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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 27, 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
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(Registrant's telephone number, including area code)
No Change
---------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
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: 16,167,572 as of October 31, 2003
---------- --------------------------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS:
HUFFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------------- -------------------------------
September 27, September 30, September 27, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Product sales $ 82,931 $ 60,686 $ 250,399 $ 184,710
Services to retailers 23,812 22,342 68,452 62,116
------------ ------------ ------------ ------------
Net sales 106,743 83,028 318,851 246,826
Product cost of sales 66,579 47,406 195,514 144,380
Services to retailers cost of sales 19,941 19,667 57,876 57,459
------------ ------------ ------------ ------------
Cost of sales 86,520 67,073 253,390 201,839
------------ ------------ ------------ ------------
Gross profit 20,223 15,955 65,461 44,987
Selling, general and administrative expenses 16,486 12,826 58,416 37,201
------------ ------------ ------------ ------------
Operating income 3,737 3,129 7,045 7,786
Other expense, net
Interest expense 1,455 287 3,847 908
Other (income) expense (630) 419 (290) 1,385
------------ ------------ ------------ ------------
Earnings before income taxes and 2,912 2,423 3,488 5,493
discontinued operations
Income tax expense 583 754 698 1,925
------------ ------------ ------------ ------------
Earnings from continuing operations 2,329 1,669 2,790 3,568
Discontinued operations:
Income (loss) from discontinued
operations, net of income taxes 589 (723) 1,547 (723)
------------ ------------ ------------ ------------
Net earnings $ 2,918 $ 946 $ 4,337 $ 2,845
============ ============ ============ ============
Earnings per common share:
Basic:
Weighted average number of common shares 15,677,536 11,871,429 15,123,752 10,896,562
Earnings from continuing operations $ 0.15 $ 0.14 $ 0.19 $ 0.33
Earnings (loss) from discontinued operations 0.04 (0.06) 0.10 (0.07)
------------ ------------ ------------ ------------
Net earnings per common share $ 0.19 $ 0.08 $ 0.29 $ 0.26
============ ============ ============ ============
Diluted:
Weighted average number of common shares 15,892,851 12,128,033 15,339,068 11,153,166
Earnings from continuing operations $ 0.15 $ 0.14 $ 0.18 $ 0.32
Earnings (loss) from discontinued operations 0.03 (0.06) 0.10 (0.06)
------------ ------------ ------------ ------------
Net earnings per common share $ 0.18 $ 0.08 $ 0.28 $ 0.26
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
HUFFY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
(Unaudited)
September 27, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,421 $ 5,419
Accounts and notes receivables, net 101,912 92,850
Inventories, net 59,657 41,847
Prepaid expenses and deferred income taxes 23,665 20,982
Net assets held for sale 5,480 5,480
--------- ---------
Total current assets 194,135 166,578
--------- ---------
Property, plant and equipment, at cost 45,315 41,331
Less: Accumulated depreciation and amortization 32,743 30,191
--------- ---------
Net property, plant and equipment 12,572 11,140
--------- ---------
Excess of cost over net assets acquired, net 29,200 26,663
Intangible assets, net 47,645 48,112
Other assets, net 32,227 29,708
--------- ---------
Total assets $ 315,779 $ 282,201
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $ 68,840 $ 54,069
Current installments of long-term obligations 5,108 5,258
Accounts payable 66,823 65,519
Accrued expenses and other current liabilities 30,031 37,059
--------- ---------
Total current liabilities 170,802 161,905
--------- ---------
Long-term obligations, less current installments 15,624 317
Pension liabilities 29,454 31,934
Other long-term liabilities 15,920 16,298
--------- ---------
Total liabilities 231,800 210,454
--------- ---------
Shareholders' equity:
Common stock 22,322 21,153
Additional paid-in capital 101,977 95,267
Retained earnings 78,013 73,769
Unearned stock compensation (45) (18)
Accumulated other comprehensive loss (28,415) (28,551)
Treasury shares, at cost (89,873) (89,873)
--------- ---------
Total shareholders' equity 83,979 71,747
--------- ---------
Total liabilities and shareholders' equity $ 315,779 $ 282,201
========= =========
See accompanying notes to condensed consolidated financial statements.
HUFFY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
(Unaudited)
Nine Months Ended
----------------------------
September 27, September 30,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings from continuing operations $ 2,790 $ 3,568
Adjustments to reconcile net earnings from continuing operations to net cash
used in operating activities:
Depreciation and amortization 3,602 2,643
Income (loss) from discontinued operations 1,547 (723)
Gain on sale of property, plant and equipment 4 12
Deferred income taxes 1,117 (11,644)
Changes in assets and liabilities:
Accounts and notes receivable, net (9,062) 4,304
Inventories (17,810) (12,089)
Prepaid expenses (2,683) (3,099)
Other assets (3,686) 14,049
Accounts payable 1,304 6,516
Accrued expenses and other current liabilities (7,028) (6,269)
Other long-term liabilities 3,467 (2,492)
-------- --------
Net cash used in operating activities (26,438) (5,224)
===========================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,534) (1,977)
Acquisition of businesses, net of cash acquired (1,360) (23,901)
-------- --------
Net cash used in investing activities (5,894) (25,878)
===========================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable 14,771 46,821
Repayment of debt assumed in the Gen-X acquisition - (37,800)
Preferred shares redeemed - (4,970)
Issuance of long-term debt 16,001 458
Repayments of long-term debt (844) (123)
Issuance of common shares 406 689
-------- --------
Net cash provided by financing activities 30,334 5,075
===========================================================================================================
Net change in cash and cash equivalents (1,998) (26,027)
Cash and cash equivalents:
Beginning of the year 5,419 26,541
-------- --------
End of the period $ 3,421 $ 514
===========================================================================================================
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 September 27, 2003, and the results of operations and cash flows for the
quarter and nine months ended September 27, 2003 and September 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 flows for the nine months ended September 30,
2002, do not include a full nine months of the results of Gen-X Sports, Inc., as
the date of the acquisition was September 19, 2002. The McCalla Company was
acquired on March 27, 2002, and is included in 2002 results of operations and
cash flows from the date of acquisition.
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. Actual results could differ from those estimates.
FREIGHT- The Company classifies outbound freight expense to customers as an
adjustment to product sales revenue on the accompanying consolidated statements
of earnings. For the three months ended September 27, 2003 and September 30,
2002, freight expense was $1,525 and $656, respectively. For the nine months
ended September 27, 2003 and September 30, 2002, freight expense was $2,970 and
$1,635, respectively.
NOTE 2. INVENTORIES
The components of inventories are as follows:
SEPTEMBER 27, DECEMBER 31,
2003 2002
--------------------- ---------------------
Finished goods $53,478 $36,104
Work-in-progress 145 147
Raw materials and supplies 6,034 5,596
--------------------- ---------------------
$59,657 $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 both Gen-X companies. 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. Per the terms of the agreement,
193,466 additional common shares were issued to the Gen-X shareholders on or
about 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 Gen-X companies,
immediately upon acquisition, redeemed $4,970 of preferred stock at face value
and refinanced their existing bank debt. Included in the assets acquired were
trademarks, patents and licensing agreements recorded at their fair values of
$45,814, $1,301 and $940, respectively, as well as goodwill in the amount of
$14,643. 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 three and nine months
ended September 30, 2002. The unaudited pro forma condensed combining statements
of operations are presented as if the Gen-X Sports Inc. and Gen-X Sports, Inc.
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
SEPTEMBER 30, 2002
---------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
HUFFY PRO FORMA HUFFY PRO FORMA
CORPORATION COMBINED CORPORATION COMBINED
----------- ----------- ----------- -----------
Net sales $ 106,743 $ 111,338 $ 318,851 $ 340,470
Earnings from continuing operations 2,329 1,352 2,790 5,294
Per common share
Basic $ 0.15 $ 0.09 $ 0.19 $ 0.36
Diluted $ 0.15 $ 0.09 $ 0.18 $ 0.36
Shares used in calculation of earnings per share
Basic 15,677,536 14,658,923 15,123,752 14,599,888
Diluted 15,892,851 14,915,527 15,339,068 14,856,492
During the first nine months of 2003, goodwill was increased $2,539 for the
issuance of hold-back shares as well as additional legal costs and other
professional fees associated with the acquisition. Gen-X patents and trademarks
increased during the first nine months of 2003 by $30 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 and was treated as contingent purchase
price in accordance with EITF 95-8, "Accounting for Contingent Consideration
Paid to the Shareholders of an Acquired Enterprise in a Purchase Business
Combination."
NOTE 4. GOODWILL AND INTANGIBLE ASSETS
The Company has the following intangible assets as of September 27, 2003 and
December 31, 2002:
SEPTEMBER 27, 2003 DECEMBER 31, 2002
---------------------------- ----------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- ------------ ---------- ------------
Assets subject to amortization:
Gen-X patents $ 1,301 $ 180 $ 1,285 $ 49
Gen-X license agreements 940 440 940 119
McCalla covenant not to compete 300 90 300 45
---------- ---------- ---------- ----------
Total assets subject to amoritzation: $ 2,541 $ 710 $ 2,525 $ 213
========== ========== ========== ==========
Assets not subject to amortization:
Trademarks at Gen-X $ 45,814 $ - $ 45,800 $ -
Goodwill recorded in connection with the
Gen-X acquisition 14,643 - 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 6,519 - 6,521 -
Goodwill in Huffy Service First business unit 478 288 478 288
---------- ---------- ---------- ----------
Total assets not subject to amortization $ 78,251 $ 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 nine months ended
September 27, 2003, are as follows:
DECEMBER 31, SEPTEMBER 27,
2002 2003
GROSS GROSS
CARRYING CARRYING
AMOUNT ADDITIONS ADJUSTMENTS AMOUNT
---------- ---------- ---------- ----------
Assets subject to amortization:
Gen-X patents $ 1,285 $ 16 $ - $ 1,301
Gen-X license agreements 940 8 (8) 940
McCalla covenant not to compete 300 - - 300
---------- ---------- ---------- ----------
Total assets subject to amoritzation: $ 2,525 $ 24 $ (8) $ 2,541
========== ========== ========== ==========
Assets not subject to amortization:
Trademarks at Gen-X $ 45,800 $ 6 $ 8 $ 45,814
Goodwill recorded in connection with the
Gen-X acquisition 12,104 2,539 - 14,643
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 - (2) 6,519
Goodwill in Huffy Service First business
unit 478 - - 478
---------- ---------- ---------- ----------
Total assets not subject to amortization $ 75,700 $ 2,545 $ 6 $ 78,251
========== ========== ========== ==========
The Company's reporting units are tested annually during the fourth quarter for
impairment.
NOTE 5. SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
-----------------------------------------
SEPTEMBER 27, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Cash paid (received) during the period for:
Interest $ 5,648 $ 505
Taxes 1,115 (119)
====================================================================================================
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
====================================================================================================
Non-cash transactions:
Issuance of common stock to pension plan $ 6,309 $ -
Issuance of hold-back shares 1,164 -
====================================================================================================
NOTE 6. ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of accumulated other comprehensive loss consist of the following:
September 27, 2003 December 31, 2002
------------------ -----------------
Foreign currency translation adjustment $ (883) $ (913)
Unrealized loss on derivative financial instruments (102) (208)
Minimum pension liability (27,430) (27,430)
------------ ------------
$ (28,415) $ (28,551)
============ ============
Components of comprehensive income (loss) consist of the following for the nine
months ended:
September 27, 2003 September 30, 2002
------------------ ------------------
Net earnings $ 4,337 $ 2,845
Other comprehensive income (loss):
Minimum pension liability, net of income tax
benefit of $11,185 - (20,698)
Unrealized gain on derivative financial instruments 106 77
Foreign currency translation adjustment 30 1
------------ ------------
Comprehensive income (loss) $ 4,473 $ (17,775)
============ ============
NOTE 7. 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 (benefit) that has been charged against earnings
for options issued below fair market value and options issued to replace
canceled options, was $(53) and $(39) (after tax $(33) and $(24)) for the three
month periods ended September 27, 2003 and September 30, 2002, respectively and
$103 and $136 (after tax $64 and $84) for the nine month period ended September
27, 2003 and September 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 and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Three Months Ended Nine Months Ended
------------------ -----------------
SEPTEMBER 27, 2003 SEPTEMBER 30, 2002 SEPTEMBER 27, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
Net earnings as reported $ 2,918 $ 946 $ 4,337 $ 2,845
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effect (263) (186) (788) (558)
Pro forma net earnings 2,655 760 3,549 2,287
Diluted net earnings per common share:
As reported $ 0.18 $ 0.08 $ 0.28 $ 0.26
Pro forma 0.17 0.06 0.23 0.21
The Company records compensation cost for awards with pro rata vesting ratably
over the vesting period.
NOTE 8. 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. Product liability expense
is recorded in cost of sales on the accompanying condensed consolidated
statements of earnings. 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 relate to a negotiated claim allowance and as
selling, general and administrative costs if they relate to a general warranty
expense.
The following is a roll-forward of the Company's claims and allowance activity
for 2003:
RETAILER CLAIMS GENERAL
ALLOWANCES WARRANTY TOTAL
---------- ---------- ----------
Balance December 31, 2002 $ 802 $ 143 $ 945
Additions to reserves 75 314 389
Settled claims (514) (393) (907)
---------- ---------- ----------
Balance September 27, 2003 $ 363 $ 64 $ 427
========== ========== ==========
The Company remains potentially responsible for product liability claims related
to the Gerry Baby Products Company for which the Company sold the assets on
April 27, 1997. Until July of 2002 when it expired, the Company maintained a
claims made 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 remediation requirements known at this time.
The total accrual for estimated environmental remediation costs related to the
Superfund site and other potential environmental liabilities was $4,482 ($6,032
before discounting) at September 27, 2003. Of that amount, the Company has a
deposit of $3,538 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 accompanying condensed 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 September 27, 2003 was $879 and the long-term escrow balance at
September 27, 2003 was $2,659. The environmental accrual is similarly classified
on the accompanying condensed consolidated balance sheet with $879 shown in
accrued liabilities and $3,603 shown in other long-term liabilities as of
September 27, 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
bodily injury and property damage 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), demurrers to such master
complaints, case management orders and initial written discovery and hears 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 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 fourth quarter, 2003, not to exceed $5,200
for the Company. The Company contributed $5,121 into a court appointed escrow
account for the future payment of claims. In the third quarter of 2003, the
Company revised its estimate of claims which resulted in income from
discontinued operations for the quarter ended in September 27, 2003, of $950
before tax, and $589 after tax.
NOTE 9. 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 (Central), which has
subsequently been amended. 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 $15,000 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 minimum
EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), and a
fixed charge coverage ratio. 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 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 September 27, 2003, the
Company was in compliance with these covenants.
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 requirements. In July 2003, the Company
amended its revolving credit facility to increase the maximum loan amount to
$105,000 and to increase
the revolving loan limit to $90,000. As of September 27, 2003, the revolving
credit facility had $10,847 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 $1,674 and accumulated depreciation of $(491) at
September 27, 2003.
NOTE 10. SEGMENT DATA
Huffy classifies its business into two segments, sporting goods 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 includes 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 September 27, 2003 and
September 30, 2002.
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
September 27, September 30, September 27, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
NET SALES TO UNAFFILIATED CUSTOMERS
Sporting Goods $ 82,931 $ 60,686 $ 250,399 $ 184,710
Services to Retailers 23,812 22,342 68,452 62,116
---------- ---------- ---------- ----------
Total net sales $ 106,743 $ 83,028 $ 318,851 $ 246,826
========== ========== ========== ==========
EARNINGS BEFORE TAXES
Sporting Goods $ 1,721 $ 4,267 $ 9,920 $ 16,322
Services to Retailers 2,414 (223) 4,170 (2,995)
---------- ---------- ---------- ----------
Total segment earnings before taxes 4,135 4,044 14,090 13,327
Corporate expenses, net 232 (1,334) (6,755) (6,926)
Net interest expense (1,455) (287) (3,847) (908)
---------- ---------- ---------- ----------
Earnings before income taxes $ 2,912 $ 2,423 $ 3,488 $ 5,493
========== ========== ========== ==========
September 27, December 31,
2003 2002
------------- ------------
ASSETS
Sporting Goods $ 250,365 $ 223,437
Services to Retailers 65,414 58,764
---------- ----------
TOTAL ASSETS $ 315,779 $ 282,201
========== ==========
NOTE 11. DISCONTINUED OPERATIONS
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 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 fourth quarter 2003, not to exceed $5,200
for the Company. The Company contributed $5,121 into a court appointed escrow
account for the future payment of claims. In the third quarter of 2003, the
Company revised its estimate of claims which resulted in income from
discontinued operations for the quarter ended September 27, 2003 of $950 before
tax, and $589 after tax.
NOTE 12. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, 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 three months or nine months ended September 27, 2003. The
cumulative effect of implementing SFAS 143 has had an immaterial effect on the
Company's financial statements taken as a whole.
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 the Company incurs
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 three months or nine months ended September 27, 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. The Company's disclosure regarding the effects of
stock-based compensation included in Note 7 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 three months or nine months ended September 27,
2003.
The Company has adopted SFAS No. 150, "Accounting for Certain Financial
instruments with Characteristics of Both Liabilities and Equity". The Statement
requires issuers to classify as liabilities (or assets in some circumstance)
three classes of freestanding financial instruments that embody obligations for
the issuer. Generally, the Statement is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. Adoption
did not
have an effect on the financial statements for the nine months ended September
27, 2003.
The Company adopted SFAS No. 149, "Amendment of Statement 133 on derivative
Instruments and Hedging Activities", which amends and clarifies accounting for
derivative instruments and hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 149 provides
guidance relating to decisions made (a) as part of the Derivatives
Implementation Group process, (b) in connection with other FASB projects dealing
with financial instruments and (c) regarding implementation issues raised in the
application of the definition of a derivative and the characteristics of a
derivative that contains financing components. SFAS No. 149 is effective for
contracts entered into or modified and for hedging relationships designated
after June 28, 2003. The application of this Statement did not have a material
impact on the company's consolidated financial statements.
NOTE 13. 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
ending after December 15, 2003 (the quarter ending December 31, 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. The adoption of FIN 46 is
not expected to have a material impact on it's financial position, results of
operations or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 27, 2003
COMPARED TO THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
----------------------------------------------
(Dollar Amounts in Thousands, Except Share Data)
THREE MONTHS ENDED
------------------
September 27, 2003 September 30, 2002 Change Percentage
-------------------- ------------------ ------------- ----------------
Net sales $ 106,743 $ 83,028 $ 23,715 28.6%
Gross profit 20,223 15,955 4,268 26.8%
Percentage of revenues 18.9% 19.2%
SG&A expenses 16,486 12,826 3,660 28.5%
Percentage of revenues 15.4% 15.4%
NINE MONTHS ENDED
-----------------
September 27, 2003 September 30, 2002 Change Percentage
-------------------- ------------------ ------------- ----------------
Net sales $ 318,851 $ 246,826 $ 72,025 29.2%
Gross profit 65,461 44,987 20,474 45.5%
Percentage of revenues 20.5% 18.2%
SG&A expenses 58,416 37,201 21,215 57.0%
Percentage of revenues 18.3% 15.1%
For the third quarter of 2003, Huffy Corporation ("Huffy" or "Company") had net
earnings from continuing operations of $2,329, or $0.15 per common share
compared to net earnings for the same period in 2002 of $1,669, or $0.14 per
common share. For the nine months ended September 27, 2003 net earnings from
continuing operations were $2,790, or $0.19 per common share, compared to
$3,568, or $0.33 per common share, in the first nine months of 2002. Current
year results include the earnings from Gen-X Sports Inc. acquired on September
19, 2002. The results and earnings of the McCalla companies for the period
subsequent to the acquisition date of March 27, 2002, are also included in the
three and nine months results.
Net Sales
Net sales in the third quarter of 2003 were $106,743, an increase of 28.6%,
compared to net sales of $83,028 for the same period in 2002. Revenue from
services to retailers rose 6.6% from $22,342 in the third quarter of 2002 to
$23,812 in the same period of 2003. Product sales rose 36.7% from $60,686 in the
third quarter of 2002 to $82,931 in the same period of 2003. This sales gain was
the result of the addition of Gen-X Sports to the Huffy portfolio. The core
Huffy business, the businesses owned by Huffy prior to the Gen-X acquisition,
suffered a decline in sales to Kmart of $5,074, reflecting not only the
bankruptcy related decrease in Kmart store count, but also a decline in sales
caused by a poor economy and associated low consumer confidence, as well as this
summer's unusual weather. Fortunately, much of this sales volume loss to Kmart
was offset by market share gains with other customers in the sporting goods
segment, and greater penetration in the home improvement market by the service
segment. At this time, management does not believe that Kmart will have any
further unfavorable impact on future sales volume or margin in the short term.
For the nine months ended September 27, 2003, consolidated net sales were
$318,851, an increase of 29.2% from $246,826 in the same period last year.
Revenue from services to retailers rose 10.2% from $62,116 in the first nine
months of 2002 to $68,452 in the same period of 2003. The addition of the
McCalla Companies accounted for the majority of the increase in services to
retailers sales. Product sales rose 35.6% from $184,710 in the first nine months
of 2002 to $250,399 in the same period of 2003. The core Huffy business, the
businesses owned by Huffy prior to the Gen-X acquisition, suffered a decline in
sales to Kmart of $16,882, reflecting not only the bankruptcy related decrease
in Kmart store count, but also a decline in sales caused by a poor economy and
the associated low consumer confidence. Fortunately, much of this sales volume
loss to Kmart was offset by market share gains with other customers in the
sporting goods segment, and greater penetration in the home improvement market
by the service segment.
Gross Profit
Consolidated gross profit for the third quarter 2003 was $20,223, or 18.9% of
net sales as compared to $15,955, or 19.2% of net sales reported for the same
period in 2002, reflecting a 26.8% improvement over the prior year gross margin
when measured on a dollar basis. 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 12.0 percentage points reflecting improved pricing and a more
efficient field cost structure.
For the first nine months of 2003, gross profit was $65,461, or 20.5% of net
sales, compared to $44,987, or 18.2% of net sales, in the same period in the
prior year. Margins in the sporting goods segment improved primarily as a result
of adding Gen-X to the Huffy portfolio. In the services to retailer segment,
margins improved by 7.8 percentage points reflecting modest pricing
improvements, coupled with improved year over year field efficiency,
particularly in the first quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $16,486, for the three months
ended September 27, 2003 were higher than the $12,826 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
acquisition of Gen-X Sports Inc. Administrative pension expense increased in
2003 by $1,961 over 2002 expense due to poor 2002 stock market performance and
declining interest rates. Insurance costs increased in 2003 by $1,314 over the
third quarter of 2002 due to the addition of Gen-X and a less favorable
insurance market. Offsetting these increased expenses, during the third quarter
of 2003, the Company recorded income of $2,669 resulting from the recovery of
expenses from prior periods.
Selling, general and administrative expenses for the first nine months of 2003
were $58,416 versus $37,201 in the first nine months of 2002. Increased pension
expenses and the added selling, general and administrative expenses associated
with the Gen-X and McCalla acquisitions were the primary reasons for the
increase. Administrative pension expense increased in 2003 by $2,895 over 2002
expense due to poor 2002 stock market performance and declining interest rates.
Insurance costs increased in 2003 by $1,621 over 2002 due to the addition of
Gen-X and McCalla and a less favorable insurance market.
Net Interest Expense
Net interest expense increased from $287 for the third quarter of 2002 to $1,455
in the current year. For the nine months ended September 27, 2003, net interest
expense increased from $908 in the first half of 2002 to $3,847 in 2003.
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.
Other (Income) Expense
At the end of the second quarter, the Company reported the loss of a contract
from merchandising services in the home improvement segment. During the three
months ended September 27, 2003, the Company recorded income of $866 related to
a termination payment under the terms of the contract.
Discontinued Operations
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 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 fourth quarter, 2003, which is expected to
approximate $5,200 for the Company. The Company contributed $5,121 into a court
appointed escrow account for the future payment of claims. In the third quarter
of 2003, the Company revised its estimate of claims which resulted in income
from discontinued operations for the quarter ended September 27, 2003 of $950
before tax, and $589 after tax.
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 both Gen-X companies.
Per the terms of the agreement, 193,466 additional common shares were issued to
the Gen-X shareholders on or about 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 upon acquisition 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 $45,814, $1,301 and $940, respectively, as well as goodwill in the amount of
$14,643. 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, $6,519 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, 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.
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 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 September 27, 2003, the Company was in
compliance with these covenants.
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 needs. In July 2003, the Company amended its
revolving credit facility to increase the maximum loan amount to $105,000 and to
increase the revolving loan limit to $90,000. As of September 27, 2003, the
Company had $10,847 of borrowing capacity on its revolving credit facility.
At September 27, 2003, inventory was valued at $59,657 up from $41,847 at
December 31, 2002. This increase is primarily the result of remaining seasonal
inventory build up for winter sporting goods products. Accounts payable at
September 27, 2003 are $66,823 as compared to $65,519 at the end of 2002. This
increase reflects the timing and mix of purchases, as well as the purchase terms
in place. Accrued expenses and other current liabilities are $30,031 at
September 27, 2003 versus $37,059 at December 31, 2002. This decrease is due
primarily to the Company's payment into escrow of the anticipated claims related
to the Washington Inventory Services litigation, as well as a reduction in the
estimated liability associated with this litigation.
As of September 27, 2003. the Company has the following contractual obligations
and outstanding borrowings that are expected to impact future liquidity and cash
flows:
Due in
--------------------------------------------------------------
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- --------------------------------------- ---------- ---------- ---------- ---------- ----------
Long-term debt $ 15,000 $ - $ 15,000 $ - $ -
Capital leases 1,085 500 585 - -
Operating leases 12,310 3,708 5,367 2,880 355
Purchase obligations 3,865 1,037 896 794 1,138
---------- ---------- ---------- ---------- ----------
Total contractual obligations $ 32,260 $ 5,245 $ 21,848 $ 3,674 $ 1,493
========== ========== ========== ========== ==========
The Company's revolving credit facility is classified as a current liability in
the accompanying condensed consolidated balance sheets.
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 ACCOUNTING STANDARDS NOT YET ADOPTED
See Note 13 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 September 27, 2003, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $214 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
As of September 27, 2003, 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 accordance 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 during the quarter
ended September 27, 2003.
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.
The discussion in this quarterly report contains forward-looking statements and
is qualified by the cautionary statements in the Company's report on Form 10-K,
dated February 20, 2003.
PART II - OTHER INFORMATION
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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 15 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 bodily injury and
property damage 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), 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 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 is expected to issue its report as to
claims made and on the amount of payments to be made in the fourth
quarter, 2003, not to exceed $5,200 for the Company. The Company
contributed $5,121 into a court appointed escrow account for the future
payment of claims. In the third quarter of 2003, the Company revised
its estimate of claims which resulted in income from discontinued
operations for the quarter ended in September 27, 2003, of $950 before
tax, and $589 after tax.
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 a report on form 8-K dated October 15, 2003 with the
Securities and Exchange Commission regarding an earnings release
announcing the financial results for the fiscal period ended September
27, 2003.
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
November 12, 2003 /s/ Timothy G. Howard
- ------------------------------------ ----------------------------------------
Date Timothy G. Howard
Vice President - Corporate Controller
(Principal Accounting Officer)
INDEX OF EXHIBITS
Exhibit
No. Item
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(2) Not applicable
(3) Not applicable
(4) Specimen Stock Certificate of Huffy Corporation
(11) Not applicable
(15) Not applicable
(18) Not applicable
(19) Not applicable
(22) Not applicable
(23) Not applicable
(24) Not applicable
(31) Section 302 Certification
(32) Section 906 Certification