1
EXHIBIT 13
Huffy
Ten-Year Financial and Operating Review (Unaudited)
(Dollar amounts in thousands, except per share data) 1997 1996 1995
SUMMARY OF OPERATIONS
Net sales $694,490 $579,670 $572,454
Gross profit 112,841 94,888 74,853
Selling, general, and administrative expenses 91,838 80,058 76,722
Operating income (loss) [1] 21,003 14,830 (7,247)
Other (income) expense, net [2] 994 (481) 102
Interest expense, net 5,514 5,791 6,525
Earnings (loss) before income taxes 14,495 9,520 (13,874)
Income tax expense (benefit) 4,066 2,596 (4,359)
Earnings (loss) from continuing operations 10,429 6,924 (9,515)
Discontinued operations (254) (467) (942)
Earnings (loss) before cumulative effect of accounting changes 10,175 6,457 (10,457)
Cumulative effect of accounting changes, net of income taxes -- -- --
Net earnings (loss) 10,175 6,457 (10,457)
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share: [3]
Basic .79 .48 (.78)
Diluted [4] .78 .48 (.77)
- -------------------------------------------------------------------------------------------------------------
Common dividends declared 4,365 4,582 4,577
Common dividends per share .34 .34 .34
Capital expenditures for plant and equipment 17,493 14,684 21,232
Weighted average common shares outstanding:
Basic 12,895 13,449 13,422
Diluted 13,062 13,578 13,533
- -------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Total assets 323,493 308,267 289,038
Working capital 72,366 89,098 87,152
Net investment in plant and equipment 79,466 78,890 81,648
Notes payable 43,000 38,910 5,750
Long-term obligations 36,184 43,897 51,236
Shareholders' equity 112,839 115,972 116,104
Equity per share 8.87 8.67 8.64
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS
Net cash provided by (used in) operating activities 51,738 (5,656) 27,898
Net cash used in investing activities (35,188) (14,665) (21,201)
Net cash provided by (used in) financing activities (16,456) 19,872 (5,724)
Net change in cash and cash equivalents 94 (449) 973
- -------------------------------------------------------------------------------------------------------------
RATIOS AND MISCELLANEOUS
Net profit margin on earnings from continuing operations 1.5% 1.2% N/A
Average working capital turnover 8.1 10.1 8.3
Return on net assets 6.8% 5.1% N/A
Return on beginning shareholders' equity 8.8% 5.6% N/A
Current ratio 1.5 1.5 1.6
Debt/total capital 28.0% 30.7% 33.7%
- -------------------------------------------------------------------------------------------------------------
Number of common shareholders 3,127 3,570 3,688
12
2
[1] Operating loss in 1995 includes a net restructure provision of $5,378
related to personnel reductions and the negotiation of a concessionary
labor contract. Operating income in 1994 includes a restructuring credit of
$934 related to a 1993 charge. Operating income in 1993 includes a
provision of $28,755 for restructuring the Company's lawn and garden tools
business.
[2] Other (income) expense, net includes the following: October 1988 - $5,584
loss on sale of capital stock of Raleigh Cycle Company of America.
[3] The 1993 net loss per share is computed using actual average outstanding
shares.
[4] The 1993 loss per share before cumulative effect of accounting changes is
($.30). The 1992 diluted earnings per share before the cumulative effect of
accounting changes is $.89.
N/A - Not Applicable.
1994 1993 1992 1991 1990 1989 1988
$598,185 $633,589 $587,810 $570,453 $424,388 $365,819 $266,134
99,849 108,119 94,398 107,289 80,839 65,335 47,119
75,172 82,204 77,257 75,621 56,040 45,332
35,005
25,611 (2,840) 17,141 31,668 24,799 20,003 12,114
(714) 464 (465) 559 (371) (594) 5,751
5,831 8,657 9,267 7,984 4,269 1,916 2,064
20,494 (11,961) 8,339 23,125 20,901 18,681 4,299
7,352 (2,798) 2,665 8,297 7,494 6,762 1,849
13,142 (9,163) 5,674 14,828 13,407 11,919 2,450
4,285 5,330 6,169 4,999 4,600 3,074 2,086
17,427 (3,833) 11,843 19,827 18,007 14,993 4,536
-- (1,084) (7,628) -- -- -- --
17,427 (4,917) 4,215 19,827 18,007 14,993 4,536
- ------------------------------------------------------------------------
1.21 (.37) .33 1.54 1.38 1.18 .36
1.19 (.37) .28 1.32 1.20 1.02 .31
- ------------------------------------------------------------------------
4,861 4,175 3,809 3,740 3,461 3,071 2,613
.34 .31 .30 .29 .27 .24 .20
32,586 17,449 18,990 20,724 8,282 12,181 10,155
14,458 13,114 12,747 12,885 13,068 12,690 12,477
14,601 13,172 15,055 14,997 15,062 14,668 14,471
- ------------------------------------------------------------------------
313,052 311,947 325,462 307,400 292,884 225,756 174,214
73,726 73,268 70,592 80,793 83,879 84,148 54,752
77,790 60,198 66,815 61,753 56,682 36,870 33,086
-- 3,500 18,975 -- -- -- --
58,611 43,211 74,918 80,208 84,348 57,525 37,196
133,403 136,029 117,687 124,997 106,747 95,645 80,776
9.85 9.27 9.35 9.68 8.39 7.43 6.50
- ------------------------------------------------------------------------
31,199 27,973 (1,788) 4,696 7,615 15,555 15,588
(22,202) (7,733) (9,169) (11,311) (53,233) (3,853) (29,941)
(11,533) (19,589) 5,984 (6,774) 15,596 24,819 16,869
(2,536) 651 (4,973) (13,389) (30,022) 36,521 2,516
- ------------------------------------------------------------------------
2.2% N/A 1.0% 2.6% 3.5% 3.3% 0.9%
7.8 8.2 7.4 7.3 6.2 6.9 6.2
8.9% N/A 4.1% 11.5% 13.8% 13.7% 6.7%
12.8% N/A 3.4% 18.6% 18.8% 18.6% 5.7%
1.9 1.9 1.8 2.0 2.0 2.1 1.8
32.4% 26.6% 40.5% 40.3% 45.7% 40.5% 33.3%
- ------------------------------------------------------------------------
4,196 3,760 3,883 3,016 2,410 2,473 2,180
13
3
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, 1997 and 1996, 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, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
February 6, 1998
Cincinnati, Ohio
14
4
HUFFY
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, 1997
TO THE YEAR ENDED DECEMBER 31, 1996
The Company recorded net earnings from continuing operations of $10,429 or
$.80 per common share in 1997 compared to $6,924, or $.51 per common share for
1996. Improved volume led to increased profitability in both segments. The net
earnings from continuing operations exclude operating results and gain from the
sale of the Company's juvenile products business which was sold to Evenflo
Company, Inc. in April, 1997. In 1997 the juvenile products business had net
sales of $37,180 and a net loss of $813, or $.06 per common share compared to
net sales of $122,209 and a net loss of $467, or $.03 per common share in 1996.
The gain on the sale of the juvenile products business was $559, or $.04 per
common share.
Net Sales
Net sales in 1997 were $694,490, a 19.8% increase over net sales of
$579,670 in 1996. Net sales in the Consumer Products segment increased by 20.7%
over 1996. Net sales in the Consumer Products segment increased due to strong
demand and market share gains for bicycles and basketball backboard systems,
combined with increased market penetration and new customer distribution in the
wheelbarrow portion of the lawn and garden business.
In the Services for Retail segment, net sales increased by 17.9% over 1996,
primarily as a result of increased market penetration in the inventory services
and product assembly and supplier services businesses.
Gross Profit
Consolidated gross profit for 1997 was $112,841, or 16.2% of net sales,
compared to $94,888, or 16.4% of net sales reported for 1996.
Volume increases in both the Consumer Products and Services for Retail
segments contributed to the increased gross profit dollars. Gross profit
expressed as a percent of net sales declined versus the prior year in the
Consumer Products segment due to continued intense competition and customer
demand for increased mix of promotionally priced products, while the Services
for Retail segment was unfavorably impacted by a shift in the mix of product
services provided.
Consolidated gross profit in total and as a percentage of sales varies by
quarter due to normal seasonal fluctuations at several Huffy Companies. True
Temper Hardware Company typically experiences lower sales in the third quarter
due to the seasonal nature of its products. Lower gross profit percentages in
the fourth quarter are typically caused by seasonal fluctuations at Huffy
Bicycle Company and Washington Inventory Service. Huffy Bicycle Company
typically stops production for a period during December to prevent inventory
build-up. The fixed costs associated with this shutdown reduce fourth quarter
profitability. Washington Inventory Service also experiences a significant
unfavorable seasonal impact during the fourth quarter as retailers typically do
not conduct inventories during the Christmas season, causing low fourth quarter
sales volume and reduced gross profit.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses in 1997 were $91,838, a 14.7%
increase over 1996. The increase in selling, general, and administrative
expenses is primarily due to volume related commissions and customer service
costs.
Net Interest Expense
Net interest expense was $5,514, a $277 decrease over net interest expense
for 1996. The decrease in interest expense is due primarily to principal
reduction in long-term debt, and reduced levels of short-term borrowings made
possible by the Gerry Baby Products Company sale.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED
DECEMBER 31, 1995
The Company recorded net earnings from continuing operations of $6,924 in
1996, compared to a net loss of $9,515 reported in 1995. The 1995 net loss from
continuing operations included an after-tax restructure charge of $3,496 to
reflect the severance and related costs associated with a reduction of the
Company's corporate and Huffy Bicycle Company workforce and other costs
associated with a new concessionary labor contract at the Company's Celina, Ohio
bicycle manufacturing facility.
Net earnings from continuing operations per share of common stock was $.51
in 1996 compared to a net loss of $.70 in 1995. If the net loss were adjusted to
exclude the impact of the restructuring charge in 1995, net loss per common
share would have been $.44 in 1995.
15
5
The net earnings from continuing operations exclude operating results from
the juvenile products business. In 1996, the juvenile products business had net
sales of $122,209 and a net loss of $467, or $.03 per common share compared to
net sales of $112,298 and a net loss of $942, or $.07 per common share in 1995.
Net Sales
Net sales in 1996 were $579,670, a 1.3% increase over net sales of $572,454
in 1995. Net sales in the Consumer Products segment decreased by .8% over 1995.
Net sales were negatively impacted by lower sales volume for the basketball
business resulting from unseasonable weather during the spring selling season.
This decrease was partially offset by increased sales in the lawn and garden
products, reflecting market gains as a result of new product introductions and
increased market penetration in existing product lines.
In the Services for Retail segment, net sales increased by 7.2% over 1995,
primarily as a result of continued market share gains in the non-bike and
in-home assembly business and increased market penetration in the inventory
services business.
Gross Profit
Consolidated gross profit for 1996 was $94,888, or 16.4% of net sales,
compared to $74,853, or 13.1% reported for 1995. The increase in gross profit in
the Consumer Products segment resulted primarily from lower labor costs and
improved productivity in the bicycle business. In the Services for Retail
segment, gross profit margins increased due to improved labor efficiency in the
inventory services business.
Consolidated gross profit in total and as a percentage of sales varies by
quarter due to normal seasonal fluctuations at several Huffy Companies. True
Temper Hardware Company typically experiences lower sales in the third quarter
due to the seasonal nature of its products. Lower gross profit percentages in
the fourth quarter are typically caused by seasonal fluctuations at Huffy
Bicycle Company and Washington Inventory Service. Huffy Bicycle Company
typically stops production for a period during December to prevent inventory
build-up. The fixed costs associated with this shutdown reduce fourth quarter
profitability. Washington Inventory Service also experiences a significant
unfavorable seasonal impact during the fourth quarter as retailers typically do
not conduct inventories during the Christmas season, causing low fourth quarter
sales volume and reduced gross profit.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses in 1996 were $80,058, a 4.3%
increase over 1995. The increase in selling, general, and administrative
expenses is primarily due to higher incentive accruals.
Net Interest Expense
Net interest expense was $5,791, a $734 decrease over net interest expense
for 1995. The decrease in interest expense is due primarily to principal
reduction in long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
The financial condition of the Company remained strong during 1997. Company
operations have historically provided a positive cash flow which, along with the
credit facilities maintained, provides adequate liquidity to meet the Company's
operational needs. Cash provided by continuing operations amounted to $1,216 in
1997, compared to $2,784 in 1996 and $27,576 in 1995.
Committed and uncommitted short-term lines of credit total $120,000 of
which $43,000 was outstanding at December 31, 1997. The Company believes that
its capital structure provides the financial flexibility to obtain additional
financing that may be necessary to fund future growth.
16
6
Funds expended for capital additions and improvements totaled $17,493 in
1997 compared to $14,684 in 1996 and $21,232 in 1995. In 1998, capital
expenditures are expected to be approximately $21,600, reflecting continuing
investment in new products and technology.
The Company's debt to total capital ratio decreased to 28.0% at December
31, 1997 compared to 30.7% at December 31, 1996 due to the scheduled repayment
of long-term obligations.
RESTRUCTURING ACTIVITY
During 1995, the Company recorded a restructure charge of $5,378 ($3,496
after-tax). The restructure plan included a charge of $715 related to a 30%
reduction in the Company's Corporate Staff, $1,280 related to a reduction in
administrative and hourly employment at the Huffy Bicycle Company, and a charge
of $3,883, which included a pension curtailment expense of $3,226, related to
the negotiation of a concessionary labor contract at the Company's Celina, Ohio
bicycle manufacturing facility. The restructure charge was offset by a $500
restructure credit recorded to reflect revised cost estimates for certain items
in a 1993 restructure charge. The restructure plan was substantially completed
during 1995 with all activity completed as of December 31, 1996.
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 San Gabriel
Basin 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 is
approximately $5,100 at December 31, 1997. Management expects that the majority
of expenditures relating to costs currently accrued will be made over the next
two to ten years.
As a result of factors such as the continuing evolution of environmental
laws and regulatory requirements, the availability and application of
technology, the identification of presently unknown remediation sites and the
allocation of costs among 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 costs of environmental remediation
requirements 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, 1997. 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.
17
7
Huffy Corporation
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
December 31, 1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,142 $ 2,048
Receivables:
Trade 107,269 77,463
Taxes and other 5,150 5,149
-------- --------
112,419 82,612
Less allowance for doubtful accounts 2,462 1,437
-------- --------
Net receivables 109,957 81,175
Inventories 81,692 54,233
Deferred federal income taxes 13,576 8,666
Prepaid expenses 5,489 5,727
Net assets of discontinued operations -- 50,776
-------- --------
Total current assets 212,856 202,625
-------- --------
PROPERTY, PLANT, AND EQUIPMENT, AT COST:
Land and land improvements 1,502 1,518
Buildings and improvements 36,350 37,013
Machinery and equipment 133,276 121,259
Office furniture, fixtures, and equipment 24,585 23,117
Leasehold improvements 3,478 3,189
Construction in progress 7,533 7,640
-------- --------
206,724 193,736
Less accumulated depreciation and amortization 127,258 114,846
-------- --------
Net property, plant, and equipment 79,466 78,890
OTHER ASSETS:
Excess of cost over net assets acquired, net of
accumulated amortization of $3,921 in 1997
and $3,453 in 1996 21,355 13,556
Deferred federal income taxes 4,773 8,085
Other 5,043 5,111
-------- --------
$323,493 $308,267
======== ========
See accompanying notes to consolidated financial statements
8
December 31, 1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 43,000 $ 38,910
Current installments of long-term obligations 7,786 7,593
Accounts payable 40,280 24,917
Accrued expenses:
Salaries, wages, and other compensation 14,849 16,065
Insurance 11,216 14,011
Other $ 15,299 $ 9,384
--------- ---------
Total accrued expenses 41,364 39,460
Other current liabilities $ 8,060 $ 2,647
--------- ---------
Total current liabilities $ 140,490 $ 113,527
--------- ---------
Long-term obligations, less current installments 36,184 43,897
Pension liability 6,791 8,850
Postretirement benefits other than pensions 17,300 16,826
Other liabilities $ 9,889 $ 9,195
--------- ---------
Total liabilities $ 210,654 $ 192,295
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, par value $1 per share
Authorized 1,000,000 shares -- --
Common stock, par value $1 per share
Authorized 60,000,000 shares; issued 16,475,114
shares in 1997 and 16,411,343 shares in 1996 16,475 16,411
Additional paid-in capital 63,885 62,488
Retained earnings 87,246 81,436
Minimum pension liability adjustment (3,894) (4,028)
Cumulative translation adjustment (1,050) (563)
--------- ---------
162,662 155,744
Less cost of 3,757,408 treasury shares in 1997
and 3,038,396 in 1996 49,823 39,772
--------- ---------
Total shareholders' equity 112,839 115,972
--------- ---------
$ 323,493 $ 308,267
========= =========
9
Huffy Corporation
CONSOLIDATED STATEMENTS OF OPERATION
(Dollar amounts in thousands, except per share data)
Years Ended December 31, 1997 1996 1995
Net sales $ 694,490 $ 579,670 $ 572,454
Cost of sales $ 581,649 $ 484,782 $ 497,601
------------ ------------ ------------
Gross profit 112,841 94,888 74,853
Selling, general, and administrative expenses 91,838 80,058 76,722
Restructuring costs $ -- $ -- $ 5,378
------------ ------------ ------------
Operating income (loss) 21,003 14,830 (7,247)
Other expense (income)
Interest expense 5,725 5,873 6,615
Interest income (211) (82) (90)
Other $ 994 $ 481) $ 102
------------ ------------ ------------
$ 6,508 $ 5,310 $ 6,627
------------ ------------ ------------
Earnings (loss) before income taxes 14,495 9,520 (13,874)
Income tax expense (benefit) $ 4,066 $ 2,596 $ (4,359)
------------ ------------ ------------
Earnings (loss) from continuing operations $ 10,429 $ 6,924 $ (9,515)
------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations, net of
income tax benefit of $458 in 1997,
$202 in 1996, and $223 in 1995 $ (813) $ (467) $ (942)
Gain on disposal of discontinued operations,
net of income tax of $4,490 in 1997 $ 559 $ -- $ --
------------ ------------ ------------
Net earnings (loss) $ 10,175 $ 6,457 $ (10,457)
------------ ------------ ------------
EARNINGS (LOSS) PER COMMON SHARE:
Basic
Weighted average number of common shares 12,894,600 13,449,143 13,422,152
Earnings (loss) from continuing operations $ .81 $ .51 $ (.71)
Loss from discontinued operations (.02) (.03) (.07)
------------ ------------ ------------
Net earnings (loss) per common share $ .79 $ .48 $ (.78)
------------ ------------ ------------
Diluted
Weighted average number of common shares
and common stock equivalents 13,062,174 13,577,862 13,532,630
Earnings (loss) from continuing operations $ .80 $ .51 $ (.70)
Loss from discontinued operations $ (.02) $ (.03) $ (.07)
------------ ------------ ------------
Net earnings (loss) per common share $ .78 $ .48 $ (.77)
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
10
Huffy Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands)
Years Ended December 31, 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations $ 010,429 $ (06,924 $ (9,515)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Restructuring credits, net of payments -- -- (203)
Depreciation and amortization 17,666 18,417 18,382
Loss on sale of property, plant, and equipment 246 14 428
Deferred federal income tax expense (benefit) (1,671) 1,736 (689)
Increase (decrease) in cash resulting from changes in:
Receivables, net (20,699) (16,492) 22,820
Inventories (26,524) 114 2,925
Prepaid expenses 435 (965) 321
Other assets (2,098) 283 (509)
Accounts payable 15,363 (7,832) (4,328)
Accrued expenses 1,975 (854) (5,263)
Other current liabilities 5,413 (1,697) 2,439
Postretirement benefits other than pensions 474 610 734
Other long-term liabilities 694 2,476 --
Other $ (487) $ 50 $ 34
--------- --------- --------
Net cash provided by continuing operating activities $ 1,216 $ (02,784 $ 27,576
--------- --------- --------
Discontinued operations:
Gain on disposal of discontinued operations 559 -- --
Loss from discontinued operations (813) (467) (942)
Items from discontinued operations 1,516 4,501 4,024
Cash provided by (used in) discontinued operations $ 49,260 $ (12,474) $ (2,760)
--------- --------- --------
Net cash provided by (used in) discontinued
operating activities $ 50,522 $ (8,440) $ 322
--------- --------- --------
Net cash provided by (used in) operating activities $ 51,738 $ (5,656) $,27,898
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,493) (14,684) (21,232)
Proceeds from sale of property, plant, and equipment $ 294 $ 19 $ 31
Acquisitions of businesses $ (17,989) $ -- $ --
--------- --------- --------
Net cash used in investing activities $ (35,188) $ (14,665) $ (21,201)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 4,090 33,160 5,750
Issuance of long-term obligations 96 94 150
Reduction of long-term obligations (7,616) (7,525) (5,140)
Issuance of common shares 1,461 2,042 536
Purchase of treasury shares (10,051) (3,318) (2,447)
Dividends paid $ (4,436) $ (4,581) $ (4,573)
--------- --------- --------
Net cash provided by (used in) financing activities $ (16,456) $ (19,872 $ (5,724)
--------- --------- --------
Net change in cash and cash equivalents 94 (449) 973
Cash and cash equivalents:
Beginning of year $ 2,048 $ 2,497 $ 1,524
--------- --------- --------
End of year $ 2,142 $ 2,048 $ (02,497
--------- --------- --------
Cash paid (refunded) during the year for:
Interest $ 6,744 $ 7,385 $ (08,548
Income taxes 6,042 (3,131) (2,415)
See accompanying notes to consolidated financial statements.
11
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
Minimum
Additional Pension Cumulative
Common Paid-In Retained Liability Translation Treasury
Stock Capital Earnings Adjustment Adjustment Stock
BALANCE AT DECEMBER 31, 1994 $16,166 $60,155 $(94,595 $(2,859) $(647) $(34,007)
Net (loss) (10,457)
Issuance of 47,039 shares in
connection with common
stock plans 47 489
Common dividends $.34
per share (4,577)
Purchase of 159,103
treasury shares (2,447)
Minimum pension liability
adjustment (388)
Foreign currency
translation adjustment 34
------- ------- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1995 $16,213 $60,644 $79,561 $(3,247) $ (613) $(36,454)
Net earnings 6,457
Issuance of 198,278 shares in
connection with common
stock plans 198 1,844
Common dividends $.34
per share (4,582)
Purchase of 263,300
treasury shares (3,318)
Minimum pension liability
adjustment (781)
Foreign currency
translation adjustment 50
------- ------- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1996 $16,411 $62,488 $81,436 $(4,028) $ (563) $(39,772)
Net earnings 10,175
Issuance of 63,771 shares in
connection with common
stock plans 64 1,397
Common dividends $.34
per share (4,365)
Purchase of 783,500
treasury shares (10,051)
Minimum pension liability
adjustment 134
Foreign currency
translation adjustment (487)
------- ------- ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997 $16,475 $63,885 $87,246 $(3,894) $(1,050) $(49,823)
======= ======= ======= ======= ======= ========
See accompanying notes to consolidated financial statements.
12
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 intercompany
transactions and balances have been eliminated.
[b] Reclassification -- The accompanying consolidated financial statements
and notes for 1996 and 1995 have been reclassified to identify separately the
earnings, net assets, and cash flows of the Company's discontinued juvenile
products business.
[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 other 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, 1997.
[e] Inventories -- Inventories are valued at cost (not in excess of market)
determined by the last-in, first-out (LIFO) method for all bicycle and
basketball inventories. Lawn and garden tools inventories are valued on the
first-in, first-out (FIFO) method. At December 31, 1997 and 1996, 60% and 49%,
respectively, of the Company's inventories were valued using the LIFO method.
[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, and equipment 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 amount 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 (6).
[i] Earnings (Loss) Per Common Share -- Effective December 31, 1997, the
Company adopted SFAS No. 128 "Earnings Per Share" which simplifies the standards
for computing earnings per share. Quarterly earnings per share have been
restated to reflect the adoption, however, there was no material impact on the
Company's previously reported earnings per share. 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 is computed based
on the weighted average number of shares of common stock and common stock
equivalents outstanding.
[j] Foreign Currency Translation -- The functional currency of
the Company's non-U.S. subsidiaries is the local currency. Adjustments resulting
from the translation of financial statements are reflected as a separate
component of shareholders' equity.
[k] 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.
[l] Stock Option Plans -- Prior to January 1, 1996, the Company accounted for
its stock option plan 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-
23
13
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.
[2] ACQUISITIONS
In 1997, the Company made several acquisitions to add product lines to
current businesses. In December, the Company acquired the assets of Royce Union
Bicycle Company, Inc. which holds a leading market position in the growing
sporting goods distribution channel. In July, the Company purchased the business
and assets of Sure Shot International, Inc. and Hydra-Rib, Inc. which produce
basketball units for institutional and in-arena use. The financial position and
earnings for these companies were immaterial to the Company's consolidated
financial statements.
[3] DISCONTINUED OPERATIONS
On April 21, 1997, the Company sold the assets of its Denver-based juvenile
products business, Gerry Baby Products Company, for $73 million to Evenflo
Company, Inc. The results of Gerry Baby Products Company have been classified as
discontinued operations for all periods presented in the Consolidated Statements
of Operations and Consolidated Statements of Cash Flows. The assets and
liabilities of discontinued operations at December 31, 1996 have been classified
in the Consolidated Balance Sheets as "Net assets of discontinued operations."
Summarized balance sheet data for discontinued operations is as follows:
1996
Current assets $34,301
Property, plant & equipment, net 10,869
Other assets 13,364
-------
Total assets 58,534
Current liabilities 7,758
-------
Net assets $50,776
=======
[4] RESTRUCTURING PROVISION
During 1995, the Company recorded a restructure charge of $5,378 ($3,496
after-tax). The restructure plan included a charge of $715 related to a 30%
reduction in the Company's Corporate Staff, $1,280 related to a reduction in
administrative and hourly employment at the Huffy Bicycle Company, and a charge
of $3,883, which includes a pension curtailment expense of $3,226, related to
the negotiation of a concessionary labor contract at the Company's Celina, Ohio
bicycle manufacturing facility.
In 1995 a restructure credit of $500 was recorded to reflect the revised cost
estimates for certain items included in the 1993 lawn and garden tools
restructuring. All activity related to the restructure of the Company's lawn and
garden tools business was completed as of December 31, 1995.
[5] INVENTORIES
The components of inventories are as follows:
1997 1996
Finished goods $43,518 $31,370
Work-in-process 13,699 8,467
Raw materials and supplies $30,505 $22,391
------- -------
87,722 62,228
Excess of FIFO cost over LIFO inventory
value $(6,030) $(7,995)
------- -------
$81,692 $54,233
======= =======
[6] LINES OF CREDIT AND LONG-TERM OBLIGATIONS
During 1997, the Company had a short-term committed line of credit with
various banks in the form of a $50,000 revolving credit agreement, expiring
December 31, 1999. The Company also had $70,000 in uncommitted lines of credit
on a no fee basis, of which $43,000 was outstanding at December 31, 1997.
Short-term borrowings are summarized as follows:
1997 1996
Unsecured notes payable:
Average borrowings $16,152 $23,246
Maximum at any month end 70,520 41,430
Weighted average rate 5.99% 4.77%
Long-term obligations are summarized as follows:
1997 1996
Unsecured notes payable:
9.62% due serially through 2000 $15,000 $18,000
9.81% due serially through 1998 4,400 8,400
8.23% Industrial Development Bonds
due serially from 2000 through 2014 20,000 20,000
Other $ 4,570 $05,090
------- -------
43,970 51,490
Less current installments $ 7,786 $77,593
------- -------
$36,184 $43,897
======= =======
Certain of the loan agreements contain covenants which, among other things,
require the Company to maintain current assets equal to 150% of current
liabilities, limit the percentage of capitalization from funded debt, and
require that certain levels of net worth be maintained.
Principal payments required on long-term obligations during each of the
years 1999 through 2002 are approximately $6,406, $7,677, $1,678, and $1,697,
respectively.
The estimated fair value of the Company's long-term obligations at December
31, 1997 and 1996 was approximately $47,225 and $54,504, respectively. 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.
14
[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 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 $.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.
[8] COMMON STOCK AND COMMON STOCK PLANS
At December 31, 1997, the Company has three 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 was
$432, $246, and $0 for 1997, 1996, and 1995, 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:
1997 1996 1995
Net earnings (loss) As Reported $10,175 $6,457 $(10,457)
Pro Forma 9,741 6,228 (10,523)
Net earnings (loss)
per common share As Reported $ .78 $ .48 $ (.77)
Pro Forma .75 .46 (.77)
Due to the phase-in period for applying the disclosure requirements of SFAS
No. 123, the pro forma information provided above is not likely to be
representative of the effects on reported net earnings for future years.
A summary of the status of the Company's fixed stock option plans as of
December 31, 1997, 1996, and 1995, changes during the years ended on those dates
is presented below:
1997 1997 1996 1996 1995 1995
NUMBER WEIGHTED-AVERAGE Number Weighted-Average Number Weighted-Average
OF SHARES EXERCISE PRICE of Shares Exercise Price of Shares Exercise Price
1988 PLAN
Outstanding at January 1 1,278,647 $ 12.42 957,156 $ 12.67 816,404 $ 13.58
Granted at fair value 272,399 14.34 433,409 13.11 336,080 10.98
Granted below fair value 0 0.00 90,000 1.00 -- --
Forfeited (168,510) 13.66 (44,503) 13.99 (156,719) 14.85
Exercised (55,221) $ 19.76 (157,415) $ 18.82 (38,609) $,18.56
---------- ---------- ---------- ---------- ------- ----------
Outstanding at December 31 1,327,315 $ 12.75 1,278,647 $ 12.42 957,156 $ 12.67
---------- ---------- ---------- ---------- ------- ----------
Exercisable at December 31 422,962 $ 13.51 302,695 $ 14.32 377,233 $ 12.04
---------- ---------- ---------- ---------- ------- ----------
Weighted-average fair value
of options granted during
the year;
Issued at fair value on
grant date $ 04.42 $ 04.21 $ 03.34
Issued below fair value on
grant date -- $ 09.02 --
1987 DIRECTOR STOCK OPTION PLAN
Outstanding at January 1 188,882 $ 12.44 184,877 $ 12.42 179,727 $ 12.75
Granted at fair value 50,625 13.00 0 -- 0 --
Granted below fair value 4,728 1.00 7,241 1.00 6,293 1.00
Forfeited 0 -- 0 -- 0 --
Exercised .(417) $ 1.00 (3,236) $ .80 (1,143) 1.00
---------- ---------- ---------- ---------- ------- ----------
Outstanding at December 31 243,818 $ 12.35 188,882 $ 12.44 184,877 $ 12.42
---------- ---------- ---------- ---------- ------- ----------
Exercisable at December 31 181,224 $ 12.92 175,348 $ 13.32 111,999 $ 10.67
========== ========== ========== ========== ======= ==========
Weighted-average fair value of
options granted during the year -- $ 10.56 $ 12.51
25
15
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ----------------------------
Average Weighted Weighted
Range of NUMBER Remaining Average NUMBER Average
Exercise OUTSTANDING Contractual Exercise EXERCISABLE Exercise
Price AT 12/31/97 Life Price AT 12/31/97 Price
1988 PLAN
$000 to 1 90,000 8.6 Years $01.00 30,000 $01.00
7 to 9 12,497 1.0 Years 8.75 12,497 8.75
10 to 12 372,382 7.5 Years 11.03 119,561 10.94
13 to 16 734,221 8.6 Years 14.10 162,338 14.50
019 to 20 0,118,215 5.6 Years 019.13 098,566 019.40
--------- --------- --------- ------ ------- ------
$00 to 20 1,327,315 8.0 Years $12.75 422,962 $13.51
1987 DIRECTOR STOCK OPTION PLAN
$000 to 1 35,693 6.8 Years $00.99 23,724 $00.98
11 to 18 208,125 4.8 Years 014.30 157,500 014.72
--------- --------- --------- ------ ------- ------
$00 to 18 243,818 5.1 Years $12.35 181,224 $12.92
The Company has two fixed option plans. The 1988 Stock Option Plan and
Restricted Share Plan authorizes the issuance of non-qualified stock options,
restricted shares, incentive stock options, and stock appreciation rights,
although no incentive stock options or stock appreciation rights have been
issued. Under the plan, the exercise price of each non-qualified stock option
equals the market price of the Company's stock on the date of grant, and such
option's maximum term is ten years. Options vest at the end of the first through
fifth years.
The 1987 Director Stock Option Plan authorizes 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. The total number of
shares issued under the plan shall not exceed 337,500 shares, and such shares
cannot include stock appreciation rights. 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 1997, 1996 and 1995, respectively: dividend yield
of 2.4% for all years; expected volatility of 30.0% for all years; risk-free
interest rates from 5.5% 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 8,133 shares, 37,627 shares, and 7,350
shares to employees in 1997, 1996, and 1995, respectively. At December 31, 1997,
rights to purchase 44,714 shares were outstanding under this plan at an exercise
price of $14.12 per share and 550,298 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 1997, 1996, and 1995,
respectively: dividend yield of 2.4% for all years; an expected life of one year
for all years; a risk-free interest rate of 5.7% for 1997 grants, 6.2% for 1996
grants and 5.6% for 1995 grants, and expected volatility of 30.0% for all years.
The weighted-average fair value of those purchase rights granted in 1997, 1996,
and 1995 were $1.85, $2.41, and $2.28, respectively.
[9] EARNINGS PER SHARE
INCOME SHARES PER SHARE
(Numerator) (Denominator) Amount
1997
BASIC EPS
Net earnings available to
common shareholders $10,175 12,894,600 $.79
EFFECT OF DILUTIVE SECURITIES
Stock options -- 167,574
------- -----------
DILUTED EPS
Earnings available to common
shareholders and assumed
conversions $10,175 13,062,174 $.78
------- ----------- ----
Income Shares Per Share
(Numerator) (Denominator) Amount
1996
BASIC EPS
Net earnings available to
common shareholders $06,457 13,449,143 $.48
EFFECT OF DILUTIVE
SECURITIES
Stock options $ -- 128,719
------- ----------- ----
DILUTED EPS
Earnings available to common
shareholders and assumed
conversions $ 6,457 13,577,862 $.48
======= =========== ====
26
16
Income Shares Per Share
(Numerator) (Denominator) Amount
1995
BASIC EPS
Net loss available to
common shareholders $(10,457) 13,422,152 ($.78)
EFFECT OF DILUTIVE SECURITIES
Stock options $ -- 110,478
-------- ----------
DILUTED EPS
Earnings available to common
shareholders and assumed
conversions $(10,457) 13,532,630 ($.77)
======== ========== =====
Options to purchase 224,785, 812,222, and 502,644 shares
of common stock were outstanding in 1997, 1996, and 1995, 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.
[10] COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing and warehouse facilities, office
space, machinery, and vehicles under cancellable and non-cancellable operating
leases, most of which expire within ten years and may be renewed by the Company.
Rent expense under such arrangements totaled approximately $7,523, $6,308, and
$5,911 in 1997, 1996, and 1995, respectively.
Future minimum rental commitments under non-cancellable operating leases at
December 31, 1997 are as follows:
AMOUNT
1998 $05,746
1999 5,126
2000 4,436
2001 3,329
2002 2,191
Thereafter $12,430
-------
Total minimum payments $33,258
=======
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.
[11] 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
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.
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 is approximately
$5,100 and $3,200 for 1997 and 1996, respectively. 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 two to ten years. As a result
of factors such as the continuing evolution of environmental laws and regulatory
requirements, the availability and application of technology, the identification
of presently unknown remediation sites, and the allocation of costs among
potentially responsible parties, estimated costs for future environmental
compliance and remediation are necessarily imprecise and it is not possible to
fully predict the amount or timing of future costs of environmental remediation
requirements 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.
[12] BENEFIT PLANS
The Company sponsors defined benefit pension plans covering certain salaried
and hourly employees. Benefits to salaried employees are based upon the highest
three consecutive years of earnings out of their last ten years of service;
benefits to hourly workers are based upon their years of credited service.
Contributions to the plans reflect benefits attributed to employees' service to
date and also to services expected to be provided in the future. Plan assets
consist primarily of common and preferred stocks, common stock index funds,
investment grade corporate bonds, and U.S. government obligations.
In accordance with SFAS No. 87, the Company has recorded an additional amount
of minimum pension liability of $6,791 at
27
17
The following table sets forth the plans' funded status and amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and
1996:
1997 1997 1996 1996
ASSETS EXCEED ACCUMULATED Assets Exceed Accumulated
ACCUMULATED BENEFITS EXCEED Accumulated Benefits Exceed
BENEFITS ASSETS Benefits Assets
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
Vested benefit obligation $31,649 $(47,110 $30,119 $41,378
------- -------- ------- -------
Accumulated benefit obligation $33,995 $(51,929 $32,838 $(45,727
------- -------- ------- -------
Projected benefit obligation for service rendered to date 39,184 54,618 39,649 47,725
Plan assets at fair value $41,716 $(43,740 $38,831 $(34,738
------- -------- ------- -------
Plan assets in excess of (less than) projected benefit
obligation 2,532 (10,878) (818) (12,987)
Unamortized transition asset (1,654) (250) (1,869) (380)
Unrecognized prior service cost (383) 1,667 (363) 3,231
Unrecognized net loss 1,797 7,736 3,922 7,929
Adjustment required to recognize minimum liability $ -- $ (6,791) $ -- $ (8,850)
------- -------- ------- -------
Pension costs prepaid (accrued) at year end $ 2,292 $ (8,516) $ 872 $(11,057)
======= ======== ======= ========
December 31, 1997 and $8,850 at December 31, 1996, representing the excess of
unfunded accumulated benefit obligations over previously recorded pension cost
liabilities. A corresponding amount is recognized as an intangible asset except
to the extent that these additional liabilities exceed related unrecognized
prior service cost and net transition obligation, in which case the increase in
liabilities is charged directly to shareholders' equity. The change in the
excess minimum pension liability, net of income taxes, resulted in a credit to
equity of $134 in 1997 and a charge to equity of $781 in 1996.
Net pension cost included the following components:
1997 1996 1995
Service cost benefits earned
during the period $ (2,254) $(2,738) $(2,506)
Interest cost on projected
benefit obligation 6,478 6,248 5,292
Actual return on plan assets (12,218) (9,100) (9,066)
Net amortization and deferral $ 5,405 $ 3,835 $(4,907
--------- ------- -------
Net periodic pension cost $ 1,919 $ 3,721 $(3,639)
========= ======= =======
Actuarial assumptions:
Weighted average discount rate 7.5% 7.5% 7.25%
Rate of return on assets 9.5% 9.5% 9.5%
Rate of increase in compensation 5.0% 5.0% 5.0%
In connection with the sale of Gerry Baby Products Company, future benefits
were suspended for its employees under one of the Company's defined benefit
plans and a curtailment gain of $851 was included in the gain on disposal of
discontinued operations.
The Company's Celina, Ohio facility participates in a multiemployer defined
benefit plan. Contributions to the multiemployer plan totaled $1,025 in 1997 and
$811 in 1996.
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 $807, $843, and $755 in 1997, 1996, and 1995,
respectively.
[13] OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's defined benefit pension plans, the Company
sponsors several defined benefit health care and life insurance plans that
provide postretirement medical, dental, and life insurance benefits to full-time
employees who meet minimum age and service requirements. The plans are
contributory, with retiree contributions adjusted annually, and contain other
cost-sharing features such as deductibles and coinsurance. The Company's policy
is to fund the cost of medical benefits in amounts determined at the discretion
of management.
The Company also sponsors a deferred compensation plan for the benefit of
highly compensated management employees. The eligible employees make
contributions to the plan and receive postretirement benefits based upon a
stated rate of return on those contributions. The Company's policy is to fund
the cost of the benefits in amounts determined at the discretion of management.
For measurement purposes, in 1997, a 9.25% health care cost trend rate was
assumed for expenses of participants under age 65; this rate was assumed to
decrease gradually to 5.5% by the year 2002 and remain at that level thereafter.
In addition, for 1997 a 7.25% health care cost trend rate was assumed for
expenses of participants over age 65; this rate was assumed to decrease
gradually to 5.5% by the year 2000 and remain at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. For example, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $1,736 and the aggregate of the
service and interest cost components of net periodic postretirement benefit cost
for the year ended December 31, 1997 by $205.
The following table presents the plans' funded status reconciled with amounts
recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and
1996 and the net periodic postretirement benefit cost recorded in the Company's
1997 and 1996 Consolidated Statements of Operations:
28
18
HEALTH CARE AND DEFERRED
LIFE INSURANCE COMPENSATION
PLANS PLAN TOTAL
1997
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
Retirees $ 6,045 $ (6,419 $ 12,464
Fully eligible active plan
participants 1,103 78 1,181
Other active plan participants $ 6,045 $ 0 $ 06,045
-------- -------- --------
13,193 6,497 19,690
UNRECOGNIZED NET GAIN (LOSS) $ 726 $ (3,116) (2,390)
-------- -------- --------
Postretirement benefits
other than pensions accrued
at year end $ 13,919 $ 3,381 $ 17,300
======== ======== ========
NET PERIODIC POSTRETIREMENT BENEFIT
COST:
Service cost $ 469 $ -- $ 469
Interest cost 932 333 1,265
Net amortization (3) -- $ (3)
-------- -------- --------
Net periodic postretirement
benefit cost $ 1,398 $ 333 $ 1,731
======== ======== ========
ACTUARIAL ASSUMPTIONS:
Weighted average discount rate
used to determine postretirement
benefit obligation 7.25% 7.25%
Health Care and Deferred
Life Insurance Compensation
Plans Plan Total
1996
ACCUMULATED POSTRETIREMENT
BENEFIT OBLIGATION:
Retirees $ 5,484 $ 2,645 $ 8,129
Fully eligible active plan
participants 1,063 2,200 3,263
Other active plan participants $ 5,653 -- $ 55,653
-------- -------- --------
12,200 4,845 17,045
UNRECOGNIZED NET GAIN (LOSS) 1,349 (1,568) $ (219)
-------- -------- --------
Postretirement benefits
other than pensions accrued
at year end $ 13,549 ($ 3,277 $ 16,826
-------- -------- --------
NET PERIODIC POSTRETIREMENT
BENEFIT COST:
Service cost $ 00,494 $ -- $ 494
Interest cost 871 338 1,209
Net amortization $ (3) $-- $ (3)
-------- -------- --------
Net periodic postretirement
benefit cost $ 1,362 $ 338 $ 1,700
-------- -------- --------
ACTUARIAL ASSUMPTIONS:
Weighted average discount rate
used to determine postretirement
benefit obligation 7.50% 7.50%
[14] INCOME TAXES
The provisions for federal and state income taxes attributable to income from
continuing operations consist of:
1997 1996 1995
Current tax expense (benefit):
Federal $ 5,047 $ 2,050 $ (3,548)
State 102 (141) (53)
Foreign $ 23 $,0045 $(00,--
-------- -------- --------
5,172 1,954 (3,601)
Deferred tax expense (benefit) $ (1,106) $,0642 $ (758)
-------- -------- --------
Total tax expense (benefit) $ 4,066 $ 2,596 $ (4,359)
======== ======== ========
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
1993.
Management expects that the Company's future levels of taxable income will be
sufficient to fully utilize the net deferred tax asset. Therefore, a valuation
allowance has not been established.
The components of the net deferred tax asset as of December 31, 1997 and 1996
were as follows:
1997 1996
DEFERRED TAX ASSETS:
Allowance for doubtful accounts $ 842 $ 584
Inventory obsolescence reserve 909 867
Workers' compensation 1,946 2,000
Product liability 1,624 2,053
Deferred compensation 1,622 1,658
Accrued vacation 1,055 1,148
Pension liability 2,626 3,060
Postretirement benefits other
than pensions 6,055 5,889
Environmental reserves 1,797 1,123
Severance reserves 624 721
Other liabilities and reserves $ 3,076 $ 1,798
------- -------
Total deferred tax assets $22,176 $20,901
------- -------
DEFERRED TAX LIABILITIES:
Property, plant, and equipment 2,977 3,650
Other assets $ 850 $ 500
Total deferred tax liabilities $ 3,827 $ 4,150
------- -------
Net deferred tax asset $18,349 $16,751
======= =======
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 and cumulative effect of
accounting change, attributable to continuing operations.
1997 1996 1995
Earnings (loss) before income
taxes from continuing operations $14,495 $9,520 $(13,874)
------- ------ --------
Tax provision computed at
statutory rate $ 4,928 $3,237 $(4,856)
Increase (reduction) in taxes
due to:
Impact of foreign losses for
which a current tax benefit
is not available (237) (54) 220
State income taxes (net of
federal tax benefit) 67 (48) (19)
Goodwill amortization 136 136 140
Foreign sales corporation (182) (210) (180)
Insurance proceeds (320) -- --
Non-deductible meals and
entertainment 385 353 310
Tax credits (138) (132) --
Refunds of prior year
income taxes (531) (545) --
Miscellaneous (42) (141) 26
------- ------ -------
Actual tax provision $04,066 $2,596 $(4,359)
======= ====== =======
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[15] BUSINESS SEGMENTS
Huffy Corporation is a diversified manufacturer and supplier of bicycles,
basketball backboards, lawn and garden tools, and inventory, assembly, and
supplier services. Bicycles and basketball backboards are sold predominantly
through national and regional high volume retailers in the United States. Lawn
and garden products are sold both directly and through wholesale distributors to
national and regional high volume retailers in the United States. In-store and
in-home assembly and repair, and in-store display services are provided to major
retailers in fifty states, Puerto Rico, and the Virgin Islands. Merchandising
services (product resets and periodic maintenance of displays) are marketed to
manufacturers who supply high volume retailers. Physical inventory services are
marketed on a nationwide basis to mass retailers, drug stores, home centers,
sporting goods stores, specialty stores, and grocery stores. The Company has
classified its operations into the following business segments:
o CONSUMER PRODUCTS -- bicycles, basketball backboards and related products,
and lawn and garden tools.
o SERVICES FOR RETAIL -- in-store assembly, repair, and display services as
well as inventory counting services.
A summary of the Company's 1997, 1996, and 1995 operations by business
segment is as follows:
EARNINGS (LOSS) DEPRECIATION
BEFORE INCOME IDENTIFIABLE AND CAPITAL
SALES TAXES ASSETS AMORTIZATION EXPENDITURES
1997
Consumer Products $514,286 $(,16,239 $253,727 $13,333 $13,149
Services for Retail 181,556 9,101 44,257 3,924 4,265
Eliminations (1,352)
Interest expense (5,725)
Interest income 211
General corporate 581,251 (5,331) 25,509 409 79
-------- --------- -------- ------- -------
$694,490 $ 14,495 $323,493 $17,666 $17,493
======== ========= ======== ======= =======
1996
Consumer Products $425,994 $,13,409 $194,270 $13,859 $10,829
Services for Retail 153,933 7,251 39,775 4,132 3,725
Eliminations (257)
Interest expense (5,873)
Interest income 82
General corporate (5,349) 23,446 426 130
-------- --------- -------- ------- -------
$579,670 $ 9,520 $257,491 $18,417 $14,684
======== ========= ======== ======= =======
1995
Consumer Products $429,332 $..(6,216)[1] $186,592 $14,101 $17,149
Services for Retail 143,587 4,819 37,060 3,766 3,997
Eliminations (465)
Interest expense (6,615)
Interest income 90
General corporate (5,952)[1] 22,583 515 086
-------- --------- -------- ------- -------
$572,454 $ (13,874) $246,235 $18,382 $21,232
======== ========= ======== ======= =======
[1] INCLUDES A NET RESTRUCTURE CHARGE OF $4,663 IN THE CONSUMER PRODUCTS
SEGMENT RELATED TO PERSONNEL REDUCTIONS AND THE RELATED NEGOTIATION OF A
CONCESSIONARY LABOR CONTRACT AND $715 IN GENERAL CORPORATE EXPENSES
RELATED TO PERSONNEL REDUCTIONS.
In 1997, two customers individually accounted for 27% and 11% of total
consolidated net sales. In 1996, two customers individually accounted for 16%
and 13% of total consolidated net sales. In 1995, two customers individually
accounted for 13% and 12% of total consolidated net sales.
In June 1997, the FASB issued No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments. The Company has not yet
determined what changes, if any, will be required to its industry segment
disclosure.
30
20
[16] QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years 1997 and 1996 are as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total[1]
1997
Net sales $ 171,927 $ 213,101 $ 149,996 $ 159,466 $ 694,490
Gross profit 27,422 37,457 23,465 24,497 112,841
Earnings from continuing operations 2,944 6,230 997 258 10,429
Discontinued operations 462 (734) 8 -- (254)
------------ --------- --------- ------------ ------------
Net earnings 3,406 5,496 1,015 258 10,175
EARNINGS PER COMMON SHARE:
Basic
Earnings from continuing operations $ .22 $ .49 $ .08 $ .02 $ .81
Discontinued operations (.04) -- (.06) -- (.02)
------------ --------- --------- ------------ ------------
Net earnings per common share $ .26 $ .43 $ .08 $ .02 $ .79
Diluted
Earnings from continuing operations $ .22 $ .49 $ .08 $ .02 $ .80
Discontinued operations .03 (.06) -- -- (.02)
------------ --------- --------- ------------ ------------
Net earnings per common share $ .25 $ 43 $ .08 $ .02 $ .78
1996
Net sales $ 151,934 $ 166,452 $ 120,822 $ 140,462 $ 579,670
Gross profit 28,144 31,218 19,658 15,868 94,888
Earnings from continuing operations 2,093 4,429 205 197 6,924
Discontinued operations 827 169 (463) (1,000) (467)
------------ --------- --------- ------------ ------------
Net earnings (loss) 2,920 4,598 (258) (803) 6,457
EARNINGS PER COMMON SHARE:
Basic
Earnings from continuing operations $ .16 $ .33 $ .02 $ .01 $ .51
Discontinued operations 06 .01 (.04) (.07) (.03)
------------ --------- --------- ------------ ------------
Net earnings (loss) per common share $ .22 $ .34 $ (.02) $ (.06) $ .48
Diluted
Earnings from continuing operations $ .16 $ .33 $ .02 $ .01 $ .51
Discontinued operations .06 .01 (.04) (.07) (.03)
------------ --------- --------- ------------ ------------
Net earnings (loss) per common share $ .22 $ .34 $ (.02) $ (.06) $ .48
[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, 1997 and 1996 were as follows:
Year ended December 31, 1997
COMMON STOCK DIVIDENDS
PRICE RANGE DECLARED
QUARTER HIGH LOW
FIRST $14-7/8 $12-3/4 $.085
SECOND 14-3/4 12-3/4 .085
THIRD 16-1/2 14-1/8 .085
FOURTH 16-15/16 13-1/16 $.085
-----
TOTAL $.340
======
Year ended December 31, 1996
Common Stock Dividends
Price Range Declared
Quarter High Low
First $11-5/8 $10-1/4 $.085
Second 14 10-5/8 .085
Third 13-3/4 11-1/8 .085
Fourth 14-7/8 12-3/4 $.085
-----
Total $.340
======
As of December 31, 1997 there were 12,717,706 shares of Huffy Corporation
Common Stock outstanding and there were 3,127 shareholders of record. Management
estimates an additional 8,500 shareholders hold their stock in nominee name.
Trading volume of the Company's Common Stock during the twelve months ended
December 31, 1997 totaled 5,698,800 shares. The average number of common shares
outstanding during this period was approximately 12,895,000 shares.
31