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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________
TO __________
COMMISSION FILE NUMBER 1-5325
HUFFY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 31-0326270
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
225 BYERS ROAD, MIAMISBURG, OHIO 45342
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (937) 866-6251
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $1.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant, as of June 27, 2003, was $105,365,477.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of June 27, 2003, was 15,052,211.
DOCUMENTS INCORPORATED BY REFERENCE
The Huffy Corporation Proxy Statement for its Annual Meeting of Shareholders on
April 22, 2004. Only such portions of the Proxy Statement as are specifically
incorporated by reference under Parts II and III of this Report shall be deemed
filed as part of this Report.
"Index to Exhibits" at page 51 of this Report
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
INDEPENDENT AUDITORS' CONSENT
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
INDEX TO EXHIBITS
2
PART I
ITEM 1. BUSINESS
Huffy Corporation, an Ohio corporation formed in 1928, and its subsidiaries
(collectively called "Huffy" or the "Company") are engaged in the sporting goods
segment in the design and sale of wheeled and related products, including
bicycles, scooters, tricycles, skateboards and inline skates; golf equipment;
hockey equipment, snowboards and licensing. Also within the sporting goods
segment, the Company designs, manufactures and markets basketball backboards and
accessories and purchases excess sports equipment and accessories and resells
these products to sporting goods retailers. In addition, the Company operates a
service segment that is involved in the assembly and repair of a variety of
wheeled and other products and merchandising services to retail customers. The
Company's executive offices are located in Miamisburg, Ohio and its principal
business offices and/or manufacturing facilities are located in Miamisburg and
Springboro, Ohio; Sussex, Wisconsin; and Toronto, Ontario, Canada.
The general development of the business is discussed in more detail below.
The Company is reporting its operations as two segments, sporting goods products
and services to retailers. This change from a single segment was adopted in 2002
as a result of a shift in the mix of Huffy Service Solutions, Inc. business
toward assembly services not directly related to the sporting goods industry, as
well as the acquisition of McCalla Company and its subsidiaries and the Gen-X
Sports Inc. businesses. Information regarding revenues from unaffiliated
customers, operating profit and total assets for each of the Company's reporting
segments is contained in the Notes to Consolidated Financial Statements included
in this Annual Report on Form 10-K.
SPORTING GOODS SEGMENT
Huffy Bicycle Company, Huffy Sports Company and Gen-X Sports Inc. operate as the
sporting goods segment, providing consumer products. Principal products and
services include wheeled and related products, basketball backboards, balls, and
related products, snowboards, golf equipment, hockey equipment, excess sports
equipment, and licensing. Sales of wheeled and related products within such
segment represented 40.0 percent, 44.4 percent and 55.8 percent of consolidated
revenues of the Company for the years ended December 31, 2003, 2002, and 2001.
Sales of portable basketball backboards, poles, goals, and balls within such
segment represented 15.6 percent, 20.4 percent, and 20.4 percent of consolidated
revenues of the Company for the years ended December 31, 2003, 2002, and 2001.
PRODUCTS, MARKETING AND DISTRIBUTION
The Huffy branded wheeled products, including Huffy(R) bicycles, scooters, and
tricycles, hold a leading market position in the United States. Inline skates
and skateboards are also included in the wheeled product group sold under such
brands as Dukes, Rage and Oxygen(R), which is licensed from a third party, and
Ultra Wheels(R). In 2001, Huffy Bicycle Company terminated, effective May 2002,
its shelter services agreement in Mexico pursuant to which it imported wheeled
products. Huffy Bicycle Company imports Huffy wheeled products from Southeast
Asia including Taiwan and China. Included in the Huffy(R) product line are adult
all-purpose bicycles; adult all-terrain bicycles; a series of innovative boys'
and girls' 20" bicycles; a series of popular children's 12" and 16" sidewalk
bicycles; children's ride-on toys, including the Green Machine(R), scooters and
tricycles. In July 1999, the Company acquired the assets of American Sports
Design Company, which markets and distributes high-end bicycles primarily
available over the World Wide Web, through distributors and directly from the
Company's advertised order center. In 2002, Huffy agreed to license the
trademarks owned by American Sports Design Company under which such bicycles are
sold and to sell the equipment and inventory associated with such American
Sports Design Company business to the licensee. Huffy(R) and Gen-X wheeled
products are advertised and are sold predominantly through United States and
Canadian national and regional high volume retailers, a distribution network
accounting for approximately 85 percent of all wheeled products sold in the
United States. Approximately 80 percent of Huffy Bicycle Company's wheeled
products are sold under the Huffy(R) brand name with the balance being sold
under private label or other Company brands.
Huffy Sports Company, a division of the Company located in Sussex, Wisconsin, is
a leading supplier of basketball backboards, poles, goals, and related products,
basketball, football, and soccer balls, indoor golf putting greens and indoor
games and sports tables for use at home. Huffy Sports Company products, many of
which bear the logo of the National Basketball Association (NBA(R)) as well as
the Huffy Sports(R) trademark, are sold predominately through national and
regional high volume retailers in the United States.
Gen-X Sports Inc., a subsidiary of Huffy Corporation was acquired on September
19, 2002. Gen-X is headquartered in Toronto, Ontario, Canada, and is a leading
supplier of sporting goods, including golf equipment, hockey equipment,
snowboards, inline skates and skateboards, and is a broker of excess
merchandise, primarily in North America, and also markets product
internationally, predominately in Europe. Prior to December 2003, Gen-X Sports
Inc. also was a supplier of skis and accessories
3
under the Volant(R) brand name. In December 2003, Gen-X Sports Inc. sold the
Volant ski business assets to Amer Group plc and its US affiliate. Gen-X imports
the majority of its products from China and Taiwan. Gen-X markets products under
numerous brand names within the sporting goods segment, including LTD(R),
Lamar(R), Sims(R), Tommy Armour(R), Ram(R), Teardrop(R), Zebra(R), Hespeler(R),
Ultra Wheels(R), Rage(R), and Dukes(R). Gen-X Sports Inc. markets these products
through United States and Canadian national and regional high volume retailers,
as well as specialty sporting goods outlets.
RAW MATERIALS
Basic materials such as raw steel, steel and aluminum tubing, plastic, resins,
and welding materials used in the Huffy Sports Company domestic manufacturing
operations are purchased primarily from domestic sources. Alternate sources are
available for all critical products and components, but the sudden loss of any
major supplier could cause a temporary negative effect on Huffy Sports Company's
operations.
PATENTS, TRADEMARKS AND LICENSES
The patents, trademarks (including the registered trademarks "Huffy" and "Huffy
Sports"), licenses (including the license to use the NBA(R) logo) and other
proprietary rights of the companies used in the sporting goods segment are
deemed important to the Company. Generally, the NBA license associated with the
Huffy Sports products has five-year terms which are renegotiated upon
termination. With the acquisition of Gen-X, the Company acquired rights in
numerous trademarks and patents relating to its various sporting goods products.
The Company has licensed certain of these intellectual property rights to third
parties and intends to expand its licensing program with the addition of such
marks. The loss by the Company of its rights under any individual patent,
trademark (other than "Huffy"), license or other proprietary right would not
have a material adverse effect on the Company. The Company's patents, by law,
have a limited life, and patent rights expire periodically. The loss of the
United States registered trademark "Huffy" could have a material adverse effect
on the Company. The Company has no reason to believe that anyone has rights to
either the United States "Huffy" trademark or the products for which the Company
uses such trademarks.
SEASONALITY AND INVENTORY
Due to the relatively short lapse of time between placement of orders for
products and shipments, the Company normally does not consider its backlog of
orders as significant. Because of rapid delivery requirements of their
customers, businesses in the sporting goods segment maintain sufficient
quantities of inventories of finished goods to meet their customers'
requirements. Sales of wheeled products are seasonal in that sales tend to be
higher in the Spring and Fall of each year. Basketball products tend to have
varying degrees of seasonality, none of which are significant to the operations
of the Company. Sales of winter sports equipment, including snowboards tend to
be higher in the Fall and Winter seasons, while golf products tend to have
higher demand during the Spring and Summer seasons. The excess merchandise
products tend to have minimal seasonal fluctuations.
COMPETITION AND CUSTOMERS
In the high volume retailer wheeled products business, Huffy Bicycle Company has
numerous competitors in the United States market, two of which are major
competitors. Even though competition in the bicycle industry is intense, Huffy
Bicycle Company believes that following its transformation from a single brand
manufacturer of bicycles to a multi-brand design, marketing and distribution
company, it is cost competitive in the high volume retailer wheeled products
market and that its decision to import, rather than manufacture, its wheeled
products allows it to profitably maintain a leading market position. Huffy
Bicycle Company's ability to provide its customers with low cost, innovative new
products has enabled it to maintain its market position despite the marketing
efforts of domestic competitors and competitors from Taiwan, China, and other
nations. Huffy Sports Company has several competitors of which one is currently
a major competitor. Huffy Sports Company maintains its competitive position by
offering its customers high quality, innovative products at competitive prices
and by supporting its products with outstanding customer service. Gen-X Sports
Inc. has numerous competitors in the markets in which it competes; six of which
are major competitors in golf, three of which are major competitors in action
sports, four of which are major competitors in hockey equipment, and two of
which are major competitors in the snowboard equipment. Gen-X Sports maintains
its competitive position by offering its customers high quality, innovative
products at competitive prices and by supporting its products with outstanding
customer service. Sales to two customers, Wal-Mart and Kmart, aggregated over
ten percent or more of the Company's consolidated revenues from each such
customer for the year ended December 31, 2003, and the loss of one of these
customers could have a material adverse effect on the Company and its
subsidiaries as a whole.
Although to date the export business is not significant, the businesses within
the sporting goods segment participate in various foreign markets and are
actively involved in expanding export volume.
4
SERVICES TO RETAILERS SEGMENT
Huffy Service Solutions, Inc., formerly known as Huffy Service First, Inc.,
operates in the service segment providing in-store assembly, diagnostics and
repair, and re-call and merchandising services sold to retail customers. McCalla
Company, Creative Retail Services, Inc. and Creative Retail Services (Canada)
Inc., acquired in March of 2002, provide merchandising services, including cycle
and periodic product resets, stocking and sales training for a number of
well-known manufacturers and/or distributors serving Home Depot. The services to
retailers segment represented 20.7 percent, 23.6 percent and 23.8 percent of the
consolidated revenues of the Company for the years ended December 31, 2003,
2002, and 2001.
Huffy Service Solutions, Inc., a wholly-owned subsidiary of the Company,
headquartered in Miamisburg, Ohio, with additional offices in Alpharetta,
Georgia, Mooresville, North Carolina and Toronto, Ontario, Canada, serves the
needs of major retailers in 50 states, Puerto Rico, Guam, the Virgin Islands and
Canada by providing in-store assembly and repair of bicycles and outdoor power
equipment, and in-store display services for a variety of products, including,
among other things, grills, physical fitness equipment, and furniture. Huffy
Service Solutions, Inc. is the only assembly service business of this kind
available to high volume retailers on a nationwide basis. Huffy Service
Solutions, Inc. also offers merchandising services (product resets and periodic
maintenance of displays) to manufacturers who supply high volume retailers. In
March 2002, Huffy Service First purchased McCalla Company and subsidiaries,
Creative Retail Services, Inc. and Creative Retail Services (Canada) Inc., which
together provide merchandising, including cycle and periodic product resets,
stocking and sales training for a number of well-known manufacturers and/or
distributors serving the Do-It-Yourself retail channel throughout North America.
McCalla Company and Creative Retail Services, Inc. are headquartered in
Alpharetta, Georgia and Creative Retail Services (Canada) Inc. has an office in
Toronto, Ontario, Canada.
SEASONALITY
The demand for services provided by Huffy Service Solutions, Inc. is seasonal in
that assembly service demand is generally strongest in Spring and at the Winter
holiday season. The McCalla companies provide merchandising services throughout
the year, with minimal seasonal fluctuations.
COMPETITION AND CUSTOMERS
Huffy Service Solutions, Inc. has numerous competitors in the United States
market, none of which is a major national competitor in the in-store and in-home
assembly service business and three of which are major competitors in the
merchandising services business. Huffy Service Solutions, Inc. believes it
remains competitive due to its nationwide network of operations, competitive
pricing and full service solution marketing approach and the recent ISO
registration of its Quality Management System, specifically its Training
Program. The McCalla companies have a number of competitors in the Home Center
channel and maintain their competitive position by providing excellent customer
service through a well-trained workforce positioned throughout North America.
OTHER ADDITIONAL INFORMATION REGARDING THE COMPANY'S BUSINESS
On March 16, 1999, Huffy sold substantially all of the assets of True Temper
Hardware Company and all of the shares of the capital stock of True Temper
Limited to an affiliate of U.S. Industries, Inc. On November 3, 2000, Huffy sold
all of the issued and outstanding shares of Washington Inventory Service to WIS
Holdings Corp., an affiliate of Sterling Investment Partners, L.P.
The Company's website address is www.huffy.com. The Company makes available free
of charge through a link provided at such website its Forms 10-K, 10-Q and 8-K
as well as any amendments thereto. Such reports are available as soon as
reasonably practicable after they are filed or furnished to the Securities and
Exchange Commission.
The number of persons employed full-time by the Company as of December 31, 2003,
was 1,068.
5
ITEM 2. PROPERTIES
Location and general character of the principal plants and other materially
important physical properties of the Company as of January 2, 2004.
Owned or
Expiration
Location Building Description Business Segment Area (Sq. Ft.) Date of Lease
- -------------------------------------------------------------------------------------------------------------------------------
Miamisburg, Ohio Offices, display and warehouse Sporting Goods and Services 47,000 2011(1)
facilities
(Corporate and Huffy Service
Solutions, Inc.)
Springboro, Ohio Offices and warehouse facility Sporting Goods 69,220 2005(2)
(Huffy Bicycle Company)
Sussex, Wisconsin Offices and manufacturing Sporting Goods 192,000 2009
(Huffy Sports Company)
Toronto, Ontario, Canada Offices, display and retail Sporting Goods 39,998 2011(3)
outlets
(Gen-X Sports Inc.)
Carson, California Warehouse facility Sporting Goods 466,703 2007(4)
(Huffy Bicycle Company and
Gen-X Sports Inc.)
Brampton, Ontario, Canada Warehouse facility Sporting Goods 70,424 2008(5)
(Gen-X Sports Inc.)
(1) Subject to two consecutive options to renew for additional terms of
five years each.
(2) Subject to one option to renew for an additional term of five years.
(3) Subject to one option to renew for an additional term of five years.
(4) The Company operates two warehouses in Carson, California. The first
warehouse is 292,900 square feet, and the lease expires in 2007; the
second is 105,654 square feet, and the lease expires in 2007. Each
lease is subject to two consecutive options to renew for additional
terms of five years.
(5) Subject to one option to renew for an additional term of three years.
All of the Company's facilities are in good condition and are considered
suitable for the purposes for which they are used. The Sussex, Wisconsin
manufacturing facility normally operates on two full shifts, with third shift
operations scheduled as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company along with numerous California water companies and other potentially
responsible parties ("PRPs") for the Baldwin Park Operable Unit of the San
Gabriel Valley Superfund have been named in fourteen civil lawsuits which allege
claims related to the contaminated groundwater in the Azusa, California area
(collectively, the "San Gabriel Cases").
The San Gabriel Cases had been stayed for a variety of reasons, including a
number of demurrers and writs taken in the Appellate Division, relating
primarily to the California Public Utilities Commission ("PUC") investigation
described below. The resulting Appellate Division decisions were reviewed by the
California Supreme Court, which ruled in February 2003. The cases have been
reactivated as a result of the California Supreme Court's decision, with the
trial level Coordination Judge holding a number of Status Conferences on all of
the cases, at which conferences issues pertaining to the three master complaints
(two of which include the Company as a defendant), demurrers to such master
complaints, case management orders, selection of "bellweather" plaintiffs,
initial written discovery, and hearings to resolve the PUC-related issues
remanded by the California Supreme Court were discussed. As noted by the matters
being discussed with the Court, the toxic tort cases are in their initial
stages. Thus, it is impossible to currently predict the outcome of any of the
actions.
6
The Company, along with the other PRPs for the Baldwin Park Operable Unit of the
San Gabriel Valley Superfund Site (the "BPOU"), was also named in four civil
lawsuits filed by water purveyors. The water purveyor lawsuits alleged CERCLA,
property damage, nuisance, trespass and other claims related to the contaminated
groundwater in the BPOU (collectively, the "Water Entity Cases"). The Company
was named as a direct defendant by the water purveyor in two of these cases, and
was added as a third party defendant in the two others by Aerojet General
Corporation, which, in those cases, was the only PRP sued by the water
purveyors. Each of the Water Entity Cases have been settled through the entry of
the Project Agreement. According to the terms of the Project Agreement, the
Water Entity Cases have been dismissed without prejudice. The Third Party
complaints filed by Aerojet in connection with the Water Entity Cases have also
been dismissed without prejudice, subject to Aerojet filing a new suit in the
event a final allocation agreement cannot be worked out.
On March 12, 1998, the PUC commenced an investigation in response to the
allegations in the toxic tort actions that "drinking water delivered by the
water utilities caused death and personal injury to customers." The PUC's
inquiry addressed two broad issues central to these allegations: 1) "whether
current water quality regulation adequately protects the public health;" and 2)
"whether respondent utilities are (and for the past 25 years have been)
complying with existing drinking water regulation." On November 2, 2000, the PUC
issued its Final Opinion and Order Resolving Substantive Water Quality Issues.
Significantly, the Order finds, in pertinent part, that: 1) "existing maximum
contaminant level ("MCLs") and action level ("ALs") established by the DHS are
adequate to protect the public health;" 2) "there is a significant margin of
safety when MCLs are calculated so that the detection of carcinogenic
contaminants above MCLs that were reported in this investigation are unlikely to
pose a health risk;" 3) based upon its comprehensive review of 25 years of
utility compliance records, that for all periods when MCLs and ALs for specific
chemicals were in effect, the PUC regulated water companies complied with DHS
testing requirements and advisories, and the water served by the water utilities
was not harmful or dangerous to health; and 4) with regard to the period before
the adoption by DHS of MCLs and ALs, a further limited investigation by the PUC
Water Division will be conducted.
Based upon information presently available, such future costs are not expected
to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Huffy Corporation Common Stock is traded on the New York Stock Exchange. The
quarterly high and low prices of Huffy Corporation Common Stock during the years
ended December 31, 2003 and 2002 were as follows:
Year Ended December 31, 2003 Year Ended December 31, 2002
---------------------------- ----------------------------
Common Stock Common Stock
Price Range Price Range
Quarter High Low Quarter High Low
- ------- ---- --- ------- ---- ---
First $7.12 $ 4.82 First $7.05 $ 5.95
Second 7.07 5.13 Second 8.90 6.98
Third 7.90 5.76 Third 8.60 5.48
Fourth 6.83 5.05 Fourth 7.98 5.97
As of December 31, 2003, there were 16,037,799 shares of Huffy Corporation
Common Stock outstanding and there were 3,172 shareholders of record. Management
estimates an additional 4,500 shareholders hold their stock in nominee name.
Trading volume of the Company's Common Stock during the twelve months ended
December 31, 2003 totaled 8,892,100 shares. The average number of common shares
outstanding during this period was approximately 15,349,763 shares. The Company
is limited in its ability to pay dividends pursuant to the terms of its Second
Amended and Restated Loan and Security Agreement, as amended.
The information to be set forth in the table entitled EQUITY COMPENSATION PLAN
INFORMATION is contained in the Company's Proxy Statement for its 2004 Annual
Meeting of Shareholders, and is hereby incorporated herein by reference.
7
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL AND OPERATING REVIEW (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net sales $437,676 $369,784 $331,138 $488,181 $422,866
Gross profit 78,258 65,573 39,950 81,342 36,723
Selling, general, and administrative expenses 79,872 57,374 47,607 53,763 56,158
Operating (loss) income (1,614) 8,199 (11,370) 26,865 (57,994)
Other (income) expense, net (730) 1,636 303 1,342 333
Interest expense, net 5,627 1,688 1,128 9,426 1,816
Earnings (loss) before income taxes (6,511) 4,875 (12,801) 16,097 (60,143)
Income tax expense (benefit) 966 540 (4,391) 6,429 (20,788)
Earnings (loss) from continuing operations (7,477) 4,335 (8,410) 9,668 (39,355)
Discontinued operations 22 (5,713) -- 25,318 6,067
Net earnings (loss) (7,455) (1,378) (8,410) 34,986 (33,288)
-------- -------- -------- -------- --------
Earnings (loss) per common share:
Basic Continuing operations (0.49) 0.36 (0.82) 1.05 (3.70)
Net earnings (loss) (0.49) (0.12) (0.82) 3.43 (3.13)
Diluted Continuing operations (0.49) 0.36 (0.82) 1.03 (3.70)
Net earnings (loss) (0.49) (0.12) (0.82) 3.39 (3.13)
Common dividends declared -- -- -- -- 2,869
Common dividends per share -- -- -- -- 0.26
Capital expenditures for plant and equipment 5,901 3,144 2,553 2,510 6,444
Weighted average common share outstanding:
Basic 15,350 11,833 10,298 10,187 10,642
Diluted 15,350 11,979 10,298 10,320 10,642
-------- -------- -------- -------- --------
FINANCIAL POSITION AT YEAR END
Total assets 292,971 281,092 145,485 180,493 214,283
Working capital 676 302 44,376 57,642 56,636
Net investment in plant and equipment 16,799 15,511 9,267 12,680 19,028
Current Portion of Long-Term Debt 80,402 59,327 -- 17,656 21,902
Long-term obligations 542 317 -- -- 51,348
Shareholders' equity 72,656 71,747 65,602 73,131 37,482
Equity per share outstanding 4.53 4.90 6.32 7.15 3.68
-------- -------- -------- -------- --------
CASH FLOWS
Net cash provided by (used in) continuing operating
activities (18,419) (1,572) 40,786 (16,541) 12,239
Net cash provided by (used in) discontinued operations 22 (5,713) -- 60,902 75,402
Net cash provided by (used in) operating activities (18,397) (7,285) 40,786 44,361 87,641
Net cash provided by (used in) investing activities (7,074) (26,298) (2,549) 4,867 (7,644)
Net cash provided by (used in) financing activities 21,484 12,461 (16,030) (65,084) (77,641)
Net change in cash and cash equivalents (3,987) (21,122) 22,207 (15,856) 2,356
-------- -------- -------- -------- --------
PERFORMANCE MEASUREMENTS
Earnings from continuing operations as a % of net
sales N/A 1.2% N/A 2.0% N/A
Average working capital turnover 5.1 4.9 5.9 8.1 5.3
Return on net assets N/A 4.3% N/A 15.4% N/A
Return on beginning shareholders' equity N/A N/A N/A 93.8% N/A
Current ratio 1.0 1.0 1.7 1.6 1.5
Total long term debt/total capital 25.6% 7.2% 0.0% 0.0% 61.7%
Number of common shareholders 3,172 3,223 3,211 3,271 3,250
-------- -------- -------- -------- --------
N/A - Not Applicable.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in thousands, except per share data)
Overview
Huffy Corporation is comprised of two business segments, the Sporting Goods
Segment, and the Services to Retailers Segment. The Sporting Goods segment
designs and markets sporting goods product for sales through retail outlets. The
primary products distributed by this segment are wheeled and related products,
basketball backboards, balls, and related products, snow boards, golf equipment,
hockey equipment, excess sports equipment and licensing. Sales of wheeled and
related products are the single largest product line, representing approximately
40.0% of total annual revenues of Huffy Corporation for the year ended December
31, 2003.
The primary operating locations for the Sporting Goods Segment are Springboro,
Ohio; Sussex, Wisconsin; and Toronto Ontario. The Company holds a leading market
position in the United States in the distribution of wheeled products such as
bicycles, scooters, and tricycles. The majority of wheeled products are sold
under the Huffy(R) brand name, (approximately 80%). The Company is also a
leading supplier of basketball backboards, poles, goals and related products
sold under the Huffy Sports brand name. Many of these products also bear the
logo of the National Basketball League.
The remainder of the Sporting Goods Segment product lines includes golf, hockey,
and snow boards are designed and marketed from the Company's facility in
Toronto, Ontario, and are sold under a variety of brand names such as Tommy
Armour(R), Oxygen(R), Dukes(R), Rage(R), Sims(R), Hespeler(R), etc.
The Company's Sporting Goods Segment tends to operate on a seasonal pattern,
with its peak operating periods being the spring and the fall.
The Services to Retail Segment, operates in the service segment providing
in-store assembly, diagnostics, repair, and recall and merchandising services
sold to retail customers. The services to retailers segment represented
approximately 21.0% of the consolidated revenues of the Company for the year
2003. The services to retailers business is conducted by a wholly owned
subsidiary of Huffy Corporation, Huffy Service Solutions, Inc. located in
Miamisburg, Ohio, with additional offices in Alpharetta, Georgia; Mooresville,
North Carolina; and Toronto, Ontario.
Huffy Service Solutions serves the needs of retailers in 50 states, Puerto Rico,
Guam, the Virgin Islands and Canada, providing in-store assembly and repair of
products such as bicycles, outdoor power equipment, gas grills, and a variety of
other products including in-store display services.
The Services to Retailers business segment tends to be seasonal, with the
highest volume periods being the spring and the winter season.
The Company primarily markets goods and services to retail customers.
Consolidation of the retail segment over the past few years has increased the
competition among suppliers for each segment of business. In addition, in both
of its business segments, the Company competes against numerous suppliers for
its portions of the market. In such a market, price competition is heavy, and
cost competitiveness is key to success. Huffy Corporation focuses significant
effort on maintaining a structure that is competitive both with respect to
product cost and organization structure.
On February 17, 2004, the Company announced a plan to consolidate the
management, sales, marketing, procurement, logistics, and customer service
functions of its Sporting Goods segment. Management believes that the
consolidation of these functions within the sporting goods segment will position
the Company to better serve its customers. This consolidation will result in a
reduction of approximately twenty percent, or more than one hundred people in
the existing sporting goods workforce, and will result in restructuring expense
of approximately $4,000 to $6,000 in 2004. The Service to Retail segment will
continue to operate as an independent business under its current management.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 TO THE YEAR ENDED DECEMBER 31,
2002
For the year ended December 31, 2003, Huffy Corporation ("Huffy" or "Company")
had a net loss of $7,455, or $0.49 per common share compared to a net loss for
the same period in 2002 of $1,378, or $0.12 per common share. Prior year results
include the post-acquisition earnings from Gen-X Sports Inc., acquired on
September 19, 2002.
Results from continuing operations for the year ended December 31, 2003 was a
net loss of $7,477, or $0.49 per common share, compared to net income of $4,335,
or $0.36 per common share in 2002.
9
Net Sales
Net sales in 2003 were $437,676, an increase of $67,892 or 18.4% compared to net
sales of $369,784 for the same period in 2002. This sales increase was almost
entirely the result of the acquisition of Gen-X Sports Inc. on September 19,
2002. The 2003 consolidated sales include a full twelve months of sales for the
Gen-X product lines compared to a partial year in 2002, from the September 19th
acquisition date through year end. The 2002 to 2003 increase in sales for the
Gen-X Sports product lines was $68,207. In addition to the Gen-X Sports Inc.
impact, the 2002 to 2003 sales comparison was influenced by the following less
significant factors. In the Company's basketball product line, 2003 sales were
below the prior year by $6,800 reflecting a decline in consumer demand for
sporting goods throughout 2003. Sales for the bicycle product line and the
Services to Retailers segment both improved during 2003, when compared to 2002
results by $3,281 and $3,766 respectively. In combination, the sales increase in
the bicycle and service segment were sufficient to offset the year over year
sales decline in the basketball product line.
Gross Profit
Consolidated gross profit for 2003 was $78,258, or 17.9% of net sales as
compared to $65,573 or 17.7% of net sales for the same period in 2002, a $12,685
improvement. The primary reason for this improvement was the inclusion of the
Gen-X Sports Inc. gross margin in the 2003 results for the entire year versus
2002 when Gen-X Sports Inc. was included for a partial year only, from the
September 19th acquisition date through year end. Of the annual increase in
gross margin, $15,688 was contributed by Gen-X, including approximately $3,200
as the result of year over year margin improvement. The second reason for the
improvement in year over year gross margin occurred in the Services to Retailers
segment, where 2003 gross margin increased over the same period in 2002, by
$4,257, or 4.7% of net sales. This increase is reflective of an improvement in
field efficiency, and a successful cost reduction program implemented during
2003. In the bicycle product line, gross margin was slightly lower during 2003
than in 2002, a decrease of $2,331 primarily as a result of unfavorable sales
mix. This decline is the result of a change in the mix of products sold, with a
larger portion of 2003's sales going to opening price point and juvenile
products which have a lower gross margin. The basketball product line
experienced a decline in gross margin of $5,204 during 2003 that was primarily
influenced by lowered year over year sales volume, but was also impacted by
increased market demand for opening price point product.
Selling, General and Administrative Expenses
Selling, general and administrative expense of $79,872, for the year ended
December 31, 2003 was higher than the $57,374 experienced during the same period
in 2002. The primary reason for the year over year increase of $22,498, in SG&A
expenses was the inclusion of the Gen-X Sports Inc. selling and administrative
support costs in consolidated operating results of the full year during 2003,
versus only a partial year in 2002 from the September 19th acquisition date
through December 31, 2002, an increase of $26,369. In addition to the Gen-X
Sports Inc. driven expense increases, 2003 versus 2002 selling, general and
administrative expenses comparisons were unfavorably impacted by economy driven
cost escalation. The major areas where such cost increases occurred were
pensions, insurance, and insurance related products. The cost of these expense
items increased by $3,283 between 2002 and 2003. In addition, 2002 to 2003 cost
comparisons were unfavorably impacted by investment in increased sales and
marketing staffing to support new products expected to favorably impact 2004
sales in the Sporting Goods segment. Offsetting these increased expenses, during
2003, the Company recorded settlements of $3,335 resulting from arbitration
related to expenses incurred in prior periods, and cost reduction efforts across
all Huffy companies.
Discontinued Operations
During the year ended December 31, 2003, the Company recorded net income from
Discontinued Operations of $22. This income includes several components. The
first is the loss on the disposal of the Company's Volant(R) Ski business, $988,
($904 after tax). Also included was the 2003 operating loss incurred by the
Volant(R) Ski business, $523, ($478 after tax). The third component related to
Huffy Corporation's divestiture of its Washington Inventory Service subsidiary
in November of 2000, and subsequent class action suits filed in California in
2001 and 2002 against the Company and the purchaser alleging violations of labor
practices. As the previous owner, the Company was obligated to indemnify the
purchaser for a portion of its liability, if any. The operating income of $290
($257 after tax) of the Volant(R) ski business for the year ended December 31,
2002 has been reclassified to discontinued operations. During 2002, the Company
recognized expenses of $9,185 ($5,970 after tax), to cover the settlement,
legal, and other contractual liabilities associated with this action. Based upon
information from the Claims Administrator released during 2003, the Company
revised its estimate of claims cost, resulting in the recognition of income from
Discontinued Operations for the year ended December 31, 2003 of $3,605, ($2,239
after tax). The final component of discontinued operations was related to
additional product liability reserves, based upon claims made, related to
products manufactured and sold by businesses which the Company previously owned.
The charges recorded during 2003 were $1,346 ($835 after tax).
10
Net Interest Expense
Net interest expense increased from $1,688 for the year ended December 31, 2002
to $5,627 for the year ended December 31, 2003. This increase in expense
reflects the acquisition of Gen-X Sports Inc. on September 19, 2002. The
increase in 2003 interest expense was also driven by the increased working
capital utilized by the Gen-X Sports Inc. product lines throughout 2003.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31,
2001
For the year ended December 31, 2002, Huffy Corporation ("Huffy" or "Company")
had a net loss of $1,378, or $0.12 per common share compared to a net loss for
the same period in 2001 of $8,410, or $0.82 per common share. Fiscal year 2002
results include the post-acquisition earnings from Gen-X Sports Inc. acquired on
September 19, 2002. In addition, the 2002 net earnings reflect a loss from
discontinued operations of $5,713 after tax, or $0.48 per common share.
These charges are related to the settlement of contractually indemnified
liabilities and a related lawsuit settlement regarding labor practices by one of
the Company's former subsidiaries, Washington Inventory Service, limited to the
period of the Company's ownership which ended on November 3, 2000. Discontinued
Operations also includes a reclassification of 2002 results related to the
disposal of the Volant(R) product line in 2003 to conform to the 2003
presentation. For the year ended December 31, 2002, the Company's results
included sales, gross profit, and net earnings for Volant of $3,112, $774, and
$257, respectively.
Results from continuing operations for the year ended December 31, 2002 were
$4,335, or $0.36 per common share, compared to a net loss of $8,410, or $0.82
per common share in 2001. The net loss from continuing operations in 2001
included a pretax charge of $3,713 ($2,440 after tax), or $0.24 per common
share, associated with the termination of Mexican manufacturing operations,
reductions of staffing levels at Huffy Bicycle Company, and the consolidation of
the financial and information technology groups. On January 22, 2002, Kmart
Corporation filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Court. The Company recorded a charge in the fourth quarter of 2001 of $4,680
($3,075 after tax), or $0.30 per common share, to reflect the Kmart bad debt.
The 2001 net loss from continuing operations excluding the reconfiguration,
refinancing and Kmart bad debt was $2,895, or $0.28 per common share.
Net Sales
Net sales in 2002 were $369,784, an increase of 11.7%, compared to net sales of
$331,138 for the same period in 2001. This sales increase was primarily related
to the acquisitions of Gen-X Sports Inc. and the McCalla Company during 2002. In
addition, the Company's basketball products also experienced a 12.3% year over
year increase in sales volume.
Gross Profit
Consolidated gross profit for 2002 was $65,573, or 17.7% of net sales as
compared to $39,950, or 12.1% of net sales reported for the same period in 2001,
reflecting a 64.1% improvement over the prior year gross margin. The primary
reason for this improvement was the addition of Gen-X Sports Inc. and the
McCalla Company to the Huffy portfolio. The second reason for the year over year
increase was the improved margin in the Company's wheeled product line where
favorable purchasing and warehousing variances in 2002 increased margins
markedly over the depressed levels experienced during 2001 as a result of the
close out of slow moving scooter inventory. The Company's basketball product
line also experienced a 270 basis point improvement in year over year margins as
a result of successful cost reduction programs. Pension charges added $1,072 of
additional expense in 2002 as compared to 2001 expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $57,374, for the year ended
December 31, 2002 were higher than the $47,607 experienced during the same
period in 2001. The primary reason for the year over year increase in these
expenses was the selling, general and administrative expenses added as a result
of the acquisitions of Gen-X Sports Inc. and the McCalla Company. 2002
administrative pension expense increased by $2,214 over 2001 expense due to poor
stock market performance and declining interest rates. Although less
significant, additional reasons for the increased selling, general and
administrative expenses include increased brand advertising and higher incentive
based compensation. 2001 selling, general and administrative expenses include a
charge for the Kmart bankruptcy of $4,680.
Net Interest Expense
Net interest expense increased from $1,128 for the year ended December 31, 2001,
to $1,688 in the current year. Borrowing costs to finance the acquisitions of
Gen-X Sports Inc. and the McCalla Company as well as the increased working
capital needs of these subsidiaries resulted in higher interest costs in 2002.
11
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. Per the
terms of the agreement, 193,466 additional common shares were issued to the
Gen-X stockholders on or about the first anniversary date. Gen-X did not meet
certain financial performance objectives in 2002, which would have resulted in
the issuance of up to 645,161 additional common shares. In addition, the
acquired companies immediately redeemed $4,970 of preferred stock at face value
and refinanced their existing bank debt. Included in the assets acquired are
trademarks, patents and licensing agreements recorded at their fair values at
the date of acquisition of $45,800, $1,285 and $940, respectively, as well as
goodwill in the amount of $12,104. During 2003, the Company sold certain assets
of the Volant Ski business, including patents and trademarks valued at $310 and
$2,000, respectively. Gen-X is a designer, marketer and distributor of branded
sports equipment, including action sports products, winter sports products and
golf products, and is a purchaser and reseller of excess sporting goods and
athletic footwear inventories and special opportunity purchases.
On March 27, 2002, Huffy Service Solutions acquired the stock of McCalla Company
and its subsidiaries, Creative Retail Services, Inc. and Creative Retail
Services (Canada) Inc. ("McCalla"). The aggregate purchase price was $5,400,
less $500 net cash acquired, and was paid in cash. A contingent purchase price
payment was recorded for the McCalla acquisition of $1,645 in the fourth quarter
of 2002. The $1,645 contingent purchase price payment was paid to the sellers in
April 2003 and was treated as contingent purchase price in accordance with EITF
95-8 "Accounting for Contingent Consideration Paid to the Shareholders of an
Acquired Enterprise in a Purchase Business Combination." 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 Home Depot, including, among others, Duracell and Spectrum
Brands.
DISCONTINUED OPERATIONS
On December 1, 2003, the Company sold its Volant(R) Ski business to the winter
sports division of the Amer Group plc (Atomic). Under the terms of the
agreement, Atomic acquired all patents, trademarks and intellectual property as
well as the manufacturing equipment and inventory related to such business.
Huffy Corporation divested its Washington Inventory Service subsidiary in
November 2000. Subsequently, in late 2001 and mid 2002, two class action suits
were filed in California seeking damages for alleged violations of labor
practices. As a previous owner, Huffy was potentially obligated to indemnify the
subsidiary purchaser for some portion of any liability it or such subsidiary had
in the first case and had potential liability in the latter case, both limited
to the periods it owned the subsidiary. After protracted negotiations and on
advice of counsel, a settlement was negotiated and preliminarily approved on
January 28, 2003 by the Superior Court of California, County of Los Angeles. A
charge to discontinued operations of $9,185 ($5,970 after tax) was taken during
2002 to record the Company's estimated obligation related to this matter. The
settlement was given final court approval, pending compliance with the terms of
the Class Settlement Agreement, and a Judgment of Dismissal was issued on April
7, 2003. The Claims Administrator issued a report as to claims made and on the
amount of payments to be made which was approximately $5,200 for the Company.
The Company contributed $5,121 into a court appointed escrow account for the
payment of claims. The Company revised its estimate of claims which resulted in
income from discontinued operations for the year ended December 31, 2003 of
$3,605 ($2,239, net of tax). In addition, based upon claims made, the Company
recorded additional reserves for product liability related to products
manufactured and sold by businesses which it previously owned. The charges
recorded during 2003 were $1,346 ($835 after tax).
LIQUIDITY AND CAPITAL RESOURCES
On March 14, 2003, the Company entered into a $15,000 subordinated Term Loan
with Ableco Finance LLC (the Term Loan). The Term Loan is secured by a lien on
the Company's trademarks and trade names and a subordinated position on all
other assets pledged under the Company's revolving credit facility. The Term
Loan matures on the earlier of the maturity of the Company's revolving credit
facility or five years. Financial covenants in the Term Loan require the Company
to maintain a minimum EBITDA, (Earnings Before Interest, Taxes, Depreciation and
Amortization) and a fixed charge coverage ratio.
In conjunction with the new Term Loan, the Company amended its credit facility
with its existing lender to incorporate the new borrowing into the agreement.
Financial covenants identical to the Term Loan were added to the revolving
credit facility. In addition, changes were made in the revolving credit
facility's existing Net Worth covenant, which raised the minimum net worth
requirement to $60,000 and increases the minimum net worth requirement to
$62,500 on January 1, 2004. The revolving credit facility is secured by all
assets of the Company and its affiliates and will expire on December 31, 2004,
with a 12 month renewal option. In anticipation of 2003 operating losses, the
Company contacted its lender to request amendment of certain of its covenants at
December 31, 2003, and certain ongoing cumulative covenants in 2004. The Company
received a waiver from its lenders addressing the deficiency in achieving its
EBITDA and fixed charge coverage ratio covenants for the quarter ended December
31, 2003. Subsequently, the lenders entered into an additional amendment
12
dated February 19, 2004 which excludes $5,200 of certain charges from the
cumulative twelve month calculation for December 2003.
From time to time, the Company has requested and received additional short-term
borrowing authority under its revolving credit facility with Congress Financial
to cover seasonal working capital needs. In July 2003, the Company amended its
revolving credit facility to increase the maximum loan amount to $105,000 and to
increase the revolving loan limit to $90,000. As of December 31, 2003, the
Company had $14,957 of borrowing capacity on its revolving credit facility.
Pre-bankruptcy receivables from Kmart were sold during the second quarter of
2002. The cash recovery from this transaction was consistent with previously
established reserves.
At December 31, 2003, inventory was valued at $49,606, up from $41,847 at
December 31, 2002. The increase of $7,759 is primarily due to inventory for the
Gen-X product lines where inventory increased by $10,528 year over year. The
increased inventory levels were driven primarily by lower than anticipated sales
volumes in 2003.
Accounts payable at December 31, 2003 are $74,722 as compared to $65,519 at the
end of 2002. This increase reflects higher incremental purchases to support
higher sales volume as well as longer payment terms negotiated with our vendors.
At December 31, 2003, cash was $3,987 lower than the same period in 2002. This
decrease was the result of an increase in working capital needs between the two
years, and an increase in capital spending. These increases were partially
offset by an increase in short term and long term debt.
Prepaid expenses and other current assets increased by $3,796 from the prior
year primarily due to the prepayment for certain inventories as required for
certain Far East vendors for Gen-X.
At year end December 31, 2003, non-current deferred income tax assets were
$16,539, down from $22,484 for the same period in 2002. This decline is due to
the changes in accrued liabilities, reflecting the payout of significant
liabilities, such as workers compensation, product liability, deferred
compensation, pension, post retirement benefits other than pensions, and legal
accruals.
Other assets at December 31, 2003 were $9,977 as compared to $6,650 for the same
period in 2002. This increase is the result of favorable investment performance
of the Huffy Master Benefit Trust, and the Huffy Supplemental/Excess Benefit
Plan Trust, as well as an increase in financing fees. These increases were
offset by usage of the environmental escrow balance.
At December 31, 2003 accrued salaries, wages and other compensation were at a
balance of $3,313 versus $6,854 in the prior year, a decrease of $3,541. The
primary reason for this decrease in year over year levels was the decrease in
2003 incentive pay accruals. Secondarily, liabilities established at December
31, 2002 for wage related liabilities associated with Washington Inventory
Service, which was sold in 2000, were paid during 2003, contributing to the
decline in year to year balances.
Other accrued liabilities at December 31, 2003 were $8,460, $5,526 lower than
the balance at December 31, 2002. The primary reason for the year to year
decrease was the WIS settlement of $7,700 paid during 2003. This decrease was
partially offset by small increases in various accruals for such expenses as
product liability, royalties, warranty and legal expenses.
At December 31, 2003, other current liabilities were $606, compared to $8,090 at
December 31, 2002. This decline in year over year balance was driven entirely by
reductions in required tax accruals due to the Company's 2003 operating loss.
At December 31, 2003, the Company valued its pension plans in accordance with
SFAS Nos. 87 and 88. Due to low interest rates and poor stock market
performance, the value of the plan assets is less than the accumulated benefit
obligation, causing the Company to record an after tax charge to accumulated
other comprehensive loss of $752.
As of December 31, 2003, the Company has the following contractual obligations
and outstanding borrowings that are expected to impact future liquidity and cash
flows:
13
Due in
-------------------------------------------------------------------
Less than After
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- ------------------------------------------- ------------ ------------- ------------- ------------- -----------
Long-term debt $ 79,844 $ 79,844 $ - $ - $ -
Capital leases 1,100 558 535 7 -
Operating leases 23,323 5,836 11,002 5,891 594
Purchase obligations 4,018 929 1,267 772 1,050
------------ ------------- ------------- ------------- -----------
Total contractual obligations $ 108,285 $ 87,167 $ 12,804 $ 6,670 $ 1,644
============ ============= ============= ============= ===========
The Company expects cash and cash equivalents, cash flow from operations and its
revolving credit facility to be sufficient to finance seasonal working capital
needs and capital expenditures throughout the coming year. The Company
frequently reviews its credit and capital structure and makes adjustments as
necessary. The Company anticipates implementation of a plan in 2004 to reduce
working capital, particularly the working capital associated with the product
lines acquired in the Gen-X acquisition. When fully implemented, the program
should contribute improved cash flows from operations.
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of its accounts receivable based upon
an analysis of historical trends, aging of accounts receivable, write-off
experience and expectations of future performance. Delinquent accounts are
written off to selling, general and administrative expense when circumstances
make further collection unlikely. In the event of a customer bankruptcy or
reorganization, specific reserves are established to write down accounts
receivable to the level of anticipated recovery. The Company may consult with
third-party purchasers of bankruptcy receivables when establishing specific
reserves. Non-specific reserves for doubtful accounts are based upon a
historical bad debt write-off of approximately 0.2% of net sales. At December
31, 2003, a 0.1 percentage point change in the historical bad debts write-off
percentage would impact the selling, general and administrative expenses by
$438.
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 was consistent with previously
established reserves. Kmart has subsequently emerged from bankruptcy, and the
Company continues to supply product for its retail locations. Post Kmart's
bankruptcy the Company has modified its credit terms on sales to minimize the
credit risk.
INVENTORY VALUATIONS
Inventories are valued at cost (not in excess of market) determined by the
first-in, first-out (FIFO) method. Management regularly reviews inventory for
salability and reduces inventory to market level in the event that market price
is lower than cost. On an annual basis, the Company takes a physical inventory
verifying the units on hand and comparing its perpetual records to physical
counts. Periodic cycle counting procedures are used to verify inventory accuracy
between physical inventories.
IMPAIRMENT OF LONG LIVED ASSETS
Long-lived assets, including fixed assets and intangibles other than goodwill,
are reviewed by the Company for impairment whenever events or changes in
circumstances indicate that the carrying amount of any such asset may not be
recoverable. If the undiscounted cash flows (excluding interest) from the use
and eventual disposition of the asset is less than the carrying value, the
Company recognizes an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset. The estimate of undiscounted
cash flow is based upon, among other things, certain assumptions about expected
future operating performance. The Company's estimates of undiscounted cash flow
may differ from actual cash flow due to, among other things, technological
changes, economic conditions, changes to its business model or changes in its
operating performance. In those cases, the Company determines that the useful
life of other long-lived assets should be shortened, the Company would
depreciate the net book value in excess of the salvage value (after testing for
impairment as described above), over the revised remaining useful life of such
asset thereby increasing amortization expense.
14
IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS WITH INDEFINITE LIVES
Goodwill represents the excess of assets over the assets of the business
acquired. 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. Pursuant to SFAS No. 142, goodwill and intangible assets
acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but instead are tested for impairment at least
annually in accordance with the provisions of SFAS No.142.
Goodwill and other intangible assets with indefinite useful lives are tested for
impairment annually during the fourth quarter, and are tested more frequently if
events and circumstances indicate that an asset might be impaired. An impairment
loss is recognized to the extent that the carrying amount exceeds the asset's
fair value. This determination is made at the reporting unit level and consists
of two steps. First, the Company determines the fair value of a reporting unit
level and compares it to its carrying amount. Second, if the carrying amount of
a reporting unit exceeds its fair value, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit's goodwill and other
intangible assets with indefinite useful lives over the implied fair value of
that goodwill and other intangible assets with indefinite useful lives. The
implied fair value is determined by allocating the fair value of the reporting
unit in a manner similar to a purchase price allocation, in accordance with SFAS
No. 141, Business Combinations. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill and other intangible
assets with indefinite useful lives.
PENSION AND OTHER POST RETIREMENT 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.
In addition to the Company's defined benefit pension plans, the Company sponsors
several welfare benefit health care and life insurance plans that provide post
retirement 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 liabilities for pension and other post retirement plans are determined by
actuaries. Key actuarial assumptions include the discount rate, expected return
on plan assets and rate of compensation increase, among others. A change to one
or more of these actuarial assumptions could materially change the amounts of
these liabilities.
SELF-INSURANCE RESERVES
The Company is self-insured for workers compensation, medical insurance and
product liability claims up to certain maximum liability amounts. Medical
insurance reserves are determined based upon historical expense experience and
loss reporting trends. Workers compensation reserves are determined based upon
historical trends of losses, settlements, litigation costs and other factors.
The Company estimates the value of each product liability claim when reported,
and then adjusts those claims by a development factor created using historical
claims. The amounts accrued for self-insurance are based upon management's best
estimate and the amounts the Company will ultimately disburse could differ from
such accrued amounts. The majority of workers compensation and product liability
expense are charged to cost of sales. The majority of medical expenses are
charged to selling, general and administrative expenses.
ENVIRONMENTAL
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Remediation costs that relate to an existing
condition caused by past operations are accrued when it is probable that these
costs will be incurred and can be reasonably estimated.
The Company, along with others, has been designated as a potentially responsible
party (PRP) by the U.S. Environmental Protection Agency (the "EPA") with respect
to claims involving the discharge of hazardous substances into the environment
in the Baldwin Park operable unit of the San Gabriel Valley Superfund site. The
Company, along with other PRPs, the Main San Gabriel Basin Watermaster
(Watermaster), the San Gabriel Water Quality Authority (WQA), and numerous local
water districts (Water Districts), have worked with the EPA on a mutually
satisfactory remedial plan, with the end result being a joint water supply/clean
up Project Agreement which settles four different lawsuits filed by the WQA and
the Water Districts. The Project Agreement was signed on March 28, 2002 and was
approved by the court and became effective May 9, 2002. In developing its
estimate of environmental remediation costs, the Company considers, among other
things, currently available technological solutions, alternative cleanup
methods, and risk-based assessments of the contamination and, as
15
applicable, an estimation of its proportionate share of remediation costs. The
Company may also make use of external consultants and consider, when available,
estimates by other PRPs and governmental agencies and information regarding the
financial viability of other PRPs. Based upon information currently available,
the Company believes it is unlikely that it will incur substantial previously
unanticipated costs as a result of failure by other PRPs to satisfy their
responsibilities for remediation costs.
The Company has recorded environmental accruals that, based upon the information
available, are adequate to satisfy remediation requirements known at this time.
The total accrual for estimated environmental remediation costs related to the
Superfund site and other potential environmental liabilities was $3,378 ($5,232
before discounting) at December 31, 2003. Of that amount, the Company has a
deposit of $2,377 that is held in escrow under the terms of the settlement
agreement. Amounts in escrow will be used to fund future costs and will serve as
a long-term performance assurance pending the completion of remediation.
Management expects that the expenditures relating to costs currently accrued
will be made over a period of fourteen years.
The environmental escrow accounts are classified as current prepaid assets on
the accompanying condensed consolidated balance sheets if the funds are expected
to be expended within the next 12 months and as long-term other assets for those
funds, which are expected to be expended beyond 12 months. The current escrow
balance at December 31, 2003 was $879 and the long-term escrow balance at
December 31, 2003 was $1,498. The environmental accrual is similarly classified
on the accompanying condensed consolidated balance sheet with $879 shown in
accrued liabilities and $2,499 shown in other long-term liabilities as of
December 31, 2003.
INCOME TAX VALUATION ALLOWANCES AND TAX RESERVES
Income taxes are accounted for under the asset and liability method. Deferred
tax asset 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 and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using 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 deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
At December 31, 2003, we have a valuation allowance of $8,392 primarily to
reduce our net operating loss and tax credit carryforwards of $14,512 to an
amount that will more likely than not be realized. These net operating loss and
tax credit carryforwards exist in many state and foreign jurisdictions and have
varying carryforward periods and restrictions on usage. The estimation of future
taxable income in these state and foreign jurisdictions and our resulting
ability to utilize net operating loss and tax credit carryforwards can
significantly change based on future events, including our determinations as to
the feasibility of certain tax planning strategies. Thus, recorded valuation
allowances may be subject to material future changes.
As a matter of course, we may be audited by federal, state and foreign tax
authorities. We provide reserves for potential exposures when we consider it
probable that a taxing authority may take a sustainable position on a matter
contrary to our position. We evaluate these reserves, including interest
thereon, on a quarterly basis to insure that they have been appropriately
adjusted for events that may impact our ultimate payment for such exposures.
See Note 11 for a further discussion of our income taxes.
ACCOUNTING PRONOUNCEMENTS ISSUED NOT IMPLEMENTED
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities", which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities", which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interest in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE.
The Company is evaluating the impact of applying FIN 46R to existing VIEs in
which it has variable interests and has not yet completed this analysis. At this
time, it is anticipated that the effect on the Company's Consolidated Balance
Sheet would be immaterial if implemented.
16
FORWARD-LOOKING STATEMENTS
This annual report contains forward looking statements that involve risks and
uncertainties. Words such as "anticipate", "believe", "plan", "expect",
"future", "intend", and similar expressions are used to identify forward looking
statements. These statements appear throughout the 10-K, and are statements
regarding our intent, belief, or current expectations primarily with respect to
the Company's operations and related industry developments. The reader should
not place undue reliance on these forward looking statements, which apply only
as of the date of this annual report. The Company's actual results could differ
materially from those anticipated in these forward looking statements.
INFLATION
Inflation rates in the United States have not had a significant impact on the
Company's operating results for the three years ended December 31, 2003. The
impact on the Company is minimized as a result of rapid turnover of inventories
and partially offset by cost reduction programs and increased operating
efficiency.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to short-term interest rate risks and foreign currency
exchange rate risks. The Company does not use derivative instruments for trading
purposes.
Interest Rate Risk
Interest rate risk arises primarily from variable rate borrowings in the United
States and Canada. The Company has entered into an interest rate swap, which is
recognized on the balance sheet at fair value. The Company has determined that
the swap is effective; therefore, changes in the fair value of the swap are
recorded on a quarterly basis as an adjustment to accumulated other
comprehensive loss. The swap was retired in January 2004 with the renegotiation
of the Sussex, Wisconsin facility lease.
At December 31, 2003, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $237 in earnings before income
taxes
Foreign Currency Exchange Risk
All subsidiaries of the Company, except Creative Retail Services (Canada) Inc.,
use the U.S. dollar as their functional currency. A small portion of the
Company's sales, receivables, purchases and expenses are denominated in Euros,
Australian dollars and Canadian dollars. The Company also maintains bank
accounts in Euros, Australian dollars and the Canadian dollars to facilitate
international operations. At this time, the Company's exposure to currency
exchange risk is not considered material.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Huffy Corporation:
We have audited the accompanying consolidated balance sheets of Huffy
Corporation and subsidiaries (the "Company") as of December 31, 2003 and 2002,
and the related consolidated statements of operations, cash flows and
shareholders' equity for each of the years in the three-year period ended
December 31, 2003. 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 of Huffy Corporation
and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," as of January 1, 2002.
/s/ KPMG LLP
KPMG LLP
Cincinnati, OH
February 12, 2004
18
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands, Except Share Data)
2003 2002 2001
-------------- -------------- --------------
Product sales $ 347,019 $ 282,676 $ 252,109
Service revenue 90,657 87,108 79,029
-------------- -------------- --------------
Net sales 437,676 369,784 331,138
Cost of products sold 281,877 226,369 223,914
Cost of services sold 77,541 77,842 67,274
---------------- -------------- --------------
Cost of sales 359,418 304,211 291,188
--------------- -------------- --------------
Gross profit 78,258 65,573 39,950
Selling, general and administrative expenses 79,872 57,374 47,607
Plant closure and manufacturing reconfiguration -- -- 3,713
-------------- -------------- --------------
Operating income (loss) (1,614) 8,199 (11,370)
Other expense (income):
Interest expense 5,990 1,973 1,761
Interest income (363) (285) (633)
Other (income) expense, net (730) 1,636 303
--------------- -------------- --------------
Earnings (loss) before income taxes (6,511) 4,875 (12,801)
Income tax expense (benefit) 966 540 (4,391)
-------------- -------------- --------------
Earnings (loss) from continuing operations (7,477) 4,335 (8,410)
Discontinued operations:
Income (loss) from discontinued operations, net 926 (5,713) --
of income tax provision (benefit) of $810 and
$(3,182), in 2003 and 2002, respectively
Loss on disposal of discontinued operations, net
of income tax benefit of $84 (904) -- --
--------------- -------------- --------------
Net loss $ (7,455) $ (1,378) $ (8,410)
=============== ============== ==============
Earnings (loss) per common share:
Basic:
Weighted average number of common shares 15,349,763 11,833,213 10,298,076
Earnings (loss) from continuing operations $ (0.49) $ 0.36 $ (0.82)
Earnings (loss) from discontinued operations 0.00 (0.48) --
-------------- ------------------ --------------
Net earnings (loss) per common share $ (0.49) $ (0.12) $ (0.82)
=============== =============== ==============
Diluted:
Weighted average number of common shares 15,349,763 11,978,747 10,298,076
Earnings (loss) from continuing operations $ (0.49) $ 0.36 $ (0.82)
Earnings (loss) from discontinued operations 0.00 (0.48) --
-------------- --------------- --------------
Net earnings (loss) per common share $ (0.49) $ (0.12) $ (0.82)
=============== =============== ==============
See accompanying notes to the consolidated financial statements.
19
HUFFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands, Except Share Data)
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,432 $ 5,419
Accounts and other receivables, net 101,283 92,850
Inventories 49,606 41,847
Deferred income tax assets 9,338 12,227
Prepaid expenses and other current assets 12,551 8,755
------------ ------------
Total current assets 174,210 161,098
------------ ------------
Property, plant and equipment, at cost:
Land and land improvements 1,621 1,621
Buildings and building improvements 4,611 4,611
Machinery and equipment 19,403 18,970
Office furniture, fixtures and equipment 16,210 17,498
Leasehold improvements 2,322 2,069
Construction in progress 1,303 933
------------ ------------
45,470 45,702
Less: Accumulated depreciation and amortization 28,671 30,191
------------ ------------
Net property, plant and equipment 16,799 15,511
Excess of cost over net assets acquired, net 29,627 26,663
Intangible assets, net 45,313 48,112
Deferred income tax assets 16,539 22,484
Pension assets 506 574
Other assets 9,977 6,650
------------ ------------
$ 292,971 $ 281,092
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 62,374 $ 54,069
Current installments of long-term obligations 18,028 5,258
Accounts payable 74,722 65,519
Accrued expenses:
Salaries, wages and other compensation 3,313 6,854
Insurance 5,152 6,141
Environmental 879 879
Other 8,460 13,986
------------ ------------
Total accrued expenses 17,804 27,860
Other current liabilities 606 8,090
------------ ------------
Total current liabilities 173,534 160,796
------------ ------------
Long-term obligations, less current installments 542 317
Pension liabilities 31,692 31,934
Postretirement benefits other than pension 9,158 9,340
Other long-term liabilities 5,389 6,958
------------ ------------
Total liabilities 220,315 209,345
------------ ------------
Shareholders' equity:
Common stock; 60,000,000 shares authorized,
22,553,280 and 21,153,290 shares issued, and
16,037,799 and 14,637,809 shares outstanding at
December 31, 2003 and 2002, respectively 22,523 21,153
Additional paid-in capital 102,917 95,267
Retained earnings 66,314 73,769
Unearned stock compensation (23) (18)
Accumulated other comprehensive loss (29,109) (28,551)
Treasury shares, at cost (89,966) (89,873)
------------- ------------
Total shareholders' equity 72,656 71,747
------------ ------------
$ 292,971 $ 281,092
============ ============
See accompanying notes to the consolidated financial statements.
20
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings from continuing operations $ (7,477) $ 4,335 $ (8,410)
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 4,634 3,820 4,676
(Gain) loss on sale of property, plant and equipment 3 (525) (4)
Write-down of certain property, plant and equipment -- -- 2,018
Deferred income taxes 8,834 (17,361) 1,323
Changes in assets and liabilities, excluding the effects of
acquisitions:
Accounts and other receivables, net (8,433) (1,264) 30,877
Inventories (7,759) (5,487) 30,841
Prepaid expenses (3,796) (1,618) (259)
Other assets (1,110) 13,291 (9,475)
Accounts payable 9,203 3,760 3,146
Accrued expenses (10,056) (6,103) (13,319)
Other current liabilities (7,484) 1,224 (1,182)
Other long-term liabilities 5,022 4,356 554
----------- ----------- -----------
Net cash (used in) provided by continuing operating activities (18,419) (1,572) 40,786
----------- ----------- -----------
Discontinued operating activities:
Loss on disposal from discontinued operations (904) -- --
Gain (loss) from discontinued operations 926 (5,713) --
----------- ----------- -----------
Net cash provided by (used in) discontinued operating activities 22 (5,713) --
----------- ----------- -----------
Net cash (used in) provided by operating activities (18,397) (7,285) 40,786
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,901) (3,144) (2,553)
Proceeds from sale of property, plant and equipment 211 747 4
Gen-X acquisition (1,384) (19,001) --
McCalla acquisition, net of cash acquired -- (4,900) --
----------- ----------- -----------
Net cash used in investing activities (7,074) (26,298) (2,549)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 8,305 54,069 (17,656)
Repayment of debt assumed in the Gen-X acquisition -- (37,800) --
Preferred shares redeemed -- (4,970) --
Issuance of long-term debt 15,270 673 --
Repayment of long-term debt (2,275) (250)
Issuance of common shares 184 739 1,626
----------- ----------- -----------
Net cash provided by (used in) financing activities 21,484 12,461 (16,030)
----------- ----------- ------------
Net change in cash and cash equivalents (3,987) (21,122) 22,207
Cash and cash equivalents:
Beginning of the year 5,419 26,541 4,334
----------- ----------- -----------
End of the year $ 1,432 $ 5,419 $ 26,541
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
21
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar Amounts in Thousands, Except Share Data)
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN RETAINED STOCK COMPREHENSIVE TREASURY
TOTAL STOCK CAPITAL EARNINGS COMPENSATION LOSS STOCK
--------- -------- ---------- -------- ------------ ------------- ---------
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 loss (1,378) (1,378)
Minimum pension liability
adjustment, net of income tax
benefit of $13,624 (25,234) (25,234)
Foreign currency translation
Adjustment 1 1
Unrealized gain on derivative
instruments, net of income
tax expense of $126 103 103
---------
Total comprehensive loss (26,508)
Unearned stock compensation (18) (18)
Issuance of 4,161,241 shares in
connection with the acquisition
of Gen-X Sports Inc. 31,932 4,161 27,771
Issuance of 60,580 shares in
connection with common
stock plans 739 61 270 408
--------- -------- ---------- -------- ----- ------------- ---------
Balance at December 31, 2002 $ 71,747 $ 21,153 $ 95,267 $ 73,769 $ (18) $ (28,551) $ (89,873)
Comprehensive loss, net of tax:
Net loss (7,455) (7,455)
Minimum pension liability
adjustment, net of income tax
benefit of $405 (752) (752)
Foreign currency translation
Adjustment 60 60
Unrealized gain on derivative
instruments, net of income
tax expense of $73 134 134
---------
Total comprehensive loss (8,013)
Unearned stock compensation (5) (5)
Issuance of 193,466 shares in
connection with the acquisition
of Gen-X Sports Inc. 1,165 193 972
Issuance of 1,100,000 shares in
connection with stock
contribution to pension plan 7,450 1,100 6,350
Repurchase of common shares (93) (93)
Issuance of 76,524 shares in
connection with common stock
plans 405 77 328
---------- -------- ---------- -------- ----- ------------- ---------
Balance at December 31, 2003 $ 72,656 $ 22,523 $ 102,917 $ 66,314 $ (23) $ (29,109) $ (89,966)
========== ======== ========== ======== ===== ============= =========
See accompanying notes to the consolidated financial statements.
22
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 intercompany transactions and
balances have been eliminated. The accompanying statement of operations for the
year ended December 31, 2002 includes the results of operations for Gen-X Sports
Inc. for the period from September 19, 2002 to December 31, 2002 and McCalla
Company for the period from March 27, 2002 to December 31, 2002. The fiscal year
2003 reflects a full year of operations for both Gen-X Sports Inc. and McCalla
Company.
BASIS OF PRESENTATION - The Company's financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
expects cash and cash equivalents, cash flow from operations and its revolving
credit facility to be sufficient to finance seasonal working capital needs and
capital expenditures throughout 2004, and for the foreseeable future; however,
there can be no assurance that these funds will be sufficient. The Company's
financing facilities require it to meet certain EBITDA and fixed charge coverage
covenants. In order to achieve these covenants, the Company will need to perform
better than it did in 2003. The Company anticipates implementation of a plan in
2004 to reduce working capital, particularly the working capital associated with
the product lines acquired in the Gen-X Sports, Inc. acquisition, and will
contribute to improved cash flows from operations when fully implemented. See
Subsequent Events discussion in Note 19. However, there is no assurance that the
Company will be able to achieve such performance levels and maintain compliance
with its financial covenants. In addition, based upon the nature of the
Company's financing arrangement, there can be no assurance that it will be able
to obtain any additional funding on acceptable terms. In the event of default
under the Company's credit facilities and in the event that the Company's
lenders do not waive the default, the Company's financial position, results of
operations and liquidity could be materially adversely affected.
RECLASSIFICATION - Certain prior year balances have been reclassified to conform
with the 2003 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 when products are shipped
and the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists
and the sales price is fixed and determinable. Revenue for retail services is
recognized at the time the service is performed.
The Company provides for right of return privileges to certain customers. The
Company's reserves for returns in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return
Exists."
TRADE ACCOUNTS RECEIVABLE - Trade accounts receivable are recorded at the
invoiced amount and do not bear interest. The allowance for doubtful accounts is
the Company's best estimate of the amount of probable credit losses in the
Company's existing accounts receivable. In the event of a customer bankruptcy or
reorganization, specific reserves are established to write down accounts
receivable to the level of anticipated recovery. The Company may consult with
third-party purchasers of bankruptcy receivables when establishing specific
reserves. The Company determines the allowance based on historical write-off
experience estimated at 0.2% of net sales. The Company reviews its allowance for
doubtful accounts monthly. Past due balances over 90 days and over a specified
amount are reviewed individually for collectibility. All other balances are
reviewed on a pooled basis. In addition to the allowance for doubtful accounts,
the Company also has certain allowances for claims that have been or may be
incurred on all products that have been shipped. The reserves are calculated
based on claims that have been submitted but not settled. The calculation also
considers anticipated claims based upon historical performance. Some major
retailers have chosen to manage the warranty process in exchange for a claims
allowance based on sales volume. The portion of the reserve related to retailer
claims allowances is netted against accounts receivable while the balance of the
reserve is classified as an accrued liability on the balance sheet. Additions to
the reserve are treated as a deduction from net sales if they related to a
negotiated claim allowance and as selling, general and administrative costs if
they related to a general warranty expense. The allowance for doubtful accounts
was $1,274 and $1,214 as of December 31, 2003 and 2002, respectively. Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. The
Company does not have any off-balance-sheet credit exposure related to its
customers.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially expose
the Company to concentrations of credit risk, as defined by 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,
23
impact Huffy's overall credit risk. Management believes that the Company's
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 December 31, 2003.
INVENTORIES - Inventories are valued at cost (not in excess of market)
determined by the first-in, first-out (FIFO) method. Management reviews
inventory for salability on a quarterly basis and believes that inventory is
appropriately stated at the lower of cost or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Plant and equipment under capital leases are stated at the present value
of minimum lease payments. Plant and equipment held under capital leases and
leasehold improvements are amortized over the shorter of the lease term or
estimated useful lives.
Annual depreciation and amortization rates are as follows:
Land improvements 5 - 10%
Buildings and improvements 2-1/2 - 10%
Office furniture, fixtures, machinery and equipment 10 - 33-1/3%
Leasehold improvements 4-1/2 - 33-1/3%
IMPAIRMENT OF LONG LIVED ASSETS - 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 discounted 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, and are no longer depreciated. The assets and liabilities of a disposal
group classified as held for sale are presented separately in the appropriate
asset and liability sections on the balance sheet.
At December 31, 2002, the Company had classified $1,500 of land and $3,980 of
buildings obtained in the Gen-X acquisition as net assets held for sale. These
assets and related reserves were reclassified as held and used in the fourth
quarter of 2003 in order to conform to the 2003 presentation, as these assets
had not sold for a period of more than a year.
PRODUCT LIABILITY - The Company maintains a reserve for product liability based
upon expected settlement charges for pending claims and an estimate of
unreported claims derived from experience, volume and product sales mix. The
Company estimates the value of each claim when reported, and then adjusts those
claims by a development factor created using historical claims. The development
factor takes into consideration factors that affect the value of each claim over
the passage of time, such as new facts regarding the cases that were not
available at the time the reserves were originally established.
FREIGHT- The Company classifies outbound freight expense to customers as an
adjustment to product sales revenue on the accompanying consolidated statements
of operations. For the years ended December 31, 2003, 2002 and 2001, freight
expense was $4,452, $3,418 and $2,633, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the excess of cost
over fair value of the assets of the business acquired. 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. Pursuant to SFAS No. 142,
goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead are
tested for impairment at least annually in accordance with the provisions of
SFAS No.142. SFAS No.142 also requires intangible assets with estimable useful
lives to be amortized on the straight-line method over their respective
estimated useful lives to their estimated residual values and reviewed for
impairment in accordance with SFAS No. 144.
Goodwill and other intangible assets with indefinite useful lives are tested for
impairment annually during the fourth quarter, and are tested more frequently if
events and circumstances indicate that an asset might be impaired. An impairment
loss is recognized to the extent that the carrying amount exceeds the asset's
fair value. This determination is made at the reporting unit level and consists
of two steps. First, the Company determines the fair value of a reporting unit
level and compares it to its carrying amount. Second, if the carrying amount of
a reporting unit exceeds its fair value, an impairment loss is recognized for
any excess of the carrying amount of the reporting unit's goodwill and other
intangible assets with indefinite useful lives over the implied fair value of
that goodwill and other intangible assets with indefinite useful lives. The
implied fair value is determined by allocating the fair value of the reporting
unit in a manner similar to a purchase price allocation, in accordance with SFAS
No. 141, Business Combinations. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill and other intangible
assets with indefinite useful lives.
24
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 2003 and 2002, the Company
recorded an adjustment, net of tax, of $134 and $103, respectively, in
accumulated other comprehensive loss 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. The swap was redeemed in January 2004 and
had no impact on the Company's results of operations.
EARNINGS (LOSS) PER COMMON SHARE - Basic earnings (loss) per share of common
stock excludes any dilutive effects of stock options and 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. The dilutive effect of stock options is excluded from the diluted per
share calculation if the Company has a loss from continuing operations, as the
impact would be anti-dilutive.
USE OF ESTIMATES - Management of the Company has made a number of estimates and
assumptions relating to the reported amounts of assets and liabilities, the
reported amounts of revenue and expenses, and the disclosures of contingent
assets and liabilities to prepare these financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ from those estimates. Significant items subject to such
estimates and assumptions include the impairment of property, plant and
equipment, and intangibles and goodwill, valuation of receivables, inventories
and deferred income tax assets, environmental remediation liabilities, and
assets and obligations related to employee benefits.
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," as amended by SFAS No. 148, 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 required by SFAS No. 123. The Company records
compensation cost for fixed awards with pro-rata vesting on a pro-rata basis
over the vesting period.
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 2003, 2002 and 2001, respectively; expected
volatility of 51.7% in 2003, 50.3% in 2002, 43.3% in 2001; risk-free interest
rates from 3.4% to 4.2% for all plans and years: and expected lives from 3.91 to
7.66 years. The weighted average fair value of the options granted in 2003, 2002
and 2001 was $3.31, $3.91 and $3.59, respectively. The weighted average expected
dividend assumed is zero.
At December 31, 2003, the Company has stock-based compensation plans which are
described in Note 8. The Company applies the principles of 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 $150,
$119, and $122, (after tax $93, $106, and $80) for the years ended December 31,
2003, 2002 and 2001, respectively. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with SFAS No. 123 for
all outstanding and vested awards in each accounting period, the Company's net
(loss) and (loss) per share would have been reduced to the pro forma amounts
indicated below:
25
2003 2002 2001
--------- --------- --------
Net loss
As Reported $ (7,455) $ (1,378) $ (8,410)
Add: Stock based employee compensation included
in reported net loss, net of tax 93 106 80
Deduct: Total stock based employee compensation
expense determined under the fair-value based method
for all awards, net of tax (987) (653) (887)
--------- --------- -------
Net loss Proforma: $ (8,349) $ (1,925) $ (9,217)
Loss per share as reported:
Basic (0.49) (0.12) (0.82)
Diluted (0.49) (0.12) (0.82)
Loss per share Proforma:
Basic (0.54) (0.16) (0.90)
Diluted (0.54) (0.16) (0.90)
INCOME TAXES- Income taxes are accounted for under the asset and liability
method. Deferred 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 and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using 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 deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
At December 31, 2003, we have a valuation allowance of $8,392 primarily to
reduce our net operating loss and tax credit carryforwards of $14,512 to an
amount that will more likely than not be realized. These net operating loss and
tax credit carryforwards exist in many state an foreign jurisdictions and have
varying carryforward periods and restrictions on usage. The estimation of future
taxable income in these state and foreign jurisdictions and our resulting
ability to utilize net operating loss and tax credit carryforwards can
significantly change based on future events, including our determinations as to
the feasibility of certain tax planning strategies. Thus, recorded valuation
allowances may be subject to material future changes.
As a matter of course, we may be audited by federal, state and foreign tax
authorities. We provide reserves for potential exposures when we consider it
probable that a taxing authority may take a sustainable position on a matter
contrary to our position. We evaluate these reserves, including interest
thereon, on a quarterly basis to insure that they have been appropriately
adjusted for events that may impact our ultimate payment for such exposures.
See Note 11 for a further discussion of our income taxes.
ENVIRONMENTAL REMEDIATION LIABILITIES - The Company accounts for environmental
remediation liabilities in accordance with the American Institute of Certified
Public Accountants issued Statement of Position 96-1, "Environmental Remediation
Liabilities," ("SOP 96-1"). The Company accrues for losses associated with
environmental remediation obligations when such losses are probable and
reasonably estimable. Accruals for estimated losses from environmental
remediation obligations generally are recognized no later than completion of the
remedial feasibility study. Such accruals are adjusted as further information
develops or circumstances change. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed probable.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of foreign operations are
generally translated into U.S. dollars at the rates of exchange in effect at the
balance sheet date. Income and expense items are generally translated at the
weighted average exchange rates prevailing during each period presented. Gains
and losses resulting from foreign currency transactions are included in the
results of operations. Gains and losses resulting from translation of financial
statements of foreign subsidiaries are recorded as a component of accumulated
other comprehensive loss until either sale or upon complete or substantially
complete liquidation by the Company of its investments in a foreign entity.
NOTE 2. ACQUISITIONS
On September 19, 2002, the Company acquired all of the stock of Gen-X Sports
Inc. and Gen-X Sports, Inc. and their subsidiaries in exchange for $19,001 in
cash and the issuance of 4,161,241 shares of Huffy Corporation's 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 was subject
to certain post-closing adjustments based upon financial performance objectives
in 2002 and no breach of representations and warranties clauses in 2003; whereby
645,161 and 193,466 additional common shares were subject to issuance for 2002
and 2003 to the Gen-X stockholders.
26
These contingent shares were issuable on or about the first anniversary date of
the acquisition. The financial performance objectives were not achieved for
2002; however, as no breach of representations and warranties occurred in 2003,
193,466 shares were issued in 2003. The acquired companies redeemed $4,970 of
preferred stock at face value immediately following the acquisition, and
refinanced their existing bank debt. Included in the assets acquired upon the
acquisition date were trademarks, patents and licensing agreements recorded at
their fair values of $45,800, $1,285 and $940, respectively, as well as goodwill
in the amount of $12,104. The fair values for these assets, excluding goodwill,
were determined by an independent third-party appraiser. During 2003, goodwill
was increased $2,960 for the issuance of 193,466 of shares in the amount of
$1,165 as well as additional legal costs and other professional fees associated
with the acquisition of $1,795. The Company believes that the consolidation of
the Huffy and Gen-X sporting goods product lines and selling and administrative
support structures 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. The acquisition also broadened each company's brand portfolios and sporting
goods product offerings and broadened and diversified the customer base.
Finally, the combination also decreased seasonal fluctuations in sales and
earnings. See discussion of the Company's plans related to Gen-X at Note 19,
Subsequent Events.
On March 27, 2002, the Company acquired 100% of the common stock of McCalla
Company and its subsidiaries, Creative Retail Services Inc. and Creative Retail
Services (Canada) Inc. ("McCalla") for $5,400, less $500 net cash acquired, and
was paid in cash. A contingent purchase price payment was recorded for the
McCalla acquisition of $1,645 in the fourth quarter of 2002. The $1,645
contingent purchase price payment was paid to the sellers in April 2003 and was
treated as contingent purchase price in accordance with EITF 95-8 "Accounting
for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise
in a Purchase Business Combination." Of the total purchase price, $4,876 was
recorded as goodwill, $300 was recorded as a covenant not-to-compete, and $224
of net assets acquired were recorded. McCalla provides merchandising, including
cycle and periodic product resets, stocking and sales training for a number of
well-known manufacturers serving Home Depot, including, among others, Duracell,
and Spectrum Brands. The purchase agreement called for an annual earn-out
payment for 2002 and 2003 net earnings in excess of contractual projections. The
2003 payment for 2002 performance was $1,645, and was recorded as an addition to
goodwill and an accrued liability at December 31, 2002 in the accompanying
consolidated balance sheet, and cash was paid in 2003. McCalla did not meet the
financial performance objectives in 2003, therefore no earn-out payment will be
made in 2004.
Both of these acquisitions were accounted for on the purchase method of
accounting in accordance with SFAS No. 141.
The Company has the following acquired intangible assets as of December 31,
2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
GROSS GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------ -------- ------------
Assets subject to amortization:
Gen-X patents $ 942 $ 103 $ 1,285 $ 49 $ -- $ --
Gen-X license agreements 940 541 940 119 -- --
McCalla covenant not to compete 300 105 300 45 -- --
-------- ------- -------- ------- -------- -------
Total assets subject to amortization $ 2,182 $ 749 $ 2,525 $ 213 $ -- $ --
======== ======= ======== ======= ======== =======
Assets not subject to amortization:
Trademarks at Gen-X $ 43,880 $ -- $45,800 $ -- $ -- $ --
Goodwill recorded in connection with the
Gen-X acquisition 15,064 -- 12,104 -- -- --
Goodwill in the Huffy bicycle business unit 8,824 2,380 8,824 2,380 8,824 2,380
Goodwill in Huffy Sports business unit 1,973 569 1,973 569 1,973 569
Goodwill recorded in connection with the
McCalla acquisition 6,525 -- 6,521 -- -- --
Goodwill in Huffy Service Solutions business
unit 478 288 478 288 478 288
-------- ------- -------- ------- -------- -------
Total assets not subject to amortization $ 76,744 $ 3,237 $ 75,700 $ 3,237 $ 11,275 $ 3,237
======== ======= ======== ======= ======== =======
The Company recorded amortization expense of $650, $213, and $726 in 2003, 2002
and 2001, respectively. The Company estimates that amortization expense will be
$478, $205, $142, $97, $82, and $396 for each of the years ended December 31,
2004, 2005, 2006, 2007, 2008 and thereafter, respectively.
Prior to the adoption of SFAS No. 142, the Company amortized the excess of cost
over of net assets acquired on a straight-line basis over fifteen to forty years
and tested for impairment if events and circumstances indicated that the
goodwill might be impaired.
27
The total amount of goodwill on the Company's books at December 31, 2003 was
$29,627. Of that amount, the Company expects that $7,750 will be deductible for
tax purposes. The amount of goodwill attributed to the sporting goods segment is
$22,912. The goodwill attributed to the services to retailers segment is $6,715.
Changes in the carrying value of intangible assets for the year ended December
31, 2003 are as follows:
DECEMBER 31, DECEMBER 31,
2002 2003
GROSS GROSS
CARRYING CARRYING
AMOUNT ADDITIONS ADJUSTMENTS AMOUNT
------------------- -------------- ---------------- ----------------
Assets subject to amortization:
Gen-X patents $ 1,285 $ 16 $ (359)(2) $ 942
Gen-X license agreements 940 8 (8) 940
McCalla covenant not to compete 300 - - 300
------------------- -------------- ---------------- ----------------
Total assets subject to amortization: $ 2,525 $ 24 $ (367) $ 2,182
==================== =============== ================ ================
Assets not subject to amortization:
Trademarks at Gen-X $ 45,800 $ 6 $ (1,926)(2) $ 43,880
Goodwill recorded in connection with the
Gen-X acquisition 12,104 2,960 (1) - 15,064
Goodwill in the Huffy Bicycle
business unit 8,824 - - 8,824
Goodwill in Huffy Sports business unit 1,973 - - 1,973
Goodwill recorded in connection with the
McCalla acquisition 6,521 - 4 6,525
Goodwill in Huffy Service Solutions
business unit 478 - - 478
-------------------- --------------- ---------------- ----------------
Total assets not subject to amortization $ 75,700 $ 2,966 $ (1,922) $ 76,744
==================== =============== ================ ================
(1) During 2003, goodwill associated with the Gen-X acquisition increased
$2,960 for the issuance of shares in the amount of $1,165, as well as
additional legal costs and other professional fees associated with the
acquisition of $1,795. The additional legal and professional fees were
primarily related to perfecting certain patent rights that were in
process at the time of the Gen-X acquisition.
(2) During 2003, Gen-X patents and trademarks decreased by $359 and $1,926,
respectively, due primarily to the sale of Volant(R), a former division
of Gen-X.
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 year ended December 31, 2001.
DECEMBER 31,
2001
------------
Reported net loss $ (8,410)
Add back: Goodwill amortization 726
---------
Adjusted net loss $ (7,684)
---------
Basic EPS
Reported net loss $ (0.82)
Adjusted net loss (0.75)
Diluted EPS
Reported net loss $ (0.82)
Adjusted net loss (0.75)
The table below presents unaudited pro forma condensed combining statements of
operations from the Company and Gen-X Sports, Inc. for the years ended December
31, 2002 and 2001. The unaudited pro forma condensed combining statements of
operations are presented as if the merger had occurred on January 1, 2001.
28
Summary Unaudited Pro Forma Condensed Combining Statement of Operations
(Dollar amounts in thousands, except per share data)
PRO FORMA YEAR ENDED PRO FORMA YEAR ENDED
DECEMBER 31, 2002(a) DECEMBER 31, 2001(a)
--------------------------- -------------------------
HUFFY PRO FORMA HUFFY PRO FORMA
CORPORATION COMBINED CORPORATION COMBINED
----------- ---------- ----------- -----------
Net sales $ 372,896 $ 466,540 $ 331,138 $ 438,606
Earnings from continuing operations 4,592 6,318 (8,410) (4,094)
Earnings from continuing operations per common
share
Basic $ 0.44 $ 0.43 $ (0.82) $ (0.27)
Diluted $ 0.43 $ 0.43 $ (0.82) $ (0.27)
Shares used in calculation of earnings per share
Basic 10,446,133 14,607,374 10,298,076 14,459,317
Diluted 10,591,667 14,752,908 10,298,076 14,459,317
(a) Reflects the results for Huffy Corporation prior to the disposal of the
Volant product line.
The following table summarized the estimated fair value of the assets acquired
and the liabilities assumed at the date of the Gen-X acquisition.
Accounts receivable $ 41,531
Inventories 23,877
Prepaid expense 3,234
Property, plant and equipment 7,979
Intangible assets 48,025
Goodwill 12,104
Other assets 1,544
------------
Total assets acquired 138,294
------------
Accounts payable 30,441
Accrued liabilities 8,998
Debt obligations 42,952
------------
Total liabilities assumed 82,391
------------
Net assets acquired $ 55,903
============
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 weighted-average useful lives of approximately
seven years. The intangible assets that make up that amount include patents of
$1,285, (approximately ten-year weighted-average useful lives), and license
agreements of $940, (approximately two-year weighted-average useful lives).
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
2003 2002 2001
--------- ----------- ---------
Cash paid (received) during the period for:
Interest $ 6,250 $ 1,645 $ 845
Taxes 1,235 (8,229) 1,532
========= =========== =========
Details of acquisitions:
Fair value of assets acquired 138,294
Liabilities assumed 82,391
-----------
Net assets acquired 55,903
Less: common shares issued 31,932
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
===========
29
NOTE 4. INVENTORIES
The components of inventories are as follows:
2003 2002
---------- ---------
Finished goods $ 43,196 $ 36,104
Work-in-process 194 147
Raw materials and supplies 6,216 5,596
---------- ---------
$ 49,606 $ 41,847
========== =========
NOTE 5. CLAIMS AND ALLOWANCES
The Company's policy is to fully reserve for claims that have been or may be
incurred on all products that have been shipped. The reserves are calculated
based on claims that have been submitted but not settled. The calculation also
considers anticipated claims based upon historical performance. Some major
retailers have chosen to manage the warranty process in exchange for a claims
allowance based on sales volume. The portion of the reserve related to retailer
claims allowances is netted against accounts receivable while the balance of the
reserve is classified as an accrued liability on the balance sheet. Additions to
the reserve are treated as a deduction from net sales if they related to a
negotiated claim allowance and as selling, general and administrative costs if
they related to a general warranty expense.
The following is a roll-forward of the Company's claims and allowance activity
for 2003:
Retailer Claims
Allowances General Warranty Total
---------- ---------------- -----
Beginning balance December 31, 2002 $ 802 $ 143 $ 945
Additions to reserves 530 1,283 1,813
Settled claims (847) (1,128) (1,975)
------- ------- -------
Ending balance December 31, 2003 $ 485 $ 298 $ 783
======= ======= =======
NOTE 6. LINES OF CREDIT AND LONG-TERM OBLIGATIONS
In September 2002, the Company entered into an Amended and Restated Loan and
Security Agreement with Congress Financial Corporation (Central), which has
subsequently been amended. The interest rate under the revolving credit facility
varies, based upon excess availability, from the prime rate to prime rate plus
..25%, or London Interbank Offering Rate (LIBOR) plus 1.75% to LIBOR plus 2.75%.
On March 14, 2003, the Company entered into a $15,000 subordinated Term Loan
with Ableco Finance LLC (the Term Loan). The Term Loan is secured by a lien on
the Company's trademarks and trade names and a subordinated position on all
other assets pledged under the Company's revolving credit facility. The Term
Loan matures on the earlier of the maturity of the Company's revolving credit
facility or five years. The Term Loan contains provisions for an annual
commitment fee of $370. The Term Loan commitment could be withdrawn if the
annual fees are not paid, or if the Company is in violation of its loan
covenants. In addition, financial covenants in the Term Loan require the Company
to maintain minimum EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization), and a fixed charge coverage ratio. In conjunction with the Term
Loan, the Company amended its credit facility with its existing lenders to
incorporate the new borrowing into the agreement. Financial covenants identical
to the Term Loan were added to the revolving credit facility. In addition,
changes were made in the revolving credit facility's existing Net Worth
covenant, which raised the minimum net worth requirement to $60,000 and
increases the minimum net worth requirement to $62,500 on January 1, 2004. The
revolving credit facility is secured by all assets of the Company and its
affiliates and will expire on December 31, 2004, with a 12-month renewal option.
In anticipation of 2003 operating losses, the Company contacted its lender to
request amendment of certain of its covenants at December 31, 2003, and certain
ongoing cumulative covenants in 2004. The Company received a waiver from its
lenders addressing the deficiency in achieving its EBITDA and fixed charge
coverage ratio covenants for the quarter ended December 31, 2003. Subsequently
the lenders entered into an additional amendment dated February 19, 2004 which
excludes $5,200 of certain charges from the cumulative twelve month calculation
for December 2003.
From time to time, the Company has requested and received additional short-term
borrowing authority under its revolving credit facility with Congress Financial
to cover seasonal working capital requirements. In July 2003, the Company
amended its revolving credit facility to increase the maximum loan amount to
$105,000 and to increase the revolving loan limit to $90,000.
30
2003 2002
--------- ---------
SHORT-TERM BORROWINGS:
Revolving credit facility $ 62,374 $ 54,069
Mortgage loan due monthly 4,495 4,744
11% Term Loan due Dec 2004 12,975 326
Maximum borrowings 75,572 62,543
Average borrowings 61,827 55,881
Weighted average interest rate 5.18% 5.00%
LONG-TERM OBLIGATIONS:
Capital leases due monthly through 2007 1,100 505
--------- ---------
18,570 5,575
Less: current installments 18,028 5,258
--------- ---------
$ 542 $ 317
========= =========
Principal payments required on the long-term obligations for 2005 through 2007
are approximately, $437, $98, and $7 respectively.
As of December 31, 2003, the revolving credit facility had $14,957 of borrowing
capacity. Management believes that the available balance on the amended credit
facility and internally generated cash flows will be sufficient to finance the
Company's seasonal working capital and capital expenditure needs in the coming
year. The Company is limited in its ability to pay dividends pursuant to the
terms of its Second Amended and Restated Loan and Security Agreement, as
amended.
Assets which are leased subject to capital leases include computer and office
equipment with a cost of $1,748 and accumulated depreciation of $631 at December
31, 2003.
NOTE 7. 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, 1994 and 2002, 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 8. 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, 22,553,280 shares are issued
and 16,037,799 are outstanding as of December 31, 2003.
At December 31, 2003, the Company has stock-based compensation plans which are
described below. The Company applies the principles of 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 $150,
$119, and $122, (after tax $93, $106, and $80) for the years ended December 31,
2003, 2002 and 2001, respectively.
31
2003 2002 2001
WEIGHTED- WEIGHTED- WEIGHTED-
2003 AVERAGE 2002 AVERAGE 2001 AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
1998 NON-QUALIFIED PLAN
Outstanding at January 1 779,138 $ 7.81 477,450 $ 8.74 353,825 $ 10.13
Granted at fair value 70,988 5.24 385,250 7.05 161,250 6.37
Granted below fair value -- -- -- -- -- --
Forfeited 70,000 7.93 (67,313) 10.41 (35,000) 12.00
Exercised -- -- (16,249) 6.23 (2,625) 6.20
------- -------- ------- -------- ------- -------------
Outstanding 780,126 $ 7.57 779,138 $ 7.81 477,450 $ 8.74
======= ======== ======= ======== ======= =============
Exercisable 366,936 $ 8.66 222,520 $ 10.16 170,549 $ 11.49
======= ======== ======= ======== ======= =============
Weighted-average fair value of options
granted during the period;
Issued at fair value on grant date $ 2.87 $ 4.03 $ 3.34
Issued below fair value on grant date -- -- --
1998 QUALIFIED PLANS
Outstanding at January 1 665,273 $ 6.31 460,843 $ 6.08 314,558 $ 5.92
Granted at fair value 227,512 5.54 203,000 6.89 190,495 5.72
Granted below fair value 45,456 1.00 22,960 1.00 -- --
Forfeited -- -- -- -- -- --
Exercised (26,122) 1.24 (21,530) 1.29 (44,210) 3.35
------- -------- ------- -------- ------- -------------
Outstanding 912,119 $ 6.00 665,273 $ 6.31 460,843 $ 6.08
======= ======== ======= ======== ======= =============
Exercisable 454,857 $ 5.89 336,023 $ 5.82 287,093 $ 5.68
======= ======== ======= ======== ======= =============
Weighted-average fair value of options
granted during the period;
Issued at fair value on grant date $ 3.05 $ -- $ 3.01
Issued below fair value on grant date 5.22 7.60 --
1988 PLAN
Outstanding at January 1 359,491 $ 13.18 440,753 $ 13.36 825,477 $ 12.42
Granted at fair value -- -- -- -- -- --
Granted below fair value -- -- -- -- -- --
Forfeited 29,607 17.50 (81,262) 14.15 (299,724) 14.30
Exercised -- -- -- -- (85,000) 1.00
------- -------- ------- -------- ------- -------------
Outstanding 329,884 $ 12.79 359,491 $ 13.18 440,753 $ 13.36
======= ======== ======= ======== ======= =============
Exercisable 329,884 $ 12.79 359,491 $ 13.18 437,003 $ 13.34
======= ======== ======= ======== ======= =============
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 1 121,773 $ 14.44 132,046 $ 13.39 188,913 $ 13.43
Granted at fair value -- -- -- -- -- --
Granted below fair value -- -- -- -- -- --
Forfeited -- -- -- -- (56,250) 13.67
Exercised (3,022) 1.00 (10,273) 1.00 (617) 0.67
------- -------- ------- -------- ------- -------------
Outstanding 118,751 $ 14.78 121,773 $ 14.44 132,046 $ 13.39
======= ======== ======= ======== ======= =============
Exercisable 118,751 $ 14.78 121,773 $ 14.44 132,046 $ 13.39
======= ======== ======= ======== ======= =============
Weighted-average fair value of options
granted during the period;
Issued at fair value on grant date $ -- $ -- $ --
Issued below fair value on grant date -- -- --
32
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE 12/31/03 LIFE PRICE AT 12/31/03 PRICE
----- -------- ---- ----- ----------- -----
1998 Non-Qualified
Plan 0-6 73,500 9.8 5.2361 2,750 5.3182
6-8 612,676 7.8 6.7224 272,986 6.5458
8-10 8,000 7.0 8.8963 5,250 8.8019
10-12 3,000 4.8 11.75 3,000 11.75
12-14 2,000 5.6 14.00 2,000 14.00
14-16 60,200 4.9 14.9927 60,200 14.9927
16-18 17,750 4.6 17.2764 17,750 17.2764
18-20 3,000 4.5 19.1875 3,000 19.1875
1998 Qualified Plans 0-4 130,607 7.6 1.00 130,607 1.00
4-6 216,500 9.7 5.4015 11,750 4.7234
6-8 491,012 6.8 6.4784 238,500 6.2876
8-10 12,000 7.3 8.79 12,000 8.79
10-14 46,000 5.2 13.6576 46,000 13.6576
14-18 16,000 4.3 16.25 16,000 16.25
1988 Plan 10-12 149,082 2.4 11.1585 149,082 11.1585
12-14 58,274 3.0 13.6074 58,274 13.6074
14-16 122,528 3.1 14.3834 122,528 14.3834
1987 Director Option
Plan 0-2 6,251 2.2 1.00 6,251 1.00
2-14 50,625 3.3 13.00 50,625 13.00
14-18 61,875 .3 17.625 61,875 17.625
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. In 2003, the Board of Directors
amended the 1998 Restricted Share Plan to discontinue beginning in 2003 the
grant of restricted shares in lieu of cash under such plan. Also in 2003, the
Board of Directors agreed that no future grants would be made under the 1998 Key
Employee Non-Qualified Stock Plan except to the extent options previously
granted under such plan are returned upon an employee's termination of service.
During 2003, the Company issued 30,000 restricted shares, which vest at a rate
of 7,500 shares per year if the following targets are achieved: i) 50% of each
tranche is based on quantitative performance goals established annually by the
compensation committee, and ii) 50% of each tranche is based on qualitative
performance goals established annually by the compensation committee. These
shares were issued from the 1998 Key Employee Stock Plan.
The 1998 Director Stock Incentive Plan authorizes an automatic issuance of
restricted shares in a number equal to $12,500 to non-employee Directors, which
vest at the next Annual Meeting of Shareholders. The 1987 Director Stock Option
Plan authorized the automatic issuance of 2,500 non-qualified stock options to
each non-employee Director as of the date of certain Annual Meetings of
Shareholders identified in the Plan. 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 following table is a summary of the shares authorized for issuance under
each of the plans:
Plan Shares Authorized
---- -----------------
1987 Director Option Plan 150,000
1988 Plan 1,775,000
1998 Non-Qualified Plan 800,000
1998 Qualified Plans 1,856,714
The 1989 Employee Stock Purchase Plan, as amended, authorizes the offering and
sale to employees of up to 975,000 shares
33
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
32,183 and 9,516 shares, to employees in 2002 and 2001, respectively. At
December 31, 2003, rights to purchase approximately 5,932 shares were
outstanding under this plan at an exercise price of $6.30 per share and 492,428
additional shares were available for issuance.
Under SFAS No. 123, as amended by SFAS No. 148, 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 2003, 2002 and 2001,
respectively: an expected life of one year for all years; a risk-free interest
rate of 1.9% for 2003 grants, 3.0% for 2002 grants and 6.1% for 2001 grants, and
expected volatility of 51.67% in 2003, 50.3% in 2002 and 43.3% in 2001. The
weighted-average fair value of those purchase rights granted in 2003, 2002 and
2001 was $.76, $1.13 and $1.22, respectively. The weighted average dividend
assumption was zero.
NOTE 9. EARNINGS PER SHARE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
DECEMBER 31, 2003
BASIC EPS
Net earnings available to common shareholders $ (7,455) 15,349,763 $ (0.49)
EFFECT OF DILUTIVE SECURITIES
Stock options -- 176,484
----------- ------------
DILUTED EPS
Net earnings available to common shareholders and assumed
conversions $ (7,455) 15,526,247 $ (0.49)
=========== ============ ========
DECEMBER 31, 2002
BASIC EPS
Net earnings available to common shareholders $ (1,378) 11,833,213 $ (0.12)
EFFECT OF DILUTIVE SECURITIES
Stock options -- 145,535
----------- ------------
DILUTED EPS
Net earnings available to common shareholders and assumed
conversions $ (1,378) 11,978,747 $ (0.12)
=========== ============ ========
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)
========== ============ =======
Options to purchase 738,373, 814,509 and 1,026,691 shares of common stock that
were outstanding at December 31, 2003, 2002, and 2001, respectively, and
unvested restricted shares of common stock of 51,575 were not included in the
computation of diluted EPS because the effect of the incremental shares would
have been antidilutive.
NOTE 10. 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 stock mutual funds (both domestic and international)
common stock Index funds, corporate bond funds, and funds containing U.S.
government obligations. The Plan also holds the Company's common stock in its
portfolio.
The equity portion of the plan portfolio consists primarily of securities that
are listed on registered exchanges, or are actively traded in the over the
counter market. The fixed income or debt portion of the plans portfolio consists
primarily of domestic and foreign securities that are rated as investment grade
or better. The high yield and merging growth portions of the debt portfolio may
be invested in securities rated below investment grade. Derivative investment
vehicles are not included in the portfolio.
34
The Company has adopted an investment policy statement that requires
diversification of investments both with respect to the asset classes held, as
well as the assets held within each asset class. In connection with this policy,
the Company establishes goals for the allocation of assets between equity
investments and debt investments. At December 31, 2003 and December 31, 2002,
those goals were 65% and 60% respectively for equity investments, and 35% and
40% respectively for debt investments.
At December 31, 2003 and 2002, the percentage of plan assets held in equity
securities, debt securities, real estate, and other investments was as follows:
December 31, 2003 December 31, 2002
----------------- -----------------
Equity Securities 68.2% 58.3%
Debt Securities 31.6% 41.6%
Real Estate Securities ---- -----
Other Investments ---- 0.1%
All
----- -----
100.0% 100.0%
===== =====
The plan's investment policy statement is developed in collaboration with the
plan's investment advisor. The policy gives consideration to the relationship of
assets to both current and projected liabilities. Using this approach, a
strategy is developed that attempts to minimize the portfolio's investment risk,
while at the same time determining a mix of investments, based upon historical
market performance, that will generate a rate of return sufficient to fund the
plans stream of projected liabilities as they become payable. The mix of
investments chosen to accomplish this objective is then combined with historical
market performance for each class of assets chosen to generate an anticipated
long term rate of return assumption for the plan.
At December 31, 2003 and 2002, the relationship of assets to the accumulated
benefit obligation for Huffy Corporation's defined benefit pension plans is as
follows:
December 31, 2003 December 31, 2002
----------------- -----------------
Salaried Plan Hourly Plan Salaried Plan Hourly Plan
------------- ----------- ------------- -----------
Accumulated Benefit
Obligation $94,195 $1,836 $85,452 $ 1,565
Market Value of Assets
$73,107 (1) $1,264 $60,196 (1) $ 929
(1) At December 31, 2003, the company stock included in the market value of
assets was $5,030, or 6.9% total of assets. At December 31, 2002, there was no
company stock included in plan assets.
The Company anticipates that it will contribute $246 to its pension plans during
2004.
In addition to the Company's defined benefit pension plans, the Company sponsors
several defined benefit health care and life insurance plans that provide
post retirement 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 sponsored in 1985-1987 a deferred compensation plan for the
benefit of highly compensated management employees. The eligible employees made
contributions to the plan and receive post retirement 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. The Company assumes that medical expenses
will increase at an annual rate of 9.0%, 8.0%, 7.0% and 6.0% for the years 2004
through 2007, with an ultimate healthcare trend rate of 5.0% for 2008 and
beyond. Further, the Company assumes an annual inflation rate of 5.5% for both
dental care and administrative expenses. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
2003 2002
---- ----
One-Percentage-Point Increase
Effect on total service and interest cost components $ 16 $ 16
Effect on postretirement benefit obligations 264 243
One-Percentage-Point Decrease
Effect on total service and interest cost components $ (14) $ (15)
Effect on postretirement benefit obligations (241) (222)
35
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 $492, $1,128 and $871,
for the years ended December 31, 2003, 2002 and 2001, respectively.
Health Care & Life Insurance
Pension Plans Plans Deferred Compensation Plan
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
Change in benefit
obligations:
Benefit obligation at
beginning of year $ 97,836 $ 81,302 $ 3,795 $ 4,077 $ 6,810 $ 6,546
Service cost 974 1,134 - - - -
Interest cost 6,489 6,358 268 276 441 443
Plan participant
contributions - - 78 80 - -
Amendments 893 873 - (538) - -
Actuarial loss 9,061 14,280 660 510 577 264
Disbursements (4,887) (5,341) (628) (610) (441) (443)
Curtailments - (770) - - - -
Settlements - - - - - -
---------- ---------- -------- ------- --------- --------
Benefit obligation at
end of period 110,366 97,836 4,173 3,795 7,387 6,810
---------- ---------- -------- ------- --------- --------
Change in plan assets:
Fair value of plan
assets at beginning of
year 61,126 73,220 - - - -
Actual return on plan
assets 10,102 (7,230) - - - -
Employer contribution 8,031 477 550 530 441 443
Plan participant
contribution - - 78 80 - -
Disbursements (4,887) (5,341) (628) (610) (441) (443)
Settlements - - - - - -
---------- ---------- -------- ------- --------- --------
Fair value of plan
assets at end of year 74,372 61,126 - - - -
---------- ---------- -------- ------- --------- --------
Funded status (35,994) (36,710) (4,173) (3,795) (7,387) (6,810)
Unrecognized net
actuarial loss 47,213 46,298 207 (452) 2,651 2,215
Unrecognized prior
service cost 1,573 802 (456) (497) - -
Unrecognized initial net
asset (324) (441) - - - -
---------- ---------- -------- ------- --------- --------
Net amount recognized 12,468 9,949 (4,422) (4,744) (4,736) (4,595)
---------- ---------- -------- ------- --------- --------
Amounts recognized in the
balance sheets consist of:
Prepaid benefit cost - - - - - -
Accrued benefit liability (32,046) (32,786) (4,422) (4,744) (4,736) (4,595)
Intangible asset 1,614 853 N/A N/A N/A N/A
Accumulated other
comprehensive income 42,900 41,882 N/A N/A N/A N/A
---------- ---------- -------- ------- --------- --------
Net amount recognized $ 12,648 $ 9,949 $ (4,422) $(4,744) $ (4,736) $ (4,595)
---------- ---------- -------- ------- --------- --------
Weighted-average
assumption:
Discount rate 6.25% 6.75% 6.25% 6.75% 6.25% 6.75%
Expected return on plan
assets 9.00% 9.0/9.50% N/A N/A N/A N/A
Rate of compensation
increase Age-Graded Age-Graded N/A N/A N/A N/A
36
The following table sets forth the plans' funded status and amounts recognized
in the Company's Consolidated Statements of Operations as of December 31, 2003,
2002 and 2001:
HEALTH CARE & LIFE DEFERRED
PENSION PLANS INSURANCE PLANS COMPENSATION PLAN
2003 2002 2003 2002 2003 2002
-------- -------- ------ ------ ------ ------
Components of net periodic benefit cost:
Service cost $ 974 $ 1,134 $ -- $ -- $ -- $ --
Interest cost 6,489 6,358 268 276 441 443
Expected return on plan assets (5,640) (6,513) -- -- -- --
Amortization of prior service cost 122 207 (41) (41) -- --
Amortization of initial net asset (117) (111) -- -- -- --
Recognized net actuarial loss (gain) 3,683 1,801 -- (21) 104 85
Curtailment gain -- 384 -- -- -- --
------------------ ------ ------ ------ ------
Net periodic benefit cost $ 5,512 $ 3,260 $ 227 $ 214 $ 545 $ 528
======== ======== ====== ====== ====== ======
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 $110,366, $106,397, and $74,372 respectively, as of
December 31, 2003, and $97,836, $93,891, and $61,126 respectively, as of
December 31, 2002.
NOTE 11. INCOME TAXES
The provisions for federal and state income taxes attributable to income from
continuing operations consist of:
2003 2002 2001
--------- --------- ----------
Current tax expense (benefit):
Federal $ (40) $ (69) $ (4,950)
State 37 16 (942)
Foreign 501 456 71
--------- --------- ----------
498 403 (5,821)
Deferred tax expense
Federal 272 (66) 1,430
Foreign (1,752) 203 --
--------- --------- ----------
(1,480) 137 1,430
Valuation Allowance 1,948 -- --
--------- --------- ----------
Total tax expense (benefit) $ 966 $ 540 $ (4,391)
========= ========= ==========
Certain foreign operations of the Company are subject to United States as well
as foreign income tax regulations. Therefore, the preceding sources of income
(loss) before income taxes by location and the provision (benefit) for income
taxes by taxing jurisdiction are not directly related. These earnings are
considered to be indefinitely invested, and accordingly, no United States
federal or state income taxes have been provided on these earnings.
Determination of the amount of unrecognized deferred taxes on these earnings is
not practical, however, unrecognized foreign tax credits would be available to
reduce a portion of the tax liability.
2003 2002 2001
--------- --------- -----------
Earnings (loss) before income taxes from continuing operations $ (6,511) $ 5,165 $ (12,801)
---------- --------- -----------
Tax provision (benefit) computed at statutory rate (2,279) 1,808 (4,480)
Increase (reduction) in taxes due to:
Impact of foreign losses for which a current tax
benefit is not available -- 272 71
State income taxes (net of federal tax benefit) 13 10 (612)
Intangible amortization -- 16 8
Foreign sales corporation/ EIE benefit (158) (105) (140)
Life insurance (4) 1 (104)
Non-deductible meals and entertainment 114 116 120
Tax credits -- (271) (71)
Change in prior year income tax estimate -- -- 662
Miscellaneous 36 (160) 155
Increase in valuation Allowance 1,948 -- --
Impact of foreign tax rates 1,296 (1,147) --
--------- --------- -----------
Actual tax provision (benefit) $ 966 $ 540 $ (4,391)
========= ========= ===========
37
The components of the net deferred tax asset as of December 31, 2003 and 2002
were as follows:
2003 2002
---- ----
DEFERRED TAX ASSETS:
Allowance for doubtful accounts $ 316 $ 363
Inventory, principally due to additional cost
inventoried for tax purposes 214 333
Intangibles 76 (501)
Accrued expenses 3,818 9,345
Pension liability 11,184 11,938
Postretirement benefits other than pensions 107 1,476
Environmental reserves 1,182 1,063
Net operating loss carry forward and tax credits 14,512 15,355
Other liabilities and reserves 4,656 1,925
---------- ----------
Gross deferred tax assets 36,065 41,297
---------- ----------
Valuation allowance (8,392) (6,444)
---------- ----------
Total deferred tax assets 27,673 34,853
---------- ----------
DEFERRED TAX LIABILITIES:
Property, plant and equipment 179 142
Other deferred liabilities 1,617 --
---------- ----------
Total deferred tax liabilities 1,796 142
---------- ----------
Net deferred tax asset $ 25,877 $ 34,711
========== ==========
The Company has U.S. net operating losses of $30,100, which expire on varying
dates between 2018 and 2023. The utilization of a portion of these net operating
loss carry forwards for federal income tax purposes is limited pursuant to the
annual utilization limitations under the provisions of Internal Revenue Code
Section 382. The Company has foreign net operating losses of $11,800, which
expire on varying dates between 2007 and 2010. The Company has state net
operating losses of $414, which expire on varying dates between 2004 and 2023.
The Company has various tax credits of $1,108, which expire through varying
dates between 2003 and 2019.
The valuation allowance for deferred tax assets as of December 31, 2003 and 2002
was $8,392 and $6,444, respectively. The valuation allowance changed for the
period ended December 31, 2003 by $1,948 related to current year net operating
losses incurred by certain foreign subsidiaries of the Company. In assessing the
reliability 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 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 $30,100 prior to the expiration of the net operating
loss carry-forwards in 2023. 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 December 31, 2003. 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 carry-forward 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 valuation allowance will be reflected as a
change in goodwill. Approximately $1,300 of the valuation allowance recorded at
December 31, 2003 is related to the Gen-X acquisition.
During 2003, the Company concluded an IRS audit, which resulted in a tax
assessment of approximately $4,600. The Company was able to utilize a portion of
its net operating loss carryforwards to offset this liability. Therefore, the
impact of this assessment had no effect on the Company's results of operations
or cash flows for the year ended December 31, 2003.
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
2000.
NOTE 12. CREDIT CONCENTRATION
Wal-mart is the Company's largest customer comprising 18% of consolidated net
sales in 2003 down from 20% and 18% in 2002 and 2001, respectively. Kmart, the
Company's next largest customer made up 12%, down from 23% and 38% of
consolidated net sales in 2003, 2002 and 2001, respectively. In January 2002,
Kmart Corporation filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. Kmart Corporation's receivable balance was 2.0% of total
accounts receivable at December 31, 2003 down from 4.0% of total accounts
receivable at December 31, 2002. Pre-bankruptcy receivables from Kmart were sold
during the second quarter 2002 and cash recovered consistent with previously
established
38
reserves. Wal-Mart's receivable balance was 19.1% of total accounts receivable
at December 31, 2003 up from 17.4% of total accounts receivable at December 31,
2002.
NOTE 13. SEGMENT DATA
Huffy classifies its business into two segments, sporting goods products and
services to retailers. The sporting goods segment is comprised of Huffy Bicycle
Company, Huffy Sports Company and Gen-X Sports, Inc., which market wheeled
recreational products, basketballs and other balls, golf clubs and accessories,
snowboards and accessories, hockey equipment and apparel, snow skis and
accessories, in-line skates, skateboards, other action sports accessories, the
excess/opportunity inventory products and licensing. The sporting goods segment
also includes Huffy companies which manufacture and market basketball
backboards. The services to retailers segment include the McCalla Company and
Huffy Service Solutions, Inc. which assemble and repair bicycles, assemble
grills, physical fitness equipment, and furniture, assemble and repair outdoor
power equipment, and provide merchandising services to major retailers and for a
number of well-known manufacturers and/or distributors serving the Home Center
channel.
Segment performance is measured on operating profit or loss (before interest,
corporate expenses and income taxes). The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in Note 1 of Notes to Consolidated Financial Statements.
Intercompany profit or loss is eliminated where applicable.
The information presented below is as of or for the year ended December 31.
NET SALES TO UNAFFILIATED CUSTOMERS OPERATING PROFIT
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Sporting Goods $347,019 $282,676 $252,109 $ 4,809 $19,231 $ (669)
Services to Retailers 90,657 87,108 79,029 3,681 (1,681) 3,000
-------- -------- -------- -------- ------- --------
Total segment data $437,676 $369,784 $331,138 8,490 17,550 2,331
======== ======== ========
Corporate expenses, net (9,374) (10,987) (14,004)
Net interest expense (5,627) (1,688) (1,128)
-------- ------- --------
Income (loss) from continuing
operations before income taxes $ (6,511) $ 4,875 $(12,801)
======== ======= ========
IDENTIFIABLE ASSETS DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES
2003 2002 2001 2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ---- ---- ---- ----
Sporting Goods $239,297 $222,328 $ 84,800 $ 3,480 $ 2,877 $ 3,953 $ 2,439 $ 1,760 $1,741
Services to Retailers 17,294 27,244 10,895 792 797 547 989 1,175 314
-------- -------- --------- ------- ------- ------- ------- ------- ------
Total segment data 256,591 249,572 95,695 4,272 3,674 4,500 3,428 2,935 2,055
Corporate 36,380 31,520 49,790 362 146 176 2,473 209 498
-------- -------- --------- ------- ------- ------- ------- ------- ------
Total $292,971 $281,092 $ 145,485 $ 4,634 $ 3,820 $ 4,676 $ 5,901 $ 3,144 $2,553
======== ======== ========= ======= ======= ======= ======= ======= ======
2003 2002 2001
---- ---- ----
NET SALES BY LOCATION (1)
North America $ 407,647 $ 343,486 $ 331,138
Europe 30,029 26,298 N/A
--------------- --------------- ---------------
Total Net Sales $ 437,676 $ 369,784 $ 331,138
ASSETS
North America $ 172,268 $ 230,547 $ 145,485
Europe 120,703 50,545 N/A
--------------- --------------- ---------------
Total Assets $ 292,971 $ 281,092 $ 145,485
LONG-LIVED ASSETS
North America $ 72,917 $ 71,476 $ 39,724
Europe 45,844 48,518 N/A
--------------- --------------- ---------------
Total Long-lived Assets $ 118,761 $ 119,994 $ 39,724
(1) Sales by location are based upon where products are sold.
39
NOTE 14. 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 $5,744, $3,490, and
$3,488, years ended December 31, 2003, 2002, and 2001, respectively.
Future minimum rental commitments under non-cancelable operating leases at
December 31, 2003 are as follows:
Years Ended
-----------
2004 $ 5,836
2005 5,596
2006 5,406
2007 4,367
2008 1,524
Thereafter 594
----------
Total minimum $ 23,323
==========
The Company sold the assets of the Gerry Baby Products Company on April 27,
1997. Until July of 2002 when it expired, the Company maintained an occurrence
based insurance policy covering product liability expense associated with
products manufactured while it owned Gerry Baby Products. When this policy
expired, the Company purchased new insurance which provides claims-made coverage
on each claim that exceeds $5.0 million in value.
LITIGATION
The Company along with numerous California water companies and other potentially
responsible parties ("PRPs") for the Baldwin Park Operable Unit of the San
Gabriel Valley Superfund have been named in fourteen civil lawsuits which allege
claims related to the contaminated groundwater in the Azusa, California area
(collectively, the "San Gabriel Cases").
The San Gabriel Cases had been stayed for a variety of reasons, including a
number of demurrers and writs taken in the Appellate Division, relating
primarily to the California Public Utilities Commission ("PUC") investigation
described below. The resulting Appellate Division decisions were reviewed by the
California Supreme Court, which ruled in February 2003. The cases have been
reactivated as a result of the California Supreme Court's decision, with the
trial level Coordination Judge holding a number of Status Conferences on all of
the cases, at which conferences issues pertaining to the three master complaints
(two of which include the Company as a defendant), demurrers to such master
complaints, case management orders, selection of "bellwether" plaintiffs,
initial written discovery, and hearings to resolve the PUC related issues
remanded by the California Supreme Court were discussed. As noted by the matters
being discussed with the Court, the toxic tort cases are in their initial
stages. Thus, it is impossible to currently predict the outcome of any of the
actions.
The Company, along with the other PRPs for the Baldwin Park Operable Unit of the
San Gabriel Valley Superfund Site (the "BPOU"), was also named in four civil
lawsuits filed by water purveyors. The water purveyor lawsuits alleged CERCLA,
property damage, nuisance, trespass and other claims related to the contaminated
groundwater in the BPOU (collectively, the "Water Entity Cases"). The Company
was named as a direct defendant by the water purveyor in two of these cases, and
was added as a third party defendant in the two others by Aerojet General
Corporation, which, in those cases, was the only PRP sued by the water
purveyors. Each of the Water Entity Cases have been settled through the entry of
the Project Agreement. According to the terms of the Project Agreement, the
Water Entity Cases have been dismissed without prejudice. The Third Party
complaints filed by Aerojet in connection with the Water Entity Cases have also
been dismissed without prejudice, subject to Aerojet filing a new suit in the
event a final allocation agreement cannot be worked out.
On March 12, 1998, the PUC commenced an investigation in response to the
allegations in the toxic tort actions that "drinking water delivered by the
water utilities caused death and personal injury to customers." The PUC's
inquiry addressed two broad issues central to these allegations: 1) "whether
current water quality regulation adequately protects the public health;" and 2)
"whether respondent utilities are (and for the past 25 years have been)
complying with existing drinking water regulation." On November 2, 2000, the PUC
issued its Final Opinion and Order Resolving Substantive Water Quality Issues.
Significantly, the Order finds, in pertinent part, that: 1) "existing maximum
contaminant level ("MCLs") and action level ("ALs") established by the DHS are
adequate to protect the public health;" 2) "there is a significant margin of
safety when MCLs are calculated so that the detection of carcinogenic
contaminants above MCLs that were reported in this investigation are unlikely to
pose a health risk;" 3) based upon its comprehensive review of 25 years of
utility compliance records, that for all periods when MCLs and ALs for specific
chemicals were in effect, the PUC regulated water companies complied with DHS
testing requirements and advisories, and the water served by the water utilities
was not harmful or dangerous to health; and 4) with regard to the period before
the adoption by DHS of MCLs and ALs, a further limited investigation by the PUC
Water Division will be conducted.
40
Based upon information presently available, such future costs are not expected
to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
As previously reported, Huffy Corporation divested its Washington Inventory
Service subsidiary in November 2000. Subsequently, in late 2001 and mid 2002,
two class action suits were filed in California seeking damages for alleged
violations of labor practices. As a previous owner, Huffy was potentially
obligated to indemnify the subsidiary purchaser for some portion of any
liability it or such subsidiary had in the first case and had potential
liability in the latter case, both limited to the periods it owned the
subsidiary. After protracted negotiations and on advice of counsel, a settlement
was negotiated and preliminarily approved on January 28, 2003 by the Superior
Court of California, County of Los Angeles. A charge to discontinued operations
of $7,914 or $0.43 per common share was taken in the fourth quarter of 2002 to
record the Company's estimated obligation related to this matter. The settlement
was given final court approval, pending compliance with the terms of the Class
Settlement Agreement, and a Judgment of Dismissal was issued on April 7, 2003.
The Claims Administrator issued a report as to claims made and on the amount of
payments to be made in the fourth quarter 2003, which is expected to approximate
$5,200 for the Company. The Company contributed $5,121 into a court appointed
escrow account for the payment of claims. The Company revised its estimate of
claims which resulted in income from discontinued operations for the year ended
December 31, 2003 of $2,259 ($1,404, net of tax). Approximately $200 of claims
remain to be paid in the first quarter of 2004.
LABOR RELATIONS
Huffy Sports Company negotiated a new collective bargaining agreement in June
2003 that expires on June 19, 2005. Of the Company's total workforce, 4% of the
employees are subject to the new agreement, which included a three percent (3%)
annual wage increase, improved retirement benefits, expanded healthcare network
and language enhancing the parties relationships.
NOTE 15. 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 $3,378 ($5,232 before
discounting at 6.25%) at December 31, 2003. Of that amount, the Company has a
deposit of $2,377 that is held in escrow under the terms of the settlement
agreement. Amounts in escrow will be used to fund future costs and will serve as
a long-term performance assurance pending the completion of remediation.
Management expects that the expenditures relating to costs currently accrued
will be made over a period of fourteen years. The undiscounted amount of
expenditures over the next five years related to this liability, 2004 through
2008, are estimated to be $702, $307, $304, $416, and $501 respectively. Given
the nature and amount of current litigation related to the San Gabriel Valley
Superfund site, it is at least reasonably possible that a change in the estimate
of the Company's obligation will occur in the near term.
The environment escrow accounts are classified as current prepaid assets on the
consolidated balance sheet if the funds are expected to be expended within the
next 12 months and as long-term other assets for those funds, which are expected
to be expended beyond 12 months. The current escrow balance at December 31, 2003
was $879 and the long-term escrow balance
41
at December 31, 2003 was $1,498. The environmental accrual is similarly
classified on the consolidated balance sheet with $879 shown in accrued
liabilities and $2,499 shown in other long-term liabilities as of December 31,
2003.
NOTE 16. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses the financial
accounting and reporting for legal obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
adoption of SFAS 143 did not materially affect the Company's Financial
Statements for the three months or nine months ended September 27, 2003. The
cumulative effect of implementing SFAS 143 has had an immaterial effect on the
Company's financial statements taken as a whole.
The Company has adopted SFAS No. 146 "Accounting for Costs Associated with Exit
or Disposal Activities" ("SFAS 146"). SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs associated with
exit or disposal activities, and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Costs addressed by SFAS 146 include costs to terminate a
contract that is not a capital lease, costs of involuntary employee termination
benefits pursuant to a one-time benefit arrangement, costs to consolidate
facilities, and costs to relocate employees. SFAS 146 is effective for exit or
disposal activities that were initiated after December 31, 2002. SFAS 146
changes the timing of expense recognition for certain costs the Company incurs
while closing facilities or undertaking other exit or disposal activities;
however, the timing difference is not typically significant in length. Adoption
of SFAS 146 did not have a material impact on the Company's Financial Statements
for the year ended December 31, 2003.
The Company has adopted Financial Accounting Standards Board ("FASB")
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. FIN 45 also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions were applicable to guarantees issued or modified after December 31,
2002. The adoption of FIN 45 did not have a material impact on the Company's
Financial Statements for the year ended December 31, 2003.
The Company has adopted SFAS No. 150, "Accounting for Certain Financial
instruments with Characteristics of Both Liabilities and Equity". The Statement
requires issuers to classify as liabilities (or assets in some circumstance)
three classes of freestanding financial instruments that embody obligations for
the issuer. Generally, the Statement is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. Adoption
did not have an effect on the financial statements for the year ended December
31, 2003.
The Company adopted SFAS No. 149, "Amendment of Statement 133 on derivative
Instruments and Hedging Activities", which amends and clarifies accounting for
derivative instruments and hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 149 provides
guidance relating to decisions made (a) as part of the Derivatives
Implementation Group process, (b) in connection with other FASB projects dealing
with financial instruments and (c) regarding implementation issues raised in the
application of the definition of a derivative and the characteristics of a
derivative that contains financing components. SFAS No. 149 is effective for
contracts entered into or modified and for hedging relationships designated
after June 28, 2003. The application of this Statement did not have a material
impact on the company's consolidated financial statements.
NOTE 17. DISCONTINUED OPERATIONS
During the year ended December 31, 2003, the Company was approached by a
potential purchaser interested in acquiring the Volant(R) Ski business, a
portion of the Company's sporting good segment. After diligent negotiations, the
Company decided to sell the assets of this business, excluding certain
receivables and liabilities. Reflecting the above actions, the Company recorded
net income from Discontinued Operations totaling $22. This income includes
several components. The first is the loss on the disposal of the Company's
Volant(R) Ski business, $988, ($904 after tax). Also included was the 2003
operating loss incurred by the Volant(R) Ski business, $523, ($478 after tax).
The third component relates to Huffy Corporation's divestiture of its Washington
Inventory Service subsidiary (WIS) in November of 2000. The operating income of
$290 ($257 after tax) for the Volant(R) Ski business for the year ended December
31, 2002 has been reclassified to discontinued operations. The assets and
liabilities of the Volant(R) Ski business have not been reclassified on the
accompanying consolidated balance sheet as of December 31, 2002 based upon
materiality.
42
Subsequent to the divestiture of WIS, in late 2001 and mid 2002, two class
action suits were filed in California seeking damages for alleged violations of
labor practices. As a previous owner, Huffy was potentially obligated to
indemnify the subsidiary purchaser for some portion of any liability it or such
subsidiary had in the first case and had potential liability in the latter case,
both limited to the periods it owned the subsidiary. During the year ended
December 31, 2002, the Company recognized expenses of $9,185 ($5,970 after tax),
including the pending case settlement, associated legal expenses 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 year ended December 31, 2002. The
settlement was given final court approval, pending compliance with the terms of
the Class Settlement Agreement, and a Judgment of Dismissal was issued on April
7, 2003. The Claims Administrator issued its report as to claims made and on the
amount of payments to be made in 2003, which was expected to approximate $5,200
for the Company. The Company contributed $5,121 into a court appointed escrow
account for the payment of claims. As a result of this report, the Company
revised its estimate of claims which resulted in an income from discontinued
operations for the year ended December 31, 2003 of $3,605, ($2,239, after tax).
In addition, based upon claims made, the Company recorded additional reserves
for product liability related to products manufactured and sold by businesses
which it previously owned. The charges recorded during 2003 were $1,346 ($835
after tax). The net income from Discontinued Operations for the year ended
December 31, 2003, was $748, ($22 after tax).
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 2003, 2002 and 2001 as
follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL [1]
----------- ----------- ----------- ----------- ---------
2003
Net sales $ 94,448 $ 116,584 $ 105,658 $ 120,986 $ 437,676
Gross profit 19,920 25,126 19,861 13,351 78,258
------------ ------------ ------------- ------------- ----------
Earnings from continuing operations (741) 1,796 2,121 (10,653) (7,477)
Discontinued operations (611) 975 797 (1,139) 22
------------ ------------ ------------- ------------- ----------
Net earnings (1,352) 2,771 2,918 (11,792) (7,455)
EARNINGS PER COMMON SHARE:
Basic
Earnings from continuing operations $ (0.05) $ 0.12 $ 0.14 $ (0.67) $ (0.49)
Discontinued operations (0.04) 0.06 0.05 (0.07) ---
------------ ------------ ------------- ------------- ----------
Net earnings per common share $ (0.09) $ 0.18 $ 0.19 $ (0.74) $ (0.49)
Diluted
Earnings from continuing operations $ (0.05) $ 0.12 $ 0.13 $ (0.67) $ (0.49)
Discontinued operations (0.04) 0.06 0.05 (0.07) ---
------------ ------------ ------------- ------------- ----------
Net earnings per common share $ (0.09) $ 0.18 $ 0.18 (0.74) $ (0.49)
2002
Net sales $ 70,385 $ 93,413 $ 83,028 $ 122,958 $ 369,784
Gross profit 12,001 17,031 15,955 20,586 65,573
------------ ------------ ------------- ------------- ----------
Earnings from continuing operations 624 1,275 1,669 767 4,335
Discontinued operations -- -- (723) (4,990) (5,713)
------------ ------------ ------------- ------------- ----------
Net earnings 624 1,275 946 (4,223) (1,378)
EARNINGS PER COMMON SHARE:
Basic
Earnings from continuing operations $ 0.06 $ 0.12 $ 0.14 $ 0.04 $ 0.36
Discontinued operations -- -- (0.06) (0.33) (0.48)
------------ ------------ ------------- ------------- ----------
Net earnings per common share $ 0.06 $ 0.12 $ 0.08 $ (0.29) $ (0.12)
Diluted
Earnings from continuing operations $ 0.06 $ 0.12 $ 0.14 $ 0.05 $ 0.36
Discontinued operations -- -- (0.06) (0.34) (0.48)
------------ ------------ ------------- ------------- ----------
Net earnings per common share $ 0.06 $ 0.12 $ 0.08 $ (0.29) $ (0.12)
[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.
NOTE 19. SUBSEQUENT EVENTS
On February 17, 2004, the Company announced a plan to consolidate the
management, sales, marketing, procurement, logistics and customer service
functions of its Sporting Goods segment. Management believes that the
consolidation of these functions within the sporting goods segment will position
the Company to better serve its customers. This consolidation will result in a
reduction of approximately twenty percent, or more than one hundred people, in
the existing sporting goods workforce. The Company estimates that the costs
associated with this consolidation plan will be in the range of $4,000 to $6,000
in 2004. The services to retail segment will continue to operate as an
independent business under its current management.
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF CONTROLS AND PROCEDURES
The Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 as of the end of the period covered by
the report. Based on the evaluation, performed under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer (the "CEO") and Chief Financial Officer (the "CFO"), the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
the report.
CHANGES IN INTERNAL CONTROLS
There were no significant changes with respect to the Company's internal
controls over financial reporting or in other factors that could significantly
affect internal controls over financial reporting during the Company's fiscal
fourth quarter.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY
The name, age and background information for each of the Company's Directors is
set forth in the section entitled ELECTION OF DIRECTORS and the table therein
contained in the Company's Proxy Statement for its 2004 Annual Meeting of
Shareholders, and is hereby incorporated herein by reference.
EXECUTIVE OFFICERS OF THE COMPANY
The Executive Officers are elected annually to their respective positions,
effective at the April meeting of the Board of Directors. The Executive Officers
of the Company at January 7, 2004, were as follows:
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
Paul R. D'Aloia(1) 45 Chief Executive Officer and August 2003
President (3)
Timothy G. Howard 57 Vice President -- Controller September 1978
Robert W. Lafferty(2) 59 Vice President -- Finance, January 2000
Chief Financial Officer
and Treasurer
Nancy A. Michaud 57 Vice President -- General February 1993
Counsel and Secretary
(1) Mr. D'Aloia was elected Chief Executive Officer on January 7, 2004. Mr.
D'Aloia was previously elected President and Chief Operating Officer on August
20, 2003. Prior to such election, he served as Group President and General
Manager of Huffy Sports Group from September 2002 to August 2003, President and
General Manager of Huffy Bicycle Company from 2001 to 2003, President and
General Manager of Huffy Service Solutions, Inc. from 1999 to 2001 and President
and General Manager of Huffy Sports Company from 1997 to 1999.
(2) Mr. Lafferty was elected Vice President-Finance, Chief Financial Officer and
Treasurer on January 3, 2000. Prior to such election, he served as Vice
President and Chief Financial Officer of Gencor Industries, Inc. (a manufacturer
of highway construction and food processing equipment) from 1998; prior thereto
he was Senior Vice President of Hoechst Marion Roussel
44
AG (a pharmaceutical business) from 1996; prior thereto he was Senior Vice
President, Finance of Hoechst Marion Roussel Inc. (a pharmaceutical business).
(3) Mr. Don R. Graber retired as Chief Executive Officer of the Company on
January 7, 2004.
Information regarding compliance with Section 16(a) of the Securities and
Exchange Act set forth in the section entitled SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE is contained in the Company's Proxy Statement for
its 2004 Annual Meeting of Shareholders, and is incorporated herein by
reference.
AUDIT COMMITTEE DISCLOSURES
The names of each of the members of the Audit Committee and the identification
of the Committee's audit committee financial experts is set forth in the section
entitled MEETINGS BY, AND CERTAIN COMMITTEES OF, THE COMPANY'S BOARD OF
DIRECTORS in the Company's Proxy Statement for its 2004 Annual Meeting of
Shareholders, and is hereby incorporated herein by reference.
CORPORATE GOVERNANCE
In 2003, the Board of Directors adopted Corporate Governance Guidelines. These
guidelines along with the charters of the Company's Audit, Compensation and
Nominating and Governance Committees, the Company's Standards of Ethics and
Behavior and the Code of Ethics for Officers and Company Presidents are
available on the Company's website, www.huffy.com, and will be made available to
any shareholder by requesting in writing a copy of any such document from the
Company, in care of the Secretary, at its executive offices. The Company has had
in place for many years a Standards of Ethics and Behavior, the Company's code
of conduct and ethics. In 2003, the Company also adopted an additional Code of
Ethics for Officers and Company Presidents, including the Company's Chief
Executive Officer and Chief Financial Officer.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is set forth in the section entitled
EXECUTIVE COMPENSATION and the tables therein, contained in the Company's Proxy
Statement for its 2004 Annual Meeting of Shareholders, and is hereby
incorporated herein by reference. Notwithstanding anything to the contrary set
forth herein or in any of the Company's previous filings under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
that might incorporate future filings, including this Form 10-K, the section
entitled REPORT OF COMPENSATION COMMITTEE and the Performance Graph which is set
forth in the Company's Proxy Statement for its 2004 Annual Meeting of
Shareholders are not deemed to be incorporated by reference in this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The number of shares of Common Stock of the Company beneficially owned by each
Director and by all Directors and Officers as a group as of January 2, 2004, set
forth in the section entitled SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT, and the table therein, is contained in the Company's Proxy
Statement for its 2004 Annual Meeting of Shareholders, and is hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain transactions with management set forth in the section
entitled CERTAIN RELATIONSHIPS AND OTHER RELATED TRANSACTIONS is contained in
the Company's Proxy Statement for its 2004 Annual Meeting of Shareholders, and
is hereby incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding the fees billed by the Company's principal accountants and
the Audit Committee's pre-approval policies and procedures set forth in the
section entitled RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
contained in the Company's Proxy Statement for its 2004 Annual Meeting of
Shareholders, and is hereby incorporated herein by reference.
45
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial statements
The following financial statements are filed as part of this
report. See index on page 2 of this report.
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
(2) The Accountants' Report on Consolidated Financial Statements
and the following Financial Statement Schedule of the Company
is included as part of this Report at Item 8 hereof:
Schedule II. Valuation and Qualifying Accounts -- years ended
December 31, 2003, 2002, and 2001
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been
omitted.
(3) The exhibits shown in "Index to Exhibits" are filed as a part
of this Report.
(b) REPORTS ON FORM 8-K
During the fiscal quarter ended December 31, 2003, the Company
filed one report on Form 8-K dated October 15, 2003. This
report on Form 8-K discussed the Company's earnings release
for its financial results for the fiscal quarter ended
September 27, 2003.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HUFFY CORPORATION
By /s/ Paul R. D'Aloia Date: March 5, 2004
-----------------------------------
Paul R. D'Aloia
Chief Executive Officer and President
(Principal Executive Officer and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Timothy G. Howard Date: March 5, 2004
-----------------------------------
Timothy G. Howard
Vice President - Controller
(Principal Accounting Officer)
/s/ Robert W. Lafferty Date: March 5, 2004
-----------------------------------
Robert W. Lafferty
Vice President - Finance, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Don R. Graber Date: March 5, 2004
-----------------------------------
Don R. Graber, Director
/s/ W. Anthony Huffman Date: March 5, 2004
-----------------------------------
W. Anthony Huffman, Director
/s/ Linda B. Keene Date: March 5, 2004
-----------------------------------
Linda B. Keene, Director
/s/ Donald K. Miller Date: March 5, 2004
-----------------------------------
Donald K. Miller, Director
/s/ James F. Robeson Date: March 5, 2004
-----------------------------------
James F. Robeson, Director
/s/ Thomas C. Sullivan Date: March 5, 2004
-----------------------------------
Thomas C. Sullivan, Director
/s/ Joseph P. Viviano Date: March 5, 2004
-----------------------------------
Joseph P. Viviano, Director
/s/ Gerald B. Wasserman Date: March 5, 2004
-----------------------------------
Gerald B. Wasserman, Director
47
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Huffy Corporation:
Under date of February 12, 2004, we reported on the consolidated balance sheets
of Huffy Corporation and subsidiaries (Company) as of December 31, 2003 and
2002, and the related consolidated statements of operations, cash flows and
shareholders' equity for each of the years in the three-year period ended
December 31, 2003, which are included in the Company's 2003 Annual Report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule as listed in Part IV, item 15(a)(2) of Form 10-K. The
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
Cincinnati, OH
February 12, 2004
48
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Huffy Corporation:
We consent to the incorporation by reference in the Registration Statements, and
the Prospectuses constituting part thereof, of (i) the Form S-8 Registration
Statement (No. 333-62903) pertaining to the Master Deferred Compensation Plan;
(ii) the Form S-8 Registration Statement (No. 333-52095) pertaining to the 1998
Director Stock Incentive Plan, as amended, the 1998 Key Employee Stock Plan, as
amended, and the 1998 Restricted Share Plan, as amended; (iii) the Form S-8
Registration Statement (No. 333-52077) pertaining to the 1998 Key Employee
Non-Qualified Stock Plan; (iv) the Form S-8 Registration Statement (Nos.
33-25487 and 333-05544) pertaining to the 1988 Stock Option Plan and Restricted
Share Plan; (v) the Form S-8 Registration Statement (No. 33-25143) pertaining to
the 1987 Director Stock Option Plan; (vi) the Form S-8 Registration Statement
(Nos. 33-28811 and 33-42724) pertaining to the 1989 Employee Stock Purchase Plan
(vii) the Form S-8 Registration Statement (No. 33-44571) pertaining to five
company savings plans; (viii) the Form S-3 Registration Statement (No.
333-106018) dated July 11, 2003 pertaining to the contribution of common shares
of Huffy Corporation into the Huffy Corporation Retirement Plan; (ix) the Form
S-8 Registration Statement, (No. 333-107435) dated July 29, 2003 pertaining to
the 1998 Director Stock Incentive Plan, the 1998 Key Employee Stock Plan and the
1998 Restricted Share Plan; and (x) the Form S-8 Registration Statement (No.
333-107436) dated July 29, 2003 pertaining to the 1998 Key Employee
Non-Qualified Stock Plan of our report dated February 12, 2004, relating to the
consolidated balance sheets of Huffy Corporation and subsidiaries as of December
31, 2003 and 2002, and the related consolidated statements of operations, cash
flows and shareholders' equity for each of the years in the three-year period
ended December 31, 2003, which report appears in the Company's 2003 Annual
Report on Form 10-K. Our report references to the adoption of the provision of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
as of January 1, 2002.
/s/ KPMG LLP
KPMG LLP
Cincinnati, Ohio
February 12, 2004
49
HUFFY CORPORATION
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
BALANCE AT ADDITIONS ADDITIONS
BEGINNING OF FROM CHARGED TO COSTS BALANCE AT
PERIOD ACQUISITIONS AND EXPENSES DEDUCTIONS END OF PERIOD
Reserves deducted from assets to which
they apply:
Allowance for doubtful accounts:
Year ended December 31, 2003 $1,214 -- 2,395 (2,335) $1,274
Year ended December 31, 2002 $5,766 131 720 (5,403) $1,214
Year ended December 31, 2001 $1,372 -- 4,819 (425) $5,766
Note: Represents accounts written off, less recoveries for allowance for
doubtful accounts.
50
INDEX TO EXHIBITS
EXHIBIT FORM 10-K
NO. EXHIBITS
--- --------
3.a Amended Articles of Incorporation, dated June 16, 1995, incorporated
by reference to Exhibit (3)(i) to Form 10-Q for the quarter ended June
30, 1995 *
3.b Amendment to Articles of Incorporation, dated October 17, 2002,
incorporated by reference to Exhibit 3.b to Form 10-K for the fiscal
year ended December 31, 2002 *
3.c Amended and Restated Code of Regulations, as amended, dated April
27, 2000, incorporated by reference to Exhibit (3) to Form 10-Q for
the fiscal quarter ended April 1, 2000 *
4.a Specimen Common Stock Certificate of Huffy Corporation ***
4.b Rights Agreement, dated as of December 16, 1988, as amended August
23, 1991, and as amended and restated as of December 9, 1994, between
Huffy Corporation and Bank One, Indianapolis, National Association,
incorporated by reference to Form 8-K, dated December 22, 1994 *
4.c Amendment appointing Harris Trust and Savings Bank Successor Rights
Agent, dated as of June 10, 1997, to Rights Agreement as amended and
restated as of December 9, 1994, between Huffy Corporation and Bank
One, Indianapolis, National Association, incorporated by reference
to Exhibit (4)(c) to Form 10-K for the fiscal year ended December
31, 1999 *
4.d Amendment appointing LaSalle Bank, N.A. Successor Rights Agent,
dated as of February 18, 2000, to Rights Agreement as amended
and restated as of December 9, 1994 between Huffy Corporation
and Bank One, Indianapolis, National Association, incorporated
by reference to Exhibit (4) to Form 10-Q for the fiscal quarter
ended April 1, 2000 *
4.e Amendment No. 1 to Rights Agreement between Huffy Corporation
and LaSalle Bank National Association, dated as of June 5, 2002,
incorporated by reference to Exhibit 3 to Form 8-A/A dated July 1, 2002 *
4.f 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,
Congress Financial Corporation (Central), and the Lenders
(as defined in the Agreement),incorporated by reference to
Exhibit 2.1(e) to Form 8-K filed October 4, 2002 *
4.g Amendment No. 1 to the Second Amended and Restated Loan
Agreement, dated November 20, 2002 by and among Huffy
Corporation and its subsidiaries, Gen-X Sports Inc. and its
subsidiaries, Gen-X Sports, Inc. and its subsidiaries and
Congress Financial Corporation (Central), incorporated by reference
to Exhibit 4.g to Form 10-K for the fiscal year ended December 31,
2002 *
* Indicates that exhibit is incorporated by reference into this Annual
Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report on
Form 10-K for the year ended December 31, 2003.
51
EXHIBIT FORM 10-K
NO. EXHIBITS
--- --------
4.h Amendment No. 2 to the Second Amended and Restated Loan
Agreement, dated as of December 31, 2002, by and among Huffy
Corporation and its subsidiaries, Gen-X Sports Inc. and its
subsidiaries, Gen-X Sports, Inc. and its subsidiaries and Congress
Financial Corporation (Central) *
4.i Amendment No. 3 to the Second Amended and Restated Loan
and Security Agreement, dated January 31, 2003 by and
among Huffy Corporation and its subsidiaries, Gen-X Sports
Inc. and its subsidiaries, Gen-X Sports, Inc. and its subsidiaries
and Congress Financial Corporation (Central) *
4.j Amendment No. 4 to the Second Amended and Restated Loan
and Security Agreement, dated March 14, 2003 by and
among Huffy Corporation and its subsidiaries, Gen-X Sports
Inc. and its subsidiaries, Gen-X Sports, Inc. and its subsidiaries
and Congress Financial Corporation (Central), incorporated by
reference to Exhibit (4.a) to Form 10-Q for the fiscal quarter ended
March 29, 2003 *
4.k Amendment No. 5 to the Second Amended and Restated Loan
and Security Agreement, dated May 2, 2003 by and
among Huffy Corporation and its subsidiaries, Gen-X Sports
Inc. and its subsidiaries, Gen-X Sports, Inc. and its subsidiaries
and Congress Financial Corporation (Central), incorporated by
reference to Exhibit (4.b) to Form 10-Q for the fiscal quarter ended
March 29, 2003 *
4.l Amendment No. 6 to the Second Amended and Restated Loan
and Security Agreement, dated May 9, 2003 by and
among Huffy Corporation and its subsidiaries, Gen-X Sports
Inc. and its subsidiaries, Gen-X Sports, Inc. and its subsidiaries
and Congress Financial Corporation (Central), incorporated by
reference to Exhibit (4.a) to Form 10-Q for the fiscal quarter ended
June 28, 2003 *
4.m Amendment No. 7 to the Second Amended and Restated Loan
and Security Agreement, dated July 9, 2003 by and
among Huffy Corporation and its subsidiaries, Gen-X Sports
Inc. and its subsidiaries, Gen-X Sports, Inc. and its subsidiaries
and Congress Financial Corporation (Central), incorporated by
reference to Exhibit (4.b) to Form 10-Q for the fiscal quarter ended
June 28, 2003 *
4.n Amendment No. 8 to the Second Amended and Restated Loan
and Security Agreement, dated July 31, 2003 by and
among Huffy Corporation and its subsidiaries, Gen-X Sports
Inc. and its subsidiaries, Gen-X Sports, Inc. and its subsidiaries
and Congress Financial Corporation (Central), incorporated by
reference to Exhibit (4.c) to Form 10-Q for the fiscal quarter ended
June 28, 2003 *
* Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report
on Form 10-K for the year ended December 31, 2003.
52
EXHIBIT FORM 10-K
NO. EXHIBITS
--- --------
4.o Amendment No. 9 to the Second Amended and Restated Loan
and Security Agreement, dated January 15, 2004 by and
among Huffy Corporation and its subsidiaries, Gen-X Sports
Inc. and its subsidiaries, Gen-X Sports, Inc. and its subsidiaries
and Congress Financial Corporation (Central) ***
4.p Amendment No. 10 to the Second Amended and Restated Loan
and Security Agreement, dated February 19, 2004 by and among
Huffy Corporation and its subsidiaries, Gen-X Sports, Inc. and its
Subsidiaries, Gen-X Sports Inc. and its subsidiaries and Congress
Financial Corporation (Central) ***
10.a Special Deferred Compensation Agreements, as amended, between
Huffy Corporation and certain of its officers and key
employees, in substantially the forms incorporated by reference
to Exhibit (ix) to Form 10-K for the fiscal year ended June 24,
1977, to Exhibit (2) to Form 10-Q for the fiscal quarter ended
September 23, 1983, and to Exhibit (19)(c) to Form 10-Q for the
fiscal quarter ended September 30, 1986 *
10.b Deferred Compensation Agreements, as amended, between Huffy
Corporation and certain of its officers and key employees, in
substantially the forms incorporated by reference to Exhibit
(vi) to Form 10-K for the fiscal year ended June 29, 1979, and
to Exhibit (3) to Form 10-Q for the fiscal quarter ended
September 23, 1983 *
10.c Master Deferred Compensation Plan, incorporated by reference to
Exhibit 4 to Form S-8, dated August 28, 1998
10.d Form of Amended and Restated Severance/Retention/Non-Compete
Agreements, as revised and restated, between Huffy
Corporation and its Officers, incorporated by reference to
Exhibit 10.a to Form 10-Q for the fiscal quarter ended July 1, 2000 *
10e. Form of Amendment to Amended and Restated Severance/ Retention/Non-
Compete Agreements between Huffy Corporation and its officers ***
10.f Long Term Incentive Plan ***
10.g Description of supplemental group life insurance arrangement between
Huffy Corporation and certain officers and key employees, incorporated
by reference to Exhibit (10)(aa) to Form 10-K for the fiscal year
ended December 31, 1991 *
10.h Description of financial planning and tax preparation services,
and automobile allowances, between Huffy Corporation and
certain officers and key employees incorporated by reference to
Exhibit (10)(m) to Form 10-K for the fiscal year ended December
31, 1999 *
* Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report on
Form 10-K for the year ended December 31, 2003.
53
EXHIBIT FORM 10-K
NO. EXHIBITS
--- --------
10.i Annual Performance Incentive Plan of Huffy Corporation for the
fiscal year ended December 31, 2003 ***
10.j Supplemental Benefit Agreement, dated as of June 21, 1996, between
Huffy Corporation and Don R. Graber, incorporated by reference to
Exhibit 10.u to Form 10-K for the fiscal year ended December 31, 1996 *
10.k Supplemental/Excess Benefit Plan, dated as of January 1, 1988,
incorporated by reference to Exhibit (10)(aa) to Form 10-K for the
fiscal year ended December 31, 1987 *
10.l First Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective as of January 1, 1988, incorporated by reference to
Exhibit (10)(ee) to Form 10-K for the fiscal year ended December 31,
1990 *
10.m Second Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, dated as of June 30, 1991, incorporated by reference to Exhibit
(10)(y) to Form 10-K for the fiscal year ended December 31, 1994 *
10.n Third Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, dated as of June 27, 1994, incorporated by reference to Exhibit
(10)(2) to Form 10-K for the fiscal year ended December 31, 1994 *
10.o Fourth Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, dated as of May 26, 1995, incorporated by reference to Exhibit
10.s to Form 10-K for the fiscal year ended December 31, 1997 *
10.p Fifth Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective as of July 15, 1996, incorporated by reference to
Exhibit 10.z to Form 10-K for the fiscal year ended December 31, 1996 *
10.q Sixth Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective as of June 15, 1997, incorporated by reference to
Exhibit 10.u to Form 10-K for the fiscal year ended December 31, 1997 *
10.r Seventh Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective as of December 22, 1997, incorporated by reference to
Exhibit 10.v to Form 10-K for the fiscal year ended December 31, 1997 *
10.s Eighth Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective as of February 12, 1998, incorporated by reference to
Exhibit (10)(x) to Form 10-K for the fiscal year ended December 31, *
1999
* Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report
on Form 10-K for the year ended December 31, 2003.
54
EXHIBIT FORM 10-K
NO. EXHIBITS
--- --------
10.t Ninth Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective as of February 15, 2000, incorporated by reference to
Exhibit (10)(d) to Form 10-Q for fiscal quarter ended July 1, 2000 *
10.u Tenth Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective as of May 25, 2000, incorporated by reference to
Exhibit (10)(e) to Form 10-Q for fiscal quarter ended July 1, 2000 *
10.v Eleventh Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective February 15, 2001, incorporated by reference to
Exhibit 10.x to Form 10-K for the fiscal year ended December 31, 2000 *
10.w Twelfth Amendment to Huffy Corporation Supplemental/Excess Benefit
Plan, effective as of January 1, 2001, incorporated by Reference to
Exhibit 10.y to Form 10-K for the fiscal year ended December 31, 2001 *
10.x Thirteenth Amendment to the Huffy Corporation Supplemental/ Excess
Benefit Plan, effective as of May 10, 2002, incorporated by Reference
to Exhibit 10.z to Form 10-K for the fiscal year ended December 31, *
2002
10.y Fourteenth Amendment to the Huffy Corporation Supplemental/ Excess
Benefit Plan, effective as of June 1, 2002, incorporated by Reference
to Exhibit (10.a) to Form 10-Q for the fiscal quarter Ended March 29,
2003 *
10.z Fifteenth Amendment to the Huffy Corporation Supplemental/ Excess
Benefit Plan, effective as of August 25, 2003 ***
10.aa Sixteenth Amendment to the Huffy Corporation Supplemental/
Excess Benefit Plan, effective as of January 1, 2004 ***
10.bb Huffy Corporation 1998 Restricted Share Plan, effective April 17,
1998, incorporated by reference to Exhibit 3 to the Company's Proxy
Statement dated March 5, 1998 for the Annual Meeting of Shareholders
held April 17, 1998 *
10.cc Amendment No. 1 to Huffy Corporation 1998 Restricted Share
Plan, effective as of April 27, 2001, incorporated by reference
to Exhibit 10.aa to Form 10-K for the fiscal year ended
December 31, 2001 *
10.dd Second Amendment to Huffy Corporation 1998 Restricted Share Plan,
effective as of April 1, 2003, incorporated by reference to Exhibit
(10.b) to Form 10-Q for the fiscal quarter ended March 29, 2003 *
* Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report
on Form 10-K for the year ended December 31, 2003.
55
EXHIBIT FORM 10-K
NO. EXHIBITS
--- --------
10.ee Third Amendment to Huffy Corporation 1998 Restricted Share Plan,
effective as of April 24, 2003, incorporated by reference to Exhibit
(10.c) to Form 10-Q for the fiscal quarter ended March 29, 2003 *
10.ff Form of Restricted Share Agreements between Huffy Corporation and
its Officers, incorporated by reference to Exhibit 10.w to Form 10-K
for the fiscal year ended December 31, 1997 *
10.gg Huffy Corporation Master Benefit Trust Agreement as Restated, dated
June 9, 1995, incorporated by reference to Exhibit 10.aa for Form 10-K
for the fiscal year ended December 31, 1995 *
10.hh First Amendment to Huffy Corporation Master Benefit Trust Agreement
as Restated, effective as of July 25, 1996, incorporated by reference
to Exhibit 10.bb to Form 10-K for the fiscal year ended December 31,
1996 *
10.ii Amendment No. 2 to Huffy Corporation Master Benefit Trust
Agreement, dated January 2, 1998, incorporated by reference
to Exhibit 10.z to Form 10-K for the fiscal year ended
December 31, 1998 *
10.jj Third Amendment to Huffy Corporation Master Benefit Trust Agreement,
as Restated, effective August 20, 1998, incorporated by reference to
Exhibit 10.aa to Form 10-K for the fiscal year ended December 31, 1998 *
10.kk Huffy Corporation 1987 Director Stock Option Plan, incorporated by
reference to Exhibit 19(a) to Form 10-Q for the fiscal quarter ended
June 30, 1988 *
10.ll First Amendment to Huffy Corporation 1987 Director Stock Option
Plan, effective as of April 30, 1991, incorporated by reference to
Exhibit (10)(nn) to Form 10-K for the fiscal year ended December 31,
1991 *
10.mm Second Amendment to Huffy Corporation 1987 Director Stock Option
Plan, effective as of December 15, 1991, incorporated by reference to
Exhibit (10)(oo) to Form 10-K for the fiscal year ended December 31,
1991 *
10.nn Third Amendment to Huffy Corporation 1987 Director Stock Option
Plan, effective as of February 15, 1996, incorporated by reference to
Exhibit 10.ff to Form 10-K for the fiscal year ended December 31, 1996 *
10.oo Huffy Corporation 1998 Director Stock Incentive Plan, effective
April 17, 1998, incorporated by reference to Exhibit 1 to the
Company's Proxy Statement dated March 6, 2002 for the Annual Meeting
of Shareholders held April 25, 2002 *
* Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report on
Form 10-K for the year ended December 31, 2003.
56
EXHIBIT FORM 10-K
NO. EXHIBITS
--- --------
10.pp First Amendment to Huffy Corporation 1998 Director Stock Incentive
Plan, effective as of April 24, 2003, incorporated by Reference to
Exhibit (10.d) to Form 10-Q for the fiscal quarter ended March 29,
2003 *
10.qq Huffy Corporation 1988 Stock Option Plan and Restricted Share
Plan, as amended, incorporated by reference to Exhibit 19(b)
to Form 10-Q for the fiscal quarter ended June 30, 1988; to
Exhibit A to the Company's Proxy Statement dated March 13,
1992 for the Annual Meeting of Shareholders held April 24,
1992; and to Annex I to the Company's Proxy Statement dated
March 7, 1996 for the Annual Meeting of Shareholders held
April 26, 1996 *
10.rr Third Amendment to Huffy Corporation 1988 Stock Option Plan and
Restricted Share Plan, effective October 22, 1998, incorporated by
reference to Exhibit 10.hh to Form 10-K for the fiscal year ended
December 31, 1998 *
10.ss Huffy Corporation 1998 Key Employee Stock Plan, effective April 17,
1998, incorporated by reference to Exhibit 2 to the Company's Proxy
Statement dated March 5, 1998 for the Annual Meeting of Shareholders
held April 17, 1998 *
10.tt First Amendment to Huffy Corporation 1998 Key Employee Stock Plan,
effective October 22, 1998, incorporated by reference to Exhibit 10.jj
to Form 10-K for the fiscal year ended December 31, 1998 *
10.uu Second Amendment to Huffy Corporation 1998 Key Employee Stock Plan,
effective July 20, 2000, incorporated by reference to Exhibit 10.nn to
Form 10-K for the fiscal year ended December 31, 2000 *
10.vv Amendment No. 3 to Huffy Corporation 1998 Key Employee Stock Plan,
effective April 29, 2001, incorporated by reference to Exhibit 10.rr to
Form 10-K for the fiscal year ended December 31, 2001 *
10.ww Fourth Amendment to Huffy Corporation 1998 Key Employee Stock Plan,
effective January 1, 2003, incorporated by reference to Exhibit
10.ccc to Form 10-K for the fiscal year ended December 31, 2002 *
10.xx Fifth Amendment to Huffy Corporation 1998 Key Employee Stock Plan,
effective April 24, 2003, incorporated by reference to Exhibit (10.e)
to Form 10-Q for the fiscal quarter ended March 29, 2003 *
10.yy Sixth Amendment to Huffy Corporation 1998 Key Employee
Stock Plan, effective February 10, 2004 ***
10.zz Huffy Corporation 1990 Directors' Retirement Plan incorporated by
reference to Exhibit (10)(qq) to Form 10-K for the fiscal year ended
December 31, 1991 *
* Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report on
Form 10-K for the year ended December 31, 2003.
57
EXHIBIT FORM 10-K
NO. EXHIBITS
--- --------
10.aaa First Amendment to Huffy Corporation 1990 Directors' Retirement
Plan, effective as of February 15, 1996, incorporated by reference to
Exhibit 10.ii to Form 10-K for the fiscal year ended December 31, 1996 *
10.bbb Second Amendment to Huffy Corporation 1990 Directors' Retirement
Plan, effective as of February 15, 1996, incorporated by reference to
Exhibit 10.jj to Form 10-K for the fiscal year ended December 31, 1996 *
10.ccc Agreement and Plan for Merger, dated June 5, 2002 and amended
as of July 1, 2002 and July 25, 2002, by and among Huffy
Corporation, HSGC, Inc. and Gen-X Sports, Inc., incorporated
by reference to Exhibit 2.a to the Company's Registration
Statement on Form-S-4 filed on July 5, 2002 and amended on
July 29, 2002 *
10.ddd 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 by reference to Exhibit 2.b to the Company's
registration Statement on Form S-4 filed on July 5, 2002 and
amended on July 29, 2002 *
10.eee 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 Sellers (as defined in the Agreement), incorporated
by reference to Exhibit 2.c to the Company's Registration Statement
on Form S-4, as amended, filed on July 29, 2002 *
10.fff 1998 Key Employee Non-Qualified Stock Plan, approved June 12, 1997
and First Amendment, dated October 22, 1998, Second Amendment,
dated December 13, 1998, and Third Amendment, dated
December 9, 1999, incorporated by reference to Exhibit (10) (a) to
Form 10-Q for the fiscal quarter ended June 29, 2002 *
10.ggg Fourth Amendment to Huffy Corporation 1998 Key Employee
Non-Qualified Stock Plan dated as of July 19, 2002, incorporated by
reference to Exhibit (10) to Form 10-Q for the fiscal quarter ended
September 30, 2002 *
10.hhh Fifth Amendment to Huffy Corporation 1998 Key Employee Non-Qualified
Stock Plan, effective April 24, 2003, incorporated by reference to
Exhibit (10.f) to Form 10-Q for the fiscal quarter ended March 29,
2003 *
10.iii Transition Compensation Agreement, dated February 13, 2004,
between Huffy Corporation and Don R. Graber ***
* Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report on
Form 10-K for the year ended December 31, 2003.
58
OTHER FILINGS
21. List of all direct and indirect Subsidiaries of the registrant:
JURISDICTION IN
NAME OF SUBSIDIARY WHICH INCORPORATED
------------------ ------------------
American Sports Design Company Ohio
Creative Retail Services, Inc. Georgia
Creative Retail Services (Canada) Inc. New Brunswick
First Team Sports, Inc. Minnesota
Gen-X Sports Canada Inc. New Brunswick
Gen-X Sports Inc. Delaware
Gen-X Sports Ltd. Washington
Gen-X Sports Outlet Inc. New Brunswick
Gen-X Sports SARL Switzerland
HCAC, Inc. Ohio
Hespeler Hockey Holding, Inc. Minnesota
Hufco-Delaware Company Delaware
Huffy International Finance, N.V. Netherland Antilles
Huffy Risk Management, Inc. Ohio
Huffy Service Solutions, Inc. Ohio
Huffy Sports, Inc. Wisconsin
Lamar Snowboard, Inc. Missouri
Lehigh Avenue Property Holdings, Inc. Illinois
McCalla Company Georgia
Tommy Armour Golf Company Washington
31.a Section 302 Certification - Chief Executive Officer ***
31.b Section 302 Certification - Chief Financial Officer ***
32. Statement Pursuant to Section 1350(a) of title 18, United States Code ***
99 Cautionary Statement for Purposes of the "Safe Harbor" ***
Provisions of the Private Securities Litigation Reform Act
of 1995
* Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-K from a previous filing with the Commission.
*** Indicates that the exhibit is included as part of this Annual Report on
Form 10-K for the year ended December 31, 2003.
59