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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 March 29, 2003
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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
--------------
(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 X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes X 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: 14,714,333 as of April 9, 2003
------------------------ --------------------------
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
March 29,2003 March 30, 2002
------------- --------------
Product sales $ 75,375 $ 56,443
Services to retailers
19,251 13,942
------------ ------------
Net sales 94,626 70,385
Product sales 58,696 43,889
Services to retailers 16,044 14,495
------------ ------------
Cost of sales 74,740 58,384
------------ ------------
Gross profit 19,886 12,001
Selling, general and administrative expenses 20,298 10,528
------------ ------------
Operating income (loss) (412) 1,473
Other expense, net
Interest expense 1,111 302
Other expense 166 204
------------ ------------
Earnings (loss) before income taxes (1,689) 967
Income tax (benefit) expense (337) 343
------------ ------------
Net earnings (loss) $ (1,352) $ 624
============ ============
Earnings (loss) per common share:
Basic:
Weighted average number of common shares 14,679,816 10,389,422
============ ============
Net earnings (loss) per common share $ (0.09) $ 0.06
============ ============
Diluted:
Weighted average number of common shares 14,679,816 10,617,935
============ ============
Net earnings (loss) per common share $ (0.09) $ 0.06
============ ============
See accompanying notes to condensed consolidated financial statements.
HUFFY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
March 29, 2003
(Unaudited) December 31, 2002
-------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 5,419
Accounts and notes receivable, net 83,878 92,850
Inventories 47,965 41,847
Prepaid expenses and federal income taxes 23,372 20,982
Assets held for sale
5,480 5,480
--------- ---------
Total current assets
160,695 166,578
--------- ---------
Property, plant and equipment, at cost
42,938 41,331
Less: Accumulated depreciation and amortization
31,295 30,191
--------- ---------
Net property, plant and equipment
11,643 11,140
Excess of cost over net assets acquired, net
27,420 26,663
Intangible assets, net
47,964 48,112
Other assets
31,014 29,708
--------- ---------
$ 278,736 $ 282,201
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 55,894 $ 54,069
Current installments of long-term obligations
5,419 5,258
Accounts payable
51,774 65,519
Accrued expenses and other current liabilities
29,920 37,059
--------- ---------
Total current liabilities
143,007 161,905
--------- ---------
Long-term obligations, less current installments
15,653 317
Pension liabilities
32,909 31,934
Other long-term liabilities
16,390 16,298
--------- ---------
Total liabilities
207,959 210,454
--------- ---------
Shareholders' equity:
Common stock
21,214 21,153
Additional paid-in capital
95,543 95,267
Retained earnings
72,418 73,769
Unearned stock compensation
-- (18)
Accumulated other comprehensive loss
(28,525) (28,551)
Treasury shares, at cost
(89,873) (89,873)
--------- ---------
Total shareholders' equity
70,777 71,747
--------- ---------
$ 278,736 $ 282,201
========= =========
See accompanying notes to condensed consolidated financial 7statements.
HUFFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
(Unaudited)
Three Months Ended
--------------------------------
March 29, 2003 March 30, 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (1,352) $ 624
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,268 878
Deferred federal income tax expense (274) (104)
Changes in assets and liabilities:
Accounts and notes receivable, net 8,972 (5,824)
Inventories (6,118) (3,911)
Prepaid expenses and federal income taxes (2,389) (2,329)
Other assets (1,049) 745
Accounts payable (13,745) 3,231
Accrued expenses and other current liabilities (7,139) (796)
Other long-term liabilities 1,112 343
-------- --------
Net cash used in operating activities (20,714) (7,143)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,607) (626)
Acquisition of businesses (757) (4,900)
-------- --------
Net cash used in investing activities (2,364) (5,526)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable 1,825 --
Issuance of long-term debt 15,637 --
Reduction of long-term debt (140) --
Issuance of common shares 337 35
-------- --------
Net cash provided by financing activities
17,659 35
Net change in cash and cash equivalents (5,419) (12,634)
Cash and cash equivalents:
Beginning of the year
5,419 26,541
End of the period $ -- $ 13,907
Cash paid (refunded) during the period for:
Interest $ 1,618 $ 180
Income Taxes (85) (333)
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENT PRESENTATION
BASIS OF PRESENTATION - The accompanying unaudited condensed consolidated
financial statements ("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, 2002. Except as disclosed herein, there has been
no material change in the information disclosed in the notes to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K as of
and for the year ended December 31, 2002. In the opinion of management, the
accompanying Financial Statements include all adjustments considered necessary
to present fairly, when read in conjunction with the Company's Annual Report on
Form 10-K as of and for the year ended December 31, 2002, the financial position
as of March 29, 2003, and the results of operations and cash flows for the
quarters ended March 29, 2003 and March 30, 2002. The results for these interim
periods are not necessarily indicative of the results to be expected for the
full year.
The results of operations and cash flow for the quarter ended March 30, 2002
does not include the results of Gen-X Sports, Inc, that was acquired on
September 19, 2002 nor McCalla Company that was acquired on March 27, 2002.
USE OF ESTIMATES - The preparation of the condensed consolidated financial
statements requires management of the Company to make a number of estimates and
assumptions related to the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements, and the reported amounts of revenues and
expenses during the period. Significant items subject to such estimates and
assumptions include the carrying value of property and equipment; valuation of
allowances of accounts receivable, inventory, and deferred tax assets; certain
liabilities and assets and obligations related to employee benefits. Actual
results could differ from those estimates.
RECLASSIFICATION - Certain prior year balances have been reclassified to conform
with the 2003 presentation. These reclassifications had no effect on previously
reported net earnings.
FREIGHT- The Company classifies outbound freight expense to customers as an
adjustment to product sales revenue on the accompanying consolidated statements
of operations. For the periods ended March 29, 2003 and March 30, 2002, freight
expense was $1,132 and $725, respectively.
NOTE 2. INVENTORIES
The components of inventories are as follows:
MARCH 29, 2003 DECEMBER 31, 2002
Finished goods $42,728 $36,104
Work-in-progress 147 147
Raw materials and supplies 5,090 5,596
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$47,965 $41,847
======= =======
NOTE 3. ACQUISITIONS
On September 19, 2002, the Company acquired all of the stock of Gen-X Sports
Inc. and Gen-X Sports, Inc. and their subsidiaries in exchange for $19,001 in
cash and the issuance of 4,161,241 shares of Huffy Corporation's common shares
to the stockholders of Gen-X. The $7.687 per share value of the common shares
issued was determined based upon 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. If there are no breaches of
representations and warranties, up to 193,549 additional common shares may be
issued to the Gen-X shareholders on or after the first annual anniversary date.
Gen-X did not meet certain financial performance objectives in 2002, which would
have resulted in the issuance of up to 645,161 additional common shares. In
addition, the acquired companies immediately redeemed $4,970 of preferred stock
at face value 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 $12,861. The fair values for these assets, excluding goodwill, were
determined by an independent third-party appraiser. 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 excess sporting goods and athletic footwear inventories and special
opportunity purchases.
The table below presents unaudited pro forma condensed combining statements of
operations from the Company and Gen-X Sports, Inc. for the period ended March
30, 2002. The unaudited pro forma condensed combining statements of operations
are presented as if the merger had occurred on January 1, 2002.
Huffy Corporation, Gen-X Sports Inc. and Gen-X Sports Inc.
Summary Unaudited Pro Forma Condensed Combining Statement of Operations
(Dollar amounts in thousands, except per share data)
PRO FORMA PERIOD ENDED
MARCH 30, 2002
--------------------------------
HUFFY PRO FORMA
CORPORATION COMBINED
----------- --------
Net sales $ 70,385 $ 96,784
Earnings (loss) from continuing operations 624 (32)
Earnings (loss) from continuing operations per common share
Basic $ 0.06 $ 0.00
Diluted $ 0.06 $ 0.00
Shares used in calculation of earnings per share
Basic 10,389,422 15,389,000
Diluted 10,617,935 15,389,000
During the first quarter of 2003, goodwill was increased $757 for additional
legal costs and other professional fees associated with the acquisition. Gen-X
patents and trademarks increased during the first quarter of 2003 by $16 for
costs associated with securing new patents and trademarks.
On March 27, 2002, the Company acquired 100% of the common stock of McCalla
Company and its 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 a covenant not to compete. In the third quarter of 2002,
goodwill was increased by $87 for additional fees associated with the
acquisition. During the fourth quarter of 2002, goodwill was increased $1,645 to
record a contingent purchase price payment owed at December 31, 2002 to the
former owners of McCalla Company. The $1,645 contingent purchase price payment
was paid to the sellers in April 2003.
NOTE 4. INTANGIBLE ASSETS
The Company has the following intangible assets as of March 29, 2003 and
December 31, 2002:
MARCH 29, 2003 DECEMBER 31, 2002
------------------------ ------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
Assets subject to amortization:
Gen-X patents $ 1,293 $ 93 $ 1,285 $ 49
Gen-X license agreements 948 224 940 119
McCalla covenant not to compete 300 60 300 45
------- ------- ------- -------
Total assets subject to amortization $ 2,541 $ 377 $ 2,525 $ 213
======= ======= ======= =======
Assets not subject to amortization:
Trademarks at Gen-X $45,800 $ -- $45,800 $ --
Goodwill recorded in connection with the
Gen-X acquisition 12,861 -- 12,104 --
Goodwill in the Huffy 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 6,521 -- 6,521 --
Goodwill in Huffy Service First business unit 478 288 478 288
------- ------- ------- -------
Total assets not subject to amortization $76,457 $ 3,237 $75,700 $ 3,237
======= ======= ======= =======
Prior to the adoption of SFAS No. 142, the Company amortized the excess of cost
over net assets acquired on a straight-line basis over fifteen to forty years.
Changes in the carrying value of intangible assets for the period ended March
29, 2003, are as follows:
12/31/02 03/29/03
GROSS GROSS
CARRYING IMPAIRMENT CARRYING
AMOUNT ADDITIONS WRITE OFF AMOUNT
-------------------------------------------------------------
Assets subject to amortization:
Gen-X patents $ 1,285 $ 8 $ - $ 1,293
Gen-X license agreements 940 8 - 948
McCalla covenant not to compete 300 - - 300
-------------------------------------------------------------
Total assets subject to amortization $ 2,525 $ 16 $ - $ 2,541
=============================================================
Assets not subject to amortization:
Trademarks at Gen-X $45,800 $ - $ - $45,800
Goodwill recorded in connection with the
Gen-X acquisition 12,104 757 - 12,861
Goodwill in the Huffy bicycle business unit 8,824 - - 8,824
Goodwill in Huffy Sports business unit 1,973 - - 1,973
Goodwill recorded in connection with the
McCalla acquisition 6,521 - - 6,521
Goodwill in Huffy Service First business unit 478 - - 478
-------------------------------------------------------------
Total assets not subject to amortization $75,700 $ 757 $ - $76,457
=============================================================
The Company's reporting units are tested annually during the fourth quarter for
impairment.
NOTE 5. STOCK OPTION PLANS
The Company applies the principles of APB Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans and its stock purchase plan except for options issued below fair market
value. The compensation cost that has been charged against earnings for options
issued below fair market value and options issued to replace canceled options,
was $28 and $69, (after tax $17 and $43) for the periods ended March 29, 2003
and March 30, 2002 respectively. Had compensation cost for the Company's
stock-based compensation plans been determined using the fair value method of
accounting for stock compensation, the Company's net earnings (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts
indicated below:
MARCH 29, 2003 MARCH 30, 2002
-------------- --------------
Net earnings (loss) as reported $ (1,352) $ 624
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effect (260) (184)
Pro forma net earnings (loss) (1,612) 440
Diluted net earnings (loss) per common share:
As reported $ (0.09) $ 0.06
Pro forma (0.11) 0.04
The Company records compensation cost for awards with pro rata vesting on a pro
rata basis over the vesting period.
NOTE 6. GUARANTEES, COMMITMENTS AND CONTINGENCIES
CLAIMS AND ALLOWANCES
The Company maintains a reserve for product liability based upon expected
settlement charges for pending claims and an estimate of unreported claims
derived from experience, volume and product sales mix. Expense for product
liability is recorded in cost of sales on the accompanying condensed
consolidated statements of operations. The Company's policy is to fully reserve
for warranty claims that have been or may be incurred on all products that have
been shipped. The reserves are calculated based on claims that have been
submitted but not settled. The calculation also considers anticipated claims
based upon historical performance. Some major retailers have chosen to manage
the warranty process in exchange for a claims allowance based on sales volume.
The portion of the reserve related to retailer claims allowances is netted
against accounts receivable while the balance of the reserve is classified as an
accrued liability on the balance sheet. Additions to the reserve are treated as
a deduction from net sales if they related to a negotiated claim allowance and
as selling, general and administrative costs if they related to a general
warranty expense.
The following is a roll-forward of the Company's claims and allowance activity
for 2003:
Retailer Claims
Allowances General Warranty Total
---------- ---------------- -----
Balance December 31, 2002 $ 802 $ 143 $ 945
Additions to/deductions from reserves (109) 99 (10)
Settled claims (424) (160) (584)
----- ----- -----
Balance March 29, 2003 $ 269 $ 82 $ 351
===== ===== =====
The Company sold the assets of the Gerry Baby Products Company on April 27,
1997. Until July of 2002 when it expired, the Company maintained an occurrence
based insurance policy covering product liability expense associated with
products manufactured while it owned Gerry Baby Products. When this policy
expired, the Company purchased new insurance that provides occurrence based
coverage on each claim that exceeds $5,000 in value.
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 that, based upon the information
available, 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 $4,894 ($6,444 before
discounting at 6.75%) at March 29, 2003. Of that amount, the Company has a
deposit of $3,786 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 expenditures relating to costs currently accrued
will be made over a period of fourteen years.
The environmental escrow accounts are classified as current prepaid assets on
the consolidated balance sheets if the funds are expected to be expended within
the next 12 months and as long-term other assets for those funds, which are
expected to be expended beyond 12 months. The current escrow balance at March
29, 2003 was $879 and the long-term escrow balance at March 29, 2003 was $2,907.
The environmental accrual is similarly classified on the consolidated balance
sheet with $879 shown in accrued liabilities and $4,015 shown in other long-term
liabilities as of March 29, 2003.
LITIGATION
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 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 San Gabriel 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 2003. 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 and a
hearing to resolve the PUC-related issues remanded by the California Supreme
Court 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"), was also named in four civil
lawsuits filed by water purveyors. The water purveyor lawsuits alleged 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 have been dismissed without prejudice. The Third Party
complaints filed by Aerojet in connection with the Water Entity Cases have also
been dismissed without prejudice subject to Aerojet filing a new suit in the
event a final allocation agreement cannot be worked out.
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.
As previously reported, Huffy Corporation divested its Washington Inventory
Service subsidiary in November 2000. Subsequently, in late 2001 and mid 2002,
two class action suits were filed in California seeking damages for alleged
violations of labor practices. As a previous owner, Huffy was potentially
obligated to indemnify the subsidiary purchaser for some portion of any
liability it or such subsidiary had in the first case and had potential
liability in the latter case, both limited to the periods it owned the
subsidiary. After protracted negotiations and on advice of counsel, a
settlement was negotiated and preliminarily approved on January 28, 2003 by
the Superior Court of California, County of Los Angeles. A charge to
discontinued operations of $7,914 million or $0.43 per common share was taken
in the fourth quarter of 2002 to record the Company's estimated obligation
related to this matter.
The settlement was given final court approval, pending compliance with the terms
of the Class Settlement Agreement, and a Judgment of Dismissal was issued on
April 7, 2003. The Claims Administrator will issue its report as to claims made
and on the amount of payments to be made in the second quarter, 2003, not to
exceed $7,700 for the Company.
LABOR RELATIONS
Huffy Sports Company is party to a collective bargaining agreement that expires
on June 15, 2003. Of the Company's total workforce 4% of the employees are
subject to this agreement.
NOTE 7. LINES OF CREDIT AND LONG-TERM OBLIGATIONS
In January 2000, the Company signed a $170 million, 18-month borrowing facility
secured by all of the assets of the Company. The facility consisted of $40
million of senior term debt, $30 million of subordinated debt, and a $100
million revolving credit facility. In November 2000, the senior term debt and
subordinated debt were repaid.
In September 2002, the Company entered into an Amended and Restated Loan and
Security Agreement with Congress Financial Corporation (Central), which has
subsequently been amended. From time to time, the Company has requested and
received additional short-term borrowing authority under its revolving credit
facility
with Congress Financial to cover seasonal working capital. Most recently, in May
2003, the Company obtained a $5,000 increase for a 60-day period. The interest
rate under the revolving credit facility varies, based upon excess availability,
from the prime rate to prime rate plus .25%, or London Interbank Offering Rate
(LIBOR) plus 1.75% to LIBOR plus 2.75%. On March 14, 2003, the Company entered
into a $15 million subordinated term note with Ableco Finance LLC. The new note
is secured by a lien on the Company's trademarks and trade names and a
subordinated position on all other assets pledged under the Company's revolving
credit facility. The loan matures on the earlier of the maturity of the
Company's revolving credit facility or five years. Financial covenants in the
loan require the Company to maintain minimum EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization), and a fixed charge coverage
ratio. As of March 29, 2003, the Company is in compliance with these covenants.
In conjunction with the new term loan, the Company amended its credit facility
with its existing lender to incorporate the new borrowing into the agreement.
Financial covenants identical to the term loan were added to the revolving
credit facility. In addition, changes were made in the revolving credit
facility's existing Net Worth covenant, which raised the minimum net worth
requirement to $60,000 and increases the minimum net worth requirement to
$62,500 on January 1, 2004. 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.
As of March 29, 2003, the revolving credit facility had $9,377 of borrowing
capacity. 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. The Company considers on an ongoing basis alternative capital financing
structures, including possible placements of equity securities and other hybrid
financing instruments, as well as senior and subordinated debt arrangements.
Assets that are leased subject to capital leases include computer and office
equipment with a cost of $1,338 and accumulated depreciation of $190 at March
29, 2003.
NOTE 8. SEGMENT DATA
Huffy classifies its business into two segments, sporting goods products and
services to retailers. The sporting goods segment includes Huffy companies which
market wheeled recreational products, basketballs and other balls, golf clubs
and accessories, snowboards and accessories, hockey equipment and apparel, snow
skis and accessories, in-line skates, skateboards, other action sports
accessories and the excess/opportunity inventory products. The sporting goods
segment also includes Huffy companies which manufacture and market basketball
backboards. The services to retailers segment include; Huffy companies which
assemble and repair bicycles, assemble grills, physical fitness equipment, and
furniture; assemble and repair outdoor power equipment, and provide
merchandising services to major retailers and for a number of well-known
manufacturers and/or distributors serving the Home Center channel.
Segment performance is measured on operating profit or loss (before interest,
corporate expenses and income taxes). The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in Note 1 of Notes to Consolidated Financial Statements in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Intercompany profit or loss is eliminated where applicable.
The information presented below is for the periods ended March 29, 2003 and
March 30, 2002.
NET SALES TO UNAFFILIATED
CUSTOMERS OPERATING PROFIT
--------- ----------------
MARCH 29, MARCH 30, MARCH 29, MARCH 30,
2003 2002 2003 2002
------- ------- -------- --------
Sporting Goods $75,375 $56,443 $ 1,730 $ 6,069
Services to Retailers 19,251 13,942 603 (2,446)
------- ------- -------- --------
Total segment data $94,626 $70,385 2,333 3,623
======= =======
Corporate expenses, net (2,911) (2,354)
Net interest expense (1,111) (302)
Income (loss) from continuing operations before
income taxes $ (1,689) $ 967
========= ========
NOTE 9. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses the financial
accounting and reporting for legal obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
adoption of SFAS 143 did not materially affect the Company's Financial
Statements for the quarter ended March 29, 2003.
The Company has adopted SFAS No. 146 "Accounting for Costs Associated with Exit
or Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs associated with
exit or disposal activities, and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Costs addressed by SFAS 146 include costs to terminate a
contract that is not a capital lease, costs of involuntary employee termination
benefits pursuant to a one-time benefit arrangement, costs to consolidate
facilities, and costs to relocate employees. SFAS 146 is effective for exit or
disposal activities that were initiated after December 31, 2002. SFAS 146
changes the timing of expense recognition for certain costs we incur while
closing facilities or undertaking other exit or disposal activities; however,
the timing difference is not typically significant in length. Adoption of SFAS
146 did not have a material impact on the Company's Financial Statements for the
quarter ended March 29, 2003.
The Company has adopted SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation as required by SFAS 123. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. Our disclosure regarding the effects of stock-based
compensation included in Note 5 is in compliance with SFAS 148.
The Company has adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. FIN 45 also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions were applicable to guarantees issued or modified after December 31,
2002. The adoption of FIN 45 did not have a material impact on the Company's
Financial Statements for the quarter ended March 29, 2003.
NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). FIN 46
addresses the consolidation of entities whose equity holders have either (a) not
provided sufficient equity at risk to allow the entity to finance its own
activities or (b) do not possess certain characteristics of a controlling
financial interest. FIN 46 requires the consolidation of these entities, known
as variable interest entities ("VIEs"), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that is subject to a
majority of the risk of loss from the VIE's activities, entitled to receive a
majority of the VIE's residual returns, or both. FIN 46 applies immediately to
variable interest in VIEs created or obtained after January 31, 2003. For
variable interests in a VIE created before February 1, 2003, FIN 46 is applied
to the VIE no later than the end of the first interim or annual reporting period
beginning after June 15, 2003 (the quarter ending July 5, 2003 for the Company).
The Interpretation requires certain disclosures in financial statements issued
after January 31, 2003, if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective. Based on the Company's analysis, we do not
believe FIN 46 will have a material impact on the Company's financial position,
results of operations or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE MONTHS ENDED MARCH 29, 2003
COMPARED TO THE
THREE MONTHS ENDED MARCH 30, 2002
---------------------------------
(Dollar Amounts in Thousands, Except Per Share Data)
For the quarter ended March 29, 2003, Huffy Corporation ("Huffy" or "Company")
had a net loss of $1,352, or $0.09 per common share compared to net income for
the same period in 2002 of $624, or $0.06 per common share. Current year results
include the earnings from Gen-X Sports Inc. acquired on September 19, 2002 and
the earnings of the McCalla companies acquired March 27, 2002.
Net Sales
Net sales in 2003 were $94,626, an increase of 34.4%, compared to net sales of
$70,385 for the same period in 2002. Revenue from Services to Retailers rose
38.1% from $13,942 in the first quarter of 2002 to $19,251 in the same period of
2003. The addition of the McCalla Companies accounted for $5,956 of the increase
in sales. Product sales rose 33.5% from $56,443 in the first quarter of 2002 to
$75,375 in the same period of 2003. The sales gains from the addition of Gen-X
Sports of $27,546 were offset by sales decreases in the bicycle and backboard
product lines. Overall weakness in the economy coupled with significant
overstocked positions of competitors' products at the retail level caused the
lower sales volume. The core Huffy product lines suffered a $10,100 drop in
sales volume year over year due to Kmart's bankruptcy, but these losses were
offset by market share gains and greater penetration in the home improvement
market. At this time, management does not believe that Kmart will have an
additional unfavorable impact on sales volume or margin in the short term.
Gross Profit
Consolidated gross profit for the first quarter 2003 was $19,886, or 21.0% of
net sales as compared to $12,001, or 17.1% of net sales reported for the same
period in 2002, reflecting a 22.8% improvement over the prior year gross margin
when measured as a percentage of net sales. The primary reason for this very
significant improvement was the addition of Gen-X Sports Inc. and the McCalla
Company to the Huffy portfolio. In addition, 2003 margins were favorably
impacted by an improved margin structure in the service segment, where year over
year margins improved by 20.7 percentage points reflecting improved costing and
a more efficient cost structure.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $20,298, for the period ended
March 29, 2003 were higher than the $10,528 experienced during the same period
in 2002. The primary reason for the increase in these expenses was the selling,
general and administrative expenses added as a result of the acquisitions of
Gen-X Sports Inc. and the McCalla Company. The Company also increased its
investment in brand development by enhancing advertising, trade show
participation and new product promotional spending during the first quarter of
2003. Administrative pension expense increased in 2003 by $788 over 2002 expense
due to poor 2002 stock market performance and declining interest rates.
Insurance costs increased in 2003 by $1,027 over the first quarter of 2002 due
to the addition of Gen-X and McCalla and a less favorable insurance market.
Net Interest Expense
Net interest expense increased from $302 for the first quarter of 2002 to $1,111
in the current year. Borrowing costs to finance the acquisitions of Gen-X Sports
Inc. and the McCalla Company as well as the increased working capital needs of
these subsidiaries resulted in higher interest costs in 2003.
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 common shares to the stockholders of Gen-X. If there are no
breaches of representations and warranties, up to 193,549 additional common
shares may be issued to the Gen-X shareholders on or after the first annual
anniversary date. Gen-X did not meet certain
financial performance objectives in 2002 that would have resulted in the
issuance of up to 645,161 additional common shares. 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 $12,861. 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 excess sporting goods and athletic footwear inventories and special
opportunity purchases.
On March 27, 2002, Huffy Service First acquired the stock of McCalla Company and
its subsidiaries, Creative Retail Services, Inc. and Creative Retail Services
(Canada) Inc. ("McCalla") for $5,400, less $500 net cash acquired, subject to
certain post-closing adjustments. A contingent purchase price payment was
recorded for the McCalla acquisition of $1,645 in the fourth quarter of 2002 and
paid in April 2003. Of the total purchase price, $6,521 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 Home Depot, including,
among others, Philips Lighting, Duracell, and Spectrum Brands.
LIQUIDITY AND CAPITAL RESOURCES
On March 14, 2003, the Company entered into a $15,000 subordinated term note
with Ableco Finance LLC. The new note is secured by a lien on the Company's
trademarks and trade names and a subordinated position on all other assets
pledged under the Company's revolving credit facility. The loan matures on the
earlier of the maturity of the Company's revolving credit facility or five
years. Financial covenants in the loan require the Company to maintain a minimum
EBITDA, (Earnings Before Interest, Taxes, Depreciation and Amortization) and a
fixed charge coverage ratio. As of March 29, 2003, the Company is in compliance
with these covenants.
In conjunction with the new term loan, the Company amended its credit facility
with its existing lender to incorporate the new borrowing into the agreement.
Financial covenants identical to the term loan were added to the revolving
credit facility. In addition, changes were made in the revolving credit
facility's existing Net Worth covenant, which raised the minimum net worth
requirement to $60,000 and increases the minimum net worth requirement to
$62,500 on January 1, 2004. The $75,000 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. As of March 29, 2003, the Company had
$9,377 of borrowing capacity on its revolving credit facility. From time to
time, the Company has requested and received additional short-term borrowing
authority under its revolving loan facility with Congress Financial to cover
seasonal working capital. Most recently, in May 2003, the Company obtained a
$5,000 increase for a 60-day period.
Pre-bankruptcy receivables from Kmart were sold during the second quarter of
2002. The cash recovery from this transaction was consistent with previously
established reserves.
At March 29, 2003, inventory was valued at $47,965 up from $41,847 at December
31, 2002. This increase is primarily the result of a seasonal inventory build up
for summer sporting goods products. Accounts payable at March 29, 2003 are
$51,774 as compared to $65,519 at the end of 2002. This decrease reflects the
timing and mix of purchases, as well as the purchase terms in place.
The Company expects cash and cash equivalents, cash flow from operations and its
revolving credit facility to be sufficient to finance seasonal working capital
needs and capital expenditures throughout the coming year. The Company considers
on an ongoing basis alternative capital financing structures, including possible
placements of equity securities and other hybrid financing instruments, as well
as senior and subordinated debt arrangements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
See Notes 10 and 11 to the accompanying notes to Condensed Consolidated
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to short-term interest rate risks and foreign currency
exchange rate risks. In the normal course of business these risks are managed
through a variety of strategies, including the use of a derivative financial
instrument to hedge our underlying exposures. The Company does not use
derivative instruments for trading purposes.
Interest Rate Risks
Interest rate risk arises primarily from variable rate borrowings in the United
States and Canada. The Company has entered into an interest rate swap, which is
recognized on the balance sheet at fair value. The Company has determined that
the swap is effective; therefore, changes in the fair value of the swap are
recorded on a quarterly basis as an adjustment to accumulated other
comprehensive loss. The swap expires on April 4, 2004.
At March 29, 2003, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $167 in earnings before income
taxes.
Foreign Currency Exchange Risk
All subsidiaries of the Company, except for Creative Retail Services (Canada)
Inc., use the U.S. dollar as their functional currency. A small portion of the
Company's sales, receivables, purchases and expenses are denominated in Euros,
Australian dollars and the Canadian dollar. The Company also maintains bank
accounts in Euros, Australian dollars and the Canadian dollar to facilitate
international operations. At this time, the Company's exposure to currency
exchange risk is not considered material.
ITEM 4. CONTROLS AND PROCEDURES
Quarterly evaluation of the Company's disclosure controls and internal controls
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.
Disclosure controls and internal controls
Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 (Exchange Act), such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's (SEC) rules and forms.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate to allow timely decisions regarding the required
disclosure. Internal controls are procedures which are designed with the
objective of providing reasonable assurance that (1) our transactions are
properly authorized; (2) our assets are safeguarded against unauthorized or
improper use; and (3) our transactions are properly recorded and reported, all
to permit the preparation of our financial statements in conformity with
generally accepted accounting principles.
Limitations on the effectiveness of controls
The Company's management, including the CEO and CFO, does not expect that our
disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some person, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, control may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
Scope of the controls evaluation
The CEO/CFO evaluation of our disclosure controls and our internal controls
included a review of the controls' objectives and design, the controls'
implementation by the Company and the effect of the controls on the information
generated for use in this Quarterly Report on Form 10-Q. In the course of the
controls evaluation, we sought to identify data errors, controls problems or
acts of fraud and to confirm that appropriate corrective action, including
process improvements, were being undertaken. This type of evaluation will be
done on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
Report on Form 10-K. Our internal controls are also evaluated on an ongoing
basis by Internal Audit, by other personnel in our Finance organization and by
our independent auditors in connection with their audit and review activities.
The overall goals of these various evaluation activities are to monitor our
disclosure controls and our internal controls and to make modifications as
necessary; our intent in this regard is that the disclosure controls and
internal controls will be maintained as dynamic systems that change (including
with improvements and corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in the Company's
internal controls, or whether the Company had identified any acts of fraud
involving personnel who have a significant role in the Company's internal
controls. This information was important both for the controls evaluation
generally and because items 5 and 6 in Section 302 Certifications of the CEO and
CFO require that the CEO and CFO disclose that information to our Board's Audit
Committee and to our independent auditors and to report on related matters in
this section of the Quarterly Report on Form 10-Q. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions"; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in
the financial statements. A "material weakness" is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employees in the normal course of performing their assigned functions. We also
sought to deal with other control matters in the controls evaluation, and in
each case if a problem was identified, we considered what revision, improvement
and/or correction to make in accord with our on-going procedures.
In accord with SEC requirements, the CEO and CFO note that, since the date of
the controls evaluation to the date of this Quarterly Report, there have been no
significant changes in internal controls or in other factors that could
significantly affect internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Conclusions
Based upon the controls evaluation, our CEO and CFO have concluded that, subject
to the limitations noted above, our disclosure controls are effective to ensure
that material information relating to Huffy and its consolidated subsidiaries is
made known to management, including the CEO and CFO, particularly during the
period when our periodic reports are being prepared, and that our internal
controls are effective to provide reasonable assurance that our financial
statements are fairly presented in conformity with generally accepted accounting
principles.
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
December 31, 2002 Annual Report on Form 10-K 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 2003. 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 will include the Company as a defendant), preliminary
demurrers to such master complaints, case management orders, initial
written discovery and a hearing to resolve the PUC-related issue
remanded by the California Supreme Court 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 have been 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. As previously reported, Huffy Corporation divested its Washington
Inventory Service subsidiary in November 2000. Subsequently, in late
2001 and mid 2002, two class action suits were filed in California
seeking damages for alleged violations of labor practices. As a
previous owner, Huffy was potentially obligated to indemnify the
subsidiary purchaser for some portion of any liability it or such
subsidiary had in the first case and had potential liability in the
latter case, both limited to the periods it owned the subsidiary. After
protracted negotiations and on advice of counsel, a settlement was
negotiated and preliminarily approved on January 28, 2003 by the
Superior Court of California, County of Los Angeles. A
charge to discontinued operations of $7,914 million or $0.43 per common
share was taken in the fourth quarter of 2002 to record the Company's
estimated obligation related to this matter.
The settlement was given final court approval, pending compliance with
the terms of the Class Settlement Agreement, and a Judgment of
Dismissal was issued on April 7, 2003. The Claims Administrator will
issue it's report to claimants in the second quarter, 2003, as to
claims made and on the amount of payments to be made, not to exceed
$7,700 for the Company.
ITEM 4. SUBMISSON OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held April 24, 2003. At
such meeting, the Shareholders of the Company elected as Directors, Donald K.
Miller, for a one-year term expiring in 2004, and W. Anthony Huffman, Joseph P.
Viviano and Gerald B. Wasserman, for two-year terms expiring in 2005. Shares
were voted as follows:
Mr. Miller For: 12,208,291; Withheld (including broker non-votes): 999,985
Mr. Huffman For: 10,910,468; Withheld (including broker non-votes): 2,297,808
Mr. Viviano For: 12,208,895; Withheld (including broker non-votes): 999,381
Mr. Wasserman For: 12,211,731; Withheld (including broker non-votes): 996,545
The terms of Directors Don R. Graber, Linda B. Keene, James F. Robeson and
Thomas C. Sullivan continued after the Annual Meeting of Shareholders.
The Shareholders voted to approve an amendment to the 1998 Key Employee Stock
Plan, the 1998 Director Stock Incentive Plan and the 1998 Restricted Share Plan
to increase the number of shares available for grant of options thereunder by
733,000 shares. Shares were voted as follows: For approval: 10,117,065; against
approval: 2,988,332; and abstain 102,879.
The Shareholders did not approve an amendment to the Company's Articles of
Incorporation which would eliminate cumulative voting in the election of
directors. Approval of such amendment required the vote of a majority of the
outstanding common shares of the Corporation. Shares were voted as follows: For
approval: 5,996,295; against approval: 4,240,513; abstain: 143,513; and broker
non-votes: 2,827,955.
In addition, the Shareholders also ratified the appointment of KPMG LLP as the
Company's independent public accountants for calendar year 2003. In accordance
with such ratification, 13,055,872 shares were voted for ratification, 110,944
shares cast against, and 41,460 shares cast to abstain (including broker
non-votes).
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 March 14, 2003 and
April 16, 2003 with the Securities and Exchange Commission regarding
the Company entering into a $15,000 term loan agreement and an earnings
release announcing the financial results for the fiscal quarter ended
March 29, 2003, 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 20, 2003 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
May 12, 2003 /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 annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the years presented in this annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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.
/s/ Don R. Graber
May 12, 2003
- ----------------------------- ----------------------------
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 annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the years presented in this annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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.
/s/ Robert W. Lafferty
May 12, 2003
- ------------------------------------ --------------------------------
Date Robert W. Lafferty
Chief Financial Officer,
Huffy Corporation
INDEX OF EXHIBITS
Exhibit
No. Item
- ------- -----------------------------------------------------
(2) Not applicable
(3) Not applicable
(4.a) Amendment No. 4 to the Second Amended and Restated Loan
Agreement, dated as of March 14, 2003, by and among Huffy
Corporation and its subsidiaries and Congress Financial
Corporation (Central).
(4.b) Amendment No. 5 to the Second Amended and Restated Loan
Agreement, dated as of May 2, 2003, by and among Huffy
Corporation and its subsidiaries and Congress Financial
Corporation (Central).
(10.a) Fourteenth Amendment to the Huffy Corporation
Supplemental/Excess Benefit Plan, effective as of June 1,2003.
(10.b) Second Amendment to the Huffy Corporation 1998 Restricted
Share Plan, effective as of April 1,2003.
(10.c) Third Amendment to Huffy Corporation 1998 Restricted Share
Plan, effective as of April 24,2003.
(10.d) First Amendment to Huffy Corporation 1998 Director Stock
Incentive Plan, effective as of April 24, 2003.
(10.e) Fifth Amendment to Huffy Corporation 1998 Key Employee Stock
Plan, effective as of April 24,2003.
(10.f) Fifth Amendment to Huffy Corporation 1998 Key Employee
Non-Qualified Stock Option Plan, effective as of April 24,
2003.
(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 2003