SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
|_X_| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
___
| |Transition report pursuant to Section 13 or 15(d) of the Securities
Act of 1934
For the transition period from _____________ to ____________
Commission file number 1-1212
DRIVER-HARRIS COMPANY
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(Exact name of registrant as specified in its charter)
New Jersey 22-0870220
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(State or other jurisdiction of incorporation I.R.S. Employer I.D.#
or organization
308 Middlesex Street, Harrison, New Jersey 07029
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 483-4802
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
---------------------- ------------------------
Common stock - par value $0.83 1/3 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorted period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates and
the total number of common shares outstanding as of March 22, 1999:
Market Value-$3,512,325 Common Stock - 1,352,833 Shares
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the annual proxy statement anticipated to be filed on or about
April 28, 1999 are incorporated into Part III.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
The Company is engaged in the business of manufacturing and marketing non-
ferrous metal products, principally insulated electrical wire and cable
through its wholly owned subsidiary, Irish Driver-Harris Co. Ltd., located
in Ireland and the U.K.
In 1994, the Company restructured its operations whereby the Company
transferred its overseas resistance operations and its U.S. operating
subsidiary to Harrison Alloys Inc., ("Harrison") in exchange for an
increase to 50% of the Company's ownership of Harrison.
In February 1995, Harrison sold its foreign operations to Kanthal AB,
a Swedish company, and used a portion of the proceeds to repay a bank
loan ($2,529,000) which the Company had guaranteed.
In September 1997, the Company sold its 50% interest in Quality Heat
Treatment Pty. Ltd., a company in the furnace manufacturing and heat
treating business, located in Australia, for a net profit of $128,000.
In November 1996, the Company acquired the assets of a distribution company,
Kestrel Cables Distribution Ltd. ("Kestrel") in the U.K. for $1,342,000.
After incurring substantial losses in 1997 and 1998, Kestrel was closed
and the net assets transferred to the Company's other U.K. distributor
Kingston Cable Distributors.
(b) Financial Information About Industry Segments
Financial information about the Company's operating segments, manufacturing,
located in Ireland and distribution, located in the U.K. is presented in
Note 8 to the accompanying financial statements.
(c) Narrative Description of Business
(i) 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 by the Company's sales staff and through agents.
The following represents a breakdown of the Registrant's total net sales
for the last three fiscal years (in thousands):
<TABLE>
Insulated Electrical
Wire & Cable Other
<C> <C> <C>
1996 $36,974 $3,321
1997 39,525 1,066
1998 40,38 0
</TABLE>
<PAGE>
(ii) The Company's specialty cable operation in Kilkenny, Ireland began
producing cable in the fall of 1997. The focus of this factory is to
manufacture lower volume, higher value-added cable products as part of the
Company's ongoing effort to shift its manufactured product orientation
toward higher margin specialty cable. The Kilkenny plant's initial product
is a high quality fire alarm cable designed to comply with the most
stringent alarm cable standards worldwide.
(iii) The principal sources of raw material for insulated electrical
wire and cable products-- copper wire conductor and PVC insulating materials
-- are refining and wire drawing and chemical companies, respectively.
During the past fiscal year, availability of raw materials was satisfactory,
although copper prices experienced a gradual decline throughout the year.
(iv) The Company owns certain trademarks which are maintained
internationally. As part of the 1994 restructuring described in Item 1(a),
the Company granted Harrison a license to use certain trademarks in
consideration for specified license fees which have presently been deferred.
Except as mentioned above, 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.
(viii) The following amounts represent the backlog of orders believed to
be firm as of the end of each year; all were expected to be filled within
the following year:
<TABLE>
Irish Driver-Harris Co. Ltd.
<S> <C>
December 31, 1997 $ 70,000
December 31, 1998 30,000
</TABLE>
(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.
<PAGE>
(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.
(xii) The number of persons employed by the Registrant and its
subsidiaries at the end of the last fiscal year was 165.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
(i) Information regarding foreign and domestic operations is provided
in Notes 2 and 8 to the consolidated financial statements.
(ii) The Registrant depends solely on foreign operations for the generation
of earnings. The insulated wire and cable operations are located in
Ireland and the U.K. These countries are considered to have relatively
stable governments and minimum political risk; nonetheless there is
exposure to fluctuations in currency exchange rates and normal business risk.
(e) Executive Officers of the Registrant
<TABLE>
<S> <C> <S>
Name Age Position
Frank L. Driver IV 38 President, Chief Executive Officer
Lavinia Z. Emery 54 Secretary and Assistant Treasurer
Thomas J. Carey 62 Chief Financial Officer
</TABLE>
Officers are elected annually by the Board of Directors for one-year
terms expiring in June.
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 became Vice
President-Finance. In September 1994, he was elected President. Prior to
joining the Company, he was a senior financial analyst with General Motors
Corp. Mr. Driver is the nephew of Mr. David A. Driver, Chairman of the
Company.
Ms. Lavinia Z. Emery joined the Company in 1982 in an administrative
capacity. In 1985 she was elected Assistant Secretary and Assistant
Treasurer. In 1998 she was elected Secretary and Assistant Treasurer.
<PAGE>
Mr. Thomas J. Carey was hired by the Company as a Consultant and Chief
Financial Officer in 1995. In 1992 through 1994, he was Chief Financial
Officer of the Home News Company, New Brunswick, NJ and prior to that a
partner of Deloitte & Touche.
Item 2. Properties
The principal properties of the Registrant and its subsidiaries are two
plants and related distribution centers in Ireland. The main plant was
constructed in 1990 and is deemed adequate for the enterprise. Additional
adjacent land was acquired in 1997 for expansion. Both are owned by the
Irish subsidiary and subject to liens by the lenders. The second plant
was acquired under a long-term Irish Development Authority financing plan
in 1997 and has adequate room for expansion.
Item 3. Legal Proceedings
None of material nature.
Item 4. Submission of Matters to a Vote of Security Holders
None in the fourth quarter of 1998.
PART II
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:
<TABLE>
1998 1997
Quarter High Low High Low
<S> <C> <C> <C> <C>
First 10 5/8 8 1/2 10 8 5/8
Second 10 5/8 10 10 5/8 9 5/8
Third 11 8 3/8 13 1/4 10
Fourth 9 1/8 2 3/4 13 3/4 9 3/4
</TABLE>
(b) The approximate number of common shareholders as of March 22, 1999
was 390. 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 did not pay cash dividends during 1998 and 1997. 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 4 to the consolidated financial statements).
<PAGE>
Item 6. Selected Financial Data
<TABLE>
Pro Forma
(Unaudited)
1998 1997 1996 1995 1994 1994
(Amounts in thousands, except per share data)
Net Sales and
<S> <C> <C> <C> <C> <C> <C>
Other Revenues $40,529 $40,754 $41,322 $36,719 $29,060 $60,558
Net(Loss)Income (2,080) (565) 2,452 1,332 (490) (976)
Total Assets 20,564 20,724 21,178 16,255 - 15,893
Long-term Debt 2,142 2,524 2,023 1,907 - 2,734
Per Common Share:
Basic Net (Loss)
Income $(1.55) $(.42) $1.86 $1.03 $(.38) $(.75)
==== ==== ==== === === ===
Diluted Net (Loss)
Income $(1.55) $(.42) $1.86 $1.03 $(.38) $(.75)
==== === === === === ===
Basic Earnings Per Share
Weighted Average Shares
Outstanding 1,344 1,339 1,317 1,295 1,294 1,294
==== ==== ==== ==== ==== ====
Diluted Earnings Per Share
Weighted Average Shares
Outstanding 1,355* 1,354* 1,321 1,296 1,294 1,294
==== ==== ==== ==== ===== ====
</TABLE>
* Adjusted weighted average shares outstanding was not used to calculate
diluted earnings per share since the effect on earnings per share would be
antidilutive.
During 1998, the Company adopted the provisions of Financial Accounting
Standards Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information". This information is presented in Note 8 to the
financial statements.
During 1997, the Company adopted the provisions of Financial Accounting
Standards Statement No. 128, "Earnings Per Share". As a result all prior
year share amounts have been recalculated to conform with Statement 128.
In 1997, the Company sold its 50% interest in Quality Heat Treatment Pty.
Ltd. a company in the furnace manufacturing and heat treating business,
located in Australia, for a net profit of $128,000 ($.09 per share).
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In 1996, the Company's fifty percent owned company, Harrison, sold its
foreign operations to Kanthal AB a Swedish company. (See Note 1 of the
financial statements.) This transaction increased net income by $895,000
($.68 per share).
In 1994, the Company restructured its foreign electrical resistance wire
operations and divested its U.S. operating company. The pro forma amounts
in Item 6, Selected Financial Data, give effect to the restructure on
March 18, 1994 and Alloys' divestiture as if both transactions occurred on
January 1, 1994.
Overview and Financial Condition:
The Company, directly and through its subsidiaries and affiliate, is
engaged in the business of manufacturing insulated electrical wire and
cable through its wholly owned subsidiary, Irish Driver-Harris Co. Ltd.,
located in Ireland and the U.K.
In 1994, the Company restructured its operations whereby the Company
transferred its overseas resistance operations to Harrison Alloys Inc. as
well as its U.S. operating subsidiary in exchange for an increase to 50%
of the Company's ownership of Harrison. Although Harrison is required to
pay to the Company license fees and commissions totaling $500,000 per year
from 1994 to 2003, which is recorded in other income, no payments have been
received since December 1996 and Harrison is presently restructuring its
operations. Income from Harrison will not be recorded until amounts are
received. No amounts were received in 1998 or 1997.
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 1994 restructuring.
The Company has a note payable to the Pension Benefit Guarantee Corporation
("PBGC") which is due September 2000. The PBGC has the right to convert
the entire unpaid principal and accrued interest into common stock of the
Company. Until the note is paid in full, the Company may not pay cash
dividends on its capital stock without permission from the PBGC. See
further discussion in Note 4 to the consolidated financial statements.
In connection with the sale by Harrison of its foreign subsidiaries in
February 1996, and repayment by Harrison of bank debt, guaranteed by the
Company, with a portion of the proceeds, the Company (i) collected certain
receivables from Harrison, (ii) repaid domestic bank debt and, (iii) was
relieved of the Harrison debt guarantee obligation.
In November 1996, the Company purchased the assets of a distribution
company, Kestrel, in the U.K. for $1,342,000. Kestrel incurred substantial
losses in 1997 and 1998 and the facility was closed in August 1998. The
net assets of Kestrel were transferred to the Company's other U.K.
distribution company Kingston Cable Distributors Ltd. at that time.
Closure costs totaled approximately $117,000 and is recorded in cost of
sales.
<PAGE>
Capital expenditures during the year totaled approximately $272,000,
including approximately $230,000 at the Company's Irish subsidiary. Cash
flow from short-term borrowings was sufficient to fund these capital
expenditures. At December 31, 1998, the Company's subsidiaries had
approximately $6,704,000 of available bank lines of credit of which
$4,677,000 was outstanding at December 31, 1998. The Company had
$362,000 in cash on hand at December 31, 1998.
The ratio of current assets to current liabilities was 1.17 at the end of
1998, compared with 1.36 at the end of 1997. The decrease is attributable
to the losses incurred in the current year.
The Company believes it has adequate cash flow from operations to meet its
ongoing obligations including debt repayments and capital commitments in
Ireland.
Market Risks
Foreign Currency Fluctuations
With operations in three different countries, the Company's operating
results may be adversely affected by significant fluctuations in the
relative values among the U.S. Dollar, Irish Punt and the British Pound
Sterling. The Company is periodically involved in hedging currency
between the Irish Punt and the British Pound Sterling through the use of
futures contracts which are relatively short term in nature. The company
historically has experienced minimal gains and losses on such foreign
currency hedging.
Debt Instruments
The Company's long term debt of $2,741,000, is primarily fixed rate debt
of which $1,124,000 is U.S. denominated with the remaining balance primarily
denominated in Irish Punt. The Company's remaining debt of $4,677,000 is
solely comprised of variable rate, short-term facilities denominated
primarily in Irish Punt which does not subject the Company to significant
interest rate risk as the borrowings are short term. The Company does not
believe any reasonable hypothetical interest rate change in the ensuing year
would have a material impact on the Company's Statement of Operations.
Price Fluctuations and Availability of Raw Materials
Copper is the principal raw material purchased by the Company, and the
Company's sales may be affected by the market price of copper. The
Company generally does not hedge potential changes in copper prices.
The Company also purchases insulating compounds, such as PVC, from
various suppliers. Although the Company has not experienced any shortages
of these compounds, the inability of suppliers to supply such raw material
could have a material adverse effect on the Company's business until a
replacement supplier is found or substitute materials are approved for use.
Although the Company has generally been able to pass on increases in the
price of copper and other raw materials to its customers, there can be no
assurance that the Company will be able to do so in the future.
Additionally, significant increases in the price of copper or other raw
materials could have a negative effect on demand for the Company's products.
Similarly, significant increases in the price of copper, or shortage of
such other raw materials, over time could have a material adverse effect on
the Company's business.
<PAGE>
Competition
The Company is subject to competition from a substantial number of
international competitors, some of which have greater financial, engineering,
manufacturing and other resources than the Company. The Company's
competitors can be expected to continue to aggressively pursue increases
in market share. Although the Company believes that it has certain
advantages over its competitors, realizing and maintaining such advantages
will require continued investment by the Company in engineering, marketing
and customer service and support. There can be no assurance that the
Company will have sufficient resources to continue to make such investments
or that the Company will be successful in maintaining such advantages.
Impact of Year 2000
Many computer systems currently record years in a two-digit format. Such
computer systems, if not modified, will be unable to properly recognize
dates beyond the year 1999. This inability to recognize the year 2000 is
commonly referred to as the "Year 2000 Issue".
The holding company in the United States has no third party issues and its
internal systems are not complex and adequate alternatives for preparation
of external reports are available at minimal cost and disruption.
The Company's main operating subsidiary, located in Ireland, which
performs all computer functions, is presently in the process of implementing
its upgraded computer systems which will be Year 2000 compliant. The
purchase cost of the new software that will be capitalized and other
related Year 2000 costs to be expensed as incurred are presently estimated
to be approximately $140,000. The project is expected to be completed in
mid-1999. As part of this process, a duplicate server will be placed into
service to serve as back up should the main system fail. Single user
computers which are Year 2000 compliant will also be available to enable
the Company to function.
As to third parties, i.e., vendors, suppliers and customers in Ireland,
the United Kingdom and elsewhere, the subsidiaries' assessment is in process.
Based upon information available at this time, third parties of critical
importance to the Company are in the process of becoming Year 2000
compliant and the Company believes the issue will not have a material
impact upon the financial position of the subsidiary and ultimately the
Company. However, there can be no assurance that presently unforeseen
difficulties will not arise and actual results could differ materially.
<PAGE>
Results of Operations
Year ended December 31, 1998 compared to year ended December 31, 1997
Units shipped were up 14.2% for the year within manufacturing although net
sales dollars increased only 2.2% due to pressure on sales prices
resulting from aggressive competition within the cable industry in the U.K.,
the Company's primary market, and the foreign rate impact of the value of
the Irish Punt relative to the U.S. Dollar for 1998 compared to 1997.
Overall, net sales to customers decreased by less than one percent for the
year ended December 31, 1998 compared to the prior year since there were
reduced sales at the distriubtion level and 1997 included sales of
$1,066,000 from the Australian subsidiary, sold in the third quarter of
1997. Correspondingly, the gross profit percentage decreased to 11.4%
from 13.3% in 1997. The Company has taken steps to strengthen its
distribution segment by closing one subsidiary, Kestrel, in August 1998
and transferring its assets to a second distribution subsidiary, Kingston.
The Company has also refocused its efforts at Kingston by reducing staff
and concentraing marketing efforts on specialty customers with higher
profit margins while de-emphasizing wholesale customers with poorer
margins. Selling, general and administrative expenses rose as a
percentage of net sales to 14.4% in 1998 compared to 14.2% in 1997.
This was attributable primarily to higher costs at Kestrel and Kingston.
Interest expense increased in 1998 by 11% due to higher average borrowings
in Ireland to meet ongoing obligations.
Income taxes for 1998 result from foreign taxable income at the Company's
Irish subsidiary. The Company has tax loss carry forwards of approximately
$7,100,000 available to offset future U.S. taxable income, which expire
between 1999 and 2010. A valuation allowance of $2,708,000 and $2,560,000
has been provided at December 31, 1998 and 1997, respectively. These
valuation allowances were established since it is not certain that the
deferred tax assets, primarily the net operating loss carry forwards, will
be realized. See further discussion in Notes 1 and 6 to the consolidated
financial statements.
Year ended December 31, 1997 compared to year ended December 31, 1996
Although net sales to customers decreased by 11% in the last quarter
compared to 1996, net sales increased slightly for the entire year.
Units shipped for the year were up 3.0% in the last quarter and 8.7% for
the year. Revenue for 1997 included $1,066,000 for the Australian
subsidiary compared to $3,508,000 for the full year of 1996. The gross
profit percentage dropped to 13.8% from 16.9% in 1996. This was due
primarily to lower selling prices resulting from aggressive price cutting
within the cable industry and the impact of significant changes in the
relative values of the Irish Punt, UK Sterling and the U.S. Dollar, as
well as a one-time write down of inventory values at the UK distribution
company. Selling, general and administrative expenses rose as a percentage
of net sales to 14.0% in 1997 compared to 13.1% in 1996. This was due
primarily to start-up expenses at the new UK distribution company and the
new manufacturing facility in Ireland. Interest expense increased by 56.8%
due to higher average borrowings in Ireland for capital spending compared
to 1996.
<PAGE>
As a result of the UK Pound Sterling strengthening against the Irish Punt,
the Company's Irish subsidiary recorded a foreign exchange gain of $374,000
in 1997. The Irish subsidiary transacts 75% of its business in Sterling.
The Company disposed of its 50% interest in Quality Heat Treatment Pty. Ltd.,
Australia, in September 1997, recording a net gain of $128,000 on the
transaction.
Income taxes for 1997 result from foreign taxable income at the Company's
Irish subsidiary. The Company has tax loss carry forwards of approximately
$6,500,000 available to offset future U.S. taxable income, which expire
between 1999 and 2011. A valuation allowance of $2,560,000 has been
provided at December 31, 1997. This valuation allowance was established
since it is not certain that the deferred tax assets, primarily the net
operating loss carry forwards, will be realized. See further discussion in
Notes 1 and 6 of the consolidated financial statements.
The foregoing discussion contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in such forward-looking statements.
Item 8. Financial Statements and Supplementary Data
This information is submitted in a separate section of this report.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
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 anticipated to be filed on or about
April 28, 1999, is herein incorporated by reference. The information with
respect to executive officers is included in Part I of this Form 10-K.
Item 11. Executive Compensation
The information with respect to officers and directors of the Company,
included in the proxy statement anticipated to be filed on or about
April 28, 1999, is herein incorporated by reference.
Item 12. Security ownership of Certain Beneficial Owners and Management
The information required by this item, included in the proxy statement
anticipated to be filed on or about April 28, 1999, is herein incorporated
by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item, included in the proxy statement
anticipated to be filed on or about April 28, 1999, is herein incorporated
by reference.
<PAGE>
PART IV
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 27. Financial Data Schedule
(b) Reports on Form 8-K
None filed in the fourth quarter of 1998.
(c ) Exhibits
Incorporated
by Reference
to Sec Form
Exhibit 3. Articles of Incorporation and By-Laws 8-K dated
November 1, 1982
Amendments thereto 8-K dated
June 17, 1987
Exhibit 10. Material Contracts:
Settlement Agreement with Pension 8-K dated
Benefit Guaranty Corporation dated December 22, 1993
December 22, 1993
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
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, 1998
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.)
Exhibit 27. Financial Statement Schedules
This portion of Item 14 is submitted in a separate section of this report.
<PAGE>
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
March 29, 1999 /s/ Thomas J. Carey
- ---------------------------- ------------------------------------------
Date Thomas J. Carey
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Ralph T. Bartlett /s/ David A. Driver
- ------------------------------- ------------------------------------
Ralph T. Bartlett David A. Driver
Director Chairman
Date: March 29,1999 Date: March 29, 1999
/s/ H. L. Biggerstaff /s/ Frank L. Driver IV
- ------------------------------- ------------------------------------
H.L. Biggerstaff Frank L. Driver IV
Director Director, President and Chief
Executive Officer
Date: March 29, 1999
Date: March 29, 1999
<PAGE>
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, 1998
<PAGE>
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, 1998 and 1997 Page 20
Consolidated Statements of Operations - Years ended December 31, 1998,
1997 and 1996 Page 22
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1998, 1997 and 1996 Page 23
Consolidated Statements of Cash Flows - Years ended December 31,
1998, 1997 and 1996 Page 24
Notes to Consolidated Financial Statements Page 25
The following consolidated financial statement schedules of Driver-Harris
Company and Subsidiaries are included in Item 14(d):
Schedule I - Condensed Financial Information of Registrant Page 42
Schedule II - Valuation and Qualifying Accounts Page 46
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.
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. Our
audits also included the financial statement schedules listed at 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
16% in 1998 and 23% in 1997, and total revenues constituting 19% in 1998,
20% in 1997 and 21% in 1996 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 total 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, 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.
MetroPark, New Jersey
March 26, 1999 /s/ ERNST & YOUNG LLP
<PAGE>
AUDITORS' REPORT TO THE MEMBERS
of
KINGSTON CABLE DISTRIUBTORS LIMITED
We have audited the accompanying balance sheets of Kingston Cable
Distributors Limited as of 31 December 1998 and 31 December 1997 and the
related statements of profit and loss and cash flows for each of the three
years in the period ended 31 December 1998. 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.
Basis of Opinion
We conducted our audits in accordance with generally accepted auditing
standards of the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from 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 audits provide a reasonable basis for our opinion.
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 1998 and 31 December 1997, and the
results of its operations and its cash flows for each of the three years in
the period ended 31 December 1998 in conformity with generally accepted
accounting principles of the United States.
Date: 26 March 1999 /s/ James, Stanley & Co.
Registered Auditors
Chartered Accountants
1733 Coventry Road
South Yardley
Birmingham
B26 1DT
<PAGE>
AUDITORS' REPORT TO THE MEMBERS
of
KESTREL CABLES DISTRIBUTION LIMITED
We have audited the accompanying balance sheets of Kestrel Cables
Distribution Limited as of 31 December 1998 and 31 December 1997 and the
related statements of profit and loss and cash flows for each of the three
years in the period ended 31 December 1998. 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.
Basis of Opinion
We conducted our audits in accordance with generally accepted auditing
standards of the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from 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 audits provide a reasonable basis for our opinion.
Opinion
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kestrel Cables
Distribution Limited as of 31 December 1998 and 31 December 1997, and the
results of its operations and its cash flows for each of the three years in
the period ended 31 December 1998 in conformity with generally accepted
accounting principles of the United States.
Date: 26 March 1999 /s/ James, Stanley & Co.
Registered Auditors
Chartered Accountants
1733 Coventry Road
South Yardley
Birmingham
B26 1DT
<PAGE>
Driver-Harris Company and Subsidiaries
Consolidated Balance Sheets
Dollar Amounts in Thousands
<TABLE>
December 31
Assets 1998 1997
Current Assets:
<S> <C> <C>
Cash $ 362 $ 848
Receivables, less allowances of $601
and $406 9,966 9,325
Inventories:
Materials 585 536
In process 152 254
Finished 3,223 3,920
------- -------
3,960 4,710
Prepaid expenses 1,054 513
------ ------
Total current assets 15,342 15,396
Property, plant and equipment, at cost:
Land and buildings 3,644 3,480
Machinery and equipment 3,739 3,731
Office equipment 352 242
------ ------
7,735 7,453
Less accumulated depreciation and
amortization 2,513 2,125
------ -------
5,222 5,328
------ -------
$20,564 $20,724
===== =====
</TABLE>
See accompanying notes.
<PAGE>
Driver-Harris Company and Subsidiaries
Consolidated Balance Sheets (continued)
Dollar Amounts in Thousands
<TABLE>
December 31
Liabilities and stockholders' equity 1998 1997
Current liabilities:
<S> <C> <C>
Short-term borrowing $ 4,677 $ 4,179
Current portion of long-term debt 599 515
Accounts payable 5,974 5,176
Accrued expenses 1,777 1,293
Income taxes payable 77 108
------ --------
Total current liabilities 13,104 11,271
Long-term debt 2,142 2,524
Deferred grants 781 796
Deferred foreign income taxes 184 147
Postretirement benefit liabilities 573 574
Other liabilities 111 149
------ ------
16,895 15,461
Stockholders' equity:
Common stock -- par value $0.83 1/3 per share:
Authorized 3,000,000 shares; issued 1,424,928
shares at December 31, 1998 and December
31, 1997 (including 72,095 and 84,507
treasury shares at December 31, 1998
and 1997) 1,233 1,223
Additional paid-in capital 2,282 2,228
Retained earnings 950 3,030
Accumulated other comprehensive loss (796) (1,218)
------ -------
3,669 5,263
Commitments and contingencies
-------- --------
$20,564 $20,724
===== =====
</TABLE>
See accompanying notes.
<PAGE>
Driver-Harris Company and Subsidiaries
Consolidated Statements of Operations
Dollar Amounts in Thousands, Except per Share Data
<TABLE>
Years ended December 31
1998 1997 1996
Revenues:
<S> <C> <C> <C>
Net sales $40,389 $40,591 $40,295
Other 140 163 1,027
------- ----- -------
40,529 40,754 41,322
Costs and expenses:
Cost of sales 35,767 35,350 33,804
Selling, general and administrative 5,867 5,770 5,343
------- ------- ------
(1,105) (366) 2,175
Interest expense 722 649 414
Foreign exchange(gain)loss and sundry 167 (374) (21)
Gain on sale of interest in Australia subsidiary (128)
Gain in connection with sale of foreign operations
by related company (895)
------ ------ -------
(Loss) income before income taxes (1,994) (513) 2,677
Provision for income taxes 86 52 225
------ ----- ------
Net (loss) income $(2,080) $ (565) $ 2,452
===== ==== =====
Basic net (loss) income per share $(1.55) $(.42) $1.86
Diluted net (loss) income per share $(1.55) $(.42) $1.86
</TABLE>
See accompanying notes.
<PAGE>
Driver-Harris Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the three years ended December 31, 1998
<TABLE>
Dollar Amounts in Thousands
Accumulated
Other
Compre-
hensive
Common Paid-In Retained Income
Stock Capital Earnings (Loss) Total
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 1,187 $ 1,997 $ 1,143 $(1,883) $2,444
Net income 2,452 2,452
Adjustment from exchange rate
changes 293 293
Adjustment in connection with
sale of foreign operations
by related company 1,694 1,694
Comprehensive income 4,439
Exercise of 782 treasury
shares 1 5 6
Directors' compensation 2 11 13
Exercise of 37,500 option
shares 31 187 218
----------------------------------------
Balance at December 31, 1996 1,221 2,200 3,595 104 7,120
Net loss (565) (565)
Adjustments from exchange rate changes (1,322) (1,322)
Comprehensive loss (1,887)
Directors' and Officers'
compensation 2 28 30
------------------------------------------
Balance at December 31, 1997 1,223 2,228 3,030 (1,218) 5,263
Net loss (2,080) (2,080)
Adjustments from exchange rate changes 422 422
Comprehensive loss (1,658)
Directors', Officers' and Employees'
compensation 4 35 39
7,062 shares purchased by
Officer 6 19 25
----------------------------------------
Balance at December 31, 1998 $ 1,233 $ 2,282 $ 950 $ (796) $3,669
====================================
</TABLE>
See accompanying notes.
<PAGE>
Driver-Harris Company and Subsidiaries
Consolidated Statements of Cash Flows
Dollar Amounts in Thousands
<TABLE>
Years ended December 31
1998 1997 1996
Operating activities
<S> <C> <C> <C>
Net (loss) income $(2,080) $ (565) $ 2,452
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 567 643 676
Provision for doubtful accounts 272 76 111
Loss (Gain) on sale of fixed assets 14 (13) (172)
Gain on sale of foreign subsidiary (128)
Equity in related company (1,561)
Non-cash compensation 39 30 19
Deferred credit (968)
Elimination of equity adjustment from
translation for foreign operations sold
by related company 1,634
Account with related company 253
Receivables (641) (1,837) (1,558)
Inventories 1,090 (520) (235)
Prepaid expenses (525) 340 (555)
Accounts payable and accrued expenses 911 772 (3)
----------------------------
Net cash provided by (used in) operating
activities (353) (1,202) 93
Investing activities
Capital expenditures (272) (2,191) (1,576)
Proceeds from sale of fixed assets 37 552 234
Assets purchased through acquisition (1,164)
Proceeds from sale of subsidiary 225
Other 48
-----------------------------
Net cash used in investing activities (235) (1,414) (2,458)
Financing activities
Change in short-term debt 329 2,054 1,847
Change in deferred grants (15) 110 300
Proceeds from issuance of long-term debt 118 1,322 313
Reduction of long-term debt (587) (389) (391)
Issuance of capital stock 25 215
----------------------------
Net cash provided by (used in) financing
activities (130) 3,097 2,284
Effect of exchange rate changes on cash 232 (35) 4
----------------------------
Net change in cash (486) 446 (77)
Cash at beginning of year 848 402 479
----------------------------
Cash at end of year $ 362 $ 848 $ 402
=======================
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 646 $ 988 $ 727
Income taxes 73 41
Supplemental schedule of non-cash investing and financing activities
Receivables offset against purchase price
of acquisition $ 178
Capital lease obligations incurred from machinery
and equipment $ 221 $1,391 705
</TABLE>
See accompanying notes.
<PAGE>
Driver-Harris Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Summary of Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Driver-Harris
Company (the "Company") and its wholly-owned subsidiary, Irish Driver-Harris
Co. Ltd., ("IDH"), located in Ireland and the U.K. and for 1997, the
operations of Quality Heat Treatment Pty. Ltd. through its disposition in
September, 1997. Intercompany accounts, transactions and profits have been
eliminated in consolidation.
The Company, directly and through its subsidiaries, is engaged in the
business of manufacturing and marketing non-ferrous metal products,
principally electrical resistance wire and insulated electrical wire and
cable.
Harrison Alloys Inc. ("Harrison"), (referred to herein as a "related
company") a fifty percent owned company, recorded on the equity method of
accounting is carried at no value on the balance sheets at December 31, 1998
and 1997. The Company will not recognize any income from its investment in
Harrison until Harrison's income exceeds Harrison's losses.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method for all inventories.
Property, Plant and Equipment
Depreciation has been provided principally by the straight-line method based
upon estimated useful lives of the depreciable assets.
Deferred Grants
Deferred grants represent foreign government grants received by the Company's
Irish subsidiary. The grants received with respect to capital expenditures
are treated as a deferred credit and are amortized to income over the
expected useful life of the related asset.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis 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
<PAGE>
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.
Earnings per Common Share
During 1997, the Company adopted the provision of Financial Accounting
Standards Statement No. 128, "Earnings Per Share". All earnings per share
amounts have been restated to conform with this statement.
As required under the provisions of Statement 128, basic and diluted
earnings per share are calculated as follows:
<TABLE>
1998 1997 1996
Numerator:
<S> <C> <C> <C>
Net (Loss) Income $ (2,080) $ (565) $ 2,452
Denominator:
Basic earnings per share -
weighted average shares 1,344,204 1,339,046 1,317,280
Effect of dilutive shares -
stock options 10,539 14,824 3,237
-------- ------- -------
Diluted earnings per share -
adjusted weighted average
shares 1,354,743* 1,353,870* 1,320,517
Basic Earnings (loss) per share $(1.55) $ (.42) $ 1.86
Diluted Earnings (loss) per share $(1.55) $ (.42) $ 1.86
</TABLE>
* Adjusted weighted average shares not used since effect on earnings per
share would be antidilutive.
<PAGE>
Employee Stock Options
As permitted under FASB Statement 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company elects to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25),
and related interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of the Company's employee stock
options equals or is greater than the market price of the underlining stock
on the date of grant, no compensation expense is recognized. Since there
were no stock options granted in 1998 and 1997, no disclosures required
under FASB 123 are necessary.
Concentration of Credit Risk
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. Three customers outstanding balances represent 29.5% of
consolidated receivables at December 31, 1998 compared to two customers
whose outstanding balances represent 22.2% of consolidated receivables at
December 31, 1997. The majority of accounts receivable, including these
customers are insured against loss from bad debts. These same customers
represent 25.2% of consolidated revenues in 1998 and 17.3% in 1997.
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, accumulated other comprehensive
income (loss).
Foreign Currency Options
To hedge against exposures to changes in foreign currency exchange rates on
certain sales commitments and anticipated, but not yet committed sales, the
Company enters into forward foreign currency contracts. These contracts
permit, but do not require, the Company to purchase specified amounts of
British Pounds expected to be received from its export sales for pre-
established Irish Punt amounts at specified dates. The forward contracts
are denominated in the same foreign currencies in which export sales are
expected to be denominated. These contracts are designated and effective
as hedges of probable quarterly export sales transactions during the next
year, which otherwise would expose the Company, on the basis of its aggregate
net cash flows in respective currencies, to foreign currency risk. The
continued effectiveness of these contracts as hedges is assessed
periodically by analyzing the correlation between the actual export sales
which occur and the degree of offset which the contracts provide.
<PAGE>
The effects of movements in currency exchange rates on these instruments
are recognized when the related operating revenue is recognized. Realized
gains and losses on forward foreign currency contracts are included in other
assets and liabilities and recognized in earnings when the future sales
occur or at the time a sale is no longer expected to occur. Realized and
unrealized gains and losses on contracts that are not designated as hedges,
that fail to be effective as hedges, or that relate to sales that
are no longer probable of occurring are included in income as foreign
exchange gains or losses.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Impairment of Long-Lived Assets
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (FASB 121), requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. This requirement had no effect on the financial
statements in 1998 and 1997.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income (Loss)"
(Statement 130). Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the
adoption of this Statement had no impact on the Company's financial
position or results of operations. Statement 130 requires foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders'equity, to be included in other comprehensive
income (loss). The financial statements have been reclassified to conform
to the requirements of Statement 130.
Segment Reporting
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (Statement 131). Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for
related disclosures about product and services, geographic areas, and
major customers. The adoption of Statement 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information. See Note 8.
<PAGE>
Pensions and Other Postretirement Benefits
Effective January 1, 1998, the Comany adopted Statement of Financial
Accounting Standards No. 132, "Disclosure about Pensions and Other
Postretirement Benefits" (Statement 132). Statement 132 revises and
improves disclosure requirements of FASB Statements No. 87,
Employers' Accounting for Pensions", No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination
Benefits", and No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions". The Statement does not change the recognition or
measurement of pension or postretirement benefits, eliminates unnecessary
disclosures and requires additional information. See Note 5.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(Statement 133). Statement 133 requires all derivatives to be recorded on
the balance sheet at fair value and establishes "special accounting" for
the following three different types of hedges: hedges of changes in the
fair value of assets, liabilities or firm commitments (referred to as fair
value hedges); hedges of the variable cash flows of forecasted transactions
(cash flow hedges); and hedges of foreign currency exposures of net
investments in foreign operations. Each of the three types of hedges
requires accounting treatment and criteria that recognizes offsetting
changes in value or cash flows of both the hedge and the hedged item in
earnings in the same period. Changes in the fair value of derivatives
that do not meet the criteria of one of these three categories of hedges
must be included in earnings in the period of the change. The Company is
required to adopt the provision of this statement in the year 2000.
the Company is currently evaluating the impact of this statement on its
financial statements but does not expect a material effect therefrom.
Reclassification
Certain prior period amounts have been reclassified to conform with the
current year presentation.
2. Foreign Operations
Net assets which are located outside the United States and are included
in the consolidated balance sheets are as follows (in thousands):
<TABLE>
December 31
1998 1997
Assets
<S> <C> <C>
Receivables, net $ 9,966 $ 9,325
Inventories 3,960 4,710
other current assets 1,174 499
Property, plant and equipment - net 5,222 5,327
------------------
20,322 19,861
Liabilities
Current liabilities 12,969 11,114
Long-tem debt 1,018 1,475
Other long-term liabilities 781 796
Deferred income taxes 184 147
Sundry 111 149
-------------------
15,063 13,681
-------------------
Net assets outside the United States $ 5,259 $ 6,180
=================
</TABLE>
Net (loss) income of the Company's foreign subsidiaries included in the
accompanying finanical statements amounted to approximately $(1,659,000)
in 1998, $(259,000) in 1997 and $1,538,000 in 1996.
Because 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, United States
income taxes have not been provided on such earnings. Unremitted
earnings of foreign subsidiaries at December 31, 1998 amounted to
approximately $5,707,000.
<PAGE>
3. Leases
Property, plant and equipment includes the following amounts related to
capital leases (in thousands):
<TABLE>
December 31
1998 1997
<S> <C> <C>
Machinery and equipment $ 1,505 $ 1,455
Less accumulated amourtization 570 379
------------------
$ 935 $ 1,076
===================
</TABLE>
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, 1998 are as follows (in thousands):
<TABLE>
<C> <C>
1999 $120
2000 109
2001 109
2002 106
2003 106
Thereafter 695
-----
$1,245
====
</TABLE>
Total rent expense under operating leases for 1998, 1997 and 1996 was
$179,000, $193,000 and $272,000, respectively.
<PAGE>
4. Long-Term Debt and Lines of Credit
Long-term debt is as follows (in thousands):
<TABLE>
December 31
1998 1997
<S> <C> <C>
Note payable to Pension Benefit Guaranty Corp. $ 1,124 $ 1,049
Other mortgage loans 913 943
Capitalized lease obligations 704 884
Sundry - 163
-------------------
2,741 3,039
Less current portion 599 515
--------------------
$ 2,142 $ 2,524
====================
</TABLE>
The Company's obligations approximate fair market value.
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, until maturity. Until
the note is paidin 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 and are
denominated primarily in Irish Punt, bear interest at 10% per year, and
are due in monthly installments through 2000. These loans and the
subsidiary's $5,874,000 general credit line are jointly collateralized
by all of its assets with a book value of $20,322,000. Under the terms of
the loans, there are certain restrictios which limit the payment of
dividends and management fees paid by the subsidiary to the Company.
Maturities of long-term debt at December 31, 1998 are as follows (in
thousands):
<TABLE>
Capitalized
Leases Other
<C> <C> <C>
1999 $ 247 $ 352
2000 185 1,304
2001 152 175
2002 114 148
2003 6 58
Thereafter - -
----------------------
$ 704 $2,037
==================
</TABLE>
<PAGE>
At December 31, 1998, the Company and its subsidiaries had available short-
term lines of credit in the aggregate amount of approximately $6,704,000
(which includes the $5,874,000 general credit line) of which $4,677,000 was
in use and is recorded as short-term borrowings on the balance sheet.
The weighted average interest rate on the short-term borrowings of the
Company and its subsidiaries was 9.3%, 7.2% and 10.4% at December 31, 1998,
1997 and 1996, respectively.
5. Postretirement Benefits - Pensions and Health Care
Pension
The Company's only defined benefit pension plans are those of a foreign
subsidiary. These cover substantially all of the foreign subsidiary's
employees, who must contribute to the plan cost. Benefits are based on
employees' year of service and 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 following tables provide a reconciliation of the changes in the
pension plans' benefit obligations and fair value of assets over the
two year period ending December 31, 1998 and a statement of the funded
status as of December 31 of both years (in thousands):
<TABLE>
Pension Benefits
December 31
1998 1997
Reconciliation of benefit obligation
<S> <C> <C>
Obligation at January 1 $ 1,719 $ 1,470
Service cost 181 120
Interest cost 143 118
Participant contributions 41 58
Actuarial (gain) loss (251) (47)
Benefit payments (309) -
Foreign currency exchange rate changes 74 -
------------------
Obligation at December 31 1,598 1,719
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1 1,617 1,241
Actual return on plan assets 144 230
Employer contributions 61 88
Participant contributions 41 58
Benefit payments (309) -
Foreign currency exchange rate changes 74 -
------------------
Fair value of plan assets invested in pooled separate
account of an insurance company at
December 31 1,628 1,617
Reconciliation of Funded status
Funded status at December 31 30 (102)
Unrecognized transition obligation 74 220
Unrecognized prior service cost (112) (114)
--------------------
Prepaid (accrued) benefit cost (8) 4
====================
Prepaid benefit cost 73 58
Accrued benefit liability (81) (54)
-------------------
Net (liability) asset recognized (8) 4
===================
</TABLE>
<PAGE>
Net pension expense for the Company's defined benefit pension plans for 1998,
1997 and 1996 included the following components (in thousands):
<TABLE>
December 31
1998 1997 1996
Service cost for benefits earned during
<S> <C> <C> <C>
the year $ 227 $ 126 $ 122
Interest cost on projected benefit
obligation 140 124 111
Actual net gains on plan assets (141) (243) (128)
Net amortization 38 143 44
---------------------------
264 150 149
Less employee contributions 41 38 37
---------------------------
Net pension expense $ 223 $ 112 $ 112
=====================
</TABLE>
The assumptions used in computing the preceding information at December 31,
1998, 1997 and 1996 are: an assumed discount rate of 8%, an assumed rate of
compensation increase of 6% and an expected rate of return on plan assets
of 8%.
The Company also has a supplemental pension plan which provides benefits to
the estate of the former Chairman. The net liability for such benefits at
December 31, 1998 was approximately $423,000 and is reflected in the balance
sheet in postretirement benefit liabilities.
Health Care and Life Insurance
Effective June 30, 1998, the Company terminated its postretirement health
care and life insurance benefits program for U.S. employees.
Accumulated postretirement benefits aggregating $261,000 of which $150,000
was accrued through June 30, were eliminated. Postretirement benefit costs
charged to expense for the six months ended June 30, 1998 amounted to
$10,500.
The Company will use the accrued amount of $150,000 to pay supplemental
medical insurance premiums to U.S. employees and surviving spouses who had
15 years or more service at June 30, 1998 when they reach the age of 65
until this accrued amount is exhausted.
<PAGE>
Postretirement benefit costs for 1997, and 1996 included the following
components (in thousands):
<TABLE>
1997 1996
<S> <C> <C>
Service cost for benefits earned during the year $ 5 $ 5
Interest cost on accumulated postretirement benefit
obligation 18 16
Amortization of transition obligation 13 13
-----------------
$ 36 $ 34
============
</TABLE>
The following assumptions were used at December 31, 1997 and 1996: a
discount rate of 7.25% and a 1996 assumed health care cost trend rate of 5%.
6. Income Taxes
Income tax expense is composed of the following (in thousands):
<TABLE>
1998 1997 1996
Foreign:
<S> <C> <C> <C>
Current $ 49 $ 79 $ 215
Deferred 37 (27) 10
---------------------
$ 86 $ 52 $ 225
==================
</TABLE>
Pre-tax (loss) income attributable to domestic and foreign operations is as
follows (in thousands):
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
United States $ (421) $ (322) $ 898
Foreign (1,573) (191) 1,779
------------------------
$(1,994) $ (513) $2,677
===================
</TABLE>
<PAGE>
Following is a reconciliation of income tax expense (credit) to the amount
based on the U.S. statutory rate of 35% (1998, 1997 and 1996) (in thousands):
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Income taxes based on U.S. statutory rate $ (698) $ (180) $ 937
Non-taxable income:
Increase (reduction) of valuation
allowances 148 120 (30)
Gain in connection with sale of foreign
operations by related company (339)
Taxes of foreign subsidiaries at rates
different than U.S.
statutory rate 636 119 (373)
Other (net) (7) 30
----------------------
$ 86 $ 52 $ 225
=================
</TABLE>
The components of deferred tax assets and liabilities at December 31, 1998
and 1997, were as follows (in thousands):
<TABLE>
1998 1997
Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
Inventories $ 57 $ 64
Depreciation $ 283 $ 218
Accrued expenses 191 225
Tax loss carry forwards 2,510 2,285
Tax credits 49 57
Sundry
------------------ -------------------
2,807 283 2,631 218
Valuation allowance 2,708 2,560
------------------ -------------------
Total $ 99 $ 283 $ 71 $ 218
============ ==============
</TABLE>
At December 31, 1998, the Company had approximately $7,100,000 of loss carry
forwards available to offset future U.S. taxable income. Such carry
forwards expire beginning in 1999. A valuation allowance of $2,708,000
and $2,560,000 has been provided at December 31, 1998 and 1997, respectively.
These valuation allowances were established since it is not certain that the
deferred tax assets, primarily the net operating loss carry forwards, will
be realized.
<PAGE>
7. Employee Stock Options
The 1983 Driver-Harris Employee Incentive Stock Option Plan which expired in
1993 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 422 of the Internal Revenue Code. Under this plan, 45,000 shares of
stock are reserved for issuance at December 31, 1998 and 1997. The following
table summarizes the activity in the Plan:
<TABLE>
Number
of Shares Price Per Share
<S> <C> <C> <S><C>
Outstanding January 1, 1996 82,500 $4.00 to $8.50
Exercised in 1996 37,500 4.00 to 6.875
--------
Outstanding December 31,
1998, 1997 and 1996 45,000 $5.25 to $8.50
=====
</TABLE>
The outstanding options at December 31, 1998, which are all fully vested,
expire between 2000 and 2002.
During 1998, the Company issued 5,350 shares of stock to non-executive
Directors, officers and employees as compensation and bonus. Total
compensation expense recorded in conjunction with the issuance of these
shares was $39,000.
8. Industry Segments and Geographic Areas
The Company classified its revenues based upon the location (i.e.
manufacture or purchase for resale-distribution) of the facility and its
function. Such revenues are regularly reviewed by the Directors and
management and decisions are made on such a basis.
The operating expenses and resultant net profit (loss) and the assets are
similarly reviewed and decisions made based upon whether they relate to
manufacturing or purchase for resale (i.e. distribution).
<PAGE>
<TABLE>
Year ended December 31, 1998:
Reportable Segments Distri- Heat
Parent Manufacturing bution Treating
Co. (U.S.) (Ireland) (U.K.) (Australia) Total
Revenues
<S> <C> <C> <C> <C> <C>
External revenues $ 32,837 $7,552 $40,389
Inter-segment revenues 3,379 143 3,522
Other revenues $ 50 90 140
Elimination of inter
-segment revenue (3,379) (143) 3,522
---------------------------------------------------
Consolidated revenues 50 32,927 7,552 40,529
Net Profit (Loss) (303) 106 (1,883) (2,080)
Assets
Total assets 1,694 20,423 4,104 26,221
Elimination of
investment (623) (623)
Elimination of inter-company
receivables (829) (3,289) (733) (4,851)
Elimination of inter-company
inventory (100) (83) (183)
-----------------------------------------------
242 17,034 3,288 20,564
Other Significant items
Depreciation expense 1 485 65 551
Interest expense 77 569 76 722
Expenditures for assets 231 41 272
Year ended December 31, 1997:
Revenues
External revenues $ 30,894 $ 8,390 $ 1,066 $40,350
Inter-segment revenues 4,275 38 4,313
Other revenues $ 332 63 9 404
Elimination of inter-segment
revenue (4,275) (38) (4,313)
Consolidated revenues 332 30,957 8,399 1,066 40,754
Net Profit (Loss) (306) 482 (744) 3 (565)
Assets
Total assets 2,315 19,994 4,435 26,744
Elimination of
investment (623) (289) (912)
Elimination of
inter-company
receivables (829) (4,074) (13) (4,916)
Elimination of
inter-company
inventory (192) (192)
863 15,439 4,422 20,724
Other Significant Items
Depreciation expenses 1 511 91 24 627
Interest expense 17 482 80 70 649
Expenditures for
assets 2,137 50 4 2,191
Year ended December 31, 1996:
Revenues
External revenues 31,770 5,204 3,321 40,295
Inter-segment revenues 2,723 2,723
Other revenues 612 228 187 1,027
Elimination of inter-
segment revenue (2,723) (2,723)
Consolidated revenues 612 31,998 5,204 3,508 41,322
Net Profit (Loss) 914 1,651 (181) 68 2,452
Other Significant Items
Depreciation expenses 1 384 42 115 542
Interest expenses 69 237 48 60 414
Expenditures for
assets 1,436 53 87 1,576
</TABLE>
<PAGE>
9. Financial Instruments
Off Balance Sheet Risk
The Company enters into forward exchange contracts to hedge certain firm
sales commitments denominated in foreign currencies and to hedge certain
anticipated but not yet committed sales expected to be denominated in
foreign currencies. The purpose of the Company's foreign currency hedging
activities is to protect the Company from the risk that the eventual cash
flows resulting from the sale of products to international customers will
be adversely affected by changes in exchange rates. At December 31, 1998,
the Company had forward exchange contracts, all having maturities of less
than six months, to exchange British Pound currencies for Irish Punt in
the amount of (3.5 million British Pounds.
Gross deferred realized gains and losses from hedging firm sales commitments
and anticipated but not yet committed sales transactions were a $5,000 loss
at December 31, 1998.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts, but the Company does not
anticipate nonperformance by any of these counterparties. The amount of
such exposure is generally the unrealized gains in such contracts.
<PAGE>
Driver-Harris Company and Subsidiaries
Schedule I - Condensed Financial Information of Registrant
Condensed Balance Sheets
<TABLE>
Dollar Amounts in Thousands
December 31
1998 1997
Assets
Current assets:
<S> <C> <C>
Cash $ 218 $ 532
Accounts receivable from subsidiaries 829 829
------- -------
Total current assets 1,047 1,361
Investment in subsidiaries 4,430 5,667
Other assets 24 15
------- -------
$ 5,501 $ 7,043
===== =====
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 25 $ 17
Accrued expenses 110 140
----- ------
Total current liabilities 135 157
Long-term debt 1,124 1,049
Postretirement benefit liabilities 573 574
----- -----
Total liabilities 1,832 1,780
Stockholders' equity
Common stock 1,233 1,223
Additional paid-in capital 2,282 2,228
Retained earnings 950 3,030
Accumulated other comprehensive loss (796) (1,218)
------ ------
3,669 5,263
Commitments (note 1)
------- ------
$ 5,501 $ 7,043
===== =====
</TABLE>
<PAGE>
Driver-Harris Company and Subsidiaries
Schedule I - Condensed Financial Information of Registrant
Condensed Statements of Operation
Dollar Amounts in Thousands
<TABLE>
Years Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Fees from subsidiaries $ 220 $ 220 $ 220
Fees from related company 500
Other income 50 54 75
----------------------
270 274 795
Selling, general and administrative
expenses 614 638 707
Interest and financing expenses 77 70 69
Gain on sale of interest in Australia subsidiary (128)
Gain in connection with sale of foreign operations
by related company (895)
----------------------
(Loss) income before equity in net income, (loss)
of subsidiaries and income taxes (421) (306) 914
Equity in net (loss) income of
subsidiaries (1,659) (259) 1,538
---------------------
(Loss) income before income taxes (2,080) (565) 2,452
Income taxes
---------------------
Net (loss) income $(2,080) $ (565) $2,452
=====================
</TABLE>
<PAGE>
Driver-Harris Company and Subsidiaries
Schedule I - Condensed Financial Information of Registrant
Condensed Statements of Cash Flow
Dollar Amounts in Thousands
<TABLE>
Years Ended December 31
1998 1997 1996
Operating activities
<S> <C> <C> <C>
Net (loss) income $ (2,080) $ (565)$ 2,452
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Undistributed net income (loss) of
subsidiaries 1,659 259 (1,538)
Provision for doubtful accounts 114
Non-cash compensation 39 30 19
Increase (reduction) in retirement
benefit liability (1) 295 74
Receivables from subsidiaries 103 (338)
Accounts payable and accrued expenses (22) (52) (73)
Deferred credit (968)
Equity in related company (1,561)
Elimination of equity adjustment from
translation for foreign operations
sold by related company 1,634
Account with related company 253
Sundry (9) 6 (14)
-------------------------
Net cash provided by (used in) operating
activities (414) 76 54
Financing activities
Increase in long-term debt 75 70 66
Issuance of capital stock 25 215
Sundry 3
-------------------------
Net cash provided by financing activities 100 70 284
-------------------------
Net change in cash (314) 146 338
Cash at beginning of year 532 386 48
-------------------------
Cash at end of year $ 218 $ 532 $ 386
=====================
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 1 $ - $ 4
=====================
</TABLE>
<PAGE>
Driver-Harris Company and Subsidiaries
Schedule I - Condensed Financial Information of Registrant
Notes to Condensed Financial Statements
1. Basis of Presentation
In the parent company only (Driver-Harris Company - U.S. Corporate Holding
Company) financial statements, the Company's investment in subsidiary
(Irish Driver-Harris Co. Ltd.) is stated at cost plus equity in
undistributed earnings since the date of acquisition. The Company's
share of net income of its unconsolidated subsidiaries is included in
consolidated income using the equity method. The Driver-Harris Company -
U.S. Corporate Holding Company financial statements should be read in
conjunction with the Company's consolidated financial statements.
<PAGE>
Driver-Harris Company and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Dollar Amounts in Thousands
<TABLE>
Col. A Col. B Col. C Col. D Col. E
Additions
(1)
Balance at Charged to Balance
Beginning Costs and Deductions at End
Description of Period Expenses Describe of Period
Year ended December 31, 1998:
Deduction from
related asset:
Tax valuation
<S> <C> <C> <C> <C>
allowance $ 2,560 $ 148(2) $ 2,708
Allowances for
doubtful trade
accounts 406 272 $ (77)(1) 601
====================================================
Year ended December 31, 1997:
Deduction from
related asset:
Tax valuation
allowance $ 2,440 $ 120(2) $ 2,560
Allowances for
doubtful trade
accounts 408 76 $ 78(1) 406
===================================================
Year ended December 31, 1996:
Deduction from
related asset:
Tax valuation
allowance $ 2,470 $ 30(2) $ 2,440
Allowances for
doubtful trade
accounts 278 $ 111 (19)(1) 408
===================================================
</TABLE>
(1) Accounts charged off during the year and adjustments due to currency
fluctuations.
(2) The change in valuation allowance is principally due to the change
in deferred tax assets.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Company's Consolidated Balance Sheet at December 31, 1998 and the
Company's Consolidated Statement of Operations for the year ended
December 31, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 362
<SECURITIES> 0
<RECEIVABLES> 10567
<ALLOWANCES> 601
<INVENTORY> 3960
<CURRENT-ASSETS> 15342
<PP&E> 7735
<DEPRECIATION> 2513
<TOTAL-ASSETS> 20564
<CURRENT-LIABILITIES> 13104
<BONDS> 2142
0
0
<COMMON> 1233
<OTHER-SE> 2436
<TOTAL-LIABILITY-AND-EQUITY> 20564
<SALES> 40389
<TOTAL-REVENUES> 40529
<CGS> 35767
<TOTAL-COSTS> 35767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 272
<INTEREST-EXPENSE> 722
<INCOME-PRETAX> (1994)
<INCOME-TAX> 86
<INCOME-CONTINUING> (2080)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2080)
<EPS-PRIMARY> (1.55)
<EPS-DILUTED> (1.55)
</TABLE>
