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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 September 30, 2002
-----------------------------------------------------------
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
----------------------------------------
(Address of principal executive offices) (Zip Code)
(937) 866-6251
--------------
(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: 14,645,844 as of November 13, 2002
---------------------- -----------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
HUFFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 29, September 30, September 29,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 83,028 $ 77,945 $ 246,826 $ 246,052
Cost of sales 67,073 70,268 201,839 214,663
------------ ------------ ------------ ------------
Gross profit 15,955 7,677 44,987 31,389
Selling, general and administrative expenses 12,826 11,150 37,201 32,282
------------ ------------ ------------ ------------
Operating income (loss) 3,129 (3,473) 7,786 (893)
Other expense (income):
Interest expense 249 377 924 1,293
Interest income 38 (110) (16) (534)
Other expense 419 870 1,385 116
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 2,423 (4,610) 5,493 (1,768)
Income tax expense (benefit) 754 (1,809) 1,925 (729)
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations 1,669 (2,801) 3,568 (1,039)
Discontinued operations:
Loss from discontinued operations, net of
income tax benefit of $443 (723) -- (723) --
------------ ------------ ------------ ------------
Net earnings (loss) $ 946 $ (2,801) $ 2,845 $ (1,039)
------------ ------------ ------------ ------------
Earnings (loss) per common share:
Basic:
Weighted average number of common shares 11,871,429 10,323,058 10,896,562 10,269,891
Earnings (loss) from continuing operations $ 0.14 $ (0.27) $ 0.33 $ (0.10)
Loss from discontinued operations (0.06) -- (0.07) --
------------ ------------ ------------ ------------
Net earnings (loss) per common share $ 0.08 $ (0.27) $ 0.26 $ (0.10)
============ ============ ============ ============
Diluted:
Weighted average number of common shares 12,128,033 10,323,058 11,153,166 10,269,891
Earnings (loss) from continuing operations $ 0.14 $ (0.27) $ 0.32 $ (0.10)
Loss from discontinued operations (0.06) -- (0.06) --
------------ ------------ ------------ ------------
Net earnings (loss) per common share $ 0.08 $ (0.27) $ 0.26 $ (0.10)
============ ============ ============ ============
See accompanying notes to the condensed consolidated financial statements.
HUFFY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
September 30,
2002 December 31,
(Unaudited) 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 514 $ 26,541
Accounts and notes receivable, net 91,203 48,934
Inventories 48,202 12,483
Prepaid expenses and federal income taxes 20,216 17,803
--------- ---------
Total current assets 160,135 105,761
--------- ---------
Property, plant and equipment 40,752 39,320
Less: Accumulated depreciation and amortization 29,557 30,053
--------- ---------
Net property, plant and equipment 11,195 9,267
Net assets held for sale 5,480 --
Excess of cost over net assets acquired, net 23,686 8,038
Intangible assets, net 48,275 --
Other assets 21,616 22,419
--------- ---------
$ 270,387 $ 145,485
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 46,821 $ --
Current installments of long-term obligations 714 --
Accounts payable 68,275 31,161
Accrued expenses and other current liabilities 32,675 30,224
--------- ---------
Total current liabilities 148,485 61,385
--------- ---------
Long-term obligations, less current installments 4,773 --
Other long-term liabilities 36,663 18,498
--------- ---------
Total liabilities 189,921 79,883
--------- ---------
Shareholders' equity:
Common stock 21,153 16,931
Additional paid-in capital 95,168 67,226
Retained earnings 77,992 75,147
Unearned stock compensation (37) --
Accumulated other comprehensive loss (24,041) (3,421)
Treasury shares, at cost (89,769) (90,281)
--------- ---------
Total shareholders' equity 80,466 65,602
--------- ---------
$ 270,387 $ 145,485
========= =========
See accompanying notes to the condensed consolidated financial statements.
HUFFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Nine Months Ended
---------------------------
September 30, September 29,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations $ 3,568 $ (1,039)
Adjustments to reconcile net earnings (loss)to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,643 3,801
Gain on sale of property, plant and equipment 12 64
Deferred federal income taxes (7,723) 2,904
Changes in assets and liabilities, excluding the effect of acquisitions:
Accounts and notes receivable, net 383 27,350
Inventories (12,089) 8,639
Prepaid expenses and federal income taxes (3,099) (798)
Other assets 14,049 (1,417)
Accounts payable 6,516 7,186
Accrued expenses and other current liabilities (6,269) (16,561)
Other long-term liabilities (2,492) (1,788)
-------- --------
Net cash provided by (used in) continuing operating activities (4,501) 28,341
-------- --------
Discontinued operations:
Loss from discontinued operations (723) -
-------- --------
Net cash provided by (used in) discontinued operating activities (723) -
-------- --------
Net cash provided by (used in) operating activities (5,224) 28,341
================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,977) (2,067)
Gen-X acquisition (19,001) -
McCalla acquisition, net of cash acquired (4,900) -
-------- --------
Net cash used in investing activities (25,878) (2,067)
================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 46,821 (17,656)
Repayment of debt assumed in the Gen-X acquisition (37,800) -
Preferred shares redeemed (4,970) -
Issuance of long-term debt 458 -
Reduction of long-term debt (123) -
Issuance of common shares 689 1,363
-------- --------
Net cash provided by (used in) financing activities 5,075 (16,293)
================================================================================================================
Net change in cash and cash equivalents (26,027) 9,981
Cash and cash equivalents:
Beginning of the year 26,541 4,334
End of the period $ 514 $ 14,315
================================================================================================================
See accompanying notes to the condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION - The accompanying unaudited condensed
consolidated financial statements include the accounts of the Company and all of
its subsidiaries. All inter-company transactions and balances have been
eliminated. The condensed consolidated financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") including the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K as of and
for the year ended December 31, 2001. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
All Huffy Corporation subsidiaries, except for the Gen-X Sports Inc. and the
McCalla Companies results include activity for the fiscal periods ended
September 28, 2002, while Gen-X Sports Inc. and the McCalla Companies results
include activity for the period ended September 30, 2002. The Company is in the
process of conforming all new acquisitions to the Company's reporting periods.
The results for the three months and the nine months ended September 30, 2002
are not necessarily indicative of the results expected for the year.
Certain prior year balances have been reclassified to conform with the 2002
presentation.
NOTE 2: ADOPTION OF NEW ACCOUNTING STANDARDS
ASSETS HELD FOR SALE - The Company accounts for long-lived assets in accordance
with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
The Company has classified a portion of the land and buildings obtained in the
Gen-X acquisition as net assets held for sale as of September 30, 2002. The
assets are stated at estimated fair value of approximately $5,480, as determined
by an independent appraisal. The Company will formalize its plan for disposal
by sale of these assets, within three months subsequent to the acquisition
date, in accordance with SFAS No. 144.
AMORTIZATION OF INTANGIBLES - The Company adopted the provisions of SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, as of January 1, 2002. SFAS No. 141 addresses financial accounting and
reporting for business combinations requiring the use of the purchase method of
accounting for combinations initiated subsequent to June 30, 2001. SFAS No. 142
provides financial accounting and reporting for goodwill and other intangible
assets requiring that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment
at least annually in accordance with the provisions of SFAS No. 142. SFAS
No. 142 also requires intangible assets with estimable useful lives to be
amortized over their respective useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 144.
On March 27, 2002, the Company acquired 100% of the common stock of McCalla
Company and subsidiaries. The aggregate purchase price was $5,400 and was paid
in cash. Of the total purchase consideration, $4,876 was allocated to goodwill
and $300 to an agreement not to compete.
On September 19, 2002, the Company acquired all of the common stock of Gen-X
Sports and its subsidiaries. Included in the assets acquired are trademarks,
patents and licensing agreements recorded at their fair values of $45,800,
$1,285 and $940, respectively, as well as goodwill in the amount of $10,772. The
fair values for these assets, excluding goodwill, were determined by an
independent third-party appraiser.
The Company has the following acquired intangible assets as of September 30,
2002 and December 31, 2001:
As of September 30, 2002 As of December 31, 2001
------------------------ ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Assets subject to
amortization:
Patents $ 1,285 $ 6 $ - $ -
License Agreements 940 14 - -
Covenant not to compete 300 30 - -
---------- ------------ ---------- ------------
Total assets subject to
amortization $ 2,525 $ 50 $ - $ -
========== ============ ========== ============
Assets not subject to
amortization:
Trademarks at Gen-X 45,800 - - -
Goodwill recorded in
connection with the
Gen-X acquisition 10,772 - - -
Goodwill in the Bicycle
business unit 8,824 2,380 8,824 2,380
Goodwill in Huffy Sports
business unit 1,973 569 1,973 569
Goodwill recorded in
connection with the
McCalla acquisition 4,876 - - -
Goodwill in Huffy Service
First business unit 478 288 478 288
---------- ------------ ---------- ------------
Total assets not subject to
amortization $ 72,723 $3,237 $11,275 $ 3,237
========== ============ ========== ============
The Company recorded amortization expense of $50 in the first three quarters of
2002 and $35 in the third quarter of 2002. The company estimates that
amortization expense will be $165 in the fourth quarter of 2002 and $655, $570,
$297, $228, and $94 for each of the years ended December 31, 2003, 2004, 2005,
2006 and 2007, respectively.
The Company's reporting units are tested annually for impairment.
The following table provides a summary of net income (loss) and related basic
and diluted EPS information as reported and as adjusted to excluded goodwill
amortization for the three and nine months ended September 30, 2002 and
September 29, 2001:
Three Months Ended Nine Months Ended
September September September September
30, 2002 29, 2001 30, 2002 29, 2001
----------- ----------- ----------- -----------
Reported net income (loss) $ 946 $(2,801) $2,845 $(1,039)
Add back: Goodwill
amortization - 183 - 546
Add back: Other
amortization - - - 1
----------- ----------- ----------- -----------
Adjusted net income (loss) $ 946 $(2,618) $2,845 $ (492)
----------- ----------- ----------- -----------
Basic EPS
Reported net income
(loss) $0.08 $ (0.27) $ 0.26 $ (0.10)
Adjusted net income
(loss) 0.08 (0.25) 0.26 (0.05)
Diluted EPS
Reported net income
(loss) $0.08 $ (0.27) $ 0.26 $ (0.10)
Adjusted net income
(loss) 0.08 (0.25) 0.26 (0.05)
REPORTING SEGMENTS - Huffy Bicycle Company, including Royce Union Bicycle
Company and American Sports Design Company, Huffy Sports Company, Gen-X Sports
Inc, McCalla Companies and Huffy Service First, Inc. operate as one business
segment providing consumer products and services.
NOTE 3. ACQUISITIONS
On September 19, 2002, the Company acquired all of the stock of Gen-X Sports
Inc. in exchange for $19,001 in cash and the issuance of 4,161,241 shares of
Huffy Corporation's Class A common shares to the stockholders of Gen-X. The
$7,681 per share value of the Class A common shares issued was determined based
on the average market price of Huffy Corporation's common shares over the two
day period before and after the terms of the acquisition were agreed to and
announced. The purchase price is subject to certain post-closing adjustments.
Should Gen-X meet 2002 financial performance objectives, specified in the
purchase agreement, and if there are no breaches of warranties and
representations, up to 838,662 additional common shares may be issued to the
Gen-X stockholders. In addition, the acquired companies immediately redeemed
$4,970 of preferred stock and refinanced their existing bank debt. Included in
the assets acquired are trademarks, patents and licensing agreements recorded
at their fair values of $45,800, $1,285 and $940, respectively, as well as
goodwill in the amount of $10,772. Gen-X is a designer, marketer and
distributor of branded sports equipment, including action sports products,
winter sports products and golf products, and is a purchaser and reseller of
sporting goods and athletic footwear inventories. The Company believes that the
combination of Huffy & Gen-X will create a stronger, more competitive sporting
goods company capable of achieving greater financial strength, earnings power,
operational efficiency and growth potential than either company would on its
own. It will also broaden each company's brand portfolios and sporting goods
product offerings and broaden and diversify the customer base. Finally, the
combination has the potential to decrease seasonal fluctuations in sales and
earnings.
The following table presents the results of operations on an unaudited
pro-forma basis as if Huffy Corporation, Gen-X Sports Inc. and Gen-X Sports,
Inc. had been combined from the beginning of the periods shown.
Huffy Corporation, Gen-X Sports Inc. and Gen-X Sports, Inc.
Summary Unaudited Pro-forma Condensed Combined Statement of Operations
Three months ended Nine months ended
--------------------------------- -------------------------------
September 30, September September September
2002 29, 2001 30, 2002 29, 2001
--------------- ------------- -------------- -------------
Net Sales $111,338 $115,867 $338,414 $322,219
Operating income (loss) from continuing
operations 2,003 (527) 7,843 3,847
--------------- ------------- -------------- -------------
Net earnings (loss) from continuing operations $ 1,352 $ (356) $ 5,294 $ 2,597
=============== ============= ============== =============
Earnings (loss) from continuing
operations per common share
Basic $ 0.09 $ (0.02) $ 0.36 $ 0.18
Diluted 0.09 (0.02) 0.36 0.18
Shares used in calculation of earnings per share
Basic 14,658,923 14,484,299 14,599,888 14,431,132
Diluted 14,915,527 14,484,299 14,856,492 14,431,132
The following table summarized the estimated fair value of the assets acquired
and the liabilities assumed at the date of acquisition.
September
19, 2002
--------
Accounts receivable $ 41,531
Inventories 23,630
Prepaid expense 3,234
Property, plant and equipment 7,979
Intangible assets 48,025
Goodwill 10,772
Other assets 1,574
--------
Total assets acquired 136,745
Accounts payable 30,441
Accrued liabilities 7,394
Long-term debt 42,952
---------
Total liabilities assumed 80,787
---------
Net assets acquired $ 55,958
=========
Of the $48,025 of acquired intangible assets, $45,800 was assigned to registered
trademarks that are not subject to amortization. The remaining $2,225 of
acquired intangible assets has a weighed-average useful life of approximately
seven years. The intangible assets that make up that amount include, patents of
$800, (approximately a ten-year weighed-average useful life), and license
agreements of $940, (approximately a two-year weighed-average useful life).
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, $4,876 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.
Both of these acquisitions were accounted for on the purchase method of
accounting in accordance with SFAS No. 141.
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September September
30, 2002 29, 2001
--------- ---------
Cash Paid (Received) during the period for:
Interest $ 505 $ 845
Taxes (119) 1,532
========= ===========
Details of acquisitions:
Fair value of assets 136,745 --
Liabilities 80,787 --
--------- -----------
Net assets acquired 55,958 --
Less: common shares issued 31,987 --
Less: preferred shares redeemed 4,970 --
--------- -----------
Cash paid for Gen-X common shares 19,001 --
--------- -----------
Cash paid for McCalla acquisition 5,400 --
Less: cash acquired 500 --
--------- -----------
Net cash paid for McCalla acquisition 4,900 --
--------- -----------
Net cash paid for acquisitions $ 23,901 $ --
========= ===========
NOTE 5. INVENTORIES
The components of inventories are as follows:
September December
30, 2002 31, 2001
------------ -----------
Finished goods $ 43,096 $ 10,768
Work-in-process 176 105
Raw materials and supplies 4,930 1,610
------------ -----------
$ 48,202 $ 12,483
============ ===========
NOTE 6. LINES OF CREDIT AND LONG-TERM OBLIGATIONS
In September 2002, the Company entered into an Amended and Restated Loan and
Security Agreement with Congress Financial Corporation. The $75 million
revolving credit facility is secured by all assets of the Company and its
affiliates and will expire on December 31, 2004, with a 12-month renewal option.
The interest rate under the revolving credit facility varies based upon excess
availability from prime to prime plus .25%, or LIBOR plus 1.75% to LIBOR plus
2.75%. The revolving credit facility contains covenants which require the
Company to maintain a minimum of $50,000 of net worth, restrict certain business
activities, including the payment of dividends, limit capital expenditures and
require EBITDA to be maintained at prescribed levels. As of September 30, 2002,
the Company is in compliance with these covenants. The Company assumed three
long-term obligations in the Gen-X acquisition with a combined outstanding
balance of $5,153. The mortgage loan assumed in the Gen-X acquisition is secured
by net assets held for sale as described in Note 2. Sale proceeds from the
disposal of this property would be used to retire the unpaid balance on the
mortgage.
September December
SHORT-TERM BORROWINGS: 30, 2002 31, 2001
------------ ------------
Revolving credit facility $ 46,821 $ --
Weighted average interest rate 5.00% N/A
LONG-TERM OBLIGATIONS:
6% Term loan due July 2003 $ 326 $ --
Mortgage loan due monthly through 2021 4,806 --
Capital lease due monthly through 2005 355
--------- ---------
5,487 --
Less: current installments 714 --
--------- ---------
$ 4,773 $ --
========= =========
Prior to the acquisition of Gen-X on September 19, 2002, the Company had been
debt free, with cash invested since the first quarter of 2001. Interest expense
in 2001 was primarily comprised of amortization of financing costs, letters of
credit and revolver non-usage fees.
Principal payments required on the long-term obligations during the fourth
quarter of 2002, each of the years 2003 through 2007, and thereafter are
approximately, $85, $714, $404, $291, $250, $250 and $3,493 respectively.
As of September 30, 2002, the revolving credit facility had $17,573 of unused
availability. Management believes that the available balance on the amended
credit facility and internally generated cash flows will be sufficient to
finance the Company's seasonal working capital and capital expenditure needs in
the coming year.
NOTE 7. COMMITMENTS AND CONTINGENCIES
A. 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 on Form 10-K as of and for the year ended December 31, 2001,
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 number of Status
Conferences on all of the cases, at which conferences issues pertaining to
the three master complaints (two of which include the Company as a
defendant), preliminary demurrers to such master complaints, case
management orders and initial written discovery were discussed. 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. 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 have been, or will
imminently be, dismissed without prejudice.
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.
B. In a Current Report on Form 8-K filed October 29, 2002, Huffy Corporation
reported on the status of two cases involving its former subsidiary,
Washington Inventory Service ("WIS"), which was acquired from Huffy
Corporation by WIS Holdings Corp. on November 3, 2000.
Under the terms of the acquisition agreement with WIS Holdings Corp.,
Huffy Corporation agreed to indemnify WIS Holdings Corp. and WIS against
certain third party claims related to the period of Huffy Corporation's
ownership of WIS.
The two cases are Perez v. Washington Inventory Service, pending in the
Los Angeles, California Superior Court, and Miranda v. Washington
Inventory Service, pending in the U.S. District Court for the Central
District of California. Both cases were filed on behalf of current and
former WIS employees by the same plaintiffs' counsel and involve alleged
violations by WIS of different aspects of state and federal wage and hour
laws. The Perez case has been certified as a class action, and the
plaintiffs are seeking class action certification in the Miranda case.
Huffy Corporation is not a named defendant in the Perez case but is a
named defendant in the Miranda case. Huffy Corporation is potentially
obligated to indemnify WIS Holdings Corp. for some portion of any
liability it or WIS incurs in both cases.
In the Form 8-K filed on October 29, 2002, Huffy Corporation reported that
a settlement mediation session in the Perez case had ended without
resolution of that case. Huffy Corporation further reported that it could
not then predict the likely outcome of either case, or the materiality of
the outcome to Huffy Corporation under its indemnity obligations to WIS
Holdings Corp. and WIS.
During the week of November 4, 2002 a series of communications among the
interested parties' counsel, including Huffy Corporation's counsel, took
place, culminating in face-to-face settlement negotiations. These
negotiations were preliminary in nature, in anticipation of a formal
mediation session scheduled to occur on November 18, 2002, any results of
which will in turn be subject to a reasonableness hearing and formal court
approval. However, based on progress made in these preliminary
negotiations, as of November 8, 2002 Huffy Corporation believes that its
obligation to indemnify WIS Holdings Corp. and/or WIS is likely to be
material in amount. However, at this time, the Company is not able to
reasonably estimate the range of possible losses and in accordance with
accounting principles generally accepted in the United States of America
has therefore not recorded any reserve for these cases in the financial
statements for the period ended September 30, 2002.
NOTE 8. ENVIRONMENTAL EXPENDITURES
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 $5,010 at
September 30, 2002. In addition, the Company has a deposit of $3,660 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.
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.
NOTE 9. CREDIT CONCENTRATION
Kmart is the Company's largest customer comprising 22% of consolidated net sales
in the first nine months of 2002, down from 38% for the year ended December 31,
2001. 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. The Company's next largest customer made up 20% and 18% of
consolidated net sales in the first nine months of 2002 and in the year ended
December 31, 2001.
NOTE 10. ACCOUNTING PRONOUNCEMENTS ISSUED NOT IMPLEMENTED
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which
will be effective for the Company beginning January 1, 2003. SFAS No. 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
No. 145"), which will be effective for the Company beginning January 1, 2003.
SFAS No. 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Cash Associated
with Exit or Disposal Activities" ("SFAS No. 146"), which will be effective for
the Company beginning January 1, 2003. SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred.
The Company has assessed the impact of SFAS Nos. 143, 145, and 146, and
estimates that the impact of these standards will not be material to the
Company's financial condition, results of operations or liquidity.
NOTE 11: DISCONTINUED OPERATIONS
During the quarter ended September 30, 2002, the Company recognized expenses
related to discontinued businesses. These expenses include product liability on
discontinued products and other contractually indemnified liabilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THE
THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2001
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
NET EARNINGS
For the third quarter of 2002, Huffy Corporation ("Huffy" or "Company") had net
earnings of $946, or $0.08 per common share, versus a loss of $2,801 or $0.27
for the same period last year. For the nine months ended September 30, 2002, net
earnings were $2,845, or $0.26 per common share, compared to a loss of $1,039,
or $0.10 per common share, in nine months of 2001. Earnings from continuing
operations in the third quarter of 2002 were $1,669, or $0.14 per common share,
versus a loss of $2,801 or $0.27 for the same period last year. For the nine
months ended September 30, 2002, earnings from continuing operations were
$3,568, or $0.32 per common share, compared to a loss of $1,039, or $0.10 per
common share, in nine months of 2001.
NET SALES
Consolidated net sales for the quarter ended September 30, 2002 were $83,028, an
increase of 6.5% over net sales of $77,945 reported for the same period in 2001.
This improvement was primarily the result of the acquisition of Gen-X on
September 19, 2002. Gen-X contributed $8,128 in net sales during the portion of
September that it was owned by Huffy Corporation. Third quarter sales of
services to retailers were 14.0% better than the same period last year
reflecting the impact of the acquisition of the McCalla companies at the end of
the first quarter, as well as the increased service sales to the existing core
service customers during the quarter. Huffy basketball and backboard sales were
also favorable, surpassing prior year results for the third quarter by 9.4%,
reflecting strong consumer demand as well as a more lucrative mix of higher
specification product.
In the bicycle business, sales for the third quarter were below those
experienced in 2001 reflecting a higher mix of opening price point product, an
increase in the mix or product shipped directly from the Orient to customers, a
process that lowers average selling price, and generally weak retail sales.
For the nine months ended September 30, 2002, consolidated net sales were
$246,826 as compared to $246,052 for the same period in 2001. On a year-to-date
basis, sales of basketball related products were favorable when compared to
prior year results reflecting a 25.3% increase over the first nine months of
2001. These results were heavily influenced by strong consumer demand for Huffy
basketball products, but also by market share gains, and an increase in the mix
of higher specification product sold. Huffy's most recent acquisition, Gen-X,
added an additional $8,128 to net sales during the portion of September that it
was owned by Huffy Corporation. Sales of services to retailers were 4.5% higher
than the prior year for this nine-month period. This improved volume reflects
the acquisition of the McCalla companies near the end of the first quarter, but
also growth with core customers substantially offsetting the drop in sales that
resulted from the K-mart bankruptcy. In the bicycle business, sales were 15.2%
below the prior year results for the nine-month period. This decline was heavily
impacted by the loss of business caused by the K-mart bankruptcy. Other factors
contributing to this decline in volume are an increase in the mix of opening
price point units sold, and an increased mix of product drop shipped directly
from the Orient to customers, as previously mentioned.
GROSS PROFIT
For the quarter ended September 30, 2002 gross profit was $15,955, or 19.2% of
net sales compared to $7,677 or 9.8% of net sales, for the quarter ended
September 29, 2001. Both the bicycle and basketball product lines reported
improved margins during the third quarter of 2002. Bicycle gross margin for the
third quarter improved by $5,795, or 15.6 percentage points when compared to the
same period in the prior year. There are several reasons for this improvement.
First, third quarter 2001 margins were unusually low due to scooter close outs.
Second, margin during the third quarter of 2002 was favorably impacted by
favorable inventory purchase price variances, as well as the recovery of $1,350
in scooter duties improperly charged by U.S. Customs during the year 2000. In
the basketball business, third quarter margins were $514, or 2.9 percentage
points better than the prior year reflecting improved pricing for the various
components of product cost, and other successful cost reduction efforts. Due to
higher margins on Gen-X products, the addition of Gen-X to Huffy Corporation for
the later portion of September favorably impacted third quarter year over year
comparisons. Third quarter margin in the retail services business for 2002, was
below the prior year by 5.9 percentage points reflecting the negative impact of
volume lost due to the K-mart bankruptcy, and field inefficiency associated with
the start up of new business with other core customers.
For the nine months ended September 30, 2001, gross margin was $44,987 or 18.2%
compared to $31,389, or 12.8% for the same period in the prior year. The primary
source of this improvement on gross margin was the bicycle product line where
multiple factors contributed to this result. First, during the third quarter of
2001, gross margin in the bicycle product line was severely depressed due to the
close out of scooters. During 2002, bicycle gross margin has been favorably
impacted by cost reduction programs that have positively impacted both product
and warehousing costs. In addition, scooter duties of $1,350, improperly
collected by U.S. Customs during 2000, were recovered during the third quarter
of 2002.
In the basketball product line, gross margin for the first nine months of 2002
was 2.7 percentage points better than the same period in 2001. This improvement
is primarily the result of effective cost reduction programs that have favorably
impacted product costs and manufacturing efficiencies.
Gen-X gross margins typically are higher than the other product lines. The
addition of Gen-X during the later portion of September improved year over year
gross margin comparisons for the period ended September 30, 2002.
In the retail services portion of the business, gross margin for the nine months
ended September 30, 2002 were below the prior year by 5.9 percentage points.
This decline is primarily the result of volume losses associated with the K-mart
bankruptcy and operating inefficiencies caused by the start up of new business
obtained with other core customers which partially offset the K-mart losses. The
acquisition of the McCalla companies at the end of the first quarter and the
gross margin contributed by this new business also tended to offset the margin
declines mentioned above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $12,826 for the third quarter
of 2002 as compared to $11,150 for the same period in 2001. This increase in
expense is primarily the result of the acquisition of the McCalla companies at
the end of the first quarter, and the acquisition of Gen-X during September
2002.
For the nine months ending September 30, 2002, selling, general and
administrative expenses were $37,201, versus $32,282 recorded during the same
period in 2001. The single largest reason for the increase on a year-to-date
basis is the acquisition of both the McCalla companies and Gen-X. In addition,
the Company experienced higher expenses due to increased advertising any year
over year growth in performance related areas, such as commission and incentive
pay. Finally, economic factors drove increases in both pension and bad debt
expense.
ACQUISITIONS
On September 19, 2002, the Company acquired all of the stock of Gen-X Sports
Inc. in exchange for $19,001 in cash and the issuance of 4,161,241 shares of
Huffy Corporation's Class A common shares to the stockholders of Gen-X. The
purchase price is subject to certain post-closing adjustments. Should Gen-X meet
2002 financial performance objectives, specified in the purchase agreement, and
if there are no breaches of warranties and representations, up to 838,662
additional common shares may be issued to the Gen-X stockholders. In addition,
the acquired companies immediately redeemed $4,970 of preferred stock and
refinanced their existing bank debt. Included in the assets acquired are
trademarks, patents and licensing agreements recorded at their fair values of
$45,800, $1,285 and $940, respectively, as well as goodwill in the amount of
$10,772. Gen-X is a designer, marketer and distributor of branded sports
equipment, including action sports products, winter sports products and golf
products, and is a purchaser and reseller of sporting goods and athletic
footwear inventories.
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, $4,876 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.
DISCONTINUED OPERATIONS
During the quarter ended September 30, 2002, the Company recognized expenses
related to discontinued businesses. These expenses include product liability on
discontinued products and other contractually indemnified liabilities.
LIQUIDITY AND CAPITAL RESOURCES
On September 19, 2002, the Company amended its credit facility with its existing
lender to incorporate Gen-X into the agreement. The $75 million revolving credit
facility is secured by all assets of the Company and its affiliates and will
expire on December 31, 2004, with a 12-month renewal at the Company's option. As
of September 30, 2002, the Company had $17,573 available on its revolving credit
facility.
Pre-bankruptcy receivables from K-mart were sold during the second quarter 2002
with cash recovered consistent with previously established reserves. Inventory
levels are $48,202, ($25,540 for the Company excluding Gen-X), at September 30,
2002, up seasonally from $12,483 at December 31, 2001. Accounts payable are
higher in the third quarter of 2002 at $68,275, ($37,432 for the Company
excluding Gen-X), up from $31,161 at December 31, 2001. The increase in accounts
payable from December 31, 2001 is due to seasonality as well as increased
payment terms from Huffy's network of global suppliers.
During the third quarter of 2002, the Company valued its pension plans in
accordance with SFAS Nos. 87 and 88. Due to record low interest rates and poor
stock market performance, the value of plan assets is now less than the
accumulated benefit obligation, causing the Company to record an after-tax
charge to accumulated other comprehensive income of $20,698.
The Company expects existing cash and cash equivalents, 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. The Company frequently reviews its credit and capital structure and makes
adjustments, as necessary.
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 September
30, 2002, a 0.1 percentage point change in bad debts as a percentage of net
sales would impact the reserve for doubtful accounts by $247.
In January 2002, K-mart Corporation filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Pre-bankruptcy receivables from K-mart 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, medical insurance and product liability
expense are 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.
For further information on these and the Company's other significant accounting
policies, refer to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K as of and for the year
ended December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to short-term interest rate risks and foreign currency
exchange rate risks. A portion of these risks are hedged, but fluctuations could
impact the Company's results of operations and financial position.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this report, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation
of the effectiveness of the Company's disclosure controls and procedures was
performed. Based on this evaluation, the CEO and CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
material information is recorded, processed, summarized and reported by
management of the Company on a timely basis in order to comply with the
company's disclosure obligations under the Securities Exchange Act of 1934 and
the SEC rules thereunder.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
A. 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 on Form 10-K as of and for the year ended December 31, 2001,
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 number of Status
Conferences on all of the cases, at which conferences issues pertaining to
the three master complaints (two of which include the Company as a
defendant), preliminary demurrers to such master complaints, case
management orders and initial written discovery were discussed. 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. 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 have been, or will
imminently be, dismissed without prejudice.
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.
B. In a Current Report on Form 8-K filed October 29, 2002, Huffy Corporation
reported on the status of two cases involving its former subsidiary,
Washington Inventory Service ("WIS"), which was acquired from Huffy
Corporation by WIS Holdings Corp. on November 3, 2000.
Under the terms of the acquisition agreement with WIS Holdings Corp.,
Huffy Corporation agreed to indemnify WIS Holdings Corp. and WIS against
certain third party claims related to the period of Huffy Corporation's
ownership of WIS.
The two cases are Perez v. Washington Inventory Service, pending in the
Los Angeles, California Superior Court, and Miranda v. Washington
Inventory Service, pending in the U.S. District Court for the Central
District of California. Both cases were filed on behalf of current and
former WIS employees by the same plaintiffs' counsel and involve alleged
violations by WIS of different aspects of state and federal wage and hour
laws. The Perez case has been certified as a class action, and the
plaintiffs are seeking class action certification in the Miranda case.
Huffy Corporation is not a named defendant in the Perez case but is a
named defendant in the Miranda case. Huffy Corporation is potentially
obligated to indemnify WIS Holdings Corp. for some portion of any
liability it or WIS incurs in both cases.
In the Form 8-K filed on October 29, 2002, Huffy Corporation reported that
a settlement mediation session in the Perez case had ended without
resolution of that case. Huffy Corporation further reported that it could
not then predict the likely outcome of either case, or the materiality of
the outcome to Huffy Corporation under its indemnity obligations to WIS
Holdings Corp. and WIS.
During the week of November 4, 2002 a series of communications among the
interested parties' counsel, including Huffy Corporation's counsel, took
place, culminating in face-to-face settlement negotiations. These
negotiations were preliminary in nature, in anticipation of a formal
mediation session scheduled to occur on November 18, 2002, any results of
which will in turn be subject to a reasonableness hearing and formal court
approval. However, based on progress made in these preliminary
negotiations, as of November 8, 2002 Huffy Corporation believes that its
obligation to indemnify WIS Holdings Corp. and/or WIS is likely to be
material in amount. However, at this time the Company is not able to
reasonably estimate the range of possible losses and in accordance with
accounting principles generally accepted in the United States of America
has therefore not recorded any reserve for these cases in the financial
statements for the period ended September 30, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Shareholders of the Company was held September 12, 2002. At
such meeting, the Shareholders of the Company approved the issuance of up to
5,000,000 shares of the Company's Common Stock pursuant to an Agreement and Plan
of Merger, as amended, dated as of June 5, 2002, by and among the Company, HSGC,
Inc. and Gen-X Sports Inc.
For Approval: 7,189,545
Against Approval: 422,368
Abstain: 55,684
The Shareholders voted to approve an amendment to the Articles of Incorporation
of the Company to reduce the vote required to approve certain specified matters
from a two-thirds vote to a majority vote of the outstanding shares. Shares were
voted as follows:
For Approval: 7,032,888
Against Approval: 569,736
Abstain: 64,973
ITEM 5: OTHER INFORMATION
Not Applicable.
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 three reports on Form 8-K dated September 19, 2002,
October 29, 2002, November 8, 2002 with the Securities and Exchange
Commission regarding the closing of the acquisition of Gen-X Sports Inc.,
and the Company's involvement in certain litigation, 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
November 13, 2002 /s/ Timothy G. Howard
- ------------------------- ----------------------------------
Date Timothy G. Howard
Vice President - Corporate Controller
(Principal Accounting Officer)
CERTIFICATIONS
I, Don R. Graber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Huffy Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/ Don R. Graber
- --------------------------------------- ------------------------
Date Don R. Graber
Chief Executive Officer
Huffy Corporation
CERTIFICATIONS
I, Robert W. Lafferty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Huffy Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/ Robert W. Lafferty
- ---------------------------------------- ---------------------------------
Date Robert W. Lafferty
Chief Financial Officer
Huffy Corporation
INDEX OF EXHIBITS
Exhibit
No. Item
- ------- -------------------------------------------------
(2) Not applicable
(3) Not applicable
(4) Not applicable
(10) Fourth Amendment to Huffy Corporation 1998 Key Employee Non-
Qualified Stock Plan dated as of July 19, 2002.
(11) Not applicable
(15) Not applicable
(18) Not applicable
(19) Not applicable
(22) Not applicable
(23) Not applicable
(24) Not applicable
(99) Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002