UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: September 19, 2002
(Date of earliest event reported)
HUFFY CORPORATION
(Exact name of Registrant as specified in its Charter)
Ohio 1-5325 31-0326270
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification Number)
225 Byers Road, Miamisburg, Ohio 45342-3657
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (937) 865-5431
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
On October 4, 2002 we filed a Form 8-K reporting the closing of our acquisition
of Gen-X Sports. In that Form 8-K, we indicated, in Item 7(a), that we would be
filing certain financial statements of the acquired companies in an amendment to
the Form 8-K. This Form 8-K/A constitutes that amendment. Items 7(a), 7(b) and
7(c) of the original Form 8-K are amended to read in their entireties as set
forth below. Item 2 is not amended in any respect and is not repeated.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
Audited combined statements of operations and cash flows of Gen-X
Holdings, Inc. and Gen-X Equipment Inc. (currently referred to as Gen-X
Sports Inc. and Gen-X Sports, Inc. respectively) for the period
beginning January 1, 2000 and ending May 26, 2000 are included in this
report and were audited by Deloitte & Touche LLP.
The combined financial statements of Gen-X Sports Inc. and Gen-X Sports,
Inc. for the year ended December 31, 2001 and for the period from May 26,
2000 to December 31, 2000 are incorporated herein by reference to Huffy
Corporation's Registration Statement on Form S-4 filed on July 5, 2002 and
amended on July 29, 2002, File No. 333-92030. Such financial statements
have been audited by Arthur Andersen LLP, independent auditors.
Representatives for Arthur Andersen LLP are not available to provide the
consent required for the inclusion of their reports on the financial
statements of Gen-X Sports Inc. and Gen-X Sports, Inc. incorporated in
this Form 8-K and we have dispensed with the requirement to file their
consent in reliance upon Rule 437a of the Securities Act of 1933. Because
Arthur Andersen LLP has not consented to the inclusion of their reports in
this Form 8-K, it will not be possible to recover against Arthur Andersen
LLP under Section 11 of the Securities Act of 1933 for any untrue
statements of a material fact contained in the financial statements
audited by Arthur Andersen LLP that are included in this Form 8-K or any
omissions to state a material fact required to be stated therein.
The combined financial statements of Gen-X Sports Inc. and Gen-X Sports,
Inc. for the period from January 1, 2002 to September 18, 2002 are
included in this report. These financial statements were audited by KPMG
LLP.
Consolidated audited financial statements of Huffy Corporation for the
period from January 1, 2002 to September 30, 2002 are included in this
report. The results of Gen-X Sports Inc. and Gen-X Sports, Inc. for the
period of Huffy's ownership from September 19, 2002 to September 30, 2002
are included in the consolidated financial statements. These consolidated
financial statements were audited by KPMG LLP.
(b) Pro forma financial information.
Unaudited pro forma financial statements of the combined companies as of
and for the nine months ended September 30, 2002 are included with this
report.
--------- ------------------------------------------------------------------------------ ----
(c) Exhibits.
--------- ------------------------------------------------------------------------------ ----
2.1(a) Agreement and Plan of Merger, dated June 5, 2002 and amended as *
of July 1, 2002, by and among Huffy Corporation, HSGC, Inc. and
Gen-X Sports Inc. (incorporated herein by reference to Exhibit 2.a
to Huffy Corporation's Registration Statement on Form S-4 filed on
July 5, 2002 and amended on July 29, 2002, File No. 333-92030).
--------- ------------------------------------------------------------------------------ ----
2.1(b) Amendment No. 2 to the Agreement and Plan of Merger, dated July 25, 2002, *
by and among Huffy Corporation, HSGC, Inc. and Gen-X Sports Inc.
--------- ------------------------------------------------------------------------------ ----
2.1(c) Share Purchase Agreement, dated June 5, 2002, by and among Huffy *
Corporation, HSGC Canada Inc., Gen-X Sports, Inc., K&J Financial, Inc.,
DLS Financial, Inc., Kenneth Finkelstein Family Trust, James Salter
Family Trust, James Salter, Kenneth Finkelstein and the Sellers
(as defined in the Agreement) (incorporated herein by reference to
Exhibit 2.b to Huffy's Registration Statement on Form S-4 filed on
July 5, 2002 and amended on July 29, 2002, File No. 333-92030).
--------- ------------------------------------------------------------------------------ ----
2.1(d) Amendment No. 1 to the Share Purchase Agreement, dated July 25, 2002, *
by and among Huffy Corporation, HSGC Canada Inc. and Kenneth Finkelstein,
as Representative for and in the name of and on behalf of the Sellers
(as defined in the Agreement).
--------- ------------------------------------------------------------------------------ ----
2.1(e) Second Amended and Restated Loan and Security Agreement, dated *
September 19, 2002, by and among Huffy Corporation and its subsidiaries,
Gen-X Sports Inc. and its subsidiaries, Gen-X Sports, Inc. and its
subsidiaries, Congress Financial Corporation (Central) and the Lenders
(as defined in the Agreement).
--------- ------------------------------------------------------------------------------ ----
23.1 Independent Auditor's Consent, Deloitte & Touche LLP dated November 27, 2002.
--------- ------------------------------------------------------------------------------ ----
23.2 Independent Auditor's Consent, KPMG LLP, dated December 2, 2002
--------- ------------------------------------------------------------------------------ ----
23.3 Independent Auditor's Consent, KPMG LLP, dated December 2, 2002
--------- ------------------------------------------------------------------------------ ----
--------- ------------------------------------------------------------------------------ ----
* Indicates that the exhibit is incorporated by reference into this 8-K
from a previous filing with the Commission.
--------- ------------------------------------------------------------------------------ ----
SIGNATURE
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 hereunto duly authorized.
Registrant:
HUFFY CORPORATION
/s/ Timothy G. Howard
Date: December 2, 2002 -------------------------------------
By: Timothy G. Howard
Vice President - Corporate Controller
(Principal Accounting Officer)
Combined Statements of Operations and Cash Flows of
GEN-X HOLDINGS, INC. AND
GEN-X EQUIPMENT INC.
Period from January 1, 2000 to May 26, 2000
(expressed in U.S. dollars)
INDEPENDENT AUDITORS' REPORT ON
COMBINED STATEMENTS OF OPERATIONS AND CASH FLOWS
To the Board of Directors of
Gen-X Holdings, Inc. and Gen-X Equipment Inc.
We have audited the combined statements of operations and cash flows of Gen-X
Holdings, Inc. and Gen-X Equipment Inc. (collectively "the Company") for the
period from January 1, 2000 to May 26, 2000. This financial information is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial information based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and auditing standards generally accepted in the United States of
America. These standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial information is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial information. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial information
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, this financial information presents fairly, in all material
respects, the results of operations and cash flows of the Company for the period
from January 1, 2000 to May 26, 2000 in accordance with Canadian generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
November 27, 2002
GEN-X HOLDINGS, INC. AND GEN-X EQUIPMENT INC.
COMBINED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 2000 TO MAY 26, 2000
(EXPRESSED IN U.S. DOLLARS)
------------------------------------------------------------------------------
REVENUE $ 34,095,729
COST OF SALES 25,050,511
------------------------------------------------------------------------------
GROSS PROFIT 9,045,218
OPERATING EXPENSES 4,966,469
------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,078,749
INCOME TAXES (Note 3) 2,000,342
------------------------------------------------------------------------------
NET INCOME $ 2,078,407
==============================================================================
Page 1 of 6
GEN-X HOLDINGS, INC. AND GEN-X EQUIPMENT INC.
COMBINED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 2000 TO MAY 26, 2000
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES
OPERATING
Net income $2,078,407
Item not affecting cash
Depreciation and amortization 169,769
Net change in non-cash working capital items
Accounts receivable (4,601,702)
Inventories 1,254,023
Prepaid expenses and deposits (56,598)
Accounts payable 3,187,240
Accrued liabilities 1,172,982
Income taxes payable 1,735,093
-------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 4,939,214
-------------------------------------------------------------------------------
INVESTING
Incorporation and other organization costs (75,000)
Purchase of capital assets, net (122,472)
-------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (197,472)
-------------------------------------------------------------------------------
FINANCING
Bank indebtedness (3,809,125)
Repayments of amounts due to parent company (820,636)
Repayment of mortgage principal (11,981)
Repayments of other long-term debt (100,000)
-------------------------------------------------------------------------------
CASH USED IN FINANCING ACTIVITIES (4,741,742)
-------------------------------------------------------------------------------
NET CASH INFLOW -
CASH, BEGINNING OF PERIOD -
-------------------------------------------------------------------------------
CASH, END OF PERIOD $ -
===============================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid $ 530,665
Income taxes paid $ -
Page 2 of 6
GEN-X HOLDINGS, INC. AND GEN-X EQUIPMENT INC.
NOTES TO COMBINED STATEMENTS OF OPERATIONS AND CASH FLOWS
PERIOD FROM JANUARY 1, 2000 TO MAY 26, 2000
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
These combined statements of operations and cash flows include the
consolidated financial information of Gen-X Holdings, Inc. and the
financial information of Gen-X Equipment Inc. (collectively the
"Company").
The Company is wholly-owned by Global Sports, Inc. ("Global" and "Parent
Company"), a public company in the United States.
This financial information is prepared in U.S. dollars as the Company
conducts a majority of its business in that currency. Intercompany
transactions and balances have been eliminated.
Gen-X Holdings, Inc. is a Washington corporation which includes the
accounts of its wholly-owned subsidiaries: Gen-X Equipment, Ltd., Gen-X
Equipment AG, and Lamar Snowboards, Inc. ("Lamar").
Gen-X Equipment Inc. is a company incorporated under the Ontario Business
Corporations Act.
Nature of business
The Company is a distributor of excess inventories of sports equipment
and accessories and specializes in acquiring excess inventories of
snowboards, snowboard boots and bindings, in-line skates, premium
sunglasses and sports goggles, skateboards, mountain bikes, wakeboards
and specialty footwear from manufacturers and other suppliers and
reselling these products to sporting goods retailers worldwide. The
Company also markets its own branded products in the snowboard and
accessories business under the Lamar and Limited brand names, as well as
aluminum scooters marketed under the Company's Rage brand.
2. SIGNIFICANT ACCOUNTING POLICIES
This financial information has been prepared by management in accordance
with Canadian generally accepted accounting principles. The more
significant accounting policies followed in the preparation of financial
information are summarized as follows:
Inventories
Inventories are carried at the lower of cost and market using the
first-in, first-out method.
Capital assets
Capital assets are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as
follows:
Furniture and fixtures - 5 years
Computer equipment - 3 years
Page 3 of 6
GEN-X HOLDINGS, INC. AND GEN-X EQUIPMENT INC.
NOTES TO COMBINED STATEMENTS OF OPERATIONS AND CASH FLOWS
PERIOD FROM JANUARY 1, 2000 TO MAY 26, 2000
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other assets
Other assets include incorporation and other organization costs
capitalized which are being amortized over 20 years.
Goodwill
Goodwill is amortized using the straight-line method over 20 years.
Goodwill is written down when there has been a permanent impairment in
the value of unamortized goodwill. A permanent impairment in goodwill is
determined by comparison of the carrying value of unamortized goodwill
with undiscounted future earnings of the related business.
Income taxes
Income taxes are provided based on the deferral method of tax allocation.
Under this method, deferred income taxes arise primarily from differences
between the financial reporting and tax basis of assets and liabilities
based on current tax rates.
Revenue recognition
The Company recognizes revenue from the sale of its products when
delivery has occurred, the sale price is fixed and collectibility is
probable. Provision is made at the time related revenue is recognized for
estimated product returns and rebates.
Concentration of credit risk
The Company performs ongoing credit evaluations of its customers. Based
on the Company's assessment of credit risk, sales in the United States
and Canada are made on open credit, C.O.D., cash in advance or by
post-dated cheque. International sales are generally made on a cash in
advance or on a letter of credit basis. The majority of accounts are
credit insured with the Export Development Corporation of Canada.
Foreign currency
Accounts receivable and accounts payable denominated in foreign
currencies are translated into U.S. dollars at the exchange rate as of
the balance sheet date. Revenues, costs of sales and expenses are
translated at the prevailing exchange rate at the time the transaction
occurs. Adjustments resulting from foreign exchange transactions are
recorded in the combined statement of operations.
Use of estimates
The preparation of the financial information in accordance with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial information and accompanying notes. Actual results could differ
from those estimates.
Page 4 of 6
GEN-X HOLDINGS, INC. AND GEN-X EQUIPMENT INC.
NOTES TO COMBINED STATEMENTS OF OPERATIONS AND CASH FLOWS
PERIOD FROM JANUARY 1, 2000 TO MAY 26, 2000
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
3. SUBSEQUENT EVENT
Effective close of business on May 26, 2000, the share capital of Gen-X
Holdings, Inc. (a Washington corporation) and the share capital of Gen-X
Equipment Inc. (an Ontario corporation) was acquired by Gen-X Sports Inc.
and Gen-X Sports, Inc., respectively, for total cash consideration of
$16,170,000. Consideration was represented by total cash of $13,200,000
and the assumption of certain notes payable amounting to $2,970,000.
In addition, Global assumed the income taxes payable in respect of Gen-X
Equipment, Ltd. prior to acquisition for the period from January 1, 2000
to May 26, 2000.
4. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's combined statements of operations and cash flows are
expressed in U.S. dollars and are prepared in accordance with Canadian
generally accepted accounting principles ("Canadian GAAP"), which conform
in all material respects with those in the United States ("U.S. GAAP"),
except for the following:
Net income reconciliation
Net income as reported $ 2,078,407
Description of items having the effect of decreasing
reported income:
Incorporation and other organization costs (a) (70,000)
--------------------------------------------------------------------------------
Net income under U.S. GAAP $ 2,008,407
================================================================================
(a) Incorporation and other organization costs
During the period, the Company recorded $73,000 of costs in other
assets related to incorporation and other organization costs net of
amortization of $2,000 in accordance with Canadian GAAP. Under U.S.
GAAP these costs are required to be expensed in the period
incurred. The net income under U.S. GAAP for the period from
January 1, 2000 to May 26, 2000 is overstated by $70,000 net of
tax.
Under Canadian GAAP, the Company is following the deferral method of tax
allocation under which full provision for income taxes are made on the
entire reported income. In accordance with SFAS No. 109, U.S. GAAP
requires that income taxes be accounted for by the liability method.
Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of the
assets and liabilities and are measured at the enacted tax rates that
will be in effect when the differences are expected to reverse. Such
differences principally arise from the timing of income and expense
recognition for accounting and tax purposes. The income taxes as
determined under SFAS No. 109 would not differ from the income taxes as
reported.
Page 5 of 6
GEN-X HOLDINGS, INC. AND GEN-X EQUIPMENT INC.
NOTES TO COMBINED STATEMENTS OF OPERATIONS AND CASH FLOWS
PERIOD FROM JANUARY 1, 2000 TO MAY 26, 2000
(EXPRESSED IN U.S. DOLLARS)
--------------------------------------------------------------------------------
4. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
The Company's comprehensive income as determined under SFAS No. 130 would
not differ from net income for the above period.
There are no differences in cash used in operating, investing and
financing activities as reported and as per US. GAAP except for the
effect of the accounting for incorporation and other organization costs
as noted above in (a). Under U.S. GAAP, cash provided by operating
activities would be $4,864,214 and cash used in investing activities
would be $122,472 after giving effect to the difference in accounting for
the incorporation and organization costs.
Page 6 of 6
DRAFT #4
NOVEMBER 22, 2002
Combined Financial Statements
(Expressed in U.S. dollars)
GEN-X SPORTS INC.
AND GEN-X SPORTS, INC.
Period from January 1, 2002 to September 18, 2002
INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the combined balance sheet of Gen-X Sports Inc. and Gen-X
Sports, Inc. as at September 18, 2002 and the combined statements of income and
retained earnings and cash flows for the period from January 1, 2002 to
September 18, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards and generally accepted auditing standards in the United States. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these combined financial statements present fairly, in all
material respects, the financial position of the Company as at September 18,
2002 and the results of its operations and its cash flows for the period then
ended in accordance with Canadian generally accepted accounting principles.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
November 1, 2002
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Combined Balance Sheet
(Expressed in U.S. dollars)
September 18, 2002
===============================================================================================================
Assets
Current assets:
Accounts receivable $ 37,609,443
Inventories 23,629,572
Prepaid expenses and deposits 3,233,674
Future income taxes (note 9) 2,299,545
---------------------------------------------------------------------------------------------------------------
66,772,234
Capital assets (note 3) 10,365,911
Other assets 13,253,453
Goodwill 7,492,036
---------------------------------------------------------------------------------------------------------------
$ 97,883,634
===============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 4) $ 29,518,001
Accounts payable and accrued liabilities 30,814,029
Current portion of long-term debt (note 5) 8,875,680
---------------------------------------------------------------------------------------------------------------
69,207,710
Long-term debt (note 5) 4,577,014
Preferred shares (note 6) 4,970,000
Shareholders' equity:
Share capital (note 7) 12,088,526
Retained earnings 7,040,384
---------------------------------------------------------------------------------------------------------------
19,128,910
Commitments (note 8)
Subsequent events (note 10)
---------------------------------------------------------------------------------------------------------------
$ 97,883,634
===============================================================================================================
See accompanying notes to combined financial statements.
On behalf of the Board:
/s/ Kenneth J. Finkelstein Director
-----------------------------------------
/s/ James J. Salter Director
-----------------------------------------
1
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Combined Statement of Income and Retained Earnings
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
===============================================================================================================
Sales $ 93,644,378
Cost of sales 70,607,187
---------------------------------------------------------------------------------------------------------------
Gross margin 23,037,191
Operating expenses 21,301,905
---------------------------------------------------------------------------------------------------------------
Income before income taxes 1,735,286
Income taxes 355,111
---------------------------------------------------------------------------------------------------------------
Net income 1,380,175
Retained earnings, beginning of period 6,843,627
Dividends 1,183,418
---------------------------------------------------------------------------------------------------------------
Retained earnings, end of period $ 7,040,384
===============================================================================================================
See accompanying notes to combined financial statements.
2
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Combined Statement of Cash Flows
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
===============================================================================================================
Cash provided by (used in):
Operating activities:
Net income $ 1,380,175
Depreciation and amortization 945,892
Change in non-cash operating working capital 2,025,221
---------------------------------------------------------------------------------------------------------------
4,351,288
Financing activities:
Repayment of long-term debt (2,692,347)
Proceeds from issuance redemption of common shares (300,000)
Proceeds from issuance redemption of preferred shares (1,183,418)
---------------------------------------------------------------------------------------------------------------
(4,175,765)
Investing activities:
Expenditures for capital assets (193,524)
---------------------------------------------------------------------------------------------------------------
Decrease in cash (18,001)
Cash, beginning of period -
---------------------------------------------------------------------------------------------------------------
Bank indebtedness, end of period $ (18,001)
===============================================================================================================
Supplemental cash flow information:
Income taxes paid $ 176,240
Interest paid 1,924,251
===============================================================================================================
See accompanying notes to combined financial statements.
3
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION:
These combined financial statements include the consolidated financial
statements of Gen-X Sports Inc. (a Delaware corporation) and the
financial statements of Gen-X Sports, Inc. (an Ontario corporation)
(collectively, the "Company"), which are companies under common control.
These combined financial statements are prepared in U.S. dollars as the
Company conducts a majority of its business in that currency.
Intercompany transactions and balances have been eliminated in these
combined statements of income and retained earnings.
Gen-X Sports Inc. and Gen-X Sports, Inc. were incorporated on December
13, 1999 and September 15, 1999, respectively, commencing operations with
the May 26, 2000, acquisition of Gen-X Holdings Inc., and Gen-X Equipment
Inc., from Global Sports, Inc. The financial statements of Gen-X Sports
Inc., includes the accounts of its wholly owned subsidiaries Gen-X
Sports, Ltd., Gen-X Sports AG and Lamar Snowboards, Inc.
The Company markets its own branded products in the golf, in-line skate,
ice hockey, snowboard and accessories business under the Tommy Armour,
Teardrop, Ram, Ultra Wheels, Hespeler, Lamar and Limited brand names, as
well as aluminum scooters marketed under the Company's Rage brand and
under the Company's licensed Oxygen name.
The Company is also a leading distributor of excess inventories of sports
equipment and accessories and specializes in acquiring excess inventories
of snowboards, snowboard boots and bindings, in-line skates, premium
sunglasses and sports goggles, skateboards, mountain bikes, wakeboards
and specialty footwear from manufacturers and other suppliers and
reselling these products to sporting goods retailers worldwide.
2. SIGNIFICANT ACCOUNTING POLICIES:
These combined financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles
("GAAP") which, as applied to the Company, are in accordance with United
States. The more significant accounting policies are summarized as
follows:
(a) Revenue recognition:
The Company recognizes revenue from the sale of its products when
delivery has occurred, the sale price is fixed and collectibility is
probable. Provision is made at the time related revenue is recognized
for estimated product returns and rebates.
4
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Concentration of credit risk:
The Company performs ongoing credit evaluations of its customers.
Based on the Company's assessment of credit risk, sales in the
United States and Canada are made on open credit, cash on deliver
("C.O.D."), cash in advance or by post-dated cheque. International
sales are generally made on a cash in advance or on a letter of
credit basis. The majority of accounts are credit insured with the
Export Development.
(c) Inventories:
Inventories are carried at the lower of cost and market using the
first-in, first-out method.
(d) Capital assets:
Capital assets are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as follows:
===================================================================
Building 40 years
Furniture and fixtures 5 years
Computer equipment 3 years
Production equipment 1 - 10 years
Leasehold improvements Over term of lease
===================================================================
(e) Goodwill:
In July 2001, The Canadian Institute of Chartered Accountants
("CICA") issued a new CICA Handbook Section 1581, "Business
Combinations" and Section 3062, "Goodwill and Other Intangible
Assets".
The Company has adopted these standards effective January 1, 2002.
The impact of adopting Section 1581, is not material for the
Company, as it does not expect to reclassify any amounts from
goodwill.
As a result of adopting Section 3062, goodwill will no longer be
amortized after December 31, 2001, but rather will be reviewed at
least annually for impairment and written down for impairment losses
as deemed necessary. Transitional impairments, if any, are not
expected to be material, however, impairment reviews may result in
future periodic write-downs.
5
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Other assets:
Other assets include patents and trademarks, incorporation, other
organization costs and deferred financing costs. Patents and
trademarks were amortized over 40 years and effective January 1,
2002, the Company adopted Section 3062, "Goodwill and Other
Intangible Assets", and as a result, patents and trademarks will no
longer be amortized after December 31, 2001 since they have been
assessed as having indefinite lives. These patents and trademarks
will be reviewed at least annually for impairment and written down
for impairment losses as deemed necessary. Incorporation and other
organization costs are amortized over 20 years. Deferred financing
costs are amortized on a straight-line basis, over the expected term
of the related financing.
(g) Foreign currency:
Accounts receivable and accounts payable denominated in foreign
currencies are translated into U.S. dollars at the exchange rate as
of the balance sheet date. Revenue, costs of sales and expenses are
translated at the prevailing exchange rate at the time the
transaction occurs. Adjustments resulting from foreign exchange
transactions are recorded in the combined statements of income and
retained earnings.
(h) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the period. Actual results could differ
from those estimates.
(i) Financial instruments:
The estimated fair values of accounts receivable, bank indebtedness,
capital loan, accounts payable and accrued liabilities, and current
portion of long-term debt approximate their carrying values due to
the relatively short period to maturity of these instruments.
The estimated fair values of long-term debt and preferred shares
approximate their carrying values as the long-term debt was paid and
preferred shares redeemed the next day.
6
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(j) Income taxes:
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, future tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Future tax assets and liabilities are measured using enacted
or substantively enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. The effect on future tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the date of enactment or substantive enactment.
(k) Stock-based compensation:
The Company has stock-based compensation plans, which are described
in note 7. No compensation expense is recognized for these plans when
stock or stock options are issued to employees. Consideration paid by
employees on the exercise of stock options is credited to common
shares. For consideration paid to an employee for the repurchase of
stock options, the excess of the consideration paid over the carrying
amount of the stock option canceled is charged to retained earnings.
3. CAPITAL ASSETS:
========================================================================================================
Accumulated Net book
Cost depreciation value
--------------------------------------------------------------------------------------------------------
Land $ 1,500,000 $ - $ 1,500,000
Building 6,500,000 133,125 6,366,875
Furniture and fixtures 1,827,387 763,318 1,064,069
Computer equipment 752,140 381,276 370,864
Production equipment 868,765 180,400 688,365
Leasehold improvements 418,019 42,281 375,738
--------------------------------------------------------------------------------------------------------
$ 11,866,311 $ 1,500,400 $ 10,365,911
========================================================================================================
7
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
4. BANK INDEBTEDNESS:
Gen-X Sports, Inc. has a demand revolving line of credit available with
the HSBC Bank Canada (the "Bank") in the amount of Cdn. $40,000,000
subject to certain margin requirements. The line of credit is available
to Gen-X Sports, Inc. and Gen-X Sports Inc. and each of its wholly owned
subsidiaries. As of September 18, 2002, U.S. $22,000,000 of this facility
was utilized by the Company. The line is available in either U.S. or Cdn.
dollar currency by way of either direct advances, bankers' acceptances or
by import letters of credit. The line bears interest primarily at either
the U.S. base rate or the Bank's prime rate of interest plus 1/2%.
Gen-X Sports, Inc. has a demand revolving line of credit with HSBC Bank
USA (the "Bank") in the amount of U.S. $9,000,000 subject to certain
margin requirements. The line of credit is available to Gen-X Sports,
Inc. As of September 18, 2002, $7,500,000 of this facility was utilized
by the Company. The line is available in U.S. dollar currency by way of
direct advances and includes a U.S. $5,000,000 sub-limit for issuance of
documentary trade letters of credit. The line bears interest primarily at
the Bank's prime rate of interest plus 3/4% or LIBOR plus 1.90% (up to
180 days).
The credit facilities are secured by:
(a) A general security agreement covering all of the Company's assets;
(b) Unlimited guarantees from all companies in the group;
(c) Subordination agreements relating to other long-term debt;
(d) A general assignment of book debts; and
(e) An assignment of accounts receivable credit and general insurance.
Subsequent to September 18, 2002, this bank indebtedness was paid in full
as part of Huffy Corporation acquiring the Company.
As at September 18, 2002, the Company had an obligation under import
letters of credit in the amount of $793,786.
8
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
5. LONG-TERM DEBT:
--------------------------------------------------------------------------------
Loan payable to Ride, Inc., bearing interest at U.S. prime rate
per annum, secured by a pledge of the shares of Gen-X
Sports, Inc. and Gen-X Sports, Ltd. The loan is repayable
in equal quarterly principal installments in the amount of
$100,000 plus accrued interest $ 300,000
Promissory notes payable to former Lamar shareholders,
bearing interest at 6% per annum, $400,000 is payable
in fiscal 2001 and $200,000 thereafter in each year through
to 2003 plus accrued interest 200,000
Promissory notes payable to former Lamar shareholders,
bearing interest at 6% per annum, $125,680 payable in
2003 plus accrued interest 125,680
Subordinated note payable to the bank, bearing interest at
banker's acceptance plus 125 basis points plus 9% per annum,
secured by a third charge on all assets of the Company (a) 8,000,000
Mortgage note payable to bank, bearing interest at U.S. prime
rate per annum, due in monthly installments of $20,833 plus
interest through October 2006, secured by land and building 4,827,014
--------------------------------------------------------------------------------------------------------
13,452,694
Less current portion 8,875,680
--------------------------------------------------------------------------------------------------------
$ 4,577,014
========================================================================================================
Principal payments are as follows:
========================================================================================================
2002 $ 283,333
2003 8,675,680
2004 250,000
2005 250,000
2006 3,993,681
--------------------------------------------------------------------------------------------------------
$ 13,452,694
========================================================================================================
(a) The Company is in violation of its subordinated note payable to the
bank at September 18, 2002 and accordingly, has reclassified this
debt as a current liability. Subsequent to September 18, 2002, this
loan was paid in full as part of Huffy Corporation acquiring the
Company.
9
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
6. PREFERRED SHARES:
========================================================================================================
Authorized:
Gen-X Sports Inc.:
3,960,000 Series A redeemable preferred shares
Gen-X Sports, Inc.:
Unlimited number of Class A preferred shares Issued and
outstanding:
Gen-X Sports Inc.:
2,970,000 Series A redeemable preferred shares $ 2,970,000
Gen-X Sports, Inc.:
2,000,000 Class A preferred shares 2,000,000
--------------------------------------------------------------------------------------------------------
$ 4,970,000
========================================================================================================
Preferred shares are represented by redeemable, retractable Series A
preferred shares of Gen-X Sports Inc. and Class A preferred shares of
Gen-X Sports, Inc. as described following:
(a) The Series A redeemable preferred ("Series A Shares") are non-voting
entitled to a cumulative dividend at a rate of 7%, and
non-participating except to the extent of this aggregate redemption
value of $2,970,000 plus any accrued unpaid dividends. Dividends are
payable on the 15th day of April, July, October and January of each
year.
Any or all of the Series A Shares are redeemable at any time at the
Company's option at a redemption price of $1.00 per share plus
accrued interest. In addition, the Series A Shares have a mandatory
redemption requirement, at a redemption price of $1.00 per share.
On May 1, 2001, Gen-X Sports Inc. was required to redeem 990,000
shares of the Series A Shares. On May 1, 2002, Gen-X Sports Inc. was
required to redeem an additional 990,000 shares of the Series A
Shares. The shareholders of the Series A Shares have elected to defer
the 2001 and 2002 retraction to any subsequent year.
Subsequent to September 18, 2002, all the preferred shares were
redeemed as part of Huffy Corporation acquiring the Company.
10
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
6. PREFERRED SHARES (CONTINUED):
(b) The Class A preferred shares ("Class A" Shares) of Gen-X Sports, Inc.
are voting, entitled to a cumulative preferential dividend at a rate
of bankers' acceptance rate plus 10.25%, with a redemption value of
$2,000,000 plus any accrued unpaid dividends. Dividends are paid on a
monthly basis.
These Series A Shares and Class A Shares dividends are recorded as
interest expense in the combined statements of income and retained
earnings.
7. SHARE CAPITAL:
========================================================================================================
Authorized:
Gen-X Sports Inc.:
250,001 Series B Junior participating preferred shares 6,000,000
Series C non-voting preferred shares 50,000,000 common shares
Gen-X Sports, Inc.:
Unlimited number of common shares
Issued and outstanding:
Gen-X Sports Inc.:
83,334 Series B Junior participating preferred shares $ -
5,462,363 Series C non-voting preferred shares 10,888,193
5,369,029 common shares 200,000
Gen-X Sports, Inc.
5,452,362 common shares 333
--------------------------------------------------------------------------------------------------------
11,088,526
Options granted (Gen-X Sports Inc.) 1,000,000
--------------------------------------------------------------------------------------------------------
$ 12,088,526
========================================================================================================
(a) The holders of the common shares in Gen-X Sports Inc. are entitled to
a 5% per annum cash dividend based on a share value of $6.00 for the
issued and outstanding common shares.
(b) The Series B Junior participating preferred shares ("Series B"
Shares) are convertible into common shares on a one-to-one basis at
any time at the option of the holders. Each of the Series B Shares
has voting rights equal to the number of common shares they are
convertible into. In the event that dividends are paid to the holders
of common shares, a dividend is payable to the holders of the Series
B Shares equal to the dividends that would have been paid in respect
of common shares into which the Series B shares are convertible.
11
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
7. SHARE CAPITAL (CONTINUED):
(c) The Series C non-voting preferred shares ("Series C" Shares) are
entitled to non-cumulative dividends, if declared.
(d) During 2002, dividends were declared and paid in the amount of
$1,795,475 to the holders of the issued and outstanding common
shares.
Stock options:
During 2002, an additional 10,000 options were issued for a total of
1,209,289, and remain outstanding at September 18, 2002 as follows:
(a) 953,000 shares at an exercise price of $6.00;
(b) 158,250 shares at an exercise price of $12.00; and
(c) 98,039 shares at an exercise price of $1.80.
These options vest either over a three or four-year period. Of the
1,209,289 shares, 125,039 are fully vested.
Subsequent to September 18, 2002, these stock options were cancelled as
part of Huffy Corporation acquiring the Company.
8. COMMITMENTS:
The Company is committed under certain operating leases. Total future
minimum lease payments related to these operating leases are
approximately as follows:
========================================================================================================
2002 $ 390,000
2003 423,000
2004 423,000
2005 423,000
2006 427,000
2007 and thereafter 1,050,000
--------------------------------------------------------------------------------------------------------
$ 3,136,000
========================================================================================================
12
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
9. INCOME TAXES:
Income tax expense for the Company differs from the amount that would be
computed by applying the Canadian federal and provincial statutory income
tax rates of 38.6% to income before income taxes. The reasons for the
differences are as follows:
========================================================================================================
Amount %
--------------------------------------------------------------------------------------------------------
Combined Canadian federal and
provincial income taxes $ 906 38.6
Effect of lower taxes applicable
to U.S. and Swiss income (1,034) (44.0)
Loss carryforward utilized, not
previously recognized (875) (37.3)
Valuation allowance 1,358 57.8
--------------------------------------------------------------------------------------------------------
$ 355 15.1
========================================================================================================
The tax effects of temporary differences that give rise to significant
portions of the current and future tax assets and future tax liabilities
at September 18, 2002 are presented below:
========================================================================================================
Current tax assets (liabilities):
Current taxes payable $ (1,446,520)
Future tax assets:
Difference in property and equipment
and goodwill basis (175,000)
Net operating loss carryforward 10,178,502
-----------------------------------------------------------------------------------------------------
10,003,502
Less valuation allowance (6,257,437)
-----------------------------------------------------------------------------------------------------
Total future tax assets 3,746,065
-----------------------------------------------------------------------------------------------------
Total future income taxes $ 2,299,545
=========================================================================================================
The Company has net operating loss carryforwards in the U.S. of
approximately $27.0 million and in Canada of approximately $2.0 million
that, depending upon the jurisdiction, expire between the years 2006 and
2022. Of these amounts, approximately $20.0 million arose from the
acquisition of First Team Sports, Inc. in 2001, and the utilization of
these net operating loss carryforwards are limited under U.S. tax
provisions.
13
GEN-X SPORTS INC. AND GEN-X SPORTS, INC.
Notes to Combined Financial Statements (continued)
(Expressed in U.S. dollars)
Period from January 1, 2002 to September 18, 2002
--------------------------------------------------------------------------------
10. SUBSEQUENT EVENTS:
The Company was acquired on September 19, 2002 by Huffy Corporation for
cash consideration and shares of Huffy Corporation.
Certain outstanding debt and preferred shares of the Company were repaid
subsequent to the purchase.
14
Consolidated Financial Statements
Huffy Corporation
September 30, 2002, December 31, 2001, and December 31, 2000
(with Independent Auditor's Report thereon)
Independent Auditors' Report
The Board of Directors and Shareholders,
Huffy Corporation:
We have audited the accompanying consolidated balance sheets of Huffy
Corporation and subsidiaries (the Company) as of September 30, 2002, December
31, 2001 and December 31, 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for the nine-months ended
September 30, 2002, and for each of the years in the two-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position and results of
operations and cash flows for the nine-months ended September 30, 2002, and for
each of the years in the two-year period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
Cincinnati, OH /s/ KPMG LLP
November 18, 2002 KPMG LLP
ITEM 7. FINANCIAL STATEMENTS:
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands, Except Share Data)
For the Years Ended
Nine Months ended ------------------------------
September 30, December 31, December 31,
2002 2001 2000
---- ---- ----
Net sales $ 246,826 $ 331,138 $ 488,181
Cost of sales 201,839 291,188 406,839
------------ ------------ ------------
Gross profit 44,987 39,950 81,342
Selling, general and administrative expenses 37,201 47,607 53,763
Plant closure and manufacturing reconfiguration -- 3,713 714
------------ ------------ ------------
Operating income (loss) 7,786 (11,370) 26,865
Other expense (income):
Interest expense 924 1,761 8,629
Interest income (16) (633) (201)
Other expense 1,385 303 1,342
------------ ------------ ------------
Earnings (loss) before income taxes 5,493 (12,801) 17,095
Income tax expense (benefit) 1,925 (4,391) 6,429
------------ ------------ ------------
Earnings (loss) from continuing operations 3,568 (8,410) 10,666
Discontinued operations:
Income (loss) from discontinued operations (723) -- 4,537
Gain on disposal of discontinued operations -- -- 20,781
Extraordinary loss -- -- (998)
------------ ------------ ------------
Net earnings (loss) $ 2,845 $ (8,410) $ 34,986
------------ ------------ ------------
Earnings (loss) per common share:
Basic:
Weighted average number of common shares 10,896,562 10,298,076 10,187,048
Earnings (loss) from continuing operations $ 0.33 $ (0.82) $ 1.05
Earnings (loss) from discontinued operations (0.07) -- 2.48
Extraordinary loss -- -- (0.10)
------------ ------------ ------------
Net earnings (loss) per common share $ 0.26 $ (0.82) $ 3.43
============ ============ ============
Diluted:
Weighted average number of common shares 11,153,166 10,298,076 10,320,362
Earnings (loss) from continuing operations $ 0.32 $ (0.82) $ 1.03
Earnings (loss) from discontinued operations (0.06) -- 2.45
Extraordinary loss -- -- (0.09)
------------ ------------ ------------
Net earnings (loss) per common share $ 0.26 $ (0.82) $ 3.39
============ ============ ============
See accompanying notes to the consolidated financial statements.
HUFFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
September 30, December 31, December 31,
2002 2001 2000
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 514 $ 26,541 $ 4,334
Accounts and notes receivable, net 87,282 48,934 79,811
Inventories 48,202 12,483 43,324
Deferred federal income taxes 9,980 13,900 16,935
Prepaid expenses 10,236 3,903 3,644
--------- --------- ---------
Total current assets 156,214 105,761 148,048
--------- --------- ---------
Property, Plant and Equipment, at cost:
Land and land improvements 151 182 182
Buildings and building improvements 1,741 3,399 2,948
Machinery and equipment 18,498 16,818 19,557
Office furniture, fixtures and equipment 17,328 16,348 16,788
Leasehold improvements 1,963 1,584 2,346
Construction in progress 1,071 989 1,600
--------- --------- ---------
40,752 39,320 43,421
Less: Accumulated depreciation and amortization 29,557 30,053 30,741
--------- --------- ---------
Net property, plant and equipment 11,195 9,267 12,680
Net assets held for sale 5,480 -- --
Excess of cost over net assets acquired, net 23,686 8,038 8,764
Intangible assets, net 48,275 -- --
Deferred federal income taxes 18,694 1,906 --
Other assets 6,843 20,513 11,001
--------- --------- ---------
$ 270,387 $ 145,485 $ 180,493
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 46,821 $ -- $ 17,656
Current installments of long-term obligations 714 -- --
Accounts payable 68,275 31,161 28,015
Accrued expenses:
Salaries, wages and other compensation 6,313 4,363 6,295
Insurance 6,049 7,403 11,235
Environmental 2,000 6,959 8,050
Other 7,947 4,403 10,867
--------- --------- ---------
Total accrued expenses 22,309 23,128 36,447
Other current liabilities 7,356 7,096 8,278
--------- --------- ---------
Total current liabilities 145,475 61,385 90,396
--------- --------- ---------
Long-term obligations, less current installments 4,773 -- --
Pension liabilities 24,200 5,294 2,091
Postretirement benefits other than pension 9,350 9,570 9,707
Other long-term liabilities 6,123 3,634 5,168
--------- --------- ---------
Total liabilities 189,921 79,883 107,362
--------- --------- ---------
Shareholders' equity:
Common stock 21,153 16,931 16,704
Additional paid-in capital 95,168 67,226 66,204
Retained earnings 77,992 75,147 83,557
Unearned stock compensation (37) -- --
Accumulated other comprehensive loss (24,041) (3,421) (2,676)
Treasury shares, at cost (89,769) (90,281) (90,658)
--------- --------- ---------
Total shareholders' equity 80,466 65,602 73,131
--------- --------- ---------
$ 270,387 $ 145,485 $ 180,493
========= ========= =========
See accompanying notes to the consolidated financial statements.
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
For the Years Ended
Nine Months Ended --------------------------
September 30, December 31, December 31,
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations $ 3,568 $ (8,410) $ 10,666
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,643 4,676 5,706
(Gain) loss on sale of property, plant and equipment 12 (4) (3,446)
Write-down of certain property, plant and equipment -- 2,018 --
Extraordinary charge for the early extinguishment of debt -- -- (998)
Deferred federal income taxes (11,644) 1,323 18,943
Changes in assets and liabilities, excluding the effects of
acquisitions:
Accounts and notes receivable, net 4,304 30,877 (23,014)
Inventories (12,089) 30,841 (19,970)
Prepaid expenses and income taxes (3,099) (259) 1,101
Other assets 14,049 (9,475) (1,941)
Accounts payable 6,516 3,146 (2,214)
Accrued expenses (9,539) (13,319) (575)
Other current liabilities 260 (1,182) 937
Postretirement benefits other than pensions (220) (137) (4,196)
Other long-term liabilities 738 691 2,463
Other -- -- (3)
-------- -------- --------
Net cash provided by (used in) continuing operating activities (4,501) 40,786 (16,541)
-------- -------- --------
Discontinued operating activities:
Gain on disposal from discontinued operations -- -- 20,781
Gain (loss) from discontinued operations (723) -- 4,537
Non-cash items from discontinued operations -- -- 3,648
Cash provided by discontinued operations -- -- 31,936
-------- -------- --------
Net cash provided by (used in) discontinued operating activities (723) -- 60,902
-------- -------- --------
Net cash provided by (used in) operating activities (5,224) 40,786 44,361
======== ======== ========
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,977) (2,553) (2,510)
Proceeds from sale of property, plant and equipment -- 4 7,377
Gen-X acquisition (19,001) -- --
McCalla acquisition, net of cash acquired (4,900) -- --
-------- -------- --------
Net cash provided by (used in) investing activities (25,878) (2,549) 4,867
======== ======== ========
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 46,821 (17,656) (4,246)
Repayment of debt assumed in the Gen-X acquisition (37,800) -- --
Preferred shares redeemed (4,970) -- --
Issuance of long-term debt 458 -- --
Reduction of long-term debt (123) -- (60,467)
Issuance of common shares 689 1,626 485
Dividends paid -- -- (856)
-------- -------- --------
Net cash provided by (used in) financing activities 5,075 (16,030) (65,084)
======== ======== ========
Net change in cash and cash equivalents (26,027) 22,207 (15,856)
Cash and cash equivalents:
Beginning of the period 26,541 4,334 20,190
-------- -------- --------
End of the period $ 514 $ 26,541 $ 4,334
======== ======== ========
See accompanying notes to the consolidated financial statements.
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar Amounts in Thousands)
Accumulated
Additional Unearned Other
Common Paid-In Retained Stock Comprehensive Treasury
Total Stock Capital Earnings Compensation Loss Stock
----- ----- ------- -------- ------------ ---- -----
Balance at December 31, 1999 $ 37,482 $ 16,667 $66,242 $ 48,571 $ -- $ (2,854) $(91,144)
Comprehensive income, net of tax:
Net earnings 34,986 34,986
Minimum pension liability adjustment,
net of income tax expense of $205 178 178
--------
Total comprehensive income 35,164
Issuance of 36,671 shares in connection
with common stock plans 485 37 (38) 486
-------- -------- ------- -------- ---------- -------- --------
Balance at December 31, 2000 $73,131 $ 16,704 $66,204 $ 83,557 $ -- $ (2,676) $(90,658)
Comprehensive loss, net of tax:
Net loss (8,410) (8,410)
Minimum pension liability adjustment,
net of income tax benefit of $194 (434) (434)
Unrealized loss on derivative
instruments (311) (311)
--------
Total comprehensive loss (9,155)
Issuance of 227,129 shares in
connection with common stock plans 1,626 227 1,022 377
-------- -------- ------- -------- ---------- -------- --------
Balance at December 31, 2001 $65,602 $ 16,931 $67,226 $ 75,147 $ -- $ (3,421) $(90,281)
Comprehensive loss, net of tax:
Net earnings 2,845 2,845
Minimum pension liability adjustment,
net of income tax benefit of $11,185 (20,698) (20,698)
Foreign currency translation adjustment 1 1
Unrealized loss on derivative
instruments, net of income tax benefit
of $126 77 77
--------
Total comprehensive loss (17,775)
Unearned stock compensation (37) (37)
Issuance of 4,161,241 shares in connection
with the acquisition of Gen-X Sports Inc. 31,987 4,161 27,826
Issuance of 60,580 shares in connection
with common stock plans 689 61 116 512
-------- -------- ------- -------- ---------- -------- --------
Balance at September 30, 2002 $80,466 $ 21,153 $95,168 $ 77,992 $ (37) $(24,041) $(89,769)
======= ======== ======= ======== ========== ======== ========
See accompanying notes to the consolidated financial statements.
Notes to Consolidated Financial Statements (in thousands, except for share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
Huffy Corporation and its subsidiaries. All Huffy Corporation subsidiaries
except for Gen-X Sports Inc. and the McCalla Companies results include activity
for the fiscal periods ended September 28, 2002 while Gen-X Sports Inc. and the
McCalla Companies results included activity for the period ended September 30,
2002. All entities results include activity for the fiscal years ended December
31, 2001 and 2000. All inter-company transactions and balances have been
eliminated. The Company is in the process of conforming all new acquisitions to
the company's reporting periods.
RECLASSIFICATION - Certain prior year balances have been reclassified to conform
with the 2002 presentation.
CASH AND CASH EQUIVALENTS - Cash equivalents consist principally of short-term
money market instruments with original maturities of three months or less.
REVENUE RECOGNITION - The Company recognizes revenue on products when shipments
occur or title passes to the customer. Revenue for retail services is
recognized at the time the service is performed.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially expose
the Company to concentrations of credit risk, as defined by Statement of
Financial Accounting Standards (SFAS) No. 105, consist primarily of trade
accounts receivable. In the normal course of business, Huffy extends credit to
various companies in the retail industry where certain concentrations of credit
risk exist. These concentrations of credit risk may be similarly affected by
changes in economic or credit conditions and may, accordingly, impact Huffy's
overall credit risk. Management believes that the diversification of accounts
receivable is sufficient to reduce potential market credit risk, and that the
allowance for doubtful accounts is adequate to absorb estimated losses as of
September 30, 2002, December 31, 2001 and December 31, 2000. The allowance for
doubtful accounts was $1,431, $5,766, and $1,372 as of September 30, 2002,
December 31, 2001 and December 31, 2000, respectively.
INVENTORIES - Inventories are valued at cost (not in excess of market)
determined by the first-in, first-out (FIFO) method. Management periodically
reviews inventory for salability and believes that the reserve for obsolescence
at September 30, 2002, December 31, 2001 and December 31, 2000 is adequate to
absorb estimated losses.
PROPERTY, PLANT, AND EQUIPMENT - Depreciation and amortization of plant and
equipment is provided on the straight-line method.
Annual depreciation and amortization rates are as follows:
Land improvements 5 - 10%
Buildings and improvements 2-1/2 - 10%
Office furniture, fixtures, machinery, equipment and computer
software 10 - 33-1/3%
Leasehold improvements 4-1/2 - 33-1/3%
ASSETS HELD FOR SALE - The Company accounts for long-lived assets in accordance
with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. SFAS No. 144 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
The Company has classified a portion of the land and buildings obtained in the
Gen-X acquisition as net assets held for sale as of September 30, 2002. The
assets are stated at estimated fair value of approximately $5,480, as determined
by an independent appraisal. The Company will formalize its plan for disposal by
sale of these assets, within three months subsequent to the acquisition date, in
accordance with SFAS No.144.
AMORTIZATION OF INTANGIBLES - The Company adopted the provisions of SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets, as of January 1, 2002. SFAS No. 141 addresses financial accounting and
reporting for business combinations requiring the use of the purchase method of
accounting for combinations initiated subsequent to June 30, 2001. SFAS No. 142
provides guidance for the financial accounting and reporting for goodwill and
other intangible
assets requiring that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS No.142. SFAS No.142 also
requires intangible assets with definite useful lives to be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144.
On March 27, 2002, the Company acquired 100% of the common stock of McCalla
Company and subsidiaries. The aggregate purchase price was $5,400 and was paid
in cash. Of the total purchase consideration, $4,876 was allocated to goodwill
and $300 to an agreement not to compete.
On September 19, 2002, the Company acquired all of the common stock of Gen-X
Sports and its subsidiaries. Included in the assets acquired are trademarks,
patents and licensing agreements recorded at their fair values of $45,800,
$1,285 and $940, respectively, as well as goodwill in the amount of $10,772. The
fair values for these assets, excluding goodwill, were determined by an
independent third-party appraiser.
The Company has the following acquired intangible assets as of September 30,
2002, December 31, 2001 and 2000:
As of September 30, 2002 As of December 31, 2001 As of December 31, 2000
------------------------ ----------------------- -----------------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
------ ------------ ------ ------------ ------ ------------
Assets subject to amortization:
Patents $ 1,285 $ 6 $ -- $ -- $ -- $ --
License agreements 940 14 -- -- -- --
Covenant not to compete 300 30 -- -- -- --
-------- -------- -------- -------- -------- --------
Total assets subject to amortization $ 2,525 $ 50 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ========
Assets not subject to amortization:
Trademarks at Gen-X 45,800 -- -- -- -- --
Goodwill recorded in connection with the
Gen-X acquisition 10,772 -- -- -- -- --
Goodwill in the Bicycle business unit 8,824 2,380 8,824 2,380 8,824 1,744
Goodwill in Huffy Sports business unit 1,973 569 1,973 569 1,973 496
Goodwill recorded in connection with the
McCalla acquisition 4,876 -- -- -- -- --
Goodwill in Huffy Service First business
unit 478 288 478 288 478 271
-------- -------- -------- -------- -------- --------
Total assets not subject to amortization $ 72,723 $ 3,237 $ 11,275 $ 3,237 $ 11,275 $ 2,511
======== ======== ======== ======== ======== ========
The Company recorded amortization expense of $50 in the first three quarters of
2002. The Company estimates that amortization expense will be $165 in the fourth
quarter of 2002 and $655, $570, $297, $228, $94, and $476 for each of the years
ended December 31, 2003, 2004, 2005, 2006, 2007 and thereafter, respectively.
Prior to the adoption of SFAS 142, the Company amortized the excess of cost
over net assets acquired on a straight-line basis over fifteen to forty years.
The Company's reporting units are tested annually for impairment.
The following table provides a summary of net income (loss) and related basic
and diluted EPS information as reported, and as adjusted to exclude goodwill
amortization, for the years ended December 31, 2001 and 2000.
December 31, December 31,
2001 2000
---- ----
Reported net income (loss) $ (8,410) $ 34,986
Add back: Goodwill amortization 726 726
---------- ----------
Adjusted net income (loss) $ (7,684) $ 35,712
---------- ----------
Basic EPS
Reported net income (loss) $ (0.82) $ 3.43
Adjusted net income (loss) (0.75) 3.51
Diluted EPS
Reported net income (loss) $ (0.82) $ 3.39
Adjusted net income (loss) (0.75) 3.46
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value
of cash and cash equivalents, trade receivables, trade accounts payable, notes
payable, and accrued expenses approximates fair value due to the short maturity
of these instruments.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, an
Amendment to SFAS No. 133, during 2002 and 2001, the Company recorded an
adjustment, net of tax, of $77 and $(311), respectively, in accumulated other
comprehensive gain to recognize at fair value an interest rate swap that is
designated as a cash-flow hedging instrument. No other derivative instruments
have been identified.
The interest rate swap 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.
EARNINGS (LOSS) PER COMMON SHARE - Basic earnings (loss) per share of common
stock is based upon the weighted average number of shares of common stock
outstanding during the year. Diluted earnings (loss) per share are computed
based on the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Earnings (loss) per common share are
not diluted if the Company has a loss from continuing operations.
USE OF ESTIMATES AND ASSUMPTIONS - Management of the Company has made a number
of estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with accounting principles generally
accepted. Actual results could differ from those estimates and assumptions.
STOCK OPTION PLANS - Prior to January 1, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
REPORTING SEGMENTS - Huffy Bicycle Company including Royce Union Bicycle Company
and American Sports Design Company, Huffy Sports Company, Gen-X Sports Inc,
McCalla Companies and Huffy Service First, Inc. operate as one business segment
providing consumer products and services.
NOTE 2. ACQUISITIONS
On September 19, 2002, the Company acquired all of the stock of Gen-X Sports
Inc. in exchange for $19,001 in cash and the issuance of 4,161,241 shares of
Huffy Corporation's Class A common shares to the stockholders of Gen-X. The
$7.687 per share value of the Class A 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. The purchase price is subject to certain post-closing adjustments.
Should Gen-X meet 2002 financial performance objectives, specified in the
purchase agreement, and if there are no breaches of warranties and
representations, up to 838,662 additional common shares may be issued to the
Gen-X stockholders. In addition, the acquired companies immediately redeemed
$4,970 of preferred stock and refinanced their existing bank debt. Included in
the assets acquired are trademarks, patents and licensing agreements recorded at
their fair values of $45,800, $1,285 and $940, respectively, as well as goodwill
in the amount of $10,772. Gen-X is a designer, marketer and distributor of
branded sports equipment, including action sports products, winter sports
products and golf products, and is a purchaser and reseller of sporting goods
and athletic footwear inventories. The Company believes that the combination of
Huffy & Gen-X will create a stronger, more competitive sporting goods company
capable of achieving greater financial strength, earnings power, operational
efficiency and growth potential than either company would on its own. It will
also broaden each company's brand portfolios and sporting goods product
offerings and broaden and diversify the customer base. Finally, the combination
has the potential to decrease seasonal fluctuations in sales and earnings.
The table below presents selected financial data from the Huffy and
Gen-X unaudited pro forma condensed combining statements of operations for the
nine months ended September 30, 2002. The unaudited pro forma condensed
combining statements of operations are presented as if the merger had occurred
on January 1, 2002. This information should be read in conjunction with the
unaudited pro forma condensed combining financial statements and related notes
and the historical financial statements and related notes of Huffy and Gen-X
included in or incorporated by reference into this joint proxy
statement/prospectus.
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 Year Ended September 30, 2002
Pro Forma
Gen-X Sports Adjustments related Pro Forma
Huffy Corporation Inc. to the Acquisition Combined
---------------------------------------------------------------------
Net Sales $ 246,826 $ 93,644 $ -- $ 340,470
Gross Profit 44,987 23,037 106 (1) 68,130
Selling, general, and
administrative expenses 37,201 17,453 445 (5) 55,099
Operating income 7,786 5,584 (339) 13,031
Other expense 1,385 826 -- 2,211
Interest expense, net 908 3,023 2,069 (2) 2,977
(3,023)(3)
----------------------------------------------------------------------
Earnings before income taxes 5,493 1,735 615 7,843
Income tax expense 1,925 355 269 (4) 2,549
----------------------------------------------------------------------
Earnings from continuing
operations $ 3,568 $ 1,380 $ 346 $ 5,294
======================================================================
Earnings from continuing operations per common share
Basic $ 0.34 $ 0.36
Diluted $ 0.33 $ 0.36
Shares used in calculation of earnings per share
Basic 10,438,647 4,161,241 14,599,888
Diluted 10,695,251 4,161,241 14,856,492
See accompanying footnotes.
Notes to Unaudited Pro Forma Condensed Combining Statement of Operations
(1) To record the effect on depreciation of adjusting the value of property,
plant and equipment to fair value.
(2) To record the change in interest expense from the use of Huffy's cash and
borrowing lines to finance the acquisition purchase price of $19,001, to
repay Gen-X and Gen-X Ontario debt, and to redeem and purchase outstanding
preferred stock for $4,970. The incremental interest on the weighted
average borrowing of $35,515 is recorded at Huffy's estimated weighted
average borrowing rate of 5.4%.
(3) To eliminate the Gen-X interest expense.
(4) To record the income tax expense adjusting the effective tax rate for the
combined entity to the expected blended tax rate of 32.5%.
(5) To amortize patents and license agreements acquired over their expected
useful lives.
The following table summarized the estimated fair value of the assets acquired
and the liabilities assumed at the date of acquisition.
September 19,
2002
----
Accounts receivable $ 41,531
Inventories 23,630
Prepaid expense 3,234
Property, plant and equipment 7,979
Intangible assets 48,025
Goodwill 10,772
Other assets 1,574
--------
Total assets acquired 136,745
--------
Accounts payable 30,441
Accrued liabilities 7,394
Long-term debt 42,952
--------
Total liabilities assumed 80,787
--------
Net assets acquired $ 55,958
========
Of the $48,025 of acquired intangible assets, $45,800 was assigned to registered
trademarks that are not subject to amortization. The remaining $2,225 of
acquired intangible assets have weighed-average useful lives of approximately
seven years. The intangible assets that make up that amount include patents of
$1,285, (approximately ten-year weighed-average useful lives), and license
agreements of $940, (approximately two-year weighed-average useful lives).
On March 27, 2002, Huffy Service First acquired the stock of McCalla Company and
its subsidiaries, Creative Retail Services and Creative Retail Services Canada,
("McCalla") for $5,400, less $500 net cash acquired, subject to certain
post-closing adjustments. Of the total purchase price, $4,876 was recorded as
goodwill and $300 was recorded as a covenant not-to-compete. McCalla provides
merchandising, including cycle and periodic product resets, stocking and sales
training for a number of well-known manufacturers serving the Home Center
channel, including, among others, Philips Lighting, Duracell, and The Stanley
Works.
Both of these acquisitions were accounted for on the purchase method of
accounting in accordance with SFAS No.141.
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
September 30, December 31, December 31,
2002 2001 2000
---- ---- ----
Cash paid (refunded) during the period for:
Interest $ 505 $ 845 $14,145
Taxes (119) 1,532 4,646
========= ====== =======
Details of acquisitions:
Fair value of assets acquired 136,745 -- --
Liabilities assumed 80,787 -- --
--------- ------ -------
Net assets acquired 55,958 -- --
Less: common shares issued 31,987 -- --
Less: preferred shares redeemed 4,970 -- --
--------- ------ -------
Cash paid for Gen-X common shares 19,001 -- --
--------- ------ -------
Cash paid for McCalla acquisition 5,400 -- --
Less: cash acquired 500 -- --
--------- ------ -------
Net cash paid for McCalla acquisition 4,900 -- --
--------- ------ -------
Net cash paid for acquisitions $ 23,901 $ -- $ --
========= ====== =======
NOTE 4. INVENTORIES
The components of inventories are as follows:
September 30, December 31, December 31,
2002 2001 2000
---- ---- ----
Finished goods $43,096 $10,768 $39,284
Work-in-process 176 105 147
Raw materials and supplies 4,930 1,610 3,893
------- ------- -------
$48,202 $12,483 $43,324
======= ======= =======
NOTE 5. 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. The $75 million
revolving credit facility is secured by all assets of the Company and its
affiliates and will expire on December 31, 2004, with a 12-month renewal option.
The interest rate under the revolving credit facility varies based upon excess
availability from prime to prime plus .25%, or LIBOR plus 1.75% to LIBOR plus
2.75%. The revolving credit facility contains covenants which require the
Company to maintain a minimum of $50,000 of net worth, restrict certain business
activities, including the payment of dividends, limit capital expenditures and
require EBITDA to be maintained at prescribed levels. As of September 30, 2002,
the Company is in compliance with these covenants. The Company assumed three
long-term obligations in the Gen-X acquisition with a combined outstanding
balance of $5,153. The mortgage loan assumed in the Gen-X acquisition is secured
by net assets held for sale as described in Note 2. Sale proceeds from the
disposal of this property would be used to retire the unpaid balance on the
mortgage.
September 30, December 31, December 31,
2002 2001 2000
---- ---- ----
SHORT-TERM BORROWINGS:
Revolving credit facility $ 46,821 $ -- $ 17,656
Weighted average interest rate 5.00% N/A 10.76%
LONG-TERM OBLIGATIONS:
6% Term loan due July 2003 $ 326 $ -- $ --
Mortgage loan due monthly through 2021 4,806 -- --
Capital lease due monthly through 2005 355 -- --
---------- -------- --------
5,487 -- --
Less: current installments 714 -- --
---------- -------- --------
$ 4,773 $ -- $ --
========== ======== ========
Prior to the acquisition of Gen-X on September 19, 2002, the Company had been
debt free, with cash invested since the first quarter of 2001. Interest expense
in 2001 was primarily comprised of amortization of financing costs, letters of
credit and revolver non-usage fees.
Principal payments required on the long-term obligations during the fourth
quarter of 2002, and for each of the years 2003 through 2007, and thereafter,
are approximately, $85, $714, $404, $291, $250, $250 and $3,493, respectively.
As of September 30, 2002, the revolving credit facility had $17,573 of unused
availability. Management believes that the available balance on the amended
credit facility and internally generated cash flows will be sufficient to
finance the Company's seasonal working capital and capital expenditure needs in
the coming year.
NOTE 6. PREFERRED STOCK
Under the Company's Amended Articles of Incorporation, there are 1,000,000
authorized, unissued shares of Cumulative Preferred Stock, $1.00 par value.
Subject to certain limitations, the Articles provide that the Board of Directors
may fix the conditions of each series of Preferred Stock.
The Company entered into a Rights Agreement with its transfer agent in 1988, as
amended in 1991 and 1994, and the Board of Directors declared a dividend of one
Preferred Share Purchase Right for each outstanding share of the Company's
Common Stock. Upon the occurrence of certain events, Preferred Share Purchase
Rights entitle the holder to purchase at a price of $60.00, one one-hundredth of
a share of Series C Cumulative Preferred Stock, subject to adjustment. The
Rights become exercisable only if a person or group acquires 15% or more of the
Company's Common Stock, or announces a tender offer for 15% or more of the
Common Stock. Under certain circumstances all Rights holders, except the person
or group holding 15% or more of the Company's Common Stock, will be entitled to
purchase a number of shares of the Company's Common Stock having a market value
of twice the Right's current exercise price. Alternately, if the Company is
acquired in a merger or other business combination, after the Rights become
exercisable, the Rights will entitle the holder to buy a number of the acquiring
Company's common shares having a market value at that time of twice each Right's
current exercise price.
Further, after a person or group acquires 15% or more (but less than 50%) of the
Company's outstanding Common Stock, the Company's Board of Directors may
exchange part or all of the Rights (other than the Rights held by the acquiring
person or group) for shares of Common Stock. The Rights expire December 9, 2004
and may be redeemed by the Company for $0.01 per Right at any time prior to the
acquisition by a person or group of 15% or more of the Company's Common Stock.
NOTE 7. COMMON STOCK AND COMMON STOCK PLANS
Under the Company's Amended Articles of Incorporation, there are 60,000,000
authorized shares of Common Stock, $1.00 par value.
At September 30, 2002, the Company has stock-based compensation plans which are
described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its 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 income for options issued below fair market value and
options issued to replace canceled options, was $161, $122, and $725, for the
nine months ended September 30, 2002 and for the years ended December 31, 2001
and 2000, respectively. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS No. 123, the Company's
net earnings (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated below:
Nine Months
Ended Year Ended
----------- --------------------
2002 2001 2000
---- ---- ----
Net earnings (loss)
As Reported $ 2,845 $ (8,410) $ 34,986
Pro Forma 2,445 (9,297) 34,497
Diluted net earnings (loss)
per common share:
As Reported $ 0.26 $ (0.82) $ 3.39
Pro Forma $ 0.22 (0.90) 3.34
2002 2001 2000
September Weighted- December Weighted- December Weighted-
30, 2002 Average 31, 2001 Average 31, 2000 Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
1998 NON-QUALIFIED PLAN
Outstanding at January 1 477,450 $ 8.74 353,825 $ 10.13 350,950 $ 12.33
Granted at fair value 185,750 7.22 161,250 6.37 142,500 6.79
Granted below fair value -- -- -- -- -- --
Forfeited (47,063) 11.60 (35,000) 12.00 (139,375) 12.28
Exercised (16,249) 6.23 (2,625) 6.20 (250) 8.50
------- ---------- ------- ---------- ------- ----------
Outstanding 599,888 $ 8.11 477,450 $ 8.74 353,825 $ 10.13
======= ========== ======= ========== ======= ==========
Exercisable 149,156 $ 11.17 170,549 $ 11.49 101,288 $ 13.37
======= ========== ======= ========== ======= ==========
Weighted-average fair value of options
granted during the period;
Issued at fair value on grant date $ 3.87 $ 3.34 $ 3.10
Issued below fair value on grant date -- -- --
1998 QUALIFIED PLANS
Outstanding at January 1 460,843 $ 6.08 314,558 $ 5.92 294,875 $ 15.22
Granted at fair value 22,960 1.00 190,495 5.72 237,160 4.23
Granted below fair value -- -- -- -- -- --
Forfeited -- -- -- -- (204,500) 17.46
Exercised (21,530) 1.29 (44,210) 3.35 (12,977) 4.51
------- ---------- ------- ---------- ------- ----------
Outstanding 462,273 $ 6.05 460,843 $ 6.08 314,558 $ 5.92
======= ========== ======= ========== ======= ==========
Exercisable 274,313 $ 6.17 287,093 $ 5.68 196,389 $ 4.93
======= ========== ======= ========== ======= ==========
Weighted-average fair value of options
granted during the period;
Issued at fair value on grant date $ 7.60 $ 3.01 $ 1.84
Issued below fair value on grant date -- -- --
1988 PLAN
Outstanding at January 1 440,753 $ 13.36 825,477 $ 12.42 1,055,888 $ 12.67
Granted at fair value -- -- -- -- -- --
Granted below fair value -- -- -- -- -- --
Forfeited (45,810) 13.73 (299,724) 14.30 (211,723) 14.04
Exercised -- -- (85,000) 1.00 (18,688) 8.34
------- ---------- ------- ---------- ------- ----------
Outstanding 394,943 $ 13.31 440,753 $ 13.36 825,477 $ 12.42
======= ========== ======= ========== ======= ==========
Exercisable 394,943 $ 13.31 437,003 $ 13.34 790,186 $ 12.33
======= ========== ======= ========== ======= ==========
Weighted-average fair value of options
granted during the period;
Issued at fair value on grant date $ -- $ -- $ --
Issued below fair value on grant date -- -- --
1987 DIRECTOR STOCK OPTION PLAN
Outstanding at January 1 132,046 $ 13.39 188,913 $ 13.43 189,612 $ 13.38
Granted at fair value -- -- -- -- -- --
Granted below fair value -- -- -- -- -- --
Forfeited -- -- (56,250) 13.67 -- --
Exercised (10,273) 1.00 (617) 0.67 (699) 0.67
------- ---------- ------- ---------- ------- ----------
Outstanding 121,773 $ 14.44 132,046 $ 13.39 188,913 $ 13.43
======= ========== ======= ========== ======= ==========
Exercisable 121,773 $ 14.44 132,046 $ 13.39 188,913 $ 13.43
======= ========== ======= ========== ======= ==========
Weighted-average fair value of options
granted during the period;
Issued at fair value on grant date $ -- $ -- $ --
Issued below fair value on grant date -- -- --
Options Outstanding Options Exercisable
------------------- -------------------
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price at 9/28/02 Life Price at 9/28/02 Price
----- ---------- ---- ----- ---------- -----
1998 Non-Qualified Plans $ 4 to 6 6,000 6.5 years $ 5.61 2,000 $ 5.61
6 to 8 483,438 8.5 years 6.67 65,385 6.33
8 to 10 13,000 7.3 years 8.80 4,750 8.74
10 to 12 6,000 7.1 years 11.07 3,000 11.41
12 to 14 2,000 6.8 years 14.00 1,500 14.00
14 to 16 66,700 6.1 years 15.01 50,271 15.01
16 to 18 19,750 5.7 years 17.21 19,250 17.23
18 to 20 3,000 5.8 years 19.19 3,000 19.19
1998 Qualified Plan $ 0 to 2 109,273 7.9 years $ 1.00 86,313 $ 1.00
2 to 6 10,000 7.6 years 4.13 10,000 4.13
6 to 8 269,000 7.3 years 6.14 111,500 6.06
8 to 10 12,000 8.6 years 8.79 12,000 8.79
10 to 14 46,000 6.5 years 13.66 38,500 13.62
14 to 18 16,000 5.6 years 16.25 16,000 16.25
1988 Plan $ 10 to 12 151,895 3.6 years $ 11.16 151,895 $ 11.16
12 to 14 64,422 4.1 years 13.62 64,422 13.62
14 to 16 154,872 4.1 years 14.48 154,872 14.48
16 to 18 3,000 5.0 years 16.31 3,000 16.31
18 to 20 20,754 1.2 years 19.00 20,754 19.00
1987 Director Option Plan $ 0 to 2 9,273 3.2 years $ 1.00 9,273 $ 1.00
12 to 14 50,625 4.6 years 13.00 50,625 13.00
14 to 18 61,875 1.6 years 17.63 61,875 17.63
The Company has fixed option plans, which include the 1998 Qualified Plans, the
1998 Key Employee Non-Qualified Plan, the 1988 Stock Option Plan and Restricted
Share Plan, and the 1987 Director Stock Option Plan. The 1998 Qualified Plans
consist of the 1998 Director Stock Incentive Plan, the 1998 Key Employee Stock
Plan, and the 1998 Restricted Share Plan.
The 1998 Non-Qualified Plan, the 1998 Key Employee Stock Plan, and the 1988
Stock Option Plan and Restricted Share Plan authorize the issuance of
non-qualified stock options, restricted shares, incentive stock options (except
under the 1998 Key Employee Non-Qualified Stock Plan), and stock appreciation
rights, although no incentive stock options or stock appreciation rights have
been issued. The exercise price of each non-qualified stock option, granted
under the plan, equals the market price of the Company's stock on the date of
the grant. The options maximum term ranges from four to ten years. Options vest
at the end of the first through fourth years.
The 1998 Director Stock Incentive Plan authorizes an automatic issuance of
restricted shares to non-employee Directors, which vest at the next Annual
Meeting of Shareholders. The 1987 Director Stock Option Plan authorized the
automatic issuance of non-qualified stock options to non-employee Directors.
Under both plans, Directors can elect to receive discounted stock options in
lieu of all or part of the annual retainer fee. Such shares cannot include stock
appreciation rights. Under the 1998 Director Stock Incentive Plan, options vest
at the end of six months. Under the 1987 Director Stock Option Plan, options
vest at the end of the third, fourth, and fifth years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000, respectively; expected
volatility of 52.9% in 2002, 43.3% in 2001, 42.2% in 2000; risk-free interest
rates from 3.35% to 6.80% for all plans and years; and expected lives from 4.00
to 8.83 years.
The 1989 Employee Stock Purchase Plan, as amended, authorizes the offering and
sale to employees of up to 975,000 shares of the Company's common stock at a
price approximately 90% of the closing price of the common stock on the offering
date. Under the plan, the Company sold 9,516 and 5,167 shares, to employees in
2001 and 2000, respectively. At September 30, 2002, rights to purchase
approximately 51,290 shares were outstanding under this plan at an exercise
price of $5.38 per share and 479,253 additional shares were available for
issuance.
Under SFAS No. 123, compensation cost is recognized for the fair value of the
employee's purchase rights, which was estimated using the Black-Scholes model
with the following assumptions for 2002, 2001 and 2000, respectively: an
expected life of one year for all years; a risk-free interest rate of 2.0% for
2002 grants, 6.1% for 2001 grants and 5.2% for 2000 grants, and expected
volatility of 52.9% in 2002, 43.3% in 2001 and 42.2% in 2000. The
weighted-average fair value of those purchase rights granted in 2002, 2001 and
2000 was $1.16, $1.22 and $1.72, respectively.
NOTE 8. EARNINGS PER SHARE
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
SEPTEMBER 30, 2002
BASIC EPS
Net earnings available to common shareholders $ 2,845 10,896,562 $ 0.26
EFFECT OF DILUTIVE SECURITIES
Stock options -- 256,604
-------- ----------
DILUTED EPS
Net earnings available to common shareholders
and assumed conversions $ 2,845 11,153,166 $ 0.26
======== ========== ========
DECEMBER 31, 2001
BASIC EPS
Net earnings available to common shareholders $ (8,410) 10,298,076 $ (0.82)
EFFECT OF DILUTIVE SECURITIES
Stock options -- --
-------- ----------
DILUTED EPS
Net earnings available to common shareholders
and assumed conversions $ (8,410) 10,298,076 $ (0.82)
======== ========== ========
DECEMBER 31, 2000
BASIC EPS
Net earnings available to common shareholders $ 34,986 10,187,048 $ 3.43
EFFECT OF DILUTIVE SECURITIES
Stock options -- 133,314
-------- ----------
DILUTED EPS
Net earnings available to common shareholders
and assumed conversions $ 34,986 10,320,362 $ 3.39
======== ========== ========
Options to purchase 864,143, 1,026,691 and 1,276,776 shares of common stock were
outstanding in 2002, 2001, and 2000. respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
NOTE 9. BENEFIT PLANS
The Company sponsors defined benefit pension plans covering certain salaried and
hourly employees. Benefits to salaried employees are based upon the highest
three consecutive years of earnings out of their last ten years of service;
benefits to hourly workers are based upon their years of credited service.
Contributions to the plans reflect benefits attributed to employees' service
to-date and also to services expected to be provided in the future. Plan assets
consist primarily of common and preferred stocks, common stock index funds,
investment grade corporate bonds, and U.S. government obligations.
In addition to the Company's defined benefit pension plans, the Company sponsors
several defined benefit health care and life insurance plans that provide
postretirement medical, dental, and life insurance benefits to full-time
employees who meet minimum age and service requirements. The plans are
contributory, with retiree contributions adjusted annually, and contain other
cost-sharing features such as deductibles and coinsurance. The Company's policy
is to fund the cost of medical benefits in amounts determined at the discretion
of management.
The Company also sponsors a deferred compensation plan for the benefit of highly
compensated management employees. The eligible employees make contributions to
the plan and receive postretirement benefits based upon a stated rate of return
on those contributions. The Company's policy is to fund the cost of the benefits
in amounts determined at the discretion of management.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
2002 2001 2000
----- ----- -----
One-Percentage-Point Increase
Effect on total service and interest cost components $ 12 $ 17 $ 65
Effect on postretirement benefit obligations 228 261 240
One-Percentage-Point Decrease
Effect on total service and interest cost components $ (11) $ (16) $ (55)
Effect on postretirement benefit obligations (208) (238) (219)
The Company maintains defined contribution retirement plans covering its
eligible employees. The purpose of these defined contribution plans is generally
to provide additional financial security during retirement by providing
employees with an incentive to make regular savings. The Company's contributions
to the plans are based on employee contributions and were $876, $871 and $544,
in the nine months ended September 30, 2002 and for the years ended December 31,
2001 and 2000, respectively.
The following tables sets forth the plans' funded status and amounts recognized
in the Company's Consolidated Statements of Operations of as September 30, 2002,
December 31, 2001 and December 31, 2000:
Pension Plans
-------------
Nine months ended Year ended Year ended
September 30, 2002 December 31, 2001 December 31, 2000
------------------ ----------------- -----------------
Change in benefit obligations:
Benefit obligation at beginning of year $ 81,302 $ 77,995 $ 76,129
Service cost 832 1,144 1,724
Interest cost 4,715 5,885 6,066
Plan participant contributions -- -- --
Amendments 860 (315) 238
Actuarial loss 7,317 2,521 4,919
Disbursements (3,858) (5,928) (4,762)
Curtailments -- -- (973)
Settlements -- -- (5,346)
------------ ------------ ------------
Benefit obligation at end of period 91,168 81,302 77,995
------------ ------------ ------------
Change in plan assets:
Fair value of plan assets at beginning of year 73,220 79,760 91,187
Actual return on plan assets (7,250) (4,837) (513)
Employer contribution 397 4,225 498
Plan participant contribution -- -- --
Disbursements (3,858) (5,928) (4,762)
Settlements -- -- (6,650)
------------ ------------ ------------
Fair value of plan assets at end of year 62,509 73,220 79,760
------------ ------------ ------------
Funded status (28,659) (8,082) 1,765
Unrecognized net actuarial loss 39,472 20,846 6,404
Unrecognized prior service cost 1,225 519 914
Unrecognized initial net asset (469) (552) (663)
------------ ------------ ------------
Net amount recognized 11,569 12,731 8,420
------------ ------------ ------------
Amounts recognized in the balance sheets consist of:
Prepaid benefit cost -- 15,267 10,703
Accrued benefit liability (24,618) (5,912) (4,991)
Intangible asset 1,280 352 312
Accumulated other comprehensive income 34,907 3,024 2,396
------------ ------------ ------------
Net amount recognized 11,569 12,731 8,420
------------ ------------ ------------
Weighted-average assumption:
Discount rate 7.25% 7.625% 7.75%
Expected return on plan assets 9.50% 9.50% 9.50%
Rate of compensation increase Age-Graded Age-Graded Age-Graded
Health Care & Life Insurance Plans
----------------------------------
Nine months ended Year ended Year ended
September 30, 2002 December 31, 2001 December 31, 2000
------------------ ----------------- -----------------
Change in benefit obligations:
Benefit obligation at beginning of year $ 4,077 $ 3,667 $ 6,113
Service cost -- 2 136
Interest cost 209 286 405
Plan participant contributions 67 85 --
Amendments (537) -- (42)
Actuarial loss 400 655 340
Disbursements (463) (618) (696)
Curtailments -- -- (2,589)
Settlements -- -- --
-------------- -------------- --------------
Benefit obligation at end of period 3,753 4,077 3,667
-------------- -------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year -- -- --
Actual return on plan assets -- -- --
Employer contribution 396 533 696
Plan participant contribution 67 85 --
Disbursements (463) (618) (696)
Settlements -- -- --
-------------- -------------- --------------
Fair value of plan assets at end of year -- -- --
-------------- -------------- --------------
Funded status (3,753) (4,077) (3,667)
Unrecognized net actuarial gain (565) (983) (1,808)
Unrecognized prior service cost (507) -- --
Unrecognized initial net asset -- -- --
-------------- -------------- --------------
Net amount recognized (4,825) (5,060) (5,475)
-------------- -------------- --------------
Amounts recognized in the balance sheets consist of:
Prepaid benefit cost -- -- --
Accrued benefit liability (4,825) (5,060) (5,475)
Intangible asset N/A N/A N/A
Accumulated other comprehensive income N/A N/A N/A
-------------- -------------- --------------
Net amount recognized (4,825) (5,060) (5,475)
-------------- -------------- --------------
Weighted-average assumption:
Discount rate 7.25% 7.625% 7.75%
Expected return on plan assets N/A N/A N/A
Rate of compensation increase N/A N/A N/A
For measurement purposes, a 9.00% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 2002, and assumed to decrease
gradually to 5.50% for 2006 and thereafter.
Deferred Compensation Plan
--------------------------
Nine months ended Year ended Year ended
September 30, 2002 December 31, 2001 December 31, 2000
------------------ ----------------- -----------------
Change in benefit obligations:
Benefit obligation at beginning of year $ 6,546 $ 6,971 $ 7,039
Service cost -- -- --
Interest cost 332 544 483
Plan participant contributions -- -- --
Amendments -- -- --
Actuarial gain (1) (624) (255)
Disbursements (381) (345) (296)
Curtailments -- -- --
Settlements -- -- --
-------------- -------------- --------------
Benefit obligation at end of period 6,496 6,546 6,971
-------------- -------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year -- -- --
Actual return on plan assets -- -- --
Employer contribution 381 345 296
Plan participant contribution -- -- --
Disbursements (381) (345) (296)
Settlements -- -- --
-------------- -------------- --------------
Fair value of plan assets at end of year -- -- --
-------------- -------------- --------------
Funded status (6,496) (6,546) (6,971)
Unrecognized net actuarial loss 1,972 2,035 2,737
Unrecognized prior service cost -- -- --
Unrecognized initial net asset -- -- --
-------------- -------------- --------------
Net amount recognized (4,524) (4,511) (4,234)
-------------- -------------- --------------
Amounts recognized in the balance sheets consist
of:
Prepaid benefit cost -- -- --
Accrued benefit liability (4,524) (4,511) (4,234)
Intangible asset N/A N/A N/A
Accumulated other comprehensive income N/A N/A N/A
-------------- -------------- --------------
Net amount recognized (4,524) (4,511) (4,234)
-------------- -------------- --------------
Weighted-average assumption:
Discount rate 7.25% 7.625% 7.75%
Expected return on plan assets N/A N/A N/A
Rate of compensation increase N/A N/A N/A
The following table sets forth the plans' funded status and amounts recognized
in the Company's Consolidated Statements of Operations as of September 30, 2002,
December 31, 2001 and December 31, 2000:
Health Care & Life Deferred
Pension Plans Insurance Plans Compensation Plan
------------- --------------- -----------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
------- ------- ------- ----- ----- ------- ---- ---- ----
Components of net
periodic benefit cost:
Service cost $ 832 $ 1,144 $ 1,724 $ -- $ 2 $ 136 $ -- $ -- $ --
Interest cost 4,715 5,885 6,066 209 286 405 332 544 483
Expected return on plan
assets (5,117) (7,387) (8,394) -- -- -- -- -- --
Amortization of prior
service cost 155 80 156 (31) -- (4) -- -- --
Amortization of initial
net asset (83) (111) (210) -- -- -- -- -- --
Recognized net
actuarial loss (gain) 1,057 302 206 (17) (171) (274) 64 79 109
Settlement loss (gain) -- -- 890 -- -- (1,470) -- -- --
Curtailment gain -- -- (861) -- -- (2,589) -- -- --
------- ------- ------- ----- ----- ------- ---- ---- ----
Net periodic benefit
cost (income) $ 1,559 $ (87) $ (423) $ 161 $ 117 $(3,796) $396 $623 $592
======= ======= ======= ===== ===== ======= ==== ==== ====
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $91,169, $87,111, and $62,509 respectively, as of
September 30, 2002, $6,961, $6,914, and $1,003 respectively, as of December 31,
2001 and $6,514, $6,047, and $1,055 respectively, as of December 31, 2000.
NOTE 10. INCOME TAXES
The provisions for federal and state income taxes attributable to income from
continuing operations consist of:
2002 2001 2000
---- ---- ----
Current tax expense (benefit):
Federal $ 710 $(4,950) $ 723
State 1 (942) 560
Foreign 462 71 181
------- ------- ------
1,173 (5,821) 1,464
Deferred tax expense 752 1,430 4,965
------- ------- ------
Total tax expense (benefit) $ 1,925 $(4,391) $6,429
======= ======= ======
The Company has a receivable for federal income taxes of $8,089 as of
September 30, 2002 and $5,951 as of December 31, 2001. Taxes payables of $200
were recorded as of December 31, 2000.
2002 2001 2000
------- -------- --------
Earnings (loss) before income taxes from continuing
operations $ 5,493 $(12,801) $ 17,095
------- -------- --------
Tax provision (benefit) computed at statutory rate 1,942 (4,480) 5,983
Increase (reduction) in taxes due to:
Impact of foreign losses for which a current tax
benefit is not available 232 71 181
State income taxes (net of federal tax benefit) 1 (612) 364
Goodwill amortization 11 8 8
Foreign sales corporation (35) (140) (155)
Life insurance (2) (104) (41)
Non-deductible meals and entertainment 98 120 135
Tax credits (232) (71) (120)
Change in prior year income tax estimate 266 662 --
Miscellaneous (59) 155 74
Impact of foreign tax rates (297) -- --
------- -------- --------
Actual tax provision (benefit) $ 1,925 $ (4,391) $ 6,429
======= ======== ========
The components of the net deferred tax asset as of September 30, 2002, December
31, 2001 and December 31, 2000 were as follows:
2002 2001 2000
-------- -------- --------
DEFERRED TAX ASSETS:
Allowance for doubtful accounts $ 472 $ 2,018 $ 481
Inventory, principally due to additional cost
inventoried for tax purposes 1,181 1,270 1,001
Intangibles (152) --
Property, plant, and equipment 1,250 405 (256)
Workers' compensation 1,199 1,417 3,383
Product liability 767 1,085 1,251
Deferred compensation 2,800 2,791 1,108
Accrued vacation 159 30 29
Incurred, but not reported 314 322 333
Pension liability 8,930 (2,661) (1,336)
Postretirement benefits other than pensions 1,414 1,506 2,797
Environmental reserves 1,054 2,436 2,890
Severance reserves 87 110 438
Promotional allowances 1,638 1,535 1,675
Net operating loss carry forward and tax credits 14,012 3,450 459
Other liabilities and reserves (7) 92 2,504
-------- -------- --------
Gross deferred tax assets 35,118 15,806 16,757
-------- -------- --------
Valuation allowance (6,444) -- --
-------- -------- --------
Total deferred tax assets 28,674 15,806 16,757
-------- -------- --------
DEFERRED TAX LIABILITIES:
Other deferred liabilities -- -- 96
-------- -------- --------
Total deferred tax liabilities -- -- 96
-------- -------- --------
Net deferred tax asset $ 28,674 $ 15,806 $ 16,661
======== ======== ========
Net operating losses of $29,289 expire on varying dates between 2017 and 2022.
Foreign operating losses of $2,961 expire in 2007. State net operating losses of
$459 expire on varying dates between 2004 and 2022. Tax credits of $840 expire
through varying dates between 2003 and 2017.
The valuation allowance for deferred tax assets as of September 30, 2002 and
December 31, 2001 and 2000 were $6,444, $0 and $0, respectively. The valuation
allowance changed for the period ended September 30, 2002 by $6,444, $6,322 of
the allowance was related to deferred tax assets acquired in the Gen-X
acquisition. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. In order
to fully realize the deferred tax asset, the Company will need to generate
future taxable income of approximately $29,289 prior to the expiration of the
net operating loss carryforwards in 2022. Taxable income (losses) for the
periods ended September 30, 2002, December 31, 2001 and December 31, 2000 were
($6,060), ($25,093) and $20,336, respectively. Based upon the level of
historical taxable income and projections for future taxable income over the
periods, which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at September 30, 2002. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. To the extent that the amount of the deferred
tax asset realized differs from these estimates and the deferred tax asset was
acquired in the Gen-X Sports acquisition, adjustments to the deferred tax assets
will be reflected as a change in goodwill.
The Company and its domestic subsidiaries file a consolidated U.S. federal
income tax return. Such returns have been audited or settled through the year
1996.
NOTE 11. CREDIT CONCENTRATION
Kmart is the Company's largest customer comprising 22% of consolidated net sales
in the first nine months of 2002 down from 38% and 28% for the years ended
December 31, 2001 and 2000, respectively. In January 2002, Kmart Corporation
filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Pre-bankruptcy receivables from Kmart were sold
during the second quarter 2002 and cash recovered consistent with previously
established reserves. The Company's next largest customer made up 20%, 18%, and
21% of consolidated net sales in the first nine months of 2002 and in the years
ended December 31, 2001 and 2000, respectively.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing and warehouse facilities, office space,
machinery, and vehicles under cancelable and non-cancelable operating leases,
most of which expire within ten years and may be renewed by the Company. Rent
expense under such arrangements totaled approximately $2,568, $3,488, and
$4,205, for the nine months ended September 30, 2002 and for the years ended
December 31, 2001 and 2000, respectively.
Future minimum rental commitments under non-cancelable operating leases at
September 30, 2002 are as follows:
Years Ended
-----------
2003 $ 4,396
2004 3,615
2005 2,809
2006 1,260
2007 502
Thereafter 731
--------
Total minimum $ 13,313
========
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 cases had been stayed for a variety of reasons, including a number of
demurrers and writs taken in the Appellate Division, relating primarily to
the California Public Utilities Commission ("PUC") investigation described
below. The resulting Appellate Division decisions were reviewed by the
California Supreme Court, which ruled in February 2002. The cases have
been reactivated as a result of the California Supreme Court's decision,
with the trial level Coordination Judge holding a number of Status
Conferences on all of the cases, at which conferences issues pertaining to
the three master complaints (two of which include the Company as a
defendant), preliminary demurrers to such master complaints, case
management orders and initial written discovery were discussed. As noted
by the matters being discussed with the Court, the toxic tort cases are in
their initial stages. Thus, it is impossible to currently predict the
outcome of any of the actions.
The Company, along with the other PRPs for the Baldwin Park Operable Unit
of the San Gabriel Valley Superfund Site (the "BPOU"), has also been named
in four civil lawsuits filed by water purveyors. The water purveyor
lawsuits allege CERCLA, property damage, nuisance, trespass and other
claims related to the contaminated groundwater in the BPOU (collectively,
the "Water Entity Cases"). The Company was named as a direct defendant by
the water purveyor in two of these cases, and was added as a third party
defendant in the two others by Aerojet General Corporation, which, in
those cases, was the only PRP sued by the water purveyors. Each of the
Water Entity Cases have been settled through the entry of the Project
Agreement. According to the terms of the Project Agreement, the Water
Entity Cases, which are in their initial stages have been, or will
imminently be, dismissed without prejudice.
On March 12, 1998, the PUC commenced an investigation in response to the
allegations in the toxic tort actions that "drinking water delivered by
the water utilities caused death and personal injury to customers." The
PUC's inquiry addressed two broad issues central to these allegations: 1)
"whether current water quality regulation adequately protects the public
health;" and 2) "whether respondent utilities are (and for the past 25
years have been) complying with existing drinking water regulation." On
November 2, 2000, the PUC issued its Final Opinion and Order Resolving
Substantive Water Quality Issues. Significantly, the Order finds, in
pertinent part, that: 1) "existing maximum contaminant level ("MCLs") and
action level ("ALs") established by the DHS are adequate to
protect the public health;" 2) "there is a significant margin of safety
when MCLs are calculated so that the detection of carcinogenic
contaminants above MCLs that were reported in this investigation are
unlikely to pose a health risk;" 3) based upon its comprehensive review of
25 years of utility compliance records, that for all periods when MCLs and
ALs for specific chemicals were in effect, the PUC regulated water
companies complied with DHS testing requirements and advisories, and the
water served by the water utilities was not harmful or dangerous to
health; and 4) with regard to the period before the adoption by DHS of
MCLs and ALs, a further limited investigation by the PUC Water Division
will be conducted.
Based upon information presently available, such future costs are not
expected to have a material adverse effect on the Company's financial
condition, liquidity, or its ongoing results of operations. However, such
costs could be material to results of operations in a future period.
In Current Reports on Form 8-K filed October 29, 2002, November 8, 2002
and November 14, 2002, Huffy Corporation reported on the status of two
cases involving its former subsidiary, Washington Inventory Service
("WIS"), which was acquired from Huffy Corporation by WIS Holdings Corp.
on November 3, 2000.
The two cases are Perez v. Washington Inventory Service, pending in the
Los Angeles, California Superior Court, and Miranda v. Washington
Inventory Service, pending in the U.S. District Court for the Central
District of California. The Perez case has been certified as a class
action, and the plaintiffs are seeking class action certification in the
Miranda case. Huffy Corporation is not a named defendant in the Perez case
but is a named defendant in the Miranda case. Huffy Corporation is
potentially obligated to indemnify WIS Holdings Corp. for some portion of
any liability it or WIS incurs in the Perez case and has potential
liability in the Miranda case for the period it owned WIS.
In the Form 8-K filed on October 29, 2002, Huffy Corporation reported that
a settlement mediation session in the Perez case had ended without
resolution of that case. Huffy Corporation further reported that it could
not then predict the likely outcome of either case, or the materiality of
the outcome to Huffy Corporation under its indemnity obligations to WIS
Holdings Corp. and WIS.
During the week of November 4, 2002 a series of communications among the
interested parties' counsel, including Huffy Corporation's counsel, took
place, culminating in face to face settlement negotiations. These
negotiations were preliminary in nature, in anticipation of a formal
mediation session scheduled to occur on November 18, 2002. Based on
progress made in these preliminary negotiations, in the Form 8-K filed on
November 8, 2002 Huffy Corporation reported that its obligation to
indemnify WIS Holdings Corp. and/or WIS was likely to be material in
amount.
The November 18, 2002 formal mediation session occurred as scheduled.
Resolution of Huffy Corporation's indemnification obligations to WIS and
WIS Holdings Corp. and its potential liability under the Miranda case and
other asserted claims was dependent upon an acceptable outcome of the
mediation. In the November 18 mediation session, the parties' tentative
settlement was approved by the mediator, a former justice of the
California Supreme Court. Although approved by the mediator, the tentative
settlement between WIS and the plaintiffs is subject to completion of
formal documentation as well as a reasonableness hearing before the court
and final court approval.
Huffy Corporation currently believes that its maximum exposure for
settlement of these cases, related claims, and indemnification of WIS and
WIS Holdings Corp. will not exceed $7.7 million, provided that the
litigation settlement occurs on the currently pending basis. However, at
this time, the Company is unable to reasonably estimate the potential
losses in these cases, and in accordance with accounting principles
generally accepted in the United States of America, has therefore not
recorded any reserve for these cases in the consolidated financial
statements for the period ended September 30, 2002. Any settlement
associated with these suits will be reflected in discontinued operations.
NOTE 13. 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 $5,010 ($8,676 before
discounting at 7.25%) at September 30, 2002. Of that amount, the Company has a
deposit of $3,660 that is held in escrow under the terms of the settlement
agreement. Amounts in escrow will be used to fund future costs and will serve as
a long-term performance assurance pending the completion of remediation.
Management expects that the expenditures relating to costs currently accrued
will be made over a period of fourteen years. As a result of factors, such as
the continuing evolution of environmental laws and regulatory requirements, the
availability and application of technology, the identification of presently
unknown remediation sites, and the allocation of costs among potentially
responsible parties, estimated costs for future environmental compliance and
remediation are necessarily imprecise and it is not possible to fully predict
the amount or timing of future environmental remediation costs which may
subsequently be determined.
Based upon information presently available, such future costs are not expected
to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
2002 2001 2000
------ ------ ------
Total expenditures $2,980 $2,471 $1,031
Expenditures charged to environmental accrual 2,111 1,092 450
Environmental accrual 5,010 6,959 8,050
Escrow Account $3,660 -- --
NOTE 14. ACCOUNTING PRONOUNCEMENTS ISSUED NOT IMPLEMENTED
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, Accounting for Asset Retirement Obligation ("SFAS No. 143"), which will
be effective for the Company beginning January 1, 2003. SFAS No. 143 addresses
the financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"), which will be effective for the Company beginning January 1, 2003. SFAS
No.145 rescinds SFAS Nos. 4, 44, 64 and amends SFAS No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No.146"), which will be effective for the
Company beginning January 1, 2003. SFAS No.146 requires that a liability for a
cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred unless the liability is for one-time termination
benefits incurred over time. SFAS No. 146 nullifies Emerging Issues Task Force
Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Costs Associated with a
Restructuring).
The Company has assessed the impact of SFAS Nos. 143, 145, and 146, and
estimates that the impact of these standards will not be material to the
Company's financial condition, results of operations or liquidity.
NOTE 15: DISCONTINUED OPERATIONS
On November 3, 2000, the Company sold the stock of its Washington Inventory
Service (WIS) subsidiary to WIS Acquisition Corp., a subsidiary of WIS Holdings
Corp., for $84,750 subject to certain post-closing adjustments. Earnings from
discontinued operations in 2000 were $7,976 ($4,537 after tax). The gain on
disposal of discontinued operations was $36,863 ($20,781 after tax). The results
for Washington Inventory Service have been classified as discontinued operations
in the Consolidated Statements of Operations and Cash Flows for the year ended
December 31, 2000.
During the quarter ended September 30, 2002, the Company recognized expenses of
$1,166 ($723 after tax), including product liability and other contractually
indemnified liabilities related to WIS. These expenses are included in the
Consolidated Statements of Operations and Cash Flows as Loss from Discontinued
Operations for the nine months ended September 30, 2002.
NOTE 16: EXTRAORDINARY ITEM
Net extraordinary charges of $1,573 ($998 after taxes) were recorded in 2000
from the early extinguishment of debt. Unamortized financing costs of $2,189
were offset by interest forgiven on the subordinated note of $404 and early
repayment debt forgiveness of $212 on an economic development grant.
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the nine months ended September 30, 2002, and the
years ended December 31, 2001 and 2000 as follows:
Nine
Months
1st Quarter 2nd Quarter 3rd Quarter Ended [1]
----------- ----------- ----------- ---------
2002
Net sales $ 70,385 $ 93,413 $ 83,028 $ 246,826
Gross profit 12,001 17,031 15,955 44,987
--------- --------- --------- ---------
Earnings from continuing operations 624 1,275 1,669 3,568
Discontinued operations -- -- (723) (723)
--------- --------- --------- ---------
Net earnings 624 1,275 946 2,845
EARNINGS PER COMMON SHARE:
Basic
Earnings from continuing operations $ 0.06 $ 0.12 $ 0.14 $ 0.33
Discontinued operations -- -- (0.06) (0.07)
--------- --------- --------- ---------
Net earnings per common share $ 0.06 $ 0.12 $ 0.08 $ 0.26
Diluted
Earnings from continuing operations $ 0.06 $ 0.12 $ 0.14 $ 0.32
Discontinued operations -- -- (0.06) (0.06)
--------- --------- --------- ---------
Net earnings per common share $ 0.06 $ 0.12 $ 0.08 $ 0.26
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total[1]
----------- ----------- ----------- ----------- --------
2001
Net sales $ 81,243 $ 86,864 $ 77,945 $ 85,086 $ 331,138
Gross profit 11,635 12,077 7,677 8,561 39,950
--------- --------- --------- --------- ---------
Net earnings (loss) 994 768 (2,801) (7,371) (8,410)
EARNINGS PER COMMON SHARE:
Basic
Net earnings (loss) $ 0.10 $ 0.07 $ (0.27) $ (0.71) $ (0.82)
Diluted
Net earnings (loss) $ 0.10 $ 0.07 $ (0.27) $ (0.71) $ (0.82)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total[1]
----------- ----------- ----------- ----------- --------
2000
Net sales $ 100,068 $ 122,029 $ 123,875 $ 142,209 $ 488,181
Gross profit 14,762 17,064 21,841 27,675 81,342
--------- --------- --------- --------- ---------
Earnings (loss) from continuing operations (1,121) 636 4,869 6,282 10,666
Discontinued operations 829 3,875 160 20,454 25,318
Extraordinary gain (loss) (848) -- 213 (363) (998)
--------- --------- --------- --------- ---------
Net earnings (loss) (1,140) 4,511 5,242 26,373 34,986
EARNINGS PER COMMON SHARE:
Basic
Earnings (loss) from continuing operations $ (0.11) $ 0.06 $ 0.48 $ 0.62 $ 1.05
Discontinued operations 0.08 0.38 0.01 2.01 2.48
Extraordinary gain (loss) (0.08) -- 0.02 (0.04) (0.10)
--------- --------- --------- --------- ---------
Net earnings (loss) $ (0.11) $ 0.44 $ 0.51 $ 2.59 $ 3.43
Diluted
Earnings (loss) from continuing operations $ (0.11) $ 0.06 $ 0.47 $ 0.61 $ 1.03
Discontinued operations 0.08 0.38 0.01 1.97 2.45
Extraordinary gain (loss) (0.08) -- 0.02 (0.04) (0.09)
--------- --------- --------- --------- ---------
Net earnings (loss) $ (0.11) $ 0.44 $ 0.50 $ 2.54 $ 3.39
[1] Quarterly per share amounts are computed independently for each quarter
and the full year based upon the respective weighted average number of
common shares outstanding and may not equal the total for the year.
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL DATA
The table below presents selected financial data from the Huffy and
Gen-X unaudited pro forma condensed combining statements of operations for the
nine months ended September 30, 2002. The unaudited pro forma condensed
combining statements of operations are presented as if the merger had occurred
on January 1, 2002. This information should be read in conjunction with the
unaudited pro forma condensed combining financial statements and related notes
and the historical financial statements and related notes of Huffy and Gen-X
included in or incorporated by reference into this joint proxy
statement/prospectus.
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 Year Ended September 30, 2002
Pro Forma
Gen-X Sports Adjustments related Pro Forma
Huffy Corporation Inc. to the Acquisition Combined
---------------------------------------------------------------------
Net Sales $ 246,826 $ 93,644 $ -- $ 340,470
Gross Profit 44,987 23,037 106 (1) 68,130
Selling, general, and
administrative expenses 37,201 17,453 445 (5) 55,099
Operating income 7,786 5,584 (339) 13,031
Other expense 1,385 826 -- 2,211
Interest expense, net 908 3,023 2,069 (2) 2,977
(3,023)(3)
----------------------------------------------------------------------
Earnings before income taxes 5,493 1,735 615 7,843
Income tax expense 1,925 355 269 (4) 2,549
----------------------------------------------------------------------
Earnings from continuing
operations $ 3,568 $ 1,380 $ 346 $ 5,294
======================================================================
Earnings from continuing operations per common share
Basic $ 0.34 $ 0.36
Diluted $ 0.33 $ 0.36
Shares used in calculation of earnings per share
Basic 10,438,647 4,161,241 14,599,888
Diluted 10,695,251 4,161,241 14,856,492
See accompanying footnotes.
Notes to Unaudited Pro Forma Condensed Combining Statement of Operations
(1) To record the effect on depreciation of adjusting the value of property,
plant and equipment to fair value.
(2) To record the change in interest expense from the use of Huffy's cash and
borrowing lines to finance the acquisition purchase price of $19,001, to
repay Gen-X and Gen-X Ontario debt, and to redeem and purchase outstanding
preferred stock for $4,970. The incremental interest on the weighted
average borrowing of $35,515 is recorded at Huffy's estimated weighted
average borrowing rate of 5.4%.
(3) To eliminate the Gen-X interest expense.
(4) To record the income tax expense adjusting the effective tax rate for the
combined entity to the expected blended tax rate of 32.5%.
(5) To amortize patents and license agreements acquired over their expected
useful lives.