FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 2, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8044
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HUNT CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 21-0481254
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Commerce Square 2005 Market Street, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no., including area code 215-656-0300
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
---
As of July 1, 2002, there were outstanding 8,976,335 shares of the registrant's
common stock.
HUNT CORPORATION
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of 3
June 2, 2002 and December 2, 2001
Condensed Consolidated Statements of Income - 4
Three Months and Six Months Ended June 2, 2002 and June 3, 2001
Consolidated Statements of Comprehensive Income (Loss) - 5
Three Months and Six Months Ended June 2, 2002 and June 3, 2001
Condensed Consolidated Statements of Cash Flows - 6
Six Months Ended June 2, 2002 and June 3, 2001
Notes to Condensed Consolidated Financial 7 - 9
Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities and Use of Proceeds 18
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
Part I - FINANCIAL INFORMATION Page 3
Item 1. Financial Statements
Hunt Corporation
Condensed Consolidated Balance Sheets
(In thousands except share and per share amounts)
June 2, December 2,
ASSETS 2002 2001
--------------- ---------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 29,392 $ 25,966
Accounts receivable, less allowance for doubtful
accounts: 2002, $735; 2001, $1,031 19,798 17,486
Inventories:
Raw materials 3,763 2,973
Work in process 1,722 1,440
Finished goods 7,601 4,976
--------------- ---------------
Total inventories 13,086 9,389
Deferred income taxes 2,840 5,834
Prepaid expenses and other current assets 9,187 14,101
--------------- ---------------
Total current assets 74,303 72,776
Property, plant and equipment, less accumulated depreciation and amortization:
2002, $44,666; 2001, $42,548 22,645 24,188
Goodwill 754 754
Intangible assets 65 65
Other assets 8,339 8,604
--------------- ---------------
Total assets $ 106,106 $ 106,387
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,000 $ 5,000
Accounts payable 4,665 4,428
Accrued expenses 18,567 22,776
--------------- ---------------
Total current liabilities 28,232 32,204
Long-term debt, less current portion 22,000 22,000
Deferred income taxes 257 1,004
Other non-current liabilities 14,951 14,106
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000
shares; none issued - -
Common stock, $.10 par value, 40,000,000 shares
authorized; issued: 2001 and 2000 -16,152,322 shares 1,615 1,615
Capital in excess of par value 7,412 7,412
Accumulated other comprehensive loss (42) -
Retained earnings 132,394 129,695
--------------- ---------------
141,379 138,722
Less cost of treasury stock:
2002 - 7,175,987 shares; 2001 - 7,248,347 shares; (100,713) (101,649)
--------------- ---------------
Total stockholders' equity 40,666 37,073
--------------- ---------------
Total liabilities and stockholders' equity $ 106,106 $ 106,387
=============== ===============
See accompanying notes to condensed consolidated financial statements.
Page 4
Hunt Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Six Months Ended
------------------------ ------------------------
June 2, June 3, June 2, June 3,
2002 2001 2002 2001
-------- -------- -------- ---------
Net sales $ 40,320 $ 39,135 $ 80,816 $ 81,398
Cost of sales 23,382 23,352 47,918 48,235
-------- -------- -------- --------
Gross profit 16,938 15,783 32,898 33,163
Selling, general and administrative expenses 12,688 12,984 24,869 25,720
Restructuring and other 121 51 202 92
-------- -------- -------- --------
Income from operations 4,129 2,748 7,827 7,351
Interest expense 572 981 1,133 2,054
Interest and other income, net (306) (108) (977) (356)
-------- -------- -------- --------
Income from continuing operations
before income taxes 3,863 1,875 7,671 5,653
Provision for income taxes 1,372 696 2,724 1,974
-------- -------- -------- --------
Income from continuing operations 2,491 1,179 4,947 3,679
-------- -------- -------- --------
Discontinued operations:
Loss from discontinued business,
net of tax benefit of $15 and $79 -- (196) -- (1,017)
-------- -------- -------- --------
Net income $ 2,491 $ 983 $ 4,947 $ 2,662
======== ======== ======== ========
Basic earnings per common share:
Income from continuing operations $ 0.28 $ 0.13 $ 0.55 $ 0.41
Loss from discontinued business -- (0.02) -- (0.11)
-------- -------- -------- --------
Net income per share - Basic $ 0.28 $ 0.11 $ 0.55 $ 0.30
======== ======== ======== ========
Diluted earnings per common share:
Income from continuing operations $ 0.28 $ 0.13 $ 0.55 $ 0.40
Loss from discontinued business -- (0.02) -- (0.11)
-------- -------- -------- --------
Net income per share - Diluted $ 0.28 $ 0.11 $ 0.55 $ 0.29
======== ======== ======== ========
Dividends per common share $ 0.1025 $ 0.1025 $ 0.205 $ 0.205
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
Page 5
Hunt Corporation
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(In thousands)
Three Months Ended Six Months Ended
--------------------- ---------------------
June 2, June 3, June 2, June 3,
2002 2001 2002 2001
------- ------- ------- -------
Net income $ 2,491 $ 983 $ 4,947 $ 2,662
Other comprehensive loss:
Foreign currency translation adjustments, net of
income tax benefit of $1,219 and $362 -- (1,769) -- (508)
Currency hedging adjustments, net of income tax
benefit of $18 and $23 (32) -- (42) --
------- ------- ------- -------
Other comprehensive loss (32) (1,769) (42) (508)
------- ------- ------- -------
Comprehensive income (loss) $ 2,459 $ (786) $ 4,905 $ 2,154
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
Page 6
Hunt Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six Months Ended
----------------------------------------
June 2, June 3,
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net income $ 4,947 $ 2,662
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,437 4,046
Deferred income taxes 2,247 (162)
(Gain) loss on disposals of property, plant and equipment 245 (10)
Payment for patent infringement litigation - 102
Payments/credits for special charges (851) (306)
Issuance of stock under management incentive bonus
and stock grant plans 71 60
Changes in operating assets and liabilities (2,192) (1,713)
---------------- ----------------
Net cash provided by operating activities 6,904 4,679
---------------- ----------------
Cash flows from investing activities:
Additions to property, plant and equipment (1,033) (2,081)
Other, net (180) (205)
---------------- ----------------
Net cash used for investing activities (1,213) (2,286)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 4,598
Payments on long-term debt, including current maturities - (4,522)
Book overdrafts (908) (2,012)
Proceeds from exercise of stock options 443 -
Purchases of treasury stock - (3,680)
Dividends paid (1,827) (1,823)
Other, net - (5)
---------------- ----------------
Net cash used for financing activities (2,292) (7,444)
---------------- ----------------
Effect of exchange rate changes on cash 27 (56)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 3,426 (5,107)
Cash and cash equivalents, beginning of period 25,966 23,878
---------------- ----------------
Cash and cash equivalents, end of period $ 29,392 $ 18,771
================ ================
See accompanying notes to condensed consolidated financial statements.
Page 7
Hunt Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed consolidated financial statements and related
notes are unaudited; however, in management's opinion all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial position at June 2, 2002 and the results of operations and cash
flows for the periods shown have been made. Such statements are presented in
accordance with the requirements of Quarterly Reports on Form 10-Q and do not
contain certain information included in the Company's annual consolidated
financial statements and notes. This Quarterly Report on Form 10-Q should be
read in conjunction with the Company's consolidated financial statements and
notes included in its 2001 Annual Report on Form 10-K. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
2. Effective October 1, 2001, the Company sold its commercial Graphics Products
business and related assets. The divested business had net sales of
approximately $13.6 million and $28.1 million and after-tax losses of $.2
million and $1.0 million for the three months and six months ended June 3, 2001,
respectively. The divested business is presented as a discontinued operation in
the accompanying Condensed Consolidated Statements of Income. However, the
Consolidated Statements of Comprehensive Income for the three months and six
months ended June 3, 2001 and Condensed Consolidated Statements of Cash Flows
for the six months ended June 3, 2001 have not been restated to reflect the
discontinued operation.
3. A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution in calculating the earnings
per share is shown below (in thousands):
Three Months Ended
---------------------------------
June 2, June 3,
2002 2001
--------------- --------------
Average common shares outstanding-basic 8,938 8,892
Add: common equivalent shares representing shares
issuable upon exercise of stock options and vesting of
stock grants 182 71
--------------- --------------
Average common shares and dilutive securities outstanding 9,120 8,963
=============== ==============
Six Months Ended
---------------------------------
June 2, June 3,
2002 2001
--------------- --------------
Average common shares outstanding-basic 8,922 8,977
Add: common equivalent shares representing shares issuable upon exercise of stock
options and vesting of stock grants 128 56
--------------- --------------
Average common shares and dilutive securities outstanding 9,050 9,033
=============== ==============
Page 8
Hunt Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. The following table sets forth the details and the cumulative activity in the
various accruals and reserves associated with the Company's 2001 cost reduction
plan in the Condensed Consolidated Balance Sheet at June 2, 2002 (in thousands):
Balance at Balance at
December 2, Provision/ Cash Non-Cash June 2,
2001 (Credit) Activity Activity 2002
--------------- ---------- -------- ---------- ------------
Lease obligations $256 - (142) - $114
Severance 3,513 (20) (604) - 2,889
Fixed assets 38 (11) - (27) -
Other 51 31 (82) - -
--------------- ---------- -------- ---------- ------------
Total $3,858 - (828) (27) $3,003
=============== ========== ======== ========== =============
The following table sets forth the details and the cumulative activity in the
various accruals and reserves associated with the Company's 1999 restructuring
plan in the Condensed Consolidated Balance Sheet at June 2, 2002 (in thousands):
Balance at Balance at
December 2, Cash Non-Cash June 2,
2001 Credit Activity Activity 2002
--------------- ---------- -------- ---------- ------------
Lease obligations $249 - - 7 $256
Severance 23 (10) (13) - -
--------------- ---------- -------- ---------- ------------
Total $272 (10) (13) 7 $256
=============== ========== ======== ========== ============
5. As a result of the sale of the commercial Graphics Products business in
fiscal 2001 (see Note 2 above) and its impact on the Company's internal
organizational structure, the Company now has only a single reportable segment:
Consumer Products. All of the Company's long-lived assets are located in North
America.
6. Effective December 3, 2001, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets." Under this SFAS, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized, but will be
subject to periodic reviews for impairment. As a result, effective December 3,
2001, the Company no longer amortizes goodwill or intangible assets with
indefinite lives. The Company has completed a transitional impairment review to
identify whether there is an impairment to goodwill or indefinite-lived
intangible assets using a fair value methodology. No such impairment loss was
identified.
The Company's indefinite-lived intangible assets consist of trademarks, and the
Company has no amortizable intangible assets.
Page 9
Hunt Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In conformity with SFAS No. 142, the results of prior periods have not been
restated. The following is a reconciliation of the Company's net income and
earnings per share for the three months and six months ended June 2, 2002 and
June 3, 2001:
Three Months Ended Six Months Ended
--------------------------- -------------------------
June 2, June 3, June 2, June 3,
2002 2001 2002 2001
----------- -------- ---------- --------
Net income:
As reported $2,491 $983 $4,947 $2,662
Amortization expense - goodwill - 311 - 496
Amortization expense - intangible assets - 24 - 49
----------- -------- ---------- --------
Adjusted net income $2,491 $1,318 $4,947 $3,207
=========== ======== ========== ========
Basic earnings per share:
As reported $.28 $.11 $.55 $.30
Amortization expense - goodwill - .04 - .06
Amortization expense - intangible assets - - - -
----------- -------- ---------- --------
Adjusted earnings per share - Basic $.28 $.15 $.55 $.36
=========== ======== ========== ========
Diluted earnings per share:
As reported $.28 $.11 $.55 $.29
Amortization expense - goodwill - .04 - .06
Amortization expense - intangible assets - - - -
----------- -------- ---------- --------
Adjusted earnings per share - Diluted $.28 $.15 $.55 $.35
=========== ======== ========== ========
Page 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements contained in this report are forward-looking statements
within the meaning of the Private Securities Litigation Act of 1995. Such
forward-looking statements represent management's assessment based upon
information currently available, but are subject to risks and uncertainties
which could cause actual results to differ materially from those set forth in
the forward-looking statements. These risks and uncertainties include, but are
not limited to, the Company's ability to successfully complete the
implementation, and realize the anticipated benefits, of its restructuring and
cost reduction plans on a timely basis; the effect of, and changes in, worldwide
general economic conditions, including the severity and duration of any economic
slowdown; price and availability of raw materials; foreign exchange rates;
technological and other changes affecting the manufacture of and demand for the
Company's products; dependence on maintaining key customers; competitive and
other pressures in the marketplace; acts of terrorism; and other risks and
uncertainties set forth herein and in the Company's 2001 Form 10-K and as may be
set forth in the Company's subsequent press releases and/or Forms 10-Q, 8-K, and
other filings with the Securities and Exchange Commission.
(Note: All earnings per share amounts in Management's Discussion and Analysis,
including the paragraph immediately below, are presented on an after-tax,
diluted basis.)
In November 2001, the Company initiated a cost reduction plan (the "2001 cost
reduction plan") designed to reduce the Company's cost structure. This plan
resulted primarily from the sale of the commercial Graphics Products business to
Neschen AG in October 2001 and is expected to generate approximately $3.6
million of annualized pre-tax cost savings in fiscal 2002 and annualized pre-tax
cost savings of approximately $4.7 million in future years. Pre-tax cost savings
realized in the second quarter and first half of 2002 were approximately $.9
million ($.06 per share) and $1.4 million ($.10 per share), respectively.
Although the Company expects to realize such future cost savings, there is no
assurance that they will actually be achieved. The adoption of the 2001 cost
reduction plan in the fourth quarter of fiscal 2001 resulted in the recognition
of charges totaling $3.9 million pre-tax ($.30 per share) in that quarter which
included employee severance costs, recognition of future lease obligations, and
other related costs. In addition to the fiscal 2001 fourth quarter charges
related to this plan, the Company expects to spend a total of approximately $1.0
million for plan implementation costs (which will be recorded as period costs as
incurred) over the next three fiscal years. During the first half of fiscal
2002, the Company recognized $.1 million ($.01 per share) of such implementation
costs, consisting primarily of outplacement expenses. See Notes 2 and 4 to the
Condensed Consolidated Financial Statements herein.
As a result of the sale of the commercial Graphics Products business and
subsequent cost reduction plan described in the preceding paragraph, management
believes that the Company has simplified its operations and expects to improve
the overall profitability and financial strength of the Company's continuing
operations. Additionally, the Company's management and Board of Directors
continue to review and evaluate various possible strategies that the Company
might pursue to strengthen the Company and enhance shareholder value. Such
potential strategies range from growing the Company through internal
development, joint ventures, and/or acquisitions, to selling some or all of the
Company.
Page 11
Results of Operations
The following discussion is on a continuing operations basis.
Net Sales
Net sales from continuing operations of $40.3 million for the fiscal 2002 second
quarter increased 3.0% from the fiscal 2001 second quarter, while net sales from
continuing operations of $80.8 million for the first half of fiscal 2002
decreased 0.7% from the first half of fiscal 2001. The fiscal 2002 second
quarter increase was largely due to higher sales of art/framing supplies
products (up 4.0%) and office supplies products (up 0.9%), while the first half
decrease was primarily due to lower sales of office supplies products (down
5.7%), partially offset by higher sales of art/framing supplies products (up
2.4%). Export sales increased 5.7% and decreased 2.9% in the fiscal 2002 second
quarter and first half compared to the same prior year periods. The second
quarter increase was primarily due to higher sales of art/framing products in
Europe, while the first half decrease was largely due to lower sales in Canada.
Management believes that the second quarter increase in sales was due to a
combination of certain large customers replenishing inventory levels and to new
distribution.
Gross Profit
The Company's gross profit percentage increased to 42.0% of net sales in the
second quarter of fiscal 2002 from 40.3% in the second quarter of fiscal 2001,
and was 40.7% in the first six months of fiscal years 2002 and 2001. Gross
margin dollars increased $1.2 million and decreased $.3 million in the fiscal
2002 second quarter and first half, respectively, from the same prior year
periods. The increases in the second quarter gross profit percentage and gross
profit dollars relative to the prior year period were primarily the result of
lower raw material and product costs, as well as lower manufacturing costs.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses decreased $.3 million, or 2.3%, in
the second quarter of fiscal 2002 and $.9 million, or 3.3%, in the first half of
fiscal 2002 compared to the same prior year periods. The decreases were the net
result of lower marketing and selling expenses, partially offset by higher
general and administrative expenses. The decreases in marketing and selling
expenses were due to lower salaries and benefits expenses attributable to the
costs savings resulting from the 2001 divestiture of the Company's commercial
Graphics Products business, and to reduced discretionary marketing spending,
partially offset by higher distribution and freight costs. The increases in
general and administrative expenses were due principally to increases in accrued
incentive compensation expenses and market value decreases in the cash surrender
value of officers' life insurance policies, partially offset by lower bad debt
expenses, decreases in reserves for customer deductions, and by reduced expenses
resulting from the 2001 cost reduction plan (lower salaries and benefit expenses
and lower rent expense).
Page 12
Selling, general, and administrative expenses, as a percentage of net sales,
were 31.5% and 30.8% in the second quarter and first half of fiscal 2002,
respectively, and 33.2% and 31.6%, respectively, in the same prior year periods.
Restructuring and Other
During the first quarter and first half of fiscal 2002, the Company reduced by
$10,000 a reserve related to its 1999 restructuring plan, and reversed an
accrual of $33,000 established in connection with the implementation of the 1999
restructuring plan. These reductions reflected lower than anticipated severance
expense. During the second quarter and first half of fiscal 2001, the Company
recorded interest charges of $51,000 and $102,000, respectively, in connection
with a previously reported patent infringement suit judgment.
The Company recorded net losses on disposals of property, plant and equipment of
$121,000 and $245,000 during the second quarter and first half of fiscal 2002,
respectively, and recorded a net gain of $10,000 in the first half of fiscal
2001.
Interest Expense
Interest expense in the fiscal 2002 second quarter and first half decreased to
$.6 million and $1.1 million, respectively, from $1.0 million and $2.1 million
in the fiscal 2001 second quarter and first half, respectively, due primarily to
a principal repayment of $25 million on the Company's senior notes during the
fourth quarter of fiscal 2001.
Interest and Other Income, net
Interest and other income, net increased to $.3 million and $1.0 million in the
fiscal 2002 second quarter and first half, respectively, from $.1 million and
$.4 million in the same prior year periods. The second quarter increase was due
primarily to the favorable foreign currency revaluation of assets held for sale
in connection with the 2001 divested business. The first half increase was due
principally to management and other net fees of $.6 million for transition
services rendered by the Company in connection with the sale of its commercial
Graphics Products business to Neschen AG.
Provision for Income Taxes
The Company's effective income tax rate was 35.5% for the fiscal 2002 second
quarter and first half, compared to 37.1% and 34.9% for the same prior year
periods due principally to lower tax credits in fiscal 2002.
Page 13
Financial Condition
The Company's overall financial condition improved during the first half of
fiscal 2002. The Company's working capital increased to $46.1 million from $40.6
million, and its current ratio increased to 2.6 from 2.3 at the end of the
second quarter of fiscal 2002 from the end of fiscal 2001. The Company's
debt/capitalization percentage was 40% at the end of the fiscal 2002 second
quarter compared to 42% at the end of fiscal 2001. Funds from operations and
available cash balances were sufficient during the first six months of fiscal
2002 to fund additions to property, plant and equipment of $1.0 million, to pay
cash dividends of $1.8 million, and to make cash payments of $.8 million related
to the 2001 cost reduction plan.
Current assets increased to $74.3 million at the end of the second quarter of
fiscal 2002 from $72.8 million at the end of fiscal 2001, largely as a result of
higher cash and cash equivalents, accounts receivable balances, and inventories,
partially offset by lower deferred tax assets and prepaid and other assets. The
increase in cash and cash equivalents and the decrease in prepaid and other
assets was due to the receipt of income tax refunds, as well as the receipt of
amounts due to the Company from Neschen AG for transition services. Accounts
receivable increased $2.3 million from the $17.5 million balance at the end of
fiscal 2001 due to higher sales in the last month of the fiscal 2002 second
quarter compared to the last month of fiscal 2001, payments to customers
pursuant to customer incentive programs accrued at the end of fiscal 2001, and
to lower bad debt reserve balances in the first half of 2002. The increase in
inventories is due principally to inventory build-up in connection with the
Company's back-to-school programs. The decrease in deferred tax assets was due
primarily to current deductibility of reserves related to the divested business
and the 2001 cost reduction plan.
Current liabilities decreased to $28.2 million at the end of the second quarter
of fiscal 2002 from $32.2 million at the end of fiscal 2001. This decrease was
largely attributable to reductions of accruals associated with the Company's
2001 divestiture of its commercial Graphics Products business ($3.2 million),
and to settlement of amounts owed to Neschen AG ($1.5 million) in connection
with the Company's 2001 divested business, partially offset by an increase in
accrued incentive compensation ($1.1 million).
Although the Company currently has a revolving credit facility of $25 million,
there were no outstanding borrowings under this facility at June 2, 2002.
The Company's ability to comply with various of its debt covenants under its
credit facility and outstanding senior notes will depend largely on the
achievement of the Company's business plan, which, in turn, could be adversely
affected by the economic climate, competitive uncertainties, and other factors.
In the event that non-compliance with such debt covenants should occur or appear
to be likely, the Company would pursue various alternatives to successfully
resolve the non-compliance, which might include, among other things, seeking
debt covenant waivers or amendments, refinancing of debt, restricting payments
of future cash dividends, and/or reducing future capital expenditures. Although
the Company believes that it would be successful in resolving any such actual or
potential non-compliance with its debt covenants, there can be no assurance that
such would be the case.
Management believes that funds generated from operations, combined with its
existing credit facilities, will be sufficient to meet currently anticipated
working capital and other capital and debt service requirements. Should the
Company require additional funds, management believes that the Company could
obtain them at competitive costs. While subject to change, management currently
expects that total fiscal 2002 expenditures for additions to property, plant and
equipment to increase capacity and productivity will be approximately $2.5
million, of which approximately $1.0 million has been expended through the first
six months of fiscal 2002. During the third quarter of fiscal 2002, the Company
plans to pay the first of five annual principal repayments of $5 million with
respect to its senior debt notes.
Outlook
The Company is optimistic about the outlook for its business for the second half
of fiscal 2002. However, while management anticipates modest sales growth and
stronger earnings for the 2002 full fiscal year, the economy remains uncertain
and could adversely affect the anticipated results. In addition, the Company's
ten largest customers account for a significant portion of its net sales and the
loss of, or a reduction in net sales of the Company's products to, one or more
of these customers could have a material adverse effect on the Company's future
sales and earnings. Although the Company has experienced some cost reductions
for certain of its raw materials during the first half of fiscal 2002,
management expects cost increases for some of these raw materials during the
second half of fiscal 2002. As a result of the Company's 2001 cost reduction
plan, the Company expects to generate $2.2 million of additional pre-tax cost
savings in the second half of fiscal 2002 and annualized pre-tax cost savings of
approximately $4.7 million in future years. However, there is no assurance that
such future cost savings will actually be achieved. In addition, management and
the Board of Directors continue to review and evaluate various potential
strategies that the Company might pursue to strengthen the Company and enhance
shareholder value, ranging from growing the Company through internal
development, joint ventures, and/or acquisitions, to selling some or all of the
Company.
Critical Accounting Policies and Estimates
Critical accounting policies are those that involve subjective or complex
judgments, often as a result of the need to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosures of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to customer
programs, product returns, bad debts, inventories, valuation of long-lived
assets, assets held for sale, intangible assets, cash surrender value of life
insurance policies, a deferred cash account, income taxes, warranty obligations,
restructuring, business divestitures, pensions and other employee benefit plans
or arrangements, environmental matters, and contingencies and litigation.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.
Page 15
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
[ ] The Company records estimated reductions to revenue for customer
programs including special promotions and other volume-based
incentives.
[ ] The Company maintains allowances for doubtful accounts for estimated
losses resulting from the Company's review and assessment of its
customers' ability to make required payments. If the financial
condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances
might be required.
[ ] The Company provides for estimated costs of future anticipated product
returns and warranty obligations based on historical experience.
[ ] The Company maintains reserves for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about
future demand and market conditions. If actual market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required.
[ ] The Company holds life insurance policies for all of its officers in
connection with the Company's Supplemental Executive Benefits Plan. The
carrying value of these policies is subject to changes in investment
market conditions.
[ ] The Company maintains an accrual for a deferred cash account in
connection with a long-term incentive compensation agreement with the
Company's Chairman and former Chief Executive Officer, Donald L.
Thompson. The value of this deferred cash account is tied to the
Company's stock price, and this accrual is subject to changes in the
fair market value of the Company's common stock.
[ ] The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While
the Company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event that the Company were to determine
that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was made.
Likewise, should the Company determine that it would not be able to
realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the
period such determination was made.
Page 16
[ ] The Company accounts for its qualified defined benefit pension plans
and Supplemental Executive Benefit Plan in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 87, "Employer's Accounting
for Pensions," which requires that amounts recognized in the financial
statements be determined on an actuarial basis. SFAS No. 87 requires
that experience gains and losses, including the effects of the
performance of the plan assets and changes in pension liability
discount rates on the Company's computation of pension expense (income)
be amortized over future periods to the extent that these fall outside
a defined threshold under SFAS 87.
The most significant elements in determining the Company's pension
expense (income) in accordance with SFAS No. 87 are the expected return
on plan assets and the discount rate to be used to calculate the
present value of plan liabilities. Differences in expected returns and
the actual return on plan assets and changes in the discount rate, as
well as changes in actuarial assumptions and experience, may materially
affect the pension expense (income) year to year.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") approved the
issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS
No. 143 requires that entities record as a liability obligations associated with
the retirement of a tangible long-lived asset when such obligations are
incurred, and capitalize the cost by increasing the carrying amount of the
related long-lived asset. SFAS No. 143 will be effective for fiscal years
beginning after June 15, 2002. The Company does not expect a material impact
from the adoption of SFAS No. 143 on its consolidated financial statements.
In August 2001, the FASB approved the issuance of SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and certain parts of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 144 establishes an accounting model based on SFAS No.
121 for long lived assets to be disposed of by sale, previously accounted for
under APB Opinion No. 30. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. The Company believes this Statement will not materially
affect the Company's financial position or results of operations.
In April 2002, the FASB approved the issuance of SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 primarily affects the reporting
requirements and classification of gains and losses from the extinguishment of
debt and requires that certain lease modifications with economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. The Company is currently assessing the impact of
the adoption of this statement, but believes it will not materially affect the
Company's financial position or results of operations.
Page 17
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk from that set
forth in Part II, Item 7A of the Company's fiscal 2001 Form 10-K.
Page 18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
As previously reported, the Company was the subject of a patent infringement
suit in which a judgment originally was entered against the Company in fiscal
2000. The Company's appeal of this judgment and a petition to the U.S. Supreme
Court were denied, and the Company paid the judgment and related costs in fiscal
2001, but indicated that it and its patent counsel continued to pursue other
options for overturning the verdict. The Company is no longer pursuing such
options.
Item 2 - Changes in Securities and Use of Proceeds
(c) During the second quarter of fiscal 2002, the Company issued from its
treasury an aggregate of 4,360 unregistered common shares under its non-employee
director compensation plan. Registration of such shares was not required because
their issuance did not involve a "sale" under Section 2(3) of the Securities Act
of 1933, or, alternatively, their issuance was exempt pursuant to the private
offering provisions of that Act and the rules thereunder.
Page 19
Item 4 - Submission of Matters to a Vote of Security Holders
(a) and (c)
The Company's Annual Meeting of Shareholders was held on April 17, 2002, and in
connection therewith, proxies were solicited by management pursuant to
Regulation 14 under the Securities Exchange Act of 1934. An aggregate of
8,903,975 shares of the Company's common stock ("Shares") were outstanding and
entitled to vote at the meeting. At the meeting the following matters (not
including ordinary procedural matters) were submitted to a vote of the holders
of Shares, with the results indicated below:
1. Election of a class of three directors to serve until the 2005 Annual
Meeting. The following persons, all of whom were serving as directors
and were management's nominees for reelection, were reelected. There
was no solicitation in opposition to such nominees. The tabulation of
votes was as follows:
- ----------------------------------------------------------------------------------------------------------------
Withheld
Nominee For (including any broker nonvotes)
- ----------------------------------------------------------------------------------------------------------------
Donald D. Belcher 8,390,869 33,266
- ----------------------------------------------------------------------------------------------------------------
Bradley P. Johnson 8,388,045 34,092
- ----------------------------------------------------------------------------------------------------------------
Robert H. Rock 8,389,092 35,043
- ----------------------------------------------------------------------------------------------------------------
2. Amendment to the Company's Restated Articles of Incorporation to
provide that Subchapter E - Control Transactions of the Pennsylvania
Business Corporation Law of 1988, as amended, shall not be applicable
to the Company. The amendment of the Company's Restated Articles of
Incorporation was approved. The tabulation of votes was as follows:
- ----------------------------------------------------------------------------------------------------------------
Abstentions
For Against (including any broker nonvotes)
- ----------------------------------------------------------------------------------------------------------------
6,560,622 385,543 90,147
- ----------------------------------------------------------------------------------------------------------------
3. Ratification of appointment of independent accountants. The appointment
of PricewaterhouseCoopers LLP as the Company's independent accountants
for fiscal 2002 was ratified. The tabulation of votes was as follows:
- ----------------------------------------------------------------------------------------------------------------
Abstentions
For Against (including any broker nonvotes)
- ----------------------------------------------------------------------------------------------------------------
8,390,103 16,786 17,244
- ----------------------------------------------------------------------------------------------------------------
Page 20
Item 6 - Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
(3)(a)(1) - Restated Articles of Incorporation, and (2) Amendment,
effective May 2, 2002, of Restated Articles of Incorporation (incorp.
by ref. to Ex. 3(a)(1) and (2) to the Company's Form 8-A12B/A filed
with the Commission in May 2002).
(10)(h)(6) - Addendum to Transition and Separation Agreement dated May
30, 2002 between Hunt Corporation and Donald L. Thompson (filed
herewith).
(10)(j)(2) - Stock Grant Agreement dated as of January 2, 2001 between
the Company and John W. Carney (filed herewith).
(10)(k)(2) - Stock Grant Agreement dated as of January 2, 2001 between
the Company and Bradley P. Johnson (filed herewith).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
Page 21
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.
HUNT CORPORATION
Date July 16, 2002 By /s/ Dennis S. Pizzica
------------------------ ---------------------------------
Dennis S. Pizzica
Vice President, Chief Financial
Officer
Date July 16, 2002 By /s/ Bradley P. Johnson
------------------------ ---------------------------------
Bradley P. Johnson
Chief Executive Officer and
President
Date July 16, 2002 By /s/ John Fanelli III
------------------------ --------------------------------
John Fanelli III
Vice President, Corporate
Controller (Principal Accounting
Officer)