10-Q 1 tenq.txt TENQ 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 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-8044 --------------------------------------------------------- HUNT CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 21-0481254 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Commerce Square 2005 Market Street, Philadelphia, PA 19103 -------------------------------------------------------------------------------- (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.

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):

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):

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):

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:

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:

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:

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:

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)

HUNT CORP 10-Q