-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RYk6fbVYUnILdu7m4xj28WSsW7CxGkGZwEPeLDIgcgeIuI9JC5qV2RnB/F9Vop9k UQFmAYe9rpDqlBdi7vRPgA== 0000889812-99-001838.txt : 19990616 0000889812-99-001838.hdr.sgml : 19990616 ACCESSION NUMBER: 0000889812-99-001838 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARVARD INDUSTRIES INC CENTRAL INDEX KEY: 0000046012 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED RUBBER PRODUCTS, NEC [3060] IRS NUMBER: 210715310 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-01044 FILM NUMBER: 99646398 BUSINESS ADDRESS: STREET 1: 3 WERNER WAY CITY: LEBANON STATE: NJ ZIP: 08833 BUSINESS PHONE: 9084374100 MAIL ADDRESS: STREET 1: 3 WERNER WAY STREET 2: SUITE 960 CITY: LEBANON STATE: NJ ZIP: 08833 FORMER COMPANY: FORMER CONFORMED NAME: HARVARD BREWING CO DATE OF NAME CHANGE: 19710315 10-K405/A 1 AMENDMENT NO. 2 TO ANNUAL REPORT As filed with the Securities and Exchange Commission on June 15, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 2 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 0-21362 ................................................ HARVARD INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 21-0715310 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3 WERNER WAY, LEBANON, NEW JERSEY 08833 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (908) 437-4100 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF SECURITIES EXCHANGES ON WHICH REGISTERED ------------------- ----------------------------- Common Stock ($0.01 par value) Nasdaq National Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No __ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. TITLE OUTSTANDING - ----- ----------- Common Stock As of September 30, 1998 there were 7,026,437 shares outstanding. On November 24, 1998 the Registrant's Chapter 11 plan became effective, the old shares were cancelled and new shares were authorized. As of January 11, 1999 the total number of outstanding shares of new Common Stock is 8,240,295. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I. This Annual Report on Form 10-K for the fiscal year ended September 30 is being amended hereby to clarify certain disclosures made as of September 30, 1998 or as of the original date of filing of the Annual Report on Form 10-K, as the case may be, unless a different date is specified. This Annual Report on Form 10-K contains forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Additional written or oral forward-looking statements may be made by the Company from time to time, in filings with the Securities Exchange Commission or otherwise. Statements contained herein that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions referenced above. Forward-looking statements may include, but are not limited to, projections of revenues, income or losses, capital expenditures, plans for future operations, the elimination of losses under certain programs, financing needs or plans, compliance with financial covenants in loan agreements, plans for liquidation or sale of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, and the effects of the bankruptcy proceedings and other pending and possible litigation, as well as assumptions relating to the foregoing. In addition, when used in this discussion, the words "anticipates," "believes," "estimates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, including, but not limited to, product demand, pricing, market acceptance, risk of dependence on third party suppliers, intellectual property rights and litigation, risks in product and technology development and other risk factors detailed in the Company's Securities and Exchange Commission filings, some of which cannot be predicted or quantified based on current expectations. Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Annual Report, particularly in "Item 1. Business--Compliance with Environmental Laws", "Item 3. Legal Proceedings", the Notes to Consolidated Financial Statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," describe factors, among others, that could contribute to or cause such differences. Other factors that could contribute to or cause such differences include unanticipated increases in launch and other operating costs, a reduction and inconsistent demand for passenger cars and light trucks, labor disputes, capital requirements, adverse weather conditions, the inability to negotiate on favorable terms in the definitive agreements for program modifications with a major customer, unanticipated developments in the bankruptcy proceedings and other pending litigation, and increases in borrowing costs. Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 1. BUSINESS BUSINESS COMPANY OVERVIEW Harvard Industries, Inc. ("Harvard" or the "Company" or "Corporation"), headquartered at 3 Werner Way in Lebanon, New Jersey, is a direct supplier of components for Original Equipment Manufacturers ("OEMs") producing cars and light trucks in North America, principally General Motors Corporation ("General Motors"), Ford Motor Company ("Ford") and Daimler-Chrysler ("Chrysler"), which together accounted for approximately 82% of sales in fiscal 1998. The Company conducts its operations primarily through three wholly owned subsidiaries, Hayes-Albion Corporation ("Hayes-Albion"); Pottstown Precision Casting, Inc. ("Pottstown"), formerly known as Doehler-Jarvis Pottstown, Inc.; and The Kingston-Warren Corporation ("Kingston-Warren"). The Company's subsidiaries, produce a wide range of products including: rubber glass-run channels; rubber seals for doors and trunk lids; complex, high volume aluminum castings and other cast, fabricated, machined and decorated metal products; and metal stamped and roll form products. 2 COMPANY HISTORY The Company has expanded through various acquisitions, including the acquisitions of Kingston-Warren and Hayes-Albion in 1986 and Doehler-Jarvis, Inc. and subsidiaries ("Doehler-Jarvis") in 1995. In 1988, the Company was taken private in a management-led leveraged buy-out transaction. As part of the buy-out transaction, the Company issued $200 million of senior subordinated notes on which it later defaulted in 1990. The Company sought bankruptcy protection in May 1991, and emerged from Chapter 11 after the bankruptcy court approved a reorganization plan that paid both the senior lenders and trade lenders in full. On May 8, 1997 ("Petition Date"), Harvard filed a petition for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On November 24, 1998 (the "Effective Date"), the Company substantially consummated its First Amended Modified Consolidated Plan Under Chapter 11 of The Bankruptcy Code dated August 19, 1998 (the "Reorganization Plan" or "Plan of Reorganization") and emerged from bankruptcy. Following the Petition Date, the Company and its subsidiaries continued to operate as debtors-in-possession subject to the supervision of the Bankruptcy Court. Under the Bankruptcy Code the Company and its subsidiaries were authorized to operate their businesses in the ordinary course but transactions that were out of the ordinary course, including the employment of attorneys, accountants and other professionals, required approval of the Bankruptcy Court. In May 1997, the Bankruptcy Court approved the appointment of an Official Committee of Unsecured Creditors' in the Chapter 11 Case (The "Creditors' Committee"). The Creditors' Committee was disbanded on the Effective Date. The Creditors' Committee retained Roger Pollazzi as an automotive industry consultant. Mr. Pollazzi acted in this capacity until November 1997, when, with the support of the Creditors' Committee, the Board of Directors appointed Mr. Pollazzi Chief Operating Officer. Prior to such appointment, Mr. Pollazzi had served as Chairman of the Board and Chief Executive Officer of The Pullman Company ("Pullman") from 1992 to 1996. Shortly after his appointment, Mr. Pollazzi hired approximately fifteen professionals as employees of Harvard to assist him in analyzing company operations, eliminating on-going negative cash flows associated with cash drains at several operations and coordinating and implementing the restructuring efforts. Since November 24, 1998, the date of reorganization and when the Company substantially completed its emergence from bankruptcy (the "Effective Date"), the management team includes: o Roger Pollazzi, who now serves as Chief Executive Officer; o James Gray, President of Harvard, an automotive executive who previously ran Tenneco Automotive's European Operations as well as the Clevite division of Pullman; o Theodore Vogtman, Chief Financial Officer of Harvard, who has over twenty years of industry experience including serving as Chief Financial Officer of Pullman; and o Vincent Toscano, Executive Vice President of Strategic Planning of Harvard, who was formerly the Vice President of Operations at Pullman and has over 21 years of experience in the automotive industry. The Company's new management developed the Plan of Reorganization with respect to its financial affairs (including the Turnaround Business Strategy). In order to be confirmed, the Plan of Reorganization was required to satisfy certain requirements of the Bankruptcy Court, including that each claim in a particular class receive the same treatment as each other claim in that class and that the Company be adequately capitalized (upon emergence from Chapter 11) so that confirmation of the Plan of Reorganization would not be followed by a liquidation or the need for further reorganization. The Company was also required to demonstrate to the satisfaction of the Bankruptcy Court that the Plan satisfied the "best interests of creditors" test. This means that holders of claims and interests in each impaired class must have either unanimously accepted the Plan of Reorganization or that such holders would not receive more in a liquidation of the Company than through the implementation of the Plan of Reorganization. The results of the voting confirmed that, in fact, each class approved the plan. 3 MATERIAL SUBSEQUENT EVENT On the effective date, pursuant to the Plan of Reorganization, substantially all pre-petition unsecured debt at pre-reorganization Harvard was converted into equity of post-reorganization Harvard in the form of common stock (the "New Common Stock"). Under the terms of the Plan of Reorganization, holders of Harvard's Pay-In-Kind Exchangeable Preferred Stock ("PIK Preferred Stock") and holders of Harvard's existing common stock (the "Old Common Stock") will each receive warrants ("Warrants") to acquire, in the aggregate, approximately 5% of the New Common Stock, with holders of PIK Preferred Stock each receiving their pro rata share of 66.67% of the Warrants and holders of the Old Common Stock each receiving their pro rata share of 33.33% of the Warrants. On the Effective Date, the Old Common Stock and PIK Preferred Stock were canceled. On November 13, 1998, the Bankruptcy Court entered the Order in Aid of Implementation of the Plan of Reorganization and Approving the Terms of Revised Exit Financing. The Company emerged from Bankruptcy on November 24, 1998. Effective with the emergence from bankruptcy, as arranged by Lehman Brothers, Inc. ("Lehman"), the Company issued $25 million of 14 1/2% Senior Secured Notes due September 1, 2003 (the "Notes"). Additionally, the Company entered into a $115 million senior secured credit facility with a group of lenders arranged by Lehman, and including General Electric Capital Corporation as Administrative Agent (the "Senior Credit Facility" and, together with the Notes, the "Financings"). The Senior Credit Facility provides for up to $50 million in term loan borrowings and up to $65 million in revolving credit borrowings. The combined proceeds from the issuance of the Notes and initial borrowings under the Senior Credit Facility were used to: o refinance the senior and junior debtor-in-possession credit facilities that provided financing to the Company while the Company was in bankruptcy proceedings (together, the "DIP Credit Facilities"), o pay administrative expenses due under the Plan of Reorganization and pay related fees and expenses, o provide cash for working capital purposes, and o provide funds for general corporate purposes. The $65 million revolving credit portion of the Senior Credit Facility will be used to finance working capital and for other general corporate purposes. INDUSTRY OVERVIEW The North American automotive parts supply business is composed of sales to OEMs and the automotive aftermarket. The Company primarily sells products to be installed as original equipment in new cars and trucks predominantly to OEMs and to other OEM suppliers. New Business Development. Historically, the U.S. automakers furnished their suppliers with blueprints and specifications for their required products and chose vendors based on price and reputation. However, in today's automotive supplier market, it is typical for the U.S. automakers to electronically furnish their suppliers with mathematical data describing the surfaces of the part or system in question, along with the technical description of its functional requirements. At this point, the supplier is expected to assume responsibility for all of the activities necessary to bring the part to production. The development cycle includes the design and engineering function and the production of prototypes for design validation. After validation of the prototype parts or system, tooling is designed and built to manufacture the finished product. The entire cycle usually requires between two and four years to complete, during which the supplier assumes most of the responsibility for managing the interface of the various groups within its own and the customer's organization. These groups include the supplier's and OEMs' respective purchasing/sales, design, engineering, quality assurance and manufacturing areas. Prior to the current era of supplier total program responsibility, customer interface was limited to the supplier sales function dealing with the customer purchasing function. In today's marketplace, it is necessary for the Company's engineers and technicians to interface constantly with their counterparts at the U.S. automakers to secure design contracts. This is the principal starting point in the process of being awarded future business. There 4 are significant differences among suppliers in their abilities to design and manage complex systems and bring them through the product design and manufacturing cycle on time and at a competitive price. Automotive Supplier Consolidation. The automotive supply industry is experiencing a period of significant consolidation. To lower costs and improve quality, OEMs are reducing their supplier base by awarding sole-source contracts to full-service suppliers who are able to provide design, engineering and program management capabilities and can meet cost, quality and delivery requirements. For suppliers such as the Company, this new environment provides an opportunity to grow by obtaining business previously provided by other non-full service suppliers and by acquiring suppliers that enhance product, manufacturing and service capabilities. OEMs rigorously evaluate suppliers on the basis of product quality, cost control, reliability of delivery, product design capability, financial strength, new technology implementation, quality and condition of facilities and overall management. Suppliers that obtain superior ratings are considered for sourcing new business. Although these new supplier policies have already resulted in significant consolidation of component suppliers in certain groups, the Company believes that consolidation will continue to provide attractive opportunities to acquire high-quality companies that complement its existing business. OEM Purchasing, Practices and Trends. In the late 1980's and early 1990's, the U.S. automakers instituted a number of fundamental changes in their sourcing procedures. Principal among these changes has been an increased focus on suppliers' cost and improving quality performance, a significant consolidation in the number of suppliers with which they have relations and, most recently, a move toward purchasing integrated systems or modules rather than component parts. OEMs are increasingly seeking suppliers capable of providing complete systems or modules rather than suppliers who only provide separate component parts. A system is a group of component parts that operate together to provide a specific engineering driven functionality and a module is a group of systems and/or component parts representing a particular area within the vehicle, which are assembled and shipped to the OEM for installation in a vehicle as a unit. By outsourcing complete systems or modules, OEMs are able to reduce their costs associated with the design and integration of different components and improve quality by enabling their suppliers to assemble and test major portions of the vehicle prior to their beginning production. In addition, by purchasing integrated systems, OEMs are able to shift engineering, design, program management, and product investment costs to fewer and more capable suppliers. By designing and supplying integrated systems, a supplier is able to reduce costs and improve quality by identifying system-wide solutions. The Company believes that this shift creates an opportunity for suppliers, such as the Company, to provide integrated systems. In addition, OEMs have implemented cost reduction programs that require suppliers to pass on a portion of the benefit of productivity improvement in the form of lower prices in exchange for multi-year supply agreements. These initiatives have required suppliers to implement programs to lower their costs and reduce component and system prices to the OEMs. New North American OEMs (Transplants). Over the last decade, foreign automotive manufacturers have gained a significant share of the U.S. market, first through exports and more recently through U.S.-based manufacturing facilities ("Transplants"). Japanese export sales have dropped significantly from 1983 to 1993, while Japanese Transplant sales have grown dramatically as Japanese car companies have shifted more of their production to North America. Based on industry analysts' estimates, Transplants produced 51.8% of the Japanese cars sold in the United States in 1994 compared with 8.4% in 1985. As a percent of total North American car production, Transplant production increased from 2.0% in 1985 to 20.5% in 1997. To the extent that the growth of Transplant sales results in loss of market share for the Company's U.S. automaker customers, the Company will experience an adverse effect. The Company plans to solicit additional business from Transplants. There can be no assurance, however, that any additional business will be generated from Transplants or if any such additional business is obtained that it will compensate for any lost business that the Company may experience. Demand. As an OEM supplier, the Company is significantly affected by consumer demand for new vehicles in North America. Demand in North American car and light truck markets is tied closely to the overall strength of the North American economies. After attaining a production level of approximately 13.6 million units 5 in 1985, North American car and light truck production fell to 10.4 million units in 1991. Since this low, production rose to 15.6 million units for the 1997 calendar year. OPERATIONS DESCRIPTION Overview. In general, automotive component manufacturers, like the Company, are invited to bid for specific products and component systems which are incorporated in both new and existing automotive platforms. If the platform already exists, the current supplier may be favored by the OEM because of the supplier's familiarity with the existing product as well as its existing investment in the manufacturing process and tooling. With respect to new platforms, there has been an increasing trend toward involving potential suppliers much earlier in the design and development process in order to encourage the supplier to share some of the design and development burden. Achieving this cooperative supplier status is a significant step towards winning a long-term supply order and gives the supplier a decided advantage over the competition. However, even if awarded an order, in almost all instances it will be at least two to four years before these cooperative suppliers see their products incorporated into new platforms. There is also an increasing trend towards potential suppliers committing to target prices on parts or systems as a condition of being awarded a design and supply order. Under target price arrangements, the burden of cost overruns is generally borne by the supplier. In addition, in order to secure long-term supply arrangements, annual price concessions through productivity improvements are expected by OEMs. As automotive parts suppliers continue to face downward pricing pressures on the components supplied to the OEMs, automotive production volumes become critical in maintaining and increasing operating profitability. Due to the long gestation between being awarded a contract for a new platform and producing parts, and the considerable designing and planning obligations required of the successful bidder during this period of delay, the OEMs were reluctant to award new business to the Company during the pendency of the Chapter 11 cases. As a result, the awarded new business during the pendency of the Chapter 11 cases was less than would be anticipated under normal conditions. This could have serious effects on the financial strength of the Company in the next several years when the recently awarded platforms commence production. Design, Production and Delivery. The Company believes that it has strong design and engineering capabilities which enable it to serve its customers better in the initial phases of product development. The Company's Computer Aided Engineering ("CAE") group, located at its Farmington Hills, Michigan facility, is the focal point of this initiative. The CAE group utilizes Computer Aided Design ("CAD") techniques which allow the Company's design engineers to develop a product's physical and performance characteristics into state- of-the-art hardware and software systems. These systems subsequently produce 3-D representations of the products, which can be automatically downloaded into Computer Numerically Controlled ("CNC") milling and cutting machines. These CNC machines can produce tooling equipment and manufacture products with a high degree of accuracy and reduced lead times, thereby reducing the historically high labor content in the pre-production costs. Furthermore, the Company can mathematically test its product designs prior to production, resulting in savings through the reduction in the number of physical prototypes and significantly reducing the lead time typical in developing and testing new products. The Company has research and development facilities in Newfields, New Hampshire and Farmington Hills, Michigan where Company personnel meet with customers to incorporate the customers' structural and thermal requirements into the product design process. In addition, the Company maintains engineering facilities at Jackson, Michigan and Wytheville, Virginia. Part of the Company's design philosophy is the early involvement of its manufacturing engineers in the initial stages of a product's design. This "Design-for-Manufacture" approach helps create a product that not only meets its required design and performance characteristics, but also results in a product that is easier and less expensive to manufacture. By adopting this approach the Company is able to save costs typically related to engineering changes which can hamper the production of new products, as well as reduce the amount of time it takes to get new products to market. Consistent with the Company's design approach is its increasing involvement in cooperative supplier programs. As a cooperative supplier, the Company receives the initial design responsibilities for a specific product or component for a particular vehicle in the early stages of its design. These programs, which effectively 6 move the burden of design and development of new products from OEMs to their suppliers, resulting in corresponding increased costs, have represented an increasing trend in the automotive industry in the late 1980's and early 1990's. In 1995 and 1996, the Company was the cooperative supplier on three major body sealing programs at General Motors. Three additional General Motors programs (GMX230, GMT360 and GMX320) were ultimately awarded to the Company in 1997. Following the design of its products, the Company employs work cells and synchronous manufacturing techniques to improve production efficiency. Central to this approach is the emphasis on a "continuous improvement" environment that enables employees to develop new and more efficient manufacturing techniques. BUSINESS STRATEGY Management's business strategy focuses on leveraging Harvard's core competencies in the design and production of OEM automotive components in order to target new business opportunities with existing automotive OEM customers, as well as in the automotive aftermarket and non-automotive industrial market. In an effort to improve operating margins, Harvard has made significant progress in closing or divesting itself of underperforming facilities and exiting unprofitable OEM business. Since the management transition in November 1997, the company has announced the closing or sale of numerous divisions/manufacturing plants and is in the process of re-allocating underutilized production capacity to higher margin industrial applications (See Asset Sales Section below). In addition to closing unprofitable facilities, Harvard is working with customers in evaluating product design and production processes to increase margins to targeted levels. Management intends to focus on accessing the non-automotive industrial market and the automotive aftermarket to leverage its existing product portfolio and manufacturing expertise. Harvard believes that a number of its existing automotive processes such as spin forming, tube rolling, rubber extrusion and high-strength steel forming will be marketable in the industrial and aftermarket arenas because these processes are commonly used for products offered in those markets. Management has experience in both the automotive and industrial markets, especially in lawn and garden machinery, and construction supplies and equipment. In addition to the non-automotive opportunities discussed above, the Company believes that it can effectively cross-market products from its different divisions to leverage its relationships at General Motors, Ford and Chrysler. The Company is focused on the design and production of integrated systems for OEMs as opposed to individual supplying parts on a contract basis. Harvard may also make selected small acquisitions to broaden its product offerings, technological capabilities and customer base, or to increase its distribution channels. ASSET SALES In November 1997, the Company sold the Materials Handling division of Kingston-Warren for approximately $18 million in cash. In 1998, Harvard sold the land, building and certain other fixed assets of its Harvard Interiors division in St. Louis, Missouri for approximately $4.1 million. During the same period, Harvard divested certain tooling assets associated with the underperforming mirrors business of its Harman Automotive, Inc. subsidiary ("Harman") for approximately $0.8 million. In June 1998, Harvard sold its Elastic Stop Nut Division ("ESNA") facility in New Jersey, for approximately $1.9 million. In September 1998, the Company sold, at auction, certain assets of Harman for approximately $2 million. In 1998, the Company focused on selling the Greeneville and Toledo plants of Doehler-Jarvis and receiving compensatory payments from Ford and General Motors for operating losses that Harvard incurred from continuing to operate the Toledo plant prior to shutdown. Production ceased at Toledo in June 1998. In September 1998, the Company sold substantially all of the assets and assigned certain liabilities of Greeneville for $10.9 million subject to adjustments. Among the sale transactions which are currently pending, Harvard has most recently signed a letter of intent to divest the Tiffin plant of the Hayes-Albion subsidiary for $1.6 million and is negotiating an agreement to sell Doehler-Jarvis Toledo's land and building. The operations formerly in the Snover, Michigan facility were moved to other locations and the Snover facility is currently for sale. 7 The table below lists those assets that have been or will be sold as part of the Company's asset disposition plan:
ASSETS SOLD OR TO BE SOLD MONTH/YEAR - ------------------------------------------------------------------------------- ------------------------ Manufacturing Plant in Sevierville, TN (Harman) August 1997 King-Way Assets (Material Handling Division of Kingston-Warren) November 1997 St. Louis Facility (Harvard Interiors) January 1998 Certain assets of Furniture Business (Harvard Interiors) March 1998 Tooling for Automotive Component Parts (Harman) April 1998 Union, NJ Facility (Specialty Fastener Division ("ESNA")) June 1998 Remaining assets of Furniture Business (Harvard Interiors) June 1998 Tooling and Equipment for Automotive Component Parts (Toledo) August 1998 Doehler-Jarvis Greeneville, TN Plant September 1998 Harman Automotive (fixed assets) September 1998 Hayes-Albion Tiffin, OH Plant Pending Doehler-Jarvis Toledo, OH--land and building Pending Doehler-Jarvis Toledo, OH--equipment Pending Harman Automotive Bolivar, TN facility Pending Hayes-Albion (Trim-Trends) Snover, MI--land and building Pending
SUBSIDIARIES Kingston-Warren Kingston-Warren, which was acquired by Harvard in 1986, has conducted business since 1945 and is primarily engaged in manufacturing rubber glass-run channels, sealing strips and body seals for door and trunk lids. Kingston-Warren operates from three plant locations which occupy 584,000 square feet: Newfields, NH; Wytheville, VA; and Church Hill, TN. At September 30, 1998, Kingston-Warren employed approximately 1,200 persons. Kingston-Warren has developed proprietary technology in the following areas: adhesive and non-adhesive techniques for bonding polymers and metals into single units, multiple extrusion capabilities, integrated components to realize cost and quality advantages of total systems and advanced polymer/metal technology that integrates polymers and metal into single systems. Kingston-Warren is also known for its prototyping and testing functions. Kingston-Warren provides a variety of sealing products for several different major OEM platforms. The following table represents a product summary.
CUSTOMER PRODUCT PLATFORM - -------- ------- -------- Freightliner Body & Glass Sealing Heavy Truck General Motors Glass Sealing Malibu/Cutlass General Motors Glass Sealing Cadillac DeVille General Motors Glass Sealing Cavalier/Sunfire General Motors Glass Sealing Grand Prix General Motors Glass Sealing Bonneville General Motors Glass Sealing LeSabre General Motors Glass Sealing Oldsmobile 88 General Motors(1) Glass Sealing Blazer & Jimmy General Motors(1) Glass Sealing DeVille General Motors(1) Glass Sealing Catera General Motors(1) Greenhouse Moldings Catera
- ------------------ (1) Products constitute goods to be delivered in the future pursuant to contracts that have been executed by the Company and the customer ("Future Booked Business"). Kingston-Warren's three manufacturing facilities deliver over 134 million feet of supported, unsupported, and multiple durometer extrusions per year. Its short cycle production is supported by interactive manufacturing 8 systems including MRP II, J-I-T, bar coding and statistical process controls. During 1998, Kingston-Warren constructed a rubber mixing facility at its Wytheville, VA location allowing the company to compound its own rubber mixtures. This will further shorten the production cycle and permit Kingston-Warren to custom mix its rubber compounds to it own performance and quality specifications. Kingston-Warren's major competitors include BTR, Standard Products, GenCorp and Waterville. Pottstown Precision Casting (formerly Doehler-Jarvis Pottstown, Inc.) Acquired by Harvard in July 1995 for $218 million, Doehler-Jarvis has been in operation since 1907. Doehler-Jarvis specialized in complex, high volume aluminum castings primarily for use in the automotive industry. Although Doehler-Jarvis through its subsidiaries historically operated three plants (Toledo, Ohio; Pottstown, Pennsylvania; and Greeneville, Tennessee), only the Pottstown plant remains in operation following Harvard's emergence from Chapter 11, and the subsidiary has been renamed Pottstown Precision Casting, Inc. Pottstown's primary customers are Ford and General Motors. At September 30, 1998, the Pottstown plant employed approximately 475 persons. The Pottstown plant specializes in medium size aluminum die castings and complements its casting capabilities with precision machining. It is an independent supplier of parts cast with 390 aluminum alloy (a heat-resistant and durable alloy) in North America, supplying heavy duty internal transmission and air compressor castings. Pottstown smelts an average of 165,000 pounds of 390 aluminum alloy per day (60% capacity), and approximately 110,000 pounds of the other alloys per day. Pottstown has over 50 casting machines to focus on small to medium sized parts. Pottstown makes products which are supplied to General Motors, Ford, and Simpson Industries, among others. The following table represents a product summary.
CUSTOMER PRODUCT PLATFORM - -------- ------- -------- General Motors Engine Bed Plate Passenger Cars General Motors Input Housing Light Trucks Simpson Industries V6 Cylinder Head Various Vehicles General Motors Pump Cover 4-L60 All vehicles
The Pottstown facility is QS9000 certified, a quality assurance program conducted by General Motors, and has a wide range of die casting capabilities. The 470,000 square foot facility has advanced robotics for painting, casting, die servicing, controlling metal pouring and casting extraction. Pottstown competes primarily with Gibbs Die Casting Corp., Spartan, Ryobi Die Casting (USA), Inc., ITT Lester Industries, Inc., Fort Wayne Foundry Corp., CMI International Inc. and Teksid SPA, as well as the captive aluminum casting operations of the U.S. automakers. Hayes-Albion Hayes-Albion was purchased by Harvard in 1986 and has conducted business since 1888 as a supplier of cast and machined parts to the automotive, farm equipment and general industrial markets. Historically, Hayes-Albion has operated six plants, but is in the process of divesting its Tiffin, Ohio plant. Hayes-Abion's five manufacturing facilities located in Albion, and Jackson, Michigan; Bridgeton, Missouri; Rock Valley, Iowa; and Ripley, Tennessee occupy approximately 1,000,000 square feet and at September 30, 1998, employed approximately 1,500 persons. The Company's Hayes-Albion primary customers are Ford, General Motors and Caterpillar. Hayes-Albion's products consist of ferrous and non-ferrous castings and fans. Ferrous castings are made from iron or steel, while non-ferrous castings are made from other components such as aluminum, magnesium or zinc. Products made from ferrous castings include transmission parts, universal joint yokes, rear axle housings and suspension parts. Products made from aluminum, magnesium and zinc castings include valve train covers, engine covers, suspension parts and steering columns supports, and are manufactured for the automotive, transportation, construction and machinery industries. 9 The Company is currently evaluating its options for the Hayes-Albion's Ripley, TN operations. Ripley produces die cast magnesium components and a small amount of die cast aluminum components primarily for the automotive OEM market. During the Chapter 11 reorganization, Ripley was unable to participate fully in the magnesium market and several of its programs were targeted for resourcing or second scourcing by its customers. Absent significant new, higher margin orders, management currently projects continued operating losses for this operation. In its Chapter 11 restructuring plan, the Company projected a growing use of magnesium in automotive and industrial applications due to its high strength and light weight. Upon further analysis, due to the stability of aluminum pricing (resulting from the OEMs recent successful conclusion of long term aluminum commodity supply agreements) the outlook for expected growth in the use of magnesium will be significantly delayed, and as a result of this changed marketing outlook, the Company is evaluating a sale of the Ripley facility. The following table represents a product summary of Hayes-Albion.
CUSTOMER PRODUCT PLATFORM - -------- ------- -------- Caterpillar Various Die Castings N/A Caterpillar Machine Shafts N/A Chrysler Plastic Fans All Trucks Ford Gear Cases Medium Trucks Ford Differential Carriers Lincoln Ford Differential Carriers All Trucks Ford Yokes All Rear Wheel Drive Vehicles General Motors Fans Medium Trucks General Motors Delphi Machined Shafts All Trucks General Motors Front Engine Covers Passenger Cars Isuzu Valve Covers Light Trucks Toyota Valve Covers Lexus Ford(1) Differential Carriers Lincoln & Jaguar Ford(1) Gear Cases F-250 and F-350 Trucks General Motors(1) Engine Fans Blazer and Jimmy Trucks GM-Delco(1) Shafts Various Cars & Trucks Caterpillar(1) Various Components Engine Applications
- ------------------ (1) Future Booked Business. Hayes-Albion has also identified opportunities with General Motors, Ford and TRW to produce differential carriers, fans and various castings for additional model platforms. Hayes-Albion utilizes a technology driven approach to manufacturing which utilizes computer modeling. Their manufacturing processes include centerless grinding, CNC machining, heat treating, broaching, vibratory deburring and parts washing and testing. Hayes-Albion's arc and coreless induction furnaces melt over 1,000 tons of iron daily. Heat treating capacity exceeds 100 tons per day and Hayes-Albion can produce a broad range of castings from under one pound to over 150 pounds. Hayes-Albion's primary competitors include Intermet, Grede, Schwitzer, Lunt and Racine. Trim Trends, Division of Hayes-Albion Trim Trends, acquired by the Company in 1986 as part of Hayes-Albion, has conducted business since 1948 primarily in functional and decorative metal stampings for automotive applications. Trim Trends operates from four plants covering 467,000 square feet: Deckerville, Michigan; Bryan and Spencerville, Ohio; and Dundalk, Ontario. In September 1998, the Company announced the consolidation of its Snover, Michigan operation into the Deckerville, Michigan facility. Operations at Snover ceased in December 1998. At September 30, 1998, Trim Trends employed approximately 700 persons. Trim Trends manufactures roll form door frames for the North American OEM market. In addition to the U.S. automakers, Trim Trends sells its products to Navistar, Lear Corporation, Mitsubishi and Honda. Trim 10 Trends has capabilities in roll forming, stretch bending, general metal assembly technology and design and engineering. Trim Trends is currently bidding for programs at General Motors and Chrysler for upper door frames, bumper impact beams, door impact beams and other door and structural components. Trim Trends also recently obtained awards from Chrysler to supply door frames for its NS Van platforms and structural components for the LH Sedan, and an award from General Motors to supply a door component for its GM 200 platform. Trim Trends products are primarily sold to automotive OEMs and automotive seating manufacturers. Primary customers include Ford, Chrysler, General Motors, Lear Corporation and Navistar. The following table represents a product summary.
CUSTOMER PRODUCT PLATFORM - -------- ------- -------- Chrysler Door Frames Mini Vans Chrysler Various Stampings Intrepid & LHS Chrysler Roll Formed H.S.S. Intrepid & LHS Ford Door Frames Escort General Motors Door Beams All Light Trucks General Motors Door Beams Cadillac DeVille General Motors Door Tracks MiniVan General Motors(1) Door Beams MiniVan General Motors(1) Cross Member DeVille Mitsubishi(1) Delta Sash Galant Mitsubishi(1) Division Post Assembly Galant Magna(1) Cross Member Chrysler Van Magna(1) Drip Rail Chrysler Van Lear Corporation(1) Seat Reinforcement Ford Van
- ------------------ (1) Future Booked Business. Trim Trends' four plants form a single source for specialized and compatible metal fabricating. The processes include: roll forming, stretch bending, stamping, various assembly functions, machining, welding, fabricating and anodizing. On-site equipment consists of over 200 presses, ranging in size up to 1,600 tons. Trim Trends utilizes statistical process controls to ensure consistently high quality, reduce failure costs and maintain the dynamics for constant product and process improvement. Trim Trends competes against a number of other domestic and international suppliers of formed metal components, including Visteon, Excel Industries, Benteler Werke AG, Magna International and Inland Fisher Guide. COMPETITION The Company is subject to competition from many companies larger in size and with greater financial resources and a number of companies of equal or similar size which specialize in certain of the Company's activities. The Company considers major competitors with respect to each unit in its business to include: Kingston-Warren: Standard Products, GenCorp, BTR. and Waterville; Hayes-Albion: Intermet, Grede, Schwitzer, Lunt and Racine; Trim Trends: Excel Industries, Inland Fisher Guide, Magna International, Visteon and Benteler Werke AG; Pottstown: Ryobi Die Casting (USA), Inc., Gibbs Die Casting Corp., ITT Lester Industries, Inc., Fort Wayne Foundry Corp., CMI International Inc., Spartan and Teksid SPA, as well as the captive aluminum casting operations of the U.S. automakers. Companies in these sectors compete based on several factors, including product quality, customer service, product mix, new product design capabilities, cost, reliability of supply and supplier ratings. INTELLECTUAL PROPERTY The Company from time to time applies for patents with respect to patentable developments. However, no patent or group of patents held by the Company is, in the opinion of management, of material importance to the Company's business as a whole. 11 MARKETING AND SALES The Company markets and distributes its products to non-governmental entities through sales persons and independent manufacturers' representatives, the loss of any one of whom would not have a materially adverse impact on the Company. The Company and its subsidiaries compete for OEM business at the beginning of the development of new products, upon customer redesign of existing components and customer decisions to outsource captive component production. Such sales to automotive OEMs are made directly by the Company's sales, customer service and engineering force. The Company's sales and engineering personnel service its automotive OEM customers and manage its continuing programs of product development and design improvement. In keeping with industry practice, OEMs generally award blanket purchase orders and contract through the life cycle of the product for specific parts and components for a given model for a particular powertrain or other mechanical component. These components are generally used across several platforms or models. Purchase orders do not commit customers to purchase any minimum number of components and are not necessarily dependent upon model changes. Substantially all of the Company's sales are derived from United States and Canadian sources. EMPLOYEES At September 30, 1998, Harvard had approximately 4,400 employees, a decrease of approximately 2,100 employees from September 30, 1997 resulting from the wind-down and/or divestiture of several operating facilities as discussed elsewhere herein. Approximately 42% of Harvard's employees as of September 30, 1998 were covered by collective bargaining agreements negotiated with 16 locals of 9 unions (collectively, the "Unions"). These contracts expire at various times through the year 2002. Discussions with various Unions regarding new labor agreements or extensions of existing contracts are presently under way. The following table outlines the labor agreement expiration dates at each of Harvard's plants.
PLANT UNION DATE OF EXPIRATION - ----- ----- ------------------ Albion UAW 3/01/02 Jackson UAW 7/01/02 Tiffin UAW 2/01/00 St. Louis IAM 5/01/00 Spencerville UAW 4/30/99 Bryan Paper-Workers 12/15/99 Dundalk/Canada USWA 6/27/99 Arnold Painters 3/13/01 Transportation Teamsters 3/31/00 Pottstown Master + Local UAW 10/31/99
The Company expects that all of the collective bargaining agreements will be extended or renegotiated in the ordinary course of business. As a result of such renegotiations, the Company expects that its labor and fringe benefit costs will increase in the future. The Company does not believe that the impact of these increases will negatively affect the financial position or results of operations of the Company. The Company has never experienced any work stoppages at its facilities and has been able to extend or renegotiate its various collective bargaining agreements without disrupting production. In December 1997 the Company entered into modified executive severance agreements (the "Executive Agreements") with Joseph Gagliardi, Roger Burtraw and Richard Dawson, the then Chief Financial Officer, President and General Counsel of the Company, respectively. These agreements continued the severance arrangements previously established for these covered executives with certain modifications. These modifications included changing the definition of "Change in Control" to prevent a triggering based on the Company's reorganization itself, confirming and supplementing certain prepetition pension arrangements and extending the expiration date of the prepetition severance agreements. Richard Dawson, former Senior Vice President for Law and Administration, left the Company's employ in February 1998 and has been paid approximately $400,000 in benefits under his Executive Agreement. Roger Burtraw left the Company's employ in July 1998 and has been paid approximately $1,000,000 in benefits under his Executive Agreement. Joseph Gagliardi remained with the 12 company as Executive Vice President Administration. The executive agreements were approved by an order of the Bankruptcy Court dated December 30, 1997. SOURCES AND AVAILABILITY OF RAW MATERIALS The raw materials required by the Company are obtained from regular commercial sources of supply and, in most cases, from multiple sources. Under normal conditions, there is no difficulty in obtaining adequate raw material requirements at competitive prices, and no shortages have been experienced by the Company. Major raw materials purchased by Harvard include aluminum, energy, steel, glass, rubber, and paint. The Company considers its major raw material suppliers with respect to each unit in its automotive business to include: Kingston-Warren: PPG and Burton Rubber; Hayes-Albion: Consumer's Power, Jackson Iron and Metal and Acustar; and Trim Trends: Inland Steel. These suppliers furnish energy, steel, glass, rubber, and paint to such subsidiaries. Pottstown is not dependent on any individual supplier. Its principal raw material is aluminum, which is purchased from multiple suppliers. Captive aluminum processing operations enable Pottstown to purchase less costly scrap aluminum and non-certified aluminum ingot and to refine the metal to the required certified specifications. Harvard's purchase orders with its OEM customers provide for price adjustments related to changes in the cost of certain materials. The Company's top ten suppliers in 1998 for continuing businesses were:
DOLLARS/YEAR (APPROXIMATE) SUPPLIER (IN THOUSANDS) PRODUCT HARVARD DIVISION - -------- -------------- ---------------- ---------------- PPG $10,800 Glass Kingston-Warren Chrysler $10,000 Steel Coil Trim Trends division Jackson Iron & Metal $ 9,600 Steel Scrap Hayes Albion M.A. Hanna Rubber Co. $ 8,000 Rubber Compound Kingston-Warren Stanton Moss, Inc. $ 4,000 Aluminum Hayes Albion Dyna-Mix, Inc. $ 3,400 Rubber Compound Kingston-Warren Asian Metals $ 3,100 Magnesium Hayes Albion Globe Metals $ 3,000 Silicon Hayes Albion Steel Technologies $ 3,000 Steel Coil Trim Trends division Eastern Alloys $ 2,900 Aluminum Hayes Albion
BUSINESS CYCLE AND SEASONALITY The Company's customers are predominantly automotive OEMs. As such, sales of the Company's products directly correlate with the overall level of passenger car and light truck production in North America. Although most of the Company's products are generally not affected by year-to-year automotive style changes, model changes may have a significant impact on sales. In addition, the Company experiences seasonal fluctuations to the extent that the operations of the domestic automotive industry slow down during the summer months, when plants close for vacation period and model year changeovers, and during the month of December for plant holiday closings. As a result, the Company's third and fourth quarter sales are usually somewhat lower than first and second quarter sales. RISK FACTORS RELATING TO THE BUSINESS Emergence from Bankruptcy The Company emerged from bankruptcy proceedings contemporaneously with the consummation of the Financings. The fact that the Company was in bankruptcy may affect the Company's ability to negotiate favorable trade terms with manufacturers and other vendors in the future. Similarly, the Company's experience in bankruptcy could have an adverse impact on its ability to secure new purchase orders with current and prospective customers. The failure to obtain favorable terms from suppliers or new business from current and prospective customers could have a material adverse effect on the Company and its financial performance. 13 In particular, the fact that the Company was in bankruptcy had a negative impact on the Company's results of operations and may also negatively affect the Company's ability to win new business in the future. In general, there is a delay of between two to four years after being awarded a contract to supply components for a new OEM platform to the period when sales of such components are made. During this period of delay, automotive component suppliers must bear considerable design and development costs associated with the new platform. In light of these considerable costs and the financial constraints of bankruptcy, the Company has not been awarded as many contracts as it might otherwise have obtained had it not been in bankruptcy. General Motors has been supportive of the Company during this period and has awarded several new contracts to Harvard during the period of bankruptcy reorganization. Net Losses The Company experienced losses for the last three fiscal years. For fiscal years 1996, 1997 and 1998, the Company had net losses of approximately $69 million, $389 million and $56 million respectively. These losses have been primarily due to operating inefficiencies and losses associated with operations of the Company designated for sale or wind-down. If the Company continues to experience net losses, the Company will be required to find additional sources of financing to fund its operating deficits, working capital requirements, and anticipated capital expenditures and financing commitments. There can be no assurance that such financing will be available on terms and conditions acceptable to the Company in such circumstances or that, if debt financing is required, such financing would be permitted under the terms of the Indenture and the Senior Credit Facility. If the Company experiences losses in the future, that fact, combined with the absence of additional financing, could impair the Company's ability to pay the principal of and Interest and premium, if any, on the Notes, or to redeem the Notes. The Company's Plan of Reorganization as an acceptable means of satisfying creditor claims in accordance with the Bankruptcy Code, was confirmed by the Court on October 15, 1998, and such plan became effective on November 24, 1998 (See Note 28). Continuation of the Debtors' business after reorganization is dependent upon the success of future operations, including execution of the Company's turnaround business strategy and the ability to meet obligations as they become due. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and at September 30, 1998 had a net working capital deficit and shareholder's deficit. These factors among others raise substantial doubt about the Company's ability to achieve successful future operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Noncomparability of Financial Information Information reflecting the results of operations and financial condition of the Company subsequent to the Effective Date will not be comparable to prior periods due to (i) the replacement of the management team and the restructuring of the Company's core operations and general and administrative activities; (ii) the Company's bankruptcy proceedings, including the costs and expenses relating thereto, and the effect of the settlement of certain related liabilities; and (iii) the application of Fresh Start Reporting (as defined herein), pursuant to which the Company's equity will be restated at "reorganization equity value," a value which was determined by the financial advisors to the Creditors' Committee, pursuant to the Plan of Reorganization. In addition, because the Company has been in a restructuring phase and has continued to incur costs and expenses relating to its bankruptcy proceedings, the results of operations since May 1997 may not be indicative of the Company's future performance. See "Item 1 Business--Subsequent Material Event." Risks Associated with Execution of the Turnaround Business Strategy The Turnaround Business Strategy entails a substantial restructuring of the Company's revenue and customer base. As a result, the Company's value and profitability are dependent upon its ability to successfully execute the Turnaround Business Strategy. The success of the Turnaround Business Strategy, however, is subject to, among other things, the Company's ability to: o terminate consensually certain unprofitable contracts and purchase orders with its customers; 14 o attract new business or customers for its present business segments; o produce and sell new products at projected margins and at competitive prices; o attract key new personnel for its manufacturing facilities; o dispose of old customer orders in a time span that will enable the Company to utilize capacity for new business in an efficient manner; o develop or acquire a distribution network for after-market and industrial products; and o appropriately gauge the impact of the Turnaround Business Strategy on relations with current customers. There can be no assurance that the Turnaround Business Strategy will be successful or that the Company will be able to operate profitably even if the Turnaround Business Strategy is successfully executed. If implementation of the Turnaround Business Strategy is not successful and the Company is unable to generate sufficient operating funds to pay Interest, Liquidated Damages and premium on, and principal of, the Notes and other indebtedness of the Company, including indebtedness under the Senior Credit Facility, there can be no assurance that alternative sources of financing would be available to the Company or, if available, that such financing would be available on commercially reasonable terms. Capital Intensive Industry; Capital Expenditure Program The Company operates in an industry which requires substantial capital investment, and additional capital expenditures are required by the Company to upgrade its facilities. The Company believes that its competition will continue to invest heavily to achieve increased production efficiencies and improve product quality. During the past few years, the Company has deferred certain discretionary capital expenditures due to financial constraints. The Company's ability to compete in such a competitive environment will be dependent upon, among other things, its ability to make major capital expenditures over the next several years in order to service existing business, enter new markets and remain competitive in certain markets. The Company had capital expenditures of approximately $25 million in 1998 and forecasts capital spending to be $20 million in 1999. Through 2002 (inclusive of 1998), the Company expects to spend approximately $110 million in capital expenditures. There can be no assurance that there will be sufficient internally generated cash or available acceptable external financing available to make the necessary capital expenditures for a sufficient period of time. Risks Inherent in the Automotive Industry A significant portion of the Company's sales are made to customers in the automobile and light truck manufacturing industry. Direct sales of the Company's products to the automobile and light truck manufacturing market accounted for approximately 92%, 98%, and 96% of its net sales for its fiscal years ended September 30, 1998, 1997 and 1996, respectively. Demand for certain of its products is affected by, among other things, the relative strength or weakness of the North American automobile and light truck manufacturing industry and events, such as regulatory requirements, trade agreements and labor disputes, one of which was settled in the third quarter of 1998 after a 54 day strike at General Motors which occurred between June 7 and July 31, 1998, affecting the North American automobile and light truck manufacturing industry. The Company's revenue and operating income was adversely impacted by the strike. In addition, automotive sales and production are cyclical and somewhat seasonal and can be affected by the strength of a country's general economy. A decline in automotive production and sales would likely affect not only the sales of components, tools and services to vehicle manufacturers and their dealerships, but also the sales of component, tools, and services to aftermarket customers. Such a decline in sales and production could result in a decline in the Company's results of operations or a deterioration in the Company's financial condition. If demand changes and the Company fails to respond accordingly, its results of operations could be adversely affected in any given quarter. See "Item 1 Business--Industry Overview." 15 Risks Associated with Obtaining Business for New and Redesigned Model Introductions The Company principally competes for new business both at the beginning of the development of new models and upon the redesign of existing models by its major customers. New model development generally begins two to five years prior to the marketing of such models to the public, and existing business generally lasts for the model life cycle. In order to meet the needs of customers with changing products, the Company needs to implement new technologies and manufacturing processes when launching its new products. Moreover, in order to meet its customers' requirements, the Company may be required to supply its customers regardless of cost and consequently suffer an adverse impact to operating profit margins. Although management believes it has implemented manufacturing processes that adapt to the changing needs of its customers, no assurance can be made that the Company will not encounter difficulties when implementing new technologies in future product launches, any of which could adversely affect the Company. Reliance on Major Customers Of the Company's consolidated net sales for fiscal year 1998, approximately 39%, 34%, and 10% were attributable to General Motors, Ford and Chrysler respectively. Although the Company has purchase orders from many of its customers, such purchase orders generally provide for supplying the customer's annual requirements for a particular model or assembly plant, renewable on a year-to-year basis, rather than for manufacturing a specific quantity of products. The loss of any one of its major customers or a significant decrease in demand for certain key models or a group of related models sold by any of its major customers could have a material adverse effect on the Company. (See "Item 1 Business--Customers.") Dependence on Key Personnel The success of the Company depends in large part upon the abilities and continued service of its executive officers and other key employees and, in particular, of Roger Pollazzi, who currently serves as Chairman and Chief Executive Officer. There can be no assurance that the Company will be able to retain the services of such officers and employees. The failure by the Company to retain the services of Mr. Pollazzi and other key personnel could have a material adverse effect on the Company's results of operations and financial condition. (See "Item 1 Business--Company History.") Environmental Matters The Company is subject to extensive regulation under environmental and occupational health and safety laws and regulations. In addition, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section Section 9601 et seq., ("CERCLA") generally imposes joint and several liability for clean-up and enforcement costs, without regard to fault on parties allegedly responsible for contamination at a site. The Company may be subject to liability as a result of the disposal of hazardous substances on and off the properties currently and formerly owned or operated by the Company. In addition, the Company is subject to various federal, state, local and foreign laws and regulations, including CERCLA, governing the use, discharge and disposal of hazardous materials. During fiscal years 1996, 1997, and 1998, the Company expended, in cash, $2.7 million, $1.7 million, and $0.1 million, respectively, in environmental remediation costs and related expenses. As a result of historical and current operations involving the use and disposal of hazardous materials in the ordinary course of its operations, the Company has been named as a defendant or potentially responsible party in a variety of environmental matters, including contractual indemnity and statutory cost recovery litigation involving current and former operating facilities as well as waste disposal sites. As part of such litigation, the Company has asserted counterclaims and cross-claims relating to the properties involved and other properties where the Company believes that the original plaintiffs, as well as other parties, are liable for certain investigative and remedial costs that have been or may be incurred by the Company. The Company believes that all claims for costs related to off-site disposal or formerly owned properties will be discharged by the bankruptcy. The Company is also conducting remedial activities at certain current and former facilities pursuant to governmental orders and private contractual agreements. The Company has granted access to the Michigan Department of Environmental Quality at the Hayes-Albion plant in Jackson, Michigan for an investigation of the 16 plant's use and disposal of chlorinated solvents. The investigation is in connection with the Department's evaluation of an area-wide groundwater contamination problem. The Company may be subject to injunctive orders requiring remediation of this property. In addition, the State of Ohio has filed a complaint in state court in Ohio seeking penalties and injunctive relief arising out of alleged air emission violations at the Tiffin, Ohio facility. Furthermore, as a result of the Company's manufacturing operations involving the use and disposal of hazardous substances, the Company is aware of certain currently owned facilities that are not required to be remediated at the current time but that could possibly require remediation activity in the future. While the Company believes it has provided adequate reserves (estimated to be approximately $8.5 million upon consummation of the Plan of Reorganization) for its share of potential costs associated with the clean-up of hazardous substances at various sites. Changes in existing environmental laws or their interpretation and more rigorous enforcement by regulatory authorities may give rise to additional expenditures, compliance requirements or liabilities that could have a material adverse effect on the business, financial condition and results of operations of Harvard. Finally, given the historical operations involving the use and disposal of hazardous substances at the Company's facilities, additional environmental liability and litigation may arise in the future, the precise nature and magnitude of which cannot be predicted. (See "Item 3 Legal Proceedings.") Underfunded Pension Plans As reflected in its audited financial statements, the Company and its subsidiaries collectively had aggregate unfunded pension liabilities as of September 30, 1998 and 1997 of approximately $17.0 and $5.7 million respectively related to their defined benefit pension plans where plan liabilities (on an accumulated benefit obligation basis) exceeded the fair value of plan assets. Approximately $7.4 million of the increase in 1998 is due to a curtailment loss associated with the Toledo plant shut down. On July 26, 1994, the Company and certain of its affiliate companies entered into a settlement agreement (the "PBGC Settlement Agreement") with the Pension Benefit Guaranty Corporation ("PBGC"), pursuant to which the Company and certain of its subsidiaries were obligated, among other things, to make contributions to specified underfunded pension plans. All contributions required to be made pursuant to such settlement agreement have been made. In connection with the Plan of Reorganization, the PBGC and the Company have entered into a new PBGC Settlement Agreement under which the PBGC Settlement Agreement was terminated. The terms and provisions of the old and new PBGC Settlement Agreements are more fully described in the Disclosure Statement. On November 6, 1998, the Company filed a Post-Event Notice of Reportable Event disclosing more than 20% reductions in participation under the Doehler-Jarvis Pension Plan for wage basis employees, the Harvard Retirement Plan and the Retirement Plan for Union Employees of Harman Automotive, Inc. as a result of the shut down, during the pendency of the Chapter 11 proceedings, of the Doehler-Jarvis Toledo operations, the St. Louis, Missouri facility of the Company's Harvard Interiors Manufacturing Company ("Harvard Interiors") division and the Bolivar, Tennessee facility of Harman Automotive, Inc., and the sale of assets of the Greeneville, Tennessee facility of Greeneville. The PBGC and the Company have amended the new PBGC Settlement Agreement to expand the matters as to which the PBGC will refrain from exercising its remedies under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") to include the above-described shutdowns and sale of assets. No additional obligations were imposed upon the Company or its subsidiaries as a result of this amendment. The Company estimates that, upon emergence from Chapter 11, the unfunded liabilities related to defined benefit pension plans will be approximately $17 million. If the Company is unable to meet its contribution obligations under such plans, and alternative contribution arrangements cannot be agreed upon, the PBGC has remedies under ERISA that would permit it to seek to terminate the affected plan or plans, thus accelerating payment obligations for the affected underfunded plan or plans. Impact of the Year 2000 As is the case with most other companies using computers in their operations, the Company is in the process of addressing the Year 2000 problem and certain of the Company's information systems are not presently Year 2000 compliant. The Company is currently installing a new management information system that will allow its 17 critical information systems and technology infrastructure to be Year 2000 compliant before transactions for the year 2000 are expected. Many of the Company's systems include new hardware and packaged software recently purchased from large vendors who have represented that these systems are already Year 2000 compliant. The Company is in the process of obtaining assurances from vendors that timely updates will be made available to make all remaining purchased software Year 2000 compliant. The Company will utilize both internal and external resources to reprogram or replace and test all of its software for Year 2000 compliance, and the Company has commenced the installation and testing of its Year 2000 compliant systems at various locations subsequent to the fiscal year end, with an expected Company-wide rollout to be completed by the end of fiscal 1999. The estimated cost for this project is $14 million. The Company spent approximately $7.7 million for Year 2000 compliance in fiscal 1998 and plans to spend approximately $5.8 million in fiscal 1999. Failure by the Company and/or vendors and customers to complete Year 2000 compliance work in a timely manner could have a material adverse effect on certain of the Company's operations. Competition The markets for the Company's products are highly competitive. The Company's products compete with those of a substantial number of companies, many of which are larger and have resources, financial or otherwise, substantially greater than those of the Company and which have not and will not likely suffer the negative effects of having been in bankruptcy. Competitive factors in the market include product quality, customer service, product mix, new product design capabilities, cost, reliability of supply and supplier ratings. There can be no assurance that the Company will be able to compete effectively with these companies in the future or that significant new competitors will not enter the market. Collective Bargaining Agreements As of September 30, 1998, the Company had approximately 4,400 employees. Approximately 42% of the Company's employees are covered by collective bargaining agreements negotiated with 16 locals of 9 unions (collectively, the "Unions"). These contracts expire at various times through the year 2000. Discussions with various Unions regarding new labor agreements or an extension of existing contracts are presently underway. Prices and Availability of Raw Materials Major raw materials purchased by the Company include aluminum, energy, steel, glass, rubber and paint. The Company obtains the raw materials it uses from regular commercial sources of supply and, in most cases, from multiple sources. Under normal conditions, there is no difficulty in obtaining adequate raw material requirements at competitive prices, and no shortages have been experienced by the Company. Nevertheless, significant increases in raw material prices could have a material adverse effect on the financial condition or results of operations of the Company. Historically, the Company has, and in the future may, enter into hedging arrangements designed to protect against fluctuations in raw material prices and also attempts to offset raw material cost increases through the use of selling price increases. Trends in the Automotive Industry In the late 1980's and early 1990's, U.S. automakers instituted a number of fundamental changes in their sourcing procedures. Principal among these changes has been an increased focus on suppliers' costs and improving quality performance, requiring component suppliers to bear a greater proportion of the burden of design and development costs and a consolidation in the number of suppliers with which the OEMs place purchase orders, among others. The result of these trends, as summarized below, has been to place greater business and financial risk on automotive component suppliers, such as the Company. In general, there has been substantial and continuing pressure from OEMs to reduce costs, including the cost of products purchased from outside suppliers. Certain of the Company's products are sold under agreements that require the Company to provide annual cost reductions to such purchasers (directly through price reductions or indirectly through suggestions regarding manufacturing efficiencies or other cost savings) by certain percentages each year. There can be no assurance that the Company will be able to generate such cost savings in the future. If 18 the Company were unable to generate sufficient cost savings in the future to offset such price reductions, the Company's profit margins could be adversely affected. See "Item 1 Business--Industry Overview." Another trend in the automotive industry is that OEMs are requiring potential suppliers of components to become involved earlier in and share a greater proportion of the costs of the design and development process for new platforms and to develop integrated systems or modules rather than merely manufacture separate parts. The component supplier is expected to manage the entire development cycle of the product or system, including design and engineering, production of prototypes, design validation, design of tooling and completion of manufactured products and integrated systems of products, all of which can take between two and four years. The ability to become involved earlier in the design and development process for new platforms is an important factor in winning new business from the OEMs. This trend has placed greater pressure on automotive component suppliers and has shifted a larger percentage of the cost of research and development and design and capital outlays for such new platforms and systems onto component suppliers, such as the Company. In addition, this trend has had a relatively greater impact on the Company than on many of its competitors because of OEMs' reluctance to award new business to the Company due to its emergence from bankruptcy. There can be no assurance that the Company will be able to become involved earlier in the design and development process for new platforms nor, if successful in becoming involved earlier in such processes, can there be any assurance that the Company will be able to generate sufficient cash or have financing available to fund the greater costs associated with that effort. One result of the above described trends is that the automotive supply industry is experiencing a period of significant consolidation. As part of OEMs' efforts to reduce costs and improve quality, U.S. automakers are reducing their supplier base by awarding sole-source contracts to full-service suppliers who are able to provide design, engineering and program management capabilities and can meet cost, quality and delivery requirements. This trend has also resulted in greater competition from larger companies with greater financial and other resources. In addition, there is no assurance that the Company will have the financial flexibility to make the necessary capital expenditures or to make acquisitions to grow its business to remain competitive and viable in the component supplier industry. An additional trend in the automotive industry is that foreign automotive manufacturers have gained a significant share of the U.S. market, both from export sales as well as the more recent opening of manufacturing facilities located domestically. Between 1985 and 1997, sales of automobiles from foreign car makers with U.S. manufacturing facilities increased from 2.0% to 20.5% of the North American market. Based on industry analysts' estimates, the percentage of Japanese cars sold in the United States from domestic manufacturing facilities grew from 8.4% in 1985 to 51.8% in 1994. To the extent that the growth of such "transplant" sales has resulted, and will likely continue to result in, a loss of market share for U.S. automakers, component suppliers, including the Company, will experience an adverse effect as most of its current customers are U.S. automakers. Although the Company plans to solicit additional business from foreign automakers, there can be no assurance that it will be successful in doing so or that such additional business will compensate for lost business that the Company has already experienced. ITEM 2. PROPERTIES FACILITIES In connection with the election of Mr. Roger Pollazzi as Chief Operating Officer in November 1997, the Company relocated its principal executive offices to leased space in Lebanon, New Jersey. The principal properties of the Company include its production facilities, all of which are owned by the Company and its subsidiaries, except for the real property in Ripley, Tennessee. The Company also leases certain warehouse and distribution facilities and regional sales offices that are not included among the Company's principal properties. None of the leases is material to the Company's business as a whole, or provides any unique advantage. Capacity at any plant depends, among other things, on the product mix, the processes and equipment used and tooling. While capacity varies periodically as a result of customer demand, the Company currently estimates that its automotive business plants generally operate between 60% and 100% of capacity on a five-day per week basis. 19 The following table sets forth certain information with respect to the Company's principal properties:
SUBSIDIARY OR DIVISION LOCATION TYPE OF FACILITY SQ. FT. - ----------------------- -------- ---------------- ------- Harvard Industries Farmington Hills, MI Administrative offices 70,000 Kingston-Warren Newfields, NH Mfg. Plant, office and warehouse 302,000 Kingston-Warren Wytheville, VA Mfg. Plant, office and warehouse 119,000 Kingston-Warren Church Hill, TN Mfg. Plant, office and warehouse 162,900 Harman Bolivar, TN Mfg. Plant, warehouse, and office(1) 294,400 Hayes-Albion Albion, MI Mfg. Plant 458,300 Hayes-Albion Bridgeton, MO Mfg. Plant 128,300 Hayes-Albion Jackson, MI Mfg. Plant 218,600 Hayes-Albion Rock Valley, IA Mfg. Plant 86,000 Hayes-Albion Ripley, TN Mfg. Plant(2) 100,000 Hayes-Albion Tiffin, OH Mfg. Plant(1) 467,400 Trim-Trends Division Kingston, MI Rental Property 12,000 Trim-Trends Division Deckerville, MI Mfg. Plant 74,900 Trim-Trends Division Snover, MI Mfg. Plant(1) 75,500 Trim-Trends, Canada Dundalk, ON, Canada Mfg. Plant 80,000 Trim-Trends Division Bryan, OH Mfg. Plant 141,500 Trim-Trends Division Spencerville, OH Mfg. Plant 159,000 Doehler-Jarvis Toledo, Ohio Mfg. Plant and office building(1) 542,000 Doehler-Jarvis Pottstown, PA Mfg. Plant 470,000 Harvard Industries Arnold, MO Mfg. Plant 31,400 Harvard Industries Salem, South Carolina Idle Mfg. Plant(1) 51,000
- ------------------ (1) Facility is currently for sale. (2) The real property underlying this facility is leased through August 30, 1999. ITEM 3. LEGAL PROCEEDINGS On three separate occasions in fiscal 1994, the Company became aware that certain products of its ESNA division were not manufactured and/or tested in accordance with required specifications at its Union, New Jersey and/or Pocahontas, Arkansas facility. These fastener products were sold to the United States Government and other customers for application in the construction of aircraft engines and airframes. In connection therewith, the Company notified the Department of Defense Office of Inspector General ("DOD/OIG") and, upon request, was admitted into the Voluntary Disclosure Program of the Department of Defense (the "ESNA matter"). The Company has settled this matter in principal (final stipulation yet to be executed) for $475, to be paid subsequent to the fiscal year end. In June 1995, a group of former employees of the Company's subsidiary, Harman Automotive-Puerto Rico, Inc., commenced an action against the Company and individual members of management in the Superior Court of the Commonwealth of Puerto Rico seeking approximately $48 million in monetary damages and unearned wages relating to the closure by the Company of the Vega Alta, Puerto Rico plant previously operated by such subsidiary. Claims made by the plaintiffs in such action include the following allegations: (i) such employees were discriminated against on the basis of national origin in violation of the laws of Puerto Rico in connection with the plant closure and that, as a result thereof, the Company is alleged to be obligated to pay unearned wages until reinstatement occurs, or in lieu thereof, damages, including damages for mental pain and anguish; (ii) during the years of service, plaintiffs were provided with a one-half hour unpaid meal break, which is alleged to violate the laws of Puerto Rico, providing for a one-hour unpaid meal break and demand to be paid damages and penalties and request seniority which they claim was suspended without jurisdiction; and (iii) plaintiffs were paid pursuant to a severance formula that was not in accordance with the laws of Puerto Rico, which payments were conditioned upon the plaintiffs executing releases in favor of the Company, and that, as a result thereof, they allege that they were discharged without just cause and are entitled to a statutory severance formula. 20 The Company is a party to various claims and routine litigation arising in the normal course of its business. Obligations of the Company in respect of litigation arising out of activities prior to the Petition Date, will be discharged in accordance with the Plan of Reorganization. Based on information currently available, management of the Company believes, after consultation with legal counsel, that the result of such claims and litigation, will not have a material adverse effect on the financial position or results of operations of the Company. ENVIRONMENTAL MATTERS The Company is subject to various foreign, federal, state and local environmental laws and regulations, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. Certain subsidiaries of the Company have received information requests or have been named potentially responsible parties ("PRPs") by the United States Environmental Protection Agency ("EPA"), state environmental agencies, or PRP groups under the Comprehensive Environmental Response, CERCLA or analogous state laws with respect to approximately 25 sites. As discussed below, any potential claims related to sites which are not owned properties will be discharges as a result of Harvard's Chapter 11 case. Given the Company's historic operations involving the use and disposal of hazardous substances, additional environmental issues may arise in the future the precise nature and magnitude of which the Company cannot predict. A number of governmental agencies, PRP groups, and individual claimants have filed proofs of claim against certain of the Company's subsidiaries with respect to liabilities relating to environmental matters, including liabilities arising under the Federal Water Pollution Control Act, 33 U.S.C. Section Section 1251 et seq., ("Clean Water Act"), and the Clear Air Act, ("CERCLA") and analogous state laws (collectively, the "Environmental Claims"). The Company believes that the aggregate costs of resolving such Environmental Claims will in all likelihood range between approximately $4 million and $8.5 million. This range reflects a number of factors which may influence the ultimate outcome of the claims resolution process, such as the amount of such claims paid in cash, the assertion of factual or legal defenses to certain claims and the willingness of certain claimants to compromise their claims. The potentially significant Environmental Claims presently asserted against the Company and its subsidiaries and the proposed treatment of all Environmental Claims are as follows: Consent Decrees and Settlement Agreements The Company and its subsidiaries are parties to several consent decrees and settlement agreements relating to environmental matters executed prior to the Chapter 11 filing (collectively, the "Consent Decrees and Settlement Agreements"). The potentially significant Environmental Claims relating to the Consent Decrees and Settlement Agreements include the following: Vega Alta Superfund Site. A Record of Decision ("ROD") was issued on November 10, 1987 naming Harman Automotive-Puerto Rico, Inc., a wholly owned subsidiary of Harman, as one of several PRPs by the EPA pursuant to CERCLA concerning environmental contamination at the Vega Alta, Puerto Rico Superfund site (the "Vega Alta Site"). Other named PRPs include subsidiaries of General Electric Company ("General Electric"), Motorola, Inc. ("Motorola"), The West Company, Inc. ("West Company") and the Puerto Rico Industrial Development Corporation ("PRIDCO"). PRIDCO owns the industrial park where the PRPs were operating facilities at the time of alleged discharges. Another party, Unisys Corporation ("Unisys"), was identified by General Electric as an additional PRP at the Vega Alta Site. There were two phases of administrative proceedings in the case. The first phase, known as Operable Unit I ("OUI"), involves a unilateral order requiring the named PRPs to implement the remedy chosen by the EPA, consisting of the replacement of the drinking water supply to local residents and installation and operation of a groundwater treatment system to remediate groundwater contamination. In addition, the EPA filed a complaint in the United States District Court for the District of Puerto Rico seeking damages and recovery of costs from the PRPs, as well as a declaratory judgment that the PRPs were liable for future response costs. The EPA also issued a Phase II Unilateral Order requiring the PRPs to perform a Phase II Remedial Investigation/Feasibility Study known as Operable Unit II. Motorola, West Company and Harman completed construction of the OUI remedy pursuant to a cost-sharing arrangement. In June 1995, the parties agreed that the total amount due from Harman to West Company and 21 Motorola was $557,297, payable in twenty equal quarterly installments. Payments have been suspended due to the Chapter 11 Cases. West Company and Motorola have each made claims for $139,324.25 for the remaining costs due pursuant to the cost-sharing arrangement for construction of the OUI. Such claims have been allowed under the Plan of Reorganization and will be discharged upon the receipt by West Company and Motorola of the Company's common stock in respect of such allowed claims. As to Harman's share of all other costs, pursuant to a Settlement Agreement, dated June 30, 1993, Harman, Motorola and West Company each agreed to pay General Electric the sum of $800,000 in return for General Electric's and Unisys' agreement to assume liability for, and indemnify and hold Harman and the others harmless against, the EPA's cost recovery claim, to undertake operation and maintenance of the OUI cleanup system and to construct, operate and maintain any other proposed system that may be required by the EPA under OUI, to comply with the Phase II Unilateral Order and to conduct any further work concerning further phases of work at the Vega Alta Site. Harman, West Company and Motorola retained liability for any cleanup activities that may in the future be required by EPA at their respective facilities due to their own actions, for toxic tort claims and for natural resource damage claims. Harman's settlement payment to General Electric was being made in 20 equal quarterly installments that commenced in January 1995 with 9% interest per annum. As a result of Harman's bankruptcy filing in May 1997, such payments were suspended. General Electric made a claim in the Chapter 11 Cases for the remaining amount which General Electric believes is owed pursuant to the Settlement Agreement. On December 29, 1998, the Bankruptcy Court approved the Company's Assumption and Modification of the Settlement Agreement whereby the Company will pay General Electric a total of $300,000 in settlement of its claims. In light of the cost-sharing arrangement described above, the PRPs (including Harman) have stipulated with the EPA as to liability in order to avoid further litigation. A consent decree among all of the PRPs and the United States, on behalf of the EPA, was fully executed by all parties, and was entered by the Federal District Court for the District of Puerto Rico, finally resolving the cost recovery litigation. On December 8, 1997, the EPA issued an amendment to its cleanup requirements, together with a supplemental statement of work required at the Vega Alta Site. In addition, on March 27, 1998 and April 8, 1998, the EPA requested all of the PRPs (including Harman) to reimburse the EPA for approximately $940,000 in past costs related to the Vega Alta Site. Harman has notified both General Electric and the EPA that pursuant to the Settlement Agreement described above, Harman expects General Electric and Unisys to comply with all of EPA's further requirements. Alsco-Anaconda Superfund Site. Alsco Inc. ("Alsco") was the former owner and operator of a manufacturing facility located in Gnadenhutten, Ohio. Alsco was merged into and became a division of Harvard. In August 1971, the Alsco division was sold to Anaconda Inc., which became Alsco-Anaconda, Inc., a predecessor to an entity now merged with and survived by the Atlantic Richfield Company ("ARCO"). The facility, when acquired by ARCO's predecessor, consisted of an architectural manufacturing plant, office buildings, a wastewater treatment plant, two sludge settling basins and a sludge pit. The basins and pit were used for treatment and disposal of substances generated from its manufacturing processes. The basins, pit and adjacent wooded marsh were proposed for inclusion on EPA's National Priorities List in October 1984. Those areas were formally listed by the EPA as the "Alsco-Anaconda Superfund Site" in June 1986. On December 28, 1989, EPA issued a unilateral administrative order pursuant to Section 106 of CERCLA, to Harvard and ARCO for implementation of the remedy at the Alsco-Anaconda Superfund Site. Litigation between Harvard and ARCO subsequently commenced in the United States District Court for the Northern District of Ohio regarding allocation of response costs. Pursuant to a Settlement Agreement, dated January 16, 1995, Harvard agreed to pay ARCO $6.25 million (as its share of up to $25 million of the cleanup and environmental costs at the Alsco-Anaconda Superfund Site) in twenty equal quarterly installments with accrued interest at the rate of 9% per annum, of which nine installments were paid through May 7, 1997. In return, ARCO assumed responsibility for cleanup activities at the site and agreed to indemnify Harvard against any environmental claims below the cap. If cleanup costs should exceed $25 million, the parties will be in the same position as if the litigation was not settled. Based on information provided by ARCO, Harvard believes that ARCO has completed 100% of the cleanup of the 4.8-acre National Priorities List site and 80% of the cleanup of the property adjacent to the National Priorities List site. Total costs are expected to be in the range of $19 million. 22 Due to the Chapter 11 Cases, payments to ARCO, pursuant to the Settlement Agreement, have been suspended. ARCO Environmental Remediation, LLC, ARCO's successor, made a claim in the Chapter 11 Cases for all amounts that ARCO is owed under the Settlement Agreement or, in the alternative, for all amounts that ARCO has expended or may expend for cleanup of the site. The Company has agreed to assume the Settlement Agreement with the modification that the Company will pay ARCO $575,000 in full satisfaction of its claim. This payment was made in December, 1998. Town of Newmarket, New Hampshire. Kingston-Warren allegedly disposed of waste at the Newmarket Landfill in New Hampshire from 1952-1975. After the State of New Hampshire ordered the Town of Newmarket (the "Town") to close the landfill, the Town sought contribution for cleanup costs from Kingston-Warren and other local manufacturers. The Town completed closure of the landfill in 1996. Pursuant to a Settlement Agreement between Harvard, Kingston-Warren, and the Town as subsequently amended, Harvard made a lump sum payment of $480,000 to the Town to satisfy its outstanding cleanup liability. No further sums are due from Harvard and Kingston-Warren unless there is a catastrophic failure of the geomembrane landfill covering. In the event of a catastrophic failure, Harvard and Kingston-Warren may be called upon to contribute further, based on a task-by-task maximum allocation. Based on the recent accounting provided by the Town, Kingston-Warren's future potential liability is presently capped at a maximum amount of approximately $655,000. The Town is required to pursue all other PRPs before seeking further payments from Harvard and Kingston-Warren. In addition, the Town is required to indemnify Harvard and Kingston-Warren from all claims and costs relating to the landfill. The Town made a contingent claim in the Chapter 11 Cases in the event there is a catastrophic failure of the landfill's geomembrane cap. The Company has assumed the Settlement Agreement but does not expect to pay any further costs because a catastrophic failure of the landfill covering is highly unlikely. State Agency claims A number of state environmental agencies have asserted environmental claims against the Company and its subsidiaries. The potentially significant environmental claims are described below: Groundwater at West Jackson, Michigan Facility. The Hayes-Albion facility in Jackson, Michigan is located within a regional area of groundwater contamination designated as West Jackson Groundwater Contamination Site ("the Site"). Hayes-Albion has completed several investigations on its property since 1989 to assist in defining the nature and source of the chlorinated solvent contamination at the Site. Hayes-Albion believes that the results, which have been submitted to the Michigan Department of Environmental Quality ("MDEQ") establish that the Hayes-Albion facility is not the source of the contamination and that the contaminants are migrating onto the Hayes-Albion property from another source. The MDEQ made a claim in the Chapter 11 Cases that Hayes-Albion is responsible for groundwater contamination at the Site seeking recovery of past and future response costs of at least $2 million. On July 21, 1998, MDEQ issued a request for voluntary access to the Hayes-Albion facility for the purpose of conducting an investigation of the nature and extent of releases at the facility. Hayes-Albion denied access because it vigorously denies that it is a source of contamination. On August 10, 1998, MDEQ issued an administrative inspection warrant for access and Hayes-Albion recently granted access. On October 15, 1998, the Bankruptcy Court issued an order expunging MDEQ's claim because it was filed after the bar date. MDEQ may bring an action for injunctive relief in the future. Air Emissions at Tiffin, Ohio Facility. On July 2, 1998, the State of Ohio filed a two count complaint against Harvard and Hayes-Albion in state court (the "Complaint") seeking civil penalties and injunctive relief for alleged violations of air emissions regulations at Hayes-Albion's Tiffin, Ohio facility from March 1990 to the present. The Complaint seeks civil penalties in the amount of $25,000 per day per violation from March 1990 to the present. Hayes-Albion disputes Ohio's method of calculating the allowable emission rate for the four induction furnaces upon which the State of Ohio bases its allegations in the Complaint, and believes that, using the proper method of calculation, the facility should have no liability. The State of Ohio filed a claim against Harvard and against Hayes-Albion in the Chapter 11 Cases for penalties related to the alleged air violations in the amount of $1,315,000. Harvard and Hayes-Albion have concluded a settlement with the State of Ohio with the entry of a consent decree dated December 23, 1998, which as of the date hereof has been approved by the Bankruptcy Court. Under the settlement the Company will pay Ohio a civil penalty of $205,857. 23 PJP Landfill Site. Pursuant to a 1985 Asset Purchase Agreement, Harvard acquired certain assets of the Elastic Stop Nut Division ("ESNA") from the Amerace Corporation ("Amerace") and agreed to indemnify Amerace for certain environmental liabilities related to the purchased assets. Although ESNA had facilities in several locations, including Union and Elizabeth, New Jersey, Harvard purchased only the Union Facility. In 1992, the New Jersey Department of Environmental Protection ("NJDEP") filed a complaint in the Superior Court of New Jersey seeking cleanup costs against a number of PRPs, including Amerace, which allegedly sent waste to the PJP Landfill in New Jersey. Amerace is one of 57 defendants who signed an Administrative Consent Order, dated June 2, 1997, with NJEDP agreeing to perform and fund the future remedy at the PJP Landfill. The NJDEP made a claim in the Chapter 11 Cases for past and future response costs relating to the PJP Landfill. Amerace also asserted a claim in the Chapter 11 Cases that it is entitled to indemnification from Harvard pursuant to the 1985 Asset Purchase Agreement for response costs it incurs in connection with the PJP Landfill. The NJDEP has withdrawn its claim. Harvard intends to object to Amerace's claim. Stratford Industrial Park Facility. Hayes-Albion operated a facility at the Stratford Industrial Park in Forsyth County, North Carolina from 1968 until 1982, when the facility and assets were sold to Sonoco Products Company ("Sonoco Products"). The North Carolina Department of Environment and Natural Resources ("NCDENR") made a claim in the Chapter 11 Cases for unliquidated amounts alleging that Hayes-Albion may be responsible for possible soil contamination in connection with the removal of a 20,000-gallon underground storage tank in 1984 at the facility. According to the NCDENR, there is no evidence of confirmation sampling to ensure that all contamination was removed at the time of the removal of the underground storage tank and therefore the site may be contaminated. As of the date hereof, NCDENR has offered to settle this claim for a de minimus amount and Harvard is currently evaluating this offer. If no settlement is reached, the Company will object to the claim. Pottstown Precision Casting, Inc. The Pennsylvania Department of Environmental Protection ("PADEP") has filed a claim in the Chapter 11 Cases for $125,000 which is a payment owed under a consent decree between Doehler-Jarvis and PADEP entered April 17, 1997. The payment is a civil penalty for Clean Water Act violations at the Pottstown Precision Casting, Inc., Pennsylvania facility. It is being handled as an unsecured claim under the Plan of Reorganization. Other Vega Alta Toxic Tort. In October 1997, several property owners in Puerto Rico filed an action against Harvard, Harman, General Electric, West Company, Motorola, Unisys, and the EPA in the U.S. District Court for the District of Puerto Rico seeking to recover costs and property damage arising from contamination of the groundwater in Vega Alta, Puerto Rico. The complaint alleges that damages exceed $50 million. Although Harvard and Harman were named defendants in this action, neither entity was served. A claim, however, was filed in the Chapter 11 Cases by the property owner plaintiffs for environmental and property damage associated with the Vega Alta groundwater contamination. That claim has been resolved and the settlement for $150,000 has been approved by the Bankruptcy Court. In addition, Unisys, on its own behalf and on behalf of Owens-Illinois de Puerto Rico, has asserted several claims in the Chapter 11 Cases against Harman and Harvard for contribution in the event Unisys is held liable to (i) the property owner plaintiffs in the Vega Alta toxic tort, (ii) Owens-Illinois de Puerto Rico in its threatened claim related to groundwater contamination in Vega Alta, and (iii) any other third party to whom Unisys may be held liable in connection with groundwater contamination at the Vega Alta Superfund Site. Harvard intends to object to the claims. Treatment of Environmental Matters Under Plan Other than the executory contracts listed below, the Company believes that, except as provided below, none of the outstanding Consent Decrees and Settlement Agreements which were entered into prior to the Petition Date of the Chapter 11 Cases by the Company or any of its subsidiaries relating to environmental matters constitutes executory contracts subject to assumption or rejection. The Company and its subsidiaries assumed the 24 Settlement Agreement with the Town of Newmarket (dated July 8, 1992, as amended March 11, 1997). Additionally the Company and its subsidiaries have agreed to assume with certain modifications the following contracts: (1) the GE Vega Alta Settlement Agreement, and (2) the ARCO Alsco-Anaconda Settlement Agreement. All monetary obligations arising out of the Consent Decrees and Settlement Agreements (other than those listed above as being assumed) will be discharged under the Plan. The Company believes that the claims relating to disposal of hazardous substances or contamination at formerly owned properties or off-site properties (as opposed to currently owned properties) ("Off-Site Claims") will be discharged under the Plan of Reorganization. Such Off-Site Claims include any claim by any governmental unit, person, or other entity, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, rule or regulation, ordinance, permit, authorization, license, order, or judicial or administrative decision, arising out of, relating to, or resulting from pollution, contamination, protection of the environment, human health or safety, or health or safety of employees, including without limitation (i) the presence, release, or threatened release of any hazardous substance that is regulated by or forms the basis of liability under any environmental law (including, without limitation, CERCLA, the Resource Conservation and Recovery Act, 42 U.S.C. Section Section 6901 et seq., the Clean Air Act, 42 U.S.C. Section Section 7401 et. seq., and any analogous state or local law) ("Hazardous Substance") on, in, under, within, or migrating to or from any real property formerly owned, leased, operated, or controlled by the Company or any of its subsidiaries or any predecessor of the Company or any of its subsidiaries, (ii) the transportation, disposal or arranging for the disposal of any Hazardous Substances by the Company or any of its subsidiaries or any predecessor of the Company or any of its subsidiaries at or to any offsite location, and (iii) any harm, injury or damage to any real or personal property, natural resources, the environment or any person or other entity alleged to have resulted from any of the foregoing. The Company and its subsidiaries believe that any claims and obligations relating to Hazardous Substance contamination on, in, under, within, or migrating to or from any real property formerly owned, leased, operated, or controlled by the Company or any of its subsidiaries or any predecessor of the Company or any of its subsidiaries or any other offsite location constitute "claims" within the meaning of section 101(5) of the Bankruptcy Code, 11 U.S.C. Section 101(5), and, therefore, all such claims are dischargeable within the meaning of section 1141 of the Bankruptcy Code, 11 U.S.C. Section 1141. It is possible that under current case law in the Third Circuit Court of Appeals, claims for injunctive relief related to currently owned property such as the Hayes-Albion facilities in Jackson, may not be discharged. The Company may be required to comply with injunctive orders issued by the state environmental agency with respect to this property. Various other legal actions, governmental investigations and proceedings and claims are pending or may be instituted or asserted in the future against the Company and its subsidiaries, none of which are expected to be material. The Company is subject to extensive and changing environmental laws and regulations. Expenditures to date in connection with the Company's compliance with such laws and regulations did not have a material adverse effect on the results of its operations, financial position, capital expenditures or competitive position. Although it is possible that new information or future developments could require the Company to reassess its potential exposure to all pending environmental matters, including those described in the footnotes to the Company's consolidated financial statements, management believes that, based upon all currently available information, the resolution of all such pending environmental matters will not have a material adverse effect on the Company's operating results, financial position, capital expenditures or competitive position. (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation, Results of Operations) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. Pursuant to an order of the United States Bankruptcy Court for the District of Delaware, claimants of the company, including equity holders, voted to accept or reject Plan of Reorganization. 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Harvard's Pre-reorganization Common Stock (the "Old Common Stock") was traded on the Over The Counter Bulletin Board of NASDAQ since March 17, 1997 under the symbol "HAVAQ." Prior to that time, the Old Common Stock was traded on the NASDAQ National Market. Upon consummation of the Plan of Reorganization on November 24, 1998, the Old Common Stock was canceled and Harvard was authorized to issue its new Common Stock to certain creditors of pre-reorganized Harvard. The Company's Common Stock is traded on the NASDAQ National Market under the symbol "HAVAV". The table below sets forth the high and low bid quotations for the Company's Old Common Stock from October 1, 1996 through September 30, 1998. These bid prices, which were obtained from NASDAQ Trading and Market Services, represent prices between dealers without adjustment for retail mark-ups, mark-downs or commissions and may not represent actual transactions. COMMON STOCK PRICE RANGE(1)
HIGH LOW -------- -------- September 30, 1998: First Quarter $ 1.375 $ 0.375 Second Quarter $ 1.0625 $ 0.5 Third Quarter $ 0.75 $ 0.5 Fourth Quarter $ 0.75 $ 0.25 September 30, 1997: First Quarter $ 10.875 $ 2.75 Second Quarter $ 4.500 $ 0.6875 Third Quarter $ 1.1875 $ 0.4375 Fourth Quarter $0.96875 $0.28125
- ------------------ (1) Reflects prices on the NASDAQ National Market prior to March 17, 1997, and on the Over the Counter Bulletin Board of NASDAQ thereafter. On January 7, 1999, the high and low bid quotations for the Company's New Common Stock were $7 1/2 and $7 1/4 respectively. There were approximately 4 holders of record. The Company has paid no cash dividends in its last two fiscal years. The Company was restricted under the terms of its borrowings, including its debt instruments from paying cash dividends on its Old Common Stock. The Company does not expect to pay cash dividends on its New Common Stock for the foreseeable future. Moreover, the Company is restricted under the terms of the Financings, from paying cash dividends on its New Common Stock. 26 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA The following table presents selected consolidated historical financial data for the Company as of the dates and for the fiscal periods indicated. The selected financial data for each of the five years ended September 30, 1998, has been derived from the Consolidated Financial Statements of the Company for the applicable periods. From May 8, 1997 through November 23, 1998, the Company was operating under Chapter 11, which afforded the Company protection from the claims of its creditors and caused the Company to incur certain bankruptcy- related expenses including legal fees, financial advisory fees, investment banking fees and independent auditor fees. As a result of the fact that the Company has emerged from Chapter 11 and the prospective effect of Fresh Start Reporting, the Company does not believe that its historical results of operations are necessarily indicative of its results of operations as an ongoing entity following its emergence on November 24, 1998 from Bankruptcy Reorganization. The following information should be read in conjunction with and is qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations," contained herein this Form 10-K.
SEPTEMBER 30, ------------------------------------------------------------- 1998 1997 1996 1995(1) 1994 --------- --------- --------- --------- --------- ($ IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales......................................... $ 690,076 $ 810,769 $ 824,837 $ 631,832 $ 614,952 Cost of sales..................................... 656,243 797,774 776,141 557,340 543,532 --------- --------- --------- --------- --------- Gross profit...................................... 33,833 12,995 48,696 74,492 71,420 Selling, general and administrative expenses...... 66,546 45,822 42,858 33,037 32,217 Amortization of goodwill.......................... 1,584 8,448 15,312 2,986 1,584 Impairment and restructuring charges(3)........... 10,842 288,545 -- -- -- Interest expense(2)............................... 14,231 36,659 47,004 19,579 11,947 Gain on sale of operations(4)..................... (28,673) -- -- -- -- Other (income) expense, net(5).................... 3,980 5,530 1,538 (1,789) (532) --------- --------- --------- --------- --------- Income (loss) from continuing operations before reorganization items, income taxes and extraordinary item.............................. (34,677) (372,009) (58,016) 20,679 26,204 Reorganization items.............................. 14,920 16,216 -- -- -- --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and, extraordinary item............ (49,597) (388,225) (58,016) 20,679 26,204 Provision (benefit) for income taxes.............. 6,207 1,204 3,196 11,566 9,536 --------- --------- --------- --------- --------- Income (loss) from continuing operations before extraordinary item.............................. (55,804) (389,429) (61,212) 9,113 16,668 Loss from discontinued operations, net of tax(6).......................................... -- -- (7,500) -- (9,038) --------- --------- --------- --------- --------- Income (loss) before extraordinary item........... (55,804) (389,429) (68,712) 9,113 7,630 Extraordinary item................................ -- -- -- (2,192) -- --------- --------- --------- --------- --------- Net income (loss)................................. $ (55,804) $(389,429) $ (68,712) $ 6,921 $ 7,630 PIK preferred dividends and accretion(7).......... -- $ 10,142 $ 14,844 $ 14,809 $ 14,767 --------- --------- --------- --------- --------- Net loss attributable to common stockholders...... $ (55,804) $(399,571) $ (83,556) $ (7,888) $ (7,137) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (Footnotes appear on the following page.)
27
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------- 1998 1997 1996 1995(1) 1994 --------- --------- --------- --------- --------- SHARE DATA: BASIC AND DILUTED EARNINGS PER SHARE Income (loss) from continuing operations.......... $ (7.94) $ (56.91) (10.87) (0.82) 0.27 Loss from discontinued operations................. -- -- (1.07) -- (1.28) Extraordinary Item................................ -- -- -- (0.32) -- --------- --------- --------- --------- --------- Net loss per share................................ (7.94) (56.91) (11.94) (1.14) (1.01) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of shares and equivalents..................................... 7,026,437 7,020,692 6,999,279 6,894,093 7,041,324 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- FINANCIAL RATIOS AND OTHER DATA: Depreciation and amortization..................... $ 27,904 $ 60,186 $ 65,658 $ 34,856 $ 29,855 Cash flows (used in) provided by continuing operations...................................... 23,526 11,045 (3,133) 24,305 89,071 Capital expenditures.............................. 24,887 36,572 40,578 22,080 10,141 Cash flows (used in) provided by investing activities...................................... 3,564 (34,156) (43,001) (226,023) (13,954) Cash flows (used in) provided by financing activities...................................... (24,678) 31,216 27,316 161,283 (30,348) BALANCE SHEET DATA: Working capital (deficiency)...................... $ (90,024) $ 2,096 $ (7,158) $ 19,417 $ 30,333 Total assets...................................... 250,981 307,494 617,705 662,262 387,942 Liabilities subject to compromise(8).............. 385,665 397,319 -- -- -- DIP Credit Facilities, including current portion.. 39,161 87,471 -- -- -- Creditors subordinated term loan.................. 25,000 -- -- -- -- Long-term debt, including current portion......... 0 14,087 360,603 324,801 113,381 PIK preferred stock............................... 124,637 124,637 114,495 99,651 99,841 Shareholders' equity (deficiency)................. $(609,230) $(547,128) $(145,724) $ (62,206) $ (59,032)
- ------------------ (1) Includes the results of operations of the Doehler-Jarvis Entities from July 28, 1995, the effective date of that acquisition. (2) Interest expense does not include interest after May 7, 1997 amounting to $13,605 and $35,618 for the fiscal years ended September 30, 1997 and 1998 respectively of the Old Senior Notes as all such interest was included as a liability subject to compromise. See Note 1 to the Consolidated Financial Statements. (3) During 1997, the Company recorded charges for impairment of long-lived assets of the Doehler-Jarvis Entities and at two other plants. The Company also recorded restructuring charges related to two operations scheduled for closing. During 1998, the Company recorded charges for impairment of long-lived assets of its Tiffin, Ohio facility and for certain assets relating to a platform that will end earlier than anticipated, and a restructuring charge. See Note 13 to the Consolidated Financial Statements. No tax benefit is currently available for any of these charges. (4) In November of 1997, the Company sold Kingston-Warren's Material Handling division resulting in a gain on sale of $11,354. During 1998, there was a gain on sale of $17,319 as a result of the sale of the land, building and certain other assets of the Harvard Interiors' St. Louis, Missouri facility and the transfer of certain assets at the Doehler-Jarvis Toledo, Ohio facility and related lease obligations to a third party and the sale of substantially all of the assets and the assumption of certain liabilities of the Doehler-Jarvis Greeneville Facility. (5) For 1997, other (income) expense, net includes approximately $2,200 related to joint venture losses. (6) The Company, in the first quarter of fiscal 1994, decided to discontinue its then specialty fastener segment ("ESNA") and therefore applied the accounting guidelines for discontinued operations. In 1996, the Company recorded a $7,500 charge to discontinued operations representing the write-down of the ESNA facility and continuing carrying costs. See Note 4 to the Consolidated Financial Statements. (7) PIK Preferred dividends after May 7, 1997 do not include $6,749 of accrued dividends. (8) September 30, 1998 and 1997, includes $300,000 of Old Senior Notes payable which are subject to the guaranty of the combined guarantor subsidiaries and accrued interest of $9,728 which is subject to the guaranty of the combined guarantor subsidiaries. 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS OF DOLLARS) FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1998 COMPARED TO 1997 Sales. Consolidated sales decreased $120,693 from $810,769 to $690,076, or 14.9%. Aggregate sales for the operations designated for sale or wind down decreased approximately $110,462 from $315,078 to $204,616. The remaining operations sales decreased $10,231 from $495,691 to $485,460 as lower volume due to the GM strike was partially offset by new business. Gross Profit. The consolidated gross margin, expressed as a percentage of sales, increased from 1.6% to 4.9%, or by $20,838. The gross profit (loss) for operations designated for sale or wind-down increased approximately $20,379 from $(15,502) to $4,877 due mainly to a decrease of approximately $17,000 in depreciation resulting from the write-down of certain property, plant and equipment in the fourth quarter of 1997 and the compensatory payments from Ford and GM relating to the Toledo Shutdown. The increase of $459 in gross profit for the remaining operations was mainly due to improved operating efficiencies and approximately $4,600 of decreases in depreciation resulting from the write-down of certain property, plant and equipment, at the continuing operations of Doehler-Jarvis offset by lost volume due to the GM strike. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $45,822 to $66,546. The increase reflects a $7,700 charge for costs to make the company's systems year 2000 compliant, a $16,000 charge for emergence related payments and deferred compensation arrangements, offset by the prior period's charge of $4,000 relating to the termination and consulting and release agreement of a former executive. Interest Expense. Interest expense decreased from $36,659 to $14,231. However, but for giving effect to the discontinuance of accruing interest on the senior notes of $35,618 in 1998 and $13,605 in 1997 from the date of filing bankruptcy, interest expense would have decreased by $415 as financing fees of $2,500 relating to the post-petition term loan facility were offset by lower borrowing levels. Amortization of Goodwill. Amortization of goodwill decreased from $8,448 to $1,584 as amortization of goodwill related to the acquisition of Doehler-Jarvis ceased March 31, 1997, when such goodwill was written-off as impaired. Impairment of Long-Lived Assets and Restructuring Costs. During 1998 the Company recorded $5,000 in restructuring charges representing shutdown and relocation costs of $2,500, relating primarily to severance and moving costs associated with the move of the corporate headquarters from Tampa, Florida to Lebanon, New Jersey, and approximately $2,500 for three senior executive officers. Additionally, the Company wrote-off as impaired substantially all the property, plant and equipment at Hayes Albion's Tiffin, Ohio facility and the equipment and tooling for a platform that is being discontinued earlier than planned. During 1997, a charge of $288,545 was recorded for the impairment of long-lived assets at several subsidiaries. Gain on Sale of Operations. This includes the gain on the sale of the Material Handling division of Kingston-Warren of $11,354, the gain on the sale of the land, building and certain other assets of the Harvard Interiors' St. Louis facility of $1,217 , the gain of $13,999 on the transfer of certain assets at the Toledo facility and their related lease obligations to a third party and the gain on the sale of certain assets and assumption of liabilities of the Doehler-Jarvis Greeneville subsidiary of $2,103. Other Expense, Net. Other expense decreased from $5,530 to $3,980 due to a decrease in loss on disposal of machinery and equipment. Reorganization Items. Represents mainly professional fees incurred in connection with the bankruptcy proceedings. Provision for Income Taxes. The increase from $1,204 to $6,207 was principally due to the reorganization of the Company. Several items that materially contributed to the increase were the federal minimum tax and state income taxes. Net Loss. The net loss decreased from $389,429 to $55,804 for the reasons described above. 29 1997 COMPARED TO 1996 Sales. Consolidated sales decreased $14,068 from $824,837 to $810,769, or 1.7%. Aggregate sales for Harman Automotive, the furniture production line of Harvard Interiors, Toledo and the Material Handling Division of Kingston-Warren, each of which had been designated for sale ("Operations designated for sale or wind-down"), decreased approximately $35,574 from $251,442 to $215,868 (including $5,700 due to a decline in average aluminum prices, the benefit of which was passed on to customers). The remaining operations sales increased $21,506 from $573,395 to $594,901 due to a higher demand for its products. Gross Profit. The consolidated gross profit expressed as a percentage of sales (the "gross profit margin") decreased from 5.9% to 1.6%, after recording curtailment gains with respect to post-retirement obligations of $8,249 in 1997. The decrease was due primarily to operational inefficiencies at most of the Company's operating units, price reductions and from unfavorable comparisons relative to tooling margins and long-term contract recoveries. The gross profit (loss) for Operations designated for sale or wind-down amounted to $(14,952) and $12,312 in 1997 and 1996, respectively, and the change represents 76% of the consolidated decrease in gross profits. The remaining operations gross profit decreased from $36,384 to $27,947. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2,964, due principally to charges of approximately $4,000 in the second quarter, primarily related to the Termination, Consulting and Release Agreement dated February 12, 1997 with Mr. Vincent J. Naimoli, the former Chairman of the Board, President and Chief Executive Officer of the Company. Interest Expense. Interest expense decreased from $47,004 to $36,659. But for giving effect to the discontinuance of accruing interest on the senior notes of $13,605 after May 7, 1997, interest expense increased by $3,260. This increase resulted from increased borrowings under financing agreements. Amortization of Goodwill. The decrease of $6,864 in goodwill amortization occurred because goodwill amortization related to Doehler-Jarvis ceased March 31, 1997, when such goodwill was written-off as impaired. Other (Income) Expense, Net. The increase of $3,992 was mainly due to an increase in loss on disposal of machinery and equipment and losses from a joint venture. Impairment of Long-Lived Assets and Restructuring Costs. As a result of continuing losses and projections of future operations and cash flows, the Company recorded charges in 1997 of $288,545 reflecting the permanent impairment of long-lived assets at its Doehler-Jarvis and Harman Automotive subsidiaries and one plant. The goodwill portion of this charge is $114,385. See Note 13 to the Consolidated Financial Statements. Operations designated for sale accounted for approximately $101,000 of the impairment charge. Reorganization Items. As a result of the bankruptcy, the Company adjusted the senior notes to the amount of its allowed claim with a charge to operations of $10,408. In addition, the Company incurred professional fees in the amount of $5,828. Provision for Income Taxes. The decrease in the provision for income taxes resulted from a decrease in operating profit in Canada. Net Loss. The net loss increased from $68,712 to $389,429 for the reasons described above. 1996 COMPARED TO 1995 Sales. Excluding the 1996 and 1995 Doehler-Jarvis sales, consolidated sales decreased $57,388, primarily during the first six months. The automotive accessories segment sales accounted for 96% and 95%, respectively, of consolidated sales for the years 1996 and 1995. Automotive sales, excluding such sales by Doehler-Jarvis, decreased $59,000, of which $41,000 was due mainly to the lower volumes for existing light vehicle platforms, principally for large passenger cars and somewhat to the effects of the March 1996 strike at General Motors, and $18,000 was attributable to the inclusion in 1995 of sales to Ford phased out in June 1995, as previously disclosed. Non-automotive sales increased $1,600 due to an increase in furniture sales. Gross Profit. The consolidated gross profit expressed as a percentage of sales (the "gross profit margin") decreased from 11.8% to 5.9%. The decrease in the gross profit was due principally to the lower passenger car sales mentioned above and somewhat to the effects of adverse weather conditions, the General Motors strike, and excess launch costs for new and replacement products in 1996. In 1996, sales of certain products aggregated $50,000 for which a negative gross margin of $7,800 was incurred. More than half of the decrease in the gross 30 profit margin was attributable to the fact that Doehler-Jarvis contributed no gross profit on over $296,000 of sales, which was caused mainly by operational inefficiencies at the Toledo and Pottstown plants, including the impact of significant overtime resulting from operating the Toledo plant on a seven day week basis and the negative margins incurred from sales of the Programs. The remaining gross profit margin decrease was caused by decreases in the other automotive operations due to the reasons mentioned, in particular excess launch costs and the General Motors strike. The non-automotive segment had a decrease in gross profit of $1,600 due principally to the fact that the prior year's gross profit included a one-time favorable settlement with a supplier amounting to $475, as well as lower margins on increased sales to major retailers in 1996. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3,700, or 13.8%, after excluding such expenses of Doehler-Jarvis, and after considering the fact that 1996 does not include any bonus provision with respect to the Company's key management and operating personnel, as compared to $3,700 in 1995. 1996 includes salary increases and additional non-automotive selling costs incurred to penetrate the mass merchandising furniture market. As a percentage of sales, such consolidated expenses were 5.2% for both 1996 and 1995. Interest Expense. Interest expense increased from $19,579 in 1995 to $47,004 in 1996. The increase in interest expense was the result of the issuance in July 1995 of the 11 1/8% Senior Notes, capital leases (which were assumed in the Doehler-Jarvis acquisition), the revolving working capital loans under the Credit Agreement, dated as of July 28, 1995, among the Company, the Guarantors and Chemical Bank, as Agent (the "Chemical Agreement") and the $7,000 short term credit facility utilized from August 2, 1996 to September 27, 1996. The effective rate of interest was 13.6% in 1996 and 12.1% in 1995. Amortization of Goodwill. Amortization of goodwill increased $12,326 due to the additional goodwill resulting from the acquisition of Doehler-Jarvis. In the fourth quarter of 1996, based upon Doehler-Jarvis' unprofitable operating results since acquisition and projected operating results for 1997, the life of such goodwill was changed from 15 years to 10 years effective October 1, 1995. Other (income) Expense, Net. The change was due, principally, to the reduction in interest income due to the use of approximately $26,300 of cash on hand in the acquisition of Doehler-Jarvis. Provision for Income Taxes. The differences between the statutory federal income tax rate and the Company's effective income tax rates result, principally, from generating an operating profit in Canada and an operating loss in the U.S. for which no tax benefit has been recognized. Loss from Discontinued Operations. Discontinued operations was charged $7,500 representing the write-down of the ESNA facility, continuing costs associated with the Company's ongoing participation in the Department of Defense Voluntary Disclosure Program and carrying costs of the Union, NJ facility. See Note 4 to the Consolidated Financial Statements. Net Income (Loss). Net loss for 1996 was $68,712 compared to net income of $6,921 in 1995. The change is because operating results (as described above) were insufficient to cover increases of $27,425 in interest expense, $12,326 in amortization of goodwill and the $7,500 loss from discontinued operations. LIQUIDITY AND CAPITAL RESOURCES For the year ended September 30, 1998, the Company had cash flow from operations of $23,526 as compared with cash flow from operations of $11,045 for the year ended September 30, 1997. The 1998 cash flows improved due to increased profit margins, lower inventory and receivable levels, but were negatively affected by payments of reorganization items and accelerated payments to post-petition suppliers and spending on year 2000 conversion costs. The cash flow from operations in 1998, together with the proceeds of $27,822 from the sale of operations and the $22,500 proceeds from the creditors' subordinated term loan were used primarily to fund capital expenditures of $24,887 and to repay obligations under DIP loans amounting to $45,810. As of September 30, 1998, the Company had availability to borrow funds in the amount of approximately $34,500 pursuant to the DIP revolving credit facility. In early 1998 the Company's new management contemplated incurring significant restructuring charges, year 2000 conversion costs, and capital expenditures to implement its turnaround business strategy. The Company, therefore, entered into a Term Loan Agreement, dated as of January 16, 1998, for a $25,000 post-petition term loan facility to allow greater borrowing availability for its ongoing operations. This facility was 31 subordinated to the security interests under the then existing DIP loans, was payable on the earlier of (a) May 8, 1999 or (b) the date the existing DIP loan was terminated and bore interest at a rate per annum equal to the greater of (i) the highest per annum interest rate for term loans and revolving credit loans under the then existing DIP loans plus 3% or (ii) 13%. The Company was required to pay facility and funding fees aggregating $2,500. The net proceeds of $22,500 were used to reduce the then current balance of the revolver portion of the DIP loans. As discussed in Footnote 28 to the Consolidated Financial Statements the Company emerged from Chapter 11 on November 24, 1998, repaid the DIP Facility, the Post-Petition Term Loan, and issued $25,000 of Senior Secured Notes and entered into a $115,000 Senior Secured Credit facility. Management anticipates having sufficient liquidity to conduct its activities in fiscal 1999 as a result of the borrowing availability provided by these facilities. The Company did not meet the fixed charge ratio covenant of its DIP Facility during the months of October and November 1997. On December 29, 1997, the Company entered into Amendment No. 1 Waiver and Consent (the "Amendment") to Post-Petition Loan and Security Agreement with its lenders whereby the lenders from December 29, 1997 waived all defaults or events of default which had occurred prior to such date from the failure to comply with the above financial covenant. The lenders also entered into the Amendment to replace the fixed charge ratio covenant with monthly consolidated EBITDA and consolidated tangible net worth covenants commencing with calculations at December 31, 1997. The Amendment required the lenders' consent for capital expenditures in excess of $30,000 for the year ending September 30, 1998. In addition, the Company entered into Amendment No. 2 and Consent to the Post-Petition Loan and Security Agreement, dated as of January 27, 1998, pursuant to which the lenders consented to the term loan, discussed above, the creation of subordinated liens thereunder and to certain asset sales. Continuation of the Debtors' business after reorganization is dependent upon the success of future operations, including execution of the Company's turnaround business strategy and the ability to meet obligations as they become due. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and at September 30, 1998 had a net working capital deficit and shareholders' deficiency. These factors among others raise substantial doubt about the Company's ability to achieve successful future operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Capital Expenditures. Capital expenditures for property, plant and equipment during 1998 and 1997 were $24,887 and $36,572, respectively, principally for machinery and equipment required in the ordinary course of operating the Company's business. The Company is currently projecting to spend approximately $20,000 principally for machinery and equipment in 1999. The projected capital expenditures are required for new business and on-going cost saving programs necessary to maintain competitive benefits, and the balance for normal replacement. The actual timing of capital expenditures for new business may be impacted by customer delays and acceleration of program launches and the Company's continual review of priority of the timing of capital expenditures. YEAR 2000 COMPLIANCE The Company is in the process of addressing the Year 2000 concerns and determined that certain of the Company's information systems are not presently Year 2000 compliant. The Year 2000 issue is the result of many computer programs and imbedded chips being written using two digits rather than four to define the applicable year. Many of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If not addressed and completed on a timely basis, failure of the Company's computer systems to process Year 2000 related data correctly could have a material adverse effect on the Company's financial condition and results of operations. Failures of this kind could, for example, lead to incomplete or inaccurate accounting, supplier and customer order processing or recording errors in inventories or other assets and the disruption of its manufacturing process as well as transactions with third parties. If not addressed, the potential risks to the Company include financial loss, legal liability and interruption to business. 32 The Company is currently installing a new management information system that will allow its critical information systems and technology infrastructure to be Year 2000 compliant before transactions for the year 2000 are expected. Many of the Company's systems include new hardware and packaged software recently purchased from large vendors who have represented that these systems are already Year 2000 compliant. The Company is in the process of obtaining assurances from vendors that timely updates will be made available to make all remaining purchased software Year 2000 compliant. The Company expects to utilize both internal and external resources to reprogram or replace and test all of its software for Year 2000 compliance, and the Company has commenced the installation of its Year 2000 compliant systems at pilot locations subsequent to the fiscal year end, with the Company-wide rollout to be completed by the Spring of 1999. The estimated cost for this project is $14 million. The Company spent approximately $7.7 million for Year 2000 compliance in fiscal 1998 and plans to spend approximately $5.8 million in fiscal 1999. However, even if these changes are successful, the Company remains at risk from Year 2000 failures caused by third parties. The Company has surveyed key utilities and suppliers but is still in the process of assessing the information provided to remediate Year 2000 issues. Failure by such key utilities or suppliers to complete Year 2000 compliance work in a timely manner could have a material adverse effect on certain of the Company's operations. Examples of problems that could result from the failure by third parties with whom the Company interacts to remediate Year 2000 problems include, in the case of utilities, service failures such as power, telecommunications, elevator operations and loss of security access control and, in the case of suppliers, failures to satisfy orders on a timely basis and to process orders correctly. Additionally, general uncertainty regarding the success of remediation may cause many suppliers to reduce their activities temporarily as they assess and address their Year 2000 efforts in 1999. This could result in a general reduction in available supplies in late 1999 and early 2000. Management cannot predict the magnitude of any such reduction or its impact on the Company's financial results. There can be no assurance that the systems of other companies on which the Company's systems rely will be converted in a timely fashion, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company's consolidated financial statements included at page 48. EFFECTS OF THE PLAN OF REORGANIZATION Following the consummation of the Plan of Reorganization, the Company's primary capital requirements consist principally of working capital requirements, capital expenditures, scheduled payments of principal and interest on outstanding indebtedness. The Company believes that cash flow from operating activities, cash generated from the sale of certain assets and periodic borrowings under the revolving credit portion of the Senior Credit Facility will be adequate to meet these capital requirements. It is expected that the combined proceeds of the Offering and initial term loan borrowing under the Senior Credit Facility will be used to (i) refinance the existing first lien and second lien DIP Credit Facilities, (ii) pay administrative expenses due under the Plan of Reorganization and pay related fees and expenses and (iii) provide cash for working capital purposes. The $65 million revolving credit portion of the Senior Credit Facility will be available to finance working capital and other general corporate purposes and is expected to be undrawn at closing, although upon consummation of the Plan of Reorganization, approximately $12.5 million of stand-by letters of credit are expected to be outstanding for workers' compensation and other insurance claims which are ongoing. The revolving credit facility will be available on a revolving basis prior to its expiration on the third anniversary of the Effective Date, provided that the sum of (i) the outstanding amount of all direct borrowings under the revolving credit facility plus (ii) the outstanding amounts of all undrawn letters of credit under the revolving credit facility may not exceed the defined eligible assets. INFLATION AND OTHER MATTERS There was no significant impact on the Company's operations as a result of inflation during the prior three year period. In some circumstances, market conditions or customer expectations may prevent the Company from increasing the price of its products to offset the inflationary pressures that may increase its costs in the future. 33 SEASONALITY Although most of the Company's products are generally not affected by year-to-year automotive style changes, model changes may have a significant impact on sales. In addition, the Company experiences seasonal fluctuations to the extent that the operations of the domestic automotive industry slows down during the summer months, when plants close for vacation period and model year changeovers, and during the month of December for plant holiday closings. As a result, the Company's third and fourth quarter sales are usually somewhat lower than first and second quarter sales. RECENT ACCOUNTING PRONOUNCEMENTS Derivative Transactions. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, but may be adopted earlier. Historically, the Company has used, and in the future may use, derivative instruments or hedge accounting. The adoption of SFAS No. 133 will have no impact on the Company's consolidated results of operations, financial position or cash flows. Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income and its components in annual and interim financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods is required. The adoption of SFAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows. Segment Reporting. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for companies to report information about operating segments in annual financial statements, based on the approach that management utilizes to organize the segments within the company for management reporting and decision making. In addition, SFAS No. 131 requires that companies report selected information about operating statements in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedules listed in Item 14 are included in this Annual Report on Form 10-K beginning on page 48. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT On September 17, 1998, management of Harvard Industries, Inc. (the "Company") dismissed PriceWaterhouseCoopers LLP ("PriceWaterhouseCoopers") as the Company's independent accountants and appointed the firm of Arthur Andersen LLP ("Arthur Andersen") as the new independent accountants for the Company. The decision to change accountants was ratified by the Board of Directors of the Company. Pursuant to Item 304(a)(1) of Regulation S-K, the Company reports the following: (i) The reports of PriceWaterhouseCoopers on the Company's consolidated financial statements for the fiscal years ended September 30, 1997 and 1996 contained no adverse opinion or disclaimer of opinion and were not qualified as to audit scope or accounting principle. However, the report included an explanatory paragraph to reflect the uncertainty arising from the Company's ability to continue as a going concern as a 34 result of its voluntary filing of petition for reorganization under Chapter 11 of the United States Bankruptcy Code. (ii) In connection with its audits for the fiscal years ended September 30, 1997 and 1996 and through September 17, 1998, there have been no disagreements with PriceWaterhouseCoopers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PriceWaterhouseCoopers would have caused them to make reference thereto in their report on the financial statements for such years. (iii) During each of the fiscal years ended September 30, 1997 and 1996, the following reportable events, as that term is defined by Item 304(a)(1)(v) of Regulation S-K, occurred: (1) PriceWaterhouseCoopers became aware of accounting irregularities related to the Company's Doehler-Jarvis, Inc. subsidiaries during the fiscal year ended September 30, 1996. These matters related to inventories, materials and supplies and fixed assets. (2) During each of the two years in the period ended September 30, 1997, the Company experienced significant turnover of accounting and financial personnel. This reduction complicated a lack of uniform (company-wide) accounting practices and information systems. As a result, the Company experienced certain material weaknesses in internal control. PriceWaterhouseCoopers discussed these reportable events with the Company's Audit Committee in August 1996, November 1996, February 1997 and December 1997. Management of the Company has authorized PriceWaterhouseCoopers to respond fully to the inquiries of Arthur Andersen, as the Company's successor accountants, concerning the reportable events described above. Pursuant to Item 304(a)(2) of Regulation S-K, the Company reports the following: During the Company's two most recent fiscal years, and any subsequent interim period prior to engaging Arthur Andersen, the Company has not consulted with Arthur Andersen regarding the application of accounting principles to a specific transaction, or the type of audit opinion that might be rendered with respect to the Company's financial statements. 35 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS OF REGISTRANT ROGER G. POLLAZZI Chairman of the Board and Chief Executive Officer since November 24, 1998. Roger G. Pollazzi was elected Chief Operating Officer of the Company in November 1997 and, has been Chairman of the Board and Chief Executive Officer since the Effective Date. He was associated with Concord Investment Partners, an investment firm headquartered in Concord, Massachusetts, from 1996 to October 1997. From 1992 to 1996, Mr. Pollazzi was Chief Executive Officer and Chairman of Pullman, an automotive parts manufacturer. Term of Office: 1 year Age: 61 JON R. BAUER Director since December 9, 1998. John R. Bauer became a director of the Company December 9, 1998. Jon R. Bauer is a Managing Partner of Contrarian Capital Management, L.L.C., and an investment management firm founded in May 1995 and located in Greenwich, Connecticut. He was a Managing Director of the Horizon series of Partnerships from 1986 to 1995. Term of Office: 1 year Age: 42 THOMAS R. COCHILL Director since November 24, 1998. Thomas R. Cochill became a director of the Company on the Effective Date. Mr. Cochill is a founding partner and serves as CEO of Ingenium, LLC, a crisis and transition management consulting firm. He currently serves as non-executive Chairman of the Board of Quantegy, Inc., a manufacturer of recording media. He served as the President, Chief Executive Officer and Chairman of the Board of Webcraft Technologies, Inc. ("Webcraft") from 1992 to 1997. Webcraft specializes in printing of direct mail products, specialized government forms, complex commercial print formats and fragrance samplers. Webcraft emerged from Chapter 11 in 1994. He serves as a member of the Board of Directors of Grand Union Company, a grocery chain in the Northeast United States, and U.S. Leather, Inc., a producer of leather and leather products. From 1981 to 1992, Mr. Cochill was the President, member of the Board of Directors, and member of the Executive Committee as well as a minority partner of The Lehigh Press, Inc., a private printing company. Mr. Cochill also served as a Group Business Manager for the Dow Chemical Company from 1969 to 1972. Term of Office: 1 year Age: 59 RAYMOND GARFIELD, JR. Director since November 24, 1998. Raymond Garfield, Jr. became a director of the Company on the Effective Date. He has been the President of Garfield Corporation, a national real estate finance and development firm, specializing in design-build/finance projects. In 1992, Mr. Garfield became Chairman and Chief Executive Officer of Vista Properties, Inc., a public national development firm formerly known as Lomas Realty USA. Mr. Garfield guided a restructuring which resulted in Vista's merger with Centex Corporation in 1996. From 1988 to 1992, Mr. Garfield served as a Senior Managing Director of Cushman & Wakefield, responsible for all financial services for the Western U.S. Mr. Garfield has also served as a Vice President of Salomon Brothers from 1984 to 1988 and Senior Vice President and National Sales Manager for Merrill Lynch Commercial Real Estate from 1980 to 1984. He is a graduate of the U.S. Naval Academy and is a former naval aviator. Term of Office: 1 year Age: 54 36 DONALD P. HILTY Director since November 24, 1998. Donald P. Hilty became a director of the Company on the Effective Date. He has been a business consultant since 1996, in which capacity he has performed business and economic analyses for numerous corporate and not-for-profit clients with regard to business conditions, industry analysis, international business, public policy concerning trade and competitiveness issues, and other functions. From 1980 to 1994, Mr. Hilty served as the Chief Economist of the Chrysler Corporation. In addition, at Chrysler, he held marketing, finance and research positions during twelve years in Geneva, London and Paris. He was a Senior Fellow at the Economic Strategic Institute from 1994 to 1996. Mr. Hilty holds a BA degree from Wheaton College, an MBA from the University of Colorado and a Doctor of Business Administration from the Indiana University Graduate School of Business. Term of Office: 1 year Age: 69 GEORGE A. POOLE, JR. Director since November 24, 1998. George A. Poole, Jr. became a director of the Company on the Effective Date. He has been private investor for more than five (5) years and is currently a member of the Board of Directors of Anacomp, Inc., a provider of multiple media data management solutions, which emerged from Chapter 11 in 1996. In addition to serving on the Board of Anacomp, Inc. since June 1996, Mr. Poole has served on the Board of Directors of U.S. Home Corp., a home building company since it emerged from Chapter 11 in June 1993. Mr. Poole also serves on the Board of Directors of Bibb Company, and has served on the Board of Directors of Bucyrus International, Inc. and Spreckles Industries. Term of Office: 1 year Age: 67 JAMES P. SHANAHAN, JR. Director since November 24, 1998. James P. Shanahan, Jr. became a director of the Company on the Effective Date. Mr. Shanahan has been the Executive Vice President, General Counsel and a member of the Board of Directors of Pacholder Associates, Inc. since 1986. He also serves on the Board of Directors of LaBarge, Inc., a manufacturer of electronic components headquartered in St. Louis, MO. In addition, Mr. Shanahan served as Chief Executive Officer of ICO, Inc. from 1990 to 1995. Term of Office: 1 year Age: 37 RICHARD W. VIESER Director since December 1998. Richard W. Vieser became a director of the Company in December 1998. Retired from active employment since 1989. Chairman, Chief Executive Officer and President of Lear Siegler, Inc. (a diversified manufacturing company) from 1987 to 1989. Chairman of the Board and Chief Executive Officer of FL Industries, Inc. and FL Aerospace (formerly Midland-Ross Corporation) (also a diversified manufacturing company) from 1985 and 1986 to 1989, respectively. Former President and Chief Operating Officer of McGraw-Edison Co. Currently, Mr. Vieser serves as a director of Ceridian Corporation (formerly Control Data), Global Industrial Technologies (formerly INDRESCO, Inc.) International Wire, Sybron International Corporation, Varian Associates and Viasystems Group, Inc. Term of Office: 1 year Age: 71 37 EXECUTIVE OFFICERS OF REGISTRANT ROGER G. POLLAZZI See Directors of Registrant. JAMES B. GRAY President since July 8, 1998. James B. Gray joined the Company on July 8, 1998 as its President and currently remains President. Before joining the Company, he was the Managing Director of Tenneco Automotive Europe since 1997. From 1987 to 1996, Mr. Gray was President of the Elastomers division of Pullman. Term of Office: 1 year Age: 56 THEODORE W. VOGTMAN Executive Vice President and Chief Financial Officer since November 17, 1997. Theodore W. Vogtman joined the Company on November 17, 1997 and is currently Executive Vice President and Chief Financial Officer. Prior to joining the Company, he was associated with Concord Investment Partners, an investment firm headquartered in Concord, Massachusetts, from 1996 to October 1997. From 1994 to 1996, he was Chief Financial Officer of Pullman. From 1992 to 1994, he was Chief Financial Officer for Safelite Glass. Term of Office: 1 year Age: 58 J. VINCENT TOSCANO Executive Vice President of Strategic Planning/Acquisition and Divestitures since November 17, 1997. J. Vincent Toscano joined the Company on November 17, 1997 and is currently Executive Vice President of Strategic Planning/Acquisition and Divestitures. Prior to joining the Company, he was associated with Concord Investment Partners, an investment firm headquartered in Concord, Massachusetts, from 1996 to October 1997. From 1993 to 1996, he was Vice President--Operations, at Pullman. From 1992 until 1993, Mr. Toscano was Chief Financial Officer of Pullman. Term of Office: 1 year Age: 50 JOSEPH J. GAGLIARDI Executive Vice President, Administration and Information Technology since July 1998. Joseph J. Gagliardi is currently the Executive Vice President, Administration and Information Technology, a position he has held since July 1998. From March 1997 to July 1998, he was the Senior Vice President, Finance and Chief Financial Officer of the Company, and from 1980 to March 1997 he served as Vice President, Finance and Chief Financial Officer of the Company. Term of Office: 1 year Age: 59 GERALD G. TIGHE Senior Vice President, General Counsel since November 17, 1997 Gerald G. Tighe joined the Company on November 17, 1997 and currently serves as Senior Vice President, General Counsel. Prior to joining the Company, he was a consultant to Pullman from 1994 until 1997. Previously, he was General Counsel of Lear Siegler Inc. Term of Office: 1 year Age: 62 38 D. CRAIG BOWMAN Vice President, Law and Secretary since December 1, 1997. D. Craig Bowman joined the Company on December 1, 1997 and is currently Vice President, Law and Secretary. Before joining the Company, he was a principal in the management-consulting firm of The Tappan Group, located in New York, New York, from June 1994 until November 1997. From 1991 to 1994, Mr. Bowman was Vice President and General Counsel of Pullman. Term of Office: 1 year Age: 52 JOHN J. BROCK Vice President, Tax since November 17, 1997. John J. Brock joined the Company on November 17, 1997 and is currently Vice President, Tax. Prior to joining the Company, he was Vice President-Tax at Pullman from 1994 through 1997. From 1990 to 1994, Mr. Brock was Vice President--Taxation with Fiat Automotive (USA). Term of Office: 1 year Age: 53 ROBERT J. CLARK Vice President, Human Resources since January 15, 1998. Robert J. Clark joined the Company on January 15, 1998 and is currently Vice President, Human Resources. Prior to joining the Company, he was Vice President Benefits and Compensation with Polygram Holding, Inc. from August 1992 until January 1998. Term of Office: 1 year Age: 44 KEVIN L. B. PRICE Vice President, Controller and Treasurer since November 17, 1997. Kevin L. B. Price joined the Company on November 17, 1997 and is currently Vice President, Controller and Treasurer. Prior to joining the Company, he was Vice President--Controller of Pullman, from 1994 until 1997. Prior to that time, Mr. Price was the Assistant Controller of Pullman. Term of Office: 1 year Age: 43 BRIAN D. BENNINGER Senior Vice President, Marketing since August 1995. Brian D. Benninger has been a Senior Vice President of the Company since August 1995. From February 1992 to July 1995, Mr. Benninger was Vice President, Sales and Product Design, of the Company's subsidiary, Kingston-Warren. In addition, from October 1993 to the time he became an officer of the Company, Mr. Benninger served as Vice President, Sales, Marketing and Product Design for both Harman Automotive Sales, Marketing and Project Design and Corporate CAE. Prior thereto, he was employed by Clevite Elastometers, a producer of automotive vibration dampening devices, as a Vice President of Sales and Marketing. Term of Office: 1 year Age: 51 DAVID L. KUTA Senior Vice President, Sales and Product Design since July 1996. David L. Kuta has been a Senior Vice President of the Company since July of 1996. Prior to joining the Company in 1996, Mr. Kuta was Vice President of Operations for United Technologies Automotive-Interiors Division since 1994 and from 1990 to 1994, Vice President and General Manager of the Padded Products Division-Interiors Division. Term of Office: 1 year Age: 54 39 DAVID C. STEGEMOLLER Senior Vice President, Powertrain since August 1995. David C. Stegemoller has been a Senior Vice President of the Company since August 1995. For the past five years, Mr. Stegemoller served as Vice President of Hayes-Albion and its Trim Trends division (which was then a subsidiary of the Company). Prior to joining the Company in 1990, Mr. Stegemoller was employed by Navistar International for 3 years. Term of Office: 1 year Age: 57 DOUGLAS D. ROSSMAN Vice President, Purchasing since December 1996. Douglas D. Rossman has been a Vice President of the Company since December 1996. Previously, he was Purchasing Manager of Federal Mogul Corp., an automobile parts manufacturer, for more than eight years. Term of Office: 1 year Age: 47 40 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------------------------------- ------------------------------------------------- AWARDS PAYOUTS OTHER ---------- UNDER- ------- ANNUAL RESTRICTED LYING ALL OTHER COMPEN- STOCK OPTIONS/($) LTIP COMPEN- NAME AND SATION AWARD)(S) (#)SARS PAYOUTS SATION PRINCIPAL POSITION YEAR SALARY($) BONUS($)(6) ($)(1)(6) (5) (5) ($)(5) ($)(6) - ------------------------- ---- --------- ----------- -------- ---------- ----------- ------- --------- John W. Adams: Chairman of the Board and Chief Executive Officer(7)............... 1998 $ 400,000 0 0 0 0 0 0 1997 $ 250,000 0 0 0 0 0 0 1996 0 0 0 0 0 0 0 Roger G. Pollazzi: Chief Operating Officer.................. 1998 $ 525,000(2) 0 0 0 0 0 0 Theodore W. Vogtman: Executive Vice President and Chief Financial Officer.................. 1998 $ 218,750 0 0 0 0 0 0 J. Vincent Toscano: Executive Vice President of Strategic Planning.... 1998 $ 218,750 0 0 0 0 0 0 Joseph J. Gagliardi: Executive Vice President, Administration and Information Technology... 1998 $ 250,000 $ 3,177 1997 236,250 0 3,177 0 0 0 0 1996 220,000 0 3,300 0 0 0 0 Roger L. Burtraw: President(7)............. 1998 $ 298,942 $70,000 $852,561(3) 1997 350,000 35,000 3,177 0 0 0 0 1996 350,000 0 3,167 0 0 0 0 Richard Dawson: Senior Vice President Law and Administration and General Counsel(7)....... 1998 $ 80,000 0 $405,647(4) 0 0 0 0 1997 174,259 0 3,385 0 0 0 0 1996 154,975 0 2,999 0 0 0 0
- ------------------ (1) Except as indicated in notes (3) and (4) below, all Other Compensation represents amounts contributed or accrued for fiscal 1998, 1997, and 1996 for the Named Officers under the Company's 401(k) savings plan. (2) Mr. Roger G. Pollazzi is being compensated at the annual rate of $600,000 since November 1997 in his capacity as Chief Operating Officer of the Company. (3) Includes severance of $800,000, a non-qualified pension of $4,348, a 401(k) matching contribution by the Company of $3,177, vacation pay of $25,000 and outplacement services of $20,000. (4) Includes severance of $400,000, a non-qualified pension of $4,547 and a 401(k) matching contribution of $1,100. (5) On the Effective Date of the Plan of Chapter 11 Reorganization, all pre-reorganization stock, options and other equity interests of the Company were cancelled. (6) All pre-reorganization management incentive plans were rejected by the Company in its Chapter 11 Reorganization Plan. Employee Benefit Plans, including plans qualified under Section 401 of the Internal Revenue Code were unaffected by the Plan. (7) Mr. Adams, Mr. Dawson, and Mr. Burtraw are no longer employed by the Company. 41 PENSION AND RETIREMENT BENEFITS PENSION PLAN TABLE
YEARS OF SERVICE(3) -------------------------------------------------------- REMUNERATION(1)(2) 15 20 25 30 40 - ------------------ -------- -------- -------- -------- -------- $150,000............................................. $ 33,075 $ 44,100 $ 55,125 $ 66,150 $ 88,200 200,000............................................. 44,325 59,100 73,875 88,650 118,200 250,000............................................. 55,575 74,100 92,625 111,150 148,200 300,000............................................. 66,825 89,100 111,375 133,650 178,200 400,000............................................. 89,325 119,100 148,875 178,650 238,200 500,000............................................. 111,825 149,100 186,375 223,650 298,200 800,000............................................. 179,325 239,100 298,875 358,650 478,200
- ------------------ (1) Covered compensation is composed of base salary for the calendar year, excluding bonuses, commissions and other special forms of compensation. The maximum amount of compensation used to determine the benefits shown in the Pension Table above has been limited by federal law. The limit on compensation for 1998 is $160,000. (2) Under applicable federal law, the annual benefits payable to any participant under the Retirement Plan may not exceed a ceiling currently $130,000 a year (subject to certain reductions based upon age and certain increases based upon adjustments to the consumer price index). (3) The Named Officers will have the following estimated credited years of service under the Retirement Plan based on continued service to normal retirement age: Mr. Gagliardi: 24; Mr. Burtraw: 15. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS(1)
AMOUNT AND NAME AND ADDRESS NATURE OF PERCENT TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNER(1)(6) OF CLASS - -------------- --------------------------------------------------------------- ---------------------- -------- Common Stock Contrarian Capital Advisors, L.L.C.(7)......................... 803,289(4) 9.75 Common Stock Contrarian Capital Management, L.L.C.(7)....................... 2,056,240(4) 24.95 Common Stock Contrarian Capital Fund II, LP(7).............................. 774,921(4) 9.40 Common James P. Shanahan.............................................. 384,182(2)(3) *
- ------------------ (1) On the Effective Date of the Plan of Chapter 11 Reorganization, all pre-reorganization stock, options and other equity interests of the Company were cancelled. Share holdings reflected herein are as of December 15, 1998. (2) Mr. Shanahan is a member of a Limited Liability Company, which is the General Partner of Pacholder Heron, LP and Pacholder Value Opportunity Fund LP which own 128,080 and 41,199 shares respectively. Mr. Shanahans's ownership in each is less than 1% and he disclaims ownership of the balance of the partnership's interests in the shares. These shares were obtained in exchange for pre-petition debt pursuant to the Plan of Chapter 11 Reorganization. (3) Mr. Shanahan is an officer of Pacholder Fund, Inc. which owns 214,903 shares. He owns less than 1% of the shares of this company and disclaims ownership of the balance of the company's interests in the shares. These shares were obtained in exchange for pre-petition debt pursuant to the Plan of Chapter 11 Reorganization. (4) These entities disclaim any beneficial ownership in these shares. (5) *Less than one percent. (6) Includes any shares the Beneficial Owner has the right to acquire within sixty days. (7) According to a statement on Schedule 13D filed by the Contrarian entities with the SEC in December, 1998, Contrarian Capital Management, L.L.C. is the general partner of Contrarian Capital Fund II, L.P. The Managing Members of Contrarian Capital Advisors, L.L.C. and Contrarian Capital Management, L.L.C. are Jon R. Bauer and David E. Jackson. As of December 15, 1998, the Retirement Plan owned no shares of the Common Stock and no shares of the Company's PIK Preferred Stock. 42 SECURITY OWNERSHIP OF MANAGEMENT(3)
AMOUNT AND NAME AND ADDRESS NATURE OF PERCENT TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNER(2) OF CLASS(3) - -------------- ------------------- ------------------- ------------- Common Stock Roger G. Pollazzi........................................ 51,580(1) Less than 1% Common Stock Theodore W. Vogtman...................................... 5,733(1) Less than 1% Common Stock J. Vincent Toscano....................................... 5,733(1) Less than 1% Common Stock Joseph J. Gagliardi...................................... 3,333(1) Less than 1% Common Stock John W. Adams............................................ 15(2) Less than 1% Common Stock Roger L. Burtraw......................................... 47(2) Less than 1% Common Stock Richard Dawson........................................... 237(2) Less than 1% Common Stock All Directors and Executive Officers taken together as a 80,344 group..................................................
- ------------------ (1) These shares were obtained in exchange for pre-petition debt pursuant to the Plan of Chapter 11 Reorganization. (2) These shares are represented by warrants to purchase the New Common Stock. (3) The holdings reflected herein are as of December 15, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During fiscal 1998 there were no such relationships or transactions. 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1)(2) Financial Statements and Schedules. The following financial statements and schedules are filed as part of this Annual Report on Form 10-K. HARVARD INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS PAGE - --------------------------------- ---- Reports of Independent Public Accountants.............................................................. 46, 47 Consolidated Balance Sheets at September 30, 1998 and 1997............................................. 48 Consolidated Statements of Operations Years Ended September 30, 1998, 1997 and 1996.................................................................... 49 Consolidated Statements of Shareholders' Deficiency Years Ended September 30, 1998, 1997 and 1996.................................................................... 50 Consolidated Statements of Cash Flows Years Ended September 30, 1998, 1997 and 1996.................................................................... 51 Notes to Consolidated Financial Statements............................................................. 52
FINANCIAL STATEMENT SCHEDULES All schedules are omitted because they are either not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto. (b) List of Exhibits
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Plan of Reorganization and related Disclosure Statement, filed with the U.S. Bankruptcy Court for the District of Delaware on July 10, 1998 (incorporated by reference to Exhibits 99.1 and 99.2 to the Company's Form 8-K filed with the Commission on July 24, 1998 (Commission File No. 001-01044)). 2.2 First Amended and Modified Consolidated Plan of Reorganization dated August 19, 1998, filed with the U.S. Bankruptcy Court for the District of Delaware on August 25, 1998 (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed with the Commission on October 30, 1998 (Commission File No. 001-01044)). 3.1(a)* Certificate of Incorporation of the Company. 3.1(b)* Certificate of Merger of the Company. 3.2* By-laws of the Company. 4.1* Form of Common Stock Certificate of the Company. 4.2* Indenture (including the Form of 14 1/2% Senior Secured Note due September 1, 2003), dated as of November 24, 1998 between the Company, the Subsidiary Guarantors and Norwest Minnesota Bank, National Association, as Trustee. 10.1* Settlement Agreement dated as of October 15, 1998, by and among the Company, certain of its subsidiaries and the PBGC. 10.2* Registration Rights Agreement, dated as of November 24, 1998, between the Company and the signatories listed therein.
44
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------------------------------- 10.3* Registration Rights Agreement, dated as of November 23, 1998, between the Company and Lehman Brothers Inc., as Initital Purchaser. 10.4* Credit Agreement, dated as of November 24, 1998, between the Company, its subsidiaries, General Electric Capital Corporation, as Administrative Agent and the lenders party thereto. 10.5* Loan Collateral Agreement, dated as of November 24, 1998, by the Company and its subsidiaries in favor of General Electric Capital Corporation, as Administrative Agent. 10.6* Collateral Agreement, dated as of November 24, 1998, by the Company and its subsidiaries in favor of Norwest Bank Minnesota, National Association, as Collateral Agent. 10.7* Warrant Agreement, dated as of November 24, 1998, between the Company and State Street Bank and Trust Company, as Warrant Agent. 10.8 Harvard Industries, Inc. Nonqualified ERISA Excess Benefit Plan (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 33-96376)). 10.9 Harvard Industries, Inc. Nonqualified Additional Credited Service Plan (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 33-96376)). 10.10* Harvard Industries, Inc. 1998 Stock Incentive Plan 10.11* Stipulation and Order between Debtors and ARCO Environmental Remediation, LLC Regarding Assumption of Settlement Agreement and the Withdrawal of Claim No. 1701 (attaching Settlement Agreement, dated as of January 16, 1995, by and between Harvard Industries, Inc. and Atlantic Richfield Company). 10.12* Stipulation and Order among the Debtors, General Electric Company and Caribe General Electric Products, Inc. Regarding Assumption of Settlement Agreement and the Withdrawal of Claim Nos. 1741 and 1742 (attaching Settlement Agreement, dated as of June 30, 1993, by General Electric Company and Caribe General Electric Products, Inc., Unisys Corporation, Harvard Industries, Inc., Harman Automotive, Inc. and Harman Automotive of Puerto Rico, Inc., Motorola, Inc. and Motorola Telcarro de Puerto Rico, Inc. and The West Company Incorporated and The West Company of Puerto Rico, Inc.) 10.13* Stipulation and Order between the Debtors and the Fonalledas Claimants. 10.14* Second Amendment to Settlement Agreement, dated March 6, 1997 and March 11, 1997, between Harvard Industries, Inc. and The Kingson-Warren Corp. and The Town of Newmarket. 16 Letter re change in certifying accountant (incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K/A filed with the Commission October 7, 1998 (Commission File No. 001-01044)). 21* List of subsidiaries of the Company. 23.1* Consent of Arthur Andersen LLP. 23.2* Consent of PricewaterhouseCoopers 24 Powers of Attorney (contained in the signature pages hereto).
(c) Reports on Form 8-K Form 8-K filed September 17, 1998 Form 8-K/A filed October 6, 1998 Form 8-K filed November 24, 1998 - ------------------ * Previously filed. 45 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Harvard Industries, Inc.: We have audited the accompanying consolidated balance sheet of Harvard Industries, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of September 30, 1998, and the related consolidated statements of operations, shareholders' deficiency and cash flows for the year 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. The financial statements of Harvard Industries, Inc. as of September 30, 1997 and for the two years in the period ended September 30, 1997 were audited by other auditors whose report dated November 14, 1997 (except for Note 9 as to which the date was December 29, 1997) contained an explanatory paragraph relating to the ability of the Company to continue as a going concern, as discussed in Note 1 to such financial statements. 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 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 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 Harvard Industries, Inc. and subsidiaries as of September 30, 1998 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 1 to the financial statements, on May 8, 1997, the Company and substantially all of its subsidiaries each filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. On August 19, 1998, the Company filed its plan of reorganization, which detailed new management's turnaround business strategy. On November 24, 1998, the Company emerged from bankruptcy (See Note 28). In addition, the Company has suffered recurring losses from operations and at September 30, 1998 had a net working capital deficit and shareholders' deficit. Continuation of the business is dependent on the Company's ability to achieve successful future operations. These factors among others raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Roseland, New Jersey January 12, 1999 46 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders of Harvard Industries, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, cash flows and shareholders' deficiency present fairly, in all material respects, the financial position of Harvard Industries, Inc. and its subsidiaries (the "Company") at September 30, 1997, and the results of their operations and their cash flows for each of the two years ended September 30, 1997 and 1996 in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The consolidated financial statements audited by us have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, on May 8, 1997, Harvard Industries, Inc. and substantially all of its subsidiaries each filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code, thereby raising substantial doubt about their ability to continue as a going concern. The Company has not filed a plan of reorganization with the Bankruptcy Court. The consolidated financial statements audited by us do not include any adjustments that might result from the outcome of the petitions for reorganization. PRICE WATERHOUSE LLP Tampa, Florida November 14, 1997, except for Note 9 as to which date is December 29, 1997 47 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1998 AND 1997 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ------------------ ------------------ ASSETS Current assets: Cash and cash equivalents............................................... $ 11,624 $ 9,212 Accounts receivable, net of allowance of $1,675 in 1998 and $2,589 in 1997................................................................. 57,046 76,190 Inventories............................................................. 26,646 54,218 Prepaid expenses and other current assets............................... 5,701 7,602 -------- -------- Total current assets.................................................... 101,017 147,222 -------- -------- Property, plant and equipment, net........................................ 122,579 132,266 Intangible assets, net.................................................... 2,833 4,417 Other assets, net......................................................... 24,552 23,589 -------- -------- Total Assets.............................................................. $250,981 $307,494 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities: Current portion of debtor-in-possession (DIP) loans..................... $ 39,161 $ 36,436 Creditors Subordinated Term Loan........................................ 25,000 -- Current portion of long term debt....................................... -- 1,748 Accounts payable........................................................ 25,098 32,267 Accrued expenses........................................................ 93,337 72,235 Income taxes payable.................................................... 8,445 2,440 -------- -------- Total current liabilities............................................ 191,041 145,126 Liabilities subject to compromise......................................... 385,665 397,319 DIP loans................................................................. -- 51,035 Long-term debt............................................................ -- 12,339 Post-retirement benefits other than pensions.............................. 95,515 96,929 Other..................................................................... 63,353 27,237 -------- -------- Total liabilities.................................................... 735,574 729,985 Commitments and contingencies............................................. -- -- 14 1/4% Pay-In-Kind Exchangeable Preferred Stock (At September 30, 1998 and 1997--includes $10,142 of undeclared accrued dividends)............. 124,637 124,637 -------- -------- Shareholders' deficiency: Common Stock, $.01 par value; 15,000,000 shares authorized; 7,026,437 shares issued and outstanding at September 30, 1998 and 1997......... 70 70 Additional paid-in capital.............................................. 32,134 32,134 Additional minimum pension liability.................................... (8,902) (3,665) Foreign currency translation adjustment................................. (2,991) (1,930) Accumulated deficit..................................................... (629,541) (573,737) -------- -------- Shareholders' Deficiency............................................. (609,230) (547,128) -------- -------- Total Liabilities and Shareholders' Deficiency............................ $250,981 $307,494 -------- -------- -------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these Balance Sheets. 48 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1998 1997 1996 ---------- ---------- ---------- Net Sales............................................................... $ 690,076 $ 810,769 $ 824,837 ---------- ---------- ---------- Costs and expenses: Cost of sales......................................................... 656,243 797,774 776,141 Selling, general and administrative................................... 66,546 45,822 42,858 Amortization of goodwill.............................................. 1,584 8,448 15,312 Impairment of long-lived assets and restructuring costs............... 10,842 288,545 -- Interest expense (contractual interest of $49,849 in 1998 and $50,264 in 1997)........................................................... 14,231 36,659 47,004 Gain on sale of operations............................................ (28,673) -- -- Other expense, net.................................................... 3,980 5,530 1,538 ---------- ---------- ---------- Total costs and expenses........................................... 724,753 1,182,778 882,853 ---------- ---------- ---------- Loss from continuing operations before reorganization items and income taxes................................................................. (34,677) (372,009) (58,016) Reorganization items.................................................... 14,920 16,216 -- ---------- ---------- ---------- Loss from continuing operations before income taxes..................... (49,597) (388,225) (58,016) Provision for income taxes.............................................. 6,207 1,204 3,196 ---------- ---------- ---------- Loss from continuing operations......................................... (55,804) (389,429) (61,212) Loss from discontinued operations....................................... -- -- (7,500) ---------- ---------- ---------- Net loss................................................................ $ (55,804) $ (389,429) $ (68,712) ---------- ---------- ---------- ---------- ---------- ---------- PIK preferred dividends and accretion (contractual amount of $19,010 in 1998 and $16,891 in 1997)............................................. $ -- $ 10,142 $ 14,844 ---------- ---------- ---------- ---------- ---------- ---------- Net loss attributable to common shareholders............................ $ (55,804) $ (399,571) $ (83,556) ---------- ---------- ---------- ---------- ---------- ---------- Basic and Diluted Earnings per share: Loss from continuing operations....................................... $ (7.94) $ (56.91) $ (10.87) Loss from discontinued operations..................................... -- -- (1.07) ---------- ---------- ---------- Net loss per share.................................................... $ (7.94) $ (56.91) $ (11.94) ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of common and common equivalent shares outstanding........................................................ 7,026,437 7,020,692 6,999,279 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements. 49 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996 (IN THOUSANDS OF DOLLARS, EXCEPT SHARES)
COMMON STOCK ADDITIONAL MINIMUM TOTAL ----------------------- PAID-IN PENSION FOREIGN ACCUMULATED SHAREHOLDERS' NO. OF SHARES AMOUNTS CAPITAL LIABILITY CURRENCY DEFICIT DEFICIENCY ------------- ------- ---------- --------- -------- ----------- ------------- Balance September 30, 1995......... 6,994,907 $70 $ 56,899 $(1,836) $(1,743) $(115,596) $ (62,206) Net loss--1996..................... -- -- -- -- -- (68,712) (68,712) PIK preferred stock dividend....... -- -- (14,375) -- -- -- (14,375) Accretion of discount on PIK preferred stock.................. -- -- (469) -- -- -- (469) Exercise of stock options including related tax benefits............. 19,450 -- 190 -- -- -- 190 Minimum pension liability.......... -- -- 69 69 Foreign currency adjustment........ -- -- -- -- (221) -- (221) --------- --- -------- ------- -------- --------- --------- Balance September 30, 1996......... 7,014,357 70 42,245 (1,767) (1,964) (184,308) (145,724) Net loss--1997..................... -- -- -- -- -- (389,429) (389,429) PIK preferred stock dividend....... -- -- (9,854) -- -- (9,854) Accretion of discount on PIK preferred stock.................. -- -- (288) -- -- -- (288) Sale of stock...................... 12,080 -- 31 -- -- -- 31 Minimum pension liability.......... -- -- -- (1,898) -- -- (1,898) Foreign currency adjustment........ -- -- -- -- 34 -- 34 --------- --- -------- ------- -------- --------- --------- Balance September 30, 1997......... 7,026,437 70 32,134 (3,665) (1,930) (573,737) (547,128) Net loss--1998..................... -- -- -- -- -- (55,804) (55,804) Minimum pension liability.......... -- -- -- (5,237) -- -- (5,237) Foreign currency adjustment........ -- -- -- -- (1,061) -- (1,061) --------- --- -------- ------- -------- --------- --------- Balance September 30, 1998......... 7,026,437 $70 $ 32,134 $(8,902) $(2,991) $(629,541) $(609,230) --------- --- -------- ------- -------- --------- --------- --------- --- -------- ------- -------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements. 50 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996 (IN THOUSANDS OF DOLLARS)
1998 1997 1996 -------- --------- -------- Cash flows related to operating activities: Loss from continuing operations before reorganization items................ $(40,884) $(373,213) $(61,212) Add back (deduct) items not affecting cash and cash equivalents: Depreciation and amortization......................................... 27,904 60,186 65,658 Impairment of long-lived assets and restructuring charges............. 10,842 288,545 -- Gain on sale of operations............................................ (28,673) -- -- Loss on disposition of property, plant and equipment and property held for sale........................................................... 1,030 1,931 2,053 Curtailment (gain) loss............................................... 4,390 (8,249) -- Write-off of deferred debt expense.................................... -- 1,792 -- Senior notes interest accrued not paid................................ -- 9,728 -- Changes in operating assets and liabilities of continuing operations, net of effects from acquisitions and reorganization items: Accounts receivable................................................... 10,673 22,798 3,133 Inventories........................................................... 21,862 (7,225) 7,112 Other current assets.................................................. 1,460 (5,965) (222) Accounts payable...................................................... (6,658) (56,806) 9,371 Accounts payable prepetition.......................................... -- 81,429 -- Accrued expenses and income taxes payable............................. 18,567 (10,254) (30,444) Postretirement benefits............................................... 1,386 (4,138) 5,822 Other noncurrent...................................................... 10,683 13,350 (4,404) -------- --------- -------- Net cash provided by (used in) continuing operations before reorganization items.................................................. 32,582 13,909 (3,133) Net cash used in reorganization items................................... (9,056) (2,864) -- -------- --------- -------- Net cash provided by (used in) continuing operations.................... 23,526 11,045 (3,133) -------- --------- -------- Cash flows related to investing activities: Acquisition of property, plant and equipment............................ (24,887) (36,572) (40,578) Cash flows related to discontinued operations........................... 557 713 (3,332) Proceeds from sales of operations....................................... 27,822 -- -- Proceeds from disposition of property, plant and equipment.............. 72 1,703 909 -------- --------- -------- Net cash provided by (used in) investing activities..................... 3,564 (34,156) (43,001) -------- --------- -------- Cash flows related to financing activities: Issuance costs of Senior Notes and financing agreements................. -- (2,200) -- Net borrowings (and repayments) under credit agreement.................. -- (38,834) 38,834 Net borrowings (and repayments) under DIP financing agreement........... (45,810) 87,471 -- Net borrowings under Unsecured Creditors Term Loan...................... 25,000 -- -- Proceeds from sale of stock and exercise of stock options............... -- 31 190 Repayments of long-term debt............................................ (88) (7,682) (3,032) Pension fund payments pursuant to PBGC settlement agreement............. -- (6,000) (6,000) Deferred financing costs................................................ (3,725) Payment of EPA settlements.............................................. (55) (1,570) (2,676) -------- --------- -------- Net cash (used in) provided by financing activities..................... (24,678) 31,216 27,316 -------- --------- -------- Net increase (decrease) in cash and cash equivalents......................... 2,412 8,105 (18,818) Cash and cash equivalents, beginning of period............................... 9,212 1,107 19,925 -------- --------- -------- Cash and cash equivalents, end of period..................................... $ 11,624 $ 9,212 $ 1,107 -------- --------- -------- -------- --------- -------- Supplemental disclosure of cash flow information: Interest paid........................................................... $ 14,039 $ 37,328 $ 41,868 -------- --------- -------- -------- --------- -------- Income taxes paid....................................................... $ 776 $ 2,244 $ 5,092 -------- --------- -------- -------- --------- --------
The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements. 51 HARVARD INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA) (1) BASIS OF PRESENTATION Harvard Industries, Inc., a Florida corporation at September 30, 1998, reorganized as a Delaware Corporation on November 24, 1998, and its subsidiaries (the "Company") are primarily engaged in the business of designing, engineering and manufacturing components for OEMs producing cars and light trucks. The Company's principal customers are General Motors, Ford and Chrysler. The Company operates primarily in the automotive accessories business. The Company produces a wide range of products, including: rubber glass-run channels; rubber seals for doors and trunk lids; aluminum castings; cast, fabricated, machined and decorated metal products; and metal stamped and roll form products. General Motors, Ford, and Chrysler accounted for 39%, 34%, and 10%, respectively, of the consolidated sales in 1998, 43%, 33%, and 7% respectively, in 1997 and 43%, 31%, and 8%, respectively, in 1996. On May 8, 1997, Harvard Industries, Inc. and its domestic subsidiaries (all of whom are hereinafter sometimes designated the "Debtors") filed voluntary petitions for relief under Chapter 11 of the Federal bankruptcy laws in the United States Bankruptcy Court (the "Court") for the District of Delaware. Under Chapter 11, certain claims against the Debtors arising prior to the filing of the petitions for relief under the Federal bankruptcy laws are stayed from collection while the Debtors continue business operations as debtors-in- possession ("DIP"). The Debtors received approval from the Court to pay or otherwise honor certain pre-petition obligations, including certain employee wages, salaries and other compensation, employee medical, pension and similar benefits, reimbursable employee expenses and certain workers' compensation, as well as continuation of pre-petition customer practices with respect to warranties, refunds and return policies. The Company's Plan of Reorganization (the Plan), as an acceptable means of satisfying creditor claims in accordance with the Bankruptcy Code, was confirmed by the Court on October 15, 1998, and such plan became effective on November 24, 1998 (See Note 28). Continuation of the Debtors' business after reorganization is dependent upon the success of future operations, including execution of the Company's turnaround business strategy and the ability to meet obligations as they become due. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and at September 30, 1998 had a net working capital deficit and shareholders' deficiency. These factors among others raise substantial doubt about the Company's ability to achieve successful future operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Liabilities subject to compromise consisted of the following at September 30:
1998 1997 -------- -------- Accounts Payable.................................................... $ 71,635 $ 79,060 Senior notes........................................................ 309,728(a) 309,728(a) Taxes............................................................... -- 3,269 Other............................................................... 4,302 5,262 -------- -------- $385,665 $397,319 -------- -------- -------- --------
- ------------------ (a) Includes accrued interest to the date of bankruptcy of $9,728 in 1998 and 1997. 52 Reorganization expenses included in the consolidated statements of operations for the year ended September 30 are comprised of the following:
1998 1997 ------- ------- Adjustment to record senior notes to amount of allowed claims........... $ -- $10,408 Professional fees....................................................... 15,350 5,828 Interest income on cash resulting from Chapter 11 proceedings........... (430) (20) ------- ------- $14,920 $16,216 ------- ------- ------- -------
In a previous Chapter 11 case the Company had a Plan of Reorganization confirmed by the Court on August 10, 1992, and that Plan became effective on August 30, 1992. In connection with its emergence from the 1992 Chapter 11 bankruptcy proceedings, the Company implemented "Fresh Start Reporting" as of August 23, 1992. Accordingly, all assets and liabilities were restated to reflect respective fair values at that date. The portion of the reorganization value which could not be attributed to specific tangible or identifiable intangible assets of the reorganized Company has been reported under the caption "Intangible Assets." (See Note 7) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Investments of 50% or less in companies and/or joint ventures are accounted for under the equity method. All material intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents. The Company considers all investments in highly liquid bank certificates of deposit to be cash equivalents. Cash equivalents include only investments with purchased maturities of three months or less. In accordance with the DIP financing agreement, substantially all the Company's cash receipts from trade receivables must be applied against the revolving line of credit. Accordingly, the Company offset $12,160 against the revolving line of credit for certain cash held in lockboxes at September 30, 1997. Trade Receivables. A substantial portion of the Company's trade receivables is mainly concentrated with the three largest U.S. automotive companies. The Company does not require collateral or other security to support credit sales. General Motors, Ford and Chrysler accounted for 46%, 11% and 17%, respectively, of consolidated trade receivables at September 30, 1998, and 42%, 12% and 11%, respectively, at September 30, 1997. Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Property, Plant and Equipment. All property, plant and equipment owned at August 23, 1992 were restated to reflect fair value in accordance with "fresh start reporting". Additions after August 23, 1992 are recorded at cost. Depreciation and amortization, which includes the amortization of machinery and equipment under capital leases, is calculated using the straight-line method at rates to depreciate assets over their estimated useful lives or remaining term of leases. The rates used are as follows: buildings and building improvements, 2.5% to 20.0%; and machinery, equipment and furniture and fixtures, 5.0% to 33.3%. Replacements and betterments are capitalized. Major scheduled furnace maintenance and die replacement programs are accrued based on units of production; all other maintenance and repairs are expensed as incurred. Upon sale or retirement of property, plant and equipment, the related cost and accumulated depreciation are removed from the accounts and any resultant gain or loss is recognized. See Note 13 for impairment of certain property, plant and equipment. Intangible Assets. Intangible assets consist of goodwill and reorganization value in excess of amounts allocable to identifiable assets. Goodwill applicable to the acquisition of Doehler-Jarvis, originally being amortized over 15 years was changed to 10 years in the fourth quarter of 1996, effective October 1, 1995, based 53 upon Doehler-Jarvis' unprofitable operating results since acquisition and projected future operating results. Reorganization value in excess of amounts allocated to identifiable assets is being amortized using the straight-line method over 10 years. (see Note 13 for impairment of goodwill.) Long-Lived Assets. The Company assesses the recoverability of its long-lived assets by determining whether the amortization of each such asset over its remaining life can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company's average cost of funds. (See Note 13.) Debt Issuance Costs. The Company amortizes its deferred debt issuance costs over the term of the related debt. Revenue Recognition. Revenues are recognized as products are shipped to customers. Income Taxes. The Company accounts for income taxes in accordance with Financial Accounting Standards Board (FASB) Statement No. 109. Such statement requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between tax basis and financial reporting basis of assets and liabilities. Environmental Liabilities. It is the Company's policy to accrue and charge against operations environmental remediation costs when it is probable that a liability has been incurred and an amount is reasonably estimable. As assessments and cleanups proceed, additional information becomes available and these accruals are reviewed periodically and adjusted, if necessary. These liabilities can change substantially due to such factors as additional information on the nature or extent of contamination, methods of remediation required, and other actions required by governmental agencies or private parties. Cash expenditures often lag behind the period in which an accrual is recorded by a number of years. Foreign Currency Translation Adjustment. Exchange adjustments resulting from foreign currency transactions are generally recognized in the results of operations, whereas adjustments resulting from the translation of balance sheet accounts are reflected as a separate component of shareholders' deficiency. Net foreign currency transaction gains or losses are not material in any of the years presented. Earnings Per Share. Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which became effective for fiscal 1998, establishes new standards for computing and presenting earnings per share (EPS). The new standard requires the presentation of basic EPS and diluted EPS and the restatement of previously reported EPS amounts. Basic EPS is calculated by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing income available to common shareholders, adjusted to add back dividends or interest on convertible securities, by the weighted average number of shares of common stock outstanding plus additional common shares that could be issued in connection with potentially dilutive securities. In connection with the Company's emergence from bankruptcy (Note 28), the number of shares of common stock outstanding will increase, thereby diluting current equity interests. Recent Accounting Pronouncements Derivative Transactions. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and loses to offset related results on the hedged item in the income statement. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, but may be adopted earlier. Historically, the Company has used, and in the future may use, derivative instruments or hedge accounting. The adoption of SFAS No. 133 will have no impact on the Company's consolidated results of operations, financial position or cash flows. Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income and its components in 54 annual and interim financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods is required. The adoption of SFAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows. Segment Reporting. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for companies to report information about operating segments in annual financial statements, based on the approach that management utilizes to organize the segments within the company for management reporting and decision making. In addition, SFAS No. 131 requires that companies report disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows. Reclassifications. Certain amounts in the 1997 and 1996 Consolidated Financial Statements and Notes to Consolidated Financial Statements have been reclassified to conform to the 1998 presentation. (3) DISPOSITION OF BUSINESSES In November 1997, the Company sold the Material Handling division of its Kingston-Warren subsidiary for approximately $18,000 of gross proceeds, of which $7,840 was applied to the scheduled DIP term loans' quarterly payments in November 1997 and February and May 1998 and $7,840 was applied to the final installment due May 1999. The balance of the proceeds was used to reduce the DIP revolving facility. The transaction resulted in a gain on sale of approximately $11,400 in the first quarter of fiscal 1998. In June 1998, the Company finalized the sale of its land, building and certain other assets related to the Harvard Interiors Furniture Division located in St. Louis, Missouri for approximately $4,100 of gross proceeds. Of the proceeds, $830 was applied to the May 31, 1998 DIP quarterly term payment, $501 was applied to the August 31, 1998 payment, $1,330 was applied to the May 8, 1999 payment and the balance was applied to reduce the DIP revolving facility. The transaction resulted in a gain on sale of approximately $1,200, which was recorded in the second and third quarters of fiscal 1998. In June 1998, the Company sold its Elastic Stop Nut ("ESNA") land and building located in Union, New Jersey for $1,900. On September 7, 1998, the Company sold substantially all of the assets of Doehler-Jarvis Greeneville, Inc. for $10,907 of gross proceeds and resulted in a gain on sale of approximately $2,100. Production has ceased at the Company's Doehler-Jarvis Toledo, Inc. subsidiary. During 1998, General Motors and Ford defrayed certain expenses of the shut down and in return obtained certain assets, which were written off when the Company recorded the impairment charge in 1997 (See Note 13), and assumed the related lease obligation. The amounts received from General Motors were recorded as revenues because they were paid in the form of incremental selling price. The amount received from Ford was intended to defray costs and, therefore, was recorded as a credit to cost of sales. As a result of the lease assumption during 1998, the Company recorded a gain on sale of approximately $14,000. This gain is recorded within "Gain on sale of operations." The facility is currently for sale. In September 1998, the Company sold, at auction, certain assets of Harman for approximately $2,000 which resulted in no material gain or loss. The remaining assets of Harman following the sale consist of land and building. Condensed operating data of operations designated for sale or wind-down (Harman Automotive, Harvard Interiors, Material Handling, Toledo, Greeneville and the Tiffin, Ohio facility of the Hayes-Albion subsidiary) are as follows:
YEAR ENDED SEPTEMBER 30 -------------------- 1998 1997 -------- -------- Net Sales............................................................. $204,616 $315,078 Gross profit (loss)................................................... 4,877 (15,502)
55 (4) ESNA DISCONTINUED OPERATIONS On three separate occasions in fiscal 1994, the Company became aware that certain products of its ESNA division were not manufactured and/or tested in accordance with required specifications at its Union, New Jersey and/or Pocahontas, Arkansas facility. These fastener products were sold to the United States Government and other customers for application in the construction of aircraft engines and airframes. In connection therewith, the Company notified the Department of Defense Office of Inspector General ("DOD/OIG") and, upon request, was admitted into the Voluntary Disclosure Program of the Department of Defense (the "ESNA matter"). The Company has settled this matter in principal (final stipulation yet to be executed) for $475, to be paid subsequent to the fiscal year end. In September 1996 the Company determined that it is not likely that the agreement entered into in May 1996 with a developer to sell the Company's ESNA facility in Union, NJ would be successfully concluded, due to Environmental Protection Agency ("EPA") requirements necessary to bring the site up to residential standards. After considering the length of time, current market conditions and environmental cleanup costs to dispose of the facility for residential and/or industrial use, the Company determined that it was appropriate to reflect the value of the ESNA facility to the Company at a nominal net realizable value including clean up costs. As a result, the Company recorded a $7,500 charge to discontinued operations in the fourth quarter of 1996 representing the write-down of the ESNA facility, continuing carrying costs associated with the Company's ongoing participation in the Department of Defense Voluntary Disclosure Program and carrying costs of the Union, NJ facility. Net assets of discontinued operations of $500 and $1,057 at September 30, 1998 and 1997 respectively reflect the estimated net realizable value of remaining assets consisting primarily of royalty receivables and are included in other non-current assets. In June of 1998, the Company sold its ESNA land and building in NJ for approximately $1,900. (5) INVENTORIES Inventories at September 30 consist of the following:
1998 1997 ------- -------- Finished goods......................................................... $ 6,476 $ 3,530 Work-in-process........................................................ 2,078 16,805 Tooling................................................................ 5,991 19,934 Raw materials.......................................................... 12,101 13,949 ------- -------- Total Inventories...................................................... $26,646 $ 54,218 ------- -------- ------- --------
(6) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at September 30 consist of the following:
1998 1997 -------- -------- Land.................................................................. $ 3,445 $ 4,537 Buildings and improvements............................................ 52,590 57,367 Machinery and equipment............................................... 161,875 177,127 Furniture and fixtures................................................ 1,768 2,011 Construction in progress.............................................. 26,331 14,799 -------- -------- Total............................................................ 246,009 255,841 Less accumulated depreciation......................................... (123,430) (123,575) -------- -------- Property, Plant and Equipment, Net.................................... $122,579 $132,266 -------- -------- -------- --------
56 Depreciation expense amounted to $24,209, $46,377, and $42,632 in 1998, 1997 and 1996, respectively. (See Note 13 regarding the impairment of property, plant and equipment in 1997 and 1998.) (7) INTANGIBLE ASSETS Intangible assets at September 30 consist of the following:
1998 1997 ------- ------- Reorganization value (See Note 2)....................................... $12,339 $12,339 Less accumulated amortization........................................... (9,506) (7,922) ------- ------- Intangible assets, net........................................... $ 2,833 $ 4,417 ------- ------- ------- -------
Amortization expense related to reorganization value amounted to $1,584, $8,448, and $15,312 in 1998, 1997 and 1996, respectively. (See Note 13) (8) OTHER ASSETS Other assets at September 30 consist of the following:
AMORTIZATION PERIOD 1998 1997 ----------------- -------- ------- Deferred financing costs..................................... life of agreement $ 3,862 $ 2,200 Deferred tooling............................................. units produced 10,297 10,291 Pension Asset................................................ N/A 18,675 16,074 Net assets of discontinued operations........................ N/A 500 1,057 Other........................................................ N/A 2,821 3,261 -------- ------- Total................................................. 36,155 32,883 Less accumulated amortization................................ (11,603) (9,294) -------- ------- Other assets, net..................................... $ 24,552 $23,589 -------- ------- -------- -------
Amortization expense related to deferred financing costs amounted to $1,262, $1,627, and $5,136 in 1998, 1997 and 1996, respectively. Amortization expense related to deferred tooling amounted to $849, $3,743, and $2,578, in 1998, 1997 and 1996, respectively. In addition, in 1997 the Company wrote-off deferred financing costs of $10,408 related to the senior notes as reorganization costs and $1,792 relating to the financing agreement as interest expense upon the refinancing of such debt with DIP financing described in Note 9. (9) DIP FINANCING AND CREDITORS SUBORDINATED TERM LOAN As discussed in Note 28, both of these financing facilities were repaid upon emergence from bankruptcy on November 24, 1998. On May 8, 1997, the Company and certain of the Company's subsidiaries obtained a two-year Post-Petition Loan and Security Agreement ("DIP financing") to enable it to continue operations during the Chapter 11 proceedings. The DIP financing provides for $65,000 of Term Loans and $110,000 of Revolving Credit Loans which includes a $25,000 sub-limit of credit facility principally for standby letters of credit. As collateral, the Debtors have pledged substantially all of the assets of the Debtors. The Company entered into a Term Loan Agreement dated as of January 16, 1998 for a $25,000 post-petition term loan facility which is subordinated to the security interests under the existing DIP loans. The loan is payable on the earlier of May 8, 1999 or the date the existing DIP loan is terminated and bears interest at a rate per annum equal to the greater of (i) the highest per annum interest rate for term loans and revolving credit loans under the existing DIP loans plus 3% or (ii) 13%. The net proceeds of $22,500 from the loan were used to reduce the current balance of the revolver portion of the DIP loans. 57 All of the Pre-petition indebtedness outstanding at May 8, 1997 under the financing agreement described in Note 10 amounting to $105,044 was repaid from borrowings under the DIP financing. At September 30, 1998 and 1997, the amount outstanding under the term loans was $64,161 and $64,035, respectively, the amount outstanding under the Revolving Credit Loans was $0 and $23,436 respectively, and outstanding letters of credit amounted to $12,243 and $12,670 (principally standby), respectively. The Revolving Credit Loans bear interest at the rate of 1.50% in excess of the Base Rate (Prime) and the Term Loans bear interest at the rate of 1.75% in excess of the Base Rate. The prime rate was 8.25% at September 30, 1998. The DIP Lenders also earn a fee of 2% per annum of the face amount of each standby letter of credit in addition to passing along to the borrowers all bank charges imposed on the DIP Lenders by the letter of credit issuing bank. Further, the DIP Lenders receive a line of credit fee of .5% per annum on the unutilized portion of the Revolving Line of Credit, together with certain other fees, including a $1,375 closing fee. The Term Loans provide for quarterly payments of $3,250 beginning November 30, 1997 through February 28, 1999, with a final installment of $45,500 due on May 8, 1999. The Company failed to meet the fixed charge ratio financial covenant during the months of October and November 1997 and on December 29, 1997 obtained a waiver of such default from its lenders. On December 29, 1997 the Company entered into Amendment No. 1, Waiver and Consent (the "Amendment") to Post-Petition Loan and security Agreement with its vendors whereby the lenders from December 29, 1997 waived all defaults or events of default which had occurred prior to such date from the Companies' failure to comply with the above financial covenants. The lenders also entered into the Amendment to replace the fixed charge ratio covenant with monthly consolidated EBITDA and consolidated tangible net worth covenants commencing calculations at December 31, 1997. The Amendment required the lenders' consent for capital expenditures in excess of $30 million for the year ending September 30, 1998. The Company also entered into Amendment No. 2 and Consent to the Post-Petition Loan and Security Agreement, dated January 27, 1998 (the "Amended DIP Financing Agreement"), pursuant to which the lenders consented to the term loan, discussed above, the creation of subordinated liens thereunder and to certain asset sales. The Company entered into Amendment Nos. 3 and 4 to the Post-Petition Loan and Security Agreement, dated April 30, 1998 and June 23, 1998, respectively, extending to May 31, 1998 and June 30, 1998, respectively, the date upon which an agreement with Ford regarding the wind-down of the Toledo facility was required to be approved by the Court. An agreement with Ford was signed on May 18, 1998 and approved by the Court on June 22, 1998. (See Note 3.) (10) LONG TERM DEBT AND CREDIT AGREEMENTS Long term debt at September 30 consists of the following:
1998 1997 ------- ------- 12% Senior Notes Due 2004............................................... $ -- $ -- 11 1/8% Senior Notes Due 2005........................................... -- -- Revolving Credit Agreement.............................................. -- -- Industrial revenue bonds................................................ -- -- Capital lease obligations............................................... -- 14,087 ------- ------- Total Long Term Debt............................................... 14,087 Less current portion.................................................... -- (1,748) ------- ------- Long-term portion....................................................... $ -- $12,339 ------- ------- ------- -------
58 On July 26, 1994, the Company consummated a public offering relating to $100,000 aggregate principal amount of the Company's 12% Senior Notes Due 2004 ("12% Notes") and on July 28, 1995, the Company consummated a private placement offering of $200,000 principal amount of 11 1/8% Senior Notes Due 2005 ("11 1/8% Notes") (which were subsequently exchanged for new 11 1/8% Notes which are not subject to transfer restrictions). Both Notes were issued pursuant to indentures by and among the Company and Guarantors, which are subsidiaries of the Company, and First Union National Bank of North Carolina, as Trustee. (See Note 26 for information concerning the Guarantors and Note 1 for the classification of such debt which is in default.) In addition, both Note Indentures require the repayment of the Notes upon the occurrence of a change in control, as defined, at a repurchase price of 101% of the principal amount thereof plus accrued and unpaid interest. The Note Indentures limit the issuance of new debt, preferred stocks, as defined, and restrict the payment of dividends, distributions from subsidiaries and the sale of assets and subsidiary stock, as defined. The Notes are redeemable at the option of the Company, in whole or in part, at any time after July 15, 1999 for the 12% Notes or August 1, 2000 for the 11 1/8% Notes at the various redemption prices set forth in the Indentures relating to the Notes, plus accrued interest to the date of redemption. The 12% Notes mature on July 15, 2004, and the 11 1/8% Notes on August 1, 2005. Interest on both Notes is payable semiannually. The Company discontinued accruing interest on both Notes from the date of bankruptcy. The net proceeds from the sale of the 12% Notes of $94,300 were used to prepay all indebtedness outstanding under the Company's then existing bank credit agreement (approximately $51,100) and to pay certain trade payables that were incurred by the Company prior to its bankruptcy (approximately $31,000). The balance of the proceeds from the sale of the 12% Notes was used for general corporate purposes. The proceeds of $188,196 from the sale of the 11 1/8% Notes were utilized as part of the purchase price of the acquisition of Doehler-Jarvis. Contemporaneously with the sale of the 11 1/8% Notes, the Company and Guarantors (see Note 26) entered into a Revolving Credit Agreement, dated as of July 28, 1995 ("Chemical Agreement"), by and among the Company and Guarantors and Chemical Bank, as Agent, providing for up to $100,000 of working capital loans. The Company and certain of its subsidiaries entered into a financing agreement dated October 4, 1996 with the CIT Group/Business Credit, Inc. as a lender and as agent for a group of lenders. On October 4, 1996, the Company borrowed $38,273, under such financing agreement of which $30,000 was borrowed as term loans and $8,273 as revolving loans. Contemporaneously with entering such financing agreement, the Company terminated the Chemical Agreement, dated as of July 28, 1995. Proceeds from this new financing agreement were used to repay all outstanding loans under the Chemical Agreement. (See Note 9 for subsequent refinancing of this Agreement.) Machinery and equipment at September 30, 1996 includes equipment held under capital leases with an acquisition cost of approximately $16,727, which arose principally through the acquisition of Doehler-Jarvis. The initial lease terms for such leases end December 2002 and September 2003. The leases are subject to renewal and the equipment under the leases may be purchased at the end of the leases at fair market value not to exceed 24% of the original cost. Substantially all such equipment was written-off as impaired in September 1997 and the lease commitments were assumed by Ford in December 1997. (See Notes 3 and 13). For current Long Term Debt and Credit Agreements see Footnote 28, Subsequent Events. 59 (11) ACCRUED EXPENSES Accrued expenses at September 30 are summarized as follows:
1998 1997 ------- ------- Interest................................................................ $ 758 $ 713 Salaries and wages...................................................... 17,080 13,207 Pension liabilities..................................................... 3,404 2,177 Workers' compensation and medical....................................... 11,510 13,521 Costs related to discontinued operations................................ 7,885 4,822 Tooling and maintenance costs........................................... 3,031 5,366 Environmental........................................................... 2,785 2,397 Post-retirement benefits................................................ 2,112 2,300 Reorganization costs.................................................... 8,808 2,944 Restructuring costs (see Note 13)....................................... 1,653 10,000 Other................................................................... 34,311 14,788 ------- ------- $93,337 $72,235 ------- ------- ------- -------
(12) OTHER LIABILITIES Other liabilities at September 30 are summarized as follows:
1998 1997 ------- ------- Pension liabilities (see Notes 19 and 20)............................... $23,566 $ 3,495 Workers' compensation................................................... 26,478 10,462 Environmental........................................................... 5,748 78 Deferred taxes.......................................................... 4,345 1,262 Tool and die replacement................................................ 3,189 8,027 Other................................................................... 27 3,913 ------- ------- $63,353 $27,237 ------- ------- ------- -------
(13) IMPAIRMENT OF LONG-LIVED ASSETS AND RESTRUCTURING CHARGES In 1998 and 1997 the Company recorded the following charges:
1998 1997 ------- -------- Impairment of Doehler-Jarvis long-lived assets......................... $ -- $266,545 Impairment of long-lived assets........................................ 5,842 12,000 Severance payments related to two facilities scheduled for closing..... -- 3,285 Restructuring charges.................................................. 5,000 6,715 ------- -------- $10,842 $288,545 ------- -------- ------- --------
During the year ended September 30, 1998, the Company recorded a $5,000 restructuring charge representing estimated shutdown costs, of which $2,500 related primarily to severance for 22 salaried office personnel and moving costs ($475) substantially associated with the move of the corporate headquarters from Tampa, Florida to Lebanon, New Jersey, which was substantially completed by August 31, 1998, and approximately $2,500 related to 3 senior officers pursuant to agreements entered into as part of the bankruptcy proceedings. In March 1998, the Company announced its intention to sell or wind down its Tiffin operations and, based on the absence of acceptable offers to date and the projected undiscounted cash flows, recorded a charge of $3,042 for the impairment of building, machinery and equipment, furniture and fixtures and construction in progress. In addition, it recorded a charge of $2,800 for the impairment of certain machinery and equipment, tooling and dies relating to a platform that will end sooner than planned. In March 1997, due to significant changes in forecasted operating results, the Company wrote off all of the $114,385 of unamortized goodwill related to its 1995 acquisition of Doehler-Jarvis. Such write-off was based on estimated discounted cash flows in accordance with SFAS No. 121, Accounting for the Impairment of Long-lived 60 Assets and for Long-lived Assets to be Disposed of. After such write-off, the projected undiscounted cash flows provided for the recovery of the remaining long-lived assets at that time. In July 1997 the Company announced its intention to sell this subsidiary. Based on the absence of acceptable offers to date and the projected future cash flows, in September 1997, the Company recorded an impairment charge of $152,160 related to all other long-lived Doehler-Jarvis assets, including building, machinery and equipment, furniture and fixtures, construction in progress, capitalized lease, spare parts and dies. The projected cash flows were used consistently to determine if impairment was indicated. If impairment was indicated, the extent of any impairment write-off also addressed estimated sales price for assets held for sale in estimating impairment charges. At the time, such recoveries, if any, were estimated to be minimal. In February 1997, based on undiscounted negative cash flow forecasts, the Company announced its plans to sell its Harman Automotive subsidiary and in March 1997 recorded a charge for the impairment of Harman's property, plant and equipment and, based on available third party offers, recorded a charge for the impairment of certain property, plant and equipment of the Tiffin plant. In September 1997, the Company reflected a restructuring charge for employee severance covering 539 salaried and hourly employees and plant closing costs relating primarily to annual maintenance, insurance and inventory for the Harman and Harvard Interiors facilities. The restructuring was completed in May 1998 for Harvard Interiors and July 1998 for Harman Automotive. See Note 3 for information relating to the sales of the above operations. (14) OTHER EXPENSE, NET Other (income) expense, net includes the following:
1998 1997 1996 ------ ------ ------ Loss on disposal of PP&E................................................... $1,030 $1,931 $2,053 Loss on joint venture...................................................... -- 2,221 -- Interest income............................................................ (37) (106) (220) Other, net................................................................. 2,987 1,484 (295) ------ ------ ------ $3,980 $5,530 $1,538 ------ ------ ------ ------ ------ ------
(15) INCOME TAXES Provision for income tax expense for continuing operations consists of the following:
1998 1997 1996 ------ ------ ------ Domestic................................................................... $5,722 $ -- $ -- Foreign.................................................................... 485 1,204 3,196 ------ ------ ------ Income tax provision..................................................... $6,207 $1,204 $3,196 ------ ------ ------ ------ ------ ------
Deferred income taxes result from temporary differences in the recognition of revenue and expense for tax and financial statement purposes. The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at September 30, 1998 and 1997 are as follows: Deferred tax assets:
1998 1997 -------- -------- Net operating loss carry forwards..................................... $ 96,788 $ 98,533 Pension and post-retirement benefits obligations...................... 34,264 33,732 Reorganization items capitalizable for tax purposes................... 4,094 4,100 Reserves and accruals not yet recognized for tax purposes............. 116,546 115,193 -------- -------- Total................................................................. 251,692 251,558 Less valuation allowance.............................................. 201,354 200,780 -------- -------- Total deferred tax assets............................................. $ 50,338 $ 50,778 -------- -------- -------- --------
61 The Company believes it will more likely than not be able to realize its net deferred tax assets of $50,338 by offsetting it against deferred tax liabilities related to existing temporary differences that would reverse in the carry forward period. The Company has established a valuation allowance for certain of its gross deferred tax assets which exceed such deferred tax liabilities. The change in the valuation allowance in 1998 and 1997 primarily represents recognition of the deferred tax asset related to reserves and accruals not yet recognized for tax purposes. Deferred tax liabilities:
1998 1997 ------- ------- Depreciation............................................................ $51,580 $50,322 Other................................................................... 3,103 1,718 ------- ------- Total deferred tax liabilities.......................................... $54,683 $52,040 ------- ------- ------- -------
The net deferred tax liabilities of $4,345 and $1,262 are included in other liabilities in the consolidated balance sheets at September 30, 1998 and 1997, respectively. The following reconciles the statutory federal income tax expense (benefit), computed at the applicable federal tax rate, to the effective income tax expense:
SEPTEMBER 30, --------------------------------- 1998 1997 1996 -------- --------- -------- Tax expense (benefit) at statutory rate............................ $(16,863) $(135,879) $(20,305) State income taxes, net of federal benefit......................... 1,529 549 736 Permanent differences arising in connection with businesses acquired or reorganization....................................... 1,126 42,991 3,737 Earnings of foreign subsidiaries subject to a different tax........ 134 109 318 Other permanent differences........................................ 115 114 115 U.S. Federal Minimum Tax........................................... 500 -- -- Amount for which no tax benefit is recognized...................... 19,666 93,320 17,837 Other.............................................................. -- -- 758 -------- --------- -------- Actual tax expense from continuing operations...................... $ 6,207 $ 1,204 $ 3,196 -------- --------- -------- -------- --------- --------
At September 30, 1998, the Company had available net operating loss carryforwards and general business tax credits of approximately $242,000 for Federal income tax purposes. These carryforwards expire in the years 2002 through 2013. Of this total, approximately $83,000 is subject to current limitation under Section 382 of the Tax Code and approximately $27,700 is subject to the "SRLY" limitations of the Income Tax Regulations. These tax attributes will be reduced by any gain or income realized as a result of the transactions contemplated by the reorganization plan, in particular, any discharge of indebtedness income ("COD Income") excluded from income pursuant to Section 108 of the Tax Code. The precise amount of COD income realized but not recognized upon reorganization has not been finally determined, and will depend in part upon the fair market value of the New Common Stock. In addition, because the reorganization will result in an "ownership change" (as defined in Section 382 of the Tax Code), the availability of any NOLs remaining after reduction for COD income to offset income of the Company after the Effective Date will be limited. Under the Tax Code, a taxpayer is generally required to include COD income in gross income. COD income is not includable in gross income, however, if it arises in a case under the Bankruptcy Code. Instead, COD income otherwise includable in gross income is generally applied to reduce certain tax attributes in the following order: NOLs, general business credit carryovers, minimum tax credit carryovers, capital loss carryovers, the taxpayer's basis in property and foreign tax credit carryovers. Discharge under the reorganization plan of certain of the General Unsecured Claims, in particular the Senior Notes, will result in the realization of COD income, which will reduce the tax attributes of the Company by the difference between the fair market value of the consideration received by the creditors and the amount of the discharged indebtedness. 62 (16) RELATED PARTY TRANSACTIONS Pursuant to a Termination, Consulting and Release Agreement, dated as of February 12, 1997, among the Company, Vincent J. Naimoli and Anchor Industries International, Inc. ("Anchor"), his affiliated corporation, the parties agreed to terminate Mr. Naimoli's management services relationship with the Company, and cancel the prior Management and Option Agreement, as amended, under which Mr. Naimoli's services had been performed as the Company's then Chairman of the Board and Chief Executive Officer, except for certain provisions of the Management and Option Agreement relating to options, registration rights and certain indemnification. The Termination, Consulting and Release Agreement provides for Mr. Naimoli to receive vested benefits which had accrued prior to termination, and Mr. Naimoli agreed to act as a consultant to the Company for three years after termination. The Company charged selling, general and administrative expense for all of the fees and benefits related to the Agreement amounting to in excess of $3,000 in the second quarter of 1997. On June 19, 1997, the Company applied to the Court for an Order authorizing the rejection of the Agreement, and on July 16, 1997, Mr. Naimoli filed an objection to the Company's motion. The matter is currently pending in the Court. Subject to application "Plan of Reorganization and the Bankruptcy Code," under the Agreement, stock options that would be so available to him, would be those available if he were a participant in such Plans, and may include benefits to his selected beneficiaries. The Nonqualified Retirement Benefit Agreement provides that if Mr. Naimoli's services terminate within two years following a change in control of the Company (as defined in the Management and Option Agreement), he is to receive the benefits thereunder within 30 days of such termination in a lump sum cash payment equal to the "actuarial equivalent" of the benefits he would have received under such Agreement. Under the Management and Option Agreement, as restated as of August 16, 1995, Mr. Naimoli is given during the term of the Agreement, medical and dental insurance benefits for both his family and him on the terms and with the benefits as are from time-to-time provided to other senior executive officers, provided however, that such benefits are without cost to Mr. Naimoli and his family. Moreover, such Agreement requires the Company to purchase and maintain during Mr. Naimoli's life, a life insurance policy on his life in the face amount of $2,000, of which Mr. Naimoli's beneficiaries are entitled to receive the benefit proceeds. Subject to application "Plan of Reorganization and the Bankruptcy Code," in the event of voluntary termination of the Agreement by the Company, or if Anchor provides notice, during the period beginning on the 30th day following and ending on the 90th day following the occurrence of a Change in Control (as defined), that it intends to terminate the Agreement, the Company is to pay to Anchor a lump sum cash payment equal to (a) the number 3 multiplied by (b) the sum of (1) the highest annual compensation in effect under the Agreement during the one-year period preceding the occurrence of the Change in Control and (2) the average amount earned under the Agreement's bonus provisions during the three years preceding the occurrence of the Change in Control and continue to provide Anchor and Mr. Naimoli with all of the other benefits that Anchor and Mr. Naimoli would otherwise be entitled to pursuant to the terms of the Agreement, including, without limitation, the stock options granted under the Agreement. Pursuant to a Registration Rights Agreement, dated as of August 16, 1993, as amended as of August 16, 1994, Anchor has been granted certain registration rights in respect of the common stock issuable upon exercise of stock options, including, at the Company's cost, up to one requested registration of such shares after November 30, 1996, provided at least 5.0% of the outstanding shares of the Company as of August 16, 1993 are included in such registration, and such shares may not be otherwise freely sold. In addition, the Registration Rights Agreement grants certain other incidental registration rights to Anchor. Mr. Naimoli, beneficially owned, through Anchor, 2,800.28 shares of the common stock and 413.9987 shares of the preferred stock of Doehler-Jarvis (representing 13.4% and 2.6%, respectively, of the shares of common stock and preferred stock of Doehler-Jarvis outstanding immediately prior to the acquisition). In addition, Mr. Naimoli directly owned $300 principal amount of 11 7/8% Notes and, through Anchor, indirectly owned $500 principal amount of 11 7/8% Notes of Doehler-Jarvis immediately prior to the acquisition. Upon consummation of the acquisition, Anchor received approximately $11,700 in the aggregate in exchange for its 63 equity ownership in Doehler-Jarvis. In connection with a tender offer by the Company for the 11 7/8% Notes of Doehler-Jarvis, Mr. Naimoli and Anchor received approximately $875 in the aggregate in consideration of their consent to the amendments to the 11 7/8% Notes Indenture and tender of their 11 7/8% Notes, plus accrued interest to the date of repurchase. As of September 30, 1997, Mr. Naimoli and members of his immediate family and affiliated entities beneficially owned an aggregate of $2,525 principal amount of the Company's 12% Notes due 7/15/04 and $50 principal amount of the Company's 11 1/8% Notes due August 1, 2005. Mr. Naimoli is a stockholder of Nice and Easy Travel & Co., Inc. ("Nice and Easy"), a travel agency, which agreed to act as exclusive travel agent and to arrange travel services in such capacity for the Company and its employees and representatives, beginning in December 1994. It had been agreed that with respect to travel services rendered to the Company by Nice and Easy, the latter rebates to the Company five percent through February 10, 1995 and three percent thereafter of annual billings to the Company for travel business. During the years ended September 30, 1997 and 1996, Nice and Easy billed the Company, $2,100 and $1,130, respectively for travel services and rebated $28 and $34 to the Company in 1997 and 1996, respectively. In October 1995, the Board of Directors of the Company approved the lease of a private suite at the Tropicana Field in St. Petersburg, Florida for Tampa Bay Devil Rays baseball. Mr. Naimoli is the Managing General Partner of Tampa Bay Devil Rays, Ltd. Management agreed with two other partners to share in the cost of the suite, thereby reducing the suite cost to $20 per annum. In connection with the transaction, the Board determined that the transaction was fair and on terms comparable to those which would be obtained from a third party in an arm's-length transaction. The Company paid in 1997 to The Blackstone Group, LP, an investment banking firm of which Mr. Hoffman, a Director of the Company, is a partner, $54 for expenses and $75 as an up-front fee for additional advice rendered in structuring alternatives to enhance shareholder value and to pay designated success fees in the event such alternatives are effected and consummated successfully. The Company also was billed $1,941 in 1995 for financial advice rendered in developing the Company's bid for Doehler-Jarvis. For fiscal 1998, directors who are not employees of the Company receive compensation at the rate of $25 per annum plus $1 for attendance at each meeting of the Company's Board of Directors and $1 for each meeting of the Audit Committee and Compensation Committee they attend. During 1997, 25% or more of such amounts was paid in common stock of the Company. The issuance of common stock for director's services ceased in September 1997 due to the bankruptcy. Officers are not separately compensated for serving as Directors of the Company. See Footnote 28 for Compensation of New Directors following the Company's emergence from bankruptcy. (17) COMMITMENTS AND CONTINGENT LIABILITIES Environmental Matters The Company's operations are subject to extensive and rapidly changing federal and state environmental regulations governing waste water discharges and solid and hazardous waste management activities. The Company is a party to a number of matters involving both Federal and State regulatory agencies relating to environmental protection matters, some of which relate to waste disposal sites including Superfund sites. The most significant site is the Alsco-Anaconda Superfund Site (the "Site") (Gnadenhutten, Ohio). ("Alsco"), a predecessor of Harvard, was the former owner and operator of a manufacturing facility located in Gnadenhutten, Ohio. The Alsco division of Harvard was sold in August 1971 to Anaconda Inc. Subsequently, Alsco became Alsco-Anaconda, Inc., a predecessor to an entity now merged with and survived by the Atlantic Richfield Company ("ARCO"). The facility, when acquired by ARCO's predecessor, consisted of an architectural manufacturing plant, office buildings, a wastewater treatment plant, two sludge settling basins and a sludge pit. The basins and pit were used for treatment and disposal of substances generated from its manufacturing processes. The basins, pit and adjacent wooded marsh were proposed for inclusion on EPA's National Priorities List in October 1984. Those areas were formally listed by the EPA as the "Alsco-Anaconda Superfund Site" in June 1986. 64 On December 28, 1989, EPA issued a unilateral administrative order pursuant to Section 106 of CERCLA, to Harvard and ARCO for implementation of the remedy at the Alsco-Anaconda Superfund Site. Litigation between Harvard and ARCO subsequently commenced in the United States District Court for the Northern District of Ohio regarding allocation of response costs. Pursuant to a Settlement Agreement dated January 16, 1995, Harvard agreed to pay ARCO $6,250 (as its share of up to $25,000 of the cleanup and environmental costs at the Alsco-Anaconda Superfund Site). In twenty equal quarterly installments with accrued interest at the rate of 9% per annum, of which nine installments were paid through May 7, 1997. In return, ARCO assumed responsibility for cleanup activities at the site and agreed to indemnify Harvard against any environmental claims below the cap. If cleanup costs should exceed $25,000, the parties will be in the same position as if the litigation was not settled. Based on information provided by ARCO, Harvard believes that ARCO has completed 100% of the cleanup of the 4.8-acre National Priorities List site and 80% of the cleanup of the property adjacent to the National Priorities List site. Total costs are expected to be in the range of $19,000. Due to the Chapter 11 Cases, payments to ARCO, pursuant to the Settlement Agreement, have been suspended. ARCO Environmental Remediation, LLC, ARCO's successor, made a claim in the Chapter 11 Cases for all amounts that ARCO is owed under the Settlement Agreement or, in the alternative, for all amounts that ARCO has expended or may expend for cleanup of the site. The Company has agreed to assume the Settlement Agreement with the modification that the Company will pay ARCO $575 in full satisfaction of its claim. This payment was made in December, 1998. The Company's Harman subsidiary has been named as one of several PRPs by EPA pursuant to CERCLA concerning environmental contamination at the Vega Alta, Puerto Rico Superfund site (the "Vega Alta Site"). Other named PRPs include subsidiaries of General Electric Company ("General Electric"), Motorola, Inc. ("Motorola"), and The West Company, Inc. ("West Company") and the Puerto Rico Industrial Development Corporation ("PRIDCO"). PRIDCO owns the industrial park where the PRPs were operating facilities at the time of alleged discharges. Another party, Unisys Corporation, was identified by General Electric as an additional PRP at the Superfund Site as a successor to the prior operator at one of the General Electric facilities. Unisys Corporation was not initially designated as a PRP by EPA, although it was named as a PRP in conjunction with the settlement proceedings and consent decree discussed below. There are currently two phases of administrative proceedings in progress. The first phase, involves a Unilateral Order by EPA that the named PRPs implement the Vega Alta Site remedy chosen by EPA, consisting of the replacement of the drinking water supply to local residents and installation and operation of a groundwater treatment system to remediate groundwater contamination. In addition, EPA sought recovery of costs it had expended at the Vega Alta Site. Motorola, West Company and Harman completed construction of the EPA remedy pursuant to a cost-sharing arrangement. On December 29, 1998, the Bankruptcy Court approved the Company's Assumption and Modification of the Settlement Agreement whereby the Company paid General Electric a total of $300 in settlement of its claim. Effective June 30, 1993, the PRPs reached a settlement among themselves. Harman, together with Motorola and West Company, completed the agreed-upon work for the first phase of administrative proceedings, as outlined above, which included final construction and initial testing of the cleanup system. In addition, Harman, Motorola and West Company each agreed to pay General Electric the sum of $800 in return for General Electric's agreement to assume liability for, and indemnify and hold Harman and the others harmless against, EPA's cost recovery claim, to undertake operation and maintenance of the cleanup system and to construct, operate and maintain any other proposed system that may be required by EPA, and to conduct any further work required concerning further phases of work at the Vega Alta Site. Harman's settlement payment to General Electric was being made in 20 equal quarterly installments, which commenced in January 1995, with 9% interest per annum. However, due to the current bankruptcy proceedings, payments have been suspended pending direction from the Court. Harman, West Company and Motorola retained liability for any cleanup activities that may in the future be required by EPA at their respective facilities due to their own actions, for toxic tort claims and for natural resource damage claims. Pursuant to a letter dated January 31, 1994 and subsequent notices since that date, Harman and the other PRPs have been put on notice of potential claims for damages, allegedly suffered by the owners and operators of farms located in the vicinity of the Vega Alta Site. If Harman were to be found liable in any future lawsuit, some of the alleged damages (e.g., personal injury, property and punitive damages) would not be covered by the settlement agreement with General Electric. In a letter to General Electric's counsel, counsel for the owners and 65 operators alleged estimated losses of approximately $400,000 "based primarily on lost income stream," purportedly based on certain assumptions concerning the value of the property, its potential for development and groundwater contamination issues. At this time, however, Harman has no information that would support such unindemnified claims, and believes the claims to be speculative. On August 25, 1997, the Company was notified by the Michigan Department of Environmental Quality ("MDEQ") that it is a responsible person as defined in the Michigan Natural Resources and Environmental Protection Act. On October 15, 1998, the Bankruptcy Court issued an order expunging MDEQ's claim because it was filed after the bar date. MDEQ may bring an action for injunctive relief in the future. By letter dated June 4, 1996, the American Littoral Society ("ALS"), a public interest group operated through the Environmental Law Clinic of the Widener University School of Law, sent a notice letter to the Company pursuant to the Clean Water Act threatening suit based on past and anticipated future discharges to the Schuykill River in excess of the limits established in the National Pollutant Discharge Elimination System permit ("NPDES") for the Pottstown, Pennsylvania plant. Doehler-Jarvis' Pottstown plant has been and is currently operating under an expired but still effective NPDES permit. The plant's wastewater treatment system (or use "equipment") is not capable of achieving routine compliance with certain discharge limitations, including limits for phenol, oil, grease and total dissolved solids. The Pottstown plant has been attempting to solve this problem by arranging to convey its effluent to the Pottstown Public Owned Treatment Works ("Pottstown POTW"). In March 1997, the Company entered into a consent decree with ALS whereby the Pottstown plant is required to construct a wastewater recycling system by December 31, 1997. In addition, the Company agreed to pay a civil penalty of $1,000 and $125 penalty from a parallel consent decree. The Company has met its construction schedule but the $1,125 in penalties has not been paid but is a prepetition liability. As of September 30, 1998, and in addition to the above matters, the Company has received information requests, or notifications from EPA, state agencies, and private parties alleging that the Company is a PRP pursuant to the provisions of CERCLA or analogous state laws; or is currently participating in the remedial investigation or closure activities at 22 other sites. In accordance with the Company's policies and based on consultation with legal counsel, the Company has provided environmental related accruals of $8,533 as of September 30, 1998. Furthermore, the Company does not expect to use a material amount of funds for capital expenditures related to currently existing environmental matters. Various environmental matters are currently being litigated, however, and potential insurance recoveries, other than those noted, are unknown at this time. While it is not feasible to predict the outcome of all pending environmental suits and claims, based on the most recent review by management of these matters and after consultation with legal counsel, management is of the opinion that the ultimate disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company. Legal Proceedings In June 1995, a group of former employees of the Company's subsidiary, Harman Automotive-Puerto Rico, Inc., commenced an action against the Company and individual members of management in the Superior Court of the Commonwealth of Puerto Rico seeking approximately $48,000 in monetary damages and unearned wages relating to the closure by the Company of the Vega Alta, Puerto Rico plant previously operated by such subsidiary. Claims made by the plaintiffs in such action include the following allegations: (i) such employees were discriminated against on the basis of national origin in violation of the laws of Puerto Rico in connection with the plant closure and that, as a result thereof, the Company is alleged to be obligated to pay unearned wages until reinstatement occurs, or in lieu thereof, damages, including damages for mental pain and anguish; (ii) during the years of service, plaintiffs were provided with a one-half hour unpaid meal break, which is alleged to violate the laws of Puerto Rico, providing for a one-hour unpaid meal break and demand to be paid damages and penalties and request seniority which they claim was suspended without jurisdiction; and (iii) plaintiffs were paid pursuant to a severance formula that was not in accordance with the laws of Puerto Rico, which payments were conditioned upon the plaintiffs executing releases in favor of the Company, and that, as a result thereof, they allege that they were discharged without just cause and are entitled to a statutory severance formula. The Company is also a party to various claims and routine litigation arising in the normal course of its business. Based on information currently available, management of the Company believes, after consultation with legal counsel, that the result of such claims and litigation, including the above mentioned claim, will not have a material adverse effect on the financial position or results of operations of the Company. 66 (18) LEASES Rent expense under operating leases, consisted of the following:
1998 1997 1996 ------ ------ ------ Rent expense............................................................... $4,354 $5,624 $3,340
The following is a schedule of future annual minimum rental payments, principally for machinery and equipment required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of September 30, 1998.
YEARS ENDING SEPTEMBER 30 AMOUNT - ------------------------- ------ 1999............................................................ $2,275 2000............................................................ 719 2001............................................................ 666 2002............................................................ 438 2003............................................................ 53
(19) RETIREMENT PLANS The Company sponsors various defined benefit pension and savings (principally 401(k)) plans covering substantially all employees. Expense under these plans amounted to $10,248 in 1998 (including a curtailment loss of $7,182), $3,619 in 1997, and $4,355 in 1996. The Company annually contributes to the pension plans amounts that are actuarially determined to provide the plans with sufficient assets to meet future benefit payment requirements. The Company contributes to the savings plans amounts that are directly related to employee contributions. The Company sponsors a defined benefit pension plan covering all non-bargaining unit employees. The annual benefits payable under this plan to a covered employee at the normal retirement age (age 65) are 1% of the first $9 of the employee's career average annual earnings, as defined in the plan, plus 1 1/2% of annual earnings in excess of $9 multiplied by the number of years of service. Substantially all of the other defined benefit pension plans the Company sponsors provide benefits of a stated amount for each year of service. In addition, the Company participates in several multi-employer pension plans for the benefit of certain union members. The Company's contributions to these plans amounted to $349 in 1998, $459 in 1997, and $500 in 1996. Under the Multi-Employer Pension Plan Amendments Act of 1980, if the Company were to withdraw from these plans or if the plans were to be terminated, the Company would be liable for a portion of any unfunded plan benefits that might exist. Information with respect to the amount of this potential liability is not readily available. Pension expense for all of the Company's defined benefit pension plans consisted of the following:
1998 1997 1996 ------- ------- ------ Benefit earned.......................................................... $ 2,988 $ 2,823 $2,865 Interest on projected benefit obligations............................... 9,584 8,790 8,445 Actual return on assets................................................. (23,265) (17,378) (8,315) Net amortization and deferral........................................... 12,806 8,318 557 Curtailment losses...................................................... 7,182 -- -- ------- ------- ------ $ 9,295 $ 2,553 $3,552 ------- ------- ------ ------- ------- ------
During 1998, the Company recorded net curtailment losses of $7,182 primarily to reflect the curtailment of defined benefit plans due to the Toledo plant shutdown, which was recorded as an increase in cost of sales. 67 The following summarizes at September 30, the funded status of the defined benefit plans that the Company sponsors and the related amounts recognized in the Company's consolidated balance sheets together with the assumptions utilized.
1998 1997 -------------------------- -------------------------- ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS ----------- ----------- ----------- ----------- Actuarial present value of accumulated benefit obligations: Vested................................................. $ 106,297 $ 33,908 $ 92,835 $15,902 Non-vested............................................. 4,417 1,931 4,525 2,257 --------- --------- --------- ------- Accumulated benefit obligations........................ 110,714 35,839 97,360 18,159 Effects of salary progression.......................... 6,158 60 3,949 86 --------- --------- --------- ------- Projected benefit obligations.......................... 116,872 35,899 101,309 18,245 Plan assets.............................................. 125,915 18,869 109,455 12,487 --------- --------- --------- ------- Plan assets over (under) projected benefit obligations... 9,043 (17,030) 8,146 (5,758) Minimum liability recognized............................. -- (10,701) -- (3,684) Net loss not recognized.................................. 9,181 8,901 7,566 3,715 Prior service cost....................................... 451 1,860 362 55 --------- --------- --------- ------- Pension assets (liability) recognized.................... $ 18,675 $ (16,970) $ 16,074 $(5,672) --------- --------- --------- ------- --------- --------- --------- ------- Assumptions used: Discount rate.......................................... 7.2% 7.2% 8.0% 8.0% Rate of return on assets............................... 9.5% 9.5% 9.5% 9.5% Salary progression rate................................ 4.0% 5.0% 4.0% 5.0%
The Company entered into a Settlement Agreement (the "Settlement Agreement"), dated as of July 26, 1994, with the Pension Benefit Guaranty Corporation (the "PBGC") pursuant to which the Company agreed to make contributions to certain of its underfunded pension plans. These contributions were in addition to the minimum statutory funding requirements with respect to such plans. Pursuant to the Settlement Agreement, the Company made additional contributions to its underfunded pension plans in an amount aggregating $6,000 on August 2, 1994 and $1,500 quarterly thereafter through September 30, 1997. The Settlement Agreement, among other things, includes a covenant restricting the Company's ability to redeem the PIK Preferred Stock and a covenant not to create or suffer to exist a lien upon any of its assets to secure both the 12% and 11 1/8% Senior Notes unless contemporaneously therewith effective provision is made to equally and ratably secure the Company's potential "unfunded benefit liabilities" (as defined in Section 4001(a)(18) of the Employee Retirement Income Security Act). Subsequent to September 30, 1998, the settlement agreement was terminated and the PBGC and the Company entered into a new agreement. (20) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Certain of the Company's subsidiaries provide postretirement health care and life insurance benefits for all salaried and for hourly retirees of certain of its plants. The obligation, as of September 30, 1998 and 1997 was determined by utilizing a discount rate of 7.2% and 8.0%, respectively, and a graded medical trend rate projected at annual rates ranging ratably from 4.7% and 7.7% in 1998 to 3.7% by the year 2000 and remain level thereafter. 68 Since the Company does not fund postretirement benefit plans, there are no plan assets. Net periodic postretirement benefit cost (benefit) at September 30 is comprised of the following:
1998 1997 1996 ------ ------ ------ Service cost............................................................... $1,100 $1,593 $1,595 Interest on accumulated postretirement benefit obligation.................. 5,827 6,955 7,196 Net amortization and deferral.............................................. (1,337) (959) (493) Curtailment gains.......................................................... (2,792) (8,249) -- ------ ------ ------ $2,798 $ (660) $8,298 ------ ------ ------ ------ ------ ------
During 1998, the Company recorded a curtailment gain to reflect the curtailment of medical benefits at one plant of Doehler-Jarvis, which was recorded as a reduction in cost of sales. During the fourth quarter of 1997 the Company recorded curtailment gains of $8,249 to reflect the curtailment of medical benefits at one plant and for all active salaried employees of Doehler-Jarvis. The accumulated postretirement benefit obligation at September 30, 1998 and 1997 consisted of the following:
1998 1997 ------- ------- Retirees.......................................................................... $57,704 $44,153 Fully eligible active plan participants........................................... 17,561 17,056 Other active plan participants.................................................... 17,025 17,224 ------- ------- Accumulated postretirement benefit obligation..................................... 92,290 78,433 Unrecognized net gain............................................................. 5,337 20,796 ------- ------- Accrued postretirement benefit cost............................................... 97,627 99,229 Included in accrued expenses...................................................... 2,112 2,300 ------- ------- Non-current postretirement benefit obligations.................................... $95,515 $96,929 ------- ------- ------- -------
The effect of a 1% annual increase in the assumed cost trend rates discussed above would increase the accumulated postretirement obligation at September 30, 1998 by approximately $11,350, and would increase the aggregate of the service and interest cost components by approximately $1,107. In January 1999 the Company adopted a Supplemental Employee Retirement Plan ("SERP"), the provisions of which were effective January 1, 1998. The accompanying financial statements include a charge of $10,000 during the fourth quarter related to the adoption of this plan. (21) PAY-IN-KIND EXCHANGEABLE PREFERRED STOCK Under its Certificate of Incorporation, the Pay-In-Kind ("PIK") Preferred Stock on liquidation, winding up and dissolution ranks senior to Common Stock and has a liquidation preference of $25.00 per share, plus accrued and unpaid dividends, before any distribution or payment is made to the holders of Common Stock. There are 12,000,000 shares authorized and 4,609,987 shares issued and outstanding in both 1998 and 1997, respectively. The PIK Preferred Stock holders are entitled to cumulative dividends at the rate per annum of $3.5625 per share, payable at the Company's option in cash or in additional shares of PIK Preferred Stock at the rate of 0.1425 share of PIK Preferred Stock for each share of PIK Preferred Stock outstanding. See Note 9 for restriction on paying cash dividends. The Company did not pay the annual dividend on PIK Preferred Stock in 1998 and 1997 and ceased accruing such dividend effective May 8, 1997 (see Note 1). On September 30, 1996, the Company paid the annual dividend on PIK Preferred Stock by issuing 574,987 additional shares of PIK Preferred Stock. The Company recorded an increase of $14,844 in 1996 in its PIK Preferred Stock and a corresponding deduction in additional paid-in-capital to recognize such dividend and the accretion of the related difference between the fair value of such stock at August 23, 1992 and redemption value. During 1997, the Company also recorded $10,142 for unpaid dividends and related accretion. 69 On November 16, 1998, the Company was required to redeem all shares of PIK Preferred Stock outstanding at the liquidation preference price which is estimated to be $151,000. If the Company fails to redeem the PIK Preferred Stock on such date, or otherwise fails to pay a dividend payment, then the number of directors constituting the Board shall be increased by two (2) and the outstanding shares of PIK Preferred Stock shall vote as a class, with each share entitled to one vote, to elect two (2) Directors to fill such newly created directorships so long as such failure continues. Due to such mandatory redemption requirements, the PIK Preferred Stock is not reflected as part of common shareholders' equity. Such stock was valued at fair value as of August 23, 1992, including the fair value of accrued dividends from October 1, 1991. Such carrying value has been increased by a periodic accretion between fair value and redemption value. The Company, at the option of the Board, may redeem, in whole or in part, shares of PIK Preferred Stock at the liquidation preference per share price plus all accrued and unpaid dividends on such shares, at any time prior to the redemption date (subject to PBGC restrictions and Financing Agreement). So long as shares of PIK Preferred Stock are outstanding, the Company shall not declare dividends on the Common Stock or any other securities junior to the PIK Preferred Stock or repurchase any of such shares. The Company may, at its option, at any time, exchange for all of its issued and outstanding shares of PIK Preferred Stock, the Company's 14 1/4% Subordinated Notes due November 16, 1998, if such securities are issued by the Company for all of its issued and outstanding shares of PIK Preferred Stock. Holders thereof will be entitled to receive $25 principal amount of Notes for each share of PIK Preferred Stock held by them at the time of exchange and each share of PIK Preferred Stock accrued as a dividend on such shares of PIK Preferred Stock on the date of exchange, up to but not including the date of exchange. So long as any shares of PIK Preferred Stock are outstanding, the Company shall not issue any shares of preferred stock which (i) specify a dividend rate in excess of 14 1/4% of the liquidation preference of such preferred stock, (ii) may be redeemed or are subject to sinking fund requirements which must be satisfied prior to the redemption or repurchase of all outstanding shares of PIK Preferred Stock, (iii) have a mandatory redemption date prior to January 1, 1999, or (iv) rank senior to the PIK Preferred Stock or, unless the net proceeds of the issuance of the preferred stock are used to redeem or repurchase PIK Preferred Stock or Exchange Notes, rank pari passu with the PIK Preferred Stock, with respect to dividend rights and rights on liquidation, winding up and dissolution. See Note 28 for the Subsequent impact of the Company's Emergence from Bankruptcy on Pay-In-Kind Exchangeable Preferred Stock. (22) PREFERRED STOCK There are no present plans for issuance of any shares of preferred stock. When and if any shares of preferred stock are issued, certain rights of the holders thereof may affect the rights of the holders of the Common Stock and PIK Preferred Stock. See Note 21 for restrictions upon the issuance of shares of preferred stock so long as shares of PIK Preferred Stock are outstanding. On October 18, 1994, the Board of Directors of the Company adopted a Shareholder Rights Plan ("Plan") which contemplates the issuance of preferred stock purchase rights to the holders of the Company's Common Stock of record as of October 21, 1994. As a result, there are 500,000 shares of Series A, Junior Preferred Stock, par value $.01 per share, authorized. The Plan calls for holders of the Company's Common Stock to receive, in the form of a dividend, one Right for each share of Common Stock held as of the above record date. The Plan, which is intended to deter coercive takeover tactics, prevents a potential acquirer from gaining control of the Company without offering a fair price to all holders of Common Stock. The Rights were to have expired on October 31, 2004. Each Right issued will, initially, entitle shareholders to buy one one-hundredth of a share of newly authorized preferred stock of the Company for $64. However, the Right will be exercisable only if a person or group (other than shareholders owning at least 10 percent but less than 20 percent of the Company's Common Stock outstanding on the date the Board of Directors authorizes the dividend) acquires beneficial ownership or commences a tender or exchange offer that will result in that person or group becoming a beneficial owner of 26 percent-or-more of the Company's Common Stock. 70 Initially, each Right not owned by a 15-percent-or-more shareholder or related parties will entitle its holder to purchase one share of the Company's preferred stock at $64 or whatever is the then-current exercise price of the Rights. Upon the occurrence of certain events, the Right can be used to purchase shares of the Company's Common Stock, or under certain circumstances to be determined by the Board of Directors, for cash, other property, or securities with a value of twice that of the Rights current price. In addition, if after any person or group has become a 15 percent-or-more shareholder, the Company is involved in a merger or other business combination with another person in which the Company does not survive, or in which the Common Stock is changed or exchanged, or the Company sells 50 percent or more of its assets or earning power to another person, each Right will then entitle its holder to purchase, at the Right's then-current price, common stock of such other person having a value equal to twice the Right's price. In the event of a tender or exchange offer for all outstanding shares of the Company that is approved by a majority of the Board's independent Directors, those not affiliated with any 15 percent-or-more shareholder, the provision relating to 15 percent-or-more beneficial ownership of the Company's shares will not apply. The Company will, generally, be entitled to redeem the Rights for $0.01 per Right at any time until 10 days, subject to extension, following a public announcement that a 15 percent position has been acquired. The Preferred Stock Purchase Rights have been registered with the Securities and Exchange Commission on Form 8-A. See Note 28 for the Subsequent impact of the Company's Emergence from Bankruptcy on Preferred Stock. (23) COMMON STOCK Dividends on the Common Stock are subject to restrictions in the Company's Financing Agreement and, so long as any PIK Preferred Stock is outstanding, the Certificate of Incorporation provides that no dividends shall be declared on Common Stock or any securities junior to the PIK Preferred Stock or repurchase of any such shares. Such holders have no preemptive or other right to subscribe for or purchase additional shares of capital stock. See Note 28 for the Subsequent impact of the Company's Emergence from Bankruptcy on Common Stock. (24) STOCK OPTIONS On November 24, 1998 the Company's plan of reorganization became effective and all stock options authorized, granted or exercised were cancelled along with the Old Common Stock. However, for historical purposes, the following information is presented outlining the plans in existence prior to the Company's emergence from reorganization. On January 19, 1994, the Board of Directors approved Stock Option Plans, and on August 4, 1994 approved certain modifications thereto, which provides for up to 400,000 shares of the Company's Common Stock to be granted to members of the Board of Directors (other than the Company's Chairman and Chief Executive Officer) and key employees. Options under both plans were granted at the fair market value on the date of grants and have an exercise period of ten years. Options under the Director's plan vest 100% at the date of grant while the key employee's plan become exercisable at 25% or 33 1/3% per year after a one-year waiting period. On August 4, 1994, the Board of Directors granted to Anchor options to purchase 17,000 shares of Common Stock which became exercisable immediately at $13.75 per share and granted Anchor an aggregate of 300,000 additional stock options to purchase 300,000 shares of Common Stock at $14.00 per share, which become exercisable as follows: 100,000--8/16/95; 100,000--8/16/96; 100,000 - --8/16/97. Such options are exercisable if the closing price of the Company's Common Stock equals or exceeds $20.00 per share for 15 of 30 trading days prior to August 16, 1995 for the first 100,000 options; and $30.00 and $40.00 per share for any 30 trading days subsequent to August 16, 1995 and 1996, respectively, and prior to August 16, 1996 and August 16, 1997, respectively. On August 16, 1995 such condition was met and the first 100,000 options became exercisable. No options became exercisable during 1996, 1997 and 1998. On August 16, 2002 any options outstanding will be 71 exercisable without regard to the per share price of Common Stock if Anchor is continuing to provide services to the Company at such date. A summary of the Company's stock option activity is as follows: OPTION SHARES
EXERCISE PRICE KEY RANGE-PER EMPLOYEES DIRECTORS ANCHOR TOTAL SHARE --------- --------- ------- ------- ---------------- Balance 9/30/95.................................. 201,250 28,000 569,096 798,346 $ 6.00 to $17.25 Granted 1996..................................... 75,800 8,000 -- 83,800 $11.25 to $28.00 Exercised........................................ 19,450 -- -- 19,450 $8.00 Cancelled........................................ 71,250 -- -- 71,250 $ 8.00 to $28.00 ------- ------- ------- ------- Balance 9/30/96.................................. 186,350 36,000 569,096 791,446 $ 6.00 to $28.00 Granted 1997..................................... 68,500 8,000 -- 76,500 $ .8125 to $8.00 Exercised........................................ -- -- -- -- Cancelled........................................ 31,375 -- -- 31,375 $ 8.00 to $28.00 ------- ------- ------- ------- Balance 9/30/97.................................. 223,475 44,000 569,096 836,571 $ 6.00 to $28.00 Grant 1998....................................... -0- -0- -0- -0- -0- Exercised........................................ -0- -0- -0- -0- -0- Cancelled........................................ -0- -0- -0- -0- -0- ------- ------- ------- ------- Balance 9/30/98.................................. 223,475 44,000 569,096 836,571 $ 6.00 to $28.00 ------- ------- ------- ------- ------- ------- ------- ------- Exercisable at September 30: 1996........................................ 77,800 34,000 369,096 480,896 $ 6.00 to $28.00 1997........................................ 108,200 42,000 369,096 519,296 $ 6.00 to $28.00 1998........................................ 108,200 42,000 369,096 519,296 $ 6.00 to $28.00
The Company has elected to continue to measure compensation cost for its stock option plans using the intrinsic value based method of accounting. No pro forma disclosure of net loss is presented since it is immaterial. (25) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents, Accounts Receivable and Accounts Payable. The carrying value amount approximates fair value because of the short maturity of these instruments. Long-Term Debt. The fair value of the Company's long-term debt is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. PIK Preferred Stock. The fair value was determined by quoted market price. 72 The estimated fair value of the Company's financial instruments are as follows:
SEPTEMBER 30 SEPTEMBER 30 -------------------- -------------------- 1998 1998 1997 1997 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Cash and cash equivalents.............................. $ 11,624 $ 11,624 $ 9,212 $ 9,212 Accounts receivable.................................... 57,046 57,046 76,190 76,190 Accounts payable....................................... 25,098 25,098 32,267 32,267 DIP financing (including current portion).............. 39,161 39,161 87,471 87,471 Senior notes........................................... 309,728 140,543 309,728 114,000 Long-term debt (including current portion)............. -0- -0- 14,087 14,087 PIK preferred stock.................................... 124,637 -0- 124,637 6,339
(26) GUARANTOR SUBSIDIARIES Both the 12% Notes and the 11 1/8% Notes are guaranteed on a senior unsecured basis, pursuant to guaranties (the Guaranties) by all of the Company's wholly-owned direct and certain of its wholly-owned indirect domestic subsidiaries (the Guarantors). Both Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by each of the Guarantors under such Guarantor's guaranty (a Guaranty). Each Guaranty by a Guarantor is limited in amount to an amount not to exceed the maximum amount that can be guarantied by that Guarantor without rendering the Guaranty, as it relates to such Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer. As such, a Guaranty could be effectively subordinated to all other indebtedness (including guarantees and other contingent liabilities) of the applicable Guarantor, and, depending on the amount of such indebtedness, a Guarantor's liability on its Guaranty could be reduced to zero. The Company conducts all of its automotive business through and derives virtually all of its income from its subsidiaries. Therefore, the Company's ability to make required principal and interest payments with respect to the Company's indebtedness (including the Notes) and other obligations depends on the earnings of its subsidiaries and on its ability to receive funds from its subsidiaries through dividends or other payments. The ability of its subsidiaries to pay such dividends or make payments on intercompany indebtedness or otherwise will be subject to applicable state laws. Upon the sale or other disposition of a Guarantor or the sale or disposition of all or substantially all of the assets of a Guarantor (in each case other than to the Company or an affiliate of the Company) permitted by the indenture governing the Notes, such Guarantor will be released and relieved from all of its obligations under its Guaranty. The following condensed consolidating information presents: 1. Condensed balance sheets as of September 30, 1998 and 1997 and condensed statements of operations and cash flows for the years ended September 30, 1998, 1997 and 1996. 2. The Parent Company and Combined Guarantor Subsidiaries with their investments in subsidiaries accounted for on the equity method. 3. Elimination entries necessary to consolidate the Parent Company and all of its subsidiaries. 4. Reorganization items have been included under the Parent Company in the accompanying condensed consolidating statements of operations and cash flows. 5. The Parent Company, pursuant to the terms of an interest bearing note with Guarantor Subsidiaries, has included in their allocation of expenses, interest expense of $14,377, $14,377 and $14,078 for the years ended September 30, 1998, 1997 and 1996, respectively. The Company believes that providing the following condensed consolidating information is of material interest to investors in the Notes and has not presented separate financial statements for each of the Guarantors, because it was deemed that such financial statements would not provide the investor with any material additional information. 73 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 1998 (IN THOUSANDS OF DOLLARS)
COMBINED COMBINED PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents................ $ 10,229 $ 1,395 $ -- $ -- $ 11,624 Accounts receivable, net................. 2,217 50,990 3,839 -- 57,046 Inventories.............................. 1,720 24,177 749 -- 26,646 Prepaid expenses and other current assets................................. 1,982 3,702 17 -- 5,701 --------- ---------- --------- ------------ ---------- Total current assets................... 16,148 80,264 4,605 -- 101,017 Investment in subsidiaries................. (262,212) 14,653 -- 247,559 -- Property, plant and equipment, net......... 2,755 112,057 7,767 -- 122,579 Intangible assets, net..................... -- 2,833 -- -- 2,833 Intercompany receivables................... 600,848 524,198 14,625 (1,139,671) -- Other assets............................... 23,211 1,341 -- -- 24,552 --------- ---------- --------- ------------ ---------- Total assets............................... $ 380,750 $ 735,346 $ 26,997 $ (892,112) $ 250,981 --------- ---------- --------- ------------ ---------- --------- ---------- --------- ------------ ---------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current portion of Debtor-in-Possession (DIP) loans............................ $ -- $ 39,161 $ -- $ -- $ 39,161 Creditors' Subordinated Term Loan Current portion of long-term debt.............. -- 25,000 -- -- 25,000 Accounts payable......................... 2,382 19,812 2,904 -- 25,098 Accrued expenses......................... 12,285 81,104 (52) -- 93,337 Income taxes payable..................... 8,144 169 132 -- 8,445 --------- ---------- --------- ------------ ---------- Total current liabilities.............. 22,811 165,246 2,984 -- 191,041 Liabilities subject to compromise.......... 385,665 -- -- -- 385,665 DIP loans.................................. -- -- -- -- -- Long-term debt............................. -- -- -- -- -- Postretirement benefits other than pensions................................. 81,949 13,566 -- -- 95,515 Intercompany payables...................... 351,525 779,115 9,031 (1,139,671) -- Other...................................... 23,393 39,631 329 63,353 --------- ---------- --------- ------------ ---------- Total liabilities 865,343 997,558 12,344 (1,139,671) 735,574 PIK Preferred 124,637 -- -- -- 124,637 Shareholders' equity (deficiency): Common stock and additional paid-in- capital................................ 32,204 16,937 10 (16,947) 32,204 Additional minimum pension liability..... (8,902) (8,902) -- 8,902 (8,902) Foreign currency translation adjustment.... (2,991) (2,991) (2,991) 5,982 (2,991) Retained earnings (deficiency)............. (629,541) (267,256) 17,634 249,622 (629,541) --------- ---------- --------- ------------ ---------- Total shareholders' equity (deficiency)........................ (609,230) (262,212) 14,653 247,559 (609,230) --------- ---------- --------- ------------ ---------- Total liabilities and shareholders' equity (deficiency)............................. $ 380,750 $ 735,346 $ 26,997 $ (892,112) $ 250,981 --------- ---------- --------- ------------ ---------- --------- ---------- --------- ------------ ----------
- ------------------ (a) Includes $309,728 senior notes payable and accrued interest which are subject to the guaranty of the combined guarantor subsidiaries. 74 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS OF DOLLARS)
COMBINED COMBINED PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED -------- ------------ ------------- ----------- ------------ Sales........................................ $ 8,536 $ 662,209 $19,331 $ 0 $ 690,076 -------- ---------- ------- ------- ---------- Cost of Expenses Cost of sales.............................. 11,482 627,407 17,354 0 656,243 Selling, general and administrative........ 3,873 62,573 100 0 66,546 Amortization of goodwill................... 0 1,584 0 0 1,584 Impairment of long-lived assets & restructuring costs..................... 5,000 5,842 0 0 10,842 Interest expense........................... 164 14,083 (16) 0 14,231 Gain on sale of operations................. (1,217) (27,456) 0 0 (28,673) Other expense, net......................... 18,950 (14,970) 0 0 3,980 Equity in (income) loss of subsidiaries.... 39,465 (120) 0 (39,345) 0 Allocated expenses......................... (14,377) 13,144 1,233 0 0 -------- ---------- ------- ------- ---------- Total costs and expenses................ 63,340 682,087 18,671 (39,345) 724,753 -------- ---------- ------- ------- ---------- Income (loss) before income taxes and reorganization items....................... (54,804) (19,878) 660 39,345 (34,677) Reorganization items......................... 1,000 13,920 0 0 14,920 -------- ---------- ------- ------- ---------- Income (loss) before income taxes............ (55,804) (33,798) 660 39,345 (49,597) -------- ---------- ------- ------- ---------- Provision for income taxes................... 0 5,667 540 0 6,207 -------- ---------- ------- ------- ---------- Net loss................................... $(55,804) $ (39,465) $ 120 $39,345 $ (55,804) -------- ---------- ------- ------- ---------- -------- ---------- ------- ------- ----------
75 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 1998 (IN THOUSANDS OF DOLLARS)
COMBINED COMBINED PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED -------- ------------ ------------- ----------- ------------ Cash flows related to operating activities: Loss from continuing operations before reorganization items...................... $(40,884) $(39,465) $ 120 $ 39,345 $(40,884) Add back (deduct) items not affecting cash and cash equivalents: Equity in (income) loss of subsidiaries... 39,465 (120) -- (39,345) -- Depreciation and amortization............. 391 26,122 1,391 -- 27,904 Impairment of long-lived assets and restructuring charges................... 5,000 5,842 -- -- 10,842 Gain on sale of operations................ (1,208) (27,465) -- -- (28,673) Loss on disposition of property, plant and equipment and property held for sale.... -- 1,030 -- -- 1,030 Curtailment (gains)/losses................ 4,390 -- -- -- 4,390 Changes in operating assets and liabilities of continuing operations before reorganization items: Accounts receivable....................... 578 11,894 (1,799) -- 10,673 Inventories............................... (12) 21,542 332 -- 21,862 Other current assets...................... (284) 1,761 (17) -- 1,460 Accounts payable.......................... 2,154 (9,891) 1,079 -- (6,658) Accrued expenses and income tax payable... (10,482) 29,289 (240) -- 18,567 Postretirement benefits................... 1,386 -- -- -- 1,386 Other noncurrent.......................... (6,399) 17,718 (636) -- 10,683 -------- -------- ------- --------- -------- Net cash provided by (used in) continuing operations before reorganization items...... (5,905) 38,257 230 -- 32,582 Net cash used in reorganization items......... (9,056) -- -- -- (9,056) -------- -------- ------- --------- -------- Net cash provided by (used in) continuing operations.................................. (14,961) 38,303 184 -- 23,526 Cash flows related to investing activities: Acquisitions of property, plant and equipment................................. (15) (24,448) (424) -- (24,887) Cash flows related to discontinued operations................................ 557 -- -- -- 557 Proceeds from sales of operations........... 4,084 23,738 -- -- 27,822 Proceeds from dispositions of property, plant, equipment.......................... -- 72 -- -- 72 -------- -------- ------- --------- -------- Net cash provided by (used in) investing activities................................ 4,626 (638) (424) -- 3,564 Cash flows related to financing activities: Net borrowings (and repayments) under DIP financing agreement....................... -- (45,810) -- -- (45,810) Net borrowings under Unsecured Creditors Term Loan................................. -- 25,000 -- -- 25,000 Repayments of long-term debt................ -- (88) -- -- (88) Deferred financing costs.................... -- (3,725) -- -- (3,725) Payment of EPA settlements.................. -- (55) -- -- (55) Net changes in intercompany balances........ 17,240 (16,922) (318) -- -- -------- -------- ------- --------- -------- Net cash (used in) provided by financing activities.................................. 17,240 (41,600) (318) -- (24,678) Net increase (decrease) in cash and cash equivalents................................. 6,905 (3,935) (512) -- (2,412) Cash and cash equivalents beginning of period...................................... $ 3,324 $ 5,376 $ 512 $ -- $ 9,212 -------- -------- ------- --------- -------- Cash and cash equivalents end of period....... $10,229 $ 1,441 $ 0 $ -- $ 11,624 -------- -------- ------- --------- -------- -------- -------- ------- --------- --------
76 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 1997 (IN THOUSANDS OF DOLLARS)
COMBINED COMBINED PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents................ $ 3,324 $ 5,376 $ 512 $ -- $ 9,212 Accounts receivable, net................. 2,795 71,355 2,040 -- 76,190 Inventories.............................. 2,475 50,662 1,081 -- 54,218 Prepaid expenses and other current assets................................ 1,698 5,904 -- -- 7,602 --------- ---------- ------- ---------- ---------- Total current assets.................. 10,292 133,297 3,633 -- 147,222 Investment in Subsidiaries................. (48,751) 12,138 -- 36,613 -- Property, plant and equipment, net......... 3,878 119,164 9,224 -- 132,266 Intangible assets, net..................... -- 4,417 -- -- 4,417 Intercompany receivables................... 240,542 276,424 9,483 (526,449) -- Other assets............................... 20,164 3,425 -- 23,589 --------- ---------- ------- ---------- ---------- $ 226,125 $ 548,865 $22,340 $ (489,836) $ 307,494 --------- ---------- ------- ---------- ---------- --------- ---------- ------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current portion of DIP loans............. $ 867 $ 35,569 $ -- $ -- $ 36,436 Current portion of long-term debt........ -- 1,748 -- -- 1,748 Accounts payable......................... 228 30,214 1,825 -- 32,267 Accrued expenses......................... 16,088 55,959 188 -- 72,235 Income taxes payable..................... (1,751) 1,246 2,945 -- 2,440 --------- ---------- ------- ---------- ---------- Total current liabilities............. 15,432 124,736 4,958 -- 145,126 Liabilities subject to compromise(a)....... 317,508 79,742 69 -- 397,319 DIP loans.................................. 705 50,330 51,035 Long-term debt............................. 12,339 -- 12,339 Postretirement benefits other than pensions................................. -- 96,929 -- -- 96,929 Intercompany payables...................... 311,955 210,284 4,210 (526,449) -- Other...................................... 3,016 23,256 965 -- 27,237 --------- ---------- ------- ---------- ---------- Total liabilities..................... 648,616 597,616 10,202 (526,449) 729,985 --------- ---------- ------- ---------- ---------- PIK Preferred.............................. 124,637 -- -- -- 124,637 --------- ---------- ------- ---------- ---------- Shareholders' equity (deficiency): Common stock and additional paid-in- capital............................... 32,204 73,054 10 (73,064) 32,204 Additional minimum pension liability..... (3,665) (3,659) -- 3,659 (3,665) Foreign currency translation adjustment............................ (1,930) (1,930) (1,930) 3,860 (1,930) Retained earnings (deficiency)........... (573,737) (116,216) 14,058 102,158 (573,737) --------- ---------- ------- ---------- ---------- Total shareholders' equity (deficiency)........................ (547,128) (48,751) 12,138 36,613 (547,128) --------- ---------- ------- ---------- ---------- $ 226,125 $ 548,865 $22,340 $ (489,836) $ 307,494 --------- ---------- ------- ---------- ---------- --------- ---------- ------- ---------- ----------
- ------------------ (a) Includes $309,728 senior notes payable and accrued interest which are subject to the guaranty of the combined guarantor subsidiaries. 77 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1997 (IN THOUSANDS OF DOLLARS)
COMBINED COMBINED PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED --------- ------------ ------------- ----------- ------------ Sales....................................... $ 19,733 $ 763,459 $27,577 $ -- $ 810,769 --------- ---------- ------- --------- ---------- Costs and expenses: Cost of sales............................. 20,380 751,489 25,905 -- 797,774 Selling, general and administrative....... 13,921 31,901 -- -- 45,822 Interest expense.......................... 24,093 12,378 188 -- 36,659 Amortization of goodwill.................. -- 8,448 -- -- 8,448 Other (income) expense, net............... 853 4,656 21 -- 5,530 Impairment of long-lived assets and restructuring costs.................... 1,000 287,545 -- 288,545 Equity in (income) loss of subsidiaries... 354,293 337 -- (354,630) -- Allocated expenses........................ (21,600) 20,160 1,440 -- -- --------- ---------- ------- --------- ---------- Total costs and expenses............... 392,940 1,116,914 27,554 (354,630) 1,182,778 Income (loss) before income taxes and reorganization items...................... (373,207) (353,455) 23 354,630 (372,009) Reorganization items........................ 16,222 (6) -- -- 16,216 --------- ---------- ------- --------- ---------- Income (loss) before income taxes........... (389,429) (353,449) 23 354,630 (388,225) --------- ---------- ------- --------- ---------- Provision for income taxes.................. -- 844 360 -- 1,204 --------- ---------- ------- --------- ---------- Net loss.................................. $(389,429) $ (354,293) $ (337) $ 354,630 $ (389,429) --------- ---------- ------- --------- ---------- --------- ---------- ------- --------- ----------
78 HARVARD INDUSTRIES, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 1997 (IN THOUSANDS OF DOLLARS)
COMBINED COMBINED PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED --------- ------------ ------------- ----------- ------------ Cash flows related to operating activities: Loss from continuing operations before reorganization items............................ $(373,207) $ (354,299) $ (337) $ 354,630 $ (373,213) Add back (deduct) items not affecting cash and cash equivalents: Equity in (income) loss of subsidiaries......... 354,293 337 -- (354,630) -- Depreciation and amortization................... 2,595 56,144 1,447 -- 60,186 Impairment of long-lived assets and restructuring costs.......................... 1,000 287,545 -- -- 288,545 Loss on disposition of property, plant and equipment and property held for sale......... 48 1,883 -- -- 1,931 Postretirement benefits......................... -- (4,138) -- -- (4,138) Write-off of deferred debt expense.............. 1,792 -- 1,792 Senior notes interest accrued prior to chapter 11, not paid......................... 9,728 -- 9,728 Changes in operating assets and liabilities : Accounts receivable............................... 3,130 16,176 3,492 -- 22,798 Inventories....................................... 2,581 (11,258) 1,452 -- (7,225) Other current assets.............................. (1,326) (4,639) -- -- (5,965) Accounts payable.................................. (3,483) (51,761) (1,562) -- (56,806) Accounts payable prepetition...................... 1,618 79,742 69 81,429 Accrued expenses and income taxes payable......... (6,229) (2,457) (1,568) -- (10,254) Other noncurrent.................................. 2,059 2,999 43 -- 5,101 --------- ---------- ------- --------- ---------- Net cash provided by (used in) continuing operations before reorganization items....................... (5,401) 16,274 3,036 -- 13,909 --------- ---------- ------- --------- ---------- Net cash used by reorganization items............... (2,870) 6 -- -- (2,864) --------- ---------- ------- --------- ---------- Net cash provided by (used in) continuing operations........................................ (8,271) 16,280 3,036 -- 11,045 --------- ---------- ------- --------- ---------- Cash flows related to investing activities: Acquisition of property, plant and equipment...... (147) (35,116) (1,309) -- (36,572) Cash flows related to net assets of discountinued operations...................................... 713 -- -- -- 713 Proceeds from disposition of property, plant and equipment....................................... -- 1,703 -- -- 1,703 --------- ---------- ------- --------- ---------- Net cash used in investing activities............... 566 (33,413) (1,309) -- (34,156) --------- ---------- ------- --------- ---------- Cash flows related to financing activities: Deferred DIP financing costs...................... (2,200) -- -- -- (2,200) Net payments under financing / credit agreement... (445) (38,389) -- -- (38,834) Net borrowings under DIP financing agreement...... 1,572 85,899 87,471 Proceeds from sale of stock / exercise of stock options......................................... 31 -- -- -- 31 Repayments of long-term debt...................... -- (7,682) -- -- (7,682) Pension fund payment pursuant to PBGC settlement agreement....................................... (6,000) -- -- -- (6,000) Payment of EPA settlements........................ (1,053) (517) -- -- (1,570) Net changes in intercompany balances.............. 20,779 (21,169) 390 -- -- --------- ---------- ------- --------- ---------- Net cash provided by financing activities........... 12,684 18,142 390 -- 31,216 --------- ---------- ------- --------- ---------- Net increase (decrease) in cash and cash equivalents....................................... 4,979 1,009 2,117 -- 8,105 Cash and cash equivalents : Beginning of period............................... (1,655) 4,367 (1,605) -- 1,107 --------- ---------- ------- --------- ---------- End of period..................................... $ 3,324 $ 5,376 $ 512 $ -- $ 9,212 --------- ---------- ------- --------- ----------
79 HARVARD INDUSTRIES, INC. CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1996 (IN THOUSANDS OF DOLLARS)
COMBINED COMBINED PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED -------- ------------ ------------- ----------- ------------ Sales........................................ $ 33,360 $765,455 $26,022 $ -- $824,837 -------- -------- ------- ------- -------- Costs and expenses: Cost of sales.............................. 20,073 733,510 22,558 -- 776,141 Selling, general and administrative........ 10,668 32,186 4 -- 42,858 Interest expense........................... 41,478 5,526 -- -- 47,004 Amortization of goodwill................... -- 15,312 -- -- 15,312 Other (income) expense, net................ 1,536 1,347 (1,345) -- 1,538 Equity in (income) loss of subsidiaries.... 41,137 (2,278) -- (38,859) -- Allocated expenses......................... (21,078) 19,857 1,221 -- -- -------- -------- ------- ------- -------- Total costs and expenses................ 93,814 805,460 22,438 (38,859) 882,853 Income (loss) before provision for income taxes...................................... (60,454) (40,005) 3,584 38,859 (58,016) Provision for income taxes................... 758 1,132 1,306 -- 3,196 -------- -------- ------- ------- -------- Income (loss) from continuing operations..... (61,212) (41,137) 2,278 38,859 (61,212) -------- -------- ------- ------- -------- Loss from discontinued operations............ (7,500) -- -- -- (7,500) -------- -------- ------- ------- -------- Net income (loss)............................ $(68,712) $(41,137) $ 2,278 $38,859 $(68,712) -------- -------- ------- ------- -------- -------- -------- ------- ------- --------
80 HARVARD INDUSTRIES, INC. CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED SEPTEMBER 30, 1996 (IN THOUSANDS OF DOLLARS)
COMBINED COMBINED PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATION CONSOLIDATED -------- ------------ ------------- ----------- ------------ Cash flows related to operating activities: Income (loss) from continuing operations...... $(61,212) $(41,137) $ 2,278 $38,859 $(61,212) Add back (deduct) items not affecting cash and cash equivalents: Equity in (income) loss of subsidiaries.... 41,137 (2,278) -- (38,859) -- Depreciation and amortization.............. 6,204 58,446 1,008 -- 65,658 Loss on disposition of property, plant and equipment and property held for sale..... -- 2,053 -- -- 2,053 Postretirement benefits.................... -- 5,822 -- -- 5,822 Changes in operating assets and liabilities: Accounts receivable........................ 213 1,465 1,455 -- 3,133 Inventories................................ 248 8,245 (1,381) -- 7,112 Other current assets....................... (31) (192) 1 -- (222) Accounts payable........................... 438 9,886 (953) -- 9,371 Accrued expenses and income taxes payable.................................. (6,103) (25,714) 1,362 11 (30,444) Other noncurrent........................... (5,802) 4,079 (2,857) 176 (4,404) -------- -------- ------- ------- -------- Net cash provided by (used in) operations............................ (24,908) 20,675 913 187 (3,133) Cash flows related to investing activities: Acquisition of property, plant and equipment.................................. (291) (35,474) (4,813) -- (40,578) Cash flows related to discontinued operations................................. (3,332) -- -- -- (3,332) Proceeds from disposition of property, plant and equipment.............................. -- 909 -- -- 909 -------- -------- ------- ------- -------- Net cash provided by (used in) investing activities.................................... (3,623) (34,565) (4,813) -- (43,001) -------- -------- ------- ------- -------- Cash flows related to financing activities: Proceeds from exercise of stock options....... 190 -- -- -- 190 Net borrowings under credit agreement......... 445 38,389 -- -- 38,834 Repayments of long-term debt.................. (31) (3,001) -- -- (3,032) Pension fund payments pursuant to PBGC settlement agreement....................... (6,000) -- -- -- (6,000) Payment of EPA settlements.................... (2,090) (586) -- -- (2,676) Intercompany dividends........................ -- 5,683 (5,683) -- -- Net changes in intercompany balances.......... 15,717 (20,048) 4,487 (156) -- -------- -------- ------- ------- -------- Net cash provided by (used in) financing activities.................................... 8,231 20,437 (1,196) (156) 27,316 -------- -------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents................................... (20,300) 6,547 (5,096) 31 (18,818) Cash and cash equivalents : Beginning of period........................... 18,645 (2,180) 3,491 (31) 19,925 -------- -------- ------- ------- -------- End of period................................. $ (1,655) $ 4,367 $(1,605) $ -- $ 1,107 -------- -------- ------- ------- -------- -------- -------- ------- ------- --------
81 (27) QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1998 QUARTERS ENDED DEC. 31 MAR. 31 JUNE 30 SEPT. 30 - -------------- -------- --------- -------- --------- Sales...................................................... $197,052 $ 206,339 $169,234 $ 117,451 Gross profit............................................... 5,330 12,248 12,873 3,382 Net loss................................................... $ (5,519) $ (3,081) $ (7,313) $ (39,891)(e) -------- --------- -------- --------- -------- --------- -------- --------- Earnings per share of Common Stock (Basic and Diluted)(a) Net Loss per share....................................... $ (0.79) $ (.44) $ (1.04) $ (5.68) -------- --------- -------- --------- -------- --------- -------- --------- FISCAL 1997 QUARTERS ENDED DEC. 31 MAR. 31 JUNE 30 SEPT. 30 - -------------- -------- --------- -------- --------- Sales...................................................... $187,261 $ 209,226 $217,914 $ 196,368 Gross profit (loss)........................................ (3,201) (746) 6,305 10,637 -------- --------- -------- --------- Net loss................................................. $(30,168) $(168,154) $(28,291) $(162,816)(b) -------- --------- -------- --------- -------- --------- -------- --------- Earnings per share of Common Stock (Basic and Diluted)(a) Net Loss per share....................................... $ (4.90) $ (24.57)(c) $ (4.27) $ (23.17)(d) -------- --------- -------- --------- -------- --------- -------- ---------
- ------------------ (a) Year-to-date earnings per share do not equal the sum of the quarterly earnings per share. (b) Includes curtailment gain. (c) Includes an impairment charge of $134,987. See Note 13. (d) Includes an impairment and restructuring charge of $153,558. See Note 13. (e) Includes charges of $10,000 for deferred compensation arrangement and $13,500 for emergence related costs. Results of operations were also negatively impacted by the General Motors strike which occurred from June 7, 1998 to July 31, 1998. (28) SUBSEQUENT EVENTS (In Whole Dollars) Emergence from Bankruptcy On November 24, 1998 the Company emerged from Chapter 11 Reorganization under the United States Bankruptcy Code. Under the terms of the Plan of Reorganization, holders of Harvard's Pay-In-Kind Exchangeable Preferred Stock ("PIK Preferred Stock") and holders of Harvard's existing common stock (the "Old Common Stock") will each receive warrants ("Warrants") to acquire, in the aggregate, approximately 5% of the New Common Stock, with holders of PIK Preferred Stock each receiving their pro rata share of 66.67% of the Warrants and holders of the Old Common Stock each receiving their pro rata share of 33.33% of the Warrants. On the Effective Date, the Old Common Stock and PIK Preferred Stock were canceled in their entirety. In connection with its emergence from Chapter 11 bankruptcy proceedings, the Company implemented "Fresh Start Reporting," as of November 29, 1998 (its normal interim closing date), as set forth in Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7), issued by the American Institute of Certified Public Accountants. "Fresh Start Reporting" was required because there was more than a 50% change in the ownership of the Company. Accordingly, all assets and liabilities were restated to reflect their respective fair values. Consolidated financial statement amounts of post-confirmation periods will be segregated by a black line in order to signify that such consolidated statements of operations, stockholders' equity (deficiency) and cash flows are those of a new reporting entity and have been prepared on a basis not comparable to the pre-confirmation periods. The Company, in accordance with SOP 90-7, has followed the accounting and reporting guidelines for companies operating as debtor-in-possession since its filing for bankruptcy protection on May 8, 1997 and until its emergence from bankruptcy protection as described above. 82 The reorganization value of the Company was determined by management, with the assistance from its independent financial professionals. The methodology employed involved estimation of enterprise value (i.e., the market value of the Company's debt and stockholders' equity), taking into account a discounted cash flow analysis and an analysis of comparable, publicly traded U.S. manufacturing companies. The discounted cash flow analysis was based on five-year cash flow projections prepared by management and average discount rates of 5.34 percent. The enterprise value of the Company was determined to be $275,000 as of November 24, 1998. Refinancings: Upon emergence from bankruptcy, as arranged by Lehman, the Company issued $25 million of 14 1/2% Senior Secured Notes due September 1, 2003 and entered into a $115 million senior secured credit facility with a group of lenders, as arranged by Lehman, and including General Electric Capital Corporation as Administrative Agent. The Senior Credit Facility provides for up to $50 million in term loan borrowings and up to $65 million of revolving credit borrowings. The guarantors of the 14 1/2% Senior Secured Notes are essentially the same as those that guaranteed the 12% and 11% notes prior to their discharge in bankruptcy. The combined proceeds from the issuance of the Notes and initial borrowings under the Senior Credit Facility were used to: o refinance the senior and junior debtor-in-possession credit facilities that provided financing to the Company while it was in bankruptcy proceedings (together, the "DIP Credit Facilities"); o pay administrative expenses due under the Plan of Reorganization and pay related fees and expenses; o provide cash for working capital purposes; and o provide funds for general corporate purposes. The $65 million revolving credit portion of the Senior Credit Facility will be used to finance working capital and other general corporate purposes New Director Compensation Pursuant to the Plan of Reorganization new directors were appointed on November 24, 1998. The compensation of new directors will be as follows: Cash Compensation: Non-employee directors will receive $10,000 per year. They will also receive, $500 for attendance at each committee meeting $500 for services as the Chairman of any committee of the Board of Directors, $1,250 for attendance at each meeting of the Board of Directors, and $750 for attendance at each committee meeting which does not occur in conjunction with a Board meeting. Grant of Stock: An annual stock grant will be made of a number of shares of common stock of Reorganized Harvard (the "New Common Stock") equal to $15,000 divided by the closing price per share of New Common Stock on the date of the grant. Grant of Options: Each non-employee director will receive Retroactive to the Effective Date a grant of options to purchase a yet to be determined number of shares of New Common Stock at an exercise price based on the closing price per share of the New Common Stock as of the Effective Date. With respect to the options granted to each non-employee director on the Effective Date, options to purchase 4,000 shares of New Common Stock will vest on the Effective Date and with respect to the balance of the options so granted, options to purchase 4,000 shares of New Common Stock will vest on each of the first, second, third and fourth anniversaries of the Effective Date. 83 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. HARVARD INDUSTRIES, INC. Date: June 14, 1999 By: /s/ ROGER G. POLLAZZI -------------------------------------------- Roger G. Pollazzi Chairman of the Board, Chief Executive Officer and Director
POWER OF ATTORNEY We, the undersigned directors and officers of Harvard Industries, Inc., do hereby severally and individually constitute and appoint Roger G. Pollazzi and D. Craig Bowman, and each of them, as our true and lawful attorneys and agents, to do any and all things and acts in our names in the capacities indicated below and to execute any and all instruments for us and in our names in the capacities indicated below which said persons may deem necessary or advisable to enable Harvard Industries, Inc. to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, including specifically, but not limited to, the power and authority to sign for us or any of us in our names in the capacities indicated below with respect to any and all amendments to this Annual Report on Form 10-K, and we hereby ratify and confirm all that said persons shall do or cause to be done by virtue hereof. 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. Date: June 14, 1999 By: /s/ THEODORE W. VOGTMAN -------------------------------------------- Theodore W. Vogtman Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: June 14, 1999 By: /s/ KEVIN L. B. PRICE -------------------------------------------- Kevin L. B. Price Vice President, Controller and Treasurer (Principal Accounting Officer) Date: June 14, 1999 By: /s/ JON R. BAUER -------------------------------------------- Jon R. Bauer Director Date: By: -------------------------------------------- Thomas R. Cochill Director Date: By: -------------------------------------------- Raymond Garfield, Jr. Director Date: June 14, 1999 By: /s/ DONALD P. HILTY -------------------------------------------- Donald P. Hilty Director
84 Date: By: -------------------------------------------- George A. Poole, Jr. Director Date: June 14, 1999 By: /s/ JAMES P. SHANAHAN, JR. -------------------------------------------- James P. Shanahan, Jr. Director Date: June 14, 1999 By: /s/ RICHARD W. VIESER -------------------------------------------- Richard W. Vieser Director
85 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------- ----------- 2.1 Plan of Reorganization and related Disclosure Statement, filed with the U.S. Bankruptcy Court for the District of Delaware on July 10, 1998 (incorporated by reference to Exhibits 99.1 and 99.2 to the Company's Form 8-K filed with the Commission on July 24, 1998 (Commission File No. 001-01044)). 2.2 First Amended and Modified Consolidated Plan of Reorganization dated August 19, 1998, filed with the U.S. Bankruptcy Court for the District of Delaware on August 25, 1998 (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K filed with the Commission on October 30, 1998 (Commission File No. 001-01044)). 3.1(a)* Certificate of Incorporation of the Company. 3.1(b)* Certificate of Merger of the Company. 3.2* By-laws of the Company. 4.1* Form of Common Stock Certificate of the Company. 4.2* Indenture (including the Form of 14 1/2% Senior Secured Note due September 1, 2003), dated as of November 24, 1998 between the Company, the Subsidiary Guarantors and Norwest Minnesota Bank, National Association, as Trustee. 10.1* Settlement Agreement dated as of October 15, 1998, by and among the Company, certain of its subsidiaries and the PBGC. 10.2* Registration Rights Agreement, dated as of November 24, 1998, between the Company and the signatories listed therein. 10.3* Registration Rights Agreement, dated as of November 23, 1998, between the Company and Lehman Brothers Inc., as Initital Purchaser. 10.4* Credit Agreement, dated as of November 24, 1998, between the Company, its subsidiaries, General Electric Capital Corporation, as Administrative Agent and the lenders party thereto. 10.5* Loan Collateral Agreement, dated as of November 24, 1998, by the Company and its subsidiaries in favor of General Electric Capital Corporation, as Administrative Agent. 10.6* Collateral Agreement, dated as of November 24, 1998, by the Company and its subsidiaries in favor of Norwest Bank Minnesota, National Association, as Collateral Agent. 10.7* Warrant Agreement, dated as of November 24, 1998, between the Company and State Street Bank and Trust Company, as Warrant Agent. 10.8 Harvard Industries, Inc. Nonqualified ERISA Excess Benefit Plan (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 33-96376)). 10.9 Harvard Industries, Inc. Nonqualified Additional Credited Service Plan (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 33-96376)). 10.10* Harvard Industries, Inc. 1998 Stock Incentive Plan 10.11* Stipulation and Order between the Debtors and ARCO Environmental Remediation, LLC Regarding Assumption of Settlement Agreement and the Withdrawal of Claim No. 1701 (attaching Settlement Agreement, dated as of January 16 1995, by and between Harvard Industries, Inc. and Atlantic Richfield Company). 10.12* Stipulation and Order among the Debtors, General Electric Company and Caribe General Electric Products, Inc. Regarding Assumption of Settlement Agreement and the Withdrawal of Claim Nos. 1741 and 1742 (attaching Settlement Agreement, dated as of June 30, 1993, by General Electric Company and Caribe General Electric Products, Inc., Unisys Corporation, Harvard Industries, Inc., Harman Automotive, Inc. and Harman Automotive of Puerto Rico, Inc., Motorola, Inc. and Motorola Telcarro de Puerto Rico, Inc. and The West Company Incorporated and The West Company of Puerto Rico, Inc.). 10.13* Stipulation and Order between the Debtors and the Fonalledas Claimants. 10.14* Second Amendment to Settlement Agreement, dated March 6, 1997 and March 11 1997, between Harvard Industries, Inc. and the Kingson-Warren Corp. and The Town of Newmarket.
16 Letter re change in certifying accountant (incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K/A filed with the Commission October 7, 1998 (Commission File No. 001-01044)). 21* List of subsidiaries of the Company. 23.1* Consent of Arthur Andersen LLP 23.2* Consent of PricewaterhouseCoopers 24 Powers of Attorney.
- ------------------ * Previously filed. -----END PRIVACY-ENHANCED MESSAGE-----