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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number: 1-1212
DRIVER-HARRIS COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-0870220
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Madison Avenue
Convent Station, New Jersey 07960
(Address of principal executive offices)
Registrant's telephone no., including area code (973) 267-8100
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $0.83 1/3 par value -- 1,474,346 shares as of November 19, 2002.
DRIVER-HARRIS COMPANY
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 3
Unaudited Condensed Consolidated Statements of
Loss - Three and Nine Months ended September 30,
2002 and September 30, 2001 4
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine Months ended September 30, 2002 and
September 30, 2001 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 10
DRIVER-HARRIS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
September 30, December 31,
2002 2001
----------- ---------
(Unaudited)
ASSETS
Current assets:
Cash $ 248 $ 250
Accounts receivable - net 5,763 6,780
Assets held for sale - 234
Inventories:
Materials 355 206
Work in process 204 246
Finished products 1,553 2,314
-------- --------
2,112 2,766
Prepaid expenses 303 251
-------- --------
Total current assets 8,426 10,281
Assets held for sale 127 127
Property, plant & equipment - net 3,224 3,155
-------- --------
$ 11,777 $ 13,563
======== ========
LIABILITIES
Current Liabilities:
Short-term borrowings $ 4,516 $ 5,785
Current portion of long-term debt 417 474
Note payable to Pension Benefit Guaranty Corp 1,556 1,434
Accounts payable 4,170 4,905
Accrued expenses 3,034 1,912
Loan payable to officer 40 41
-------- -------
Total current liabilities 13,733 14,551
Long-term debt 3 36
Deferred Grants 368 361
Postretirement benefit liabilities 597 570
-------- -------
Total Liabilities 14,701 15,518
Stockholders' equity:
Common stock 1,320 1,320
Additional paid-in capital 2,425 2,425
Accumulated deficit (4,392) (3,376)
Accumulated other comprehensive loss (2,277) (2,324)
--------- -------
Stockholders' equity (2,924) (1,955)
--------- -------
$ 11,777 $ 13,563
========= =======
See accompanying notes.
DRIVER-HARRIS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
2002 2001 2002 2001
------- ------- -------- ------
Net sales $5,371 $7,408 $16,041 $24,242
Other revenue 31 13 54 48
------- ------- -------- ------
Total Revenue 5,402 7,421 16,095 24,300
Cost of sales 4,889 6,915 14,497 22,424
------- ------- -------- ------
Gross profit 513 506 1,598 1,876
Selling, general and
administrative expenses 913 1,005 2,551 3,111
------ ------- -------- ------
Operating (loss) (400) (499) (953) (1,235)
Other charges (credits):
Gain on assets held for sale - - (239) -
Interest 169 169 405 618
Foreign exchange (gain) loss (13) 88 (103) 29
-------- -------- -------- ------
(Loss) before income taxes (556) (756) (1,016) (1,882)
Income taxes - - - (37)
-------- -------- -------- ------
NET (LOSS) $ (556) $ (756) $ (1,016) $ (1,845)
======== ======== ======== ======
BASIC NET (LOSS) PER SHARE $(.38) $(.51) $(.69) $(1.25)
======== ======== ======== ======
DILUTED NET (LOSS) PER SHARE $(.38) $(.51) $(.69) $(1.25)*
======== ======== ======== =======
Basic earnings per share-weighted
average shares 1,474,346 1,472,477 1,474,346 1,472,477
Diluted earnings per share-weighted
average shares 1,474,346 1,472,477 1,474,346 1,472,477
* Adjusted weighted average shares not used since effect on earnings
per share would be anti-dilutive.
See accompanying notes.
DRIVER-HARRIS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands)
NINE MONTHS ENDED
September 30
----------------------
2002 2001
------ ------
OPERATING ACTIVITIES
Net (loss) $ (1,016) $ (1,845)
Adjustments to reconcile net (loss)
to net cash provided by operating activities:
Depreciation and amortization 303 292
Gain on disposal of assets held for sale (242) 35
Receivables 1,602 1,102
Inventories 881 434
Prepaid expenses (45) 255
Accounts payable and accrued expenses (275) (146)
Sundry - 2
--------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,208 129
INVESTING ACTIVITIES
Capital expenditures (60) (212)
Sundry 567 9
------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 507 (203)
FINANCING ACTIVITIES
Change in short-term debt (1,872) (130)
Issuance of long-term debt 121 98
Reduction of long-term debt (34) (171)
Sundry - (15)
------- -------
NET CASH (USED IN) FINANCING
ACTIVITIES (1,785) (218)
Effect of exchange rate changes on cash 68 (112)
------- -------
Net change in cash (2) (404)
Cash at beginning of year 250 428
------- -------
CASH AT END OF PERIOD $ 248 $ 24
======= =======
See accompanying notes.
NOTES TO FINANCIAL STATEMENTS
1 - Basis of Presentation
These financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information,
disclosures, and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with
generally accepted accounting principles. Reference should be made to
the financial statements contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001. These financial statements
include all adjustments which are, in the opinion of management, necessary
to a fair presentation of the results for the interim period.
2 - Investments in Related Company and Other Subsidiaries
The Company owns Irish Driver-Harris Co. Ltd.,("IDH"), located in Ireland.
3 - Comprehensive Income
The components of comprehensive loss as presented under Financial
Accounting Standard 130, "Reporting Comprehensive Income", for the three
and nine months ended September 30, 2002 and 2001 are as follows:
Three Months Nine Months
2002 2001 2002 2001
Net loss $ (556) $ (756) $ (1,016) $ (1,845)
Foreign currency translation adjustment (71) 197 47 (213)
--------- -------- --------- ------
Comprehensive loss $ (627) $(559) $ (969) $ (2,058)
========= ======== ========= =========
4. - Industry Segments and Geographic Areas
The Company classifies its revenues based upon the location of the facility
and its function (i.e. manufacture or purchase for resale-distribution).
Such revenues are regularly reviewed by the Directors and management and
decisions are made on such basis.
The operating expenses and resultant net profit (loss) and the assets are
similarly reviewed and decisions made based upon whether they relate to
manufacturing or purchase for resale (i.e. distribution).
Reporting Segments
Parent Co. Manufacturing Distribution Total
(U.S.) (Ireland) (U.K.)
---------- ------------- ------------ ------
Nine months ended September 30, 2002:
Revenues
External revenues $ 15,204 $ 837 $ 16,041
Inter-segment revenues 178 178
Elimination of inter-
segment revenues (178) (178)
Consolidated revenues 15,204 837 16,041
Net (Loss) (244) (562) (210) (1,016)
Assets
Total assets 1,482 11,531 104 13,117
Elimination of investment (623) (623)
Elimination of inter-
company receivables (829) 112 (717)
----------- ------------- ------------ ------
Total assets 30 11,643 104 11,777
Other Significant Items
Depreciation expense 328 4 332
Interest expense 122 274 5 401
Expenditures for assets 60 60
Nine months ended September 30, 2001:
Revenues
External revenues $ 21,579 $ 2,673 $ 24,252
Inter-segment revenues $ 681 681
Other revenues $ 35 13 48
Elimination of inter-
segment revenues (681) (681)
Consolidated revenues 35 21,592 2,673 24,300
Net (Loss) (256) (1,484) (105) (1,845)
Assets
Total assets 1,473 16,041 1,835 19,349
Elimination of investment (623) (623)
Elimination of inter-
company receivables (829) (1,220) (17) (2,066)
Elimination of inter-
company inventory (502) (502)
----------- ------------- ------------ ------
Total assets 21 14,319 1,818 16,158
Other Significant Items
Depreciation expense 305 15 320
Interest expense 98 486 34 618
Expenditures for assets 212 212
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
The ratio of current assets to current liabilities was 0.61 at September 30,
2002, compared to 0.71 at December 31, 2001.
At September 30, 2002, the Company's subsidiaries had approximately $5.8
million in available bank credit lines of which $4.5 million was in use.
The maximum amount the Company may borrow under these credit lines at any
point in time fluctuates in proportion to and is limited to the value of
the Company's receivables.
The Company believes it has adequate cash flow from operations to meet its
ongoing obligations including debt repayments and capital commitments in
Ireland based on a plan to reduce inventories and receivables in line with the
restructuring plan. The restructuring implemented in 2001 is simplifying the
Company's operations, leading to very significantly reduced debt levels and
reduced dependence on low margin products. The Company believes the actions
it has taken will result in a return to stability and reduce its exposure to
the competitive pressures of the ongoing consolidation in the industry.
The Company has a note payable to the Pension Benefit Guaranty Corporation
("PBGC") for which the due date was extended on April 10, 2000 to April 16,
2001. On April 13, 2001 the Company re-negotiated the terms of the note
whereby all payments of such note were deferred for two years. The note will
be payable in ten equal annual payments beginning April 16, 2003 and ending
April 16, 2012. The Company is in dispute with the PBGC as to the terms of
this renegotiated note. As a result of this dispute, the PBGC has notified
the Company that it considers it in default and pending determination of this
issue the Company has considered it prudent to reclassify the note to short-
term debt in the Company's consolidated balance sheet. Until the note is
paid in full, the Company may not pay cash dividends on its capital stock
without permission from the PBGC.
On April 17,2002 the Company sold the goodwill, stocks and certain assets of
its UK distribution subsidiary to a competitor. Management believes that the
transaction will permit a greater focus on the core manufacturing business in
Ireland.
The Company has been informed that it falls below certain minimum listing
requirements of the American Stock Exchange. The Company has presented
the Exchange with a plan to return to compliance. On July 10, 2002
the Exchange notified the Company that it had accepted the Company's
plan of compliance and granted the Company an extension of time to
regain compliance with the continued listing standards. The Company
will be subject to periodic review by the Exchange Staff during the
extension period. Failure to make progress consistent with the plan or
to regain compliance with the continued listing standards could result
in the Company being delisted from the American Stock Exchange.
Market Risks
Foreign Currency Fluctuations
With operations in three different countries, the Company's operating results
may be adversely affected by significant fluctuations in the relative values
among the U.S. dollar, Euro and the British Pound Sterling. The Company is
periodically involved in hedging currency between the Euro and the
British Pound Sterling through the use of futures contracts which are
relatively short term in nature. The Company historically has experienced
minimal gains and losses on such foreign currency hedging.
Debt Instruments
The Company's long term debt of $1,974,000 including the current portion, is
primarily fixed rate debt of which $1,556,000 is U.S. denominated with the
remaining balance denominated in Euro. The Company's remaining debt of
$4.5 million is solely comprised of variable rate, short-term facilities
denominated primarily in Euro to cover banking overdraft that does not
subject the Company to significant interest rate risk. The Company estimates
that a 1% increase in the interest rate on the borrowings would increase annual
interest expense by approximately $49,000.
Results of Operations
Nine Months of 2002 Compared to 2001:
Net sales to customers decreased by 33.9% during the first nine months of 2002
compared to 2001. Manufacturing revenue decreased by 40.2% while distribution
sales decreased by 73.3%. Units shipped in manufacturing decreased by 28.0%.
Manufacturing revenue decreased primarily as a result of the restructuring
implemented in late 2001. The gross profit percentage increased to 9.6% in
2002 compared to 7.5% in 2001. This is primarily attributable to an improvement
in the mix of products and sale of the distribution subsidiary in mid-April.
Improved product mix was possible due to the restructuring which permitted
the Company to focus on higher margin products and customers. Selling, general
and administrative expenses decreased by 47.7% in absolute dollar terms when
compared with the first nine months of last year but increased to 10.1% of net
sales compared to 12.8% for the same period last year due to the fact that the
reduction in overheads were proportionally lower than the reduction in sales
revenues for the period.
In February, the Company sold its property located in Dublin, Ireland. The
sale resulted in a one-time profit of $239,000 during the first half.
On April 17, 2002 the Company sold the goodwill, stocks and certain other
assets of its UK distribution subsidiary to a competitor. The Company
recovered approximately $400,000 in working capital that had been invested
in this subsidiary.
The Company had a foreign exchange gain of $103,000 for the nine months ended
September 30, 2002 compared to a loss of $29,000 for the nine months ended
September 30, 2001. The gain was due to the effect of the translation of
Sterling denominated receivables and payables into Euro.
Third Quarter of 2002 Compared to 2001:
Net sales to customers decreased by 27.5% during the third quarter of 2002
compared to the same period in 2001. This decrease is due to the policy of
refusing orders below certain minimum margins, the restructuring implemented
in late 2001 and the sale of the UK distribution subsidiary in mid-April 2002.
Units shipped in the third quarter of 2002 decreased by 19.3% compared to the
third quarter of 2001. The gross profit percentage increased to 8.9% in 2002
compared to 6.7% in 2001 due to reduced reliance on low margin business which
resulted from the restructuring. Selling, general and administrative expenses
increased to 17.0% of net sales compared to 13.5% in 2001 since sales
decreased without a corresponding decrease in administrative costs.
The Company has tax loss carry forwards of approximately $3,830,000 available
to offset future U.S. taxable income which expire between 2002 and 2021.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 99.1 Certification to 18 U.S.C. Section 1350, as Adopted Pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
b. Reports on Form 8-K
None filed in Quarter
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRIVER-HARRIS COMPANY
Date: November 19, 2002 By: Frank L. Driver
- ----------------------- -----------------------
Chief Financial Officer
Exhibit 99.1
Certification of Principal Executive Officer and Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350
In connection with the accompanying Quarterly Report on Form 10-Q of Driver-
Harris Company for the Quarter ended September 30, 2002, I, Frank L. Driver,
Chairman of the Board, President and Chief Executive Officer of Driver-Harris
Company, hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 that :
(1) such Quarterly Report on Form 10-Q for the Quarter
ended September 30, 2002 fully complies with the
requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in such Quarterly Report
on form 10-Q for the Quarter ended September 30,
2002 presents, in all material respects, the financial
condition and results of operations of Driver-
Harris Company.
November 19, 2002 Frank L. Driver
---------------
Chairman of the Board,
President and Chief
Executive Officer
(Principal Executive Officer
and Principal Financial
Officer)