10-Q 1 qrt10qq302.txt THIRD QUARTER 2002, SEPTEMBER 30, 2002 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

DRIVER-HARRIS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands)

DRIVER-HARRIS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollar amounts in thousands, except per share data)

DRIVER-HARRIS COMPANY AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Amounts in thousands)

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:

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)

DRIVER HARRIS CO 10-Q