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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended June 29, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5325
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Huffy Corporation
-----------------
(Exact name of registrant as specified in its charter)
Ohio 31-0326270
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Byers Road, Miamisburg, Ohio 45342
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(Address of principal executive offices) (Zip Code)
(937) 866-6251
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(Registrant's telephone number, including area code)
No Change
---------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
----- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding Shares: 10,461,965 as of July 19, 2002
-------------------- -------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS COMPANY FOR WHICH REPORT IS FILED:
HUFFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 29, 2002 June 30, 2001 June 29, 2002 June 30, 2001
------------- ------------- ------------- -------------
Net sales $ 93,413 $ 86,864 $ 163,798 $ 168,107
Cost of sales 76,382 74,787 134,766 144,395
------------ ------------ ------------ ------------
Gross profit 17,031 12,077 29,032 23,712
Selling, general and administrative expenses 13,847 11,089 24,375 21,132
------------ ------------ ------------ ------------
Operating income 3,184 988 4,657 2,580
Other expense (income)
Interest expense 326 348 675 916
Interest income (7) (262) (54) (424)
Other expense (income) 762 (337) 966 (754)
------------ ------------ ------------ ------------
Earnings before income taxes 2,103 1,239 3,070 2,842
Income tax expense 828 471 1,171 1,080
------------ ------------ ------------ ------------
Net earnings $ 1,275 $ 768 $ 1,899 $ 1,762
============ ============ ============ ============
Earnings per common share:
Basic:
Weighted average number of
common shares 10,429,836 10,255,057 10,409,129 10,243,307
============ ============ ============ ============
Net earnings per common share $ 0.12 $ 0.07 $ 0.18 $ 0.17
============ ============ ============ ============
Diluted:
Weighted average number of
common shares 10,736,459 10,502,865 10,715,752 10,491,116
============ ============ ============ ============
Net earnings per common share $ 0.12 $ 0.07 $ 0.18 $ 0.17
============ ============ ============ ============
HUFFY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
June 29,
2002 December 31,
(Unaudited) 2001
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,255 $ 26,541
Accounts and notes receivable, net 45,795 48,934
Inventories 26,211 12,483
Prepaid expenses and federal income taxes 18,181 17,803
--------- ---------
Total current assets 126,442 105,761
--------- ---------
Property, plant and equipment, at cost 40,515 39,320
Less: Accumulated depreciation and amortization 31,559 30,053
--------- ---------
Net property, plant and equipment 8,956 9,267
Excess of cost over net assets acquired, net 13,115 8,038
Other assets 23,060 22,419
--------- ---------
$ 171,573 $ 145,485
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ --
Current installments of long-term obligations -- --
Accounts payable 55,155 31,161
Accrued expenses and other current liabilities 28,879 30,224
--------- ---------
Total current liabilities 84,034 61,385
--------- ---------
Long-term obligations, less current installments -- --
Other long-term liabilities 19,398 18,498
--------- ---------
Total liabilities 103,432 79,883
--------- ---------
Shareholders' equity:
Common stock 16,969 16,931
Additional paid-in capital 67,259 67,226
Retained earnings 77,048 75,147
Accumulated other comprehensive loss (3,369) (3,421)
Treasury shares, at cost (89,766) (90,281)
--------- ---------
Total shareholders' equity 68,141 65,602
--------- ---------
$ 171,573 $ 145,485
========= =========
HUFFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Six Months Ended
------------------------------
June 29, 2002 June 30, 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,899 $ 1,762
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,818 2,600
Gain on sale of property, plant and equipment (2) --
Deferred federal income tax expense 858 991
Changes in assets and liabilities:
Accounts and notes receivable, net 4,260 32,538
Inventories (13,728) 7,670
Prepaid expenses and federal income taxes (1,331) (254)
Other assets (543) (1,563)
Accounts payable 23,837 (607)
Accrued expenses and other current liabilities (2,562) (10,872)
Other long-term liabilities 954 (879)
-------- --------
Net cash provided by operating activities 15,460 31,386
==================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,432) (1,402)
Acquisition of businesses (4,900) --
Proceeds from sale of property, plant and equipment -- --
-------- --------
Net cash used in investing activities (6,332) (1,402)
==================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings -- (17,656)
Issuance of common shares 586 286
-------- --------
Net cash provided by (used in) financing activities 586 (17,370)
==================================================================================================================
Net change in cash and cash equivalents 9,714 12,614
Cash and cash equivalents:
Beginning of the year 26,541 4,334
-------- --------
End of the six month period $ 36,255 $ 16,948
==================================================================================================================
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands, except per share data)
(Unaudited)
Note 1: Footnote disclosure, which would substantially duplicate the
disclosure contained in the Annual Report to Shareholders for the
year ended December 31, 2001, has not been included. The unaudited
interim condensed consolidated financial statements reflect all
adjustments, which, in the opinion of management, are necessary to a
fair statement of the results for the periods presented and to
present fairly the consolidated financial position of Huffy
Corporation as of June 29, 2002. All such adjustments are of a normal
recurring nature.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
Note 2: Inventories of Huffy Bicycle Company and Huffy Sports Company are
at cost (not in excess of market) determined by the FIFO method. The
components of inventories are as follows:
June 29, December 31,
2002 2001
-------- ------------
Finished Goods $24,165 $10,768
Work-in-Progress 105 105
Raw Materials & Supplies 1,941 1,610
------- -------
$26,211 $12,483
======= =======
Note 3: On March 27, 2002, Huffy Service First acquired the stock of McCalla
Company and its subsidiaries, Creative Retail Services and Creative
Retail Services Canada, ("McCalla") for $5,400, less $500 net cash
acquired, subject to certain post-closing adjustments. Of the total
purchase price, $4,792 was recorded as goodwill and $300 was recorded
as a covenant not-to-compete. McCalla provides merchandising,
including cycle and periodic product resets, stocking and sales
training for a number of well-known manufacturers serving the Home
Center channel, including, among others, Philips Lighting, Duracell,
and The Stanley Works.
The Company announced its intention to acquire Gen-X Sports, Inc.
("Gen-X") on June 17, 2002. Under the terms of the proposed merger
agreement, the Company will acquire Gen-X for cash and the issuance
of 5,000,000 shares of Class A common stock to the stockholders of
Gen-X. Gen-X, headquartered in Toronto, Ontario, Canada, with offices
in Geneva, Switzerland and Minneapolis, Minnesota, is a diversified
sporting goods company that designs, markets, and distributes a wide
range of branded sporting goods across multiple channels. Gen-X
markets products under numerous well-known brands, including: for
golf, Tommy Armour (R), RAM(R), Zebra(R) and Teardrop(R); for
snowboards: Sims(R), Lamar(R) and Limited(R); for action sports and
inline skates: Rage(R), Dukes(R), Oxygen(R), Ultra-Wheels(R), Street
Attack(R) and Skate Attack(R); for skis: Volant(R); and for hockey:
Hespeler(R). Gen-X also supports separate product lines dedicated to
licensing and the sale of opportunity and excess inventory. Merger
consideration is estimated to be $57,435 for the common stock of
Gen-X and Gen-X Ontario, $4,970 to purchase and redeem Gen-X
preferred stock, $44,661 to retire a portion of Gen-X's existing debt
and $3,340 for fees and expenses. The acquisition, which is expected
to close during the fourth quarter of 2002, is subject to shareholder
approval and satisfaction of certain conditions prior to close. The
terms of the proposed merger are included in the Company's
Form S-4 Registration Statement filed with the Securities and
Exchange Commission on July 5, 2002.
Note 4: The Company classifies its operations into a single integrated
business segment.
Note 5: The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS
141"), and SFAS No. 142, "Goodwill and Other Intangible Assets", as
of January 1, 2002 ("SFAS 142"). SFAS 141 addresses financial
accounting and reporting for business combinations requiring the use
of the purchase method of accounting and reporting for goodwill and
other intangible assets. In accordance with the provisions of SFAS
142, goodwill and intangible assets with indefinite useful lives will
no longer be amortized, but instead will be tested for impairment at
least annually. SFAS 142 also requires intangible assets with defined
useful lives be amortized over their estimated useful life to their
estimated residual values, and reviewed for impairment at least
annually.
As of June 29, 2002, the Company had $13,115 of goodwill and other
intangibles, including $4,792 of goodwill and $285 related to a
covenant not-to-compete associated with the McCalla acquisition. The
covenant not-to-compete was valued at $300 as of the acquisition date
and is being amortized over its expected useful life of five years.
In the second quarter of 2001, $181 ($112 after-tax), or $0.01 per
common share, of goodwill amortization was included in selling,
general and administrative expenses. Second quarter 2001 net earnings
excluding goodwill amortization was $880, or $0.08 per common share.
Goodwill amortization in the first half of 2001 of $362, or $0.02 per
common share, was included in selling, general and administrative
expenses. First half 2001 net earnings without goodwill amortization
were $1,986, or $0.19 per common share. The Company charged selling,
general and administrative expense for $726 ($477 after tax), or
$0.05 per common share, for the amortization of goodwill for the year
ended December 31, 2001. The full year 2001 net loss without goodwill
amortization was $7,933, or $0.77 per common share. No goodwill
amortization was incurred in 2002. The Company tested each reporting
unit's unamortized goodwill for impairment and found the assets
unimpaired as of the date of adoption. In accordance with SFAS 142,
the Company will test each reporting unit's goodwill annually as of
end of the fiscal year.
Effective January 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). SFAS 144 retained many of the fundamental provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("SFAS 121"), but resolved
certain implementation issues associated with that Statement. SFAS
144 also requires the results of operations of a component entity
that is classified as held for sale or has been disposed of to be
reported as discontinued operations in the Condensed Consolidated
Statements of Earnings if certain conditions are met. These
conditions include elimination of the operations and cash flows of
the component entity from the ongoing operations of the Company, and
no significant continuing involvement by the Company in the
operations of the component entity after the disposal transaction.
The adoption of SFAS 144 did not have a material impact on the
Company's consolidated results of operations.
Note 6. In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations"
("SFAS 143"), which will be effective for the Company beginning
January 1, 2003. SFAS 143 addresses the financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, 64, Amendment of FASB Statement No. 13, and
Technical Corrections" ("SFAS 145"), which will be effective for the
Company beginning January 1, 2003. SFAS 145 rescinds FASB Statement
No. 4, 44, 64 and amends SFAS No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions.
The Company has assessed the impact of SFAS 143 and 145, and
estimates that the impact of these standards will not be material.
Note 7: Critical Accounting Policies
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its accounts receivable
based upon an analysis of historical trends, aging of accounts
receivable, write-off experience and expectations of future
performance. Delinquent accounts are written off to selling, general
and administrative expense when circumstances make further collection
unlikely. In the event of a customer bankruptcy or reorganization,
specific reserves are established to write down accounts receivable
to the level of anticipated recovery. The Company may consult with
third-party purchasers of bankruptcy receivables when establishing
specific reserves. Non-specific reserves for doubtful accounts are
based upon a historical bad debt write-off of approximately 0.2% of
net sales. At June 29, 2002, a 0.1 percentage point change in bad
debts as a percentage of net sales would impact the reserve for
doubtful accounts by $164.
In January 2002, Kmart Corporation filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Pre-bankruptcy receivables
from Kmart were sold during the second quarter 2002 and cash
recovered consistent with previously established reserves.
Inventory Valuations
Inventories are valued at cost (not in excess of market) determined
by the first-in, first-out (FIFO) method. Management regularly
reviews inventory for salability and establishes obsolescence
reserves to absorb estimated losses. The Company also maintains
reserves against inventory shrinkage. On an annual basis, the Company
takes a physical inventory verifying the units on hand and comparing
its perpetual records to physical counts. Periodic cycle counting
procedures are used to verify inventory accuracy between physical
inventories. In the interim periods, a reserve for shrinkage is
established based upon historical experience and recent physical
inventory results. Inventory obsolescence and shrinkage are charged
to cost of sales.
Self-Insurance Reserves
The Company is self-insured for workers compensation, medical
insurance and product liability claims up to certain maximum
liability amounts. Medical insurance reserves are determined
based upon historical expense experience and loss reporting trends.
Workers compensation and product liability reserves are determined
based upon actuarial analysis of historical trends of losses,
settlements, litigation costs and other factors. The amounts accrued
for self-insurance are based upon management's best estimate and the
amounts the Company will ultimately disburse could differ from such
accrued amounts. The majority of workers compensation and medical
insurance expense is charged to cost of sales with the remainder
charged to selling, general and administrative expense.
Environmental
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Remediation costs that relate
to an existing condition caused by past operations are accrued when
it is probable that these costs will be incurred and can be
reasonably estimated.
The Company, along with others, has been designated as a potentially
responsible party (PRP) by the U.S. Environmental Protection Agency
(the "EPA") with respect to claims involving the discharge of
hazardous substances into the environment in the Baldwin Park
operable unit of the San Gabriel Valley Superfund site. The Company,
along with other PRPs, the Main San Gabriel Basin Watermaster
(Watermaster), the San Gabriel Water Quality Authority (WQA), and
numerous local water districts (Water Districts), have worked with
the EPA on a mutually satisfactory remedial plan, with the end result
being a joint water supply/clean up Project Agreement which settles
four different lawsuits filed by the WQA and the Water Districts. The
Project Agreement was signed on March 28, 2002 and was approved by
the court and became effective May 9, 2002. In developing its
estimate of environmental remediation costs, the Company considers,
among other things, currently available technological solutions,
alternative cleanup methods, and risk-based assessments of the
contamination and, as applicable, an estimation of its proportionate
share of remediation costs. The Company may also make use of external
consultants and consider, when available, estimates by other PRPs and
governmental agencies and information regarding the financial
viability of other PRPs. Based upon information currently available,
the Company believes it is unlikely that it will incur substantial
previously unanticipated costs as a result of failure by other PRPs
to satisfy their responsibilities for remediation costs.
The Company has recorded environmental accruals, based upon the
information available, that are adequate to satisfy known remediation
requirements. The total accrual for estimated environmental
remediation costs related to the Superfund site and other potential
environmental liabilities was $3,506 at June 29, 2002. In addition,
the Company has a deposit of $1,656 that is held in escrow under the
terms of the settlement agreement. Amounts in escrow will be used to
fund future costs and will serve as a long-term performance assurance
pending the completion of remediation.
Note 8: The components of comprehensive income are immaterial and are
therefore not disclosed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 29, 2002
COMPARED TO THE
THREE AND SIX MONTHS ENDED JUNE 30, 2001
(Dollar Amounts in Thousands, Except Per Share Data)
NET EARNINGS
For the second quarter of 2002, Huffy Corporation ("Huffy" or "Company") had net
earnings of $1,275, or $0.12 per common share, versus $768 or $0.07 for the same
period last year. For the six months ended June 29, 2002, net earnings were
$1,899, or $0.18 per common share, compared to $1,762, or $0.17 per common
share, in the first half of 2001.
NET SALES
Consolidated net sales for the quarter ended June 29, 2002 were $93,413, an
increase of 7.5% over net sales of $86,864 for the same quarter in 2001.
Backboard and ball sales climbed 26.3% over the second quarter 2001 contributing
most of the sales growth. Strong sales growth from bicycle and other wheeled
products was offset by decreased demand for merchandising at Kmart. The McCalla
companies acquired at the end of the first quarter added $2,924 of incremental
merchandising revenue.
For the six months ended June 29, 2002, consolidated net sales were $163,798, a
decrease of 2.5% from $168,107 in the same period last year. This sales decrease
was primarily the result of Kmart's first quarter bankruptcy, which interrupted
shipments of product, and unfavorably impacted consumer sales. Strong demand for
backboards was not sufficient to offset weakness in merchandising and the mix
shift to opening price point bicycles. In addition, during the first half of
2001 sales of closeout scooters enhanced the net sales line but added only
minimal margin contribution.
GROSS PROFIT
Gross profit for the quarter ended June 29, 2002 was $17,031, or 18.2% of net
sales, compared to $12,077, or 13.9% of net sales, for the quarter ended June
30, 2001. Bicycles and basketball backboards provided strong margin contribution
during the second quarter, up 5.6 points over the same quarter last year. Lower
merchandising activity coupled with higher field labor costs in assembly
weakened the favorable contributions from product sales. Margin contributions
from the McCalla companies were $895 in the quarter.
For the first six months of 2002, gross profit was $29,032, or 17.7% of net
sales, compared to $23,712, or 14.1% of net sales, last year. Strong margin
improvement in wheeled products and basketball backboards were offset by
declining margin associated with lower merchandising volume and higher assembly
field labor costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $13,847 for the second quarter
of 2002, compared to $11,089 for the same period in 2001. Higher pension
expenses and the addition of McCalla's selling, general administrative costs
were the primary reasons for the year-to-year increase.
Selling, general and administrative expenses for the first half of 2002 were
$24,375 versus $21,132 in the first six months of 2001. Increased pension
expenses and the added selling, general and administrative expenses associated
with the recent McCalla acquisition were the primary reasons for the increase.
ACQUISITIONS
The Company announced its intention to acquire Gen-X Sports, Inc. ("Gen-X") on
June 17, 2002. Under the terms of the proposed merger agreement, the Company
will acquire Gen-X for cash and the issuance of 5,000,000 shares of Class A
common stock to the stockholders of Gen-X. Gen-X, headquartered in Toronto,
Ontario, Canada, with offices in Geneva, Switzerland and Minneapolis, Minnesota,
is a diversified sporting goods company that designs, markets, and distributes a
wide range of branded sporting goods across multiple channels. Gen-X markets
products under numerous well-known brands, including: for golf, Tommy Armour
(R), RAM(R), Zebra(R) and Teardrop(R); for snowboards: Sims(R), Lamar(R) and
Limited(R); for action sports and inline skates: Rage(R), Dukes(R), Oxygen(R),
Ultra-Wheels(R), Street Attack(R) and Skate Attack(R); for skis: Volant(R); and
for hockey: Hespeler(R). Gen-X also supports separate product lines dedicated to
licensing and the sale of opportunity and excess inventory. Merger consideration
is estimated to be $57,435 for the common stock of Gen-X and Gen-X Ontario,
$4,970 to purchase and redeem Gen-X preferred stock, $44,661 to retire a portion
of Gen-X's existing debt and $3,340 for fees and expenses. The acquisition,
which is expected to close during the fourth quarter of 2002, is subject to
shareholder approval and satisfaction of certain conditions prior to close. The
terms of the proposed merger are included in the Company's Form S-4 Registration
Statement filed with the Securities and Exchange Commission on July 5, 2002.
On March 27, 2002, Huffy Service First acquired the stock of McCalla Company and
its subsidiaries, Creative Retail Services and Creative Retail Services Canada,
("McCalla") for $5,400, less $500 net cash acquired, subject to certain
post-closing adjustments. Of the total purchase price, $4,792 was recorded as
goodwill and $300 was recorded as a covenant not-to-compete. McCalla provides
merchandising, including cycle and periodic product resets, stocking and sales
training for a number of well-known manufacturers serving the Home Center
channel, including, among others, Philips Lighting, Duracell, and The Stanley
Works.
LIQUIDITY AND CAPITAL RESOURCES
The Company's $75,000 revolving credit facility is secured by all assets of the
Company and its affiliates and will expire on December 31, 2002, with a 12-month
renewal at the Company's option. As of June 29, 2002, the Company had $32,430
available on its revolving credit facility and had no outstanding balance. Huffy
is negotiating an amendment with its existing lender to incorporate Gen-X in the
credit facility.
Pre-bankruptcy receivables from Kmart were sold during the second quarter 2002
with cash recovered consistent with previously established reserves. Inventory
levels are $26,211 at June 29, 2002, up seasonally from $12,483 at December 31,
2001, but down from the June 30, 2001 levels of $35,654. The
June 2001 inventory investment was inflated by scooter inventory. Accounts
payable are higher in the second quarter of 2002 at $55,155, up from $31,161 at
December 31, 2001 and $27,408 at June 30, 2001. The increase in accounts payable
from December 31, 2001 and June 30, 2001, is due to seasonality as well as
increased payment terms from Huffy's network of global suppliers.
The Company expects existing cash, cash flow from operations, and its revolving
credit facility will be sufficient to finance seasonal working capital needs and
capital expenditures throughout the coming year.
CRITICAL ACCOUNTING POLICIES
Allowance for Doubtful Accounts
The Company evaluates the collectibility of its accounts receivable based upon
an analysis of historical trends, aging of accounts receivable, write-off
experience and expectations of future performance. Delinquent accounts are
written off to selling, general and administrative expense when circumstances
make further collection unlikely. In the event of a customer bankruptcy or
reorganization, specific reserves are established to write down accounts
receivable to the level of anticipated recovery. The Company may consult with
third-party purchasers of bankruptcy receivables when establishing specific
reserves. Non-specific reserves for doubtful accounts are based upon a
historical bad debt write-off of approximately 0.2% of net sales. At June 29,
2002, a 0.1 percentage point change in bad debts as a percentage of net sales
would impact the reserve for doubtful accounts by $164.
In January 2002, Kmart Corporation filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Pre-bankruptcy receivables from Kmart were sold during
the second quarter 2002 and cash recovered consistent with previously
established reserves.
Inventory Valuations
Inventories are valued at cost (not in excess of market) determined by the
first-in, first-out (FIFO) method. Management regularly reviews inventory for
salability and establishes obsolescence reserves to absorb estimated losses. The
Company also maintains reserves against inventory shrinkage. On an annual basis,
the Company takes a physical inventory verifying the units on hand and comparing
its perpetual records to physical counts. Periodic cycle counting procedures are
used to verify inventory accuracy between physical inventories. In the interim
periods, a reserve for shrinkage is established based upon historical experience
and recent physical inventory results. Inventory obsolescence and shrinkage are
charged to cost of sales.
Self-Insurance Reserves
The Company is self-insured for workers compensation, medical insurance and
product liability claims up to certain maximum liability amounts. Medical
insurance reserves are determined based upon historical expense experience and
loss reporting trends. Workers compensation and product liability reserves are
determined based upon actuarial analysis of historical trends of losses,
settlements, litigation costs and
other factors. The amounts accrued for self-insurance are based upon
management's best estimate and the amounts the Company will ultimately disburse
could differ from such accrued amounts. The majority of workers compensation and
medical insurance expense is charged to cost of sales with the remainder
charged to selling, general and administrative expense.
Environmental
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Remediation costs that relate to an existing
condition caused by past operations are accrued when it is probable that these
costs will be incurred and can be reasonably estimated.
The Company, along with others, has been designated as a potentially responsible
party (PRP) by the U.S. Environmental Protection Agency (the "EPA") with respect
to claims involving the discharge of hazardous substances into the environment
in the Baldwin Park operable unit of the San Gabriel Valley Superfund site. The
Company, along with other PRPs, the Main San Gabriel Basin Watermaster
(Watermaster), the San Gabriel Water Quality Authority (WQA), and numerous local
water districts (Water Districts), have worked with the EPA on a mutually
satisfactory remedial plan, with the end result being a joint water supply/clean
up Project Agreement which settles four different lawsuits filed by the WQA and
the Water Districts. The Project Agreement was signed on March 28, 2002 and was
approved by the court and became effective May 9, 2002. In developing its
estimate of environmental remediation costs, the Company considers, among other
things, currently available technological solutions, alternative cleanup
methods, and risk-based assessments of the contamination and, as applicable, an
estimation of its proportionate share of remediation costs. The Company may also
make use of external consultants and consider, when available, estimates by
other PRPs and governmental agencies and information regarding the financial
viability of other PRPs. Based upon information currently available, the Company
believes it is unlikely that it will incur substantial previously unanticipated
costs as a result of failure by other PRPs to satisfy their responsibilities for
remediation costs.
The Company has recorded environmental accruals, based upon the information
available, that are adequate to satisfy known remediation requirements. The
total accrual for estimated environmental remediation costs related to the
Superfund site and other potential environmental liabilities was $3,506 at June
29, 2002. In addition, the Company has a deposit of $1,656 that is held in
escrow under the terms of the settlement agreement. Amounts in escrow will be
used to fund future costs and will serve as a long-term performance assurance
pending the completion of remediation. Management expects that the majority of
expenditures relating to costs currently accrued will be made over the next
year. As a result of factors, such as the continuing evolution of environmental
laws and regulatory requirements, the availability and application of
technology, the identification of presently unknown remediation sites, and the
allocation of costs among potentially responsible parties, estimated costs for
future environmental compliance and remediation are necessarily imprecise and it
is not possible to fully predict the amount or timing of future environmental
remediation costs which may subsequently be determined.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company along with numerous California water companies and other potentially
responsible parties ("PRPs") for the Baldwin Park Operable Unit of the San
Gabriel Valley Superfund (see Note 10 to the Company's annual report regarding
the Superfund in which a tentative remediation settlement has been reached) have
been named in fourteen civil lawsuits which allege claims related to the
contaminated groundwater in the Azusa, California area (collectively, the "San
Gabriel Cases").
The cases had been stayed for a variety of reasons, including a number of
demurrers and writs taken in the Appellate Division, relating primarily to the
California Public Utilities Commission ("PUC") investigation described below.
The resulting Appellate Division decisions were reviewed by the California
Supreme Court, which ruled in February 2002. The cases have been reactivated as
a result of the California Supreme Court's decision, with the trial level
Coordination Judge holding a Status Conference on all of the cases on July 17,
2002, at which conference issues pertaining to the drafting of three master
complaints (two of which will include the Company as a defendant), a case
management order and a preliminary questionnaire to be responded to by all of
the plaintiff's were discussed. A follow up conference with the Court to further
address and reach resolution on these issues is scheduled for July 29, 2002. As
noted by the matters being discussed with the Court, the toxic tort cases are in
their initial stages. Thus, it is impossible to currently predict the outcome of
any of the actions.
The Company, along with the other PRPs for the Baldwin Park Operable Unit of the
San Gabriel Valley Superfund Site (the "BPOU"), has also been named in four
civil lawsuits filed by water purveyors. The water purveyor lawsuits allege
CERCLA, property damage, nuisance, trespass and other claims related to the
contaminated groundwater in the BPOU (collectively, the "Water Entity Cases").
The Company was named as a direct defendant by the water purveyor in two of
these cases, and was added as a third party defendant in the two others by
Aerojet General Corporation, which, in those cases, was the only PRP sued by the
water purveyors. As noted above, each of the Water Entity Cases have been
settled through the entry of the Project Agreement. According to the terms of
the Project Agreement, the Water Entity Cases, which are in their initial
stages, will be dismissed within thirty days.
On March 12, 1998, the PUC commenced an investigation in response to the
allegations in the toxic tort actions that "drinking water delivered by the
water utilities caused death and personal injury to customers." The PUC's
inquiry addressed two broad issues central to these allegations: 1) "whether
current water quality regulation adequately protects the public health;" and 2)
"whether respondent utilities are (and for the past 25 years have been)
complying with existing drinking water regulation." On November 2, 2000, the PUC
issued its Final Opinion and Order Resolving Substantive Water Quality Issues.
Significantly, the Order finds, in pertinent part, that: 1) "existing maximum
contaminant level ("MCLs") and action level ("ALs") established by the DHS are
adequate to protect the public health;" 2) "there is a significant margin of
safety when MCLs are calculated so that the detection of carcinogenic
contaminants above MCLs that were reported in this investigation are unlikely to
pose a health risk;" 3) based upon its comprehensive review of 25 years of
utility compliance records, that for all periods when MCLs and ALs for specific
chemicals were in effect, the PUC regulated water companies complied with DHS
testing requirements
and advisories, and the water served by the water utilities was not harmful or
dangerous to health; and 4) with regard to the period before the adoption by DHS
of MCLs and ALs, a further limited investigation by the PUC Water Division will
be conducted.
Based upon information presently available, such future costs are not expected
to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
ITEM 5: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - The exhibits, as shown in the "Index of Exhibits" attached
hereto are applicable to be filed as a part of this report.
b. The Company filed two reports on Form 8-K dated April 25, 2002 and
June 18, 2002 with the Securities and Exchange Commission regarding
remarks of the Chief Executive Officer at the Annual Shareholders
Meeting and the press release issued announcing the acquisition of
Gen-X Sports, Inc., respectively.
Please see the Company's meaningful cautionary statements regarding forward
looking statements contained in the Company's report on Form 10-K filed with the
Securities and Exchange Commission on February 21, 2002 which is hereby
incorporated herein by reference.
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.
HUFFY CORPORATION, Registrant
July 23, 2002 /s/ Timothy G. Howard
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Date Timothy G. Howard
Vice President - Corporate Controller
(Principal Accounting Officer)
INDEX OF EXHIBITS
Exhibit
No. Item
- ------- -------------------------------------------------------------------
(2) Not applicable
(3) Not applicable
(4) Not applicable
(10) (a) 1998 Key Employee Non-Qualified Stock Plan, approved June 12, 1997,
and First Amendment, dated October 22, 1998, Second Amendment, dated
December 13, 1998, and Third Amendment, dated December 9, 1999.
(b) Share Purchase Agreement, dated June 5, 2002, by and among Huffy
Corporation, HSGC Canada Inc., Gen-X Sports, Inc., DMJ Financial
Inc., K & J Financial, Inc., DLS Financial, Inc., Kenneth Finkelstein
Family Trust, James Salter Family Trust, Osgoode Financial Inc.,
James Salter, and Kenneth Finkelstein, incorporated by reference to
Exhibit 2(b) of Form S-4 filed July 5, 2002.
(c) Agreement and Plan of Merger, dated June 5, 2002, by and among Huffy
Corporation, HSGC, Inc. and Gen-X Sports Inc., incorporated by
reference to Annex A of Form S-4 filed July 5, 2002.
(11) Not applicable
(15) Not applicable
(18) Not applicable
(19) Not applicable
(22) Not applicable
(23) Not applicable
(24) Not applicable
(99) Not applicable