation adjustments are recorded as a separate component of equity. Changes in the equity account during 1994 and 1993 primarily resulted from such translation adjustments.
3. Acquisition of Assets of Driver-Harris Alloys Inc.
On November 29, 1994, effective September 30, 1994, Driver-Harris Alloys Inc. (Alloys) a wholly-owned subsidiary of DHCO, transferred substantially all of its assets to Harrison, in exchange for the assumption by Harrison of an equivalent amount of liabilities (all assets were transferred at net book value). This transaction was the result of the exercise by Harrison on June 14, 1994 of an option granted in 1987. The transferred assets consist principally of raw material and in-process inventory and equipment located at the Harrison and Somerset, New Jersey and Spartanburg, South Carolina plants of Alloys as well as the land and factory building in Somerset, New Jersey. The Alloys assets had an aggregate net book value of $7,424,000 and the liabilities assumed by Harrison consisted of $5,807,000 accounts payables and other current liabilities and a $1,617,000 obligation to Harrison, which was netted against Harrison's receivable from Alloys. No gain or loss resulted from this transaction which was recorded as of September 30, 1994, and the results of operations of Alloys have been included since October 1, 1994.
Under the New Jersey Industrial Site Recovery Act certain clean-up procedures must be completed with respect to the New Jersey locations. Harrison has assumed all of the obligations and liabilities under any federal and state environmental laws pursuant to the March 1994 transaction with DHCO (see Note 1). The expected cost is $200,000 which has been fully accrued at December 31, 1994.
4. Long-Term Debt
Long-term debt consists of the following:
The following is the debt repayment schedule:
U. S. Loans
Harrison and Alloys are jointly and severally liable for the bank agreement (credit agreement) which is $2,967,000 at December 31, 1994. This indebtedness is payable by Harrison in monthly installments of $59,000 through October 1994 and $77,000 from November 1994 through October 1997, when the balance is due. The payments include principal and interest at the prime rate. This credit agreement is also guaranteed by DHCO. In addition, Alloys entered into a mortgage loan for $1,900,000 with a lender in 1992. Alloys and Harrison are jointly and severally liable for this loan. In February 1994, Harrison recast this mortgage loan resulting in an addition of $640,000 and an increase in its monthly interest and principal payments to $85,000 (previously $50,000). In November 1994, this loan was modified to require eleven monthly interest and principal payments (including interest calculated at 12.36%) of $85,000 beginning January 1, 1995 and a final balloon payment of $261,000 due on December 1, 1995. The balance remaining at December 31, 1994 is $1,267,000.
In December 1994, Harrison refinanced its asset-based loan with a new lender whereby it can borrow up to $12,000,000 based on eligible accounts receivable, inventory and certain fixed assets as defined in the agreement. At December 31, 1994, $7,937,000 was outstanding under this agreement which expires December 1996. A portion of this loan ($686,000 as of December 31, 1994) is a term loan which has been classified as long-term debt. Monthly principal payments of $11,000 for the term loan are required under the terms of this loan. At December 31, 1994, the balance of the asset-based loan ($7,251,000) is included in notes payable on the consolidated balance sheets. The interest rate for this facility is prime plus 2.25%. The initial proceeds of this asset-based loan were used to repay the previous asset-based loan and for working capital.
The deferred financing charges relate to the debt restructuring and refinancing and are being amortized over the terms of the debt.
The agreements with the lenders contain certain covenants including those that require Harrison to maintain minimum amounts of working capital, prohibit the payment of common stock cash dividends and a limitation as to incurring indebtedness and creating liens. At December 31, 1994, Harrison was not in compliance with a certain loan covenant. The lender has waived this violation to January 1, 1996.
Substantially all of the Company's U.S. assets have been pledged as collateral for the above debt.
In addition, four officers of Harrison guarantee the $1,267,000 mortgage loan and each officer guarantees $1,250,000 of the asset-based loan noted above.
Foreign Loans
One foreign subsidiary has a mortgage loan with a balance of $227,000 at December 31, 1994, which is collateralized by its plant, machinery and inventories with a net book value of $2,743,000.
One foreign subsidiary has various loans with a total principal balance of $133,000 at December 31, 1994, which are collateralized by certain machinery and equipment with a total net book value of $142,000.
5. Foreign Operations
The net assets which are located outside the United States and are included in the consolidated balance sheets are as follows:
The net loss of the Company's foreign subsidiaries included in the accompanying financial statements amounted to approximately $1,831,000 in 1994 and $233,000 in 1993.
Because (i) the Company plans to continue to finance foreign expansion and operating requirements by reinvesting a substantial portion of the undistributed earnings of its foreign subsidiaries, and (ii) the availability of U.S. tax loss carryovers (see Note 12) to offset dividends from these subsidiaries, United States income taxes have not been provided on such earnings. Unremitted earnings of foreign subsidiaries at December 31, 1994 amounted to approximately $3,300,000.
6. Employee Benefit Plans
U.S. Defined Contribution Plan
Substantially all U.S. employees are participants in a defined contribution plan. Under the plan, Harrison contributes an amount equal to 5% of salaries and matches employee contributions up to an additional 5%. Harrison's contributions consist of preferred stock, while employee contributions may be invested in a guaranteed interest contract with an insurance company, an equity fund, a balanced acccount or preferred stock. The total expense recorded under this plan was $757,000 and $651,000 for the years ended December 31, 1994 and 1993, respectively.
Foreign Pension Plans
The Company maintains employee pension plans covering certain foreign employees. Total pension cost for all foreign plans was $109,000 in 1994.
7. Postretirement Benefits - Healthcare and Life Insurance
Harrison provides certain health care and life insurance benefits for retired employees. A substantial number of Harrison's employees may become eligible if they reach normal retirement age while still working for Harrison. Those benefits are provided through an insurance company whose premiums are based on the benefits paid during the year.
During 1989, Harrison, DHCO and Alloys entered into discussions regarding the payment of health care and life insurance benefits for employees of DHCO who retired prior to a reorganization in 1985. A settlement agreement was reached effective December 31, 1989, whereby DHCO agreed to assume one-half of the future costs regarding these benefits and Harrison agreed to assume the remaining one-half. In conjunction with this agreement, Harrison agreed to repurchase 70,000 of the 200,000 non-voting common shares owned by Alloys for $350,000. As a result of Harrison's transaction with DHCO (see Note 1) effective March 18, 1994, Harrison has agreed to assume all the costs regarding these benefits effective January 1, 1994. During 1993, Harrison and DHCO equally shared costs totaling $306,000 for these benefits. Total cost for these benefits for 1994 was $383,000, which reflects the adoption, effective January 1, 1994, of SFAS 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions".
Effective January 1, 1994, Harrison adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This standard requires companies to accrue for estimated future postretirement benefit expenses during the years employees are working and earning benefits for retirement. Previously, Harrison expensed the costs of these benefits as current payments were made.
The following table sets forth the status of the Harrison and DHCO plans, which are unfunded, reconciled with the accrued postretirement benefit cost included in the Company's consolidated balance seet at December 31, 1994:
Postretirement benefit cost for 1994 included the following components:
The following assumptions were used at December 31, 1994: a discount rate of 8.0% and a 1995 assumed health care cost trend rate of 5%. The Company elected to amortize the estimated liabilities for postretirement benefits at January 1, 1994 over periods of 15 to 20 years.
A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated postretirement benefit obligation at December 31, 1994 by $576,000 and the aggregate service and interest cost components of postretirement benefit cost for 1994 by $50,000.
8. Common Stock
Common stock is comprised of the following:
Class A voting common stock - $.01 par value, 1,000,000 shares authorized; 412,083 shares issued and outstanding at December 31, 1994 and 1993, respectively.
Class B common stock - $.01 par value, 1,000,000 shares authorized; 412,083 voting shares issued and outstanding at December 31, 1994 and 130,000 non-voting shares issued and outstanding at December 31, 1993.
9. Preferred Stock of a Subsidiary
The preferred stock of a subsidiary is comprised of the following:
Class C 8% non-voting cumulative preferred stock - $1.00 par value, 10,000,000 shares authorized; 6,321,074 and 5,054,000 shares issued and outstanding at December 31, 1994 and 1993, respectively.
Class D 13% non-voting cumulative preferred stock - $1.00 par value, 5,000,000 shares authorized; 3,357,920 and 3,144,000 shares issued and outstanding at December 31, 1994 and 1993, respectively.
All outstanding shares of preferred stock have been issued pursuant to an employee benefit plan of a subsidiary and, in most cases, are to be redeemed by the subsidiary within 60 days of each participant's termination of employment. During 1994 and 1993, respectively, 857,257 and 669,991 shares of preferred stock were issued. In addition, 242,990 and 403,767 shares were repurchased by the subsidiary in 1994 and 1993, respectively. Under certain circumstances, preferred stock representing contributions by the participants may be redeemed prior to termination of employment. Dividends on the preferred stock have been paid in the form of additional shares of preferred stock. During 1994 and 1993, respectively, 868,000 and 761,000 shares of preferred stock were issued as dividends.
10. Related Party Transaction
For the years ended December 31, 1994 (up to September 30) and 1993, Harrison purchased $23,196,000 and $27,295,000, respectively, of products from Alloys and billed Alloys $8,123,000 and $9,427,000, respectively, for production and administrative functions. Harrison also paid $204,000 of interest on indebtedness of Alloys during the year ended December 31, 1993.
As explained in Note 1, Harrison included in its 1994 expenses, $500,000 of license fees and commissions to DHCO.
At December 31, 1994, Harrison had non interest bearing loans payable and loans receivable with officers of Harrison totaling $124,000 and $200,000, respectively.
11. Commitments and Contingencies
Property, plant and equipment includes the following amounts related to capital leases at December 31, 1994:
Amortization of the assets recorded under capital leases is included in depreciation expense.
The future minimum rental commitments for all operating leases as of December 31, 1994 are as follows:
Total rent expense under operating leases for 1994 and 1993 was $385,000 and $27,000, respectively.
In August 1991, Harrison acquired certain machinery and equipment in the amount of $830,000 and secured financing from the seller. This equipment note was collateralized by a first lien on certain machinery and equipment. The note was payable in thirty monthly installments of $30,000 as to principal and interest with a balloon payment of the remaining principal balance which was to be paid on March 1, 1994.
As of April 1, 1992, Harrison stopped making the monthly installments on the remaining balance of $650,000 because they believed the lender, who was responsible for providing technical and other assistance, had not fulfilled its obligation. The lender, in response, instituted a lawsuit in May 1993 for recovery of the outstanding note plus accrued interest and/or return of the equipment. During 1993, the equipment was returned to the lender. Harrison and its legal counsel believe it has meritorious defenses. Although the litigation is still in process, Harrison believes the final resolution will not result in a material adverse impact to the Company's financial position. During 1992, Harrison wrote down the related machinery and equipment by $500,000 due to its nonperformance. At December 31, 1993, machinery and equipment and debt have been reduced by $650,000 to reflect the return of the equipment.
12. Income Taxes
Income tax benefit for 1994 is $33,000 which is comprised of a current foreign tax provision of $126,000 and a deferred foreign tax benefit of ($159,000). There was no income tax expense or benefit for 1993.
Pretax loss attributable to domestic and foreign operations is as follows:
The following is a reconciliation of income tax expense (credit) to the amount based on the U.S. statutory rate of 34%:
In 1993, the Company implemented SFAS 109 "Accounting for Income Taxes", which requires companies to change the method of accounting for income taxes from the deferred method to the liability method. This change had no effect on the accompanying financial statements.
The components of deferred tax assets and liabilities as of December 31, 1994 and 1993 were as follows:
The increase in the total deferred taxes and valuation allowance is primarily due to the acquisition of DHCO's overseas resistance wire operations (see Note 1).
At December 31, 1994, Harrison had approximately $4,000,000 of loss carryforwards available to offset future U.S. taxable income. Such carryforwards expire from 2005 to 2009.
Loss carryforwards of approximately $13,000,000 are available to offset future taxable income of certain foreign subsidiaries, primarily in the U.K., Italy and Spain. These carryforwards expire beginning in 1995.
Exhibit (23)
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 2-95134) pertaining to the Driver-Harris Employee Incentive Stock Option Plan of our report dated March 10, 1995, with respect to the consolidated financial statements and schedules of Driver-Harris Company included in this Annual Report (Form 10-K) for the year ended December 31, 1994 and to the reference made to us under the caption "Experts" in the aforementioned Registration Statement insofar as that reference relates to our report for the year ended December 31, 1994.
ERNST & YOUNG LLP
MetroPark, New Jersey April 11, 1995