<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number: 1-13600
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HUNTCO INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MISSOURI 43-1643751
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14323 SOUTH OUTER FORTY, SUITE 600N, TOWN & COUNTRY, MISSOURI 63017
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 878-0155
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(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act:
CLASS A COMMON STOCK,
$0.01 PAR VALUE NEW YORK STOCK EXCHANGE
--------------------- -------------------------------------------
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
----
(Title of class)
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 12, 1999 was $18,229,230 (computed by reference to the
closing price of the registrant's Class A common stock, as quoted by the New
York Stock Exchange, Inc. on such date). All of the Company's Class B common
stock, which is the only other voting stock of the Company, is held by
affiliates of the Company.
As of March 1, 1999, the number of shares outstanding of each class of
the Registrant's common stock was as follows: 5,292,000 shares of Class A
common stock and 3,650,000 shares of Class B common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Notice of Annual Meeting and Proxy
Statement for the Annual Meeting of Shareholders to be held May 6, 1999 (the
"1999 Proxy Statement"), are incorporated by reference into Part III of this
Report on Form 10-K.
PART I
ITEM 1. BUSINESS
- -----------------
BACKGROUND
- ----------
Huntco Inc. ("Huntco" or "the Company") was incorporated under Missouri law in
May 1993, to indirectly hold the common stock of Huntco Steel, Inc., a
Delaware corporation ("Huntco Steel") and Midwest Products, Inc., a Missouri
corporation ("Midwest"). The Company, through Huntco Steel, is a major
intermediate steel processor, specializing in the processing of flat rolled
carbon steel to specified close tolerances. Through Midwest, the Company is a
leading manufacturer of (i) portable compressed air vessels for sale through
mass merchandisers and to manufacturers of air compressors, and (ii)
compressed air cylinders for use in tractor-trailer brake systems.
The Company's products are delivered from facilities in Arkansas, Illinois,
Kentucky, Missouri, Oklahoma, South Carolina, Tennessee, and Texas to over
1,500 customers located primarily in the midwestern and southern regions of
the United States. The strategic location of the Company's steel processing
plants, with access to major suppliers via the inland waterway system or by
ocean port, allows the Company to take delivery of raw materials by barge or
ocean going vessel, in addition to rail and truck, thereby minimizing inbound
transportation costs. The Company's primary processed products include hot
rolled, hot rolled pickled and oiled, hot rolled tempered and cold rolled
steel, which is cut-to-length into sheets, plates, or custom blanks; slit;
edge conditioned; or in the case of pickled and oiled, tempered and cold
rolled products, sold as master coils. The Company also produces custom metal
stampings.
INDUSTRY OVERVIEW
- -----------------
Intermediate steel processors occupy a niche between the primary steel
producers and industrial customers who need processed steel for their end-
product manufacturing purposes. Intermediate steel processors are also
positioned between the primary steel mill producers and general steel service
centers and distributors who handle broad product lines of processed metal
products, and who tend to specialize more in distribution than in processing.
Intermediate steel processors specialize in value-added processing of steel
coils, such as cutting-to-length, slitting, blanking, shape correction and
surface improvement, pickling, cold reduction, annealing, tempering, edge
rolling, shearing and stamping. These processes produce steel to specified
lengths, widths, shapes and surface characteristics pursuant to specific
customer orders. The processing techniques typically require specialized
equipment and require high volume production in order to be performed
economically. Intermediate steel processors typically have lower cost
structures and provide better service in value-added processing than the
primary producers. The intermediate steel processors are able to perform many
of these processes more efficiently than steel service centers and
distributors because the intermediate steel processors specialize in a
narrower range of products and therefore are able to attract sufficient volume
to justify the investment in specialized processing equipment.
Primary steel producers historically have emphasized the sale of steel to
large volume purchasers, and generally have viewed intermediate steel
processors as an integral part of their customer base. Furthermore, end
product manufacturers and service centers and distributors increasingly have
sought to purchase steel on shorter lead times and with more frequent and
reliable deliveries than normally can be provided by the primary producers.
Most manufacturers are not willing to commit to the investment in technology,
equipment and inventory required to process steel for use in their own
operations. These industry forces have created a market in which the success
of an intermediate steel processor is based upon its ability to purchase,
process and deliver steel to the end user in a more efficient and cost
effective manner than the end user could achieve in dealing directly with the
primary producer of the steel or with another intermediate steel processor.
PRODUCTS AND PROCESSING SERVICES
- --------------------------------
The Company maintains a substantial inventory of steel coils purchased from
the primary producers. This steel is in the form of a continuous sheet,
typically 36 to 84 inches wide, between .015 and .500 inches thick, and rolled
into 10 to 30-ton coils. Because of the size and weight of these coils and
the equipment required to move and process them into smaller sizes, such coils
do not meet the requirements, without further processing, of a majority of the
Company's customers. By purchasing various kinds of steel in large quantities
and at predetermined intervals, the Company attempts to purchase its raw
materials at the lowest competitive price for the quality purchased.
Customer orders are entered in a computerized order entry system, and
appropriate inventory is then selected and scheduled for processing in
accordance with the customer's specified delivery date. The Company attempts
to maximize yield by combining customer orders for processing to use each
purchased coil to the fullest extent practicable.
The Company uses techniques such as cold rolling, annealing, tempering,
pickling, cutting-to-length, slitting, blanking, shearing and stamping to
process steel to specified lengths, widths and shapes pursuant to specific
customer orders. Cold rolling and tempering reduce the thickness of the steel
by passing the steel through pressure reduction rolls, which also improves the
surface characteristics of the steel being processed. Annealing involves
heating the steel to soften it for further finishing after it has been cold
reduced. Pickling cleans the mill scale from the steel by subjecting the
steel to a series of hydrochloric acid baths. A portion of the steel that the
Company pickles serves as feed stock for the cold rolling mill. Cutting-to-
length involves cutting steel along the width of the coil. Slitting involves
cutting steel to specified widths along the length of the coil. Blanking cuts
the steel into close tolerance, specific shapes. Shape correction improves
the physical appearance of the steel by removing edge wave, center buckle,
crown or camber from the steel by a process known as elongation, which
includes equalizing and tension leveling, and which achieves shape correction
by stretching the fibers of the steel. Shearing cuts the steel into small
pieces. Stamping involves using presses to form previously processed steel
(e.g. slit coils) into parts.
The Company also manufactures compressed air cylinders for tractor-trailer air
brake systems, for air compressors, and portable compressed air vessels to
inflate objects, such as automobile tires, which are sold to mass
merchandisers and automotive specialty stores. The air cylinders are
fabricated from components processed by a Company processing center, including
the stamped heads, legs and handles and the blanked wraps. The components are
welded, painted, tested and packaged as required.
REVIEW OF OPERATIONS
- --------------------
The Company conducts its steel processing business in three separate operating
divisions - the Flat Rolled Products Division, the Custom Products Division,
and the Rolling Mill Division. Each of these divisions is involved in the
processing, use and/or sale of flat rolled carbon steel. The Company
segregated its operations on this product orientation basis in an effort to
better concentrate attention on its commercial organization. The Company is
intent on maintaining and fine tuning an efficient, responsive and low cost
operating structure in order to service its diverse customer base.
Flat Rolled Products Division:
-----------------------------
The Flat Rolled Products Division processes approximately one-half of the
total volume of steel output of the Company. This division includes all of
the Company's operations in Berkeley County, South Carolina; Catoosa,
Oklahoma; Chattanooga, Tennessee; Gallatin County, Kentucky; Madison,
Illinois; and Pasadena, Texas; as well as the hot rolled steel cut-to-length
and slitting operation at the Company's Blytheville, Arkansas location. The
Company operates cut-to-length equipment at all these locations. The Berkeley
County, Blytheville, Chattanooga, and Madison facilities also operate coil
slitting equipment, affording the Company the ability to process both heavy
gauge hot rolled steel coils, as well as lighter gauge pickled and oiled and
cold rolled products.
Blytheville, Arkansas:
The Company's Blytheville, Arkansas facility, which has access to the
Mississippi River, is located adjacent to Nucor Steel's Hickman, Arkansas flat
rolled mini-mill. The Company began operation at this location in October 1992
with a new, heavy gauge, cut-to-length line. The Company followed this
investment in June 1993 with the opening of a new, heavy gauge, slitting line.
These two processing lines comprise the nucleus of the Flat Rolled Products
Division's operation in Blytheville.
Chattanooga, Tennessee:
Located in an industrial park on the Tennessee River, the Chattanooga,
Tennessee facility opened in July 1994 with a heavy gauge, cut-to-length line.
In April 1995 a new slitting line was added, and in June 1995 a new cut-to-
length line was installed, both of which were designed to process lighter
gauge cold rolled and pickled and oiled steel. The Chattanooga facility
provides the Company access to markets in the southeastern United States,
servicing customers such as service centers, appliance and furniture
manufacturers, tube mills, and other end users of both hot rolled and cold
rolled steel.
Berkeley County, South Carolina:
Located in Berkeley County, South Carolina, near Charleston, this facility is
in close proximity to a new Nucor steel mill that produces both hot rolled and
cold rolled steel. The Company opened this facility late in its fiscal year
ended April 30, 1997 with a new, heavy gauge, sheet and plate cut-to-length
line and added a new high-speed, light gauge slitting line shortly thereafter.
The South Carolina facility has rail access as well as waterway access to the
Atlantic Ocean. The Company is serving markets along the Atlantic seaboard to
the north and south, as well as to the west, with processed products from this
location.
Madison, Illinois:
Located in the St. Louis metropolitan area with access to the Mississippi
River, the Madison, Illinois facility commenced operations in 1983. The
facility operates a cut-to-length line, acquired early in calendar 1996, to
process cold rolled and pickled and oiled steel. The facility is also
equipped with a coil slitting line primarily used to process cold rolled and
pickled and oiled steel. During 1996, the Company expanded this location by
constructing inside rail access to better facilitate the handling of cold
rolled products. Late in 1998, the Company disposed of the slitting line used
to process narrower width heavy gauge, hot rolled material, given the
facility's lack of success in garnering an acceptable level of sales on this
particular line since its acquisition in the Company's fiscal year ended April
30, 1995. The facility provides processed steel products to a diverse group of
customers, including metal fabricators, service centers and tube, consumer
durable and transportation equipment manufacturers.
Catoosa, Oklahoma:
Located at the Port of Catoosa, near Tulsa, Oklahoma, the Catoosa facility is
situated on the western edge of the inland waterway system on the Arkansas
River. This facility commenced operations in 1978 and is equipped with a
heavy gauge, cut-to-length line that was purchased new in 1985. The facility
was expanded during the year ended April 30, 1996, to include a doubling of
the physical plant and the addition of a cut-to-length line to process cold
rolled and pickled and oiled steel. The building expansion also allows for
inside coil storage. The facility processes coils into sheets and plates,
primarily for heavy equipment manufacturers, manufacturers of tanks for
petroleum products and for wet and dry bulk storage, construction and metal
building companies.
Pasadena, Texas:
Located on a 20-acre tract of land on the shipping channel in Pasadena, Texas,
near Houston, this facility commenced operations in 1982. The facility is
equipped with two heavy gauge cut-to-length lines. One of these lines was
acquired in December 1994 and the second was added during 1998 to replace a
lower capacity line that had been in place since 1982. The facility operates
its own unloading facility and is capable of directly discharging barges. The
physical plant was also expanded in 1996, with the addition of a new climate
controlled warehouse used to store cold rolled steel master coils prior to
final sale in this facility's market territory. The facility produces
processed hot rolled sheets and plates for manufacturers of heavy farm and
construction equipment, storage tanks, metal building companies, and various
energy related concerns and distributes unprocessed master coils of cold
rolled and tempered steel.
Gallatin County, Kentucky:
This facility is situated in Gallatin County, Kentucky, on a 20-acre tract of
land immediately adjacent to the Gallatin steel mill, and with access to the
Ohio River. The Company opened this location in May 1996 with a new, heavy
gauge, sheet and plate cut-to-length line. The facility sells processed
sheets and plates to manufacturers servicing the transportation and heavy
machinery industries.
Rolling Mill Division:
---------------------
The Rolling Mill Division includes the Company's cold rolling, tempering and
pickling operations located in Blytheville, Arkansas. This division is focused
on the production and processing of master coils from hot rolled steel coil
substrate acquired from the Company's various producing mill vendors. The
Rolling Mill Division is able to produce: (1) pickled and oiled coils, (2)
full hard cold rolled coils, (3) fully annealed and tempered cold rolled
coils, or (4) hot rolled tempered coils. Both cold rolling and tempering are
processes whereby the thickness of the steel coil is reduced by passing it
through pressure reduction rolls. Pickling removes mill scale from hot rolled
steel by subjecting the coils to hydrochloric acid cleansing. The Rolling
Mill Division sells its master coil production to both end users or to sister
divisions of the Company, where such coils may be converted into cut-to-length
sheets or blanks, slit coils or stamped and fabricated parts prior to final
sale.
The Rolling Mill Division operates a four-high reversing mill, annealing
furnaces, and a temper mill for processing of cold rolled coils up to 60
inches wide. The Division has the capacity to produce up to 360,000 tons of
fully annealed cold rolled master coils on an annual basis. Huntco has put
great emphasis on enhancing the quality of its cold rolled product since it
opened its cold rolling mill in 1995. These improvements include the addition
of shape meter rolls and a new filtration system to the reversing mill and an
electrostatic oiler to the temper mill.
The Company has operated a push-pull coil pickling line in Blytheville since
June 1994. A new coil pickling line with greater agitation and tension
recoiling capabilities became operational during 1998 at the Division's
Blytheville location. The new pickling line provides a higher quality
feedstock for use on the reversing mill or for sale to customers. With this
addition, the Rolling Mill Division has the capacity to pickle and oil
approximately 900,000 tons of steel annually.
Since January 30, 1997, the Division has also operated a two-high hot rolled
steel tempering mill, and is looking to expand the use of this value-added
processing service through sale to end users or via tolling arrangements.
Custom Products Division:
------------------------
The Custom Products Division includes the Company's cylinder manufacturing and
assembly operation located in Strafford, Missouri, as well as the metal
stamping and custom blanking and slitting business located in Blytheville,
Arkansas.
Blytheville, Arkansas:
During the summer of 1996, the Company relocated its stamping operations from
a facility located in Springfield, Missouri to a new plant located in
Blytheville, Arkansas. In conjunction with this relocation, the Company added
new slitting and blanking equipment designed to process both cold rolled and
pickled and oiled steel.
The Custom Products Division's metal stamping operation concentrates on high
volume metal stamping orders. The Division utilizes its stamping presses to
form previously processed steel (i.e., slit coils) into parts, such as those
used by the Company in the manufacture of air cylinders. The Division also
operates light gauge, close tolerance slitting and blanking equipment designed
to process cold rolled and pickled and oiled steel.
Strafford Facility:
Located in Strafford, Missouri, this facility is home for the Company's
cylinder operation, which produces approximately 1.0 million units annually.
These products include air cylinders used in tractor-trailer brake systems and
portable compressed air vessels used to fill inflatable objects such as
automobile tires, and for construction compressors. The air cylinders are
fabricated from pickled steel components, including stamped heads, legs,
handles and blanked wraps, which have been processed at the Division's
Blytheville location prior to delivery to Strafford for final assembly,
welding and painting. The Company installed an electrostatic, powder coating
paint system at this facility during fiscal 1996, resulting in higher product
quality and lower costs, as well as opening new markets for the Company.
QUALITY CONTROL
- ---------------
The procurement of high quality steel from suppliers on a consistent basis is
critical to the Company's business. Historically, about 2% of raw materials
have failed to conform to order specifications, with most of the nonconforming
raw material being diverted to less critical applications. The Company has
instituted quality control measures to attempt to assure that the quality of
purchased raw material will allow the Company to meet the specifications of
its customers and to reduce the costs and inefficiencies of production
interruptions. Physical and chemical analyses are performed on selected raw
materials to verify that their mechanical and dimensional properties,
cleanliness and surface characteristics meet the Company's requirements. The
Company believes that maintenance of high standards for accepting raw
materials ultimately results in reduced return rates from its customers.
Similar analyses are conducted on processed steel on a selected basis before
delivery to the customer. The Company also uses statistical process control
techniques to monitor its slitting process so management can document to
customers that required tolerances have been continuously maintained
throughout processing. The Company also maintains a test laboratory at its
Blytheville facility to provide timely and economical testing and quality
certifications.
SUPPLIERS
- ---------
The Company purchases steel coils for processing at regular intervals from a
number of primary steel producers including Nucor Corporation, Gallatin Steel,
AK Steel Corporation, Trico, National Steel Corporation, USX Corporation,
Geneva Steel, Inland Steel Company, Bethlehem Steel Corporation, and various
foreign suppliers (generally through trading companies). The Company orders
steel to specified physical qualities and alloy content. By purchasing in
large quantities at consistent predetermined intervals, the Company attempts
to purchase its raw materials at the lowest competitive prices for the quality
purchased. The Company believes that it is not dependent on any one of its
suppliers for raw materials and that it has good relationships with its
suppliers.
MARKETING
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The Company's products and services are sold primarily by Company sales
personnel supported by executive management of Huntco Steel, and by the
Company's technical support staff. The Company generally produces its
processed steel products to specific customer orders rather than for
inventory. The Company generally does not enter into fixed-price sales
contracts with its steel processing customers with terms longer than three
months. Many of the Company's customers commit to purchase on a quarterly
basis with the customer notifying the Company of specific release dates as
they require the processed products. Customers typically notify the Company
of release dates anywhere from a just-in-time basis up to approximately three
weeks before the release date. The Company is therefore required to carry
sufficient inventory of raw materials to meet the short lead-time and just-in-
time delivery requirements of its customers. Because the Company ships most
steel processing orders on short lead-times, the amount of backlog at any
point is not significant.
CUSTOMERS AND DISTRIBUTION
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Huntco sells its processed steel products to over 1,500 customers in market
areas reaching from the upper midwest, south to the Gulf of Mexico and from
the southeastern coastline, west to the Rocky Mountains. The Company's
customer base is diverse and includes service centers and metal fabricators as
well as various storage tank, consumer durable, energy and transportation
related manufacturers. The Company did not have any customers representing
more than 5% of net sales for 1998. Steel service centers and distributors,
which represent the Company's largest single customer group, accounted for
approximately one-fourth of the Company's net sales for 1998. The large
geographic area the Company services helps to minimize the adverse impact of
regional economic changes.
While the Company ships products throughout the United States, its customers
are primarily located in the midwestern and southern regions of the United
States. Most of its steel processing customers are located within a 250-mile
radius of each of the Company's steel processing plants, facilitating an
efficient delivery system capable of handling a high frequency of short lead-
time orders. The Company transports a major portion of its products directly
to customers via independent trucking firms, supplemented by rail and barge.
The Company believes that its long-term relationships with many of its
customers are a significant factor in its business and that pricing and
service capabilities are the most critical factors in maintaining these
relationships.
COMPETITION
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Intermediate steel processing is a highly competitive industry in which
companies compete based on price, service and their ability to process and
deliver steel products based on short lead-time customer orders. The Company
competes primarily with other intermediate steel processors. Geographic
proximity to a customer is a significant factor. Specific, reliable data
concerning the size of the market in products that the Company processes, by
region, generally is not available. The Company believes that it is a
significant competitor in all of the market areas it serves, and that it is
one of the larger companies specializing in the processing of flat rolled
carbon steel. The Company's largest competitors currently include Cargill,
Inc., Ferralloy Corp. and Heidtman Steel Products Inc. The primary
competitors of the Company's Cold Mill are various foreign suppliers, USX
Corporation, Gulf States Steel, Worthington Industries and Nucor.
SEASONALITY
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Shipping volumes are lowest during the November and December holiday periods,
and also tend to be slow during mid-summer as many of the Company's customers
schedule plant shutdowns for vacations. These factors tend to result in lower
net sales and net income during these periods. Quarterly results can also be
affected, either negatively or positively, by changing steel prices.
GOVERNMENTAL REGULATION
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The Company's processing centers and manufacturing facilities are subject to
many federal, state and local requirements relating to the protection of the
environment. The Company continually examines ways to reduce emissions and
waste and to effect cost savings relating to environmental compliance.
Management believes that it is in material compliance with all laws, does not
anticipate any material expense to meet environmental requirements and
generally believes that its processes and products do not present any unusual
environmental concerns. Expenditures incurred in connection with compliance
with federal, state and local environmental laws have not had, and are not
expected to have during the current calendar year, a material adverse effect
upon the capital expenditures, cash flows, earnings or competitive position of
the Company or any of its subsidiaries.
The Company's operations are also governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Act and regulations thereunder which, among other requirements,
establish noise and dust standards. Management believes that it is in
material compliance with these laws and regulations and does not believe that
future compliance with such laws and regulations will have a material adverse
effect on its results of operations, cash flows, or financial condition.
EMPLOYEES
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As of December 31, 1998, the Company employed 723 people. None of the
Company's employees are covered by collective bargaining agreements. The
Company has never experienced a significant work stoppage and considers its
employee relations to be good.
ITEM 2. PROPERTIES
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Reference should be made to the "REVIEW OF OPERATIONS" information found
within ITEM 1 for a further discussion of the Company's operating plant
facilities. The following sets forth certain additional information with
respect to each of these facilities:
<TABLE>
<CAPTION>
Square
Utilization Footage Owned or leased
- ------------------------------ ------- -------------------------------------
FLAT ROLLED PRODUCTS DIVISION:
Blytheville:
-----------
<S> <C> <C>
Cutting-to-length 80,000 Capital lease ($100 purchase option).
Slitting Owned equipment.
Tension leveling, shape
correction or elongation
Gauge verification and testing
Coil storage
Chattanooga:
-----------
Cutting-to-length 126,000 Owned.
Slitting
Tension leveling
Coil storage
Gauge verification and testing
Berkeley County:
---------------
Cutting-to-length 130,000 Owned real estate and ancillary
Slitting equipment; processing equipment is
Tension leveling leased with fair value purchase
Coil storage options to the Company.
Gauge verification and testing
Gallatin County:
---------------
Cutting-to-length 65,000 Owned.
Tension leveling
Coil storage
Gauge verification and testing
Pasadena:
--------
Cutting-to-length 45,000 Owned.
Gauge verification and testing
Humidity controlled coil storage 21,000 Owned.
Madison:
-------
Cutting-to-length 128,000 Owned.
Slitting
Tension leveling
Coil storage
Gauge verification and testing
Catoosa:
-------
Cutting-to-length 80,000 Owned improvements on leased land.
Tension leveling
Coil storage
Gauge verification and testing
ROLLING MILL DIVISION:
- ---------------------
Blytheville:
-----------
Coil pickling 30,000 Owned improvements on capital
Coil warehouse and storage 32,000 lease of land.
Second coil pickling line 96,000 Leased equipment with fair value
purchase option; other owned
improvements on capital lease of
land.
Cold rolling, annealing 194,000 Lease with $100 purchase option (1).
and tempering Certain annealing furnaces leased
with fair value purchase options.
Heavy gauge tempering 130,000 Leased facility and equipment, with
Gauge verification and testing certain fair value purchase options.
CUSTOM PRODUCTS DIVISION:
- ------------------------
Blytheville:
-----------
Cutting-to-length 152,000 Lease with $100 purchase option (1).
Slitting
Blanking
Tension leveling
Shearing and stamping
Gauge verification and testing
Design and tool engineering
Strafford:
---------
Gauge verification and testing 100,000 Owned.
Cylinder Assembly
Welding
Painting
(1) These leases represent arrangements under which title is held by the
municipality involved for tax abatement purposes and are considered capital
leases, whereby the underlying lease obligation of the operating subsidiary
(i.e., Huntco Steel) is owed to the Company's Huntco Nevada, Inc. finance
subsidiary. As such, these amounts are eliminated in consolidation, and such
property is reflected as owned property on the Company's consolidated balance
sheet.
</TABLE>
The above facilities are well maintained and in good operating condition.
With respect to capacity and utilization, most of the Company's facilities
operate an average of approximately 2 shifts per day on a five-day per week
basis.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
From time to time, the Company is named as a defendant in legal actions
arising out of the normal course of business. The Company is not currently a
party to any pending legal proceedings other than routine litigation
incidental to the business. Management believes the resolution of such
matters will not have a material adverse effect on the Company's results of
operations, cash flows or financial condition. The Company maintains
liability insurance against risks arising out of the normal course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to the security holders of the Company during the
three months ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
Information regarding the executive officers is contained in Item 10 of Part
III of this Report (General Instruction G) and is incorporated herein by
reference.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
Class A common stock of the Company is traded on the New York Stock Exchange,
under the symbol "HCO". As of December 31, 1998, there were approximately 65
holders of record of the Company's Class A common stock.
The only other class of common equity authorized for issuance under the
Company's Restated Articles of Incorporation (the "Articles") is Class B
common stock (the "Class B Shares"). All of the Company's outstanding
3,650,000 Class B Shares are held by Huntco Acquisitions Holding, Inc. and
Huntco Farms, Inc., corporations controlled by Mr. B. D. Hunter, the Company's
Chairman of the Board and Chief Executive Officer.
There is no established public trading market for the Class B Shares. The
Articles provide that the Class B Shares are not transferable except: (i)
upon conversion into Class A Shares; (ii) to the Company for cancellation; or
(iii) to any "Hunter Affiliate" or any member of the "Hunter Group", as those
terms are defined in the Articles.
The table below shows the Company's quarterly high and low Class A common
stock sales prices as reported by the New York Stock Exchange, and quarterly
per share dividend amounts paid on the Class A common stock and the Class B
common stock for the periods presented.
<TABLE>
<CAPTION>
High Low Dividends
------ ------ ---------
<S> <C> <C> <C>
Quarter ended July 31, 1996 19.3750 15.1250 .030
Quarter ended October 31, 1996 20.1250 15.3750 .035
Quarter ended January 31, 1997 18.5000 13.5000 .035
Quarter ended April 30, 1997 14.0000 10.0000 .035
Quarter ended July 31, 1997 15.0000 12.8750 .035
Quarter ended October 31, 1997 14.8750 13.3750 .035
Two-month period ended December 31, 1997 17.1250 11.6250 .035
Quarter ended March 31, 1998 16.6250 14.3125 -
Quarter ended June 30, 1998 14.5625 11.8125 .035
Quarter ended September 30, 1998 11.7500 6.7500 .035
Quarter ended December 31, 1998 6.8750 3.2500 .035
</TABLE>
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
- ---------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA (in thousands, except per share amounts):
Year Eight months
ended ended Year Ended April 30,
December 31, December 31, ---------------------------------------
1998 1997 (1) 1997 1996 1995 1994
-------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $391,181 $246,324 $326,563 $264,087 $197,195 $146,213
Cost of sales 369,864 227,871 294,455 245,863(2) 171,521 126,412
------- ------- ------- ------- ------- -------
Gross profit 21,317 18,453 32,108 18,224 25,674 19,801
Selling, general and
administrative expenses 19,939 11,757 15,383 13,147 9,638 8,183
------- ------- ------- ------- ------- -------
Income from operations 1,378 6,696 16,725 5,077 16,036 11,618
Interest, net (8,113) (5,194) (6,239) (3,268) 5 (183)
------- ------- ------- ------- ------- -------
Income (loss)
before income taxes (6,735) 1,502 10,486 1,809 16,041 11,435
Provision (benefit)
for income taxes (2,444) 486 3,997 701 6,037 4,305
------- ------- ------- ------- ------- -------
Net income (loss) (4,291) 1,016 6,489 1,108 10,004 7,130
Preferred dividends 200 133 50 - - 399
------- ------- ------- ------- ------- -------
Net income (loss) available
for common shareholders $(4,491) $ 883 $ 6,439 $ 1,108 $10,004 $ 6,731
======= ======= ======= ======= ======= =======
Earnings (loss) per common share:
Basic $(.50) $0.10 $0.72 $0.12 $1.12 $0.86
Diluted $(.50) $0.10 $0.72 $0.12 $1.11 $0.85
Weighted average common shares outstanding:
Basic 8,942 8,942 8,942 8,942 8,940 7,805
Diluted 8,942 8,951 8,942 8,948 9,048 7,926
Common cash dividends per share $0.11 $0.11 $0.14 $0.12 $0.10 $0.06
(1) On October 23, 1997, the Company filed a Form 8-K announcing that it had determined to change its
fiscal year end from April 30 to a calendar year. As a result, the Company reported an eight-month
transition period ended December 31, 1997, in order to change to a calendar year end.
(2) Includes an $8,000 lower of cost or market inventory adjustment recorded in the second quarter of the
year ended April 30, 1996.
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA (in thousands):
April 30,
December 31, -------------------------------------
1998 1997 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 71,028 $ 84,182 $ 79,502 $ 62,305 $ 84,046 $ 58,220
Total assets 293,231 285,265 307,318 222,437 209,898 114,380
Short-term debt 7,352 209 189 189 371 357
Long-term debt
(net of current portion) 102,555 110,730 100,877 73,066 68,505 1,631
Preferred stock 4,500 4,500 4,500 - - -
Common shareholders' equity 111,074 116,505 116,561 111,366 111,252 102,097
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
1999 OUTLOOK:
- ------------
As the Company enters 1999, we continue to see a weak market environment and
falling prices, especially in cold rolled products. A successful resolution
of recent trade actions against hot rolled steel imports and less impact from
inventory liquidations could result in a leveling of prices by the second half
of 1999. With a stabilization of market conditions and competitive selling
values, the Company would anticipate a strengthening of customer demand,
resulting in improved utilization of plant facilities -- especially at the
Company's cold rolling mill.
The Company has initiated certain organizational and operational changes that
are expected to be substantially completed during the first half of 1999. The
move to a divisional operating structure is expected to generate improved
results by developing better accountability and attention to the details of
our business, and should be more conducive to providing the level of service
demanded by our customers. Along with these changes, the Company plans to
realize a significant reduction in its investment in inventories by mid-
summer. The Company is also evaluating several strategic initiatives
involving its cold rolling mill, and expects to take steps during 1999 to
better position this operation for long-term success and profitability.
The Company is in the process of negotiating a new multi-year credit agreement
to replace its existing bank revolver, as well as modifications to the terms
of its long-term notes to provide increased near-term borrowing capacity. It
expects to have these negotiations completed and new or amended agreements in
place near the end of the first quarter of 1999.
RISK FACTORS - 1999 OUTLOOK:
- ---------------------------
This Annual Report contains certain statements that are forward-looking and
involve risks and uncertainties. Words such as "expects," "anticipates,"
"projects," "estimates," "plans," "believes," and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are based on current expectations and projections concerning
the Company's plans for 1999 and about the steel processing industry in
general, as well as assumptions made by Company management and are not
guarantees of future performance. Therefore, actual events, outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements. Achievement of these forward-looking results is
dependent upon numerous factors, circumstances and contingencies, certain of
which are beyond the control of the Company. Certain of the more important
factors that the Company believes could cause actual results to differ
materially from the forward-looking data presented include:
Impact of changing steel prices on the Company's results of operations:
As evidenced by the unfavorable impact on operating results recognized by the
Company in its recent fiscal periods, changing steel prices can significantly
impact the Company's financial results. The Company's principal raw material
is flat rolled carbon steel coils. The steel industry is highly cyclical in
nature and prices for the Company's raw materials are influenced by numerous
factors beyond the control of the Company, including general economic
conditions, competition, labor costs, import duties and other trade
restrictions and currency exchange rates. Changing steel prices may cause the
Company's results of operations to fluctuate significantly.
To respond promptly to customer orders for its products, the Company maintains
a substantial inventory of steel coils in stock and on order. The Company's
commitments for steel purchases are generally at prevailing market prices in
effect at the time the Company places its orders. The Company has no
long-term, fixed-price steel purchase contracts. The Company generally does
not enter into sales contracts without escalation provisions with its steel
processing customers with terms longer than three months.
As steel producers change the effective selling price for the Company's raw
materials, competitive conditions may influence the amount of the change, if
any, in the Company's selling prices to its customers. Changing steel prices
could therefore affect the Company's net sales and net income, particularly as
it liquidates its inventory position. The Company believes that a major
portion of the effect of a steel price change on net income is likely to be
experienced within three months of the effective date of the change. When a
series of changes in steel prices occurs, the period in which net income may
be affected can extend beyond a three-month period of time. Accordingly, the
Company believes that comparisons of its quarterly results of operations are
not necessarily meaningful in periods of changing steel prices.
Steel prices charged by the primary producers of hot rolled steel coils, both
domestic and foreign, have been extremely volatile over the previous three
years, and conditions exist which could cause this volatility to continue
during 1999. No assurance can be given that volatility in steel prices will
not again negatively impact the Company's results of operations and net
income.
Competition:
The principal markets served by the Company are highly competitive. The
Company has different competitors within each of its product lines.
Competition is based principally on price, service, production and delivery
scheduling. Further, new competition is expected in the sale of cold rolled
and pickled products as new pickling and/or cold rolling capacity is added by
Nucor in Hickman, Arkansas, and by Worthington Industries, Steel Technologies
(through its Mi-Tech joint venture) and Trico in Decatur, Alabama.
Cyclical demand for Company products:
Many of the Company's steel processing products are sold to industries that
experience significant fluctuations in demand based on economic conditions,
energy prices or other matters beyond the control of the Company. The Company
has increased the level of tons of steel sold and processed in each of its
last five fiscal years. However, no assurance can be given that the Company
will be able to increase or maintain its level of tons shipped, especially in
periods of economic stagnation or downturn.
Liquidity:
The Company's liquidity can be significantly impacted by domestic and global
competitive conditions surrounding raw material inventory supply and sourcing
issues for steel purchases. The Company's investment in raw material
inventories is substantially lower when it is able to obtain sufficient
quantities of hot rolled steel coils at competitive prices from domestic
sources. Greater lead times are typically required to place orders and
receive shipment from foreign concerns than from the Company's domestic
suppliers. During such times of higher import requirements, the Company is
faced with committing a greater amount of its liquidity to its inventory.
This greater commitment of liquidity to inventory can act to limit the
Company's ability to negotiate and realize the benefits of quick pay discounts
from its vendors, as it negotiates terms on such purchases in view of staying
in compliance with its long-term debt and revolving credit financing
commitments.
The need to invest greater amounts of the Company's liquidity into raw
material inventories is oftentimes necessary when offshore supply sources
offer more competitive pricing and/or payment structures than are available
domestically. Recent global and domestic economic and competitive conditions
compelled the Company to source a greater portion of its raw material supply
needs via imports.
Interest rates:
Borrowings under the Company's revolving credit agreement are at interest
rates that float generally with the prime rate or with LIBOR. The level of
interest expense incurred by the Company under the revolving credit agreement
will therefore fluctuate in line with changes in these rates of interest and
based upon outstanding borrowings under the revolving credit agreement.
Year 2000 Compliance:
The Company has utilized software and related computer technologies essential
to its operations and to certain products that use two digits rather than four
to specify the year, which could result in a date recognition problem with the
transition to the "Year 2000". The Company has established a plan, utilizing
internal resources, to assess the potential impact of Year 2000 on the
Company's systems and operations and to implement solutions to address this
issue.
The Company is nearing completion of the assessment phase of its Year 2000
plan, which in addition to the assessment of its own systems and operations
includes surveying the Company's primary suppliers, vendors and service
providers for Year 2000 compliance. The Company expects to complete its
assessment phase by March 31, 1999.
The Company's remediation plan includes a combination of repair and
replacement of affected systems. For substantially all of the Company's
internal systems, this remediation is an incidental consequence of the
implementation of a new integrated core business system, which has been
installed at all of the Company's steel processing facilities. The Company
expects its remediation phase, including testing, to be completed by June 30,
1999. As such, all critical internal Company systems should be Year 2000
compliant by June 30, 1999.
The cost of implementation of the new integrated core business system is
approximately $.7 million, which amount was incurred by the Company through
December 31, 1998. The Company cannot quantify how much of this amount was
directly related to Year 2000 compliance matters. Similarly, the Company is
not in a position to quantify the amount remaining to be spent on Year 2000
concerns, although it anticipates that the direct costs to be incurred in
addressing its remaining internal Year 2000 issues will not exceed $.2
million.
The Company is dependent upon various third parties, including certain product
suppliers, to conduct its business operations. The failure of mission-
critical third parties to achieve Year 2000 compliance could have a material
adverse effect on the Company's operations. The Company is diligently
quantifying issues and developing contingency sources to mitigate the risks
associated with interruptions in its supply chain due to Year 2000 problems.
The bulk of the Company's primary steel suppliers have Year 2000 projects in
process, and the Company will continue to monitor their progress on a
quarterly basis. The Company also continues to monitor its available inbound
and outbound shipping suppliers concerning their ability to provide
uninterrupted service in light of Year 2000 exposures.
The Company is reviewing its building and utility systems (electrical, heat,
water, telephones, etc.) for the impact of Year 2000. Many of such systems
are currently Year 2000 compliant. While the Company is diligently working
with these service providers, and has no reason to expect that they will not
meet their requirements for Year 2000 compliance, there is no assurance that
these suppliers will in fact meet the Company's requirements. A failure by
any of these suppliers to adequately or timely address Year 2000 concerns
could conceivably cause a shutdown of one or more of the Company's facilities,
thereby potentially impacting the Company's ability to meet its delivery
obligations to customers.
As an important supplier of processed steel products, a significant Year 2000
risk of the Company is the potential for shutting down production at one of
its customer's facilities. While lost revenues from such an event are a
concern, the greater risks are the consequential damages for which the Company
could be liable if it were to be found responsible for the shutdown of a
customer facility. Such a finding could have a material impact on the
Company's operating results.
The most likely way in which the Company could shut down a customer's
production is by being unable to supply material or parts to that customer.
The material supplied by the Company in many cases is an integral component of
the end products that the customer produces. Breakdowns caused by Year 2000
exposures could conceivably prevent the Company from processing and shipping
customer orders.
Although the Company has not yet developed a contingency plan in the event of
a failure caused by a supplier or third party, it will do so if and when a
specific problem is identified. The Company does, however, intend to develop
contingency plans during the third quarter of 1999 in the event its systems or
its mission critical vendors do not, or are not envisioned to, achieve Year
2000 compliance. In some cases, however, especially with respect to
utilities, there may be no viable alternative source under which the Company
can develop a workable contingency scenario.
Nevertheless, the Company believes the steps it has completed and plans to
take will serve to minimize the risks and cost of Year 2000 compliance. There
can be no assurance, however, that the Company will not experience
unanticipated costs and/or business interruptions due to Year 2000 problems in
its internal systems, its supply chain, or from customer product migration
issues.
RESULTS OF OPERATIONS:
- ---------------------
On October 23, 1997, the Company announced that it had determined to change
its fiscal year end from April 30 to a calendar year. As a result, the
Company reported an eight-month transition period ending December 31, 1997, in
order to change to this new calendar year end. The following table sets forth
comparative consolidated statements of operations for both the years ended
December 31, 1998 ("1998") and 1997 ("1997"), as well as for the eight month
transition period ended December 31, 1997 ("TP97" or "transition period") and
the corresponding period in 1996 ("TP96"):
<TABLE>
<CAPTION>
Consolidated Statements of Operations for the
---------------------------------------------
Year ended Eight months
December 31, ended December 31,
1998 1997 1997 1996
(audited) (unaudited) (audited) (unaudited)
--------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $391,181 $366,553 $246,324 $206,334
Cost of sales 369,864 337,574 227,871 184,751
------- ------- ------- -------
Gross profit 21,317 28,979 18,453 21,583
Selling, general and
administrative expenses 19,939 17,060 11,757 10,082
------- ------- ------- -------
Income from operations 1,378 11,919 6,696 11,501
Interest, net (8,113) (7,550) (5,194) (3,883)
------- ------- ------- -------
Income (loss)
before income taxes (6,735) 4,369 1,502 7,618
Provision (benefit)
for income taxes (2,444) 1,579 486 2,904
------- ------- ------- -------
Net income (loss) (4,291) 2,790 1,016 4,714
Preferred dividends 200 183 133 -
------- ------- ------- -------
Net income (loss) available
for common shareholders $ (4,491) $ 2,607 $ 883 $ 4,714
======= ======= ======= =======
Earnings (loss) per common
share (basic and diluted) $ (.50) $ .29 $ .10 $ .53
===== ===== ===== =====
</TABLE>
1998 (AUDITED) COMPARED TO 1997 (UNAUDITED):
Net sales for 1998 were $391.2 million, an increase of 6.7% over the prior
year's net sales of $366.6 million. The improvement in net sales is
attributable to increased levels of tons processed. The Company processed
1,208,255 tons of steel during 1998, an increase of 10.7% in comparison to
1997. A substantial portion of this tonnage increase occurred at the
Company's new South Carolina facility.
Direct (i.e., non-tolling) sales volume measured in tons shipped increased
12.1% for 1998 versus 1997, the vast majority of which increase occurred in
the first half of 1998. Tolling volume increased 6.1% year over year, but
declined sharply in the last half of 1998. Approximately 22.5% and 23.5% of
the tons processed in the years ended December 31, 1998 and 1997, represented
customer-owned material processed on a per ton, fee basis. Processing
customer-owned material generally results in lower revenues per ton, but
higher gross profit expressed as a percentage of net sales, in comparison to
when the Company processes and sells its own steel inventory. In addition,
the Company sold 261,914 and 216,028 tons of cold rolled products during 1998
and 1997, which rate of increase also slowed considerably in the last half of
1998.
The volume slowdown during the second half of 1998 reflected lower shipping
volumes, primarily at the Company's Blytheville, Arkansas facility, where the
Company experienced a slow-down in its tolling volume, and lower sales levels
for processed hot rolled steel products and cold rolled master coil sales.
Tons shipped from the Blytheville facility can represent up to 50% of the
Company's total shipments. The reduced level of tolling volume at Blytheville
reflects a move to off-shore purchasing by certain of the Company's tolling
customers, who traditionally buy from the Nucor mill at Hickman, Arkansas and
use the Company's Blytheville facility for toll slitting and pickling and
increased competition for toll pickle business.
Also negatively impacting volume levels and the Company's total net sales was
the rapid deterioration in steel prices. An environment of steel price
declines typically encourages delays in purchases by the Company's customers,
as they wait for prices to find their lowest levels before reentering the
market for needed supply. This was especially acute in the markets served by
the Company's cold rolling mill located at its Blytheville facility. Weighted
average per ton selling values declined 6.3% for 1998 versus 1997, with
softness in selling values continuing into 1999.
Gross profit, expressed as a percentage of net sales, declined from 7.9% in
1997 to 5.5% for 1998, primarily reflecting lower steel prices throughout the
year and lower sales and production volumes during the second half of 1998,
especially at the Company's Blytheville facility.
With respect to the Company's Blytheville facility, lower production volume at
the cold rolling operation, combined with an extremely weak pricing
environment for cold rolled products, resulted in a pretax loss of
approximately $2.8 million in the 1998 fourth quarter. The poor market
fundamentals for cold rolled products reflect the high levels of foreign cold
rolled available in the Company's market territories at extremely depressed
prices. Further, the Company's metal stamping and custom slitting and blanking
operations caused pretax losses of approximately $2.5 million in the balance
of the Company's Blytheville operations in the 1998 fourth quarter due to low
pricing and low utilization of equipment.
In addition to the negative results incurred during the fourth quarter at its
Blytheville facility, the Company's Madison facility recognized a pretax loss
of approximately $.7 million during the 1998 fourth quarter relating to the
sale of one of the slitters operated at this plant and liquidation of related
inventory.
Selling, general and administrative ("SG&A") expenses of $19.9 million for
1998 reflect an increase of $2.9 million over the prior year. This increase
is attributable to the higher level of business activity conducted throughout
the Company. SG&A expenses expressed as a percentage of net sales also
increased year over year from 4.7% during 1997 to 5.1% during 1998. Staffing
of the Company's operations for anticipated higher business activity levels,
versus the lower selling value and volume levels experienced contributed to
this percentage increase.
Income from operations was $1.4 million in 1998, a decrease of $10.5 million
from 1997's income from operations of $11.9 million. This decrease reflects
the factors discussed in the preceding paragraphs.
Net interest expense of $8.1 million was incurred during 1998, an increase of
$.6 million over the prior year. This increase was the result of generally
higher 1998 borrowings to support higher working capital levels, as well as
lower capitalized interest during 1998 versus 1997, as substantially all of
the Company's capital projects have been placed into service. The Company
capitalized $1.2 million of interest costs to construction in progress in
1998, versus $1.4 million for 1997.
The effective income tax (benefit) rates experienced by the Company were
(36.3)% and 36.1% for 1998 and 1997, respectively. These rates reflect the
impact of non-deductible expenses, such as goodwill amortization, as well as
the recognition of certain state income tax benefits during both years.
The Company incurred a net loss for common shareholders of $4.5 million, or
$(.50) per share both basic and diluted, for 1998. During 1997, the Company
generated net income available for common shareholders of $2.6 million, or
$.29 per share both basic and diluted. These decreases reflect the factors
discussed in the preceding paragraphs.
TRANSITION PERIOD -- EIGHT MONTHS ENDED DECEMBER 31, 1997 (AUDITED)
COMPARED TO EIGHT MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED):
Net sales for the transition period were $246.3 million, an increase of 19.4%
over the TP96's net sales of $206.3 million. The improvement in net sales was
primarily attributable to increased levels of tons processed. The Company
processed 744,468 tons of steel during the transition period; an increase of
23.3% in comparison to the eight months ended December 31, 1996. A
substantial portion of this tonnage increase occurred at the Company's
Blytheville facility (both processing and cold rolled sales), and at its new
South Carolina facility.
Approximately 24.5% of the tons processed during the transition period
represented customer-owned material processed on a per ton, fee basis. For
the eight months ended December 31, 1996, approximately 22.3% of the tons
processed by the Company represented customer-owned material.
Reflecting lower cost material available in the Company's markets during TP97,
average per ton selling values declined approximately 2.7% for the transition
period, as compared to TP96.
The Company's gross profit margins came under pressure late in TP96, and this
margin pressure extended into and throughout TP97. The narrowing of gross
profit margins was partially attributable to higher domestic prices incurred
by the Company for its primary raw material, hot rolled steel coils, as
significant quantities of lower priced imported material became available in
its market territories. Gross profit was also negatively impacted during TP97
due to production inefficiencies realized by the Company at its recently
relocated stamping operation, as well as additional costs incurred in
conjunction with the ramp-up of the Company's newly expanded cold rolling
capacity. As a result of these gross margin pressures, gross profit expressed
as a percentage of net sales dropped to 7.5% for TP97, versus 10.5% for TP96.
SG&A expenses of $11.8 million for the transition period reflect an increase
of $1.7 million over TP96. However, the Company's SG&A expenses expressed as
a percentage of net sales remained relatively steady. During TP97, SG&A
expenses expressed as a percentage of net sales decreased only .1% from the
4.9% of net sales figure realized for the eight months ended December 31,
1996. The increase in SG&A expenses was attributable to the higher level of
business activity conducted throughout the Company, inclusive of the new
Gallatin County, Kentucky and Berkeley County, South Carolina facilities.
Income from operations was $6.7 million in the transition period, a decrease
of $4.8 million from TP96's income from operations of $11.5 million. This
decrease reflects the factors discussed in the preceding paragraphs.
Net interest expense of $5.2 million was incurred during TP97, an increase of
$1.3 million over TP96. This increase was the result of higher transition
period borrowings on the Company's revolving credit facility to support higher
working capital levels, as well as lower amounts of capitalized interest. The
Company capitalized $.8 million of interest costs to construction in progress
during the transition period, versus $.9 million for the eight months ended
December 31, 1996.
The effective income tax rate experienced by the Company was 32.4% during the
transition period, which is lower than the 38.1% rate recognized by the
Company during TP96, due to certain state income tax benefits recorded by the
Company during the transition period.
Net income available for common shareholders for the transition period was $.9
million, or $.10 per share, which amounts decreased from net income available
for common shareholders for the eight months ended December 31, 1996 of $4.7
million, or $.53 per share. These decreases reflect the factors discussed in
the preceding paragraphs, as well as the accrual of preferred dividends of $.1
million during the transition period, related to preferred stock issued
subsequent to the end of TP96.
FISCAL YEAR ENDED APRIL 30, 1997 ("FY97") COMPARED TO FISCAL YEAR ENDED
APRIL 30, 1996 ("FY96"):
Net sales for FY97 were $326.6 million, an increase of 23.7% over the prior
year's net sales of $264.1 million. The improvement in net sales was
attributable to increased levels of tons processed. The Company processed a
record 941,545 tons of steel in FY97, an increase of 22.0% in comparison to
FY96. A substantial portion of this tonnage increase related to the sale of
cold rolled products, which sales volume increased 98.4% over the prior year
to 181,313 cold rolled tons for FY97. This increase was somewhat tempered by
lower sales prices, as average per ton selling values declined approximately
0.7% when comparing FY97 to FY96.
Approximately 22.2% of the tons processed during FY97 represented customer-
owned material processed on a per ton, fee basis, versus approximately 23.9%
during FY96.
The Company's gross profit margins came under pressure late in the second
quarter of FY97, and this margin pressure extended through the balance of the
fiscal year. The narrowing of gross profit margins during the second half of
FY97 was primarily due to higher domestic prices incurred by the Company for
its primary raw material, hot rolled steel coils, as significant quantities of
lower priced imported material became available in its market territories.
Gross profit margins were also negatively impacted during FY97 due to costs
stemming from the start-up of the Company's new plants, primarily the
relocated Blytheville stamping operation and the new Kentucky and South
Carolina facilities. In addition, shipments declined during the Company's
third quarter of FY97 as Coil-Tec, Inc. liquidated a substantial amount of
hot-rolled steel inventory in the Company's market territories prior to the
sale of certain of its operating assets to the Company on January 30, 1997.
This volume decline served to reduce the absorption of fixed manufacturing
costs during the third quarter of FY97, contributing to lower gross profit
margins realized by the Company.
Despite these gross margin pressures, gross profit expressed as a percentage
of net sales increased to 9.8% for FY97, versus 6.9% for FY96. However, the
improvement in the Company's gross profit percentage was attributable to a
very low gross profit percentage in FY96 caused primarily by declining steel
prices and start-up expenses related to the Company's cold rolling mill.
SG&A expenses of $15.4 million for FY97 reflect an increase of $2.2 million
over the prior year. However, SG&A expenses declined as a percentage of net
sales from 5.0% during FY96 to 4.7% of net sales during FY97. The increase in
SG&A expenses was attributable to the higher level of business activity
conducted throughout the Company, inclusive of its new facilities.
Income from operations was $16.7 million in FY97, an increase of $11.6 million
over FY96's income from operations of $5.1 million. This increase reflects
the factors discussed in the preceding paragraphs.
Net interest expense of $6.2 million was incurred during FY97, an increase of
$2.9 million over the prior year. This increase was the result of higher FY97
borrowings on the Company's revolving credit facility in order to support
higher working capital levels, as well as lower capitalized interest during
FY97 versus FY96, as the Company's largest capital projects (e.g., the cold
rolling operation) were placed into service during FY96. As a result, the
Company capitalized $1.2 million of interest costs to construction in progress
in FY97, versus $2.1 million for FY96.
The effective income tax rate experienced by the Company was 38.1% during
FY97, which compared to a rate of 38.8% during the prior year. The decrease
in the effective rate reflects the impact of non-deductible expenses, such as
goodwill amortization, which have a lesser percentage impact upon the
Company's effective income tax rate at higher levels of taxable income.
Net income available for common shareholders for FY97 was $6.4 million, or
$.72 per share, which amounts increased over net income available for common
shareholders for FY96 of $1.1 million, or $.12 per share. These increases
reflect the factors discussed in the preceding paragraphs.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Investment in steel coil inventories and the associated payment terms offered
by vendors materially influence the Company's liquidity. Inventory levels can
be heavily influenced by the source of the Company's raw material supply. Use
of imported steel typically requires the Company to maintain higher levels of
inventory. Receipt of imported steel is normally by large ocean-going vessel,
with longer lead times required and less predictable delivery schedules for
such bulk import orders, as compared to the procurement process faced when
purchasing steel coils from domestic producing mills. In addition, the timing
of receipt of imported steel coils can significantly impact the balance of the
Company's inventories on any given day.
For a number of years, steel imports into the United States have been on the
rise. During 1998, steel imports in the United States surged in the wake of
the Asian economic crisis. In January 1999, the U.S. Commerce Department
found evidence that Japan, Russia, and Brazil illegally dumped hot rolled
carbon steel into the U.S. market at prices dramatically below production
costs. These trade cases demonstrate that flat rolled steel coils have become
increasingly available in the Company's market territories, much of it being
offered at substantial discounts to similar product offered by the Company's
domestic supply base.
In an effort to stay competitive from a raw material pricing perspective, the
Company shifted a major portion of its steel purchases to imported coils. Due
to the use of imported coils and the resultant increase in inventory, the
Company extended payment terms, primarily from its import vendors, and elected
to forego quick pay discounts on its domestic inventory purchases. As a
result, the Company's investment in inventories and balance of accounts
payable increased $10.6 million and $16.9 million, respectively, during 1998.
As of December 31, 1998, the Company also held approximately $25.9 million of
vendor-owned steel coil inventory on a consignment basis for use in its steel
processing and sales activities.
The Company has witnessed the tendency of its suppliers to price their steel
coil offerings without regard for the inflationary or deflationary impact of
such pricing policies on their customers' inventory positions. Rather, steel
coil price offerings have been based primarily on the level of supplier
backlog. A supplier's offered price can be significantly influenced by
outside economic pressures, such as those faced by the economic slowdown in
the Far East. These external pressures have resulted in greater steel
offerings to purchasers in the United States; including the Company, its
competitors, and to a lesser extent certain of its steel service center
customers.
The Company expects that its inventories will peak near the end of the first
quarter of 1999. The Company is focused on increasing inventory turns, and is
concentrating efforts to better manage inventory levels. In order to limit
the Company's exposure to rapid inventory price inflationary and deflationary
pressures, the Company intends to reduce its steel coil inventory holdings and
maintain these lower levels consistent with sound business practice. The
Company is striving to decrease on- hand and on-order inventory positions, and
believes it can do so through the many supply channels developed over the past
few years.
In terms of other consequential working capital items, the Company's
investment in accounts receivable is typically lowest at December 31, versus
that of its interim quarter ends of March, June and September or that of its
former April 30 year end. The business activity level of the Company is
typically slower during the months of November and December, when there are
less business shipping days due to the holidays occurring during these months.
As a result, the monthly sales levels preceding the Company's interim quarter
ends, as well as its former April 30 year end, is typically higher than
compared to December 31, due to the seasonal nature of its late fourth quarter
sales activity. The $4.8 million decrease in accounts receivable for the
transition period follows this seasonality. Otherwise, accounts receivable
increased in each of the years ended December 31, 1998, April 30, 1997 and
1996, consistent with the Company's sales growth.
The Company generated $8.8 million, $.1 million, and $29.9 million of cash
from operating activities during 1998, the transition period, and FY96; which
compares to net cash used by operations of $4.5 million for FY97. During 1998
and FY97, the Company was able to fund much if not all of its increased
inventory with increases in accounts payable. The transition period saw the
reverse with a decrease in inventory providing the liquidity to reduce the
Company's accounts payable balance. FY96 also saw a large reduction in the
Company's investment in raw materials as the Company sought to reduce its
exposure to raw material price changes by maintaining a relatively lower
balance of domestically supplied steel coils.
The Company invested $6.7 million, $10.0 million, $28.1 million, and $34.2
million of cash during 1998, TP97, FY97, and FY96, respectively, in new
property, plant and equipment. The Company has now completed the physical
expansion that began with its initial public offering in 1993. The Company
sustained these efforts primarily by way of increased corporate borrowings.
The Company also issued its $4.5 million of Series A Preferred Stock on
January 30, 1997 to the shareholder of Coil-Tec in exchange for certain of its
assets. The Company does not contemplate any further significant level of
capital additions over the course of the next twelve months.
During 1998, capital spending was concentrated on the Company's second coil
pickling line and improvements to the cold rolling mill; both located in
Blytheville, Arkansas, as well as the acquisition and installation of a heavy
gauge cut-to-length line for the Pasadena, Texas facility. Construction of
the Company's new facility in South Carolina, the acquisition of certain steel
processing equipment from Coil-Tec, Inc. on January 30, 1997 and costs related
to the Company's second coil pickling line were the principal property
additions attributable to TP97 and FY97. Completion of the cold rolling
facility was the primary capital-spending item for FY96.
On March 24, 1998, the Company amended its primary long-term debt agreements
to provide these lenders with security interests in the accounts receivable,
inventory and selected fixed assets of the Company. The maximum amount of
corporate borrowings is now based upon, among other things, percentages of
eligible accounts receivable, inventory and selected fixed assets of the
Company.
The Company's primary long-term debt agreements require the maintenance of
various financial covenants and ratios. The Company was in compliance, or had
obtained waivers of such non-compliance, with the financial covenants and
ratios required by these agreements as of December 31, 1998. Within these
arrangements, the Company agreed to limit its long-term debt, inclusive of
current maturities (i.e., "funded debt"), to no more than 50% of total
capitalization (i.e., the sum of the Company's funded debt and total
shareholders' equity)(the "leverage covenant"). As of December 31, 1998, the
ratio of funded debt to total capitalization was 48.7%. Accordingly, as of
December 31, 1998 the Company had unused borrowing capacity of $5.7 million
under its leverage covenant.
Beyond the leverage covenant at December 31, 1998, the Company had unused
borrowing capacity of an additional $14.7 million under its $80.0 million
revolving credit facility. In order to access this liquidity, the Company is
negotiating a new asset-based revolving credit agreement (the "new revolver")
that is not expected to contain a leverage covenant. The Company is also
negotiating with the holders of its $50.0 million 8.13% term notes (the "1995
Notes") to accept a relaxed leverage covenant to allow access to this
liquidity.
The new revolver is expected to provide the Company with up to $90.0 million
in credit at rates generally equivalent to those being incurred under the
current lending arrangement. The new revolver should be in place on or around
March 31, 1999 for a term of three years; and will be secured by accounts
receivable, inventory and selected fixed assets of the Company. The new
revolver is also expected to provide funds for the scheduled amortization of
the Company's payment obligations under the 1995 Notes. The 1995 Notes mature
in equal annual installments of $7.1 million on each July 15, 1999-2005. With
a heightened focus on working capital management and the additional
availability expected from its long-term debt refinancings, the Company once
again would like to take advantage of quick pay discounts on its steel coil
inventory purchases.
The Company has also accessed capital by way of off balance sheet financing
arrangements. As described above, the Company has recently taken advantage of
vendor-owned steel inventory consignment for its raw material needs, primarily
from import sources. The Company has also entered into various operating
leases with domestic commercial lenders for steel processing and other
equipment at certain of its facilities. The Company also entered into an
operating lease on January 30, 1997, in order to obtain use of Coil-Tec's
former plant facility in Blytheville. Annual operating lease payments are
expected to range between $3.8 million and $4.4 million over the next five
years.
During 1998 and the transition period, the Company paid dividends of $.9
million on its Class A and Class B common stock ("common stock"). The Company
paid dividends on its common stock of $1.2 million and $1.0 million during the
years ended April 30, 1997 and 1996, respectively.
The Company continued its practice of declaring and paying a quarterly common
dividend of 3.5 cents per share in the first quarter of 1999. The Company
evaluates business conditions each quarter and makes a determination regarding
declaration of dividends at such time. The Company could decide to eliminate
dividend payments in any future quarter, or series of quarters, if liquidity
does not improve or if better uses of liquidity are available. Further, if
business conditions improve and the Company's Class A common stock price
continues to trade at a substantial discount to book value, then the Company
may implement a stock repurchase program in lieu of continuing periodic
declarations of common dividends.
The Company's cash position, unused borrowing capacity expected under its new
revolver, and cash anticipated to be generated from operations is expected to
be sufficient to meet its commitments in terms of working capital growth, debt
service, capital expenditures and the payment of dividends on the outstanding
shares of Series A preferred stock and Class A and Class B common stock during
1999, although the Company's ability to pay dividends may be tied to
compliance with the terms of its new revolver.
The Company maintains the flexibility to issue additional equity in the form
of Class A common stock or additional series of preferred stock junior to the
Series A preferred stock if and when market circumstances should ever dictate.
The Company, from time-to-time, explores financing alternatives such as
increasing its borrowing capacity on its revolving credit facility, the
possibility of issuing additional long-term debt, or pursuing further
operating lease financing for new business expansions. The Company also
continues to evaluate its business with the intent to streamline operations,
improve productivity and reduce costs.
QUARTERLY EFFECTS AND SEASONALITY:
- ---------------------------------
Shipping volumes are lowest during the November and December holiday periods
and also tend to be lower during mid-summer, as many of the Company's
customers schedule plant shutdowns for vacations. These factors tend to
result in lower net sales and net income during these time periods. Quarterly
results can also be affected, either negatively or positively, by changing
steel prices, as described previously herein.
INFLATION:
- ---------
The Company's operations have not been, nor are expected to be, materially
affected by inflation. However, the Company is affected by changes in the
price of steel charged by the primary producers, which are not considered to
be inflation-sensitive, but rather sensitive to changes in steel demand as the
primary producers use pricing policy to attempt to control their order levels
and backlog.
NEW ACCOUNTING STANDARDS:
- ------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133), which establishes accounting and reporting
standards for derivative instruments as well as for hedging activities. FAS
133 requires the recognition of all derivatives (both assets and liabilities)
in an entity's balance sheet to be measured at fair value. The Company does
not anticipate that FAS 133, which is first effective for the Company's third
quarter of 1999, will significantly impact the Company's financial reporting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
In the ordinary course of business, the Company is exposed to interest rate
risks by way of changes in short-term interest rates. The Company does not
have any significant amount of export sales denominated in foreign currencies,
and acquires its raw material supply needs in U.S. dollar denominated
transactions. Therefore, the Company is not viewed as being exposed to
foreign currency fluctuation market risks. In addition, although the Company
both acquires and sells carbon steel coils and products, no commodity exchange
exists that the Company might access to hedge its risk to carbon steel price
fluctuations.
The Company has no material derivative financial instruments as of December
31, 1998, and does not enter into derivative financial instruments for trading
purposes. Market risks that the Company has currently elected not to hedge
primarily relate to its floating rate debt.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
HUNTCO INC.
CONSOLIDATED BALANCE SHEET
(amounts in thousands)
<TABLE>
<CAPTION>
December 31, April 30,
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 21 $ 27 $ 1,124
Accounts receivable, net 43,579 41,643 46,452
Inventories 92,240 81,612 105,569
Other current assets 2,914 5,015 3,983
------- ------- -------
138,754 128,297 157,128
Property, plant and equipment, net 143,401 145,777 141,436
Other assets 11,076 11,191 8,754
------- ------- -------
$293,231 $285,265 $307,318
======= ======= =======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 56,923 $ 40,027 $ 72,569
Accrued expenses 3,451 3,879 4,868
Current maturities of long-term debt 7,352 209 189
------- ------- -------
67,726 44,115 77,626
------- ------- -------
Long-term debt 102,555 110,730 100,877
Deferred income taxes 7,376 9,415 7,754
------- ------- -------
109,931 120,145 108,631
------- ------- -------
Commitments and contingencies (see Note 8) - - -
Shareholders' equity:
Series A preferred stock
(stated at liquidation value) 4,500 4,500 4,500
Common stock:
Class A (issued and outstanding, 5,292) 53 53 53
Class B (issued and outstanding, 3,650) 37 37 37
Additional paid-in-capital 86,530 86,530 86,530
Retained earnings 24,454 29,885 29,941
------- ------- -------
115,574 121,005 121,061
------- ------- -------
$293,231 $285,265 $307,318
======= ======= =======
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, December 31, Year Ended April 30,
1998 1997 1997 1996
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Net sales $391,181 $246,324 $326,563 $264,087
Cost of sales 369,864 227,871 294,455 245,863
------- ------- ------- -------
Gross profit 21,317 18,453 32,108 18,224
Selling, general and
administrative expenses 19,939 11,757 15,383 13,147
------- ------- ------- -------
Income from operations 1,378 6,696 16,725 5,077
Interest, net (8,113) (5,194) (6,239) (3,268)
------- ------- ------- -------
Income (loss)
before income taxes (6,735) 1,502 10,486 1,809
Provision (benefit)
for income taxes (2,444) 486 3,997 701
------- ------- ------- -------
Net income (loss) (4,291) 1,016 6,489 1,108
Preferred dividends 200 133 50 -
------- ------- ------- -------
Net income (loss) available
for common shareholders $(4,491) $ 883 $ 6,439 $ 1,108
======= ======= ======= =======
Earnings (loss) per common
share: (basic and diluted) $(.50) $ .10 $ .72 $ .12
===== ===== ===== =====
Weighted average
common shares outstanding:
Basic 8,942 8,942 8,942 8,942
===== ===== ===== =====
Diluted 8,942 8,951 8,942 8,948
===== ===== ===== =====
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(amounts in thousands)
<TABLE>
<CAPTION>
Eight months
Year ended ended Year ended
December 31, December 31, April 30,
1998 1997 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Series A preferred stock
Balance at beginning of period $ 4,500 $ 4,500 $ - $ -
January 30, 1997 share issuance - - 4,500 -
------ ------ ------ ------
Balance at end of period $ 4,500 $ 4,500 $ 4,500 $ -
====== ====== ====== ======
Class A common stock
Balance at beginning of period $ 53 $ 53 $ 53 $ 53
------ ------ ------ ------
Balance at end of period $ 53 $ 53 $ 53 $ 53
====== ====== ====== ======
Class B common stock
Balance at beginning of period $ 37 $ 37 $ 37 $ 37
------ ------ ------ ------
Balance at end of period $ 37 $ 37 $ 37 $ 37
====== ====== ====== ======
Additional paid-in-capital
Balance at beginning of period $86,530 $86,530 $86,567 $86,533
Other changes - - (37) 34
------ ------ ------ ------
Balance at end of period $86,530 $86,530 $86,530 $86,567
====== ====== ====== ======
Retained earnings
Balance at beginning of period $29,885 $29,941 $24,709 $24,629
Net income (loss) (4,291) 1,016 6,489 1,108
Dividends on:
Common stock (940) (939) (1,207) (1,028)
Series A preferred stock (200) (133) (50) -
------ ------ ------ ------
Balance at end of period $24,454 $29,885 $29,941 $24,709
====== ====== ====== ======
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Year Eight months
ended ended Year ended
December 31, December 31, April 30,
1998 1997 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,291) $ 1,016 $ 6,489 $ 1,108
------- ------- ------- -------
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 10,265 6,018 8,225 6,561
Other (65) 50 (675) (5)
Decrease (increase) in:
accounts receivable (1,936) 4,809 (9,648) (7,662)
inventories (10,628) 23,957 (51,605) 23,762
other current assets 2,101 (1,032) (2,057) (961)
other assets (1,049) (2,837) (2,632) (910)
Increase (decrease) in:
accounts payable 16,896 (32,542) 43,566 3,485
accrued expenses (428) (989) 934 2,470
non-current deferred taxes (2,039) 1,661 2,875 2,091
------- ------- ------- -------
Total adjustments 13,117 (905) (11,017) 28,831
------- ------- ------- -------
Net cash provided (used) by operations 8,826 111 (4,528) 29,939
------- ------- ------- -------
Cash flows from investing activities:
Acquisition of property,
plant and equipment, net (6,661) (10,008) (28,102) (34,153)
------- ------- ------- -------
Net cash used by investing activities (6,661) (10,008) (28,102) (34,153)
------- ------- ------- -------
Cash flows from financing activities:
Issuance of Series A preferred stock - - 4,500 -
Net proceeds from newly-issued debt 978 10,000 28,000 50,000
Net payments on long-term debt (2,010) (128) (189) (45,621)
Common stock dividends (939) (939) (1,207) (1,028)
Preferred stock dividends (200) (133) (50) -
Other - - (37) 34
------- ------- ------- -------
Net cash provided
(used) by financing activities (2,171) 8,800 31,017 3,385
------- ------- ------- -------
Net decrease in cash (6) (1,097) (1,613) (829)
Cash, beginning of period 27 1,124 2,737 3,566
------- ------- ------- -------
Cash, end of period $ 21 $ 27 $ 1,124 $ 2,737
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
-----------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The policies utilized by the Company in the preparation of the financial
statements conform to generally accepted accounting principles. Management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates. The significant accounting
policies followed by the Company are described below:
Change in fiscal year end:
On October 23, 1997, the Company filed a Form 8-K announcing that it had
determined to change its fiscal year end from April 30 to a calendar year. As
a result, the Company reported an eight-month transition period ending
December 31, 1997, in order to change to its new calendar year end.
Organization and operations:
Huntco Inc. ("Huntco" or "the Company") conducts its operations through its
wholly-owned subsidiaries Huntco Steel, Inc. ("Huntco Steel") and Midwest
Products, Inc. ("Midwest"). Huntco Steel operates seven steel processing
centers specializing in the processing and distribution of flat rolled carbon
steel, and sells its processed steel products to a diverse group of industrial
customers, steel service centers and distributors. Midwest is principally
engaged in the manufacture of compressed air cylinders used in the
transportation industry and sold through mass merchandisers.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Revenue recognition:
Revenue from the sale of processed steel and compressed air cylinders is
recognized upon shipment to the customer. Costs and related expenses to
process steel and manufacture compressed air cylinders are recorded as cost of
sales when the related revenue is recognized. Sales returns and allowances
are treated as reductions to net sales.
Cash and cash equivalents:
For purposes of the consolidated statement of cash flows, the Company
considers cash on hand and demand deposits with financial institutions with an
original maturity of three months or less to be cash.
Concentration of credit risk:
Huntco Steel sells its products to a wide variety of customers, including
steel service centers and distributors, general fabricators and stampers,
manufacturers of consumer durables, tank manufacturers and energy-related
users, primarily in the midwestern and southern regions of the United States.
Midwest sells its compressed air cylinders to customers in the transportation
industry, to compressor manufacturers, as well as through mass merchandisers.
Concentration of credit risk with respect to trade receivables is limited due
to the size of the customer base and its dispersion. The Company performs on-
going credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and
such losses have been within management's expectations. As of December 31,
1998 and 1997, and April 30, 1997, the Company's allowance for doubtful
accounts balance was $530, $333, and $544, respectively.
Relationships with suppliers:
The Company procures raw materials from numerous primary steel producers.
Management believes it is not dependent on any one of its suppliers for raw
materials and that its relationships therewith are strong.
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
using the specific identification method for steel processing inventories and
on a first-in, first-out (FIFO) basis for its compressed air cylinder
products.
Property, plant and equipment:
Property, plant and equipment is recorded at cost and is depreciated using the
straight-line method over the estimated useful lives of the respective
property, ranging from three to thirty years. Expenditures for repairs,
maintenance and renewals are charged to income as incurred. Expenditures that
improve an asset or extend its useful life are capitalized. When properties
are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is included in
income.
Leases meeting the criteria of a capital lease are recorded at the present
value of the non-cancelable lease payments over the term of the lease.
Properties held under capital leases are amortized over the estimated useful
lives of the assets, ranging from five to twenty years. The interest portion
of the respective capital lease payment is charged to operations.
Environmental policy:
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated. The Company has not been notified by regulatory
authorities of non-compliance with any federal, state or local environmental
law or regulation, nor is the Company aware of any such non-compliance.
Income taxes:
Deferred income taxes are accounted for under the liability method, whereby
deferred tax assets and liabilities are recognized based upon temporary
differences between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
Earnings per common share:
Earnings per common share is computed by dividing net income (loss) available
for common shareholders by the weighted average number of common shares
outstanding for basic earnings per common share, and by the weighted average
number of common shares and share equivalents outstanding during the period
for diluted earnings per common share.
New accounting standards:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130), which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. Adoption of FAS 130 did not
significantly impact the Company's financial reporting.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131), which requires public entities
to report information about operating segments in annual financial statements
and requires that selected information about operating segments be reported in
interim financial reports issued to shareholders. Adoption of FAS 131 did not
significantly impact the Company's financial reporting.
2. INVENTORIES
Inventories consisted of the following as of:
<TABLE>
<CAPTION>
December 31, April 30,
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
Raw materials $ 66,063 $ 55,991 $ 84,046
Finished goods 26,177 25,621 21,523
-------- -------- --------
$ 92,240 $ 81,612 $105,569
======== ======== ========
</TABLE>
The Company's investment in finished goods includes cold rolled steel coils
produced at the Company's Blytheville, Arkansas facility. These cold rolled
coils can either be sold as master coils, without further processing, or may
be slit, blanked or cut-to-length by the Company prior to final sale.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of the dates
presented:
<TABLE>
<CAPTION>
December 31, April 30,
1998 1997 1997
------ ------- --------
<S> <C> <C> <C>
Land and improvements $ 5,032 $ 3,664 $ 3,730
Buildings and improvements 62,632 58,930 55,525
Machinery and equipment 112,815 96,925 94,603
-------- -------- --------
180,479 159,519 153,858
Less accumulated depreciation 37,395 28,870 23,499
-------- -------- --------
143,084 130,649 130,359
Construction in progress 317 15,128 11,077
-------- -------- --------
$143,401 $145,777 $141,436
======== ======== ========
</TABLE>
4. LONG-TERM DEBT
The Company's long-term debt includes $50,000 of term notes (the "Notes")
issued to a group of domestic commercial lenders. The Notes bear interest at
the fixed rate per annum of 8.13%, with interest payable semiannually each
January 15 and July 15, and mature in equal annual installments of $7,143 on
each July 15, 1999 - 2005.
The balance of long-term debt primarily consists of amounts outstanding under
a revolving credit agreement entered into with a group of domestic commercial
banks (the "bank revolver"). The bank revolver provides for borrowings and
issuances of letters of credit in amounts totaling up to $80,000 until
termination on October 31, 1999. The bank revolver provides for borrowings at
varying interest rates set either below the prime rate for LIBOR-based loans
or at or slightly above the prime rate for daily revolving credit advances,
payable monthly or at the maturity of any LIBOR-based loans. Under the bank
revolver, compensating balances are not required.
The Notes and the bank revolver both require the maintenance of various
financial covenants and ratios. The Company was in compliance with the
financial covenants and ratios required by the Notes as of December 31, 1998.
The Company was also in compliance, or received necessary waivers for areas of
non-compliance, with the financial covenants and ratios required under the
bank revolver as of December 31, 1998.
The Company agreed in the Notes and under the bank revolver to limit its long-
term debt, inclusive of current maturities (i.e., "funded debt"), to no more
than 50% of total capitalization (i.e., the sum of the Company's funded debt
and total shareholders' equity). As of December 31, 1998, the ratio of funded
debt to total capitalization was 48.7%. Accordingly, the Company had unused
borrowing capacity of $5,667 as of December 31, 1998, in accordance with this
debt covenant.
On March 24, 1998, the Company amended the bank revolver and the agreements
under which the Notes are outstanding to provide these lenders with security
interests in the accounts receivable, inventory and selected fixed assets of
the Company. Effective with these amendments, the maximum amount of
borrowings available to the Company under its bank revolver is based upon
percentages of eligible accounts receivable, inventory and selected fixed
assets, as defined in the amended revolver.
The Company is negotiating a new revolving credit facility with an asset-based
lending institution (the "asset-based revolver"). The asset-based revolver is
expected to provide the Company with up to $90.0 million in credit at rates
generally equivalent to those being incurred under the bank revolver. The
asset-based revolver should be in place on or around March 31, 1999 for a term
of three years or more; and will be secured by the accounts receivable,
inventory and selected fixed assets of the Company. The asset-based revolver
is expected to provide funds for the scheduled amortization of the Company's
payment obligations under the Notes and will be used to refinance the bank
revolver. Given this anticipated refinancing, the $58,500 balance due on the
bank revolver as of December 31, 1998 would become due on or around March 31,
2002, rather than October 31, 1999 as provided under the terms of the bank
revolver. Given the likelihood of a successful conclusion to the Company's
refinancing effort described herein, principal payments due on the Company's
long-term debt for each of the five years following December 31, 1998 will be
as follows:
<TABLE>
<S> <C>
1999 $ 7,352
2000 8,012
2001 7,365
2002 65,749
2003 7,143
Thereafter 14,286
--------
$109,907
========
</TABLE>
Total cash paid for interest during 1998, the eight months ended December 31,
1997, and the years ended April 30, 1997 and 1996 was $9,392, $5,295, $7,552,
and $4,450, respectively. Of the Company's total interest costs, it
capitalized $1,189, $774, $1,244, and $2,091 to construction in progress
during 1998, the eight months ended December 31, 1997, and the years ended
April 30, 1997 and 1996, respectively.
5. Capital stock
The Company is authorized to issue 5,000,000 shares of $.01 per share par
value preferred stock. The Company is also authorized to issue two classes of
common stock, both of which possess a par value of $.01 per share and have
identical rights, preferences and powers, except the Class B common stock is
entitled to ten votes per share.
On January 30, 1997, the Company issued 225,000 shares of its $.01 par value
Series A preferred stock (the "Series A Preferred"). Shares of Series A
Preferred are cumulative and non-voting, and accrue dividends at the annual
rate of $.888889 per share, with such dividends being payable quarterly
beginning March 1, 1997. The Series A Preferred carries a liquidation
preference of $20.00 per share. The Series A Preferred is convertible on a
one-for-one basis into shares of Class A common stock at any time at the
option of the holder, and at the option of the Company under certain
circumstances, including if at any time the closing price of the Class A
common stock is at least $25.00 per share for thirty consecutive trading days.
Under the Company's Restated Articles of Incorporation, authorized but
unissued preferred stock is issuable in series under such terms and conditions
as the Company's Board of Directors may determine. However, no further shares
of Series A Preferred may be issued by the Company. The Company issued all
225,000 shares of Series A Preferred to Coil-Tec, Inc. in connection with the
Company's acquisition of $4,500 of depreciable assets and certain other
operating assets of Coil-Tec, Inc. on January 30, 1997.
The Company is authorized to issue 25,000,000 shares of Class A common stock,
of which 5,292,000 shares were issued as of December 31, 1998 and 1997, and
April 30, 1997. The Company is authorized to issue 10,000,000 shares of Class
B common stock, of which 3,650,000 shares were issued as of December 31, 1998
and 1997, and April 30, 1997. Shares of Class B common stock are not
transferable to persons or entities unaffiliated with Mr. B. D. Hunter,
Chairman of the Board and Chief Executive Officer of the Company, who is in
control of all issued and outstanding shares of Class B common stock through
his personal and family interests. All shares of Class B common stock are
convertible into a like number of shares of Class A common stock at the sole
discretion of the holder of such Class B common stock, with such conversion
becoming mandatory at the date which follows ten years after the death of Mr.
B. D. Hunter.
6. Incentive stock plan
The Company maintains an incentive stock plan, which provides for the grant of
non-qualified stock options, incentive stock options, restricted shares and
stock appreciation rights to officers and key employees, as well as directors,
of the Company selected by a committee of the Board of Directors. A maximum
of 900,000 shares of Class A common stock may be issued under the plan.
Options issued under the plan may be exercised, subject to a ten-year maximum
term, over periods determined by the committee.
A summary of the status of the Company's stock option plan as of December 31,
1998 and 1997, and April 30, 1997 and 1996, and changes during the periods
ending on those dates, is as follows:
<TABLE>
<CAPTION>
Options Weighted Average
Outstanding Exercise Price
----------- ----------------
<S> <C> <C>
Balance at April 30, 1995 687,000 $18.73
Options granted 73,000 $19.50
Options exercised (2,000) $17.00
Options canceled or forfeited (12,500) $20.18
-------
Balance at April 30, 1996 745,500 $18.78
Options granted 98,500 $12.50
Options canceled or forfeited (8,000) $23.13
-------
Balance at April 30, 1997 836,000 $18.00
Options granted 353,000 $13.50
Options canceled or forfeited (342,750) $20.57
-------
Balance at December 31, 1997 846,250 $15.08
Options canceled or forfeited (113,750) $16.57
-------
Balance at December 31, 1998 732,500 $14.85
=======
</TABLE>
The following table summarizes stock options outstanding and exercisable as of
December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------- ---------------------
Remaining Average Average
Exercise No. of Average Exercise No. of Exercise
Price Range Options Life Price Options Price
- ------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
$17.00 306,000 4.5 yrs $17.00 306,000 $17.00
$12.50-$13.50 426,500 2.4 yrs $13.31 34,125 $12.90
------- ------- -------
732,500 3.3 yrs $14.85 340,125 $16.59
======= ======= =======
</TABLE>
No compensation expense has been recognized by the Company for its incentive
stock plan in accordance with the Company's continued use of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees. Had the fair value method of accounting contemplated by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," been applied to the Company's incentive stock plan, the
Company's net income and earnings per common share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Eight
Year ended months ended
December 31, December 31, Year ended April 30,
1998 1997 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) available
for common shareholders:
As reported $(4,491) $ 883 $6,439 $1,108
Pro forma (4,766) 827 6,402 1,106
Earnings (loss) per common
share (basic and diluted):
As reported $(.50) $ .10 $ .72 $ .12
Pro forma (.53) .09 .72 .12
</TABLE>
The pro forma impact only takes into account options granted since April 1996,
and is likely to increase in future years as additional options are granted
and amortized ratably over the vesting period. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for options granted
during the eight months ended December 31, 1997, and the years ended April 30,
1997 and 1996, respectively: risk-free interest rates of 5.7%, 6.7%, and 5.1%;
dividend yield of .9%; expected common stock market price volatility factor of
47.0%, 50.1%, and 54.8%; and a weighted average expected life of the options
of three to five years. The weighted average fair value of options granted
for the eight months ended December 31, 1997, and the years ended April 30,
1997 and 1996, respectively, was $1.90, $3.84, and $4.90.
7. Income taxes
The components of the provision for income taxes for 1998, the transition
period ended December 31, 1997, and for the years ended April 30, 1997 and
1996, respectively, are as follows:
<TABLE>
<CAPTION>
Eight
Year ended months ended Years ended April 30,
December 31, December 31, ---------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Current:
Federal $ 196 $(1,528) $1,284 $ -
State (58) 65 43 (24)
------ ------ ------ ------
138 (1,463) 1,327 (24)
------ ------ ------ ------
Deferred (primarily Federal):
Current (543) 288 (205) (1,366)
Non-current (2,039) 1,661 2,875 2,091
------ ------ ------ ------
(2,582) 1,949 2,670 725
------ ------ ------ ------
Provision (benefit)
for income taxes $(2,444) $ 486 $3,997 $ 701
====== ====== ====== ======
</TABLE>
Deferred income taxes reflect the tax impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The net deferred income tax
liabilities of the Company are comprised of the following as of:
<TABLE>
<CAPTION>
December 31, April 30,
1998 1997 1997
------ ------ ------
<S> <C> <C> <C>
Total deferred tax liabilities,
primarily related to property basis
differences and related effects,
including accelerated tax depreciation $18,781 $14,580 $8,929
------- ------ ------
Deferred tax assets attributable to:
Non-deductible liabilities and reserves 1,741 1,247 1,588
Net operating loss carryovers
expiring through the year ending
December 31, 2018 11,385 5,095 1,052
------- ------ ------
Total deferred tax assets 13,126 6,342 2,640
------- ------ ------
Net deferred tax liabilities, net of
$1,721, $1,177, and $1,465, respectively,
reflected in other current assets $ 5,655 $ 8,238 $6,289
======= ====== ======
</TABLE>
A reconciliation of the provision for income taxes to the maximum statutory
Federal rate of 35% is as follows for the following periods:
<TABLE>
<CAPTION>
Year Eight months
ended ended Years ended
December 31, December 31, April 30,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tax at statutory Federal rate $(2,357) $ 526 $3,670 $ 633
State income taxes, net
of federal tax benefit (347) (143) 195 (94)
Goodwill amortization 101 67 101 101
Other 159 36 31 61
------ ----- ------ -----
$(2,444) $ 486 $3,997 $ 701
====== ===== ====== =====
</TABLE>
During 1998, the eight months ended December 31, 1997, and the years ended
April 30, 1997 and 1996, the Company made cash payments for income taxes of
$317, $1,016, $3,000, and $50, respectively. Of the amount paid during 1998,
$200 was claimed as a Federal refund in January 1999. During 1998, the
Company received Federal tax refunds totaling $2,097. During the year ended
April 30, 1997, the Company claimed Federal tax refunds of $1,871, which were
received in May 1997.
8. Commitments and contingencies
The Company is a party to various claims and legal proceedings generally
incidental to its business. Although the ultimate disposition of these
proceedings is not presently determinable, management does not believe that
adverse determination in any or all of such proceedings will have a material
adverse effect upon the financial condition, cash flows, or the results of
operations of the Company.
The Company leases a variety of assets for use in its operations. With
respect to operating leases of steel processing equipment and certain real
property, the Company has negotiated purchase options that are effective prior
to or at the end of the lease term of such operating lease agreements. With
respect to the Company's operating lease commitments, net aggregate future
lease payments as of December 31, 1998, are payable as follows:
<TABLE>
<S> <C>
1999 $ 4,426
2000 4,289
2001 3,972
2002 3,910
2003 3,827
Thereafter 7,604
-------
$28,028
=======
</TABLE>
9. Quarterly financial data (unaudited)
Summarized quarterly financial data for the calendar years ended December 31,
1998 and 1997 follows:
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter Year
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Net sales:
December 1998 $110,373 $104,724 $95,646 $80,438 $391,181
December 1997 85,501 93,657 93,903 93,492 366,553
Gross profit (loss):
December 1998 7,756 7,762 5,156 643 21,317
December 1997 7,349 9,056 8,167 4,407 28,979
Net income (loss):
December 1998 651 482 (1,103) (4,321) (4,291)
December 1997 1,224 1,572 1,197 (1,203) 2,790
Earnings (loss) per common share
(basic and diluted):
December 1998 .07 .05 (.13) (.49) (.50)
December 1997 .13 .17 .13 (.14) .29
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Huntco Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows, and of changes in
shareholders' equity present fairly, in all material respects, the financial
position of Huntco Inc. and its subsidiaries at December 31, 1998, 1997, and
April 30, 1997, and the results of their operations and their cash flows for
the year ended December 31, 1998, the eight months ended December 31, 1997,
and for each of the two years in the period ended April 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
/s/ PricewaterhouseCoopers LLP
St. Louis, Missouri
February 5, 1999
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information regarding (i) directors of the Company and (ii) the only executive
officers of the Company (who are also directors of the Company), is
incorporated herein by reference to the information included under the title
"Proposal 1: Election of Directors --Nominees for Directors", "--Information
as of March 22, 1999 Regarding the Board's Nominees for Election as Directors
at the 1999 Annual Meeting for Terms to Expire at the Annual Meeting in 2002";
and "--Information as of March 22, 1999 Regarding the Directors Who are Not
Nominees for Election and Whose Terms Continue Beyond 1999," contained within
the Company's 1999 Proxy Statement. The individuals identified in the 1999
Proxy Statement as executive officers of the Company have been appointed to
serve as such until their respective successors are duly elected and have
qualified, or until their earlier death, resignation or removal.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information regarding executive compensation is incorporated herein by
reference to the information included under the titles "Proposal 1: Election
of Directors --Directors' Fees" contained within the Company's 1999 Proxy
Statement; "Executive Compensation --Summary Compensation Table", "--
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values", "-Employment Agreements; Separation Agreements", and "--Compensation
Committee Interlocks and Insider Participation" contained within the Company's
1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference to the information included
under the title "Voting, Voting Securities and Principal Holders Thereof --
Holdings of Management and Principal Shareholders" contained within the
Company's 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information regarding certain relationships and related transactions is
incorporated herein by reference to the information included under the title
"Certain Transactions" contained within the Company's 1999 Proxy Statement.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Company's financial statements together with the report thereon
of PricewaterhouseCoopers LLP dated February 5, 1999, are set forth herein
under Item 8.
(2) Financial Statement Schedules -- Omitted, not applicable.
(3) Exhibits
These Exhibits are numbered in accordance with the Exhibit Table at
Item 601 of Regulation S-K. The following Exhibits listed in the Exhibit
Index are filed with this Report:
10(iii)(A)(5): Description of Performance Bonus Arrangement for
executive officers for the calendar year ending December 31, 1999.
10(iii)(A)(9): Severance Agreement and Release entered into by and
between Huntco Inc. and Terry J. Heinz, dated as of March 8, 1999.
23(ii): Consent of PricewaterhouseCoopers LLP.
24: Powers of Attorney submitted by B. D. Hunter, Robert J. Marischen,
James J. Gavin, Jr., Donald E. Brandt and Michael M. McCarthy.
27: Financial Data Schedule.
For a listing of each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Report, see the Exhibits listed
under Exhibit Nos. 10(iii)(A)(1) through 10(iii)(A)(8).
(b) Reports on Form 8-K
The Company filed a Form 8-K on October 23, 1998, which discussed under Item
5, "Other Events", its earnings for the three and nine months ended September
30, 1998, and certain forward-looking data for the years ending December 31,
1998 and 1999.
The Company filed a Form 8-K on February 8, 1999, which discussed under Item
5, "Other Events", its earnings for the three and twelve months ended December
31, 1998, updated the Company's financial risk factors, and discussed certain
forward-looking data for the year ending December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
HUNTCO INC.
(Registrant)
Date: March 25, 1999 By:/s/ Robert J. Marischen
-----------------------
Robert J. Marischen,
Vice Chairman, President,
and Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints B. D. Hunter and Robert J. Marischen, and each of
them (with full power to each of them to act alone), his true and lawful
attorney-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this report and any and all amendments to this report, and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or any of them, or their substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ B. D. Hunter Director, Chairman of the March 25, 1999
- --------------------------------- Board and Chief Executive
B. D. Hunter Officer
(Principal Executive Officer)
/s/ Robert J. Marischen Director, Vice Chairman of March 25, 1999
- --------------------------------- the Board, President and
Robert J. Marischen Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/ Donald E. Brandt Director March 25, 1999
- ---------------------------------
Donald E. Brandt
/s/ James J. Gavin, Jr. Director March 25, 1999
- ---------------------------------
James J. Gavin, Jr.
/s/ Michael M. McCarthy Director March 25, 1999
- ---------------------------------
Michael M. McCarthy
<PAGE>
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item 601
of Regulation S-K.
2: Omitted - not applicable.
3(i): Restated Articles of Incorporation of Huntco Inc. incorporated by
reference to Exhibit 3(i) of the Company's 1995 Annual Report on Form 10-K,
filed on July 28, 1995.
3(ii): Amended and Restated Bylaws of Huntco Inc., incorporated by
reference to Exhibit 3(ii) of the Company's Form 10-Q for the quarter ended
October 31, 1997, filed on December 15, 1997.
4(i)(a): Reference is made to Articles III and VIII of the Restated Articles
of Incorporation of Huntco Inc., incorporated by reference to Exhibit 3(i) of
the Company's 1995 Annual Report on Form 10-K filed July 28, 1995.
4(i)(b): Certificate of Designation defining the terms and provisions of the
Company's Series A Preferred Stock, incorporated by reference to Exhibit
4(v)(a) of the Company's Form 10-Q for the quarter ended January 31, 1997,
filed on March 14, 1997.
4(i)(c): Registration Rights Agreement dated January 30, 1997, issued in
conjunction with the issuance of the Company's Series A Preferred Stock,
incorporated by reference to Exhibit 4(v)(b) of the Company's Form 10-Q for
the quarter ended January 31, 1997, filed on March 14, 1997.
4(i)(d): Reference is made to Articles III, IV, V, XI, XII, and XIII
incorporated by reference to Exhibit 3(ii) of the Company's Form 10-Q for the
quarter ended October 31, 1997, filed on December 15, 1997.
4(ii)(a)(1): Revolving Credit Agreement dated December 17, 1996, by and among
Huntco Inc., Huntco Nevada, Inc., Huntco Steel, Inc., Midwest Products, Inc.,
HSI Aviation, Inc., Mercantile Bank National Association, Harris Trust and
Savings Bank, NBD Bank, Bank of America Illinois, and SunTrust Bank, Atlanta,
incorporated by reference to Exhibit 4(iii)(a) of the Company's Form 10-Q for
the quarter ended January 31, 1997, filed on March 14, 1997.
4(ii)(a)(2): Form of Revolving Credit Note issued in connection with the
execution of the Revolving Credit Agreement of December 17, 1996 (the
"Agreement"), and a schedule of the amount of each Revolving Credit Note
issued on December 17, 1996 in conjunction with this Agreement, incorporated
by reference to Exhibit 4(iii)(b) of the Company's Form 10-Q for the quarter
ended January 31, 1997, filed on March 14, 1997.
4(ii)(a)(3): First Amendment, dated April 30, 1997, to Revolving Credit
Agreement dated December 17, 1996, by and among Huntco Inc., Huntco Nevada,
Inc., Huntco Steel, Inc., HSI Aviation, Inc., Mercantile Bank National
Association, Harris Trust and Savings Bank, NBD Bank, Bank of America
Illinois, and SunTrust Bank, Atlanta, incorporated by reference to Exhibit
4(ii)(b)(3) of the Company's fiscal 1997 Annual Report on Form 10-K, filed on
July 25, 1997.
4(ii)(b)(1): Amended and Restated Revolving Credit Agreement dated March 24,
1998, by and among Huntco Inc., Huntco Nevada, Inc., Huntco Steel, Inc.,
Midwest Products, Inc., HSI Aviation, Inc., Mercantile Bank National
Association, Harris Trust and Savings Bank, The First National Bank of
Chicago, Bank of America NT&SA, and SunTrust Bank, Atlanta, incorporated
herein by reference to Exhibit 4(ii)(b)(1) of the Company's Form 10-K filed on
March 30, 1998.
4(ii)(b)(2): Form of Revolving Credit Note issued in connection with the
execution of the Amended and Restated Revolving Credit Agreement of March 24,
1998, incorporated herein by reference to Exhibit 4(ii)(b)(2) of the Company's
Form 10-K filed on March 30, 1998.
4(ii)(c)(1): Note Purchase Agreement dated July 14, 1995, providing for the
issuance of $50.0 million of 8.13% ten-year term notes, maturing in equal
annual installments from July 15, 1999-2005, by and among Huntco Inc. and each
of the purchasers listed on Schedule A thereto, incorporated herein by
reference to Exhibit 4(v)(a) of the Company's Form 8-K filed on July 18, 1995.
4(ii)(c)(2): First Amendment to Note Purchase Agreement dated July 14, 1995,
entered into as of March 24, 1998, by and among Huntco Inc., Principal Mutual
Life Insurance Company, Nippon Life Insurance Company of America, TransAmerica
Life Insurance and Annuity Company, TransAmerica Assurance Company,
TransAmerica Occidental Life Insurance Company, ProvidentMutual Life and
Annuity Company of America, Berkshire Life Insurance Company, and The Security
Mutual Life Insurance Company of Lincoln, Nebraska, incorporated herein by
reference to Exhibit 4(ii)(c)(2) of the Company's Form 10-K filed on March 30,
1998.
4(ii)(c)(3): Individual Notes due July 2005, sold pursuant to the Note
Purchase Agreement dated July 14, 1995, incorporated herein by reference to
Exhibits 4(b)-(j) of the Company's Form 8-K filed on July 18, 1995.
4(ii)(c)(4): Subsidiary Guaranty dated July 14, 1995, from Huntco Nevada,
Inc., Huntco Steel, Inc., and Midwest Products, Inc. entered into in
connection with the Note Purchase Agreement dated July 14, 1995, incorporated
herein by reference to Exhibit 4(k) of the Company's Form 8-K filed on July
18, 1995.
4(ii)(c)(5): Subsidiary Guaranty dated March 24, 1998, from HSI Aviation,
Inc. entered into in connection with the First Amendment to Note Purchase
Agreement dated July 14, 1995, incorporated herein by reference to Exhibit
4(ii)(c)(5) of the Company's Form 10-K filed on March 30, 1998.
4(ii)(d)(1): Form of Security Agreement dated March 24, 1998, executed by
each of Huntco Inc., Huntco Nevada, Inc., Huntco Steel, Inc., Midwest
Products, Inc., and HSI Aviation, Inc., in favor of Mercantile Bank National
Association, as Collateral Agent for the Company's creditors under that
certain Amended and Restated Revolving Credit Agreement dated March 24, 1998,
that certain Note Purchase Agreement dated July 14, 1995, as amended, and that
certain Collateral Agency and Intercreditor Agreement dated March 24, 1998,
incorporated herein by reference to Exhibit 4(ii)(d)(1) of the Company's Form
10-K filed on March 30, 1998.
4(ii)(d)(2): Collateral Agency and Intercreditor Agreement dated March 24,
1998, executed by and among Huntco Inc., Huntco Nevada, Inc., Huntco Steel,
Inc., Midwest Products, Inc., HSI Aviation, Inc.; Mercantile Bank National
Association, Harris Trust and Savings Bank, The First National Bank of
Chicago, Bank of America NT&SA, SunTrust Bank, Atlanta; Principal Mutual Life
Insurance Company, Nippon Life Insurance Company of America, TransAmerica Life
Insurance and Annuity Company, TransAmerica Assurance Company, TransAmerica
Occidental Life Insurance Company, ProvidentMutual Life and Annuity Company of
America, Berkshire Life Insurance Company, and The Security Mutual Life
Insurance Company of Lincoln, Nebraska, incorporated herein by reference to
Exhibit 4(ii)(d)(2) of the Company's Form 10-K filed on March 30, 1998.
4(ii)(e)(1): Lease Agreement dated as of June 1, 1992 by and between the City
of Blytheville, Arkansas and Huntco Steel, Inc., which Lease Agreement
represents a capital lease, incorporated herein by reference to Exhibit
10(ii)(D)(1) of the Company's Registration Statement on Form S-1 (33-62936)
and filed on May 19, 1993.
4(ii)(e)(2): First Amendment to Lease Agreement dated as of August 17, 1993
by and between the City of Blytheville, Arkansas and Huntco Steel, Inc., which
Lease Agreement represents a capital lease, incorporated herein by reference
to Exhibit 10(ii)(D)(1)(ii) to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (33-71426) and filed on November 23, 1993.
9: Omitted - not applicable.
10(iii)(A)(1): Form of Executive Employment Agreement, incorporated by
reference to Exhibit 10(iii)(A)(1) of the Company's Form 10-Q for the quarter
ended July 31, 1993, filed on September 13, 1993.
10(iii)(A)(2): Form of Amended Performance Bonus Agreement for fiscal year
ending April 30, 1996, incorporated by reference to Exhibit 10(iii)(A) of the
Company's Form 10-Q for the quarter ended January 31, 1996, filed on February
28, 1996.
10(iii)(A)(3): Description of Performance Bonus Arrangement for executive
officers for the fiscal year ending April 30, 1997, incorporated by reference
to Exhibit 10(iii)(A)(5) of the Company's 1996 Annual Report on Form 10-K,
filed on July 26, 1996.
10(iii)(A)(4): Description of Performance Bonus Arrangement for executive
officers for the calendar year ending December 31, 1998, incorporated herein
by reference to Exhibit 10(iii)(A)(7) of the Company's Form 10-K filed on
March 30, 1998.
10(iii)(A)(5): Description of Performance Bonus Arrangement for executive
officers for the calendar year ending December 31, 1999.
10(iii)(A)(6): Huntco Inc. 1993 Incentive Stock Plan, as Amended and Restated
in 1996, incorporated herein by reference to Exhibit 10(iii)(A)(2) of the
Company's Form 10-Q for the quarter ended July 31, 1996, filed on August 13,
1996.
10(iii)(A)(7): Form of Option Agreement for Awards of Options under 1993
Incentive Stock Plan, incorporated herein by reference to Exhibit
10(iii)(A)(9) of the Company's Form 10-K filed on March 30, 1998.
10(iii)(A)(8): Description of tax reimbursement arrangement between the
Company and its executive employees upon exercise of non-qualified stock
options, incorporated herein by reference to Exhibit 10(iii)(A)(6) of the
Company's 1994 Annual Report on Form 10-K, filed on July 29, 1994.
10(iii)(A)(9): Severance Agreement and Release entered into by and between
Huntco Inc. and Terry J. Heinz, dated as of March 8, 1999.
11: Omitted - not applicable.
12: Omitted - not applicable.
13: Omitted - not applicable.
16: Omitted - not applicable.
18: Omitted - not applicable.
21: Subsidiaries of the Company, incorporated by reference to Exhibit 21 of
the Company's fiscal 1997 Annual Report on Form 10-K, filed on July 25, 1997.
22: Omitted - not applicable.
23(ii): Consent of PricewaterhouseCoopers LLP.
24: Powers of attorney contained on the signature page found herein.
27: Financial Data Schedule.
99: Omitted - not applicable.
Description of performance bonus arrangement for executive officers for the
calendar year ending December 31, 1999 ("1999"):
For the first half of calendar 1999, the Company's executive officers will be
eligible for discretionary bonus compensation of up to 20% of base salary if
positive net income is realized year-to-date through June 30, 1999.
The bonus plan for the second half of 1999 is based on two components: 1)
Return on Capital and 2) Unit Growth. Bonuses (if any) are to be calculated and
paid quarterly, based upon stand alone quarterly results. Potential bonuses are
also to be calculated on full year amounts at year end, with such year end
calculation determined at four times the applicable quarterly rate, less any
interim payments. No return of a prior bonus is required if the full year
calculation yields less than the sum of prior quarter payments.
Return on Capital ("ROC") is defined to equal, for the applicable time period
calculated, the product of (a) income from operations before bonus accruals
pursuant to this plan (either for the full year, or annualized by multiplying
quarterly pre-bonus income from operations by four, as applicable), divided by
(b) the sum of (i) average shareholders' equity and (ii) average funded debt.
If ROC is 5% or greater, the ROC bonus shall be actual ROC for the applicable
period times the employee's full year base salary.
Unit Growth is to equal actual unit volume for the applicable quarterly or
full year period, less actual unit volume for the comparable prior year
period, divided by actual unit volume for the comparable prior year period.
The Unit Growth component of the applicable employee's bonus shall be
determined as follows:
<TABLE>
<CAPTION>
If Unit the ROC Bonus is at least as follows,
Growth is and then Unit Growth Bonus % is:
- -------------- ------------------------------------------
5% 10% 15%
---- ----- -----
<S> <C> <C> <C>
Zero or less (1.0)% (2.0)% (3.0)%
0.01% to 9.99% - - -
10.00% to 14.99% 2.5% 5.0% 10.0%
15.00% to 19.99% 5.0% 10.0% 15.0%
20.00% or more 10.0% 15.0% 20.0%
</TABLE>
SEPARATION AGREEMENT AND RELEASE
THIS SEPARATION AGREEMENT AND RELEASE is made and entered into as of the date
the last party to execute this Agreement so executes it, by and between Huntco
Inc., a Missouri corporation ("Huntco"), and Terry J. Heinz ("Heinz").
WITNESSETH THAT:
WHEREAS, Heinz was employed by Huntco under the terms of that certain
Executive Employment Agreement entered into by and between Huntco and Heinz
effective May 18, 1993 (the "Employment Agreement"), a copy of which is
attached hereto as Attachment A; and
WHEREAS, Heinz's employment with Huntco terminated on January 4, 1999 under
Section 8.4 of the Employment Agreement although Huntco paid Heinz's base
salary and the other benefits due Heinz under the Employment Agreement through
February 28, 1999 as if Heinz were still an employee of Huntco; and
WHEREAS, the parties desire to resolve all matters arising out of Heinz's
employment by Huntco and the subsequent termination of such employment.
NOW THEREFORE, in consideration of the mutual agreements, promises and the
release contained herein, the parties hereto agree as follows:
1. Termination of Employment. Effective upon the "Effective Date" of this
Agreement, as that term is defined in Section 7(b) hereof, and except as
specifically provided herein, the rights and obligations of the parties hereto
under the Employment Agreement shall cease and terminate and shall be of no
further force or effect.
2. Severance Payments and Benefits.
(a) In consideration for the termination of the Employment
Agreement, the covenants of Heinz contained herein and the release contained
in Section 6 hereof, Huntco shall: (i) for the Five (5) year period commencing
February 1, 1999 and ending January 31, 2004 (the "Payment Period"), pay Heinz
(or in the event of Heinz's death, to his spouse, Gretchen Heinz), $100,000
(the "Annual Payment") per year in equal installments and in accordance with
Huntco's normal payroll policies and procedures, less any applicable federal,
state, and local income tax withholding; (ii) at Huntco's sole cost and
expense, provide Heinz during the Payment Period with the group health,
medical, hospitalization and dental benefits generally available to the full-
time employees of Huntco as if Heinz were still employed by Huntco; ("Group
Health Benefits") and (iii) pay Heinz $6,845.70 (the "Aggregate Car Lease
Payment") which amount represents the total of the Ten (10) remaining lease
payments on the automobile which was in Heinz's possession on the date of
termination of Heinz's employment and which Heinz was to use primarily for
Huntco business (the "Leased Automobile").
(b) Heinz and Huntco acknowledge that during February 1999,
Huntco has paid Heinz $22,750 (the "February Payment"), equaling One-Twelfth
of Heinz's annual base salary during 1998 of $273,000. Anything in Section
2(a) hereof to the contrary notwithstanding, Huntco's payment to Heinz under
Section 2(a) hereof for March, 1999 shall be in the amount of $762.36,
calculated by determining the difference between the February Payment of
$22,750 and the sum of (i) $8,333.33 (which represents One-Twelfth of the
Annual Payment attributable to February 1999) and (ii) $6,845.70 (the
Aggregate Car Lease Payment made on the date hereof), which is $7,570.97 (the
"February Overpayment"), which February Overpayment is to be subtracted from
$8,333.33 (One-Twelfth of the Annual Payment attributable to March, 1999),
resulting in a difference of $762.36. Based on Huntco's normal payroll
policies, this amount shall not be due or payable until March 31, 1999.
(c) All of the options to purchase shares of Class A Common
Stock, par value $.01 per share of Huntco (the "Class A Shares"), awarded to
Heinz under the Huntco Inc. 1993 Incentive Stock Plan (as Amended and Restated
in 1996), are hereby cancelled and otherwise forever terminated and of no
further force or effect. Concurrently herewith and pursuant to the
immediately preceding sentence the following agreements are cancelled and
forever terminated and of no further force or effect: (i) the Stock Option
Agreement - 1993 Award entered into by and between Huntco and Heinz dated June
29, 1993 relating to options to purchase up to 150,000 Class A Shares (the
"IPO Stock Options") previously awarded to Heinz; (ii) the Stock Option
Agreement entered into by and between Huntco and Heinz dated April 3, 1997
relating to options to purchase up to 10,000 Class A Shares previously awarded
to Heinz; (iii) the Stock Option Agreement entered into by and between Huntco
and Heinz dated December 4, 1997 relating to options to purchase up to 60,000
Class A Shares previously awarded to Heinz; and (iv) the agreement between
Huntco and Heinz by which Huntco agreed to reimburse Heinz with respect to
federal and state income taxes payable by Heinz on the first $400,000 of
taxable income recognized by Heinz upon the exercise of the IPO Stock Options.
(d) All compensation, payments or benefits which Huntco would
have provided to Heinz contractually or otherwise for the period commencing
January 5, 1999 and thereafter had Heinz's employment with Huntco not been
terminated (the "Terminated Benefits"), are by the agreement of the parties
hereto, cancelled and otherwise forever terminated as of January 4, 1999, the
date Heinz ceased to be employed by Huntco, which Terminated Benefits include
but are not limited to: (i) the cellular telephone provided by Huntco to
Heinz; (ii) reimbursement for gasoline, insurance, maintenance or any other
expenses (other than the fixed amount provided for in Section 2(a)(iii))
incurred by Heinz with respect to the Leased Automobile; (iii) participation
in any group life insurance programs generally available to the full-time
employees of Huntco, (iv) the supplemental reimbursement for health, medical,
hospitalization and dental expenses incurred by Heinz after January 4, 1999
above and beyond those covered by the Group Health Benefits; (v) Huntco's
contribution to Heinz's account in the Huntco Inc. 401(k) Retirement Savings
Plan; (vi) reimbursement of the dues paid in connection with Heinz's country
club membership; and (vii) payments made by Huntco on Heinz's behalf with
respect to the life insurance and disability insurance policies maintained by
Huntco on Heinz, it being acknowledged and agreed that if Heinz desires to
continue such insurance in effect, Heinz shall make all premium payments
thereon for all coverage periods from and after January 4, 1999.
(e) This Section 2 shall have no force or effect if Heinz
revokes his acceptance of this Agreement pursuant to Section 7(b) hereof.
3. Consulting Agreement.
(a) Huntco hereby contracts and engages Heinz, and Heinz hereby
contracts and agrees to serve as an independent consultant during the Payment
Period, to advise Huntco or any of the other "Huntco Entities" (as hereinafter
defined) on those matters on which Heinz has special competence by reason of
his prior experience in and knowledge of the intermediate steel processing
business generally and of Huntco and the other Huntco Entities specifically,
and to engage in such services as Huntco in good faith seeks (the "Consulting
Duties"), on the terms and conditions set forth below.
(b) As an independent contractor, neither Huntco nor any of the
other Huntco Entities shall have the right to exercise supervision over Heinz
in the performance of the Consulting Duties or to require Heinz to comply with
detailed orders or instructions. Anything in the preceding sentence to the
contrary notwithstanding, however, Heinz and Huntco agree that Heinz shall
receive general direction and assignment with respect to his Consulting Duties
from Mr. Robert J. Marischen, Huntco's Vice Chairman ("Marischen"), or from
any other officers or employees of Huntco designated by Marischen or his
replacement.
(c) Heinz need not devote his principal working time, attention
and energies to the performance of his Consulting Duties, but he shall devote
his best efforts and such time, attention and energies as shall be necessary
to fulfill his obligations hereunder. Heinz may own, be employed by or
perform consulting or other services for other companies, entities or
businesses so long as such services do not interfere with Heinz's Consulting
Duties and are otherwise permitted by, or do not conflict with the terms of,
this Agreement (including but not limited to Heinz's obligations under Section
4 hereof).
(d) In consideration for his Consulting Duties, Huntco shall pay
Heinz a consulting fee of $1,000 per day (the "Consulting Fee") plus
reimbursement of "Travel Expenses" as hereinafter defined. Huntco shall
reimburse Heinz for only those Travel Expenses Heinz incurs in performing a
specific project for Huntco or one of the Huntco Entities, which project must
have been assigned to Heinz by Marischen or by any other officers or employees
of Huntco designated by Marischen or his replacement. Reimbursement of
Heinz's Travel Expenses shall be made only upon submission of an expense
report including receipts, vouchers and other evidence of expenses incurred,
all in a manner which is consistent with reimbursement of Travel Expenses
incurred by employees of Huntco when conducting business for Huntco. "Travel
Expenses" shall mean all reasonable expenses incurred by Heinz for air fare
(coach class) car rental, taxi fares, reimbursement for mileage at rates
allowed as deductions under applicable Internal Revenue Code Regulations (if
Heinz's personal automobile is used; reimbursement for gasoline only if the
Leased Automobile is used), lodging and travel related meals.
(e) In his capacity as a consultant, Heinz is for all purposes
to be considered an independent contractor and not an employee or agent of
Huntco. Accordingly, no amounts shall be withheld by Huntco from any payments
for Consulting Duties performed hereunder for federal, state, local, FICA,
FUTA or other taxes unless required under applicable law. Heinz agrees to pay
all taxes due with respect to the payments received hereunder as and when due.
(f) Heinz covenants and agrees that he shall not represent
himself to any person or entity to be an employee of Huntco and further
convenants and agrees that he does not have, and shall not represent to any
person or entity that he has, the authority to contractually bind Huntco.
(g) Neither Huntco nor any of the Huntco Entities shall be
obligated to utilize Heinz's services as a consultant under this Section 3 and
Huntco shall only be obligated to pay such Consulting Fees and Travel Expenses
with respect to Consulting Duties actually performed by Heinz pursuant to the
terms of Section 3 hereof.
4. Heinz's Surviving Obligations Under the Employment Agreement.
(a) Heinz understands and agrees that all obligations of Huntco
under the Employment Agreement have been released and forever terminated
pursuant to this Agreement. Notwithstanding the preceding, Heinz agrees that
Heinz is not relieved of any of Heinz's continuing obligations expressly
provided for in the Employment Agreement, including, but not limited to, those
obligations set forth in Sections 4, 5.2, 5.3, 6, 11.1(a)-(c) (except as
Heinz's obligation under Section 11.1(a)-(c) are modified by this Section 4
hereof, but without regard to any actions which Huntco was required to take
under the Employment Agreement to obtain the benefits of Section 11.1
thereunder, which actions are no longer required pursuant to the provisions
hereof) and Section 12, which sections of the Employment Agreement (except as
modified herein) are incorporated into this agreement as fully and as
completely as if set forth herein. The duration of the obligations set forth
in Sections 4, 5.2, 5.3, 6, and 12 shall survive for the period set forth in
the Employment Agreement, and if the Employment Agreement does not provide for
expiration, such obligations survive indefinitely. The obligations of Section
11.1(a)-(c) shall continue through January 31, 2000 (the "Non-Compete
Period").
(b) Huntco prospectively waives its rights under Section 4(a)
herein to prevent Heinz or any entity affiliated with Heinz from purchasing
all of the issued and outstanding capital stock or the assets of [a certain
steel-related concern ("Steel Target Company")], or any interest therein and
to thereafter operate or be employed by [Steel Target Company], based solely
upon Heinz's representation to Huntco that [Steel Target Company] is a
"general line service center" which does not own, lease or operate a cut-to-
length line and has no plan or present intention to purchase, lease or
otherwise acquire, install or operate a cut-to-length line during the Non-
Compete Period. Heinz acknowledges that Huntco's prospective waiver of the
noncompete provision of Section 4(a) hereof with respect to [Steel Target
Company] is based on (i) Heinz's representation in the immediately preceding
sentence and (ii) Heinz's covenant and agreement that [Steel Target Company]
shall not purchase, lease or otherwise acquire, install or operate a cut to
length line during the Non-Compete Period.
5. Termination of Employment; Resignation from Officer Positions and
Directorships.
(a) Heinz acknowledges and agrees that his employment with
Huntco was terminated as of January 4, 1999 and that he is not entitled to
future employment with or to provide consulting services to any of the Huntco
Entities or to any of their respective successors, assigns, subsidiaries or
affiliates, provided, however, that pursuant to Section 3 hereof, Huntco may
compel Heinz to perform Consulting Duties.
(b) Effective upon execution of this Agreement, Heinz resigns as
a director, officer, and employee of each of the Huntco Entities of which he
is a director, officer or employee (except Huntco) and effective as of the
Effective Date, Heinz shall be deemed to have resigned as a director of
Huntco.
6. Heinz Release. Heinz, for himself and for each of his heirs,
administrators, representatives, executors, successors and assigns
(collectively the "Heinz Group") hereby releases, remises, and forever
discharges Huntco and each of its subsidiaries (collectively the "Huntco
Entities"), together with the respective directors, officers, agents, and
employees of the Huntco Entities (who, together with the Huntco Entities
constitute the "Released Parties"), from any and all claims and demands of any
kind, known or unknown, which the Heinz Group may have against the Released
Parties as of the date Heinz executes this Agreement or which the Heinz Group
may have had at any time before the date of signing this Agreement. Heinz
understands that he is releasing the Released Parties to the maximum extent
permissible by law, from any liability which Heinz believes the Released
Parties may have had to the Heinz Group at any time up to and including the
date Heinz executes this Agreement. This release includes a waiver (a giving
up) of any legal rights or claims the Heinz Group may have or may have ever
had, including claims of race, color, national origin, sex or gender, age or
disability discrimination, arising under Title VII of the Civil Rights Act of
1964, the Rehabilitation Act of 1973, the Civil Rights Act of 1866 (Section
1981), the Americans with Disabilities Act, the Employee Retirement Income
Security Act of 1974, the Age Discrimination in Employment Act, the Family and
Medical Leave Act of 1993, the Missouri Service Letter Statute, the Missouri
Human Rights Act, the Employment Agreement and under any other federal, state,
or local statute, regulation, or the common law of any state, including but
not limited to any and all claims in tort or contract, to the maximum extent
permitted by applicable law, except as otherwise specifically provided in this
Agreement.
7. Consideration and Revocation; Effective Date.
(a) Heinz acknowledges and agrees that (i) he received this
Agreement on February 26, 1999, (ii) the Agreement has been reviewed in detail
with him, (iii) the language contained herein and therein has been explained
to him, (iv) he has been encouraged by Huntco to review this Agreement with an
attorney of his choice, (v) that he has had a reasonable period of time and
has had adequate opportunity to consider the terms of the Agreement and
whether to enter into the Agreement, and (vi) he has voluntarily entered into
this Agreement of his own free will based only upon the terms and conditions
set out herein.
(b) Heinz has 21 calendar days after the date Heinz receives the
Agreement within which to consider the Agreement, although he may sign and
return it sooner if he desires. Heinz may revoke the Agreement, by delivering
a written notice of revocation to Mr. Robert J. Marischen, Vice Chairman,
Huntco Inc., 14323 South Outer Forty, Suite 600 N., Town & Country, Missouri
63017, within 7 calendar days after Heinz signs the Agreement. The Agreement
will become effective and enforceable immediately after the 7 day revocation
period expires (the "Effective Date"), if Heinz has not revoked this Agreement
pursuant to the terms hereof prior to that time.
8. Return of Property. Heinz agrees that as of the Effective Date, he
shall return to Huntco all property belonging to any Huntco Entity which has
not previously been returned to such Huntco Entity.
9. Section 16 Filings. Heinz represents and warrants to Huntco that as of
February 17, 1999, Heinz filed or caused to be timely filed with the
Securities and Exchange Commission (the "Commission") and the New York Stock
Exchange (the "NYSE"), all reports required to be filed by him under Section
16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules promulgated under Section 16 thereof (the "Section 16 Rules"),
with respect to (i) transactions in the Class A Shares or in options in which
the underlying security are Class A Shares (collectively the "Huntco
Securities") effected by him or (ii) transactions in Huntco Securities
effected by others but pursuant to which he is deemed to have a pecuniary
interest, during the preceding two years. Heinz further represents and
warrants to Huntco that he has not engaged in any transactions in Huntco
Securities which required the filing of a Form 5 by February 17, 1999. Heinz
covenants and agrees that he will notify Huntco if he effects any transactions
involving Huntco Securities or if transactions in Huntco Securities in which
he is deemed to have a pecuniary interest are effected by others, if and to
the extent Heinz has an obligation to report such transactions to the
Commission and the NYSE pursuant to the Section 16 Rules. Heinz further
covenants and agrees that he will provide Huntco with a copy of all reports
which he files or causes to be filed with the SEC and the NYSE pursuant to the
Section 16 Rules with respect to the foregoing.
10. No Admission of Liability. Heinz acknowledges that this Agreement
shall not in any way be construed as an admission of any liability on the part
of any of the Released Parties and that all such liability is expressly denied
by each and every one of the Released Parties.
11. Public Comment; Cooperation. Heinz shall not take any action
inconsistent with Heinz's relationship and responsibilities as a former
director, executive officer and employee of Huntco or of any of the other
Huntco Entities of which he was a former director, executive officer or
employee, or take any action which is intended, or may be reasonably expected,
to harm the reputation, business, prospects or operations of Huntco or any of
the other Huntco Entities, including, but not limited to, making any
disparaging remarks about any of the Huntco Entities or any of their
respective officers, directors, employees or shareholders. To that end, Heinz
shall continue to (i) cooperate and assist in the orderly transition of
management when reasonably requested by any of the Huntco Entities, including
execution of any minutes or other appropriate documents, and (ii) cooperate
and assist any and all of the Huntco Entities in any pending, threatened or
new litigation filed against or in any manner involving the Huntco Entities,
or in any investigation or audit by any governmental entity, including but not
limited to, providing truthful information to each of the Huntco Entities and
the directors, officers, agents, employees of, and attorneys for, the Huntco
Entities, and to governmental investigators (if required by applicable law).
12. No Litigation. Heinz, for himself and the Heinz Group, agrees not to
enter into any suit, action, or other proceeding at law or in equity, or to
prosecute further any existing suit or action that might presently exist, or
to make any claim or demand of any kind or nature against any of the Released
Parties, other than an action to enforce his rights contained herein. If
Heinz or any member of the Heinz Group enters into any action in violation of
this Section 12, Heinz shall pay all legal costs, including reasonable
attorneys' fees, incurred by Huntco or any of the other Released Parties in
defending against Heinz's action(s) or those of the Heinz Group.
13. Right of Set-off. If Heinz breaches any material provision of this
Agreement, or if any provisions of Sections 1, 4, 5, 6, 8, 11 or 12 hereof are
found by a court of competent jurisdiction to be unenforceable, Heinz agrees
to return to Huntco the amounts paid to Heinz under this Agreement and to
reimburse Huntco any costs or attorneys' fees Huntco or any of the other
Huntco Entities incurs in connection with obtaining the return of these
amounts, to the maximum extent permitted by applicable law. This provision
shall not restrict Huntco or any of the other Huntco Entities from seeking any
remedy available to Huntco or any of the Huntco Entities to enforce the terms
of this Agreement, including but not limited to, ceasing any further payments
under this Agreement or seeking equitable relief for the violation of any
provision for which damages are not appropriate.
14. Miscellaneous.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Missouri without giving effect to the
conflicts of laws provisions thereof. The parties hereto consent to the
jurisdiction of the Circuit Court of the County of St. Louis, State of
Missouri and the United States District Court for the Eastern District of
Missouri for all purposes in connection with any litigation between or among
the parties hereto. Heinz hereby irrevocably waives any objection which he
now or hereafter may have to the laying of venue of any action or proceeding
arising out of or relating to this Agreement brought in the United States
District Court for the Eastern District of Missouri or the Circuit Court of
the County of St. Louis, Missouri and any objection on the ground that any
such action or proceeding in either of such courts has been brought in an
inconvenient forum.
(b) This Agreement (which includes the surviving provisions of
the Employment Agreement) contain the entire agreement between Heinz and
Huntco and supercedes all prior agreements or understandings between them on
the subject matters of this Agreement. Such other agreements shall have no
force or effect, and are hereinafter void. No change or waiver of any part of
the Agreement will be valid unless in writing and signed by both Heinz and
Huntco. Except where the context requires a different interpretation to
effectuate the purposes of this Agreement, the term "Agreement" means this
Agreement and the surviving provisions of the Employment Agreement as modified
hereby.
(c) If a court of competent jurisdiction determines that any
provision contained in this Agreement, or any part thereof, is unenforceable
for any reason, Heinz agrees that such court shall have the power to reduce
the duration or scope of such provision, or otherwise modify such provision,
as the case may be, and, in its reduced form, such provision shall then be
enforceable, provided, however, that if the duration of the non-compete
provision set forth in Section 4 hereof and in section 11.1(a)-(c) of the
Employment Agreement (the applicable portions of which are incorporated into
this Agreement), are reduced by such court, such court shall have the power to
also reduce proportionately the payment due Heinz under Section 2(a) hereof,
provided, further, however, that if such court fails to reduce the amount of
such payment proportionately, Huntco and Heinz agree to a proportionate
reduction which reduction shall thereafter be evidenced by an amendment to
this Agreement which Heinz agrees to execute and deliver to Huntco. If any
court of competent jurisdiction determines that any provision contained in
this Agreement or any part thereof is unenforceable and cannot for any reason
be reduced and enforced as described in the immediately preceding sentence,
Heinz agrees that such determination shall not affect, impair or invalidate
the remainder of this Agreement.
(d) This Agreement shall be freely assignable by Huntco and
shall inure to the benefit of and be binding upon the Heinz Group and shall
inure to the benefit of and be binding upon the Released Parties. This
Agreement shall not be assignable by Heinz without the prior written consent
of Huntco.
(e) Heinz and Huntco agree to reasonably cooperate with the
other party or their agents in taking all steps necessary to effectuate the
purposes of this Agreement, including but not limited to executing documents
and providing information when reasonably requested by the other party.
(f) This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
(g) The description headings of the several sections of this
Agreement are inserted for convenience only and do not qualify or affect the
terms and conditions thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
Witness: TERRY J. HEINZ
/s/ Terry J. Heinz
__________________________________ ___________________________________
Witness: HUNTCO INC.
/s/ Robert J. Marischen 3/8/99
__________________________________ ___________________________________
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (Nos. 33-68488, 33-71610, 333-662, and 333-19461) of
Huntco Inc. of our report dated February 5, 1999, appearing under Item 8 of
this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF HUNTCO INC. AT AND FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 21
<SECURITIES> 0
<RECEIVABLES> 44,109
<ALLOWANCES> 530
<INVENTORY> 92,240
<CURRENT-ASSETS> 138,754
<PP&E> 180,796
<DEPRECIATION> 37,395
<TOTAL-ASSETS> 293,231
<CURRENT-LIABILITIES> 67,726
<BONDS> 102,555
0
4,500
<COMMON> 90
<OTHER-SE> 110,984
<TOTAL-LIABILITY-AND-EQUITY> 293,231
<SALES> 391,181
<TOTAL-REVENUES> 391,181
<CGS> 369,864
<TOTAL-COSTS> 369,864
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 228
<INTEREST-EXPENSE> 8,113
<INCOME-PRETAX> (6,735)
<INCOME-TAX> (2,444)
<INCOME-CONTINUING> (4,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,291)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
</TABLE>
