1
Exhibit 13
Huffy Corporation
FIVE-YEAR FINANCIAL AND OPERATING REVIEW (UNAUDITED)
(Dollar amounts in thousands, except per share data)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS
Net sales $488,181 $422,866 $468,351 $481,534 $389,924
Gross profit 81,342 36,723 76,178 74,038 55,171
Selling, general, and administrative expenses 53,763 56,158 59,723 61,825 49,316
Operating income (loss) 26,865 (57,994) (4,865) 12,213 5,855
Other expense (income), net 1,342 333 (3) 1,376 84
Interest expense, net 8,428 1,816 2,542 533 1,060
Earnings (loss) before income taxes 17,095 (60,143) (7,404) 10,304 4,711
Income tax expense (benefit) 6,429 (20,788) (2,904) 2,715 1,284
Earnings (loss) from continuing operations 10,666 (39,355) (4,500) 7,589 3,427
Discontinued operations 25,318 6,067 2,335 1,368 3,030
Extraordinary loss (998) -- -- -- --
Net earnings (loss) 34,986 (33,288) (2,165) 8,957 6,457
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic Continuing operations 1.05 (3.70) (0.37) 0.59 0.25
Net earnings 3.43 (3.13) (0.18) 0.70 0.48
Diluted Continuing operations 1.03 (3.70) (0.37) 0.58 0.25
Net earnings 3.39 (3.13) (0.18) 0.69 0.48
- -----------------------------------------------------------------------------------------------------------------------------------
Common dividends declared -- 2,869 4,092 4,365 4,582
Common dividends per share -- 0.26 0.34 0.34 0.34
Capital expenditures for plant and equipment 2,510 6,444 14,989 9,128 8,440
Weighted average common share outstanding:
Basic 10,187 10,642 12,122 12,895 13,449
Diluted 10,320 10,642 12,280 13,062 13,578
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Total assets 180,493 214,283 324,068 307,501 295,774
Working capital 66,143 64,084 85,730 116,122 131,665
Net investment in plant and equipment 12,680 19,028 53,476 51,305 52,999
Notes payable 17,656 21,902 99,240 43,000 38,910
Long-term obligations -- 51,348 29,110 35,482 43,162
Shareholders' equity 73,131 37,482 95,390 116,578 120,929
Equity per share outstanding 7.15 3.68 7.91 8.87 8.67
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS
Net cash provided by (used in) continuing operating activities (16,541) 12,239 21,513 (1,637) 4,306
Net cash provided by (used in) discontinued operations 60,902 75,402 (5,878) 45,075 (16,377)
Net cash provided by (used in) operating activities 44,361 87,641 15,635 43,438 (12,071)
Net cash provided by (used in) investing activities 4,867 (7,644) (27,901) (27,040) (8,423)
Net cash provided by (used in) financing activities (65,084) (77,641) 27,984 (16,407) 20,323
Net change in cash and cash equivalents (15,856) 2,356 15,718 (9) (171)
- -----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE MEASUREMENTS
Earnings from continuing operations as a % of net sales 2.2% N/A N/A 1.6% 0.9%
Average working capital turnover 7.1 5.3 5.0 8.3 10.0
Return on net assets 15.4% N/A N/A 6.8% 5.1%
Return on beginning shareholders' equity 93.8% N/A N/A 8.8% 5.6%
Current ratio 1.7 1.6 1.5 1.9 2.3
Long term debt/total capital 0.0% 61.7% 27.1% 27.1% 29.5%
- -----------------------------------------------------------------------------------------------------------------------------------
Number of common shareholders 3,271 3,250 3,454 3,127 3,570
N/A - Not Applicable.
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INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
HUFFY CORPORATION:
We have audited the accompanying consolidated balance sheets of Huffy
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2000. 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 at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
February 2, 2001
Cincinnati, Ohio
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Huffy Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
(Dollar amounts in thousands, except per share data)
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31,
1999
The Company recorded net earnings from continuing operations of $10,666 or
$1.03 per common share in 2000 compared to a net loss of $39,355 or $3.70 per
common share for 1999. Earnings from continuing operations for 2000 include a
pretax charge of $714 ($446 after tax), or $0.05 per common share, for
reconfiguration of the bicycle business, and $702 ($438 after tax) or $0.04 per
common share for refinancing the Company. The earnings for 1999 include a pretax
charge of $38,559 ($25,218 after tax), or $2.37 per common share for the
reconfiguration of the bicycle business. Net earnings from continuing
operations, excluding the bicycle reconfiguration charges and refinancing
charges, were $11,550 or $1.12 per common share compared to a net loss of
$14,137 or $1.33 per common share for 1999.
Current year net earnings from continuing operations exclude both the
operating results and the gain from the sale of Washington Inventory Service, a
transaction that occurred in November 2000. Through the date of disposition,
Washington Inventory Service had sales of $142,195 and net earnings of $4,537,
or $0.44 per common share, compared to full year sales of $138,173 and net
earnings of $119 in 1999. The gain on the sale of Washington Inventory Service
was $20,781 after tax, or $2.01 per common share.
The improvement in year-over-year earnings is primarily related to the
success of the bicycle reconfiguration to a multi-brand, design, marketing and
distribution company. In addition, the success of two new products, the Huffy
Micro(TM) Scooters, and X-Games(R) bicycles contributed significantly to
improved profitability.
Net Sales
Net sales in 2000 were $488,181, a 15.4% increase compared to net sales of
$422,866 in 1999. Net sales growth was driven primarily by strong demand for
X-Games(R) bicycles, Huffy Micro(TM) Scooters, and merchandising services,
offset by an overall softness in the sporting goods industry that negatively
impacted the Huffy Sports Company's basketball backboard business.
Gross Profit
Consolidated gross profit for 2000 was $81,342, or 16.7% of net sales,
compared to $36,723, or 8.7% of net sales for 1999. The gross profit improvement
is directly related to the favorable impact of the bicycle business
reconfiguration, the elimination of domestic manufacturing, and new products
such as the Huffy Micro(TM) Scooters and X-Games(R) bicycles. This favorable
impact was partially offset by volume driven margin declines at Huffy Sports and
higher costs of travel and training at Huffy Service First. 1999 gross profit
included an inventory write-down of $6,300, which negatively impacted gross
margin by 1.5 percentage points.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses in 2000 were $53,763, a 4.3%
decrease versus 1999. The decrease in selling, general, and administrative
expenses is primarily the result of the Huffy Bicycle Company reconfiguration,
but was also significantly impacted by SG&A reduction programs at all Huffy
Companies.
Net Interest Expense
Net interest expense was $8,428, up 364% over 1999. The increase in
interest expense is due to higher borrowing levels, and higher interest rates
associated with the new financing package consummated in January of 2000.
Extraordinary Item
Net extraordinary charges of $1,573 ($998 after taxes) were recorded in
2000 from the early extinguishment of debt. Unamortized financing costs of
$2,189 were offset by interest forgiven on the subordinated note of $404 and
early repayment debt forgiveness of $212 on an economic development grant.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998
The Company recorded a net loss from continuing operations of $39,355 or
$3.70 per common share in 1999 compared to a net loss from continuing operations
of $4,500 or $0.37 per common share in 1998. Earnings for 1999 included a pretax
charge of $38,559 ($25,218 after tax), or $2.37 per common share for plant
closure and manufacturing reconfiguration at the Huffy Bicycle Company. Earnings
for 1998 included a pretax charge of $21,320 ($13,112 after tax), or $1.07 per
common share for plant closure and manufacturing reconfiguration at the Huffy
Bicycle Company. The net loss from continuing operations, excluding the Huffy
Bicycle Company plant closure and reconfiguration was $14,137 in 1999, or $1.33
per common share compared to net income of $8,612 in 1998, or $0.70 per common
share.
Net Sales
Net sales in 1999 were $422,866 reflecting a decrease of 9.7% compared to
net sales of $468,351 in 1998. This decrease occurred primarily as a result
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of an economic environment that caused very cautious retail ordering, and retail
store level inventory reductions. In addition, foreign competitors created
significant downward pricing pressure on wheeled products.
Gross Profit
Consolidated gross profit for 1999 was $36,723, or 8.7% of net sales, down
from $76,178, or 16.3% of net sales in 1998. The decrease in gross profit
dollars and percentage was driven primarily by downward pricing pressure caused
by foreign competitors, a swing in product mix to lower margin product, and
inventory write-downs of $6,300 at Huffy Bicycle Company. These negative
influences were partially offset by strong margin improvement in basketball
backboard products.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses in 1999 were $56,158, a 6.0%
decrease from 1998. Reduced sales volume lowered variable commission, customer
service and distribution costs.
Net Interest Expense
During 1999, net interest expense was $1,816, representing a $726 decrease
compared to 1998. Although interest rates were higher in 1999 than in 1998, the
decreased working capital requirements in 1999 were sufficient to more than
offset the unfavorable impact on net interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company experiences seasonal fluctuations in sales and operating
earnings, which cause variations in the required investments in working capital,
primarily inventory and receivables. Strong fourth quarter demand for newly
released products resulted in a 39.4% increase in receivables compared to the
same period in 1999. An expansion of the Company's product offerings,
particularly the Huffy Micro(TM) Scooters, and lower than anticipated retail
sales during the Christmas season, resulted in higher inventory levels at the
end of 2000 versus 1999 record low inventory levels.
As of January 26, 2000, the Company signed a new $170 million, 18-month
lending facility secured by all of the assets of the Company. The facility
consisted of $40 million of senior term debt, $30 million of subordinated debt,
and a $100 million revolving credit facility. In November 2000, the senior term
debt and subordinated debt were repaid. As of December 31, 2000, the revolving
credit facility had availability of $71.2 million of which $17.7 million was
outstanding.
The Company entered into an Amended and Restated Loan and Security
Agreement, dated January 31, 2001 with Congress Financial Corporation. The $75
million revolving credit facility is secured by all assets of the Company and
its affiliates and will expire on December 31, 2002, with a 12-month renewal
option. Management believes that the amended credit facility and internally
generated cash flows will be sufficient to finance the seasonal working capital
and capital expenditure needs in the coming year.
Funds expended for capital additions and improvements totaled $2,510,
$6,444 and $14,989 in 2000, 1999 and 1998, respectively. This decline in capital
requirements is consistent with the multi-brand, design, marketing and
distribution format for the reconfigured bicycle business. Capital expenditures
are expected to be approximately $4,800 in 2001.
PLANT CLOSURE AND MANUFACTURING RECONFIGURATION
During the fourth quarter of 1999, the Company closed its remaining
domestic bicycle manufacturing facilities in Farmington, Missouri and Southaven,
Mississippi, and reconfigured its bicycle operations. During the first quarter
of 2000, the Company increased imports from a global network of sourcing
partners to offset this loss of production capacity. Closing these plants
eliminated the costs required to operate the facilities and completed Huffy
Bicycle Company's transformation from a single brand manufacturer and marketer
of bicycles, to a multi-brand, design, marketing and distribution company. The
plan included the termination of 742 hourly and salaried employees.
In 2000, the Company incurred plant closure and manufacturing
reconfiguration charges of $714 ($446 after tax), or $0.05 per common share.
Reconfiguration charges included severance and related benefits of $1,190, and
facility shutdown costs of $3,965 offset by gains from sales of the Farmington,
Missouri plant of $3,050 and the settlement of the Miamisburg, Ohio office
capital lease of $2,105.
The remaining plant closure and manufacturing reconfiguration reserve,
which is included in other accrued expense at December 31, 2000, includes $1,023
in severance, health care, and workers compensation costs, and $208 in
environmental related costs. The Company expects the remaining balance to be
expended in 2001.
In 1999, the Company incurred plant closure and manufacturing
reconfiguration charges of $38,559 ($25, 218 after tax), or $2.37 per common
share. Of these charges, $34,744 related to the 1999 reconfiguration, and $3,815
related to the reconfiguration implemented in 1998. The 1999 reconfiguration
charges included severance and related benefits of $4,165 and facility shutdown
costs and asset write-downs of $30,579.
During 1998, the Company implemented a plan to maximize operational
efficiency by eliminating excess production capacity and reducing annual
operating expenses at the Huffy Bicycle Company. The plan included the closure
of the Celina, Ohio manufacturing facility to reduce capacity; the leasing of a
parts fabrication facility to support other plants;
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and the continuation of its import program for opening price point bikes. The
plan included the termination of 935 hourly and salaried employees. In 1998, the
Company incurred plant closure and manufacturing reconfiguration charges of
$21,320 ($13,112 after tax) or $1.07 per share. In 1998, these charges included
severance and related benefits of $6,548; facility shutdown costs and asset
write-downs of $8,218; and new facility startup costs and equipment, personnel
and inventory relocation of $6,554. In 1999, these charges included severance
and related benefits of $2,248 and new facility startup costs and equipment,
personnel and inventory relocation of $1,567.
OTHER MATTERS
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. Currently, the Company, along with other PRPs, the Main San
Gabriel Basin Watermaster, the San Gabriel Water Quality Authority, and numerous
local water districts, are working with the EPA on a mutually satisfactory
remedial plan.
The total accrual for estimated environmental remediation costs related to
the Superfund site and other potential environmental liabilities was
approximately $8,050 at December 31, 2000. Management expects that the majority
of expenditures relating to costs currently accrued will be made over the next
year.
As a result of factors such as the continuing evolution of environmental
laws and regulatory requirements, the availability and application of
technology, the identification of presently unknown remediation sites and the
allocation of costs among PRPs, estimated costs for future environmental
compliance and remediation are necessarily imprecise and it is not possible to
fully predict the amount or timing of future environmental remediation costs,
which may subsequently be determined.
Based upon information presently available, such future costs are not
expected to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
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, 2000. 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.
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Huffy Corporation
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
December 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,334 $020,190
Receivables:
Trade 79,617 58,068
Taxes and other 1,566 513
-------- --------
81,183 58,581
Less allowance for doubtful accounts 1,372 1,784
-------- --------
Net receivables 79,811 56,797
Inventories 43,324 23,354
Deferred federal income taxes 16,935 22,435
Prepaid expenses 11,409 9,827
Net assets of discontinued operations -- 35,584
-------- --------
Total current assets 155,813 168,187
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land and land improvements 182 441
Buildings and building improvements 2,948 7,722
Machinery and equipment 19,557 37,757
Office furniture, fixtures, and equipment 16,788 17,210
Leasehold improvements 2,346 1,250
Construction in progress 1,600 1,442
-------- --------
43,421 65,822
Less accumulated depreciation and amortization 30,741 46,794
-------- --------
Net property, plant, and equipment 12,680 19,028
-------- --------
OTHER ASSETS:
Excess of cost over net assets acquired, net
accumulated amortization of $2,511 in 2000
and $1,785 in 1999 8,764 9,490
Deferred federal income taxes -- 13,443
Other 3,236 4,135
-------- --------
Total assets $180,493 $214,283
======== ========
See accompanying notes to consolidated financial statements.
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Huffy Corporation
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
December 31,
2000 1999
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 17,656 $ 21,902
Current installments of long-term obligations -- 9,119
Accounts payable 28,015 30,229
Accrued expenses:
Salaries, wages, and other compensation 5,735 3,535
Insurance 11,235 5,927
Environmental 8,050 7,250
Other 10,701 17,944
------------ ------------
Total accrued expenses 35,721 34,656
Other current liabilities 8,278 8,197
------------ ------------
Total current liabilities 89,670 104,103
------------ ------------
LONG TERM LIABILITIES:
Long-term obligations, less current installments -- 51,348
Pension liabilities 1,912 3,198
Postretirement benefits other than pensions 9,707 13,903
Other liabilities 6,073 4,249
------------ ------------
Total liabilities 107,362 176,801
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock -- --
Common stock 16,704 16,667
Additional paid-in capital 66,204 66,242
Retained earnings 83,557 48,571
Accumulated other comprehensive income (2,676) (2,854)
------------ ------------
163,789 128,626
Treasury stock cost 90,658 91,144
------------ ------------
Total shareholders' equity 73,131 37,482
------------ ------------
Total liabilities and shareholders' equity $ 180,493 $ 214,283
============ ============
Common stock, shares issued 16,704,340 16,667,669
Treasury shares held 6,567,276 6,659,687
- ----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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Huffy Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
Years Ended December 31,
2000 1999 1998
---- ---- ----
Net sales $ 488,181 $ 422,866 $ 468,351
Cost of sales 406,839 386,143 392,173
------------ ------------ ------------
Gross profit 81,342 36,723 76,178
Selling, general, and administrative expenses 53,763 56,158 59,723
Plant closure and manufacturing reconfiguration 714 38,559 21,320
------------ ------------ ------------
Operating income (loss): 26,865 (57,994) (4,865)
Other expense (income)
Interest expense 8,629 2,241 2,665
Interest income (201) (425) (123)
Other 1,342 333 (3)
------------ ------------ ------------
9,770 2,149 2,539
------------ ------------ ------------
Earnings (loss) before income taxes 17,095 (60,143) (7,404)
Income tax expense (benefit) 6,429 (20,788) (2,904)
------------ ------------ ------------
Earnings (loss) from continuing operations 10,666 (39,355) (4,500)
------------ ------------ ------------
Discontinued operations:
Earnings (loss) from discontinued operations 4,537 (193) 2,335
Gain on disposal of discontinued operations 20,781 6,260 --
Extraordinary loss (998) -- --
------------ ------------ ------------
Net earnings (loss) $ 34,986 $ (33,288) $ (2,165)
------------ ------------ ------------
EARNINGS (LOSS) PER COMMON SHARE:
Basic
Weighted average number of common shares 10,187,048 10,642,257 12,122,278
Earnings (loss) from continuing operations $ 1.05 $ (3.70) $ (0.37)
Earnings from discontinued operations 2.48 0.57 0.19
Extraordinary loss (.10) -- --
------------ ------------ ------------
Net earnings (loss) per common share $ 3.43 $ (3.13) $ (0.18)
------------ ------------ ------------
Diluted
Weighted average number of common shares 10,320,362 10,642,257 12,279,833
Earnings (loss) from continuing operations $ 1.03 $ (3.70) $ (0.37)
Earnings from discontinued operations 2.45 0.57 0.19
Extraordinary loss (.09) -- --
------------ ------------ ------------
Net earnings (loss) per common share $ 3.39 $ (3.13) $ (0.18)
============ ============ ============
See accompanying notes to consolidated financial statements.
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Huffy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except per share data)
Years Ended December 31,
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations $ 10,666 $(39,355) $ (4,500)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 5,706 9,643 10,154
(Gain) loss on sale of property, plant, and equipment (3,446) 8,679 3,222
Write-down of certain property, plant, and equipment -- 23,278 --
Extraordinary charge for the early extinguishments of debt (998) -- --
Deferred federal income tax expense (benefit) 18,943 (17,269) 954
Increase (decrease) in cash resulting from changes in:
Receivables, net (23,014) 6,749 18,346
Inventories (19,970) 26,946 3,589
Prepaid expenses (1,582) (6,954) (2,691)
Other assets 742 (408) 1,691
Accounts payable (2,214) (630) 504
Accrued expenses 1,065 10,978 (8,237)
Other current liabilities 937 (1,628) (500)
Postretirement benefits other than pensions (4,196) (1,500) (1,897)
Other long-term liabilities 823 (6,290) 742
Other (3) -- 136
-------- -------- --------
Net cash provided by (used in) continuing operating
activities (16,541) 12,239 21,513
-------- -------- --------
Discontinued operations:
Gain on disposal of discontinued operations 20,781 6,260 --
Gain (loss) from discontinued operations 4,537 (193) 2,335
Non-cash items from discontinued operations 3,648 2,841 4,461
Cash provided by (used in) discontinued operations 31,936 66,494 (12,674)
-------- -------- --------
Net cash provided by (used in) discontinued
operating activities 60,902 75,402 (5,878)
-------- -------- --------
Net cash provided by operating activities 44,361 87,641 15,635
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,510) (6,444) (14,989)
Proceeds from sale of property, plant, and equipment 7,377 48 46
Acquisitions of businesses -- (1,248) (12,958)
-------- -------- --------
Net cash provided by (used in) investing activities 4,867 (7,644) (27,901)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable (4,246) (77,338) 56,240
Issuance of long-term obligations -- 37,098 --
Reduction of long-term obligations (60,467) (12,124) (7,745)
Issuance (repurchase) of common shares 485 (22,419) (16,353)
Dividends paid (856) (2,858) (4,158)
-------- -------- --------
Net cash provided by (used in) financing activities (65,084) (77,641) 27,984
-------- -------- --------
Net change in cash and cash equivalents (15,856) 2,356 15,718
Cash and cash equivalents:
Beginning of year 20,190 17,834 2,116
-------- -------- --------
End of year $ 4,334 $ 20,190 $ 17,834
======== ======== ========
Cash paid (refunded) during the year for:
Interest $ 14,145 $ 7,201 $ 9,218
Income taxes 4,646 (420) (3,191)
See accompanying notes to consolidated financial statements.
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Huffy Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
Total Stock Capital Earnings Income Stock
----------- --------- ---------- ---------- ------------- -----------
BALANCE AT DECEMBER 31, 1998 $ 95,390 $16,633 $65,892 $84,728 $(3,522) $(68,341)
Net loss (33,288) (33,288)
Comprehensive income, net of tax
Minimum pension liability
adjustment, net of income tax
expense of $360 668 668
--------
Total comprehensive income $(32,620)
Issuance of 34,993 shares in
connection with common
stock plans 384 34 350
Common dividends $0.26 per share (2,869) (2,869)
Purchase of 1,751,700
treasury shares (22,803) (22,803)
-------- ------- ------- ------- -------- --------
BALANCE AT DECEMBER 31, 1999 $ 37,482 $16,667 $66,242 $48,571 $(2,854) $(91,144)
Net earnings 34,986 34,986
Comprehensive income, net of tax
Minimum pension liability
adjustment, net of income tax
expense of $205 178 178
--------
Total comprehensive income $ 35,164
Issuance of 36,671 shares in
connection with common
stock plans 485 37 (38) 486
-------- ------- ------- ------- -------- --------
BALANCE AT DECEMBER 31, 2000 $ 73,131 $16,704 $66,204 $83,557 $(2,676) $(90,658)
======== ======= ======= ======= ======= ========
See accompanying notes to consolidated financial statements.
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Huffy Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[a] Consolidation - The consolidated financial statements include the
accounts of Huffy Corporation and its subsidiaries. All inter-company
transactions and balances have been eliminated.
[b] Reclassification - Certain 1999 and 1998 balances have been
reclassified to conform with the 2000 presentation.
[c] Cash and Cash Equivalents - Cash equivalents consist principally of
short-term money market instruments with original maturities of three months or
less.
[d] Concentrations of Credit Risk - Financial instruments which potentially
expose the Company to concentrations of credit risk, as defined by Statement of
Financial Accounting Standards (SFAS) No. 105, consist primarily of trade
accounts receivable. In the normal course of business, Huffy extends credit to
various companies in the retail industry where certain concentrations of credit
risk exist. These concentrations of credit risk may be similarly affected by
changes in economic or credit conditions and may, accordingly, impact Huffy's
overall credit risk. However, management believes that consolidated accounts
receivable are well diversified, thereby reducing potential material credit
risk, and that the allowance for doubtful accounts is adequate to absorb
estimated losses as of December 31, 2000.
[e] Inventories - Inventories are valued at cost (not in excess of market)
determined by the first-in, first-out (FIFO) method. Effective the fourth
quarter of 1999, the Company changed from the LIFO method to the FIFO method.
Note (4).
[f] Property, Plant, and Equipment - Depreciation and amortization of plant
and equipment is provided on the straight-line method.
Annual depreciation and amortization rates are as follows:
Land improvements 5 - 10%
Buildings and improvements 2-1/2 - 10%
Machinery and equipment 5 - 33-1/3%
Office furniture, fixtures, equipment
and computer software 10 - 33-1/3%
Leasehold improvements 4-1/2 - 33-1/3%
[g] Amortization of Intangibles - The excess of cost over net assets
acquired is amortized on a straight-line basis over fifteen to forty years. The
carrying value of goodwill is reviewed at each balance sheet date to determine
whether goodwill has been impaired. If this review indicates that goodwill will
not be recoverable, as determined based on projected, undiscounted future cash
flows of the entity acquired, the Company's carrying value of goodwill would be
reduced by the estimated impairment.
[h] 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. The fair value of the Company's long-term
debt obligations is disclosed in Note (5).
[i] Earnings (Loss) Per Common Share - Basic earnings (loss) per share of
common stock is based upon the weighted average number of shares of common stock
outstanding during the year. Diluted earnings (loss) per share are computed
based on the weighted average number of shares of common stock and common stock
equivalents outstanding during the year.
[j] Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
[k] Stock Option Plans - Prior to January 1, 1996, the Company accounted
for its stock option plans in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
12
[2] DISCONTINUED OPERATIONS
On November 3, 2000, the Company sold the stock of its Washington Inventory
Service subsidiary to WIS Acquisition Corp., a subsidiary of WIS Holdings Corp.,
for $84,750 subject to certain post-closing adjustments. The results for
Washington Inventory Service have been classified as discontinued operations in
the Consolidated Statements of Operations and Consolidated Statements of Cash
Flows. The assets and liabilities of discontinued operations have been
classified in the December 31, 1999 Consolidated Balance Sheet as net assets of
discontinued operations.
On March 16, 1999, the Company sold the assets of the Harrisburg,
Pennsylvania based lawn and garden tools and wheelbarrows business, True Temper
Hardware Company, for $100 million to U.S. Industries, Inc. The results for True
Temper Hardware Company have been classified as discontinued operations for all
periods presented in the Consolidated Statements of Operations and Consolidated
Statements of Cash Flows.
[3] PLANT CLOSURE AND MANUFACTURING
RECONFIGURATION
During the fourth quarter of 1999, the Company closed its remaining
domestic bicycle manufacturing facilities in Farmington, Missouri and Southaven,
Mississippi, and reconfigured its bicycle operations. During the first quarter
of 2000, the Company increased imports from a global network of sourcing
partners to offset this loss of production capacity. Closing the plants
eliminated the costs required to operate the facilities and completed Huffy
Bicycle Company's transformation from a single-brand manufacturer and marketer
of bicycles, to a multi-brand, design, marketing and distribution company. The
plan included the termination of 742 hourly and salaried employees.
In 2000, the Company incurred plant closure and manufacturing
reconfiguration charges of $714 ($446 after tax), or $0.05 per common share.
Reconfiguration charges included severance and related benefits of $1,190, and
facility shutdown costs of $3,965, offset by gains from sales of the Farmington,
Missouri plant of $3,050 and the settlement of the Miamisburg, Ohio office
capital lease of $2,105.
The remaining plant closure and manufacturing reconfiguration reserve,
which is included in other accrued expense at December 31, 2000, includes $1,023
in severance, health care, and workers compensation costs, and $208 in
environmental related costs. The Company expects the remaining balance to be
expended in 2001.
In 1999, the Company incurred plant closure and manufacturing
reconfiguration charges of $38,559 ($25,218 after tax), or $2.37 per common
share. Of these charges, $34,744 related to the 1999 reconfiguration, and $3,815
related to the reconfiguration implemented in 1998. The 1999 reconfiguration
charges included severance and related benefits of $4,165, and facility shutdown
costs and asset write-downs of $30,579.
During 1998, the Company implemented a plan to maximize operational
efficiency by eliminating excess production capacity and reducing annual
operating expenses at the Huffy Bicycle Company. The plan included the closure
of the Celina, Ohio manufacturing facility to reduce capacity; the leasing of a
parts fabrication facility to support other plants; and the continuation of its
import program for opening price point bikes. The plan included the termination
of 935 hourly and salaried employees. In 1998, the Company incurred plant
closure and manufacturing reconfiguration charges of $21,320 ($13,112 after tax)
or $1.07 per share. In 1998, these charges included severance and related
benefits of $6,548; facility shutdown costs and asset write-downs of $8,218; and
new facility startup costs and equipment, personnel and inventory relocation of
$6,554. In 1999, these charges included severance and related benefits of
$2,248; and new facility startup costs and equipment, personnel and inventory
relocation of $1,567.
[4] INVENTORIES
The components of inventories are as follows:
2000 1999
Finished goods $39,284 $17,345
Work-in-process 147 106
Raw materials and supplies 3,893 5,903
--------- ---------
$43,324 $23,354
========= =========
During the fourth quarter of 1999, the Company changed its method of
determining the cost of inventories from the LIFO method to the FIFO method.
Under the current economic environment of deflation, the Company believes that
the FIFO method will result in a better measurement of operating results. The
change has been applied retroactively by restating the financial statements for
prior years.
[5] LINES OF CREDIT AND LONG-TERM OBLIGATIONS
As of January 26, 2000, the Company signed a new $170 million, 18-month
lending facility secured by all of the assets of the Company. The facility
consisted of $40 million of senior term debt, $30 million of subordinated debt,
and a $100 million revolving credit facility. In November 2000, the senior term
debt and subordinated debt were repaid. As of December 31, 2000, the revolving
credit facility had availability of $71.2 million of which $17.7 million was
outstanding.
The Company entered into an Amended and Restated Loan and Security
Agreement, dated January 31, 2001 with Congress Financial Corporation. The $75
million revolving credit facility is secured by all assets of the Company and
its affiliates and will expire on December 31, 2002, with a 12-month renewal
option. Management believes that the amended credit facility and
13
internally generated cash flows will be sufficient to finance the seasonal
working capital and capital expenditure needs in the coming year.
Short-term borrowings are summarized as follows:
2000 1999
Notes payable:
Average borrowings $ 35,264 $ 64,831
Maximum at any month end 50,731 118,220
Weighted average rate 10.76% 6.16%
Long-term obligations are summarized as follows:
2000 1999
Secured notes payable:
Prime plus 3-6% term loan due
2001 $0 $57,098
Other 0 3,369
--------- ---------
0 60,467
Less current installments 0 9,119
--------- ---------
$0 $51,348
========= =========
The estimated fair value of the Company's long-term obligations at December
31, 1999 was approximately $63,688. Fair value estimates are made at a specific
point in time, based on relevant market information and information about the
financial instrument. Fair value estimates were based on the amount of future
cash flows discounted using the Company's current borrowing rate for loans of
comparable maturity. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
[6] PREFERRED STOCK
Under the Company's Amended Articles of Incorporation, there are 1,000,000
authorized, unissued shares of Cumulative Preferred Stock, $1.00 par value.
Subject to certain limitations, the Articles provide that the Board of Directors
may fix the conditions of each series of Preferred Stock.
The Company entered into a Rights Agreement with its transfer agent in
1988, as amended in 1991 and 1994, and the Board of Directors declared a
dividend of one Preferred Share Purchase Right for each outstanding share of the
Company's Common Stock. Upon the occurrence of certain events, Preferred Share
Purchase Rights entitle the holder to purchase at a price of $60.00, one
one-hundredth of a share of Series C Cumulative Preferred Stock, subject to
adjustment. The Rights become exercisable only if a person or group acquires 15%
or more of the Company's Common Stock, or announces a tender offer for 15% or
more of the Common Stock. Under certain circumstances all Rights holders, except
the person or group holding 15% or more of the Company's Common Stock, will be
entitled to purchase a number of shares of the Company's Common Stock having a
market value of twice the Right's current exercise price. Alternately, if the
Company is acquired in a merger or other business combination, after the Rights
become exercisable, the Rights will entitle the holder to buy a number of the
acquiring Company's common shares having a market value at that time of twice
each Right's current exercise price.
Further, after a person or group acquires 15% or more (but less than 50%)
of the Company's outstanding Common Stock, the Company's Board of Directors may
exchange part or all of the Rights (other than the Rights held by the acquiring
person or group) for shares of Common Stock. The Rights expire December 9, 2004
and may be redeemed by the Company for $0.01 per Right at any time prior to the
acquisition by a person or group of 15% or more of the Company's Common Stock.
[7] COMMON STOCK AND COMMON STOCK PLANS
Under the Company's Amended Articles of Incorporation, there are 60,000,000
authorized shares of Common Stock, $1.00 par value.
At December 31, 2000, the Company has stock-based compensation plans which
are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans and its stock purchase plan
except for options issued below fair market value. The compensation cost that
has been charged against income for options issued below fair market value and
options issued to replace canceled options, was $725, $81, and $202 for 2000,
1999, and 1998, respectively. Had compensation cost for the Company's
stock-based compensation plans been determined consistent with FASB Statement
No. 123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
2000 1999 1998
Net earnings (loss)
As Reported $ 34,986 $(33,288) $(2,165)
Pro Forma 34,497 (34,053) (2,799)
Diluted net earnings
(loss) per common
share
As Reported $3.39 $ (3.13) $ (0.18)
Pro Forma 3.34 (3.20) (0.23)
14
2000 1999 1998
Weighted- Weighted- Weighted-
2000 Average 1999 Average 1998 Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
1998 NON-QUALIFIED PLAN
Outstanding at January 1 350,950 $ 12.33 244,950 $ 15.73 -- $ --
Granted at fair value 142,500 6.79 138,000 7.31 245,700 15.73
Granted below fair value -- -- -- -- -- --
Forfeited (139,375) 12.28 (32,000) 16.67 (750) 15.94
Exercised (250) 8.50 -- -- --
---------- ------- ---------- -------- ---------- ----------
Outstanding at December 31 353,825 $ 10.13 350,950 $ 12.33 244,950 $ 15.73
========== ======= ========== ======== ========== ==========
Exercisable at December 31 101,288 $ 13.37 58,858 $ 15.75 -- $ --
========== ======= ========== ======== ========== ==========
Weighted-average fair value of
options granted during the year;
Issued at fair value on grant
date $ 3.10 $ 3.42 $ 4.58
Issued below fair value on
grant date -- -- --
1998 QUALIFIED PLANS
Outstanding at January 1 294,875 $ 15.22 231,958 $ 16.57 -- $ --
Granted at fair value 237,160 4.23 63,976 10.10 231,958 16.57
Granted below fair value -- -- -- -- -- --
Forfeited (204,500) 17.46 -- -- -- --
Exercised (12,977) 4.51 (1,059) 1.00 -- --
---------- ------- ---------- -------- ---------- ----------
Outstanding at December 31 314,558 $ 5.92 294,875 $ 15.22 231,958 $ 16.57
========== ======= ========== ======== ========== ==========
Exercisable at December 31 196,389 $ 4.93 111,500 $ 12.49 16,000 $ 16.25
========== ======= ========== ======== ========== ==========
Weighted-average fair value of
options granted during the year;
Issued at fair value on grant
date $ 1.84 $ 6.40 $ 5.08
Issued below fair value on
grant date -- -- --
1988 PLAN
Outstanding at January 1 1,055,888 $ 12.67 1,131,763 $ 12.73 1,327,315 $ 12.75
Granted at fair value -- -- -- -- 15,000 14.75
Granted below fair value -- -- -- -- -- --
Forfeited (211,723) 14.04 (63,412) 13.28 (136,834) 13.94
Exercised (18,688) 8.34 (12,463) 11.22 (73,718) 12.05
---------- ------- ---------- -------- ---------- ----------
Outstanding at December 31 825,477 $ 12.42 1,055,888 $ 12.67 1,131,763 $ 12.73
========== ======= ========== ======== ========== ==========
Exercisable at December 31 790,186 $ 12.33 851,457 $ 12.45 632,399 $ --
========== ======= ========== ======== ========== ==========
Weighted-average fair value of
options granted during the year;
Issued at fair value on grant
date $ -- $ -- $ 4.29
Issued below fair value on grant
date -- -- --
1987 DIRECTOR STOCK OPTION PLAN
Outstanding at January 1 189,612 $ 13.38 196,078 $ 12.98 243,818 $ 12.35
Granted at fair value -- -- -- -- -- --
Granted below fair value -- -- -- -- -- --
Forfeited -- -- -- -- (5,625) 11.66
Exercised (699) 0.67 (6,466) 1.00 (42,115) 9.55
---------- ------- ---------- -------- ---------- ----------
Outstanding at December 31 188,913 $ 13.43 189,612 $ 13.38 196,078 $ 12.98
========== ======= ========== ======== ========== ==========
Exercisable at December 31 188,913 $ 13.43 189,612 $ 13.38 140,725 $
========== ======= ========== ======== ========== ==========
Weighted-average fair value of
options granted during the year;
Issued at fair value on grant
date $ -- $ -- $ --
Issued below fair value on grant
date -- -- --
15
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------
Range Number Average Weighted Weighted
of Outstanding Remaining Average Number Average
Exercise at Contractual Exercise Exercisable Exercise
Price 12/31/00 Life Price at 12/31/00 Price
--------- ------------ ----------- --------- ----------- -----
1998 Non-Qualified Plans $4 to 13 213,750 9.4 years $6.59 24,438 $6.78
13 to 17 116,325 7.9 years 15.06 64,975 15.07
17 to 20 23,750 7.6 years 17.62 11,875 17.62
1998 Qualified Plan $ 0 to 1 104,558 9.0 years $1.00 104,588 $1.00
4 to 10 148,000 9.5 years 5.86 52,331 5.51
13 to 18 62,000 7.9 years 14.33 39,500 14.58
1988 Plan $0 to 1 85,000 5.6 years $1.00 85,000 $1.00
10 to 12 219,798 5.2 years 11.15 219,798 11.15
12 to 17 452,249 5.5 years 14.14 416,958 14.12
17 to 20 68,430 2.1 years 19.38 68,430 19.38
1987 Director Stock Option Plan $0 to 1 20,163 3.9 years $0.99 20,163 $0.99
13 to 18 168,750 3.2 years 14.92 168,750 14.92
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 Option Plan, the 1998 Key
Employee Stock Plan, and the 1998 Restricted Share Plan.
The 1998 Non-Qualified Plan, the 1998 Key Employee Stock Plan, and the 1988
Stock Option Plan and Restricted Share Plan authorize the issuance of
non-qualified stock options, restricted shares, incentive stock options (except
under the 1998 Key Employee Non-Qualified Stock Plan), and stock appreciation
rights, although no incentive stock options or stock appreciation rights have
been issued. The exercise price of each non-qualified stock option, granted
under the plan, equals the market price of the Company's stock on the date of
the grant. The options maximum term ranges from four to ten years. Options vest
at the end of the first through fourth years.
The 1998 Director Stock Option Plan and 1987 Director Stock Option Plan
authorize the automatic issuance of non-qualified stock options to members of
the Board of Directors who are not employees of the Company. 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 Option Plan, options vest at the end of six months. Under
the 1987 Director Stock Option Plan, options vest at the end of the third,
fourth, and fifth years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999, and 1998, respectively: dividend
yield of 2.4% for 1998; expected volatility of 42.2% in 2000, 36.0% in 1999 and
30.0% in 1998; risk-free interest rates from 4.9% to 6.8% for all plans and
years; and expected lives of 5.8 years for all plans.
The 1989 Employee Stock Purchase Plan, as amended, authorizes the offering
and sale to employees of up to 975,000 shares of the Company's common stock at a
price approximately 90% of the closing price of the common stock on the offering
date. Under the plan, the Company sold 5,167, 14,895, and 40,729 shares, to
employees in 2000, 1999, and 1998, respectively. At December 31, 2000, rights to
purchase approximately 5,000 shares were outstanding under this plan at an
exercise price of $8.87 per share and 527,922 additional shares were available
for issuance.
Under FASB Statement No. 123, compensation cost is recognized for the fair
value of the employee's purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 2000, 1999, and 1998,
respectively: dividend yield of 2.4% for 1998; an expected life of one year for
all years; a risk-free interest rate of 5.2% for 2000 grants, 6.7% for 1999
grants, and 4.8% for 1998 grants, and expected volatility of 42.2% in 2000,
36.0% in 1999 and 30.0% in 1998. The weighted-average fair value of those
purchase rights granted in 2000, 1999 and 1998 were $1.72, $1.56 and $1.47,
respectively.
16
[8] EARNINGS PER SHARE
Income Shares Per Share
(Numerator) (Denominator) Amount
2000
BASIC EPS
Net earnings available
common shareholders $ 34,986 10,187,048 $ 3.43
------
EFFECT OF DILUTIVE SECURITIES
Stock options -- 133,314
---------- -----------
DILUTED EPS
Earnings available
to common share-
holders and assumed
conversions $ 34,986 10,320,362 $ 3.39
---------- ---------- ------
Income Shares Per Share
(Numerator) (Denominator) Amount
1999
BASIC EPS
Net earnings available
common shareholders $ (33,288) 10,642,257 $(3.13)
---------- ---------- ------
EFFECT OF DILUTIVE SECURITIES
Stock options -- --
---------- -----------
DILUTED EPS
Earnings available
to common shareholders and
assumed conversions $ (33,288) 10,642,257 $(3.13)
---------- ---------- ------
Income Shares Per Share
(Numerator) (Denominator) Amount
1998
BASIC EPS
Net earnings available
common shareholders $ (2,165) 12,122,278 $(0.18)
------
EFFECT OF DILUTIVE SECURITIES
Stock options -- 157,555
---------- ----------
DILUTED EPS
Earnings available to
common shareholders and
assumed conversions $ (2,165) 12,279,833 $(0.18)
---------- ---------- ------
Options to purchase 1,549,459; 1,752,088; and 385,340; shares of common
stock were outstanding in 2000, 1999, and 1998, respectively, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares.
[9] 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 $4,205, $3,596, and
$2,747, in 2000, 1999, and 1998, respectively.
Future minimum rental commitments under non-cancelable operating leases at
December 31, 2000 are as follows:
Amount
2001 $2,933
2002 2,551
2003 2,176
2004 1,474
2005 738
Thereafter 1,387
---------
Total minimum $11,259
=========
The Company is subject to a number of lawsuits, investigations, and claims
arising out of the conduct of its business primarily related to commercial
transactions and product liability. While it is not feasible to predict the
outcome of all pending suits and claims, management is of the opinion that their
ultimate disposition will not have a material adverse effect upon the
consolidated financial position, liquidity, or ongoing results of operations of
the Company.
[10] 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 ("Superfund"). Currently, the Company, along with other PRPs, the
Main San Gabriel Basin Watermaster, the San Gabriel Basin Water Quality
Authority, and numerous local water districts are working with the EPA on a
mutually satisfactory remedial plan. 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.
17
The Company has recorded environmental accruals, based upon the information
available, that are adequate to satisfy known remediation requirements. The
total accrual for estimated environmental remediation costs related to the
Superfund site and other potential environmental liabilities was approximately
$8,050 at December 31, 2000. This accrual has not been discounted, and
management expects that the majority of expenditures relating to costs currently
accrued will be made over the next year. As a result of factors such as the
continuing evolution of environmental laws and regulatory requirements, the
availability and application of technology, the identification of presently
unknown remediation sites, and the allocation of costs among potentially
responsible parties, estimated costs for future environmental compliance and
remediation are necessarily imprecise and it is not possible to fully predict
the amount or timing of future environmental remediation costs which may
subsequently be determined.
Based upon information presently available, such future costs are not
expected to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
[11] BENEFIT PLANS
The Company sponsors defined benefit pension plans covering certain
salaried and hourly employees. Benefits to salaried employees are based upon the
highest three consecutive years of earnings out of their last ten years of
service; benefits to hourly workers are based upon their years of credited
service. Contributions to the plans reflect benefits attributed to employees'
service to-date and also to services expected to be provided in the future. Plan
assets consist primarily of common and preferred stocks, common stock index
funds, investment grade corporate bonds, and U.S. government obligations.
The sale of Washington Inventory Service Company in 2000 generated a
curtailment gain of $861 and a settlement loss of $890, which were included in
the gain on disposal of discontinued operations.
In 1999, the Company changed the benefit formulas for Huffy Service First
and Washington Inventory Service hourly employees, resulting in a curtailment
gain of $1,612. The 1999 sale of the True Temper Hardware Company generated a
curtailment gain of $1,138, included in gain on disposal of discontinued
operations.
In addition to the Company's defined benefit pension plans, the Company
sponsors several defined benefit health care and life insurance plans that
provide postretirement medical, dental, and life insurance benefits to full-time
employees who meet minimum age and service requirements. The plans are
contributory, with retiree contributions adjusted annually, and contain other
cost-sharing features such as deductibles and coinsurance. The Company's policy
is to fund the cost of medical benefits in amounts determined at the discretion
of management.
In 2000, the Company changed the eligibility formulas for the
postretirement medical and dental plans resulting in a curtailment gain of
$2,840.
In connection with the sale of the Washington Inventory Service Company,
True Temper Hardware Company and the Celina plant closure; future benefits were
terminated for their employees under the postretirement medical and dental
plans, and settlement and curtailment gains of $1,219 in 2000, $1,343 in 1999,
and $2,725 in 1998 were included in the gain on disposal of discontinued
operations and plant closure and manufacturing reconfiguration, respectively.
The Company also sponsors a deferred compensation plan for the benefit of
highly compensated management employees. The eligible employees make
contributions to the plan and receive postretirement benefits based upon a
stated rate of return on those contributions. The Company's policy is to fund
the cost of the benefits in amounts determined at the discretion of management.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
2000 1999
ONE-PERCENTAGE-POINT INCREASE
Effect on total service and interest
cost components $ 65 $ 105
Effect on postretirement benefit obligations 240 671
ONE-PERCENTAGE-POINT DECREASE
Effect on total service and interest
cost components $ (55) $ (89)
Effect on postretirement benefit obligations (219) (579)
Prior to closure, the Celina, Ohio facility participated in a
multi-employer defined benefit plan. Contributions to the multi-employer plan
totaled $489 in 1998.
The Company maintains defined contribution retirement plans covering its
eligible employees under Section 401(k) of the Internal Revenue Code. 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 $544, $1,171, and $599, in 2000, 1999, and 1998,
respectively.
18
The following table sets forth the plans' funded status and amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 2000 and
1999:
Health Care & Life
Pension Plans Insurance Plans Deferred Compensation Plan
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Change in benefit obligations:
Benefit obligation at beginning
of year $76,129 $102,402 $6,113 $9,720 $7,039 $ 6,797
Service cost 1,724 2,168 136 261 -- --
Interest cost 6,066 6,283 405 459 483 478
Plan Participant Contributions -- -- -- -- -- --
Amendments 238 -- (42) -- -- --
Actuarial (gain) loss 4,919 (12,235) 340 (2,377) (255) --
Disbursements (4,762) (5,316) (696) (862) (296) (236)
Curtailments (973) (3,273) (2,589) (1,088) -- --
Settlements (5,346) (13,900) -- -- -- --
--------- --------- ----------- ---------- ------------ -------------
Benefit obligation at end of
year 77,995 76,129 3,667 6,113 6,971 7,039
--------- --------- ----------- ---------- ------------ -------------
Change in plan assets:
Fair value of plan assets at
beginning
of year 91,187 98,038 -- -- -- --
Actual return on plan assets (513) 12,145 -- -- -- --
Employer contribution 498 1,366 696 862 296 236
Disbursements (4,762) (5,316) (696) (862) (296) (236)
Settlements (6,650) (15,046) -- -- -- --
--------- --------- ----------- ---------- ------------ -------------
Fair value of plan assets at
end of year 79,760 91,187 -- -- -- --
--------- --------- ----------- ---------- ------------ -------------
Funded status 1,765 15,058 (3,667) (6,113) (6,971) (7,039)
Unrecognized net actuarial
(gain) loss 6,404 (7,515) (1,808) (3,815) 2,737 3,103
Unrecognized prior service cost 914 944 -- (39) -- --
Unrecognized initial net asset (663) (989) -- -- -- --
--------- --------- ----------- ---------- ------------ -------------
Net amount recognized 8,420 7,498 (5,475) (9,967) (4,234) (3,936)
--------- --------- ----------- ---------- ------------ -------------
Amounts recognized in the balance
sheets consist of:
Prepaid benefit cost 10,703 9,375 -- -- -- --
Accrued benefit liability (4,991) (5,075) (5,475) (9,967) (4,234) (3,936)
Intangible asset 312 416 N/A N/A N/A N/A
Accumulated other comprehensive
income 2,396 2,782 N/A N/A N/A N/A
--------- --------- ----------- ---------- ------------ -------------
Net amount recognized 8,420 7,498 (5,475) (9,967) (4,234) (3,936)
--------- --------- ----------- ---------- ------------ -------------
Weighted-average assumption as
of December 31:
Discount rate 7.75% 8.00% 7.75% 8.00% 7.75% 7.25%
Expected return on plan assets 9.50% 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
For measurement purposes, a 7.00% annual rate of increase in the per capita cost
of covered health care benefits for Pre-65 was assumed for 2000, and assumed to
decrease gradually to 5.50% for 2002. For Post-65, a 5.50% annual rate of
increase was assumed for 2000 and all future years.
19
The following table sets forth the plans' funded status and amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 2000 and
1999:
Health Care & Life
Pension Plans Insurance Plans Deferred Compensation Plan
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Components of net
periodic benefit cost:
Service cost $1,724 $ 2,168 $ 136 $ 261 $ -- $ --
Interest cost 6,066 6,283 405 459 483 478
Expected return on plan assets (8,394) (8,282) -- -- -- --
Amortization of prior service
cost 156 170 (4) (3) -- --
Amortization of initial net
asset (210) (311) -- -- -- --
Recognized net actuarial loss
(gain) 206 305 (274) (269) 109 --
Settlement loss (gain) 890 331 (1,470) -- -- --
Curtailment gain (861) (2,750) (2,589) (1,343) -- --
--------- --------- ----------- ---------- ------------ -------------
Net periodic benefit cost $(423) $(2,086) $(3,796) $ (895) $ 592 $ 478
========= ========= =========== ========== ============ =============
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 $6,514, $6,047, and $1,055, respectively, as of
December 31, 2000, and $6,284, $6,053, and $978, respectively, as of December
31, 1999.
20
[12] INCOME TAXES
Total income tax expense for the year ended December 31, 2000 was allocated
as follows:
Income from continuing operations $ 6,429
Discontinued operations 3,439
Gain on sale of discontinued operations 16,082
Extraordinary item (575)
-------
$25,375)
========
The provisions for federal and state income taxes attributable to income
from continuing operations consist of:
2000 1999 1998
-------- --------- --------
Current tax expense
(benefit):
Federal $ 723 $(3,141) $(1,170)
State 560 (72) (210)
Foreign 181 117 34
-------- --------- --------
1,464 (3,096) (1,346)
Deferred tax expense
(benefit) 4,965 (17,629) (1,331)
-------- --------- --------
Total tax expense
(benefit) $ 6,429 $(20,725) $(2,677)
======== ========= ========
The Company and its domestic subsidiaries file a consolidated U.S. federal
income tax return. Such returns have been audited or settled through the year
1996.
Management expects that the Company's future level of taxable income will
be sufficient to fully utilize the net deferred tax asset. Therefore, the
valuation allowance has not been established.
The components of the net deferred tax asset as of December 31, 2000 and
1999 were as follows:
2000 1999
--------- ---------
DEFERRED TAX ASSETS:
Allowance for doubtful
accounts $ 481 $ 673
Inventory, principally due to
additional cost inventoried
for tax purposes 1,001 567
Workers' compensation 3,383 2,652
Product liability 1,251 1,002
Deferred compensation 1,108 1,215
Accrued vacation 29 235
Incurred, but not reported 333 --
Pension liability (1,336) 434
Postretirement benefits other
than pensions 2,797 3,488
Environmental reserves 2,890 2,705
Severance reserves 438 8,784
Promotional allowances 1,675 936
Net operating loss carry
forward and tax credits 459 15,670
Other liabilities and reserves
2,504 2,245
-------- --------
Other deferred tax assets 17,013 40,606
-------- --------
DEFERRED TAX LIABILITIES:
Property, plant, and equipment 256 3,822
Other assets 96 906
-------- --------
Total deferred tax liabilities 352 4,728
-------- --------
Net deferred tax asset $ 16,661 $ 35,878
-------- ========
State net operating losses of $459 expire through varying dates between
2004 and 2020.
The following table accounts for the difference between the actual tax
provision and the amounts obtained by applying the statutory U.S. federal income
tax rate to the earnings (loss) before income taxes attributable to continuing
operations.
2000 1999 1998
Earnings (loss)
before income taxes
from continuing
operations $ 17,095 $(59,961) $ (6,824)
-------- -------- --------
Tax provision
(benefit) computed
at statutory rate 5,983 (20,387) (2,388)
Increase (reduction)
in taxes due to:
Impact of foreign
losses for which a
current tax benefit
is not available 181 (117) (35)
State income taxes
(net of federal tax
benefit) 364 (507) (136)
Goodwill amortization 8 136 140
Foreign sales corporation (155) (102) (91)
Insurance proceeds (41) (45) --
Non-deductible meals
and entertainment 135 518 467
Tax credits (120) (205) (173)
Refunds of prior year
income taxes -- -- (86)
Miscellaneous 74 (16) (375)
-------- -------- --------
Actual tax provision
(benefit) $ 6,429 $(20,725) $ (2,677)
======== ======== ========
[13] CREDIT CONCENTRATION
In 2000, two customers individually accounted for 28% and 21% of total
consolidated net sales. In 1999, two customers individually accounted for 32%
and 19% of total consolidated net sales. In 1998, two customers individually
accounted for 33% and 17% of total consolidated net sales.
21
[14] QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years 2000 and 1999 are as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total[1]
2000
Net sales 100,068 122,029 123,875 142,209 488,181
Gross profit 14,762 17,064 21,841 27,675 81,342
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing operations (1,121) 636 4,869 6,282 10,666
Discontinued operations 829 3,875 160 20,454 25,318
Extraordinary gain (loss) (848) -- 213 (363) (998)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) (1,140) 4,511 5,242 26,373 34,986
EARNINGS PER COMMON SHARE:
Basic
Earnings (loss) from continuing operations (0.11) 0.06 0.48 0.62 1.05
Discontinued operations 0.08 0.38 0.01 2.01 2.48
Extraordinary gain (loss) (0.08) -- 0.02 (0.04) (0.10)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) per common share (0.11) 0.44 0.51 2.59 3.43
Diluted
Earnings (loss) from continuing
operations (0.11) 0.06 0.47 0.61 1.03
Discontinued operations 0.08 0.38 0.01 1.97 2.45
Extraordinary gain (loss) (0.08) -- 0.02 (0.04) (0.09)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) per common share (0.11) 0.44 0.50 2.54 3.39
1999
Net sales $ 107,922 $ 131,256 $ 76,350 $ 107,338 $ 422,866
Gross profit 16,021 19,750 (1,518) 2,470 36,723
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing operations (854) 2,815 (29,912) (11,404) (39,355)
Discontinued operations 3,005 2,476 4,297 (3,711) 6,067
----------- ----------- ----------- ----------- -----------
Net earnings (loss) 2,151 5,291 (25,615) (15,115) (33,288)
EARNINGS PER COMMON SHARE:
Basic
Earnings (loss) from continuing operations $ (0.07) $ 0.27 $ (2.94) $ (1.12) $ (3.70)
Discontinued operations 0.25 0.23 0.42 (0.37) 0.57
----------- ----------- ----------- ----------- -----------
Net earnings (loss) per common share $ 0.18 $ 0.50 $ (2.52) $ (1.49) $ (3.13)
Diluted
Earnings (loss) from continuing operations $ (0.07) $ 0.26 $ (2.94) $ (1.12) $ (3.70)
Discontinued operations 0.25 0.24 0.42 (0.37) 0.57
----------- ----------- ----------- ----------- -----------
Net earnings (loss) per common share $ 0.18 $ 0.50 $ (2.52) $ (1.49) $ (3.13)
[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.
COMMON STOCK
Huffy Corporation Common Stock is traded on the New York Stock Exchange.
Cash dividends declared and the quarterly high and low prices of Huffy
Corporation Common Stock during the years ended December 31, 2000 and 1999 were
as follows:
Year Ended December 31, 2000
Common Stock Dividends
Price Range Declared
---------------------- ----------
Quarter High Low
First $ 6-5/8 $ 4-1/2 $ --
Second 4-11/16 3 --
Third 13-11/16 4-1/8 --
Fourth 11-3/4 6-1/16 --
----------
Total $ --
==========
Year Ended December 31, 1999
Common Stock Dividends
Price Range Declared
---------------------- ----------
Quarter High Low
First $14-3/4 $12 $ .085
Second 14-1/2 13-3/16 .085
Third 14-11/16 9-7/8 .085
Fourth 10-1/4 5-3/16 --
----------
Total $ .255
==========
As of December 31, 2000, there were 10,222,064 shares of Huffy Corporation
Common Stock outstanding and there were 3,271 shareholders of record. Management
estimates an additional 4,000 shareholders hold their stock in nominee name.
Trading volume of the Company's Common Stock during the twelve months ended
December 31, 2000 totaled 20,660,300 shares. The average number of common shares
outstanding during this period was approximately 10,187,048 shares.