-----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, BX+BYbhD2jQpkNKmRrVoMnjW4lmSt6qwZsCZTbYrwrdmolSzezZLBMPmrT0xMf2V pOj88PwTqA1VF5FS5+D8Kg== 0000905722-01-500025.txt : 20020410 0000905722-01-500025.hdr.sgml : 20020410 ACCESSION NUMBER: 0000905722-01-500025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 1934 Act SEC FILE NUMBER: 001-13600 FILM NUMBER: 1785477 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 form10q3.txt FORM 10-Q THIRD QUARTER 2001 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 September 30, 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: 000-21916 --------- 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. [X] Yes [ ] No As of November 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 September 30, 2001 (Unaudited) and December 31, 2000 (Audited) Condensed Consolidated Statements of Operations Nine and Three Months Ended September 30, 2001 and 2000 (Unaudited) Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 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 4. Submission of Matters to a Vote of Security Holders 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) September 30, December 31, 2001 2000 ---------- ----------- (unaudited) (audited) ASSETS Current assets: Cash $ 1,434 $ 1,322 Accounts receivable, net 19,402 25,979 Inventories 25,257 46,517 Other current assets 1,823 769 -------- -------- 47,916 74,587 Property, plant and equipment, net 53,025 57,072 Assets held for sale - 7,180 Other assets 8,765 8,061 -------- -------- $109,706 $146,900 ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 31,326 $ 35,109 Accrued expenses 5,590 1,670 Current maturities of long-term debt 388 359 Current maturities of long-term debt expected to be refinanced 46,646 - -------- -------- 83,950 37,138 -------- -------- Long-term debt 9,833 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 87,220 86,530 Accumulated deficit (75,887) (64,613) -------- -------- 15,923 26,507 -------- -------- $109,706 $146,900 ======== ======== See Accompanying Notes to Condensed Consolidated Financial Statements HUNTCO INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands, except per share amounts)
Nine Months Three Months Ended September 30 Ended September 30 2001 2000 2001 2000 ------- ------- ------- ------- Net sales $140,491 $231,595 $ 38,350 $ 66,313 Cost of sales 136,224 217,890 36,446 65,702 ------- ------- ------ ------ Gross profit 4,267 13,705 1,904 611 Selling, general and administrative expenses 10,902 13,063 2,237 4,098 ------- ------- ------ ------ Income (loss) from operations (6,635) 642 (333) (3,487) Interest, net (4,639) (7,566) (1,058) (2,492) ------ ------- ------ ------ Loss before income taxes (11,274) (6,924) (1,391) (5,979) Benefit for income taxes - (2,400) - (2,049) ------- ------- ------ ------ Net loss (11,274) (4,524) (1,391) (3,930) Preferred dividends 150 150 50 50 ------- ------- ------ ------ Net loss available for common shareholders $(11,424) $ (4,674) $(1,441) $(3,980) ======= ======= ====== ====== Loss per common share: Basic and diluted $(1.28) $(.52) $(.16) $(.45) ====== ===== ===== ===== Weighted average common shares outstanding: (Basic and diluted) 8,942 8,942 8,942 8,942 ===== ===== ===== ===== See Accompanying Notes to Condensed Consolidated Financial Statements
HUNTCO INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands) Nine Months Ended September 30, 2001 2000 ------- ------- Cash flows from operating activities: Net loss $(11,274) $(4,524) ------- ------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 4,428 7,827 Deferred income taxes - (2,397) Decrease (increase) in: accounts receivable 6,577 8,427 inventories 21,260 7,385 other current assets (1,054) 370 other assets (924) 212 Increase (decrease) in: accounts payable (3,783) (12,661) accrued expenses 3,919 (99) Other - (221) ------- ------- Total adjustments 30,423 8,843 ------- ------- Net cash provided by operations 19,149 4,319 ------- ------- Cash flows from investing activities: Acquisition of property, plant and equipment, net (892) (2,013) Proceeds from sale of property, plant & equipment, net of direct selling costs 16,882 264 Liquidation of operating leases on sold equipment (8,280) - ------- ------- Net cash provided (used) by investing activities 7,710 (1,749) ------- ------- Cash flows from financing activities: Net proceeds from (payments on): Revolving credit facilities (36,342) (1,480) Enron debt 10,000 - Other debt and capital lease obligations (405) (214) Dividends paid - (150) ------- ------- Net cash used by financing activities (26,747) (1,844) ------- ------- Net increase in cash 112 726 Cash, beginning of period 1,322 414 ------- ------- Cash, end of period $ 1,434 $ 1,140 ======= ======= 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 September 30, 2001, the condensed consolidated statements of operations for the nine and three months ended September 30, 2001 and 2000, and the condensed consolidated statements of cash flows for the nine months ended September 30, 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 September 30, 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 of Part I, "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 September 30, 2001 are not necessarily indicative of the operating results for the full year. 2. INVENTORIES Inventories consisted of the following as of: September 30, December 31, 2001 2000 ------- --------- Raw materials $ 18,334 $ 33,426 Finished goods 6,923 13,091 -------- -------- $ 25,257 $ 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. 3. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations. This statement requires, among other things, that all business combinations be accounted for by the purchase method. Additionally, in June 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. This Standard will be adopted by the Company on January 1, 2002. Under this new Standard, goodwill and other intangible assets that are determined to have indefinite lives will no longer be amortized. Instead, these assets will be subject to impairment testing according to the rules set out in the new Standard. Intangible assets with a finite useful life will continue to be amortized over the useful life of that asset. During the first quarter of 2002, the Company expects to cease amortization of its goodwill and indefinite lived intangible assets and perform the impairment testing as required by the standard. Goodwill amortization for the third quarter ended September 30, 2001 was $111 thousand and is expected to be $445 thousand for all of 2001. An impairment of goodwill or intangible assets, if any, would be presented as a separate line item in the Statement of Operations. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS No.143"). This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 will become effective as of January 1, 2003. The Company is still assessing the impact to which its financial condition or results of operations may be affected by the implementation of this accounting standard. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). This statement addresses financial accounting and reporting for the impairment or disposal of long- lived assets and supersedes FASB Statement No. 121. SFAS No. 144 will become effective as of January 1, 2002 for the Company. 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 beyond 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 Huntco Inc. 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 filed an application on July 18, 2001 with the Securities and Exchange Commission (the "SEC") to obtain the SEC's approval to delist the Class A common stock with the NYSE effective at the opening of the trading session on August 10, 2001. 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. As of June 13, 2001, Huntco Inc. 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 are available in the Pink Sheets Electronic Quotation Service and on the OTC Bulletin Board. 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 operating lease commitment obligations associated with 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 is providing 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 agreements. 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 Item 1 "Business," of the Company's Form 10-K for the year ended December 31, 2000 for a discussion of why actual results may differ materially from the forward-looking statements contained in these paragraphs. The Company began executing steel purchase transactions as contemplated by the Enron inventory agreements on July 19, 2001. 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 share of Class A common stock. 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 ended September 30, 2001 were $38.4 million, a decrease of 42.2% in comparison to net sales of $66.3 million for the three months ended September 30, 2000. The Company attributes the decrease in net sales to lower sales volumes resulting from the June 2001 sale of the cold rolling and pickling assets as well as to a reduction in shipping volume and average selling prices for the continuing operations. Average selling prices for the Company's products during the 2001 third quarter were approximately 16.8% lower than those of the 2000 third quarter. Excluding the effect of average selling prices for cold rolled steel, the decline would have been 14.4%. With respect to volumes, the Company processed and shipped 150,775 tons of steel in the quarter, a decrease of 36.0% in comparison to the prior year's third quarter. The Company's direct sales volume for the third quarter of 2001 versus 2000 declined by 32.9%, with the largest portion of the decline being attributable to the sale of the Company's cold rolling operations. Excluding the effect of the loss of mill direct cold rolled steel sales, direct sales volume declined 15.6%. The Company's toll processing volumes also declined by 42.7% in comparison to the prior year's third quarter. Excluding the effect of the loss of toll conversion of cold rolled steel master coils attributable to the sale of the cold mill, toll processing volume declined 21.0%. Approximately 28.4% of the tons processed in the third quarter of 2001 represented customer-owned material processed on a per ton, fee basis, versus a tolling percentage of 31.7% in the comparable period of the prior year. Net sales for the nine months ended September 30, 2001 were $140.5 million, a decrease of 39.3% in comparison to net sales of $231.6 million for the nine months ended September 30, 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 first nine months of 2001 were approximately 13.9% lower than those of the same period in 2000. Excluding the effect of average selling prices for cold rolled steel, the decline would have been 12.9%. With respect to volumes, the Company processed and shipped 546,405 tons of steel in the first nine months of 2001, a decrease of 26.9% in comparison to the comparable prior year period. The Company's direct sales volume for the first nine months of 2001 versus 2000 declined by 29.0%, with the largest portion of the decline due to the loss of production attributable to the sale of the Company's cold rolling operations. Excluding the effect of mill direct cold rolled steel sales, direct sales volumes would have decreased by 18.7% for the first nine months of 2001 versus 2000. The Company's toll processing volumes also declined by 21.1%. The decline would have been 5.8% if the decline in toll conversion of cold rolled steel master coils due to the loss in production attributable to the sale of the cold mill were excluded. Approximately 28.4% of the tons processed in the first nine months of 2001 represented customer-owned material processed on a per ton, fee basis, versus a tolling percentage of 26.3% in the comparable period of the prior year. Gross profit expressed as a percentage of net sales was 5.0% and 3.0% for the three and nine months ended September 30, 2001, which compares to .9% and 5.9% for the comparable prior year periods. 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 nine months 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 half of 2001 were especially negatively impacted by the underutilization of the Company's cold rolling operations. This was attributable to a combination of an over capacity situation plaguing the cold rolling sector of the flat rolled steel industry, a 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 $2.2 million and $10.9 million for the three and nine months ended September 30, 2001, respectively, reflect a decrease of $1.9 million and $2.2 million from the respective prior year periods. The decrease in spending on selling, general and administrative expenses that occurred primarily in the 2001 third quarter, is attributable to the Company's ongoing efforts to streamline its operations in the face of a difficult market environment as well as reductions in personnel due to the sale of the Company's cold rolling and coil pickling operations in the second quarter of 2001. The Company reported a loss from operations of $.3 million and $6.6 million in the three and nine month periods ended September 30, 2001, respectively, which compares to a loss from operations of $3.5 million for the three months ended September 30, 2000 and income from operations of $.6 million for the nine months ended September 30, 2000. These changes reflect the factors discussed in the preceding paragraphs. Net interest expense of $1.1 million and $4.6 million was incurred during the three and nine month periods ended September 30, 2001, respectively, versus $2.5 million and $7.6 million, respectively, in the comparable prior year periods. These decreases are primarily attributable to lower interest rates being in effect and lower average borrowings during the 2001 periods versus the comparable 2000 periods. The Company maintained substantially lower amounts of working capital during the 2001 periods versus the comparable 2000 periods, which resulted in lower borrowings against the Company's credit facility. For instance, inventories stood at $70.4 million on September 30, 2000 and had been reduced to $25.3 million as of September 30, 2001. Accounts receivable balances also declined by $14.0 million between September 30, 2000 and September 30, 2001, as transaction pricing and volumes declined from the robust levels of the first half of 2000, reflective of the general market slowdown in the manufacturing sector of the economy during 2001. Another factor contributing to the reduction in inventory and accounts receivable was the liquidation of the working capital related to the Company's cold rolling and pickling operations, which were sold late in the second quarter of 2001. The proceeds from the sale of these operations were used primarily to reduce the Company's credit facility and to pay off operating leases associated with machinery and equipment used in the sold operations. Inventory levels were further reduced as a result of the Enron inventory agreement, which has allowed the Company to acquire inventory from Enron just prior to the time of processing and sale. The effective income tax rate experienced by the Company was 34.7% in the first nine months 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 $1.4 million and $11.4 million (or $(.16) and $(1.28) per share both basic and diluted) for the three and nine months ended September 30, 2001, compared to a net loss available for common shareholders of $4.0 million and $4.7 million (or $(.45) and $(.52) per share both basic and diluted) in the comparable 2000 periods. These changes reflect 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. 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 a significant portion 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 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. During the third quarter of 2001, the Company's volume of direct sales was 108,009 tons of steel in the quarter, of which 11.4% was purchased from Enron under the terms of the Enron inventory agreements. The Company expects to purchase approximately 80% of its steel requirements from Enron prospectively once it completes the transition to the Enron inventory agreements expected to occur in early-2002. At September 30, 2001, the Company held call options for the purchase of 32,372 tons of steel from Enron at a call price generally equal to prevailing steel market prices at the date the call options are exercised. These call options have a term of 120 days from the date of issuance. The Company has recorded approximately $1.4 million in deferred costs at September 30, 2001 related to these call options. Upon exercise of the call options, these deferred costs will become part of the carrying value of the inventory purchased from Enron and ultimately recognized as cost of goods sold when the inventory is sold. In the event these call options expire unexercised, these deferred costs would be recognized immediately in the Company's results of operations. The Company anticipates that substantially all of the call options will be exercised. In connection with modifications agreed to in June 2001, the interest rates generally applicable to the revolver increased 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 stood 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, as part of the modifications to which the Company and its senior lender agreed in June, 2001, 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 became effective in July 2001. The term of the Company's revolving credit facility continues until April 15, 2002. During the first nine months of 2001, the Company generated approximately $19.1 million of cash from operating activities (primarily from a reduction of its outstanding inventories) and $16.9 million from the sale of property, plant and equipment, primarily from the sale of its cold rolling and coil pickling operations. The Company used $36.3 million of cash during the first nine months of 2001 to reduce balances outstanding on its revolving credit facility and $8.3 million to retire operating lease obligations. The Company used relatively limited amounts of funds for capital expenditures during the first nine months of 2001 and 2000, investing $.9 million and $2.0 million, respectively. Total borrowings under the Company's asset-based revolving credit facility were approximately $46.6 million at September 30, 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 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, preferred dividend payments totaling $.2 million, are in arrears as of September 30, 2001, of which $.05 million would have been paid in the third quarter 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 is contractually prohibited from paying preferred or common dividends absent repayment of, or a refinancing of the Company's asset-based revolving credit facility that would not include this restriction. The Company's operations, borrowing capacity available under its asset-based revolving credit facility and off-balance sheet financing leverage available under the Enron inventory agreements, and potential additional asset sales are expected to generate sufficient funds to meet the Company's immediate working capital commitments, debt service requirements, and necessary capital expenditures, over the near-term. However, these sources of cash flow are expected to be insufficient to provide the means for any significant reduction in the level of steel vendor financing currently in place, which totaled approximately $28.0 million at September 30, 2001, substantially all of which is or will soon be beyond agreed upon terms as the Company's primary suppliers of steel are forcing the Company to pay for current shipments at the time of delivery. Further, the Company has not yet been successful in obtaining an extension or replacement of its existing revolving credit facility that expires on April 15, 2002. The Company continues to pursue an extension of its revolving credit facility and is conducting discussions with its current secured lenders, as well as potential replacement lenders concerning this issue. No assurance can be given as to the successful outcome of these negotiations. Further, the Company continues to pursue various ways in which to reduce the level of vendor financing, including negotiations of outstanding balances with the applicable vendors. A meeting with the Company's primary steel vendors has been scheduled for December 12, 2001 to further discuss alternatives available to the Company to resolve outstanding balances due to such vendors. No assurance can be given at this time as to the outcome of these negotiations. A successful resolution of the balances owed to vendors as well as an extension or replacement of the Company's revolving credit facility are essential for the Company to continue operating as a going concern. 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 September 30, 2001, $56.6 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 $.3 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. At September 30, 2001, the Company held call options for the purchase of 32,372 tons of steel from Enron at a call price generally equal to prevailing steel market prices at the date the call options are exercised. These call options have a term of 120 days from the date of issuance. The Company anticipates that substantially all of the call options will be exercised. The Company has no material derivative financial instruments as of September 30, 2001, and does not enter into derivative financial instruments for trading purposes. PART II. OTHER INFORMATION - ----------------------------- Item 3. Defaults Upon Senior Securities - -------------------------------------------- (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, preferred dividend payments totaling $.2 million, of which $.05 million would have been paid in the third quarter 2001, 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 is contractually prohibited from paying preferred or common dividends absent repayment of, or a refinancing of the Company's asset-based revolving credit facility that would not include this restriction. Item 4. Submission of Matters to a Vote of Security Holders - --------------------------------------------------------------- (a) The Company held its annual meeting of shareholders on July 20, 2001. (b) James J. Gavin, Jr. was elected to serve a term of three years, with such term to expire in 2004: The remaining directors include B. D. Hunter and Robert J. Marischen, whose terms expire in 2002; and Donald E. Brandt and Michael M. McCarthy whose terms expire in 2003. (c) With respect to the vote for a director, Mr. Gavin received 37,444,778 votes in favor of election, with 11,100 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) Huntco Inc. did not file any reports on Form 8-K during the quarter ended September 30, 2001. *************************** 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: November 13, 2001 By: /s/ PAUL M. GREEN ----------------------- Paul M. Green, 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-----