UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-13600
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HUNTCO INC.
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(Exact name of registrant as specified in its charter)
MISSOURI 43-1643751
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14323 SOUTH OUTER FORTY, SUITE 600N, TOWN & COUNTRY, MISSOURI 63017
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(Address of principal executive offices)
(314) 878-0155
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
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
As of July 31, 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.
<PAGE>
HUNTCO INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1999 (Unaudited) and December 31, 1998 (Audited)
Condensed Consolidated Statements of Operations
Six and Three Months Ended June 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
<PAGE> PART I. FINANCIAL INFORMATION
-----------------------------------
Item 1. Financial Statements
-----------------------------------
HUNTCO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- -----------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 21 $ 21
Accounts receivable, net 43,691 43,579
Inventories 76,608 92,240
Other current assets 2,769 2,914
-------- --------
123,089 138,754
Property, plant and equipment, net 138,542 143,401
Other assets 11,689 11,076
-------- --------
$273,320 $293,231
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 28,396 $ 56,923
Accrued expenses 2,844 3,451
Short-term debt 13,291 -
Current maturities of long-term debt 205 7,352
-------- --------
44,736 67,726
-------- --------
Long-term debt 119,127 102,555
Deferred income taxes 3,165 7,376
-------- --------
122,292 109,931
-------- --------
Shareholders' equity:
Series A preferred stock (issued and
outstanding, 225; stated at liquidation value) 4,500 4,500
Common stock:
Class A (issued and outstanding, 5,292) 53 53
Class B (issued and outstanding, 3,650) 37 37
Additional paid-in-capital 86,530 86,530
Retained earnings 15,172 24,454
-------- --------
106,292 115,574
-------- --------
$273,320 $293,231
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30 Ended June 30
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $181,239 $215,097 $ 90,863 $104,724
Cost of sales 175,504 199,579 87,275 96,962
------- ------- ------ ------
Gross profit 5,735 15,518 3,588 7,762
Selling, general and
administrative expenses 10,208 9,718 5,419 5,000
------- ------- ------ ------
Income (loss) from operations (4,473) 5,800 (1,831) 2,762
Interest, net (5,007) (4,017) (2,810) (1,997)
------- ------- ------ ------
Income (loss) before income taxes (9,480) 1,783 (4,641) 765
Provision (benefit) for income taxes (3,255) 650 (1,593) 283
------- ------- ------ ------
Net income (loss) before
extraordinary item (6,225) 1,133 (3,048) 482
Extraordinary item, net of tax (2,644) - (2,644) -
------- ------- ------ ------
Net income (loss) (8,869) 1,133 (5,692) 482
Preferred dividends 100 100 50 50
------- ------- ------ ------
Net income (loss) available
for common shareholders $ (8,969) $ 1,033 $(5,742) $ 432
======= ======= ====== ======
Earnings per common share (basic and diluted):
Net income (loss)
before extraordinary item $ (.70) $ .12 $ (.34) $ .05
Extraordinary item, net of tax (.30) - (.30) -
Net income (loss) (1.00) .12 (.64) .05
Weighted average
common shares outstanding:
Basic 8,942 8,942 8,942 8,942
Diluted 8,942 8,972 8,942 8,946
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,869) $ 1,133
------- -------
Adjustments to reconcile net income (loss)
to net cash (used) by operating activities:
Depreciation and amortization 5,653 4,954
Loss on early extinguishment of debt 4,067 -
Other 8 (428)
Decrease (increase) in:
accounts receivable (112) (11,115)
inventories 15,633 (8,979)
other current assets 145 2,153
other assets 219 (648)
Increase (decrease) in:
accounts payable (28,527) 8,545
accrued expenses (607) 309
non-current deferred taxes (4,212) 150
------- -------
Total adjustments (7,733) (5,059)
------- -------
Net cash (used) by operations (16,602) (3,926)
------- -------
Cash flows from investing activities:
Cash used to acquire property, plant and equipment (336) (5,473)
------- -------
Cash flows from financing activities:
Net proceeds from revolving credit facilities 59,867 9,978
Payments for debt issuance costs (1,549) -
Retirement of long-term notes (50,000) -
Debt repurchase premiums (3,816) -
Issuance of short-term debt 13,291 -
Payments on other debt obligations (442) (174)
Dividends (413) (413)
------- -------
Net cash provided by financing activities 16,938 9,391
------- -------
Net decrease in cash - (8)
Cash, beginning of period 21 27
------- -------
Cash, end of period $ 21 $ 19
======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
HUNTCO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in thousands, except per share amounts)
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1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 1999, the condensed
consolidated statements of operations for the six and three months ended June
30, 1999 and 1998, and the condensed consolidated statement of cash flows for
the six months ended June 30, 1999 and 1998 have been prepared by Huntco Inc.
and its subsidiaries (the "Company") without audit. In the opinion of
management, all adjustments (which include only normal, recurring adjustments)
necessary to present fairly the financial position at June 30, 1999, and the
results of operations and cash flows for the interim periods presented have
been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted where inapplicable. A summary of
the significant accounting policies followed by the Company is set forth in
Note 1 to the Company's consolidated financial statements included within Item
8 to the Company's annual report on Form 10-K for the year ended December 31,
1998 (the "Form 10-K"), which Form 10-K was filed with the Securities and
Exchange Commission on March 29, 1999. The condensed consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1998,
included in the aforementioned Form 10-K. The results of operations for the
periods ended June 30, 1999 are not necessarily indicative of the operating
results for the full year.
2. INVENTORIES
Inventories consisted of the following as of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- ---------
<S> <C> <C>
Raw materials $ 53,317 $ 66,063
Finished goods 23,291 26,177
-------- --------
$ 76,608 $ 92,240
======== ========
</TABLE>
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 did not possess any substantial
amount of vendor-owned consigned material as of June 30, 1999.
The Company classifies its inventory of cold rolled steel coils as finished
goods, which 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. DEBT FINANCING
On April 15, 1999, the Company refinanced substantially all of its long-term
debt obligations by entering into a new revolving credit facility with an
asset-based lending institution. This new financing has a three year term and
provides the Company with up to $140.0 million in credit at varying rates of
interest set either below the prime rate for LIBOR-based loans or generally
0.5% above the prime rate for daily revolving credit advances, payable
monthly. These rates are generally equivalent to those incurred by the
Company under its former bank revolver, and are currently less than those
incurred under the Company's former 8.13% term notes. In conjunction with this
refinancing, the Company retired early its $50.0 million of 8.13% term notes,
which were due in installments through July 15, 2005. As a result of this
early retirement, the Company incurred a prepayment penalty and related
charges of approximately $4.1 million, before income tax benefits, which
amount is reflected as an extraordinary item in the 1999 second quarter. The
Company also incurred approximately $1.5 million in costs associated with the
issuance of this new debt, which is being amortized over its term.
The new credit agreement eliminated the limitation on the amount of debt which
could be incurred by the Company, which was limited to 50% of total capital
pursuant to the terms of the previous bank revolver and the term notes. The
Company used the proceeds of the incremental borrowings, net of the amounts
required for debt retirement and transaction expenses, including the
prepayment penalty, to reduce its obligations to trade vendors which were
unusually high because of abnormally high inventory levels. The Company's
inventory levels peaked near the end of the first quarter of 1999, and have
significantly decreased through the date of this report.
Security under the new agreement consists of the accounts receivable,
inventory, fixed assets and other assets of the Company. The maximum amount
of borrowings available to the Company under the new revolver is based upon
percentages of eligible accounts receivable and inventory, as defined in the
new asset-based revolving credit agreement, as well as amounts attributable to
selected fixed assets of the Company.
On June 30, 1999, the Company executed a short-term note payable in the
approximate amount of $13.3 million in satisfaction of certain trade payable
obligations. This unsecured promissory note bears interest at prime plus two
percent from May 1, 1999, and calls for principal payments of $1.5 million on
July 15, 1999, $1.0 million each month thereafter through November 15, 1999,
with the remaining principal and interest balance due on December 15, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ---------------------------------------------------------------------------
This Quarterly Report on Form 10-Q contains certain statements that are
forward-looking and involve risks and uncertainties. Words such as "expects,"
"believes," and "anticipates," 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. The Company encourages those who make use of this forward-looking
data to make reference to a complete discussion of the factors which may cause
the forward-looking data to differ materially from actual results, which
discussion is contained under the title "Risk Factors - 1999 Outlook" included
within Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of the Company's annual report on Form 10-K for the
year ended December 31, 1998, as filed with the Securities and Exchange
Commission on March 29, 1999.
RESULTS OF OPERATIONS
Net sales were $90.9 million for the quarter ended June 30, 1999, a decrease
of 13.2% in comparison to net sales of $104.7 million for the three months
ended June 30, 1998. Net sales for the six months ended June 30, 1999 were
$181.2 million, a decrease of 15.7% in comparison to net sales of $215.1
million for the six months ended June 30, 1998. The decrease in net sales is
primarily attributable to lower average selling prices, with somewhat lower
levels of tons processed during 1999 also contributing to the decline.
The Company processed and shipped 306,146 and 636,415 tons of steel in the
three and six months ended June 30, 1999, a decrease of 7.4% and 5.1%,
respectively, in relation to the comparable periods of the prior year.
Decreased sales of cold rolled products contributed to the volume decline.
The Company sold 67,004 and 128,824 tons of cold rolled products during the
three and six months ended June 30, 1999, versus 72,204 and 158,044 tons
during the comparable periods of the prior year. This decrease in cold rolled
sales volume was attributable to higher levels of competition stemming from
imports of cold rolled products into the Company's market territories.
Average per ton selling values declined 11.2% and 10.4% during the three and
six months ended June 30, 1999, in comparison to prior year levels, reflecting
lower prices for hot rolled steel coils charged by the Company's suppliers and
the resulting impact upon eventual sales transaction prices.
Approximately 21.1% and 23.7% of the tons processed in the three and six
months ended June 30, 1999 represented customer-owned material processed on a
per ton, fee basis, versus tolling percentages of 24.3% and 24.0% in the
comparable period of the prior year. 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.
Gross profit, expressed as a percentage of net sales, was 3.9% and 3.2% for
the three and six months ended June 30, 1999; compared to 7.4% and 7.2% for
the three and six months ended June 30, 1998. The lower gross profit margin
reflects the devaluation in steel prices over the last year, resulting in an
extremely competitive market environment where the Company and its competitors
sought to achieve higher inventory turns in the face of such falling prices.
The lower percentage of tolling volume to total sales also contributed to the
decline in the gross profit percentage.
Selling, general and administrative ("SG&A") expenses of $5.4 million and
$10.2 million for the three and six months ended June 30, 1999, reflect
increases of $.4 million and $.5 million over the comparable periods of the
prior year. The increases in SG&A expenses are primarily attributable to
additional costs incurred in exiting the stamping business and additional
costs incurred in relocating certain administrative functions of the Company.
SG&A expenses, when expressed as a percentage of net sales, increased from
4.8% and 4.5% during the three and six months ended June 30, 1998, to 5.9% and
5.6% of net sales during the three and six months ended June 30, 1999 due to
the issues discussed above and the fact that a good portion of the Company's
SG&A expenses are fixed and do not decline with a drop in selling values or
volumes.
The Company incurred a loss from operations of $1.8 million and $4.5 million
during the three and six months ended June 30, 1999, which compares to income
from operations of $2.8 million and $5.8 million as reported for the
corresponding periods of the prior year. These decreases reflect the factors
discussed in the preceding paragraphs. In addition, during the 1999 second
quarter, the Company elected to dispose of its metal stamping business
conducted at its Blytheville facility. The Company's stamping operation had
not performed up to management's expectations since its relocation to
Blytheville in 1996. The Company incurred operating losses of $.7 million and
$1.0 million in its stamping operations during the three and six months ended
June 30, 1999. Certain equipment related to this operation has subsequently
been sold during the third quarter of 1999. However, the Company will
continue to utilize certain stamping equipment that produces components for
its air cylinder operations.
Net interest expense of $2.8 million and $5.0 million was incurred during the
three and six months ended June 30, 1999, versus $2.0 million and $4.0 million
for the comparable periods of the prior year. These increases are
attributable to higher levels of corporate borrowings during 1999 to support
higher inventory levels, slightly higher interest rates charged on the
Company's variable rate borrowings, as well as lower amounts of capitalized
interest. The Company capitalized $.3 million and $.6 million of interest
costs during the three and six months ended June 30, 1998, versus none for
1999. The Company placed into service substantially all of its construction
projects at or near the end of 1998.
The effective income tax rates experienced by the Company before extraordinary
charges were 34.3% during the three and six months ended June 30, 1999, which
rates declined from the 37.0% and 36.4% effective income tax rates recognized
during the comparable periods of the prior year. The lower effective income
tax rate is due to the effects of non-deductible expenses incurred by the
Company applied to pre-tax income for 1998, versus a pre-tax loss for 1999.
The Company incurred an extraordinary charge of $2.6 million, net of income
tax benefits of approximately $1.4 million related to the early retirement of
its primary long-term debt obligations on April 15, 1999. See LIQUIDITY AND
CAPITAL RESOURCES below for a further discussion of this matter.
The Company reported a net loss available for common shareholders for the 1999
second quarter of $5.7 million ($.64 per share both basic and diluted), which
included an extraordinary charge of $2.6 million ($.30 per share both basic
and diluted) incurred in connection with the early retirement of the Company's
previously outstanding long term debt agreements. The resulting net loss
before extraordinary charges of $3.0 million for the second quarter of 1999
that is available for common shareholders ($.34 per share both basic and
diluted) compares to net income available for common shareholders of $.4
million ($.05 per share both basic and diluted) in the prior year's second
quarter. These decreases reflect the factors discussed in the preceding
paragraphs.
The Company reported a net loss available for common shareholders for the six
months ended June 30, 1999 of $9.0 million ($1.00 per share both basic and
diluted), which included the extraordinary charge referred to above. The net
loss before extraordinary charges of $6.3 million for the six months ended
June 30, 1999 that is available for common shareholders ($.70 per share both
basic and diluted) compares to net income available for common shareholders of
$1.0 million ($.12 per share both basic and diluted) for the comparable period
of the prior year. These decreases 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,
during 1998 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 in the latter half of 1998 and into the first
quarter of 1999. 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. This consigned material was
billed to the Company during the first quarter of 1999, and the Company does
not currently possess any substantial amount of vendor-owned consigned
material. As discussed further below, the Company utilized proceeds from its
long-term debt refinancing, as well as the issuance of short term debt, to
substantially reduce its outstanding accounts payable balance during the
second quarter of 1999.
The Company's inventories peaked near the end of the first quarter of 1999,
and management is focused on increasing inventory turns and better managing
inventory levels. In order to limit the Company's exposure to rapid inventory
price inflationary and deflationary pressures, the Company reduced its steel
coil inventory holdings and intends to maintain these lower levels consistent
with sound business practice. The Company succeeded in its efforts to reduce
its inventory position during the second quarter of 1999, and continues to
strive to limit its on-hand inventory position. The Company believes it can
successfully operate its business on inventory levels lower than those
maintained in late 1998 and early 1999, 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. 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 is typically higher than compared
to December 31, due to the seasonal nature of its late fourth quarter sales
activity. The $.1 million and $11.1 million increases in accounts receivable
for the six months ended June 30, 1999 and 1998, respectively, follows this
seasonality. It should be noted that the 1999 increase was less than that of
1998, given the decrease in sales transaction pricing and the lower shipping
volumes as previously discussed.
Net cash used by operations was $16.6 million and $3.9 million for the six
months ended June 30, 1999 and 1998, respectively. Such cash used by
operating activities was funded by additional corporate borrowings in both
years.
The Company invested $.3 million and $5.5 million of cash during the six
months ended June 30, 1999 and 1998, respectively, in new property, plant and
equipment. During 1998 such expenditures primarily related to the Company's
second coil pickling line and improvements to the cold rolling mill, both
located in Blytheville, Arkansas. The Company sustained its 1998 construction
efforts by way of increased corporate borrowings. The Company does not
currently contemplate any further significant level of capital additions over
the course of the next twelve months. On the contrary, subsequent to the June
30, 1999 quarter end, the Company sold certain of its stamping operation
assets for approximately $.5 million.
Through the end of the 1999 first quarter, the Company's primary long-term
debt agreements required the maintenance of various financial covenants and
ratios. 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"). However, the Company
was operating very close to its leverage covenant near the end of 1998 and
throughout the first quarter of 1999. In order to access additional
liquidity, the Company entered into negotiations with various domestic
commercial lenders to establish a new asset-based revolving credit agreement
that would either relax or remove the leverage covenant mentioned above.
On April 15, 1999, the Company refinanced substantially all of its long-term
debt obligations by entering into a new revolving credit facility with an
asset-based lending institution. This new financing has a three year term and
provides the Company with up to $140.0 million in credit at varying rates of
interest set either below the prime rate for LIBOR-based loans or generally
0.5% above the prime rate for daily revolving credit advances, payable
monthly. These rates are generally equivalent to those incurred by the
Company under its former bank revolver, and are currently less than those
incurred under the Company's former 8.13% term notes. In conjunction with
this refinancing, the Company retired early its $50.0 million of 8.13% term
notes, which were due in installments through July 15, 2005. As a result of
this early retirement, the Company incurred a prepayment penalty and related
charges of approximately $4.1 million, before income tax benefits, which
amount is reported as an extraordinary item in 1999. The Company also
incurred approximately $1.5 million in costs associated with the issuance of
this new debt.
The new credit agreement eliminated the limitation on the amount of debt which
could be incurred by the Company, which was limited to 50% of total capital
pursuant to the terms of the previous bank revolver and the term notes. The
Company used the proceeds of the incremental borrowings, net of the amounts
required for debt retirement and transaction expenses, including the
prepayment penalty, to reduce its obligations to trade vendors which were
unusually high because of abnormally high inventory levels.
Security under the new agreement consists of the accounts receivable,
inventory, fixed assets and other assets of the Company. The maximum amount
of borrowings available to the Company under the new revolver is based upon
percentages of eligible accounts receivable and inventory, as defined in the
new agreement, as well as amounts attributable to selected fixed assets of the
Company. Close attention is given to managing the liquidity afforded under
the Company's asset-based revolving credit agreement.
On June 30, 1999, the Company executed a short-term note payable in the
approximate amount of $13.3 million in satisfaction of certain trade payable
obligations. This unsecured promissory note bears interest at prime plus two
percent from May 1, 1999, and calls for principal payments of $1.5 million on
July 15, 1999, $1.0 million each month thereafter through November 15, 1999,
with the remaining principal and interest balance due on December 15, 1999.
During the six months ended June 30, 1999, the Company paid dividends on both
its common and preferred stock totaling $.4 million. As of this time the
Company has suspended the payment of common dividends. Future common
dividends may or may not be declared, at the discretion of the Board of
Directors, depending on restrictions imposed by the Company's revolving credit
agreement, industry conditions, evaluation of the Company's performance and
current liquidity situation. However, the Company continues to declare and
pay the $50,000 quarterly preferred dividend associated with its outstanding
Series A preferred stock.
The Company's operations, proceeds from the rationalization of certain
underutilized assets, and the potential to generate proceeds from the sale of
other assets is expected to generate sufficient funds to meet the Company's
working capital commitments, debt service requirements, necessary capital
expenditures and the payment of dividends on the outstanding shares of Series
A preferred stock during the balance of 1999.
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, also explores financing alternatives such as
the possibility of issuing additional debt, or pursuing further operating
lease financing. The Company also continues to evaluate its business with the
intent to streamline operations, improve productivity and reduce costs.
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 completed the assessment phase of its Year 2000 plan, which in
addition to the assessment of its own systems and operations included
surveying the Company's primary suppliers, vendors and service providers for
Year 2000 compliance. 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. As of July 31,
1999, the Company has substantially completed its remediation phase, including
testing. As such, the Company believes all its critical internal systems are
Year 2000 compliant.
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.
Item 2. Changes in Securities and Use of Proceeds
- -----------------------------------------------------
Under the terms of the Company's revolving credit agreement executed on April
15, 1999, the Company's ability to declare common dividends is subject to the
current liquidity situation of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
INTEREST RATE 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 has
currently elected not to hedge the market risk associated with its floating
rate debt. With the Company's debt refinancing completed, as of June 30,
1999, approximately $129.4 million of the Company's debt obligations bear
interest at variable rates. Accordingly, the Company's earnings and cash flow
are affected by changes in interest rates. Assuming the current level of
borrowings at variable rates and assuming a one-half point increase in average
interest rates under these borrowings, it is estimated that the Company's
annual interest expense would increase by approximately $.6 million. In the
event of an adverse change in interest rates, management would likely take
actions to mitigate the Company's exposure to interest rate risk; however, due
to the uncertainty of the actions that would be taken and their possible
effects, this analysis assumes no such action. Further, this analysis does
not consider the effects of the change in the level of overall economic
activity that could exist in such an environment.
OTHER RISKS
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 June 30,
1999, and does not enter into derivative financial instruments for trading
purposes.
PART II. OTHER INFORMATION
- -----------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
(a) The Company held its annual meeting of shareholders on May 6,
1999.
(b) The following directors were elected to serve terms of three
years, with such terms to expire in 2002: B. D. Hunter and Robert J.
Marischen. The remaining directors include Donald E. Brandt and Michael M.
McCarthy, whose terms expire in 2000; and James J. Gavin, Jr., whose term
expires in 2001.
(c) With respect to the vote for directors, Messrs. Hunter and
Marischen received 40,847,488 votes in favor of election, with 165,025 votes
withheld. Brokers were permitted to vote on the election of directors in the
absence of instructions from street name holders; broker non-votes did not
occur in this matter.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------
(a) See the Exhibit Index included herein.
(b) Reports on Form 8-K:
The Company filed a Form 8-K on April 19, 1999, which filing discussed under
Item 5, Other Events, the Company's earnings for the three months ended March
31, 1999, announced the refinancing of its primary long-term debt obligations,
and provided certain forward-looking data for the year ending December 31,
1999.
The Company filed a Form 8-K on July 29, 1999, which filing discussed under
Item 5, Other Events, the Company's earnings for the three and six months
ended June 30, 1999, as well as providing certain forward-looking data for the
year ending December 31, 1999.
******************
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUNTCO INC.
(Registrant)
Date: August 6, 1999 By: /s/ ROBERT J. MARISCHEN
-----------------------
Robert J. Marischen,
Vice Chairman of the Board,
President and
Chief Financial Officer
<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: Omitted - not applicable.
4: Omitted - not applicable.
10: Omitted - not applicable.
11: Omitted - not applicable.
15: Omitted - not applicable.
18: Omitted - not applicable.
19: Omitted - not applicable.
22: Omitted - not applicable.
23: Omitted - not applicable.
24: Omitted - not applicable.
27: Financial Data Schedule.
99: Omitted - not applicable.
<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 SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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