-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NsJQnGmIT5boe0c9PUffFlaCS77DwrNBMdbEby3rOBIexLUH33mlP5sCXSFJvfT4 u8pC8PxNmRWoYRBXpgwpCA== 0000905722-01-500012.txt : 20010619 0000905722-01-500012.hdr.sgml : 20010619 ACCESSION NUMBER: 0000905722-01-500012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010618 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUNTCO INC CENTRAL INDEX KEY: 0000905722 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 431643751 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13600 FILM NUMBER: 1662180 BUSINESS ADDRESS: STREET 1: 14323 SOUTH OUTER FORTY STREET 2: STE 600 N CITY: TOWN & COUNTRY STATE: MO ZIP: 63017 BUSINESS PHONE: 3148780155 MAIL ADDRESS: STREET 1: 14323 S OUTER FORTY STREET 2: STE 600N CITY: TOWN & COUNTRY STATE: MO ZIP: 63017 10-Q 1 form10q1.txt FORM 10-Q 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 March 31, 2001, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ----------------------- Commission File Number: 1-13600 ------- HUNTCO INC. ------------------------------------------------------ (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 -------------------------------------------------------------------- (Address of principal executive offices) (314) 878-0155 -------------- (Registrant's telephone number, including area code) NOT APPLICABLE ---------------------- (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. [ ] Yes [X] No As of June 1, 2001, 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. HUNTCO INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 2001 (Unaudited) and December 31, 2000 (Audited) Condensed Consolidated Statements of Operations Three Months Ended March 31, 2001 and 2000 (Unaudited) Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000 (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 3. Defaults Upon Senior Securities Item 6. Exhibits and Reports on Form 8-K PART I. FINANCIAL INFORMATION ----------------------------------- Item 1. Financial Statements ----------------------------------- HUNTCO INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) March 31, December 31, 2001 2000 ---------- ----------- (unaudited) (audited) ASSETS Current assets: Cash $ 1,408 $ 1,322 Accounts receivable, net 30,594 25,979 Inventories 38,486 46,517 Other current assets 901 769 -------- -------- 71,389 74,587 Property, plant and equipment, net 56,173 57,072 Assets held for sale 7,180 7,180 Other assets 7,720 8,061 -------- -------- $142,462 $146,900 ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 36,226 $ 35,109 Accrued expenses 2,574 1,670 Current maturities of long-term debt 359 359 -------- -------- 39,159 37,138 -------- -------- Long-term debt 79,835 83,255 -------- -------- 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 Accumulated deficit (67,652) (64,613) -------- -------- 23,468 26,507 -------- -------- $142,462 $146,900 ======== ======== See Accompanying Notes to Condensed Consolidated Financial Statements HUNTCO INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share amounts) Three Months Ended March 31, 2001 2000 ------- ------- Net sales $59,469 $85,860 Cost of sales 56,794 77,792 -------- ------- Gross profit 2,675 8,068 Selling, general and administrative expenses 3,771 4,547 -------- ------- Income (loss) from operations (1,096) 3,521 Interest, net (1,943) (2,507) -------- ------- Income (loss) before income taxes (3,039) 1,014 Provision for income taxes - 390 -------- ------- Net income (loss) (3,039) 624 Preferred dividends paid and in arrears 50 50 -------- ------- Net income (loss) available for common shareholders $ (3,089) $ 574 ======== ======= Earnings (loss) per common share: Basic and diluted $(.35) $ .06 ===== ===== Weighted average common shares outstanding: Basic and diluted 8,942 8,942 ===== ===== See Accompanying Notes to Condensed Consolidated Financial Statements HUNTCO INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Three Months Ended March 31, 2001 2000 ------- ------- Cash flows from operating activities: Net income (loss) $(3,039) $ 624 ------- ------- Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 1,578 2,605 Decrease (increase) in: accounts receivable (4,615) (1,712) inventories 8,031 (1,628) other current assets (132) (18) other assets 174 (263) Increase (decrease) in: accounts payable 1,117 (5,269) accrued expenses 904 402 Other - (2) ------- ------- Total adjustments 7,058 (5,885) ------- ------- Net cash provided (used) by operations 4,019 (5,261) ------- ------- Cash flows from investing activities: Acquisition of property, plant and equipment, net (513) (619) ------- ------- Net cash used by investing activities (513) (619) ------- ------- Cash flows from financing activities: Net proceeds from (payments on): Revolving credit facilities (3,320) 6,143 Other debt and capital lease obligations (100) 273 Dividends paid - (50) ------- ------- Net cash provided (used) by financing activities (3,420) 6,366 ------- ------- Net increase in cash 86 486 Cash, beginning of period 1,322 414 ------- ------- Cash, end of period $ 1,408 $ 900 ======= ======= See Accompanying Notes to Condensed Consolidated Financial Statements HUNTCO INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) ----------------------------------------------------------- 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Huntco Inc. and subsidiaries (the "Company") have prepared the condensed consolidated balance sheet as of March 31, 2001, and the condensed consolidated statements of operations and of cash flows for the three months ended March 31, 2001 and 2000, without audit. In the opinion of management, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the financial position at March 31, 2001, 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, 2000 (the "Form 10-K"), which Form 10-K was filed with the Securities and Exchange Commission on June 14, 2001. In addition, the Company entered into a number of significant agreements in the second quarter of 2001 that are described in the notes to the consolidated financial statements in the Form 10-K, and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q. 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, 2000, included in the aforementioned Form 10-K. The results of operations for the period ended March 31, 2001 are not necessarily indicative of the operating results for the full year. 2. INVENTORIES Inventories consisted of the following as of: March 31, December 31, 2001 2000 ------- --------- Raw materials $ 27,654 $ 33,426 Finished goods 10,832 13,091 -------- -------- $ 38,486 $ 46,517 ======== ======== 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. 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 2001 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 "Business Risk Factors" included within Item 1, "Business", of the Company's annual report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on June 14, 2001. RESULTS OF OPERATIONS RECENT DEVELOPMENTS Market for common shares: The New York Stock Exchange ("NYSE") suspended trading in the shares of Class A common stock of the Company on June 13, 2001, citing that the Company has not met the NYSE's continued listing criteria, in that its total market capitalization has been less than $15.0 million over an extended period of time. The NYSE has informed the Company that it intends to file an application with the Securities and Exchange Commission (the "SEC") required to obtain the SEC's approval to delist the Class A common stock with the NYSE. Even though delisted with the NYSE, the Class A common stock will continue to be registered with the SEC under the Securities Exchange Act of 1934 (the "Exchange Act"), and the Company intends to file with the SEC all reports required under the Exchange Act. Prior to entering into the Enron Transactions discussed below, the Company submitted a business plan to the NYSE's Listings and Compliance Committee for returning the Company to compliance with the NYSE's continued listing criteria no later than June 7, 2002. On March 24, 2001, the NYSE accepted the Company's plan, and began monitoring the Company's progress towards complying with its continued listing criteria, retaining the discretion to initiate suspension or delisting procedures with respect to a company that is not in compliance with its standards, including those that are subject to a previously-approved listing standards compliance plan. The NYSE requires that a $15.0 million market capitalization be maintained if a company has at least $50.0 million of total shareholders' equity. The NYSE further requires that if a company's total shareholders' equity is less than $50.0 million, then it must maintain a market capitalization of at least $50.0 million. In light of the Enron Transactions described below and the asset impairment charge taken during 2000, the Company's total shareholders' equity fell below $50.0 million. As a result, the Company would have been required to attain a $50.0 million market capitalization, rather than a $15.0 million market capitalization, in order to continue its NYSE listing. The Company's 30-day average market capitalization has been under $15.0 million since the fourth quarter of 2000, which fact resulted in the suspension. The Company expects that the SEC will accept the application to permanently delist the Class A common stock from the NYSE. As of June 13, 2001, the Company was assigned a new stock-trading symbol of "HCOIA". Bid and ask quotes for over-the-counter trading of shares of the Company's Class A common stock is available in the Pink Sheets Electronic Quotation Service. The Company also plans to pursue quotation of its shares of Class A common stock by the OTC Bulletin Board once it has filed this Annual Report on Form 10-K and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. Enron Transactions: In June 2001, the Company entered into a series of transactions with Enron North America Corp. ("ENA"), EBF LLC ("EBF"), in which ENA is a member, and Enron Industrial Markets LLC ("EIM")(hereinafter ENA and EIM are collectively referred to as "Enron"). Following is a brief discussion of these different transactions: Sale of cold rolling and pickling assets: The Company sold its cold rolling and coil pickling operations to EBF in June 2001, and used the net sale proceeds to reduce its long-term debt, and to retire certain lease commitment obligations associated with operating leased equipment used in the operations sold. With this transaction, the Company no longer is in the business of producing cold rolled steel coils for its own account. The Company did retain ownership of its original coil pickling line in Blytheville, Arkansas, and is exploring opportunities to either redeploy or sell this asset. Operation and maintenance of cold rolling and coil pickling assets: In conjunction with the sale of the cold rolling and coil pickling assets, the Company further contracted to provide EBF with ongoing operating and maintenance assistance for these assets on a cost-plus reimbursement basis. As a result, the Company will continue to employ personnel to operate the assets sold to EBF in accordance with EBF's instructions, and as otherwise called for in the contractual arrangement. Under the Operation and Maintenance Agreement (the "O&M agreement"), the Company will provide production, maintenance, and administrative services to EBF for a variable fee, depending upon production levels, along with various production and yield incentives. The Company is also subject to penalties not to exceed the amount of the variable fees and incentives due from EBF for not achieving certain production and yield goals. The O&M agreement is for an initial three-year term, with renewal options and provisions for earlier termination at EBF's option. The Company also expects to have the ability to procure pickled and cold rolled steel coil products on a competitive basis in support of the flat rolled processing business of its other facilities stemming from its involvement with EBF in connection with the O&M agreement. Inventory supply and price risk management agreement: The Company entered into a fifteen-year inventory supply and price risk management agreement (the "Enron inventory agreements"), under which Enron will provide inventory to the Company for its use at then current market rates as defined in the agreement. This arrangement will result in steel coil inventory previously held as raw material on the Company's books to eventually be held by Enron for acquisition by the Company just prior to the time of processing and sale. To promptly respond to customer orders for its products, the Company has traditionally maintained a substantial inventory of steel coils in stock and on order. Prior to implementing the Enron inventory agreements, the Company's commitments for steel purchases were generally at prevailing market prices in effect at the time the Company placed its orders, which for imported material could be up to six to nine months prior to receipt at one of the Company's facilities. While the Company will continue to procure its steel coil products through its current supply channels, the Enron inventory agreements will allow the Company to generally acquire its inbound steel coil purchases from Enron at prevailing market prices at the time of processing and sale. As a result, the Company expects to be less susceptible to the negative effects of future steel coil price fluctuations. As prevailing market prices rise, causing the Company to pay more for steel purchases from Enron, it expects that it will be able to pass along such increases to its traditional spot market customer base. Conversely, as prevailing market prices decline, the Company's customers typically demand lower selling prices. Under the Enron inventory agreements, the Company expects to better maintain its margins in such a declining market environment due to the expected decline in the price at which it will acquire its steel coil requirements from Enron at the time of processing the customer's order. The Enron inventory agreements are also expected to improve the Company's liquidity. The Company's revolving credit agreement provides for borrowings of up to 65% of the value of the Company's inventories. Future purchases pursuant to the Enron inventory agreements will effectively provide the liquidity equivalent of an approximate 85% advance rate against the value of the Company's steel coil purchase needs. After full implementation of the Enron inventory agreements, the Company also expects to be able to reduce its average inventory holding periods from historical levels of 75-120 days to less than 30 days. Reference should be made to the caption "Implementation of inventory management agreements" found under the "Business Risk Factors" section of this Item 1 "Business," for a discussion of why actual results may differ materially from the forward-looking statements contained in these paragraphs. Newly issued $10.0 million debt to Enron: The Company obtained a new $10.0 million five-year term loan from Enron, which is generally secured by all of the assets of the Company, the security interests of Enron being subordinate to those of the Company's lender under its asset-based revolving credit agreement. Issuance of common stock warrants: The Company issued Enron a warrant for the issuance of up to 1.0 million shares of Huntco Inc. Class A common stock, exercisable within ten years from the date of grant with a strike price of $1.45 per Class A common share. See Note 2 to the Consolidated Financial Statements included within the Company's annual report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on June 14, 2001, for a further discussion of these transactions. Background on decision to sell cold rolling and pickling assets: The Company committed significant capital and operating resources to the development of this line of business since the mid-1990s, only to be faced with unexpected and unpredictable eroding spreads between hot rolled and cold rolled pricing that occurred since its decision to construct the cold mill and related assets in 1993. Erratic and volatile flat rolled steel coil pricing at both the hot rolled and cold rolled levels has been fed over the last few years by the heightened amount of steel imports, domestic overcapacity constructed at the producer levels for hot rolled, cold rolled, and galvanized steel coils, which producers of such products represented suppliers to, competitors of, and customers for the Company's cold rolling operations, respectively. The difficulties faced by the Company in supplying its cold rolling operations on an independent basis in competition with producing hot mills or against duty-free cold rolled imports were staggering in light of the significant volatility in hot rolled and cold rolled steel coil prices that impaired the Company's liquidity over the last three years. Import restrictions on hot rolled coils without commensurate restrictions on cold rolled products put pressure on the traditional spread between hot rolled and cold rolled steel prices. As a result, the Company was no longer able to generate sufficient margins on this business to justify any continued investment in these operations. Unfortunately, the hot rolled/cold rolled spreads that existed when the Company committed to construct its cold rolling facility in 1993 and when it started up these operations in 1995 deteriorated to the point that the Company concluded in late calendar 2000 that the best course of action was to divest itself of its cold rolling and pickling assets. The spread between hot rolled and cold rolled transaction prices according to Purchasing Magazine averaged just over $150 per ton in 1994 and 1995, as the Company was constructing and starting up its cold rolling operations. Unfortunately, the average spread between hot rolled and cold rolled transaction prices according to Purchasing Magazine declined to approximately $107 per ton over the course of 1998, 1999 and 2000. Beyond the deterioration in cold rolled transaction margins referred to above, in order for the Company to operate as an independent cold rolled producer, it had to acquire hot rolled coils in advance to ensure it could meet its customer demands. As a result, the Company was further exposed to deteriorating and volatile hot rolled steel prices due to its need to maintain hot rolled feedstock for its cold rolling operations. As the Company's cold rolling operations improved in quality, it also found that certain of its customers' orders were best met by using steel produced by integrated mills as this resulted in a higher quality cold rolled coil. However, the Company was not able to domestically source a sufficient quantity of such integrated hot rolled supply, as such integrated producers were also competitors of the Company's cold rolling mill. In addition, with Nucor's construction of a cold rolling and galvanizing plant immediately adjacent to the Company's cold rolling facility in Arkansas, sourcing of hot rolled material from Nucor for cold rolling purposes also dropped off. In order to meet the Company's feedstock requirements for the cold mill, it looked to import sources for much of its hot rolled coil needs. Importing such requirements required the Company to commit to fixed hot rolled purchase prices as long as 6-9 months in advance of when the material would be available for use in its cold reduction process. The Company was not only exposed to the volatile nature of steel coil prices on such advance purchases, but also to the sizes it ordered in light of an evolving and changing customer order book given the competitive landscape that it faced. It was often necessary for the Company to order wider hot rolled coils than might have otherwise been called for (if the hot bands could have been ordered with shorter lead times and more visibility to the Company's sales order book), in order to ensure that it had a sufficient amount of feedstock available for cold rolling purposes. The result of this situation was that the mix of the Company's orders for specified finished cold rolled widths did not necessarily match up with its hot rolled feedstock sizes. As a result, the Company incurred increased yield loss (i.e., scrap) due to such longer lead time feedstock purchases, as it was often necessary to specify the width of the incoming hot rolled feedstock before actual orders were in hand. In addition to the factors relating to price volatility, transaction spreads and yields discussed above, subsequent to the Company's decision to develop its cold rolling capacity, competitors added over 3.0 million tons of additional new cold rolling capacity in the Company's market territories since it opened its cold mill in 1995. Unfortunately, the market could not absorb all of this additional capacity, as evidenced by the bankruptcy filing of Heartland Steel, Inc., an Indiana-based steel processor that commenced operations at a newly constructed cold rolling mill approximately two years ago and well after the Company's entry in the cold rolled market. The above-referenced situation manifested itself over the course of 1998, 1999 and 2000, as the average spread between the price of cold rolled steel for the current month versus the price of hot rolled steel as of six months earlier fell to $20-$25 per ton in the fourth quarter of 2000, and only averaged $78 and $87 per ton in 1999 and 2000, respectively. Given that the Company incurred production costs, inclusive of scrap and non-cash expenses such as depreciation, ranging from approximately $80 per ton during the first half of 2000 when capacity utilization was relatively high to in excess of $100 per ton as capacity utilization declined significantly in the second half of 2000 and the first quarter of 2001, to convert hot rolled coils into fully processed cold rolled coils, the deteriorated spreads referred to above rendered it virtually impossible for the Company to earn a return sufficient to cover its selling, overhead and financing costs associated with these operations. The Company also attempted to create a niche market for its cold rolling operations by selling more full hard cold rolled product to galvanizers for use as feedstock in the production of hot dipped galvanized coils. Unfortunately, overcapacity built in this industry sector also led to a drop in the spread between cold rolled and galvanized prices. Per Purchasing Magazine, the average per ton spread between cold rolled and galvanized prices declined from $112 in 1998, to $36 and $13 in 1999 and 2000, respectively, with certain months showing cold rolled prices either the same as or higher than hot dipped galvanized prices. The Company believes that these deteriorations in market fundamentals resulted in the idling of one of the Company's largest cold rolled customers, Galvpro, in the first quarter of 2001. Given this market environment, the Company's prospects of maintaining its independent cold rolling facility were greatly diminished. 2001 versus 2000: Net sales for the quarter were $59.5 million, a decrease of 30.7% in comparison to net sales of $85.9 million for the three months ended March 31, 2000. The Company attributes the decrease in net sales to a reduction in shipping volume and average selling prices. Average selling prices for the Company's products during the 2001 first quarter were approximately 10.1% and 7.6% lower than those of the 2000 first quarter and fourth quarter, respectively. With respect to volumes, the Company processed and shipped 227,770 tons of steel in the quarter, a decrease of 13.5% in comparison to the prior year's first quarter. The Company's direct sales volume for the first quarter of 2001 versus 2000 declined by 20.2%, with the largest decline found at the Company's cold rolling operations. The Company's toll processing volumes were slightly up over the prior year. Approximately 27.3% of the tons processed in the first quarter of 2001 represented customer-owned material processed on a per ton, fee basis, versus a tolling percentage of 21.2% in the comparable period of the prior year. Gross profit expressed as a percentage of net sales was 4.5% for the quarter ended March 31, 2001, which compares to 9.4% for the prior year's first quarter. During the 2000 first quarter, the Company benefited from generally rising steel prices and good utilization of its facilities. However, the Company was faced with declining selling values and a soft economic environment during the first quarter of 2001, especially with respect to its cold rolling and coil pickling operations, which the Company sold in June 2001. Gross profit margins for the first three months of 2001 were especially negatively impacted by the underutilization of the Company's cold rolling operations due to a combination of the overcapacity situation plaguing the cold rolling sector of the flat rolled steel industry, the general market slowdown affecting the manufacturing sector of the economy as a whole, and the narrowing spreads between prevailing hot rolled and cold rolled steel prices that was exacerbated by the decision of the International Trade Commission to uphold steel import duties on hot rolled steel, but not similarly on cold rolled products. Such actions have had a negative impact on independent cold rolled steel processors, such as the Company, and contributed to the Company's decision to sell its cold rolling productive assets. Selling, general and administrative ("SG&A") expenses of $3.8 million reflect a decrease of $.8 million, or 17.1%, from the prior year's first quarter. This decrease is attributable to the Company's ongoing efforts to streamline its operations in the face of a difficult market environment. However, SG&A expenses expressed as a percentage of net sales increased from 5.3% to 6.3% when comparing the first quarters of 2000 and 2001, as a portion of the Company's SG&A costs are fixed and do not fluctuate with sales levels. The Company reported a loss from operations of $1.1 million in the quarter ended March 31, 2001, which compares to income from operations of $3.5 million as reported for the corresponding period of the prior year. This change reflects the factors discussed in the preceding paragraphs, principally the discussion concerning the change in the Company's gross profit. Net interest expense of $1.9 million and $2.5 million was incurred during the quarters ended March 31, 2001 and 2000, respectively. This decrease is primarily attributable to lower interest rates being in effect and lower average borrowings during the 2001 versus 2000 first quarter. The Company maintained substantially lower amounts of working capital during the 2001 versus 2000 first quarter. For instance, inventories stood at $79.5 million on March 31, 2000, and had been reduced to $38.5 million as of March 31, 2001, a reduction of 51.6%, inclusive of the impact of the fourth quarter 2000 writedown of the Company's inventory carrying value. Accounts receivables declined 29.7% between March 31, 2000 and March 31, 2001, as transaction pricing and volumes declined from the robust levels of the first quarter of 2000, reflective of the general market slowdown in the manufacturing sector of the economy during 2001. The effective income tax rate experienced by the Company was 38.5% in the first quarter of 2000. The absence of an income tax benefit related to the Company's 2001 pre-tax loss reflects the Company's decision to establish and maintain a valuation allowance against its net deferred tax assets, which allowance was initially established as of December 31, 2000. The Company continues to evaluate the likelihood of its ability to realize the benefit of its deferred tax assets given the continuing uncertainty of the domestic steel market. The Company will continue to assess the valuation allowance and to the extent it is determined that it is not necessary; the allowance will be subsequently adjusted. The Company reported a net loss for common shareholders of $3.1 million (or $.35 per share both basic and diluted) for the 2001 first quarter, compared to net income available for common shareholders of $.6 million (or $.06 per share both basic and diluted) in the prior year's first quarter. This change reflects the factors discussed in the preceding paragraphs. LIQUIDITY AND CAPITAL RESOURCES In June 2001, the Company finalized an agreement to sell its cold rolling and coil pickling operations located in Blytheville, Arkansas to EBF, which took an assignment of the asset purchase from EIM, for $16.0 million, net of related transaction costs. In connection with this transaction, the Company also arranged for a newly-issued $10.0 million five-year term secured loan from Enron, which bears interest at 3.0% over LIBOR. The Company utilized these net proceeds to retire certain of its operating lease obligations associated with assets formerly used in the cold rolling and pickling operation, to reduce the balance of the Company's asset-based revolving credit facility, and to fund a decrease in its balance of accounts payable. In connection with the transactions, the Company issued Enron a warrant for the issuance of up to 1.0 million shares of Huntco Inc. Class A common stock, exercisable within ten years from the date of grant with a strike price of $1.45 per Class A common share. The fair value of these warrants was approximately $.7 million, and will be amortized to expense over the fifteen- year life of the Enron inventory agreements. See Note 2 to the Consolidated Financial Statements included within the Company's annual report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on June 14, 2001, for a further discussion of these transactions. During the second quarter of 2001, the Company also entered into a fifteen year inventory supply and price risk management agreement under which Enron will provide inventory to the Company for its use at then current market rates as defined in the agreement. The Company believes this arrangement will result in approximately $20.0-$25.0 million of the steel coil inventory previously held as raw material on the Company's books to eventually be held by Enron for acquisition by the Company just prior to the time of processing and sale. The Company agreed to pay Enron, in monthly installments, an annualized price risk management fee of approximately $2.0 million per year during the term of the agreement. The Company further agreed to pay Enron a transaction fee equal to the value of held material at a rate of 2.25% over LIBOR. In connection with the inventory management agreements, the Company also issued Enron a warrant for the issuance of up to 1.0 million shares of Huntco Inc. Class A common stock, exercisable within ten years from the date of grant at a strike price of $1.45 per share. The fair value of these warrants was approximately $.7 million, and will be amortized to expense over the fifteen-year life of the inventory management agreements. The Company believes that the Enron inventory agreements should improve the Company's liquidity. The Company's revolving credit agreement provides for borrowings of up to 65% of the value of the Company's inventories. Future purchases through Enron will effectively provide the liquidity equivalent of an approximate 85% advance rate against the value of the Company's steel coil purchase needs. After full implementation of the Enron inventory agreements, the Company expects to be able to reduce its average inventory holding periods from historical levels of 75-120 days to less than 30 days. In connection with modifications agreed to in June 2001, the interest rates generally applicable to the revolver will increase to 1.0% over prime or 2.75% over LIBOR for the daily revolving credit advances on the line. The total size of the revolving credit facility stood at $140.0 million until April 2001, whereupon the Company exercised its right to reduce the size of the facility to $90.0 million. In June 2001, the Company further agreed to three separate $10.0 million line reductions, each subject to a 0.5% premium, such that the size of the asset-based revolver will stand at $60.0 million as of the end of October 2001. The Company agreed to such reductions in light of the reduced borrowing needs on the revolver stemming from the sale of its cold rolling operations, receipt of the newly issued $10.0 million term loan from Enron, and the phase-in of the Enron inventory management and supply arrangement. The Company and its senior lender also agreed to amend the asset-based revolver to eliminate a maintenance of net worth covenant which the Company was otherwise in violation of as of December 31, 2000 and March 31, 2001 absent the amendment and waiver, and to replace this covenant with a fixed charge coverage covenant that becomes effective in July 2001. The term of the Company's revolving credit facility continues until April 15, 2002. The Company intends to explore extension of the facility, as well as the possibility of obtaining additional financing associated with its property, plant and equipment during the balance of 2001. However, there can be no assurance that the Company will be successful in its efforts to obtain additional borrowings at what are deemed to be reasonable terms and financing rates. During the first quarter of 2001, the Company generated approximately $4.0 million of cash from operating activities, primarily from a reduction of its outstanding inventories. The Company used $5.3 million of cash from operating activities during the first quarter of 2000, primarily to reduce the Company's accounts payable balance. With the goal of limiting the Company's exposure to rapid inventory price deflation, the Company sought to reduce its steel coil inventory holdings. The Company focused on increasing inventory turns and better managing inventory levels, as evidenced by the $8.0 million decline in inventory during the first quarter of 2001, as well as the $36.5 million inventory decrease that occurred between March 31, 2000 and 2001, excluding the remaining portion of the inventory reserve recorded by the Company in the fourth quarter of 2000. The Company believes that it has been successful in this effort, but believes the benefits to be derived from the inventory supply and price risk management agreement entered into with Enron during the second quarter of 2001 should further reduce the Company's exposure to future inventory deflation pressures. 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 Company's business activity level 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 are typically higher than compared to December 31, due to the seasonal nature of its late fourth quarter sales activity. The $4.6 million and $1.7 million accounts receivable increases in the quarters ended March 31, 2001 and 2000, respectively, follow this seasonality. The Company used relatively limited amounts of funds for capital expenditures during the first quarters of 2001 and 2000, investing $.5 million and $.6 million, respectively. During the first quarter of 2001, the Company was able to fund its capital expenditures and a $3.3 million reduction in its long-term debt by way of cash generated from operating activities. The Company funded its first quarter 2000 operating and investing activities by way of additional corporate borrowings, primarily on its asset-based revolving credit facility. Total borrowings under the Company's asset-based revolving credit facility were approximately $79.6 million at March 31, 2001. The maximum amount of borrowings available to the Company under the revolver is based upon percentages of eligible accounts receivable and inventory, 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, which availability in excess of actual borrowings has been relatively limited throughout the term of the agreement. The Company has also accessed capital by way of other off balance sheet financing arrangements. The Company has entered into various operating leases for steel processing and other equipment at certain of its facilities. The Company did not pay any common dividends during 2000 or 2001. The Company's revolving credit agreement contains restrictions on the Company's ability to declare and pay common dividends. Pursuant to the terms of such revolving credit agreement, the Company has not been in a position to declare and pay common dividends since the first quarter of 1999. Dividends on the Company's Series A preferred stock are cumulative; were paid through the third quarter of 2000 and thereafter suspended. As a result, the scheduled December 1, 2000 and March 1, 2001 payments, totaling $.1 million, are in arrears as of March 31, 2001. In conjunction with obtaining the consent of the Company's senior lender to the June 2001 transactions with Enron and EBF, the Company agreed to a restriction on its ability to pay dividends on its Series A preferred stock through the remaining term of the asset-based revolving credit agreement, which is set to expire on April 15, 2002. As a result, the Company will not be in a position to declare preferred or common dividends until April 15, 2002, absent a refinancing of its asset-based revolving credit facility that would not include this restriction. The Company's operations, unused borrowing capacity available under its asset-based revolving credit facility, off-balance sheet financing leverage available under the Enron inventory agreements, and access to additional operating lease financings are expected to generate sufficient funds to meet the Company's working capital commitments, debt service requirements, and necessary capital expenditures, over the next twelve months. 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 dictate. The Company, from time-to-time, also explores financing alternatives such as the possibility of issuing additional debt, entering into further operating lease financings, and pursuing strategic alternatives. The Company also continues to evaluate its business with the intent to streamline operations, improve productivity and reduce costs. ITEM 3. 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 has currently elected not to hedge the market risk associated with its floating rate debt. As of March 31, 2001, $79.6 million of the Company's debt obligations bore 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 $.4 million. In the event of an adverse change in interest rates, management would likely strive to take actions to mitigate the Company's exposure to interest rate risk. However, due to the variety of actions that could be taken depending on the circumstances and the different effects that could result based on the action taken, management cannot predict the results of an adverse change in interest rates. 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. 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. Although the Company both acquires and sells carbon steel coils and products, prior to Enron's recent efforts, no formal commodity exchange existed that the Company could access to hedge its risk to carbon steel price fluctuations. The Company believes that the fifteen year inventory supply and price risk management agreement entered into with Enron in June 2001 will serve to ameliorate the impacts of future inventory market price changes on the Company, as the Company will obtain its inventory requirements at market rates for the current processing of its traditional spot market-priced flat rolled steel orders. However, the Company may still be exposed to steel price changes during the time it holds and processes such material prior to sale to its customers. The Company has no material derivative financial instruments as of March 31, 2001, and does not enter into derivative financial instruments for trading purposes. The Company is currently completing its evaluation of the impact of FAS 133 on the Enron inventory agreements. However, the Company does not believe the impact, if any, will have a material impact on its future results of operations. PART II. OTHER INFORMATION - ----------------------------- Item 3. Defaults Upon Senior Securities (a) Defaults: On June 8, 2001, the Company and its senior lender agreed to amend the Company's asset-based revolver to eliminate a maintenance of net worth covenant which the Company was otherwise in violation of as of December 31, 2000 and March 31, 2001 absent the amendment and waiver, and to replace this covenant with a fixed charge coverage covenant that becomes effective in July 2001. (b) Preferred stock arrearage: Dividends on the Company's outstanding 225,000 shares of Series A convertible preferred stock (having a liquidation preference of $20.00 per share) are cumulative; were paid through the third quarter of 2000 and thereafter suspended. As a result, the scheduled December 1, 2000, March 1, 2001, and June 1, 2001 quarterly payments of $50,000 are in arrears as of the date of this Quarterly Report on Form 10-Q. In conjunction with obtaining the consent of the Company's senior lender to the June 2001 transactions with Enron and EBF, the Company agreed to a restriction on its ability to pay dividends on its Series A preferred stock through the remaining term of the asset-based revolving credit agreement, which is set to expire on April 15, 2002. As a result, the Company will not be in a position to declare preferred or common dividends until April 15, 2002, absent a refinancing of its asset-based revolving credit facility that would not include this restriction. 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 February 2, 2001, which filing discussed under Item 5, Other Events, that the Company had been advised by the New York Stock Exchange (NYSE) that the Company fell below the NYSE's continued listing criteria relating to total market capitalization. *************************** 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: June 14, 2001 By: /s/ ANTHONY J. VERKRUYSE ----------------------- Anthony J. Verkruyse, Vice President and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) 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. 99: Omitted - not applicable. -----END PRIVACY-ENHANCED MESSAGE-----