10-Q 1 sec10q901.txt THIRD QUARTER 2001 10Q 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, 2001 [ ] 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 15, 2001. 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, 2000. 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 and the U.K. 3 - Comprehensive Loss The components of comprehensive loss as presented under Financial Accounting Standard 130, "Reporting Comprehensive Income", for the three and nine months ended September 30, 2001 and 2000 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). 5. - Note due to PBGC In April 2001, the Company re-negotiated the terms of the note payable to the Pension Benefit Guarantee Corporation (PBGC) whereby payment of such note was deferred for two years. The note would 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 the permission from the PBGC. 6. - Settlement of Law Suit On May 22, 2001, the Company settled the lawsuit which had been filed by the landlord of an affiliate which claimed that the Company was guarantor of a lease signed by the affiliate and was therefore liable for unpaid back rent. Although the Company and its attorneys believe that suit was without merit, the settlement was made in order to minimize the resources required to prepare and mount a legal defense. The settlement calls for payments of $10,000 per quarter for twelve quarters, beginning on October 1, 2001, with subsequent payments due to the first business day of each subsequent quarter. The Company failed to make the initial payment on October 1, 2001 therefore the landlord has the right to recommence suit. Reporting Segments Parent Co. Manufacturing Distribution Total (U.S.) (Ireland) (U.K.) Nine months ended September 31, 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) (1,486) (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 Nine months ended September 30, 2000: Revenues External revenues $ 25,914 $ 3,176 $29,090 Inter-segment revenues $ 230 977 1,207 Other revenues 27 5 15 47 Elimination of inter- segment revenues (230) (977) (1,207) Consolidated revenues 27 25,919 3,191 29,137 Net Loss (250) (221) (22) (493) Assets Total assets 1,509 16,121 1,976 19,579 Elimination of investment (623) (623) Elimination of inter- company receivables (829) (306) (19) (1,154) Elimination of inter- company inventory (386) (386) ------ ------ ------ ------ Total assets 30 15,815 1,571 17,416 Other Significant Items Depreciation expense 292 13 305 Interest expense 66 350 51 467 Expenditures for assets 209 6 215

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition Due to ongoing losses, the Company announced a restructuring on October 15 that involves the reduction of the total employment by one-third, from 141 to 99 employees. The Company also announced closure of it manufacturing facility in Kilkenny with a relocation of this operation into the main factory in New Ross, Ireland. In addition, the Company is closing its Dublin warehousing and distribution operations and relocating that activity to the main factory in New Ross. Both the Kilkenny and Dublin properties are being sold with the proceeds to be used to reduce debt. In addition, the Company announced that it was scaling back its UK distribution operation and reducing employment there by one-third. The Company is projecting a reduced productive capacity in its main plant and expects revenue to reduce by approximately one-third. In its new structure, the Company will focus its revenue on its higher margin products and customers and will eliminate the lower margin products from its range of cables produced. After a period of transition expected to last until February 2002, the Company expects to have reduced its working capital requirements by approximately $3.0 million dollars. Upon sale of fixed assets, the Company expects to reduce debt by an additional $1.0 million. The Company will incur restructuring costs in the fourth quarter of 2001 associated with these actions of approximately $100,000. In addition to increased margins and a reduction of expenses expected to exceed $2.4 million per year, the Company expects lower interest will be a major factor in the return to profitability forecast for 2002. The ratio of current assets to current liabilities was 0.81 at September 30, 2001, compared to 1.03 at December 31, 2000. At September 30, 2001, the Company's subsidiaries had approximately $7.7 million in available bank credit lines of which $6.2 million was in use. Although the heavy losses incurred by the Company during the year have resulted in negative cash flow, the Company has implemented an aggressive restructuring plan, which is currently being supported by its lenders. The Company believes it has adequate cash flow from operations to meet its ongoing obligations including debt repayments and capital commitments. On April 13, 2001, the Company re-negotiated the terms of the note payable to the Pension Benefits Guarantee Corporation (PBGC) whereby payment for such note was deferred for two years. The note would be payable in ten equal annual payments beginning April 16, 2003 and ending April 16, 2012. Due to a dispute about the terms of the re-negotiated note, 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. Market Risks Foreign Currency Fluctuations With operations in three different countries, the Company's operating results may be adversely affected by significant fluctuations in the relative values among the U.S. dollar, Irish Pound and the British Pound Sterling. The Company is periodically involved in hedging currency between the Irish Pound 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 $1,726,000 including the current portion, is primarily fixed rate debt of which $1,403,000 is U.S. dollar denominated and the balance is denominated in Irish Pounds. The Company's remaining bank debt of $6,096,000 is solely comprised variable rate, short-term facilities denominated primarily in Irish Pounds to cover banking overdraft that does not subject the Company to significant interest rate risk. The Company does not believe any reasonable interest rate change in the ensuring year would have a material impact on the Company's Statement of Operations. Results of Operations Nine Months of 2001 Compared to 2000: Net sales to customers decreased by 16.6% during the first nine months of 2001 compared to 2000. The decrease is attributable to lower selling prices and lower shipments to customers, particularly in the first quarter. Quantities shipped decreased by 16.1% in the first nine months ended September 30, 2001 compared to 2000. The gross profit percentage decreased to 7.7% in 2001 compared to 11.9% in 2000, due primarily to lower average selling prices. Selling, General and Administrative expenses increased to 12.8% of net sales from 12.0% in the preceding period. An exchange loss resulted from fluctuation of the British Sterling to the Irish Punt. Third Quarter of 2001 Compared to 2000: Net sales to customers decreased by 6.3% during the third quarter of 2001 compared to the same period in 2000. This decrease is due to a decrease in quantities shipped by 11.5% coupled with a decline of selling prices as competitors reduced prices to attempt to gain market share. The gross profit percentage declined to 6.7% in 2001 compared to 8.4% in 2000 as a result of lower selling prices, offset slightly by a drop in price of copper. Selling, General and Administrative expenses decreased to 13.6% of net sales compared to 13.9% in 2000 due to a decrease in administrative costs. An exchange loss resulted from the fluctuation of British Sterling to the Irish Pound. The Company has tax loss carry forwards of approximately $3,620,000 available to offset future U.S. taxable income and approximately $1,065,000 to offset U.K. taxable income. Such carry forwards expire between 2001 and 2020 and the U.K. carry forwards are indefinite. 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 23, 2001 By: Frank L. Driver ----------------------- --------------------------- Chief Financial Officer

DRIVER HARRIS CO 10-Q