<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 3, 2000
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8044
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HUNT CORPORATION.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 21-0481254
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Square 2005 Market Street, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no., including area code (215) 656-0300
--------------
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
As of October 1, 2000, there were outstanding 9,833,819 shares of the
registrant's common stock.
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Page 2
HUNT CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
--------------------
Condensed Consolidated Balance Sheets as of
September 3, 2000 and November 28, 1999 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 3, 2000 and August 29, 1999 4
Consolidated Statements of Comprehensive Income -
Three Months and Nine Months Ended
September 3, 2000 and August 29, 1999 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 3, 2000 and
August 29, 1999 6
Notes to Condensed Consolidated Financial
Statements 7-11
Item 2 - Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations 12-17
---------------------------------------------
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 18
----------------------------------------------------------
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 19
-----------------
Item 6 - Exhibits and Reports on Form 8-K 19
--------------------------------
Signatures 20
----------
Exhibit Index 21
-------------
</TABLE>
<PAGE>
Part I - FINANCIAL INFORMATION Page 3
---------------------
Item 1. Financial Statements
Hunt Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
September 3, November 28,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,763 $ 36,897
Accounts receivable, less allowance for doubtful
accounts: 2000, $973; 1999, $967 37,966 33,445
Inventories:
Raw materials 9,772 6,966
Work in process 3,626 3,337
Finished goods 14,977 10,373
-------- --------
Total inventories 28,375 20,676
Deferred income taxes 3,791 5,406
Prepaid expenses and other current assets 3,289 850
-------- --------
Total current assets 84,184 97,274
Property, plant and equipment, at cost, less accumulated
depreciation and amortization:
2000, $47,013; 1999, $43,781 42,764 45,121
Excess of acquisition costs over net assets acquired, net 22,599 25,013
Other assets 13,380 12,221
-------- --------
Total assets $162,927 $179,629
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 20 $ 23
Accounts payable 8,136 10,762
Accrued expenses:
Salaries, wages and commissions 2,519 3,584
Income taxes 2,102 1,481
Other 17,101 20,001
-------- --------
Total current liabilities 29,878 35,851
Long-term debt, less current portion 54,662 56,647
Deferred income taxes 730 1,906
Other non-current liabilities 14,197 14,710
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares
(including 50,000 shares of Series A Junior
Participating Preferred); none issued - -
Common stock, $.10 par value, 40,000,000 shares
authorized; issued: 2000 and 1999 -16,152,322 shares 1,615 1,615
Capital in excess of par value 7,412 6,434
Accumulated other comprehensive loss (6,439) (2,459)
Retained earnings 159,084 160,267
-------- --------
161,672 165,857
Less cost of treasury stock:
2000 - 6,309,303 shares; 1999 - 5,987,383 shares (98,212) (95,342)
-------- --------
Total stockholders' equity 63,460 70,515
-------- --------
Total liabilities and stockholders' equity $162,927 $179,629
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Page 4
Hunt Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 3, August 29, September 3, August 29,
2000 1999 2000 1999
(14 weeks) (13 weeks) (40 weeks) (39 weeks)
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $63,697 $61,143 $187,193 $182,696
Cost of sales 41,621 38,198 121,075 113,282
------ ------- -------- --------
Gross profit 22,076 22,945 66,118 69,414
Selling, administrative and general expenses 20,059 18,614 57,936 56,566
Restructuring and other 3,335 - 3,164 -
------ ------- -------- --------
Income (loss) from operations (1,318) 4,331 5,018 12,848
Interest expense 1,105 1,153 3,307 3,452
Other income, net (400) (308) (1,215) (1,233)
------ ------- -------- --------
Income (loss) before income taxes (2,023) 3,486 2,926 10,629
Provision (benefit) for income taxes (735) 1,220 997 3,720
------ ------- -------- --------
Net income (loss) ($1,288) $2,266 $1,929 $6,909
====== ======= ======== ========
Net income (loss) per share - Basic ($0.13) $0.22 $0.19 $0.66
====== ======= ======== ========
Net income (loss) per share - Diluted ($0.13) $0.22 $0.19 $0.66
====== ======= ======== ========
Dividends per common share $0.103 $0.103 $0.308 $0.308
====== ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Page 5
Hunt Corporation
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- -----------------------------
September 3, August 29, September 3, August 29,
2000 1999 2000 1999
(14 weeks) (13 weeks) (40 weeks) (39 weeks)
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net income (loss) $(1,288) $2,266 $ 1,929 $6,909
Comprehensive loss:
Foreign currency translation adjustments,
net of income tax benefits of $375 and
$2,059 in 2000, and $41 and $807 in 1999,
respectively (661) (75) (3,980) (1,499)
------- ------ ------- ------
Other comprehensive loss (661) (75) (3,980) (1,499)
------- ------ ------- ------
Comprehensive income (loss) $(1,949) $2,191 $(2,051) $5,410
======= ====== ======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Page 6
Hunt Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 3, August 29,
2000 1999
(40 weeks) (39 weeks)
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,929 $ 6,909
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 6,692 6,741
Deferred income taxes 453 1,741
Loss on disposals of property, plant and equipment 66 4
Gain on business divestitures 133 -
Payments/credits for special charges (3,654) (1,595)
Issuance of stock under management incentive bonus
and stock grant plans 58 -
Changes in operating assets and liabilities (17,765) (11,995)
-------- --------
Net cash provided by (used for) operating activities (12,088) 1,805
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (4,762) (3,067)
Acquisition of business (108) -
Other, net - (32)
-------- --------
Net cash used for investing activities (4,870) (3,099)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 9,215 11,812
Payments on long-term debt, including current maturities (10,676) (12,575)
Book overdrafts (1,498) (438)
Purchases of treasury stock (2,981) (6,138)
Dividends paid (3,059) (3,255)
Other, net (75) (33)
-------- --------
Net cash used for financing activities (9,074) (10,627)
-------- --------
Effect of exchange rate changes on cash (102) (131)
-------- --------
Net decrease in cash and cash equivalents (26,134) (12,052)
Cash and cash equivalents, beginning of period 36,897 40,724
-------- --------
Cash and cash equivalents, end of period $ 10,763 $ 28,672
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Page 7
Hunt Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed consolidated financial statements and related
notes are unaudited; however, in management's opinion all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial position at September 3, 2000 and the results of operations and
cash flows for the periods shown have been made. Such statements are presented
in accordance with the requirements of Form 10-Q and do not include all
disclosures normally required by generally accepted accounting principles or
those normally made in Form 10-K.
2. A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution in calculating the earnings
per share is shown below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
------------------------
Sept. 3, Aug. 29,
2000 1999
------- --------
<S> <C> <C>
Average common shares outstanding - basic 9,857 10,405
Add: common equivalent shares representing
shares issuable upon exercise of stock options
and stock grants - 2
----- ------
Average common shares and dilutive
securities outstanding (antidilutive in fiscal 2000) 9,857 10,407
===== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
Sept. 3, Aug. 29,
2000 1999
------- --------
<S> <C> <C>
Average common shares outstanding - basic 9,930 10,541
Add: common equivalent shares representing
shares issuable upon exercise of stock options
and stock grants 18 7
----- ------
Average common shares and dilutive
securities outstanding 9,948 10,548
===== ======
</TABLE>
<PAGE>
Page 8
3. The following table sets forth the details and the cumulative activity in the
various accruals and reserves associated with the Company's 1999 restructuring
plan in the Condensed Consolidated Balance Sheet at September 3, 2000 (in
thousands):
<TABLE>
<CAPTION>
Balance at Cash Non-Cash Balance at
Nov. 28, 1999 Credits Reductions Activity Sept. 3, 2000
-------------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Severance $2,539 $ (9) $(1,139) - $1,391
Lease Obligations 1,766 (113) (1,401) - 252
Fixed Assets 1,581 (70) (10) $(1,224) 277
Other 177 (104) (61) - 12
----- ------ -------- ------- -------
Total $6,063 (296) $(2,611) $(1,224) $1,932
====== ===== ======= ======= ======
</TABLE>
In addition to the above, the Company reduced its 1997 business divestiture
reserves by $.1 million, principally related to inventory returns and
environmental reserves.
4. The following table sets forth the details and the cumulative activity in the
various accruals and reserves associated with the Company's 1997 strategic plan
in the Condensed Consolidated Balance Sheet at September 3, 2000 (in thousands):
<TABLE>
<CAPTION>
Balance at Cash Non-Cash Balance at
Nov. 28, 1999 Credits Reductions Activity Sept. 3, 2000
-------------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Lease Obligations $554 - $(554) $ - -
Severance 46 - (46) - -
Other 296 $(82) (65) - $149
---- ---- ------ ---- ----
Total $896 $(83) $(664) $ - $149
==== ==== ===== ==== ====
</TABLE>
5. Several years ago, the Company was sued for patent infringement with respect
to one of its minor products. After a jury trial in 1998, the U. S. District
Court for the Western District of Wisconsin entered judgement against the
Company in this matter and awarded damages to the plaintiffs in the amount of
$3.3 million, plus interest and costs. The verdict was appealed, and, contrary
to the expectations of the Company and its patent counsel, a three-judge panel
of the U. S. Court of Appeals affirmed the judgement in July 2000. Subsequently,
a request was filed with the Court of Appeals by the Company to have the case
reconsidered by all twelve judges of the Court of Appeals and was denied in
October 2000. As a result, the Company has recorded a liability of $3.6 million,
which amount is included in the accompanying fiscal 2000 third quarter Condensed
Consolidated Statements of Operations under Restructuring and other. However,
the Company and its patent counsel continue to believe that the verdict against
the Company was incorrect and will be seeking a review of the decision by the
Supreme Court of the United States.
<PAGE>
Page 9
6. During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 requires selected information about
reportable segments in interim financial reports that is consistent with that
made available to management to assess performance. The Company operates in two
reportable business segments, each of which is a strategic business that is
managed separately because each business develops, manufactures and sells
distinct products. The business segments consist of consumer products (including
office and art supplies) and graphics products (including supplies and
equipment). The Company's management evaluates performance based on several
factors. However, the primary measurement focus is "operating income" excluding
amounts related to the 1997 strategic and 1999 restructuring plans, net gain on
divestitures, costs incurred in connection with the implementation of the 1999
restructuring plan, costs incurred in connection with the patent infringement
litigation described in Note 5, and any other unusual items.
The following table presents information about the Company's reportable
segments. Intersegment sales are not significant. Operating income includes all
revenues and expenses of the reportable segment except for amounts related to
the 1997 strategic and 1999 restructuring plans, net gain on divestitures, costs
incurred in connection with the implementation of the 1999 restructuring plan,
costs incurred in connection with the patent infringement litigation described
in Note 5, interest expense, interest income, other expenses, other income, and
income taxes, which are excluded from the measure of segment profitability
reviewed by Company's management. Identifiable assets are those assets used in
the operations of each business segment. Corporate assets include cash and
miscellaneous other assets not identifiable with any particular segment.
<PAGE>
Page 10
<TABLE>
<CAPTION>
Nine Months Ended Consumer Graphics
Sept. 3, 2000 Products Products Corporate Consolidated
----------------- -------- -------- --------- ------------
<S> <C> <C> <C> <C>
Net external sales $81,682 $105,511 $187,193
======= ======== ========
Operating income $13,714 $ 4,615 $(5,778) $ 12,551
======= ======== =======
Restructuring
accrual reversals $ - $ 378 $ - 378
======= ======== =======
Net gain on
divestitures $ 133 $ - $ - 133
======= ======== =======
Patent infringement
litigation costs $(3,609) $ - $ - (3,609)
======= ======== =======
Implementation costs $ - $ (4,180) $ (255) (4,435)
======= ======== ======= --------
Income from operations $ 5,018
Interest expense (3,307)
Interest income 1,024
Other income, net 191
--------
Income from continuing
operations before
income taxes $ 2,926
========
Identifiable assets $39,712 $ 94,690 $28,525 $162,927
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Consumer Graphics
Aug. 29, 1999 Products Products Corporate Consolidated
----------------- -------- -------- --------- ------------
<S> <C> <C> <C> <C>
Net external sales $84,152 $ 98,544 $182,696
======= ======== ========
Operating income $15,952 $ 2,876 $(5,980) $ 12,848
======= ======== ======= --------
Income from operations $ 12,848
Interest expense (3,452)
Interest income 1,053
Other income, net 180
--------
Income from continuing
operations before
income taxes $ 10,629
========
Identifiable assets $38,019 $ 93,594 $42,763 $174,376
======= ======== ======= ========
</TABLE>
<PAGE>
Page 11
7. On June 28, 2000, the Company amended its 1996 employment agreement with
Donald L. Thompson, Chairman of the Board, President and Chief Executive
Officer. The "phantom stock" portion of this agreement (Appendix A thereto) was
amended to replace the stock account consisting of 175,000 phantom shares of
common stock of the Company (fully vested) with a deferred cash account with an
opening balance equal to the closing value of the stock account on June 28,
2000, determined on the basis of the fair market value of a share of the
Company's common stock on such date ($9.6875) multiplied by 175,000. Prior to
Mr. Thompson's termination of employment, the amount in his deferred cash
account will be decreased by $175,000 for each $1.00 decline in the price of the
Company's common stock below the $9.6875 stock value and will be subsequently
increased by $175,000 for each $1.00 increase in the price of the Company's
common stock up to, but not in excess of, the $9.6875 stock value. In addition,
on June 28, 2000, the Company granted to Mr. Thompson stock options under the
Company's Amended 1993 Stock Option and Stock Grant Plan for 175,000 common
shares at an option price of $9.6875 per share, which was the fair market value
of such common shares at the date of the grant.
8. On September 12, 2000, the Company amended its revolving credit agreement
that provided for unsecured borrowings up to $75 million. In accordance with the
amended agreement, the facility was reduced to $50 million and the expiration
date was extended to September 12, 2003. The interest rates under this facility
are, at the option of the Company, one of the following: a base rate (defined as
the higher of: (i) the applicable prime rate of the bank and (ii) the federal
funds rate plus 50 basis points); LIBOR plus a margin of between 55 and 95 basis
points, the margin in each case to be adjusted quarterly based on the Company's
leverage ratio (as defined in the credit facility); a competitive bid rate based
on a competitive bid made by a competitive bid lender; or a quoted rate offered
by a swingline lender.
<PAGE>
Page 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion includes certain forward-looking statements within the
meaning of the Private Securities Litigation Act of 1995. Such forward-looking
statements represent management's assessment based upon information currently
available, but are subject to risks and uncertainties which could cause actual
results to differ materially from those set forth in the forward-looking
statements. These risks and uncertainties include, but are not limited to, the
Company's ability to successfully complete the implementation, and realize the
anticipated growth and other benefits, of its restructuring and strategic plans
on a timely basis; the effect of, and changes in, worldwide general economic
conditions including increases in raw material and freight costs; technological
and other changes affecting the manufacture of and demand for the Company's
products; competitive and other pressures in the marketplace; and other risks
and uncertainties set forth herein and in the Company's 1999 Form 10-K and as
may be set forth in the Company's subsequent Forms 10-Q, 8-K and other filings
with the Securities and Exchange Commission.
In October 1999, the Company initiated a comprehensive reorganization and
restructuring plan (the "1999 restructuring plan"). The major components of the
1999 restructuring plan include (with principal emphasis on the Company's
Graphics Products business) creating manufacturing centers of excellence,
outsourcing the Company's European distribution activities and consolidating its
U. S. distribution activities, and focusing its product offering and marketing
efforts. In addition to the restructuring charges of $6.2 million relating to
this plan recognized in the fourth quarter of fiscal 1999, the Company, during
the third quarter of fiscal 2000, revised its projections upwardly and now
expects to spend approximately $5.8 million for implementation costs (which will
be recorded as period costs as incurred) of this plan. Approximately $5.4
million of this amount is expected to be incurred in fiscal 2000. The total
estimated implementation costs of $5.8 million are approximately $2.7 million
higher than planned and is primarily the result of higher than anticipated
manufacturing and operating costs. These costs principally consist of air
freight costs of products from the Company's European operations which are sold
in the U. S.; outsourcing costs of some converting operations; and higher
material product substitution costs. Management believes that these expenditures
are appropriate in order to protect its service levels and customer base in the
face of higher demand for certain of its products in the U. S. and Europe. In
addition, during the third quarter of fiscal 2000, the Company incurred higher
than expected manufacturing start-up costs associated with the integration of
the converting operations into the Company's Statesville, North Carolina
facility. Management anticipates that these higher manufacturing and operating
costs will continue in the fourth quarter of fiscal 2000 but expects
productivity improvements as the integration of the manufacturing operations
into the Company's Statesville, North Carolina facility is completed. During the
third quarter and the first nine months of fiscal 2000, the Company recognized
$2.2 million and $4.4 million of such implementation costs, respectively. These
implementation costs consisted primarily of the above described manufacturing
and operating costs, employee retention bonuses and training, project
consulting, and other costs and are included in the Condensed Consolidated
Statements of Operations for the three months and nine months ended September 3,
2000 as follows (in millions except per share data):
<PAGE>
Page 13
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 3, 2000 September 3, 2000
------------------------ ----------------------
Per Share Per Share
$ Amount $ Amount
----- --------- ---- ---------
<S> <C> <C> <C> <C>
Cost of sales $1.4 $.10 $2.6 $.17
Selling, administrative
& general expenses .8 .05 1.8 .12
---- ---- ---- ----
Total $2.2 $.15 $4.4 $.29
+=== ==== ==== ====
</TABLE>
The Company has substantially completed the consolidation of its manufacturing
operations and distribution activities in the U. S. and the outsourcing of its
European distribution activities. The Company is proceeding with its plan to
consolidate its European manufacturing operations with expected completion by
early fiscal 2001. (See Note 3 to Condensed Consolidated Financial Statements
herein.)
The estimated pre-tax cost savings to be generated from the 1999 restructuring
plan are expected to be approximately $1.5 million in fiscal 2000, of which
approximately $.7 million has been realized during the first nine months of
fiscal 2000, and such pre-tax cost savings are expected to grow to $5.5 million
in fiscal 2001 and $5.9 million per year thereafter. Although the Company
expects realization of such future costs savings, there can be no assurance that
they will be achieved. (Note: All earnings per share amounts included in
Management's Discussion and Analysis are presented on an after-tax, diluted
basis.)
Results of Operations
The Company's 2000 fiscal year is comprised of 53 weeks compared to 52 weeks for
fiscal 1999. The third quarter of fiscal 2000 and fiscal 1999 contained 14 weeks
and 13 weeks, respectively, while the first nine months of fiscal 2000 and
fiscal 1999 contained 40 weeks and 39 weeks, respectively.
Net Sales
Net sales of $63.7 million for the third quarter and $187.2 million for the
first nine months of fiscal 2000 increased 4% and 3%, respectively, from the
corresponding fiscal periods of fiscal 1999. These increases were largely due to
higher sales of graphics products (up 9% for the second quarter and 7% for the
first nine months), partially offset by lower sales of consumer products (down
1% for the third quarter and 3% for the first nine months). In addition, sales
were adversely impacted by lower net selling prices in the third quarter and
first nine months of fiscal 2000 compared to last year, primarily within the
consumer products business, as well as by the effects of unfavorable exchange
rates for the Dutch guilder (the functional currency of the Company's
Netherlands operations) and the British pound sterling (the functional currency
of the Company's U. K. operations). The increase in graphics products sales was
due to higher sales of consumables products (up 9% and
<PAGE>
Page 14
8%, respectively), consisting of films and adhesives and board products (up 15%
and 9%, respectively). The decrease in consumer products sales was due primarily
to the termination by Schwan-STABILO Schwanhausser GmbH & Co. of its
distribution agreement with the Company (effective September 1, 1999) relating
to highlighter markers and writing instruments, to lower net selling prices, and
to a general softness in demand for its products. Export sales increased 12% and
9%, respectively, in the third quarter and first nine months of fiscal 2000
compared to the same periods of fiscal 1999. Foreign sales decreased 8% in the
third quarter and in the first nine months of fiscal 2000 compared to the same
prior year periods. The decrease in foreign sales was largely due to weaker
European currencies and to a general softness in demand for some of its products
which appears to be continuing in the fourth quarter.
Management is uncertain how long this general softness in demand for some of the
Company's products will continue and the extent to which these conditions will
affect the Company's business in the future.
Gross Profit
The Company's gross profit percentage decreased to 34.7% of net sales in the
third quarter of fiscal 2000 from 37.5% in the third quarter of fiscal 1999 and
decreased to 35.3% in the first nine months of fiscal 2000 compared to 38.0% in
the first nine months of fiscal 1999. These decreases were primarily the result
of implementation costs related to the 1999 restructuring plan of $1.4 million
and $2.6 million recorded in cost of sales in the third quarter and first nine
months of fiscal 2000, respectively. Excluding the effects of these costs, the
gross profit percentages for the third quarter and first nine months of fiscal
2000 would have been 36.8% and 36.7%, respectively. The remaining decreases in
gross profit percentages were principally the result of higher material costs,
lower net selling prices, and unfavorable inventory adjustments, partially
offset by lower net pension costs and cost savings realized from the 1999
restructuring plan. Management believes the pressure on net selling prices
(attributable in large part to the growing bargaining power of the Company's
largest customers such as the office superstores) is likely to continue. The
Company has experienced significant cost increases for some of its raw
materials, such as styrene plastic and corrugated packaging materials, during
the first nine months of fiscal 2000 and is uncertain if this trend will
continue. Management has initiated cost reduction measures, planned selling
price increases, and other programs in an effort to offset these cost increases.
In addition, the Company expects cost savings in the fourth quarter of fiscal
2000 from the 1999 restructuring plan to help mitigate these cost increases and
improve profit percentages.
Selling, Administrative and General Expenses
Selling, administrative and general expenses, as a percentage of net sales,
increased to 31.5% for the third quarter of fiscal 2000 from 30.4% for the same
period of fiscal 1999 and were essentially flat for the first nine months of
fiscal 2000 compared to last year (31%). Higher marketing and selling expenses
(due primarily to higher freight related costs, promotional and advertising
costs, travel and entertainment expenses, and
<PAGE>
Page 15
relocation and recruiting costs), were partially offset by lower administrative
and general costs (due principally to lower professional services expenses). In
addition, the selling, administrative and general expenses included
implementation costs related to the 1999 restructuring plan of $.8 million and
$1.8 million, respectively, for the third quarter and first nine months of
fiscal 2000. Excluding these implementation costs, selling, administrative and
general expenses, as a percentage of net sales, would have decreased for the
third quarter and first nine months of fiscal 2000 compared to the same prior
periods of fiscal 1999.
Restructuring and Other
In the third quarter of fiscal 2000, the Company recorded a charge and related
liability of $3.6 million (including interest) in connection with a patent
infringement suit with respect to one of its minor products. (See Note 5 to the
Consolidated Financial Statements herein for further information concerning this
charge.)
In addition, during the third quarter and first nine months of fiscal 2000, the
Company reduced by $.3 million, or $.02 per share, and $.1 million, or $.01 per
share, respectively, some of its reserves related to its 1999 restructuring and
1997 strategic plans. These reserve reductions related primarily to a final
resolution of lease obligations for a vacant facility, lower than anticipated
losses on asset disposals, and a decision not to vacate a certain lease
facility. Also during the first nine months of fiscal 2000, the Company reduced
by $.1 million, or $.01 per share, some of its reserves related to its 1997
business divestitures. These reserve reductions related primarily to lower than
anticipated inventory returns and environmental reserves.
Provision (Benefit) for Income Taxes
The Company recorded an income tax benefit of $.7 million in the third quarter
of fiscal 2000 due primarily to the patent infringement litigation charge
recorded in the third quarter but incurred an income tax provision of $1.0
million for the first nine months of fiscal 2000. The Company's effective income
tax rate was 36.3% for the third quarter and 34.1% for the first nine months of
fiscal 2000 compared to 35% for both comparable periods of fiscal 1999.
Net Income (Loss) and Earnings (Loss) Per Share
Net loss was $1.3 million for the third quarter of fiscal 2000 compared to net
income of $2.3 million for the third quarter of fiscal 1999 and net income was
$1.9 million for the first nine months of fiscal 2000 compared to $6.9 million
for the first nine months of fiscal 1999. Excluding the effects of special items
recorded during the third quarter and first nine months of fiscal 2000 in
connection with the implementation of the 1999 restructuring plan, the patent
infringement litigation and the reduction of reserves related to its 1999
restructuring plan, the 1997 strategic plan and the 1997 business divestitures,
earnings per share would have been $.24 and $.69 during the third quarter and
first nine months of fiscal 2000, respectively, compared to $.22 and $.66 for
the same periods last year.
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These earnings per share results for the first nine months of fiscal 2000 were
favorably impacted by lower average common shares outstanding as a result of the
Company's stock repurchase program (average diluted common shares outstanding
were 9,948,000 and 10,548,000 in the first nine months of fiscal 2000 and 1999,
respectively).
Financial Condition
The Company's working capital decreased to $54.3 million from $61.4 million, and
its current ratio increased to 2.8 from 2.7 at the end of the third quarter of
fiscal 2000 from the end of fiscal 1999, respectively. The Company's
debt/capitalization ratio increased to 46% at the end of the third quarter of
fiscal 2000 from 45% at the end of fiscal 1999. Funds from operations and
available cash balances were sufficient during the first nine months of fiscal
2000 to fund additions to property, plant and equipment of $4.8 million, to pay
cash dividends of $3.1 million, to fund the repurchase of $3.0 million of the
Company's common shares, to fund a $1.5 million reduction of long-term debt, and
to make cash payments related to the 1999 restructuring and 1997 strategic plans
of $3.3 million.
Current assets decreased to $84.2 million at the end of the third quarter of
fiscal 2000 from $97.3 million at the end of fiscal 1999 largely as a result of
lower cash and cash equivalents, partially offset by higher inventory, accounts
receivable and other current assets balances. The decrease in cash and cash
equivalents was largely due to items discussed in the preceding paragraph. The
$4.5 million increase in accounts receivable was largely due to higher sales in
the third quarter of fiscal 2000 compared to the fourth quarter of fiscal 1999
and to seasonal dating and promotion programs. Inventories increased to $28.4
million at the end of the third quarter from $20.7 million at the end of fiscal
1999 due primarily to inventory build-up in fiscal 2000 in connection with plant
relocations pursuant to the 1999 restructuring plan and to lower than
anticipated sales volume in the third quarter of fiscal 2000.
Current liabilities decreased to $29.9 million at the end of the third quarter
of fiscal 2000 from $35.9 million at the end of fiscal 1999. This decrease was
largely attributable to the timing of accounts payable and interest payments,
the payment of a $1.0 million special performance award to Company employees
which had been accrued, and reductions in the accruals associated with the
Company's 1999 restructuring and 1997 strategic plans, partially offset by the
patent infringement litigation accrual. The effect of unfavorable currency
exchange rates for the Dutch guilder (the functional currency of the Company's
Netherlands operations) and the British pound sterling (the functional currency
of the Company's U. K. operations) was the principal cause for the $4.0 million
increase in the accumulated other comprehensive loss account in stockholders'
equity.
At September 3, 2000, the Company had a revolving credit agreement of $75
million and a line of credit at one of its foreign operations of 1.5 million
British pounds sterling (approximately $2.2 million). There were outstanding
borrowings totaling $2.3 million under these credit facilities at September 3,
2000. On September 12, 2000, after the end of the fiscal 2000 third quarter, the
Company amended its revolving credit agreement. In
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accordance with the amended agreement, the facility was reduced to $50 million
and the expiration date was extended to September 12, 2003. (See Note 7 to the
Condensed Consolidated Financial Statements herein for further information.)
Management believes that funds generated from operations, combined with the
existing credit facilities, will be sufficient to meet currently anticipated
working capital and other capital and debt service requirements. Should the
Company require additional funds, management believes that the Company could
obtain them at competitive costs. Management currently expects that total fiscal
2000 expenditures for additions to property, plant and equipment to increase
capacity and productivity will approximate $7.6 million, of which approximately
$4.8 million had been expended through the first nine months of fiscal 2000.
New Accounting Pronouncements
During the third quarter of fiscal 2000, the Company adopted Financial
Accounting Standards Board ("FASB") Interpretation ("FIN") No. 44, "Accounting
for Certain Transactions Involving Stock Compensation," an interpretation of
Accounting Principles Board ("APB") Opinion No. 25 ("the Interpretation"). The
Interpretation was intended to clarify certain problems that have arisen in
practice since the issuance of APB Opinion No. 25 in October 1972. It
specifically answers certain questions and provides guidance on the
implementation of APB Opinion No. 25. The Company believes that adoption of this
interpretation is not expected to have any impact on its financial position or
results of operations.
Recently, the FASB's Emerging Issue Task Force released Issue 00-10, "Accounting
for Shipping and Handling Revenues and Costs" ("the Issue"), which requires
amounts charged to customers for shipping and handling to be classified as
revenue. In addition, the Issue established that the classification of shipping
and handling costs is an accounting policy decision that should be disclosed
pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies." If shipping
and handling costs are significant and are not included in cost of sales, a
company should disclose both the amount of such costs and which line item on the
income statement includes that amount. This Issue is applicable no later than
the fourth quarter of fiscal years beginning after December 15, 1999. Since the
Issue only relates to financial statement classification, its adoption will not
affect the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". This
SAB summarizes certain of the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. Accordingly,
guidance is provided with respect to the recognition, presentation, and
disclosure of revenue in the financial statements. Adoption of SAB No. 101, as
amended by SAB No. 101A, "Amendment: Revenue Recognition in Financial
Statements" and SAB No. 101B, "Second Amendment: Revenue Recognition in
Financial Statements" must be no later than the fourth quarter of fiscal years
beginning after December 15, 1999. The Company has not yet determined the impact
of the implementation of these SABs.
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Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk from that set
forth in the Company's fiscal 1999 Form 10-K.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to Part I, Item 3 of the Company's fiscal 1999 Form 10-K and
to Note 5 to the Condensed Consolidated Financial Statements herein.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
4(b) Amended and Restated Credit Agreement dated as of September 12,
2000.
10(c) 1993 Stock Option and Stock Grant Plan, as amended effective
June 28, 2000.
10(h) (1) Employment Agreement, dated as of April 8, 1996, between the
Company and Donald L. Thompson (incorp. by ref. to
Ex. 10 to Form 10-Q for quarter ended June 2, 1996);
(2) Amendment No. 1, dated October 1, 1999, to Employment
Agreement;
(3) Amendment, effective June 28, 2000, to Appendix A to Employment
Agreement;
(4) Nonqualified Stock Option Agreement dated June 28, 2000.
27 Financial Data Schedule for the nine months ended September 3,
2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
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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.
HUNT CORPORATION
Date October 16, 2000 By /s/ William E. Chandler
------------------------------- ------------------------------------
William E. Chandler
Senior Vice President, Finance
(Principal Financial Officer)
Date October 16, 2000 By /s/ Donald L. Thompson
------------------------------- -------------------------------------
Donald L. Thompson
Chairman of the Board
and Chief Executive Officer
Date October 16, 2000 By /s/ John Fanelli III
------------------------------- ------------------------------------
John Fanelli III
Vice President, Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit 4(b) - Amended and Restated Credit Agreement dated as of September 12,
2000
Exhibit 10(c) - 1993 Stock Option and Stock Grant Plan, as amended effective
June 28, 2000
Exhibit 10(h) - (1) Employment Agreement, dated as of April 8, 1996, between the
Company and Donald L. Thompson (incorp. by ref. to Ex. 10
to Form 10-Q for quarter ended June 2, 1996);
(2) Amendment No. 1, dated October 1, 1999, to Employment
Agreement;
(3) Amendment, effective June 28, 2000, to Appendix A to
Employment Agreement;
(4) Nonqualified Stock Option Agreement dated June 28, 2000
Exhibit 27 - Financial Data Schedule for the nine months ended September 3,
2000
