-----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, Gbib/wXyt/vjDez7PZU5CtEZihDrGXiPClw5axjgPZLHTnBGMP2r7GsFrtZGK2pu ZBCxecmJuKu9nf+7zCTE/w== 0000905722-99-000015.txt : 19991117 0000905722-99-000015.hdr.sgml : 19991117 ACCESSION NUMBER: 0000905722-99-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99752995 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 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, 1999, 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. [X] Yes [ ] No As of October 31, 1999, the number of shares outstanding of each class of the Registrant's common stock was as follows: 5,292,000 shares of Class A common stock and 3,650,000 shares of Class B common stock. HUNTCO INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets September 30, 1999 (Unaudited) and December 31, 1998 (Audited) Condensed Consolidated Statements of Operations Nine and Three Months Ended September 30, 1999 and 1998 (Unaudited) Condensed Consolidated Statement of Cash Flows Nine Months Ended September 30, 1999 and 1998 (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds Item 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, 1999 1998 ---------- ----------- (unaudited) (audited) ASSETS Current assets: Cash $ 19 $ 21 Accounts receivable, net 41,759 43,579 Inventories 69,560 92,240 Other current assets 2,483 2,914 -------- -------- 113,821 138,754 Property, plant and equipment, net 135,736 143,401 Other assets 11,369 11,076 -------- -------- $260,926 $293,231 ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 34,587 $ 56,923 Accrued expenses 2,496 3,451 Short-term debt 9,791 - Current maturities of long-term debt 205 7,352 -------- -------- 47,079 67,726 -------- -------- Long-term debt 105,967 102,555 Deferred income taxes 2,584 7,376 -------- -------- 108,551 109,931 -------- -------- Shareholders' equity: Series A preferred stock (issued and outstanding, 225; stated at liquidation value) 4,500 4,500 Common stock: Class A (issued and outstanding, 5,292) 53 53 Class B (issued and outstanding, 3,650) 37 37 Additional paid-in-capital 86,530 86,530 Retained earnings 14,176 24,454 -------- -------- 105,296 115,574 -------- -------- $260,926 $293,231 ======== ======== 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 1999 1998 1999 1998 ------- ------- ------- ------ Net sales $265,439 $310,744 $84,199 $95,646 Cost of sales 254,094 290,070 78,589 90,490 ------- ------- ------ ------ Gross profit 11,345 20,674 5,610 5,156 Selling, general and administrative expenses 14,786 14,615 4,578 4,897 ------- ------- ------ ------ Income (loss) from operations (3,441) 6,059 1,032 259 Interest, net (7,503) (6,012) (2,496) (1,995) ------- ------- ------ ------ Income (loss) before income taxes (10,944) 47 (1,464) (1,736) Provision (benefit) for income taxes (3,772) 17 (517) (632) ------- ------- ------ ------ Net income (loss) before extraordinary item (7,172) 30 (947) (1,104) Extraordinary item, net of tax (2,644) - - - ------- ------- ------ ------ Net income (loss) (9,816) 30 (947) (1,104) Preferred dividends 150 150 50 50 ------- ------- ------ ------ Net loss available for common shareholders $ (9,966) $ (120) $ (997) $(1,154) ======= ======= ====== ====== Earnings per common share (basic and diluted): Net loss before extraordinary item $ (.81) $ (.01) $ (.11) $ (.13) Extraordinary item, net of tax (.30) - - - ----- ----- ----- ----- Net loss $(1.11) $ (.01) $ (.11) $ (.13) ===== ===== ===== ===== 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 STATEMENT OF CASH FLOWS (unaudited, in thousands)
Nine Months Ended September 30, 1999 1998 ------- ------- Cash flows from operating activities: Net income (loss) $ (9,816) $ 30 ------- ------- Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 8,573 7,453 Loss on early extinguishment of debt 4,067 - Other (34) (428) Decrease (increase) in: accounts receivable 1,820 (8,071) inventories 22,681 (6,911) other current assets 431 2,673 other assets 242 (888) Increase (decrease) in: accounts payable (22,336) 7,765 accrued expenses (955) (1,125) non-current deferred taxes (4,793) (122) ------- ------- Total adjustments 9,696 346 ------- ------- Net cash provided (used) by operations (120) 376 ------- ------- Cash flows from investing activities: Acquisition of property, plant and equipment (717) (8,103) Proceeds from sale of property, plant and equipment 661 921 ------- ------- Net cash (used) by investing activities (56) (7,182) ------- ------- Cash flows from financing activities: Net proceeds from revolving credit facilities 46,918 7,978 Payments for debt issuance costs (1,604) - Retirement of long-term notes (50,000) - Debt repurchase premiums (3,816) - Net proceeds from issuance of short-term debt 9,791 - Payments on other debt obligations (652) (405) Dividends (463) (776) ------- ------- Net cash provided by financing activities 174 6,797 ------- ------- Net decrease in cash (2) (9) Cash, beginning of period 21 27 ------- ------- Cash, end of period $ 19 $ 18 ======= ======= See Accompanying Notes to Condensed Consolidated Financial Statements
HUNTCO INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited, dollars in thousands, except per share amounts) ----------------------------------------------------------- 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated balance sheet as of September 30, 1999, the condensed consolidated statements of operations for the nine and three months ended September 30, 1999 and 1998, and the condensed consolidated statement of cash flows for the nine months ended September 30, 1999 and 1998 have been prepared by Huntco Inc. and its subsidiaries (the "Company") without audit. In the opinion of management, all adjustments (which include only normal, recurring adjustments) necessary to present fairly the financial position at September 30, 1999, and the results of operations and cash flows for the interim periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted where inapplicable. A summary of the significant accounting policies followed by the Company is set forth in Note 1 to the Company's consolidated financial statements included within Item 8 to the Company's annual report on Form 10-K for the year ended December 31, 1998 (the "Form 10-K"), which Form 10-K was filed with the Securities and Exchange Commission on March 29, 1999. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1998, included in the aforementioned Form 10-K. The results of operations for the periods ended September 30, 1999 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, 1999 1998 ------- --------- Raw materials $ 47,473 $ 66,063 Finished goods 22,087 26,177 -------- -------- $ 69,560 $ 92,240 ======== ========
As of December 31, 1998, the Company also held approximately $25.9 million of vendor-owned steel coil inventory on a consignment basis for use in its steel processing and sales activities. The Company did not possess any substantial amount of vendor-owned consigned material as of September 30, 1999. The Company classifies its inventory of cold rolled steel coils as finished goods, which coils can either be sold as master coils, without further processing, or may be slit, blanked or cut-to-length by the Company prior to final sale. 3. DEBT FINANCING On April 15, 1999, the Company refinanced substantially all of its long-term debt obligations by entering into a new revolving credit facility with an asset-based lending institution. This new financing has a three year term and provides the Company with up to $140.0 million in credit at varying rates of interest set either below the prime rate for LIBOR-based loans or generally 0.5% above the prime rate for daily revolving credit advances, payable monthly. These rates are generally equivalent to those incurred by the Company under its former bank revolver, and are currently less than those incurred under the Company's former 8.13% term notes. In conjunction with this refinancing, the Company retired early its $50.0 million of 8.13% term notes, which were due in installments through July 15, 2005. As a result of this early retirement, the Company incurred a prepayment penalty and related charges of approximately $4.1 million, before income tax benefits, which amount is reflected as an extraordinary item in the 1999 second quarter. The Company also incurred approximately $1.6 million in costs associated with the issuance of this new debt, which is being amortized over its term. The new credit agreement eliminated the limitation on the amount of debt which could be incurred by the Company, which was limited to 50% of total capital pursuant to the terms of the previous bank revolver and the term notes. The Company used the proceeds of the incremental borrowings, net of the amounts required for debt retirement and transaction expenses, including the prepayment penalty, to reduce its obligations to trade vendors which were unusually high because of abnormally high inventory levels. The Company's inventory levels peaked near the end of the first quarter of 1999, and have significantly decreased through the date of this report. Security under the new agreement consists of the accounts receivable, inventory, fixed assets and other assets of the Company. The maximum amount of borrowings available to the Company under the new revolver is based upon percentages of eligible accounts receivable and inventory, as defined in the new asset-based revolving credit agreement, as well as amounts attributable to selected fixed assets of the Company. On June 30, 1999, the Company executed a short-term note payable in the approximate amount of $13.3 million in satisfaction of certain trade payable obligations. This unsecured promissory note bears interest at prime plus two percent from May 1, 1999, and calls for principal payments of $1.5 million on July 15, 1999, $1.0 million each month thereafter through November 15, 1999, with the remaining principal and interest balance due on December 15, 1999. As of September 30, 1999, the remaining principal balance of this short-term note payable was approximately $9.8 million. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------------------------------------------------------- This Quarterly Report on Form 10-Q contains certain statements that are forward-looking and involve risks and uncertainties. Words such as "expects," "believes," and "anticipates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are based on current expectations and projections concerning the Company's plans for 1999 and about the steel processing industry in general, as well as assumptions made by Company management and are not guarantees of future performance. Therefore, actual events, outcomes, and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company encourages those who make use of this forward-looking data to make reference to a complete discussion of the factors which may cause the forward-looking data to differ materially from actual results, which discussion is contained under the title "Risk Factors - 1999 Outlook" included within Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of the Company's annual report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission on March 29, 1999. RESULTS OF OPERATIONS Net sales for the quarter were $84.2 million, a decrease of 12.0% in comparison to net sales of $95.6 million for the three months ended September 30, 1998. Net sales for the nine months ended September 30, 1999 were $265.4 million, a decrease of 14.6% in comparison to net sales of $310.7 million for the nine months ended September 30, 1998. The Company's lower net sales are primarily the result of declining selling prices. The effect of historically high imports of steel products into the United States during late 1998 and early 1999 resulted in significant declines in selling values realized by the Company and the steel processing industry in general. The Company's average per ton selling values declined 8.8% and 10.6% for the three and nine months ended September 30, 1999, in comparison to prior year levels. Also reflected in the lower net sales for 1999, were reduced direct sales volumes. Direct (i.e., non-tolling) sales volume measured in tons shipped decreased 3.4% and 4.3% in the third quarter and for the nine months ended September 30, 1999. The Company processed and shipped 292,024 and 928,439 tons of steel in the three and nine months ended September 30, 1999, compared to 288,044 and 958,877 tons for the three and nine months ended September 30, 1998. Approximately 24.8% and 24.0% of the tons processed in the three and nine month periods ended September 30, 1999, represented customer-owned material processed on a per ton, fee basis, versus a tolling percentage of 21.0% and 23.1% in the comparable periods of the prior year. Processing customer-owned material generally results in lower revenues per ton, but higher gross profit expressed as a percentage of net sales, in comparison to when the Company processes and sells its own steel inventory. The Company sold 66,504 and 195,328 tons of cold rolled products during the three and nine months ended September 30, 1999, as compared to 58,789 and 216,758 tons in the corresponding 1998 periods. Gross profit expressed as a percentage of net sales was 6.7% and 4.3% for the three and nine months ended September 30, 1999, which compares to 5.4% and 6.6% for the comparable periods of 1998, respectively. The higher quarter- over-quarter gross profit percentage is attributable to the recent improvement in industry-wide steel pricing, versus the deterioration in market prices that began in earnest in the third quarter of 1998. The lower year-over-year gross profit percentage reflects the devastating impact that steel selling price declines had on the Company in early 1999, especially in cold rolled steel product pricing and volumes. Selling, general and administrative ("SG&A") expenses of $4.6 million for the quarter ended September 30, 1999 decreased $.3 million from 1998 levels, while nine month year-to-date SG&A expenses increased $.2 million to $14.8 million when comparing 1998 to 1999. The year-over-year increase in SG&A expenses is attributable to additional costs incurred in exiting the stamping business and additional costs incurred in relocating certain administrative functions of the Company. The quarter-over-quarter decrease is the result of management's efforts to streamline its administrative efforts between 1998 and 1999. SG&A expenses as a percentage of net sales increased from 5.1% and 4.7% during the three and nine months ended September 30, 1998, to 5.4% and 5.6% during the comparable periods of 1999 due to the issues discussed above and the fact that a good portion of these expenses are fixed and do not decline with a drop in selling values or volumes. The Company reported income from operations of $1.0 million for the third quarter of 1999, an improvement of $.8 million over prior year third quarter results. This improvement is the result of the factors discussed in the preceding paragraphs. The Company incurred a loss from operations of $3.5 million during the nine months ended September 30, 1999, which compares to income from operations of $6.1 million as reported for the corresponding periods of the prior year. This decrease reflects the factors discussed in the preceding paragraphs. In addition, during the 1999 second quarter, the Company elected to dispose of its metal stamping business conducted at its Blytheville facility. The Company's stamping operation had not performed up to management's expectations since its relocation to Blytheville in 1996. The Company incurred operating losses of approximately $1.0 million in its stamping operations during the nine months ended September 30, 1999. Certain equipment related to this operation was sold during the third quarter of 1999. However, the Company will continue to utilize certain stamping equipment that produces components for its air cylinder operations. Net interest expense of $2.5 million and $7.5 million was incurred during the three and nine months ended September 30, 1999, versus $2.0 million and $6.0 million for the comparable periods of the prior year. These increases are attributable to higher levels of corporate borrowings during 1999 to support higher average inventory levels, especially during the earlier part of 1999, slightly higher interest rates charged on the Company's variable rate borrowings, as well as lower amounts of capitalized interest. The Company capitalized $.4 million and $1.0 million of interest costs during the three and nine months ended September 30, 1998, versus none for 1999. The Company placed into service substantially all of its construction projects at or near the end of 1998. The effective income tax rates experienced by the Company before extraordinary charges were 35.3% and 34.5% during the three and nine months ended September 30, 1999, which rates declined from the 36.4% and 36.2% effective income tax rates recognized during the comparable periods of the prior year. The lower year-over-year effective income tax rate is due to the effects of non- deductible expenses incurred by the Company applied to pre-tax income for 1998, versus a pre-tax loss for 1999. The Company incurred an extraordinary charge of $2.6 million, net of income tax benefits of approximately $1.4 million related to the early retirement of its primary long-term debt obligations on April 15, 1999. See LIQUIDITY AND CAPITAL RESOURCES below for a further discussion of this matter. The Company reported a net loss available for common shareholders for the 1999 third quarter of $1.0 million ($.11 per share both basic and diluted), which compares to a net loss available for common shareholders of $1.2 million ($.13 per share both basic and diluted) in the prior year's third quarter. The Company reported a net loss available for common shareholders for the nine months ended September 30, 1999 of $10.0 million ($1.11 per share both basic and diluted), which includes an extraordinary charge of $2.6 million ($.30 per share both basic and diluted) incurred in connection with the early retirement of the Company's previously outstanding long term debt agreements. The net loss before extraordinary charges of $7.3 million for the nine months ended September 30, 1999 that is available for common shareholders ($.81 per share both basic and diluted) compares to a net loss available for common shareholders of $.1 million ($.01 per share both basic and diluted) for the comparable period of the prior year. These changes reflect the factors discussed in the preceding paragraphs. LIQUIDITY AND CAPITAL RESOURCES Investment in steel coil inventories and the associated payment terms offered by vendors materially influence the Company's liquidity. Inventory levels can be heavily influenced by the source of the Company's raw material supply. Use of imported steel typically requires the Company to maintain higher levels of inventory. Receipt of imported steel is normally by large ocean-going vessel, with longer lead times required and less predictable delivery schedules for such bulk import orders, as compared to the procurement process faced when purchasing steel coils from domestic producing mills. In addition, the timing of receipt of imported steel coils can significantly impact the balance of the Company's inventories on any given day. For a number of years, steel imports into the United States have been on the rise. During 1998, steel imports in the United States surged in the wake of the Asian economic crisis. In January 1999, the U.S. Commerce Department found evidence that Japan, Russia, and Brazil illegally dumped hot rolled carbon steel into the U.S. market at prices dramatically below production costs. These trade cases demonstrate that flat rolled steel coils became increasingly available in the Company's market territories, much of it being offered at substantial discounts to similar product offered by the Company's domestic supply base. In an effort to stay competitive from a raw material pricing perspective, during 1998 the Company shifted a major portion of its steel purchases to imported coils. Due to the use of imported coils and the resultant increase in inventory, the Company extended payment terms, primarily from its import vendors, and elected to forego quick pay discounts on its domestic inventory purchases. As a result, the Company's investment in inventories and balance of accounts payable increased in the latter half of 1998 and into the first quarter of 1999. As of December 31, 1998, the Company also held approximately $25.9 million of vendor-owned steel coil inventory on a consignment basis for use in its steel processing and sales activities. This consigned material was billed to the Company during the first quarter of 1999, and the Company does not currently possess any substantial amount of vendor-owned consigned material. As discussed further below, the Company utilized proceeds from its long-term debt refinancing, as well as the issuance of short term debt, to substantially reduce its outstanding accounts payable balance during the second quarter of 1999. The Company's inventories peaked near the end of the first quarter of 1999, and management focused on increasing inventory turns and better managing inventory levels. In order to limit the Company's exposure to rapid inventory price inflationary and deflationary pressures, the Company reduced its steel coil inventory holdings and intends to maintain these lower levels consistent with sound business practice. The Company succeeded in its efforts to reduce its inventory position during the second and third quarters of 1999, and continues to strive to limit its on-hand inventory position. The Company believes it can successfully operate its business on inventory levels lower than those maintained in late 1998 and early 1999, and believes it can do so through the many supply channels developed over the past few years. In terms of other consequential working capital items, the Company's investment in accounts receivable is typically lowest at December 31, versus that of its interim quarter ends of March, June and September. The business activity level of the Company is typically slower during the months of November and December, when there are less business shipping days due to the holidays occurring during these months. As a result, the monthly sales levels preceding the Company's interim quarter ends is typically higher than compared to December 31, due to the seasonal nature of its late fourth quarter sales activity. The $8.1 million increase in accounts receivable for the nine months ended September 30, 1998, follows this seasonality. Despite this seasonality, however, accounts receivable decreased for the nine months ended September 30, 1999, given the decrease in sales transaction pricing and the lower shipping volumes previously discussed. Net of proceeds from property sales, which includes $.5 million of proceeds from the sale of the Company's stamping assets during 1999, the Company invested $.1 million and $7.2 million of cash during the nine months ended September 30, 1999 and 1998, respectively, in new property, plant and equipment. During 1998 such expenditures primarily related to the Company's second coil pickling line and improvements to the cold rolling mill, both located in Blytheville, Arkansas. The Company sustained its 1998 construction efforts by way of increased corporate borrowings. The Company does not currently contemplate any further significant level of capital additions over the course of the next twelve months. Through the end of the 1999 first quarter, the Company's primary long-term debt agreements required the maintenance of various financial covenants and ratios. Within these arrangements, the Company agreed to limit its long-term debt, inclusive of current maturities (i.e., "funded debt"), to no more than 50% of total capitalization (i.e., the sum of the Company's funded debt and total shareholders' equity)(the "leverage covenant"). However, the Company was operating very close to its leverage covenant near the end of 1998 and throughout the first quarter of 1999. In order to access additional liquidity, the Company entered into negotiations with various domestic commercial lenders to establish a new asset-based revolving credit agreement that would either relax or remove the leverage covenant mentioned above. On April 15, 1999, the Company refinanced substantially all of its long-term debt obligations by entering into a new revolving credit facility with an asset-based lending institution. This new financing has a three year term and provides the Company with up to $140.0 million in credit at varying rates of interest set either below the prime rate for LIBOR-based loans or generally 0.5% above the prime rate for daily revolving credit advances, payable monthly. These rates are generally equivalent to those incurred by the Company under its former bank revolver, and are currently less than those incurred under the Company's former 8.13% term notes. In conjunction with this refinancing, the Company retired early its $50.0 million of 8.13% term notes, which were due in installments through July 15, 2005. As a result of this early retirement, the Company incurred a prepayment penalty and related charges of approximately $4.1 million, before income tax benefits, which amount is reported as an extraordinary item in 1999. The Company also incurred approximately $1.6 million in costs associated with the issuance of this new debt. The new credit agreement eliminated the limitation on the amount of debt which could be incurred by the Company, which was limited to 50% of total capital pursuant to the terms of the previous bank revolver and the term notes. The Company used the proceeds of the incremental borrowings, net of the amounts required for debt retirement and transaction expenses, including the prepayment penalty, to reduce its obligations to trade vendors which were unusually high because of abnormally high inventory levels. Security under the new agreement consists of the accounts receivable, inventory, fixed assets and other assets of the Company. The maximum amount of borrowings available to the Company under the new revolver is based upon percentages of eligible accounts receivable and inventory, as defined in the new agreement, as well as amounts attributable to selected fixed assets of the Company. Close attention is given to managing the liquidity afforded under the Company's asset-based revolving credit agreement. On June 30, 1999, the Company executed a short-term note payable in the approximate amount of $13.3 million in satisfaction of certain trade payable obligations. This unsecured promissory note bears interest at prime plus two percent from May 1, 1999, and calls for principal payments of $1.5 million on July 15, 1999, $1.0 million each month thereafter through November 15, 1999, with the remaining principal and interest balance due on December 15, 1999. During the nine months ended September 30, 1999, the Company paid dividends on both its common and preferred stock totaling $.5 million. As of this time the Company has suspended the payment of common dividends. Future common dividends may or may not be declared, at the discretion of the Board of Directors, depending on restrictions imposed by the Company's revolving credit agreement, industry conditions, evaluation of the Company's performance and current liquidity situation. However, the Company continues to declare and pay the $50,000 quarterly preferred dividend associated with its outstanding Series A preferred stock. The Company's operations, proceeds from the rationalization of certain underutilized assets, and the potential to generate proceeds from the sale of other assets is expected to generate sufficient funds to meet the Company's working capital commitments, debt service requirements, necessary capital expenditures and the payment of dividends on the outstanding shares of Series A preferred stock during the balance of 1999. The Company maintains the flexibility to issue additional equity in the form of Class A common stock or additional series of preferred stock junior to the Series A preferred stock if and when market circumstances should ever dictate. The Company, from time-to-time, also explores financing alternatives such as the possibility of issuing additional debt, or pursuing further operating lease financing. The Company also continues to evaluate its business with the intent to streamline operations, improve productivity and reduce costs. YEAR 2000 COMPLIANCE The Company has utilized software and related computer technologies essential to its operations and to certain products that use two digits rather than four to specify the year, which could result in a date recognition problem with the transition to the "Year 2000". The Company has established a plan, utilizing internal resources, to assess the potential impact of Year 2000 on the Company's systems and operations and to implement solutions to address this issue. The Company completed the assessment phase of its Year 2000 plan, which in addition to the assessment of its own systems and operations included surveying the Company's primary suppliers, vendors and service providers for Year 2000 compliance. The Company's remediation plan includes a combination of repair and replacement of affected systems. For substantially all of the Company's internal systems, this remediation is an incidental consequence of the implementation of a new integrated core business system, which has been installed at all of the Company's steel processing facilities. The Company has substantially completed its remediation phase, including testing. As such, the Company believes all its critical internal systems are Year 2000 compliant. The cost of implementation of the new integrated core business system was approximately $.7 million, which amount was incurred through December 31, 1998. The Company cannot quantify how much of this amount was directly related to Year 2000 compliance matters. Similarly, the Company is not in a position to quantify the amount remaining to be spent on Year 2000 concerns, although it anticipates that the direct costs to be incurred in addressing its remaining internal Year 2000 issues will not exceed $.2 million. The Company is dependent upon various third parties, including certain product suppliers, to conduct its business operations. The failure of mission- critical third parties to achieve Year 2000 compliance could have a material adverse effect on the Company's operations. The Company is diligently quantifying issues and developing contingency sources to mitigate the risks associated with interruptions in its supply chain due to Year 2000 problems. The bulk of the Company's primary steel suppliers have Year 2000 projects in process, and the Company will continue to monitor their progress on a quarterly basis. The Company also continues to monitor its available inbound and outbound shipping suppliers concerning their ability to provide uninterrupted service in light of Year 2000 exposures. The Company is reviewing its building and utility systems (electrical, heat, water, telephones, etc.) for the impact of Year 2000. Many of such systems are currently Year 2000 compliant. While the Company is diligently working with these service providers, and has no reason to expect that they will not meet their requirements for Year 2000 compliance, there is no assurance that these suppliers will in fact meet the Company's requirements. A failure by any of these suppliers to adequately or timely address Year 2000 concerns could conceivably cause a shutdown of one or more of the Company's facilities, thereby potentially impacting the Company's ability to meet its delivery obligations to customers. As an important supplier of processed steel products, a significant Year 2000 risk of the Company is the potential for shutting down production at one of its customer's facilities. While lost revenues from such an event are a concern; the greater risks are the consequential damages for which the Company could be liable if it were to be found responsible for the shutdown of a customer facility. Such a finding could have a material impact on the Company's operating results. The most likely way in which the Company could shut down a customer's production is by being unable to supply material or parts to that customer. The material supplied by the Company in many cases is an integral component of the end products that the customer produces. Breakdowns caused by Year 2000 exposures could conceivably prevent the Company from processing and shipping customer orders. Although the Company does not anticipate that its systems or its mission critical vendors will result in significant disruptions to its business operations, the Company does plan to take certain precautionary measures prior to year end to address Year 2000 concerns. The Company intends to print hard copies of its critical internal business information prior to December 31, 1999. The Company also intends to have plant maintenance personnel and information system staff available over the December 31, 1999/January 1, 2000 weekend to address any problems that may arise should a specific Year 2000 problem be identified. With respect to plant production, the Company plans to temporarily shutdown all of its steel processing equipment prior to midnight on December 31, 1999, with the exception of the Company's annealing furnaces which have been certified to be Year 2000 compliant by the manufacturer of such equipment. The Company will then bring these machines back on line for processing in the Year 2000. Certain exposures, such as the availability of operating utilities may be beyond the control and ability of the Company to develop a viable alternative source or processing method. Nevertheless, the Company believes the steps it has completed and plans to take will serve to minimize the risks and cost of Year 2000 compliance. There can be no assurance, however, that the Company will not experience unanticipated costs and/or business interruptions due to Year 2000 problems in its internal systems, its supply chain, or from customer product migration issues. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- INTEREST RATE RISK In the ordinary course of business, the Company is exposed to interest rate risks by way of changes in short-term interest rates. The Company has currently elected not to hedge the market risk associated with its floating rate debt. With the Company's debt refinancing completed, as of September 30, 1999, approximately $115.2 million of the Company's debt obligations bear interest at variable rates. Accordingly, the Company's earnings and cash flow are affected by changes in interest rates. Assuming the current level of borrowings at variable rates and assuming a one-half point increase in average interest rates under these borrowings, it is estimated that the Company's annual interest expense would increase by approximately $.6 million. In the event of an adverse change in interest rates, management would likely take actions to mitigate the Company's exposure to interest rate risk; however, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such action. Further, this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment. OTHER RISKS The Company does not have any significant amount of export sales denominated in foreign currencies, and acquires its raw material supply needs in U.S. dollar denominated transactions. Therefore, the Company is not viewed as being exposed to foreign currency fluctuation market risks. In addition, although the Company both acquires and sells carbon steel coils and products, no commodity exchange exists that the Company might access to hedge its risk to carbon steel price fluctuations. The Company has no material derivative financial instruments as of September 30, 1999, and does not enter into derivative financial instruments for trading purposes. PART II. OTHER INFORMATION - ----------------------------- Item 2. Changes in Securities and Use of Proceeds - ----------------------------------------------------- Under the terms of the Company's revolving credit agreement executed on April 15, 1999, the Company's ability to declare common dividends is subject to the current liquidity situation of the Company. Item 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 July 29, 1999, which filing discussed under Item 5, Other Events, the Company's earnings for the three and six months ended June 30, 1999, as well as providing certain forward-looking data for the year ending December 31, 1999. The Company filed a Form 8-K on October 15, 1999, which filing discussed under Item 5, Other Events, the Company's earnings for the three and nine months ended September 30, 1999, provided certain forward-looking data for the year ending December 31, 1999, and announced the appointment of a new Chief Financial Officer. ****************** 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 12, 1999 By: /s/ ANTHONY J. VERKRUYSE ------------------------ Anthony J. Verkruyse, Vice President & Chief 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. 27: Financial Data Schedule. 99: Omitted - not applicable. EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF HUNTCO INC. AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 SEP-30-1999 19 0 42,468 709 69,560 113,821 179,646 43,910 260,926 47,079 105,967 0 4,500 90 100,706 260,926 265,439 265,439 254,094 254,094 0 190 7,503 (10,944) (3,772) (7,172) 0 (2,644) 0 (9,816) (1.11) (1.11)
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