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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 March 31, 2003
[ ] 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 princial executive offices)
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 May 22, 2003.
DRIVER-HARRIS COMPANY
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 (unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of
Operations Three Months ended March 31, 2003 and
March 31, 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 2003 and
March 31, 2002 5
Notes to Condensed Consolidated 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. 10
(a) Reports on Form 8-K
None filed in quarter
Exhibit 99.1 11
SIGNATURES 11
DRIVER-HARRIS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
March 31, December 31,
2003 2002
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash $ 177 $ 329
Accounts receivable - net 6,170 5,945
Inventories:
Materials 491 425
Work in process 256 364
Finished products 1,554 1,675
------- -------
2,301 2,464
Prepaid expenses 341 315
------- --------
Total current assets 8,989 9,053
Assets held for sale 151 145
Property, plant & equipment - net 3,304 3,272
-------- --------
Total assets $ 12,444 $ 12,470
====== ======
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Short-term borrowings $ 5,307 $ 5,137
Current portion of long-term debt 461 444
Note payable to Pension Benefit Guaranty Corp 1,642 1,598
Accounts payable 4,241 4,757
Accrued expenses 2,845 2,303
Loan payable to officer 110 100
-------- ---------
Total current liabilities 14,606 14,339
Deferred Grants 384 381
Postretirement benefit liabilities 616 607
- -------- ---------
Total Liabilities 15,606
12,470
Stockholders' Equity (Net Capital Deficiency):
Common stock 1,320 1,320
Additional paid-in capital 2,425 2,425
Retained loss (4,872) (4,505)
Accumulated other comprehensive loss (2,035) (2,097)
--------- ---------
Total stockholders' equity (net capital deficiency) (3,162) (2,857)
--------- --------
$ 12,444 $ 12,470
======= ======
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
MARCH 31,
--------------------
2003 2002
------ ------
Net sales $6,729 $ 5,921
Other revenue - 19
--------- ---------
Total Revenue 6,729 5,940
Cost of sales 5,990 5,279
------- -------
Gross profit 739 661
Selling, general and administrative 884 886
------ --------
Operating (loss) (145) (225)
Other (charges) credits:
Gain on disposal of assets
held for sale - 239
Interest (148) (103)
Foreign exchange (gain) loss (74) 123
-------- --------
Net (loss) income $ (367) $ 34
===== =====
Basic net (loss) income per share $(.25) $.02
==== ====
Diluted net (loss) income per share $(.25) $.02
==== ====
Basic earnings per share-weighted
average shares 1,474,346 1,474,346
Diluted earnings per share-weighted
average shares 1,474,346 1,474,346
See accompanying notes.
DRIVER-HARRIS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands)
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
------ ------
OPERATING ACTIVITIES
Net (loss) income $ (367) $ 34
Adjustments to reconcile net (loss)/income
to net cash (used in ) provided by
operating activities:
Depreciation and amortization 89 96
Gain on disposal of assets held for sale - (239)
Receivables 5 306
Inventories 254 362
Prepaid expenses (17) 79
Accounts payable and accrued expenses (153) 47
--------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (189) 685
INVESTING ACTIVITIES
Capital expenditures - (5)
Proceeds from disposal
of assets held for sale - 525
------- -------
NET PROVIDED BY INVESTING ACTIVITIES - 520
FINANCING ACTIVITIES
Change in short-term debt 27 (1,378)
Reduction of long-term debt - (17)
------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 27 (1,395)
Effect of exchange rate changes on cash 10 20
-------- -------
Net change in cash (152) (170)
Cash at beginning of year 329 250
------- -------
CASH AT END OF PERIOD $ 177 $ 80
====== =====
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, 2002. 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) income as presented under Financial
Accounting Standard 130, "Reporting Comprehensive Income", for the three
months ended March 31, 2003 and 2002 are as follows:
Three Months
2003 2002
Net (loss) income $ (367) $ 34
Foreign currency translation adjustment 62 67
-------- ------
Comprehensive loss $(305) $ 101
===== =====
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.)
Three months ended March 31, 2003:
Revenues
External revenues $ 6,729 $ 6,729
Consolidated revenues 6,729 6,729
Net Loss $ (137) (230) (367)
Assets
Total assets 1,463 12,433 13,896
Elimination of investment (623) (623)
Elimination of inter-
company receivables (829) (829)
------- --------- -------- ---------
Total assets 11 12,433 12,444
Other Significant Items
Depreciation expense 101 101
Interest expense 44 104 148
Expenditures for assets
Three months ended March 31, 2002:
Revenues
External revenues $ 5,155 $ 766 $ 5,921
Inter-segment revenues 130 130
Other revenues $ 19 19
Elimination of inter-
segment revenues (130) (130)
Consolidated revenues 19 5,155 766 5,940
Net Loss (121) 193 (38) 34
Assets
Total assets 1,475 12,308 883 14,666
Elimination of investment (623) (623)
Elimination of inter-
company receivables (829) (867) (1,696)
Elimination of inter-
company inventory (225) (225)
------- -------- -------- --------
Total assets 23 11,216 883 12,122
Other Significant Items
Depreciation expense 101 4 105
Interest expense 40 59 4 103
Expenditures for assets 5 5
5 - Employee Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the fair market value of the Company's shares at the date of the grant over
the amount an employee must pay to acquire the shares. This cost is deferred
and charged to expense rateably over the vesting period (generally five years).
Where shares are granted to employees at less than fair market value, the
excess of the fair market value over the amount the employee must pay to
acquire the shares is charged to expense as stock compensation and credited
to additional paid-in capital in the period of transfer.
In December 2002, the Financial Accounting Standards Board issued Statement
No. 148, "Accounting for Stock- Based Compensation- Transition and
Disclosure" ("SFAS 148"). SFAS 148 requires the following disclosures
in the interim financial statements of all companies with stock based
compensation regardless of whether they account for that compensation
using the fair value method of SFAS 123 or the intrinsic value method of
APB 25.
Pro forma information regarding net income (loss) and income (loss) per
share is required by SFAS 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS 123. No
shares were issued as compensation during the first quarter of 2003 or 2002.
The following table illustrates the effect on net income (loss) and
income (loss) per share AS if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation
(in thousands, except per share data):
Three Months Ended
March 31,
2003 2002
Net income (loss), as reported $ (367) $ 34
Deduct: Total stock-based employee
compensation expese determined
under fair value based method of
awards, net of related tax effects (5) (5)
------- -------
Proforma net income (loss) $ (372) $ 29
(Loss) income per share:
Basic and diluted - as reported $ (0.25) $ 0.02
Basic and diluted - pro forma $ (0.25) $ 0.02
These amounts may not necessarily be indicative of the pro-forma effect
of SFAS No. 123 for future periods in which options may be granted.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
The ratio of current assets to current liabilities was 0.62 at
March 31, 2003 down from 0.63 at December 31, 2002.
At March 31, 2003, the Company's subsidiaries had approximately
$6.2 million in available short-term bank credit lines of which
$5.3 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 has a note payable to the Pension Benefit Guarantee
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
re-negotiated note. As a result of this dispute, the PBGC has notified
the Company that it considers it in default and pending the 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 February 12, 2003 DRH Investments, LLC and DRH Equity Investments, LLC
(collectively DRH LLC) jointly filed a Schedule 13D, notifying the Security
and Exchange Commission that DRH Investments LLC had purchased the Note from
the PBGC and that they had purchased 60,400 and 85,000 shares of the Company
equal to 4.1% and 5.8% of the outstanding equity of the Company. The joint
filers indicated that they were considering a wide variety of possible
courses of action with respect to the Note and the Company. DRH LLC is not
a related party to the Company, its officers or directors.
On April 30, 2003, DRH Investments, LLC filed suit against the Company for
breach of the Note and money had and received. DRH seeks (i) payment of
US$1,484,150 plus interest from February, 10, 2003, (ii) not less than 30,400
shares of Common Stock of the Company, (iii) penalties, costs and expenses
associated with registering the Company shares, (iv) fees and costs incurred
pursuant to the Note and other agreements, and (v) such other and further
relief as the Court may deem just and proper.
The Company believes it has adequate cash flow to meet its ongoing operating
obligations including debt repayments and capital commitments in Ireland,
based on a plan of continuous cost reductions, increased margins and minimal
capital expenditure which will permit the Company to remain within the limits
of its receivables discounting bank facility. 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 its
industry.
The Company has struggled to meet supplier payments in the past two years due
to the impact of cumulative losses and their impact on the net worth and
reduced borrowing capacity. Going forward, the Company is dependent upon good
collection of debtors and maintaining inventories at low levels in order to
meet payments to creditors.
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 $2,103,000 including the current portion,
is primarily fixed rate debt of which $1,642,000 is U.S. dollar denominated
with the remaining balance primarily denominated in Euro. The Company's
remaining debt of $5,307,000 is solely comprised of variable rate, short-term
facilities denominated primarily in Euro and Sterling 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 $53,000.
Results of Operations
Net sales to customers increased by 13.6% during the first quarter of 2003
compared to the first quarter of 2002, all of which was manufacturing revenue.
Distribution sales were eliminated due to closure of the UK subsidiary in 2002.
Increase in manufacturing revenue was due to an increase in the rate of
exchange of Euro into dollars. Units shipped in manufacturing increased
by 1.0%. The gross profit percentage during the first quarter increased
to 11.0% in 2003 compared to 10.8% in 2002. This is primarily attributable
to a small improvement in the mix of products, largely offset by more intense
price competition. Improved mix was possible due to the restructuring which
permitted the Company to focus on higher margin products and customers.
Selling, general and administrative expenses were essentially unchanged when
compared with the first quarter of last year.
The Company had a foreign exchange loss of $74,000 for the three months ended
March 31, 2003 compared to a gain of $123,000 for the three months ended
March 31, 2002. This loss was due to the effect of the translation of Sterling
denominated receivables and payables into Euro.
The Company has tax loss carry forwards of approximately $3,994,000 available
to offset future U.S. taxable income, which expire between 2003 and 2022, and
approximately $4,909,000 available to offset Iish taxable income.
Critical accounting policies
The Company believes it follows conservative and prudent accounting policies
in all areas of its disclosed accounts. There is little subjectivity in the
application of GAAP and few areas where management has discretion over
accounting methods which could substantially alter the reported results.
Areas where discretion in accounting policies could notably impact the
results of the company if implemented differently include:
Going Concern - The accounts have been prepared on the basis that the company
is a going concern. Due to continuing losses including the heavy losses in
2002 and the fact that the Company has a deficiency of net assets and negative
stockholders' equity, there are certain risks regarding the Company's ability
to continue to trade in a normal manner. In the event that the Company was
not a going concern, the asset values reflected in the balance sheet would
likely have to be revised or reclassified and additional liabilities could
arise and the classification of liabilities could be revised. Risks which
exist for the Company's status as a going concern include the fact that
lenders to the Irish operating subsidiary have severely limited the amount
of funds that can be repatriated to the US parent company for payment of US
operating expenses. Several of these expenses are critical to the viability
of the Company and should funds be unavailable, the Company's going concern
status could be threatened. In addition, certain creditors of the parent
Company have potential claims against the Company. While these claims are
not necessarily accepted by the Company and its attorneys, successful legal
action by any of these creditors would impose severe cash requirements on the
Company that could also place the Company's going concern status at risk. With
regard to the preceding the Company is presently in negotiations to refinance
the PBGC note. Further, the Company is dependent upon several key suppliers
for raw materials. Should an interruption in supply of raw materials occur
with any of these organizations, the Company would struggle to replace them
with alternate suppliers. Finally, due to the serious nature of the losses,
the lenders to the Company are constantly reviewing their ongoing level of
support to the Company. If any of the credit lines to the Company are
substantially reduced, the Company will face a liquidity shortfall. Management
believes that the PBGC note can be satisfactorily renegotiated and that based
on budgeted cash flows it has adequate cash flow to meet its ongoing operating
obligations including debt repayments and capital commitments in Ireland, based
on a plan of continuous cost reductions, increased margins and minimal capital
expenditure which will permit the Company to remain within the limits of its
receivables discounting banking facility.
Accounts Receivable - The Company reviews its accounts receivable on a regular
basis and makes provision for amounts that are doubtful.
PART II - OTHER INFORMATION
Exhibit 99.1
CERTIFICATION
I, Frank L. Driver, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Driver-Harris
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have;
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to me by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report my conclusions about the effectiveness
of the disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 22, 2003 Frank L. Driver
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)
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: May 22, 2003 By: Frank L. Driver
- --------------------- -----------------------
Chief Financial Officer