Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _______
COMMISSION FILE NUMBER 1-5325
HUFFY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 31-0326270
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
225 BYERS ROAD, MIAMISBURG, OHIO 45342
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (937) 866-6251
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $1.00 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, as of January 31, 2002, was $94,412,729.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ X ] No [ ]
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of January 31, 2002, was 14,669,992.
"Index to Exhibits" at page 45 of this Report
1
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. CONTROLS AND PROCEDURES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
SIGNATURES
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
INDEPENDENT AUDITORS' CONSENT
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
INDEX TO EXHIBITS
2
PART I
ITEM 1. BUSINESS
Huffy Corporation, an Ohio corporation formed in 1928, and its subsidiaries
(collectively called "Huffy" or the "Company") are engaged in the sporting goods
segment in the design and sale of wheeled and related products, including
bicycles, scooters, tricycles, skateboards and inline skates; golf equipment;
hockey equipment; snowboards, skis and accessories. Also within the sporting
goods segment, the Company designs, manufactures and markets basketball
backboards and accessories and purchases excess sports equipment and accessories
and resells these products to sporting goods retailers. In addition, the Company
operates a service segment that is involved in the assembly and repair of a
variety of wheeled and other products and merchandising services to retail
customers. The Company's executive offices are located in Miamisburg, Ohio and
its principal business offices and/or manufacturing facilities are located in
Miamisburg and Springboro, Ohio; Sussex, Wisconsin; and Toronto, Ontario,
Canada.
The general development of the business is discussed in more detail below.
The Company is reporting its operations as two segments, sporting goods products
and services to retailers. The change from a single segment is a result of a
shift in the mix of Huffy Service First Inc. business toward assembly services
not directly related to the sporting goods industry, as well as the acquisition
of McCalla Company and its subsidiaries and the Gen-X Sports Inc. businesses.
Information regarding revenues from unaffiliated customers, operating profit and
total assets for each of the Company's reporting segments is contained in the
Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K.
SPORTING GOODS SEGMENT
Huffy Bicycle Company including Royce Union Bicycle Company and American Sports
Design Company, Huffy Sports Company and Gen-X Sports Inc. operate as the
sporting goods segment, providing consumer products. Principal products and
services include wheeled and related products, basketball backboards, balls, and
related products, snowboards, skis and accessories, golf equipment, hockey
equipment, and excess sports equipment. Sales of wheeled and related products
represented 43.8 percent, 55.8 percent and 70.1 percent of consolidated revenues
of the Company for the years ended December 31, 2002, 2001, and 2000. Sales of
portable basketball backboards, poles, goals, and balls represented 20.1
percent, 20.4 percent, and 12.7 percent of consolidated revenues of the Company
for the years ended December 31, 2002, 2001, and 2000.
PRODUCTS, MARKETING AND DISTRIBUTION
The Huffy(R) branded wheeled products, including bicycles, scooters, and
tricycles, hold a leading market position in the United States. Gen-X inline
skates and skateboards are also included in the wheeled product group sold under
such brands as Oxygen(R) and Ultra Wheels(R). In September 1999, in response
to an unprecedented decline in Chinese bicycle pricing, the Company announced
its decision to cease its United States bicycle manufacturing operations at its
facilities located in Southaven, Mississippi and Farmington, Missouri. These
facilities were closed in December 1999 and sold or the lease terminated, as
applicable, in 2000. In 2001, the Huffy Bicycle Company terminated, effective
May 2002, its shelter services agreement pursuant to which it imported wheeled
products. The Huffy Bicycle Company imports Huffy(R) wheeled products from
Southeast Asia including Taiwan and China. Included in the Huffy(R) product line
are adult all-purpose bicycles; adult all-terrain bicycles; a series of
innovative boys' and girls' 20" bicycles; a series of popular children's 12" and
16" sidewalk bicycles; scooters and tricycles. In July 1999, the Company
acquired the assets of American Sports Design Company, which markets and
distributes high-end bicycles primarily available over the World Wide Web,
through distributors and directly from the Company's advertised order center. In
2002, Huffy agreed to license the trademarks owned by American Sports Design
Company under which such bicycles are sold and to sell the equipment and
inventory associated with such American Sports Design Company business to the
licensee. Huffy(R) and Gen-X wheeled products are extensively advertised and are
sold predominantly through United States and Canadian national and regional high
volume retailers, a distribution network accounting for approximately 85 percent
of all wheeled products sold in the United States. Approximately 80 percent of
Huffy Bicycle Company's wheeled products are sold under the Huffy(R) brand name
with the balance being sold under private label or other Company brands.
Huffy Sports Company, a division of the Company located in Sussex, Wisconsin, is
a leading supplier of basketball backboards, poles, goals, and related products
and basketball, football, and soccer balls for use at home. Huffy Sports Company
products, many of which bear the logo of the National Basketball Association
("NBA") as well as the Huffy Sports(R) trademark, are sold predominately through
national and regional high volume retailers in the United States.
3
Gen-X Sports Inc., a subsidiary of Huffy Corporation was acquired on September
19, 2002. Gen-X is headquartered in Toronto, Ontario, Canada, and is a leading
supplier of sporting goods, including golf equipment, hockey equipment,
snowboards, skis, inline skates and skateboards, and is a broker of excess
merchandise, primarily in North America, and also markets product
internationally, predominately in Europe. Gen-X imports the majority of its
products from China and Taiwan, with certain of the ski products imported from
Austria. Gen-X markets products under numerous brand names within the sporting
goods segment, including LTD(R), Lamar(R), Sims(R), Tommy Armour(R), Ram(R),
Teardrop(R), Zebra(R), Hespeler(R), Volant(R), Ultra Wheels(R), Rage(R), and
Dukes(R). Gen-X Sports Inc. markets these products through United States and
Canadian national and regional high volume retailers, as well as specialty
sporting goods outlets.
RAW MATERIALS
Basic materials such as raw steel, steel and aluminum tubing, plastic, resins,
and welding materials used in the Huffy Sports Company domestic manufacturing
operations are purchased primarily from domestic sources. Alternate sources are
available for all critical products and components, but the sudden loss of any
major supplier could cause a temporary negative effect on Huffy Sports Company's
operations.
PATENTS, TRADEMARKS AND LICENSES
The patents, trademarks (including the registered trademarks "Huffy" and "Huffy
Sports"), licenses (including the license to use the NBA logo) and other
proprietary rights of the companies used in the sporting goods segment are
deemed important to the Company. Generally, the NBA license associated with the
Huffy Sports products has five-year terms which are renegotiated upon
termination. With the acquisition of Gen-X, the Company acquired rights in
numerous trademarks and patents relating to its various sporting goods products.
The Company has licensed certain of these intellectual property rights to third
parties and intends to expand its licensing program with the addition of such
marks. The loss by the Company of its rights under any individual patent,
trademark (other than "Huffy"), license or other proprietary right would not
have a material adverse effect on the Company. The Company's patents, by law,
have a limited life, and patent rights expire periodically. The loss of the
United States registered trademark "Huffy" could have a material adverse effect
on the Company. The Company has no reason to believe that anyone has rights to
either the United States "Huffy" trademark or the products for which the Company
uses such trademarks.
SEASONALITY AND INVENTORY
Due to the relatively short lapse of time between placement of orders for
products and shipments, the Company normally does not consider its backlog of
orders as significant. Because of rapid delivery requirements of their
customers, businesses in the sporting goods segment maintain sufficient
quantities of inventories of finished goods to meet their customers'
requirements. Sales of wheeled products are seasonal in that sales tend to be
higher in the Spring and Fall of each year. Basketball products tend to have
varying degrees of seasonality, none of which are significant to the operations
of the Company. Sales of winter sports equipment, including snowboards, skis and
accessories tend to be higher in the Fall and Winter seasons, while golf
products tend to have higher demand during the Spring and Summer seasons. The
excess merchandise products tend to have minimal seasonal fluctuations.
COMPETITION AND CUSTOMERS
In the high volume retailer wheeled products business, Huffy Bicycle Company has
numerous competitors in the United States market, two of which are major
competitors. Even though competition in the bicycle industry is intense, Huffy
Bicycle Company believes that following its transformation from a single brand
manufacturer of bicycles to a multi-brand design, marketing and distribution
company, it is cost competitive in the high volume retailer wheeled products
market and that its decision to import, rather than manufacture, its wheeled
products will allow it to profitably maintain a leading market position. Huffy
Bicycle Company's ability to provide its customers with low cost, innovative new
products has enabled it to maintain its market position despite the marketing
efforts of domestic competitors and competitors from Taiwan, China, and other
nations. Huffy Sports Company has several competitors of which one is currently
a major competitor. Huffy Sports Company maintains its competitive position by
offering its customers high quality, innovative products at competitive prices
and by supporting its products with outstanding customer service. Gen-X Sports
Inc. has numerous competitors in the markets in which it competes; six of which
are major competitors in golf, three of which are major competitors in action
sports, four of which are major competitors in hockey equipment, and two of
which are major competitors in the snowboard and ski equipment. Gen-X Sports
maintains its competitive position by offering its customers high quality,
innovative products at competitive prices and by supporting its products with
outstanding customer service. Sales to two customers, Wal-Mart and Kmart,
aggregated over ten percent or more of the Company's consolidated revenues from
each such customer for the year ended December 31, 2002, and the loss of one of
these customers could have a material adverse effect on the Company and its
subsidiaries as a whole.
4
Although to date the export business is not significant, the businesses within
the sporting goods segment participate in various foreign markets and are
actively involved in expanding export volume.
SERVICES TO RETAILERS SEGMENT
Huffy Service First, Inc. operates in the service segment providing in-store
assembly and repair, and merchandising services sold to retail customers.
McCalla Company, Creative Retail Services, Inc. and Creative Retail Services
(Canada) Inc., acquired in March of 2002, provide merchandising services,
including cycle and periodic product resets, stocking and sales training for a
number of well-known manufacturers and/or distributors serving Home Depot. The
services to retailers segment represented 23.5 percent, 23.8 percent and 17.3
percent of the consolidated revenues of the Company for the years ended December
31, 2002, 2001, and 2000.
Huffy Service First, Inc., a wholly-owned subsidiary of the Company,
headquartered in Miamisburg, Ohio, serves the needs of major retailers in 50
states, Puerto Rico, Guam and the Virgin Islands by providing in-store and
in-home assembly and repair of bicycles and outdoor power equipment, and
in-store display services for a variety of products, including, among other
things, grills, physical fitness equipment, and furniture. Huffy Service First,
Inc. is the only assembly service business of this kind available to high volume
retailers on a nationwide basis. Huffy Service First, Inc. also offers
merchandising services (product resets and periodic maintenance of displays) to
manufacturers who supply high volume retailers. In March 2002, Huffy Service
First purchased McCalla Company and subsidiaries, Creative Retail Services, Inc.
and Creative Retail Services (Canada) Inc., which together provide
merchandising, including cycle and periodic product resets, stocking and sales
training for a number of well-known manufacturers and/or distributors serving
Home Depot throughout North America. McCalla Company and Creative Retail
Services, Inc. are headquartered in Alpharetta, Georgia and Creative Retail
Services (Canada) Inc. has an office in Toronto, Ontario, Canada.
SEASONALITY
The demand for services provided by Huffy Service First, Inc. is seasonal in
that assembly service demand is generally strongest in Spring and at the Winter
holiday season. The McCalla companies provide merchandising services throughout
the year, with minimal seasonal fluctuations.
COMPETITION AND CUSTOMERS
Huffy Service First, Inc. has numerous competitors in the United States market,
none of which is a major national competitor in the in-store and in-home
assembly service business and three of which are major competitors in the
merchandising services business. Huffy Service First, Inc. believes it remains
competitive due to its nationwide network of operations, competitive pricing and
full service solution marketing approach. The McCalla companies have a number of
competitors in the Home Center channel and maintain their competitive position
by providing excellent customer service through a well-trained workforce
positioned throughout North America.
OTHER ADDITIONAL INFORMATION REGARDING THE COMPANY'S BUSINESS
On March 16, 1999, Huffy sold substantially all of the assets of True Temper
Hardware Company and all of the shares of the capital stock of True Temper
Limited to an affiliate of U.S. Industries, Inc. On November 3, 2000, Huffy sold
all of the issued and outstanding shares of Washington Inventory Service to WIS
Holdings Corp., an affiliate of Sterling Investment Partners, L.P.
The Company's website address is www.huffy.com. The Company makes available free
of charge through a link provided at such website its Forms 10-K, 10-Q and 8-K
as well as any amendments thereto. Such reports are available as soon as
reasonably practicable after they are filed or furnished to the Securities and
Exchange Commission.
The number of persons employed full-time by the Company as of December 31, 2002,
was 1,514.
5
ITEM 2. PROPERTIES
Location and general character of the principal plants and other materially
important physical properties of the Company as of January 2, 2003.
Owned or
Expiration
Date of
Location Building Description Business Segment Area (Sq. Ft.) Lease
- --------------------------------------------------------------------------------------------------------------------------
Miamisburg, Ohio Offices, display and warehouse Sporting Goods and Services 47,000 2011(1)
facilities
(Corporate and Huffy Service
First, Inc.)
Springboro, Ohio Offices and warehouse facility Sporting Goods 69,220 2005(2)
(Huffy Bicycle Company)
Sussex, Wisconsin Offices and manufacturing Sporting Goods 192,000 2004(3)
(Huffy Sports Company)
Toronto, Ontario, Canada Offices, display and retail Sporting Goods 39,998 2011(4)
outlets
(Gen-X Sports Inc.)
Carson City, California Warehouse facility Sporting Goods 398,554 2007(5)
(Huffy Bicycle Company and
Gen-X Sports Inc.)
(1) Subject to two consecutive options to renew for additional terms of five
years each.
(2) Subject to one option to renew for an additional term of five years.
(3) Subject to an option to purchase during the term of or at the expiration
of the lease.
(4) Subject to one option to renew for an additional term of five years.
(5) The Company operates two warehouses in Carson City, California. The first
warehouse is 292,900 square feet, and the lease expires in 2007; the second
is 105,654 square feet, and the lease expires in 2007. Each lease is
subject to two consecutive options to renew for additional terms of five
years.
All of the Company's facilities are in good condition and are considered
suitable for the purposes for which they are used. The Sussex, Wisconsin
manufacturing facility normally operates on two full shifts, with third shift
operations scheduled as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company along with numerous California water companies and other potentially
responsible parties ("PRPs") for the Baldwin Park Operable Unit of the San
Gabriel Valley Superfund have been named in fourteen civil lawsuits which allege
claims related to the contaminated groundwater in the Azusa, California area
(collectively, the "San Gabriel Cases").
The San Gabriel Cases had been stayed for a variety of reasons, including a
number of demurrers and writs taken in the Appellate Division, relating
primarily to the California Public Utilities Commission ("PUC") investigation
described below. The resulting Appellate Division decisions were reviewed by the
California Supreme Court, which ruled in February 2002. The cases have been
reactivated as a result of the California Supreme Court's decision, with the
trial level Coordination Judge holding a number of Status Conferences on all of
the cases, at which conferences issues pertaining to the three master complaints
(two of which include the Company as a defendant), preliminary demurrers to such
master complaints, case management orders and initial written discovery were
discussed. As noted by the matters being discussed with the Court, the toxic
tort cases are in their initial stages. Thus, it is impossible to currently
predict the outcome of any of the actions.
The Company, along with the other PRPs for the Baldwin Park Operable Unit of the
San Gabriel Valley Superfund Site (the "BPOU"), was also named in four civil
lawsuits filed by water purveyors. The water purveyor lawsuits alleged CERCLA,
property damage, nuisance, trespass and other claims related to the contaminated
groundwater in the BPOU (collectively, the "Water Entity Cases"). The Company
was named as a direct defendant by the water purveyor in two of these cases, and
was added as a third party defendant in the two others by Aerojet General
Corporation, which, in those cases, was the only PRP sued by the water
purveyors. Each of the Water Entity Cases have been settled through the entry of
the Project Agreement. According to the terms of the Project Agreement, the
Water Entity Cases have been dismissed without prejudice. The Third Party
6
complaints filed by Aerojet in connection with the Water Entity Cases are
expected to be dismissed without prejudice subject to Aerojet filing a new suit
in the event a final allocation agreement cannot be worked out.
On March 12, 1998, the PUC commenced an investigation in response to the
allegations in the toxic tort actions that "drinking water delivered by the
water utilities caused death and personal injury to customers." The PUC's
inquiry addressed two broad issues central to these allegations: 1) "whether
current water quality regulation adequately protects the public health;" and 2)
"whether respondent utilities are (and for the past 25 years have been)
complying with existing drinking water regulation." On November 2, 2000, the PUC
issued its Final Opinion and Order Resolving Substantive Water Quality Issues.
Significantly, the Order finds, in pertinent part, that: 1) "existing maximum
contaminant level ("MCLs") and action level ("ALs") established by the DHS are
adequate to protect the public health;" 2) "there is a significant margin of
safety when MCLs are calculated so that the detection of carcinogenic
contaminants above MCLs that were reported in this investigation are unlikely to
pose a health risk;" 3) based upon its comprehensive review of 25 years of
utility compliance records, that for all periods when MCLs and ALs for specific
chemicals were in effect, the PUC regulated water companies complied with DHS
testing requirements and advisories, and the water served by the water utilities
was not harmful or dangerous to health; and 4) with regard to the period before
the adoption by DHS of MCLs and ALs, a further limited investigation by the PUC
Water Division will be conducted.
Based upon information presently available, such future costs are not expected
to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
As previously reported, Huffy Corporation divested its Washington Inventory
Service subsidiary in November 2000. Subsequently, in late 2001 and mid 2002,
two class action suits were filed in California seeking damages for alleged
violations of labor practices. As a previous owner, Huffy was potentially
obligated to indemnify the subsidiary purchaser for some portion of any
liability it or such subsidiary had in the first case and had potential
liability in the latter case, both limited to the periods it owned the
subsidiary. After protracted negotiations and on advice of counsel, a settlement
was negotiated and preliminarily approved on January 28, 2003 by the Superior
Court of California, County of Los Angeles. A one-time charge to discontinued
operations of $7,914 million or $0.43 per common share was taken in the fourth
quarter of 2002 to fully resolve this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Huffy Corporation Common Stock is traded on the New York Stock Exchange. The
quarterly high and low prices of Huffy Corporation Common Stock during the years
ended December 31, 2002 and 2001 were as follows:
Year Ended December 31, 2002 Year Ended December 31, 2001
---------------------------- -----------------------------
Common Stock Common Stock
Price Range Price Range
Quarter High Low Quarter High Low
- ------- ----- ----- ------- ------ -----
First $7.05 $5.95 First $7.74 $6.08
Second 8.90 6.98 Second 10.50 6.14
Third 8.60 5.48 Third 9.81 6.25
Fourth 7.98 5.97 Fourth 6.62 5.41
As of December 31, 2002, there were 14,637,809 shares of Huffy Corporation
Common Stock outstanding and there were 3,223 shareholders of record. Management
estimates an additional 4,500 shareholders hold their stock in nominee name.
Trading volume of the Company's Common Stock during the twelve months ended
December 31, 2002 totaled 7,595,600 shares. The average number of common shares
outstanding during this period was approximately 11,833,213 shares. The Company
is limited in its ability to pay dividends pursuant to the terms of its Second
Amended and Restated Loan and Security Agreement, as amended.
The information to be set forth in the table entitled EQUITY COMPENSATION PLAN
INFORMATION is contained in the Company's Proxy Statement for its 2003 Annual
Meeting of Shareholders, and is hereby incorporated herein by reference.
7
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL AND OPERATING REVIEW (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales $372,896 $331,138 $488,181 $422,866 $468,351
Gross profit 66,347 39,950 81,342 36,723 76,178
Selling, general, and administrative expenses 57,858 47,607 53,763 56,158 59,723
Operating income (loss) 8,489 (11,370) 26,865 (57,994) (4,865)
Other expense (income), net 1,636 303 1,342 333 (3)
Interest expense, net 1,688 1,128 8,428 1,816 2,542
Earnings (loss) before income taxes 5,165 (12,801) 17,095 (60,143) (7,404)
Income tax expense (benefit) 573 (4,391) 6,429 (20,788) (2,904)
Earnings (loss) from continuing operations 4,592 (8,410) 10,666 (39,355) (4,500)
Discontinued operations (5,970) -- 25,318 6,067 2,335
Extraordinary loss -- -- (998) -- --
Net earnings (loss) (1,378) (8,410) 34,986 (33,288) (2,165)
- --------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic Continuing operations 0.39 (0.82) 1.05 (3.70) (0.37)
Net earnings(loss) (0.12) (0.82) 3.43 (3.13) (0.18)
Diluted Continuing operations 0.38 (0.82) 1.03 (3.70) (0.37)
Net earnings(loss) (0.12) (0.82) 3.39 (3.13) (0.18)
Common dividends declared -- -- -- 2,869 4,092
Common dividends per share -- -- -- 0.26 0.34
Capital expenditures for plant and equipment 3,144 2,553 2,510 6,444 14,989
Weighted average common share outstanding:
Basic 11,833 10,298 10,187 10,642 12,122
Diluted 11,979 10,298 10,320 10,642 12,280
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Total assets 282,201 145,485 180,493 214,283 324,068
Working capital 4,673 44,376 57,642 56,636 85,730
Net investment in plant and equipment 11,140 9,267 12,680 19,028 53,476
Notes payable 54,069 -- 17,656 21,902 99,240
Long-term obligations 317 -- -- 51,348 29,110
Shareholders' equity 71,747 65,602 73,131 37,482 95,390
Equity per share outstanding 4.90 6.32 7.15 3.68 7.91
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS
Net cash provided by (used in) continuing operating
activities (1,315) 40,786 (16,541) 12,239 21,513
Net cash provided by (used in) discontinued
operations (5,970) -- 60,902 75,402 (5,878)
Net cash provided by (used in) operating activities (7,285) 40,786 44,361 87,641 15,635
Net cash provided by (used in) investing activities (26,298) (2,549) 4,867 (7,644) (27,901)
Net cash provided by (used in) financing activities 12,461 (16,030) (65,084) (77,641) 27,984
Net change in cash and cash equivalents (21,122) 22,207 (15,856) 2,356 15,718
- --------------------------------------------------------------------------------------------------------------------------
PERFORMANCE MEASUREMENTS
Earnings from continuing operations as a % of net
sales 1.2% N/A 2.2% N/A N/A
Average working capital turnover 4.9 5.9 8.1 5.3 5.0
Return on net assets 4.3% N/A 15.4% N/A N/A
Return on beginning shareholders' equity N/A N/A 93.8% N/A N/A
Current ratio 1.0 1.7 1.6 1.5 1.5
Total long term debt/total capital 7.2% 0.0% 0.0% 61.7% 27.1%
Number of common shareholders 3,223 3,211 3,271 3,250 3,454
- --------------------------------------------------------------------------------------------------------------------------
N/A - Not Applicable.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED
DECEMBER 31, 2001
For the year ended December 31, 2002, Huffy Corporation ("Huffy" or "Company")
had a net loss of $1,378, or $0.12 per common share compared to a net loss for
the same period in 2001 of $8,410, or $0.82 per common share. Current year
results include the earnings from Gen-X Sports Inc. acquired on September 19,
2002. In addition, the current year net earnings reflect a loss from
discontinued operations of $5,970 after tax, or $0.50 per common share. These
charges are related to the settlement of contractually indemnified liabilities
and a related lawsuit settlement regarding labor practices by one of the
Company's former subsidiaries, Washington Inventory Service, limited to the
period of the Company's ownership which was sold on November 3, 2000.
Results from continuing operations for the year ended December 31, 2002 were
$4,592, or $0.38 per common share, compared to a net loss of $8,410, or $0.82
per common share in 2001. The net loss from continuing operations in 2001
included a pretax charge of $3,713 ($2,440 after tax), or $0.24 per common
share, associated with the termination of Mexican manufacturing operations,
reductions of staffing levels at Huffy Bicycle Company, and the consolidation of
the financial and information technology groups. On January 22, 2002, Kmart
Corporation filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Court. The Company recorded a charge in the fourth quarter of 2001 of $4,680
($3,075 after tax), or $0.30 per common share, to reflect the Kmart bad debt.
The 2001 net loss from continuing operations excluding the reconfiguration,
refinancing and Kmart bad debt was $2,895, or $0.28 per common share.
Net Sales
Net sales in 2002 were $372,896, an increase of 12.6%, compared to net sales of
$331,138 for the same period in 2001. This sales increase was primarily related
to the acquisitions of Gen-X Sports Inc. and the McCalla Company during 2002. In
addition, the Company's basketball products also experienced a 12.3% year over
year increase in sales volume.
Gross Profit
Consolidated gross profit for 2002 was $66,347, or 17.8% of net sales as
compared to $39,950, or 12.1% of net sales reported for the same period in 2001,
reflecting a 47.0% improvement over the prior year gross margin. The primary
reason for this very significant improvement was the addition of Gen-X Sports
Inc. and the McCalla Company to the Huffy portfolio. The second most
significant reason for the year over year increase was the improved margin in
the Company's wheeled product line where favorable purchasing and warehousing
variances in 2002 increased margins markedly over the depressed levels
experienced during 2001 as a result of the close out of slow moving scooter
inventory. The Company's basketball product line also experienced a 270 basis
point improvement in year over year margins as a result of successful cost
reduction programs. Pension charges added $1,072 of additional expense in 2002
as compared to 2001 expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $57,858, for the year ended
December 31, 2002 were higher than the $47,607 experienced during the same
period in 2001. The primary reason for the year over year increase in these
expenses was the selling, general and administrative expenses added as a result
of the acquisitions of Gen-X Sports Inc. and the McCalla Company. 2002
administrative pension expense increased by $2,214 over 2001 expense due to poor
stock market performance and declining interest rates. Although less
significant, additional reasons for the increased selling, general and
administrative expenses include increased brand advertising and higher incentive
based compensation. It is pertinent to note that 2001 selling, general and
administrative expenses include a charge for the Kmart bankruptcy of $4,680.
Net Interest Expense
Net interest expense increased from $1,128 for the year ended December 31, 2001,
to $1,688 in the current year. Borrowing costs to finance the acquisitions of
Gen-X Sports Inc. and the McCalla Company as well as the increased working
capital needs of these subsidiaries resulted in higher interest costs in 2002.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED
DECEMBER 31, 2000
The Company recorded a net loss from continuing operations of $8,410, or $0.82
per common share, in 2001 compared to net earnings from continuing operations of
$10,666, or $1.03 per common share in 2000. Earnings for 2001 included a pretax
charge of $3,713 ($2,440 after tax), or $0.24 per common share, associated with
the termination of Mexican manufacturing operations, reduction of staffing
levels at Huffy Bicycle Company, and consolidation of the financial and
information
9
technology groups. On January 22, 2002, Kmart filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Court. The Company recorded a fourth quarter
2001 charge of $4,680 ($3,075 after tax) or $0.30 per common share, to reflect
expected receivable losses from Kmart. Earnings for 2000 included 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 net loss from continuing operations, excluding
the reconfiguration, refinancing, and Kmart receivable charges was $2,895, or
$0.28 per common share, in 2001 compared to 2000 net earnings of $11,550, or
$1.12 per common share.
Net Sales
Net sales in 2001 were $331,138, a decrease of 32.1%, compared to net sales of
$488,181 in 2000. The sales decrease was primarily attributable to lower sales
of Micro(TM) scooters. The Company sold over $128,000 of scooters in 2000 and
had only minimal scooter sales in 2001. The remaining decline in sales is
primarily the result of a shift to opening price point products in the bicycle
business. Basketball products experienced improved sales during 2001 up 7.5%
over last year. Despite a strong fourth quarter, retail service revenue was
down 6.2%.
Gross Profit
Consolidated gross profit for 2001 was $39,950, or 12.1% of net sales, down from
$81,342, or 16.7% of net sales in 2000. A 217 basis point improvement in margins
from retail services, ongoing cost reduction efforts company-wide, and
aggressive foreign sourcing programs partially offset the effect of lower sales
of high margin scooters in 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $47,607, for 2001, include a
charge for the Kmart bankruptcy of $4,680. Including this charge, current year
expenses are 11.5% lower than those incurred in 2000. These lower expenses are
attributable to reduced variable selling and marketing costs, as well as steps
taken throughout 2001 to properly align SG&A expense with the revised operating
structure.
Net Interest Expense
Net interest expense decreased from $8,428 in 2000 to $1,128 in 2001. The
Company has been debt free, with cash invested since the first quarter of 2001.
2001 interest expense is primarily comprised of amortization of financing costs,
letter of credit, and non-usage revolver fees.
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.
ACQUISITIONS
On September 19, 2002, the Company acquired all of the stock of Gen-X Sports
Inc. in exchange for $19,001 in cash and the issuance of 4,161,241 shares of
Huffy Corporation's Class A common shares to the stockholders of Gen-X. The
purchase price is subject to certain post-closing adjustments. Should Gen-X meet
certain financial performance objectives, specified in the purchase agreement,
and if there are no breaches of warranties and representations, up to 838,662
additional common shares may be issued to the Gen-X stockholders. In addition,
the acquired companies immediately redeemed $4,970 of preferred stock and
refinanced their existing bank debt. Included in the assets acquired are
trademarks, patents and licensing agreements recorded at their fair values of
$45,800, $1,285 and $940, respectively, as well as goodwill in the amount of
$12,104. Gen-X is a designer, marketer and distributor of branded sports
equipment, including action sports products, winter sports products and golf
products, and is a purchaser and reseller of excess sporting goods and athletic
footwear inventories.
On March 27, 2002, Huffy Service First acquired the stock of McCalla Company and
its subsidiaries, Creative Retail Services, Inc. and Creative Retail Services
(Canada), Inc. ("McCalla") for $5,400, less $500 net cash acquired, subject to
certain post-closing adjustments. A contingent purchase price payment was
recorded for the McCalla acquisition of $1,645 in the fourth quarter of 2002.
Payment of the performance-based payment is expected during the first quarter
of 2003. Of the total purchase price, $6,521 was recorded as goodwill and $300
was recorded as a covenant not-to-compete. McCalla provides merchandising,
including cycle and periodic product resets, stocking and sales training for a
number of well-known manufacturers serving Home Depot, including, among others,
Philips Lighting, Duracell, and Spectrum Brands.
10
DISCONTINUED OPERATIONS
On November 3, 2000, the Company sold the stock of its Washington Inventory
Service (WIS) subsidiary to WIS Acquisition Corp., a subsidiary of WIS Holdings
Corp., for $84,750 subject to certain post-closing adjustments. Earnings from
discontinued operations in 2000 were $7,976 ($4,537 after tax). The gain on
disposal of discontinued operations was $36,863 ($20,781 after tax). The results
for Washington Inventory Service have been classified as discontinued operations
in the Consolidated Statements of Operations and Cash Flows for the year ended
December 31, 2000.
During the year ended December 31, 2002, the Company recognized expenses of
$9,185 ($5,970 after tax), including the pending Miranda case settlement,
associated legal expenses and other contractually indemnified liabilities
related to WIS. These expenses are included in the Consolidated Statements of
Operations and Cash Flows as Loss from Discontinued Operations for the year
ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
On September 19, 2002, the Company amended its credit facility with its existing
lender to incorporate Gen-X Sports Inc., into the agreement. The $75.0 million
revolving credit facility is secured by all assets of the Company and its
affiliates and will expire on December 31, 2004, with a 12-month renewal option.
As of December 31, 2002, the Company had $10,517 of borrowing capacity on its
revolving credit facility.
Pre-bankruptcy receivables from Kmart were sold during the second quarter of
2002. The cash recovery from this transaction was consistent with previously
established reserves.
At December 31, 2002, inventory was valued at $41,847 ($20,636 for the Company
excluding Gen-X) up from $12,483 at December 31, 2001. This increase is
primarily the result of adding safety stock to protect our customers against
inventory outages resulting from the West Coast dock strike. Accounts payable at
December 31, 2002 are $65,519 ($48,542 excluding Gen-X) as compared to $31,161
at the end of 2001. This increase reflects higher incremental purchases to
support higher sales volume as well as longer payment terms negotiated with our
vendors.
At December 31, 2002, the Company valued its pension plans in accordance with
SFAS Nos. 87 and 88. Due to record low interest rates and poor stock market
performance, the value of the plan assets is now less than the accumulated
benefit obligation, causing the Company to record an after tax charge to
accumulated other comprehensive loss of $25,234.
The Company expects cash and cash equivalents, cash flow from operations and its
revolving credit facility to be sufficient to finance seasonal working capital
needs and capital expenditures throughout the coming year. The Company
frequently reviews its credit and capital structure and makes adjustments as
necessary.
CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of its accounts receivable based upon
an analysis of historical trends, aging of accounts receivable, write-off
experience and expectations of future performance. Delinquent accounts are
written off to selling, general and administrative expense when circumstances
make further collection unlikely. In the event of a customer bankruptcy or
reorganization, specific reserves are established to write down accounts
receivable to the level of anticipated recovery. The Company may consult with
third-party purchasers of bankruptcy receivables when establishing specific
reserves. Non-specific reserves for doubtful accounts are based upon a
historical bad debt write-off of approximately 0.2% of net sales. At December
31, 2002, a 0.1 percentage point change in bad debts as a percentage of net
sales would impact the reserve for doubtful accounts by $373.
In January 2002, Kmart Corporation filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. Pre-bankruptcy receivables from Kmart were sold during
the second quarter 2002 and cash recovered was consistent with previously
established reserves.
INVENTORY VALUATIONS
Inventories are valued at cost (not in excess of market) determined by the
first-in, first-out (FIFO) method. Management regularly reviews inventory for
salability and establishes obsolescence reserves to absorb estimated losses. The
Company also maintains reserves against inventory shrinkage. On an annual basis,
the Company takes a physical inventory verifying the units on hand and comparing
its perpetual records to physical counts. Periodic cycle counting procedures are
used to
11
verify inventory accuracy between physical inventories. In the interim periods,
a reserve for shrinkage is established based upon historical experience and
recent physical inventory results. Inventory obsolescence and shrinkage are
charged to cost of sales.
SELF-INSURANCE RESERVES
The Company is self-insured for workers compensation, medical insurance and
product liability claims up to certain maximum liability amounts. Medical
insurance reserves are determined based upon historical expense experience and
loss reporting trends. Workers compensation and product liability reserves are
determined based upon actuarial analysis of historical trends of losses,
settlements, litigation costs and other factors. The amounts accrued for
self-insurance are based upon management's best estimate and the amounts the
Company will ultimately disburse could differ from such accrued amounts. The
majority of workers compensation, medical insurance and product liability
expense are charged to cost of sales with the remainder charged to selling,
general and administrative expense.
ENVIRONMENTAL
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Remediation costs that relate to an existing
condition caused by past operations are accrued when it is probable that these
costs will be incurred and can be reasonably estimated. In developing its
estimate of environmental remediation costs, the Company considers, among other
things, currently available technological solutions, alternative cleanup
methods, and risk-based assessments of the contamination and, as applicable, an
estimation of its proportionate share of remediation costs. The Company may also
make use of external consultants and consider, when available, estimates by
other PRPs and governmental agencies and information regarding the financial
viability of other PRPs. Based upon information currently available, the Company
believes it is unlikely that it will incur substantial previously unanticipated
costs as a result of failure by other PRPs to satisfy their responsibilities for
remediation costs. The Company has recorded environmental accruals that, based
upon the information available, are adequate to satisfy known remediation
requirements.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations", (SFAS No. 143) which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
or normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain on settlement.
The Company is required and plans to adopt the provisions of SFAS No. 143 for
the quarter ending March 31, 2003. To accomplish this, the Company must identify
legal obligations for asset retirement obligations, if any, and determine the
fair value of these obligations at the date of adoption. The determination of
fair value is complex and will require the Company to gather market information
and develop cash flow models. Additionally, the Company will be required to
develop processes to track and monitor those obligations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
("SFAS No. 145"), which will be effective for the Company beginning January 1,
2003. SFAS No. 145 rescinds SFAS Nos. 4, 44, 64 and amends SFAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"), which will be effective for
the Company beginning January 1, 2003. SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized at fair
value when the liability is incurred unless the liability is for one-time
termination benefits incurred over time. SFAS No. 146 nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Costs
Associated with a Restructuring)."
The Company has assessed the impact of SFAS Nos. 143, 145 and 146, and
estimates that the impact of these standards will
12
not be material to the Company's financial condition, results of operations or
liquidity.
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," which
elaborates on required disclosures by a guarantor in its financial statements
about obligations under certain guarantees that it has issued and clarifies the
need for a guarantor to recognize, at the inception of certain guarantees, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company is reviewing the provisions of this Interpretation
relating to initial recognition and measurement of guarantor liabilities, which
are effective for qualifying guarantees entered into or modified after December
31, 2002, but does not expect it to have a material impact on the Company's
financial statements. The disclosure requirements of the Interpretation, which
are effective for the Company's year ended December 31, 2002, are included in
footnotes 2 and 5 to the consolidated financial statements, which discuss
contingent consideration relative to the Company's acquisition of Gen-X, as well
as the Company's disclosures relative to its product warranty liability.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an Amendment of FASB Statement No. 123"
("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for employee stock-based
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in annual and interim financial
statements about the method of accounting for stock-based compensation and its
effect on reported results. The disclosure provisions of SFAS No. 148 are
included in the accompanying Notes to Consolidated Financial Statements. The
Company applies the principles of APB Opinion No. 25 and related interpretations
in accounting for its stock-based compensation plans. See Note 8 to the
consolidated financial statements.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities," which
addresses consolidation by a business of variable interest entities in which it
is the primary beneficiary. The Interpretation is effective immediately for
certain disclosure requirements and variable interest entities created after
January 31, 2003, and in fiscal 2004 for all other variable interest entities.
The Company is reviewing the provisions of the Interpretation and complies with
the disclosure requirements, but does not expect the Interpretation to have a
material impact on the Company's financial statements.
INFLATION
Inflation rates in the United States have not had a significant impact on the
Company's operating results for the three years ended December 31, 2002. The
impact on the Company is minimized as a result of rapid turnover of inventories
and partially offset by cost reduction programs and increased operating
efficiency.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to short-term interest rate risks and foreign currency
exchange rate risks. In the normal course of business these risks are managed
through a variety of strategies, including the use of a derivative financial
instrument to hedge our underlying exposures. The Company does not use
derivative instruments for trading purposes.
Interest Rate Risk
Interest rate risk arises primarily from variable rate borrowings in the United
States and Canada. The Company has entered into an interest rate swap, which is
recognized on the balance sheet at fair value. The Company has determined that
the swap is effective; therefore, changes in the fair value of the swap are
recorded on a quarterly basis as an adjustment to accumulated other
comprehensive loss. The swap expires on April 4, 2004.
At December 31, 2002, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of $606 in earnings before income
taxes. During 2001 and for the first eight months of 2002, the Company did not
borrow against its variable rate credit facility.
Foreign Currency Exchange Risk
All subsidiaries of the Company, except Creative Retail Services (Canada) Inc.,
use the U.S. dollar as their functional currency. A small portion of the
Company's sales, receivables, purchases and expenses are denominated in Euros,
Australian dollars and the Canadian dollar. The Company also maintains bank
accounts in Euros, Australian dollars and the Canadian dollar to facilitate
international operations. At this time, the Company's exposure to currency
exchange risk is not considered material.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Huffy Corporation:
We have audited the accompanying consolidated balance sheets of Huffy
Corporation and subsidiaries (Company) as of December 31, 2002 and 2001, 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, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Huffy Corporation
and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Cincinnati, OH
January 31, 2003
14
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar Amounts in Thousands, Except Share Data)
2002 2001 2000
-------------------- --------------- ---------------
Product sales $ 285,788 $ 252,109 $ 403,677
Service revenue 87,108 79,029 84,504
-------------- -------------- --------------
Net sales 372,896 331,138 488,181
Cost of products sold 228,707 223,914 333,071
Cost of services sold 77,842 67,274 73,768
-------------- --------------- --------------
Cost of sales 306,549 291,188 406,839
-------------- -------------- --------------
Gross profit 66,347 39,950 81,342
Selling, general and administrative expenses 57,858 47,607 53,763
Plant closure and manufacturing reconfiguration -- 3,713 714
-------------- -------------- --------------
Operating income (loss) 8,489 (11,370) 26,865
Other expense (income):
Interest expense 1,973 1,761 8,629
Interest income (285) (633) (201)
Other expense, net 1,636 303 1,342
-------------- -------------- --------------
Earnings (loss) before income taxes 5,165 (12,801) 17,095
Income tax expense (benefit) 573 (4,391) 6,429
-------------- -------------- --------------
Earnings (loss) from continuing operations 4,592 (8,410) 10,666
Discontinued operations:
Income (loss) from discontinued operations (5,970) -- 4,537
Gain on disposal of discontinued operations -- -- 20,781
Extraordinary loss -- -- (998)
-------------- -------------- --------------
Net earnings (loss) $ (1,378) $ (8,410) $ 34,986
=============== =============== ==============
Earnings (loss) per common share:
Basic:
Weighted average number of common shares 11,833,213 10,298,076 10,187,048
Earnings (loss) from continuing operations $ 0.39 $ (0.82) $ 1.05
Earnings (loss) from discontinued operations (0.51) -- 2.48
Extraordinary loss -- -- (0.10)
-------------- -------------- --------------
Net earnings (loss) per common share $ (0.12) $ (0.82) $ 3.43
=============== ============== ==============
Diluted:
Weighted average number of common shares 11,978,747 10,298,076 10,320,362
Earnings (loss) from continuing operations $ 0.38 $ (0.82) $ 1.03
Earnings (loss) from discontinued operations
(0.50) -- 2.45
Extraordinary loss
-- -- (0.09)
-------------- -------------- --------------
Net earnings (loss) per common share $ (0.12) $ (0.82) $ 3.39
=============== ============== ==============
See accompanying notes to the consolidated financial statements.
15
HUFFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
December 31, December 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,419 $ 26,541
Accounts and notes receivable, net 92,850 48,934
Inventories, net 41,847 12,483
Deferred income tax assets 12,227 13,900
Prepaid expenses and other current assets 8,755 3,903
Net assets held for sale 5,480 --
----------- -----------
Total current assets 166,578 105,761
----------- -----------
Property, plant and equipment, at cost:
Land and land improvements 120 182
Buildings and building improvements 1,741 3,399
Machinery and equipment 18,970 16,818
Office furniture, fixtures and equipment 17,498 16,348
Leasehold improvements 2,069 1,584
Construction in progress 933 989
----------- -----------
41,331 39,320
Less: Accumulated depreciation and amortization 30,191 30,053
----------- -----------
Net property, plant and equipment 11,140 9,267
Excess of cost over net assets acquired, net 26,663 8,038
Intangible assets, net 48,112 --
Deferred income tax assets 22,484 1,906
Pension assets 574 15,267
Other assets 6,650 5,246
----------- -----------
$ 282,201 $ 145,485
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 54,069 $ --
Current installments of long-term obligations 5,258 --
Accounts payable 65,519 31,161
Accrued expenses:
Salaries, wages and other compensation 6,854 4,363
Insurance 6,141 7,403
Environmental 879 6,959
Other 15,095 4,403
----------- -----------
Total accrued expenses 28,969 23,128
Other current liabilities 8,090 7,096
----------- -----------
Total current liabilities 161,905 61,385
----------- -----------
Long-term obligations, less current installments 317 --
Pension liabilities 31,934 5,294
Postretirement benefits other than pension 9,340 9,570
Other long-term liabilities 6,958 3,634
----------- -----------
Total liabilities 210,454 79,883
----------- -----------
Shareholders' equity:
Common stock 21,153 16,931
Additional paid-in capital 95,267 67,226
Retained earnings 73,769 75,147
Unearned stock compensation (18) --
Accumulated other comprehensive loss (28,551) (3,421)
Treasury shares, at cost (89,873) (90,281)
----------- -----------
Total shareholders' equity 71,747 65,602
----------- -----------
$ 282,201 $ 145,485
=========== ===========
See accompanying notes to the consolidated financial statements.
16
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
2002 2001 2000
-------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations $ 4,592 $ (8,410) $ 10,666
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,820 4,676 5,706
Gain on sale of property, plant and equipment (525) (4) (3,446)
Write-down of certain property, plant and equipment -- 2,018 --
Extraordinary charge for the early extinguishment of debt -- -- (998)
Deferred income taxes (17,361) 1,323 18,943
Changes in assets and liabilities, excluding the effects of acquisitions:
Accounts and notes receivable, net (1,264) 30,877 (23,014)
Inventories (5,487) 30,841 (19,970)
Prepaid expenses (1,618) (259) 1,101
Other assets 13,291 (9,475) (1,941)
Accounts payable 3,760 3,146 (2,214)
Accrued expenses (6,103) (13,319) (575)
Other current liabilities 1,224 (1,182) 937
Postretirement benefits other than pension (230) (137) (4,196)
Other long-term liabilities 4,586 691 2,463
Other -- -- (3)
----------- ----------- -----------
Net cash provided by (used in) continuing operating activities (1,315) 40,786 (16,541)
----------- ----------- -----------
Discontinued operating activities:
Gain on disposal from discontinued operations -- -- 20,781
Gain (loss) from discontinued operations (5,970) -- 4,537
Non-cash items from discontinued operations -- -- 3,648
Cash provided by discontinued operations -- -- 31,936
----------- ----------- -----------
Net cash provided by (used in) discontinued operating activities (5,970) -- 60,902
----------- ----------- -----------
Net cash provided by (used in) operating activities (7,285) 40,786 44,361
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,144) (2,553) (2,510)
Proceeds from sale of property, plant and equipment 747 4 7,377
Gen-X acquisition (19,001) -- --
McCalla acquisition, net of cash acquired (4,900) -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities (26,298) (2,549) 4,867
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 54,069 (17,656) (4,246)
Repayment of debt assumed in the Gen-X acquisition (37,800) -- --
Preferred shares redeemed (4,970) -- --
Issuance of long-term debt 673 -- --
Reduction of long-term debt (250) -- (60,467)
Issuance of common shares 739 1,626 485
Dividends paid -- -- (856)
----------- ----------- -----------
Net cash provided by (used in) financing activities 12,461 (16,030) (65,084)
----------- ----------- -----------
Net change in cash and cash equivalents (21,122) 22,207 (15,856)
Cash and cash equivalents:
Beginning of the period 26,541 4,334 20,190
----------- ----------- -----------
End of the period $ 5,419 $ 26,541 $ 4,334
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
17
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar Amounts in Thousands)
ACCUMULATED
ADDITIONAL UNEARNED OTHER
COMMON PAID-IN RETAINED STOCK COMPREHENSIVE TREASURY
TOTAL STOCK CAPITAL EARNINGS COMPENSATION LOSS STOCK
------- -------- ---------- --------- ------------ ------------- --------
Balance at December 31, 1999 $ 37,482 $ 16,667 $ 66,242 $ 48,571 $ -- $ (2,854) $ (91,144)
Comprehensive income, net of tax:
Net earnings 34,986 34,986
Minimum pension liability
adjustment, net of income tax
expense of $205 178 178
---------
Total comprehensive income 35,164
Issuance of 36,671 shares in
connection with common stock
plans 485 37 (38) 486
--------- --------- -------- --------- ----- --------- ---------
Balance at December 31, 2000 $ 73,131 $ 16,704 $ 66,204 $ 83,557 $ -- $ (2,676) $ (90,658)
Comprehensive loss, net of tax:
Net loss (8,410) (8,410)
Minimum pension liability
adjustment, net of income tax
benefit of $194 (434) (434)
Unrealized loss on derivative
instruments (311) (311)
---------
Total comprehensive loss (9,155)
Issuance of 227,129 shares in
connection with common stock
plans 1,626 227 1,022 377
--------- --------- -------- --------- ----- --------- ---------
Balance at December 31, 2001 $ 65,602 $ 16,931 $ 67,226 $ 75,147 $ -- $ (3,421) $ (90,281)
Comprehensive loss, net of tax:
Net loss (1,378) (1,378)
Minimum pension liability
adjustment, net of income
tax benefit of $13,624 (25,234) (25,234)
Foreign currency translation
Adjustment 1 1
Unrealized loss on derivative
instruments, net of income
tax benefit of $126 103 103
---------
Total comprehensive loss (26,508)
Unearned stock compensation (18) (18)
Issuance of 4,161,241 shares in
connection with the acquisition
of Gen-X Sports Inc. 31,932 4,161 27,771
Issuance of 60,580 shares in
connection with common stock
plans 739 61 270 408
--------- --------- -------- ------- ----- --------- ---------
Balance at December 31, 2002 $ 71,747 $ 21,153 $ 95,267 $73,769 $ (18) $ (28,551) $ (89,873)
========= ========= ======== ======= ===== ========= =========
See accompanying notes to the consolidated financial statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT FOR SHARE DATA)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
Huffy Corporation and its subsidiaries. All intercompany transactions and
balances have been eliminated. The accompanying statement of operations for the
year ended December 31, 2002 includes the results of operations for Gen-X Sports
Inc. for the period from September 19, 2002 to December 31, 2002 and McCalla
Company for the period from March 27, 2002 to December 31, 2002.
RECLASSIFICATION - Certain prior year balances have been reclassified to conform
with the 2002 presentation.
CASH AND CASH EQUIVALENTS - Cash equivalents consist principally of short-term
money market instruments with original maturities of three months or less.
REVENUE RECOGNITION - The Company recognizes revenue on products when shipments
occur or title passes to the customer. Revenue for retail services is recognized
at the time the service is performed.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially expose
the Company to concentrations of credit risk, as defined by Statement of
Financial Accounting Standards (SFAS) No. 105, consist primarily of trade
accounts receivable. In the normal course of business, Huffy extends credit to
various companies in the retail industry where certain concentrations of credit
risk exist. These concentrations of credit risk may be similarly affected by
changes in economic or credit conditions and may, accordingly, impact Huffy's
overall credit risk. Management believes that the Company's diversification of
accounts receivable is sufficient to reduce potential market credit risk, and
that the allowance for doubtful accounts is adequate to absorb estimated losses
as of December 31, 2002. The allowance for doubtful accounts was $1,214 and
$5,766 as of December 31, 2002 and 2001, respectively.
INVENTORIES - Inventories are valued at cost (not in excess of market)
determined by the first-in, first-out (FIFO) method. Management periodically
reviews inventory for salability and believes that the reserve for obsolescence
at December 31, 2002 is adequate to absorb estimated losses.
PROPERTY, PLANT AND EQUIPMENT - Depreciation and amortization of plant and
equipment is provided on the straight-line method.
Annual depreciation and amortization rates are as follows:
Land improvements 5 - 10%
Buildings and improvements 2-1/2 - 10%
Office furniture, fixtures or machinery and equipment 10 - 33-1/3%
Leasehold improvements 4-1/2 - 33-1/3%
ASSETS HELD FOR SALE - The Company accounts for long-lived assets in accordance
with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets". SFAS No. 144 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to discounted future net cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
The Company has classified $1,500 of land and $3,980 of buildings obtained in
the Gen-X acquisition as net assets held for sale as of December 31, 2002. The
assets are stated at estimated fair value, as determined by an independent
appraisal. The property is currently being marketed for sale. Assets held for
sale are included in the Sporting Goods segment.
PRODUCT LIABILITY - The Company maintains a reserve for product liability based
upon expected settlement charges for pending claims and an estimate of
unreported claims derived from experience, volume and product sales mix.
FREIGHT- The Company classifies outbound freight expense to customers as an
adjustment to product sales revenue on the accompanying consolidated statements
of operations. For the years ended December 31, 2002, 2001 and 2000, freight
expense was $3,418, $2,633 and $2,301, respectively.
19
AMORTIZATION OF INTANGIBLES - The Company adopted the provisions of SFAS No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", as of January 1, 2002. SFAS No. 141 addresses financial accounting and
reporting for business combinations and requires the use of the purchase method
of accounting for combinations initiated subsequent to June 30, 2001. SFAS No.
142 provides guidance for the financial accounting and reporting for goodwill
and other intangible assets requiring that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires intangible assets with definite useful lives to be
amortized over their respective estimated useful lives to their estimated
residual values and reviewed for impairment in accordance with SFAS No. 144.
On September 19, 2002, the Company acquired all of the common stock of Gen-X
Sports Inc. and Gen-X Sports, Inc. and their subsidiaries in exchange for cash
and the issuance of common stock of the Company. Included in the assets acquired
are trademarks, patents and licensing agreements recorded at their fair values
of $45,800, $1,285 and $940, respectively, as well as goodwill in the amount of
$12,104. The fair values for these assets, excluding goodwill, were determined
by an independent third-party appraiser. During the fourth quarter of 2002,
goodwill was increased $1,332 for additional legal costs and other professional
fees associated with the acquisition.
On March 27, 2002, the Company acquired 100% of the common stock of McCalla
Company and its subsidiaries. The aggregate purchase price was $5,400 and was
paid in cash. Of the total purchase consideration, $4,876 was allocated to
goodwill and $300 to an agreement not to compete. During the fourth quarter of
2002, goodwill was increased $1,645 to record an earn-out payment owed at
December 31, 2002 to the former owners of McCalla Company.
The Company has the following acquired intangible assets as of December 31,
2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
GROSS GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------ ------- ------------
Assets subject to amortization:
Gen-X patents $ 1,285 $ 49 $ -- $ -- $ -- $ --
Gen-X license agreements 940 119 -- -- -- --
McCalla covenant not to compete 300 45 -- -- -- --
-------- ------- -------- ------- -------- -------
Total assets subject to amortization $ 2,525 $ 213 $ -- $ -- $ -- $ --
======== ======= ======== ======= ======== =======
Assets not subject to amortization:
Trademarks at Gen-X $ 45,800 $ -- $ -- $ -- $ -- $ --
Goodwill recorded in connection with the
Gen-X acquisition 12,104 -- -- -- -- --
Goodwill in the Huffy bicycle business unit 8,824 2,380 8,824 2,380 8,824 1,744
Goodwill in Huffy Sports business unit 1,973 569 1,973 569 1,973 496
Goodwill recorded in connection with the
McCalla acquisition 6,521 -- -- -- -- --
Goodwill in Huffy Service First
business unit 478 288 478 288 478 271
-------- ------- -------- ------- -------- -------
Total assets not subject to amortization $ 75,700 $ 3,237 $ 11,275 $ 3,237 $ 11,275 $ 2,511
======== ======= ======== ======= ======== =======
The Company recorded amortization expense of $213 in 2002. The Company estimates
that amortization expense will be $655, $570, $297, $228, $94, and $468 for each
of the years ended December 31, 2003, 2004, 2005, 2006, 2007 and thereafter,
respectively.
Prior to the adoption of SFAS No. 142, the Company amortized the excess of cost
over net assets acquired on a straight-line basis over fifteen to forty years.
The Company's reporting units are tested annually during the fourth quarter for
impairment.
20
The following table provides a summary of net income (loss) and related basic
and diluted EPS information as reported, and as adjusted to exclude goodwill
amortization, for the years ended December 31, 2001 and 2000.
December 31, 2001 December 31, 2000
----------------- -----------------
Reported net income (loss) $ (8,410) $ 34,986
Add back: Goodwill amortization 726 726
--------- ---------
Adjusted net income (loss) $ (7,684) $ 35,712
--------- ---------
Basic EPS
Reported net income (loss) $ (0.82) $ 3.43
Adjusted net income (loss) (0.75) 3.51
Diluted EPS
Reported net income (loss) $ (0.82) $ 3.39
Adjusted net income (loss) (0.75) 3.46
DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value
of cash and cash equivalents, trade receivables, trade accounts payable, notes
payable, and accrued expenses approximates fair value due to the short maturity
of these instruments.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an Amendment to SFAS No. 133", during 2002 and 2001, the Company
recorded an adjustment, net of tax, of $103 and $(311), respectively, in
accumulated other comprehensive loss to recognize at fair value an interest rate
swap that is designated as a cash-flow hedging instrument. No other derivative
instruments have been identified.
The interest rate swap is recognized on the balance sheet at fair value. The
Company has determined that the swap is effective; therefore, changes in the
fair value of the swap are recorded on a quarterly basis as an adjustment to
accumulated other comprehensive loss. The swap expires on April 4, 2004.
EARNINGS (LOSS) PER COMMON SHARE - Basic earnings (loss) per share of common
stock excludes any dilutive effects of stock options and is based upon the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings (loss) per share are computed based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the year. The dilutive effect of stock options is excluded from the diluted per
share calculation, if the Company has a loss from continuing operations as the
impact would be anti-dilutive.
USE OF ESTIMATES - Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with accounting principles generally accepted in the
United States of America. Actual results could differ from those estimates.
STOCK OPTION PLANS - Prior to January 1, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148, which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure required by SFAS No. 123. The Company records
compensation cost for fixed awards with pro-rata vesting on a pro-rata basis
over the vesting period.
At December 31, 2002, the Company has stock-based compensation plans which are
described in Note 8. The Company applies the principles of APB Opinion No. 25
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans and its
stock purchase plan except for options issued below fair market value. The
compensation cost that has been charged against income for options issued below
fair market value and options issued to replace canceled options, was $119,
$122, and $725, (after tax $106, $80, and $452) for the years ended December 31,
2002, 2001 and 2000, respectively. Had compensation cost for the Company's
stock-based
21
compensation plans been determined consistent with SFAS No. 123, the Company's
net earnings (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated below:
2002 2001 2000
---------- ----------- ----------
Net earnings (loss)
As Reported $ (1,378) $ (8,410) $ 34,986
Pro Forma (2,031) (9,297) 34,497
Diluted net earnings (loss)
per common share:
As Reported $ (0.12) $ (0.82) $ 3.39
Pro Forma (0.17) (0.90) 3.34
REPORTING SEGMENTS - The Company is reporting its operations as two segments,
Sporting Goods Products and Services to Retailers. Huffy Bicycle Company
including Royce Union Bicycle Company and American Sports Design Company, Huffy
Sports Company, and Gen-X Sports Inc., comprise the Sporting Goods Products
segment. The Services to Retailers segment is comprised of the McCalla Companies
and Huffy Service First, Inc. The change from a single segment is a result of a
shift in the product mix of Huffy Service First, Inc. toward assembly services
not directly related to the sporting goods industry, as well as the acquisition
of the McCalla Company and its subsidiaries and the Gen-X Sports Inc. business.
The Sporting Goods Products segment includes wheeled recreational products,
basketball backboards, basketballs and other balls, golf clubs and accessories,
snowboards and accessories, hockey equipment and apparel, snow skis and
accessories, in-line skates, roller blades, other action sports accessories and
the excess/opportunity inventory products. Services to Retailers include,
assembly and repair of bicycles, assembly of grills, physical fitness equipment,
and furniture, assembly and repair of outdoor power equipment, and merchandising
services.
NOTE 2. ACQUISITIONS
On September 19, 2002, the Company acquired all of the stock of Gen-X Sports
Inc. and Gen-X Sports, Inc. and their subsidiaries in exchange for $19,001 in
cash and the issuance of 4,161,241 shares of Huffy Corporation's Class A common
shares to the stockholders of Gen-X. The $7.687 per share value of the Class A
common shares issued was determined based upon the average market price of Huffy
Corporation's common shares over the two day period before and after the terms
of the acquisition were agreed to and announced. The purchase price is subject
to certain post-closing adjustments. Should Gen-X meet certain financial
performance objectives, specified in the purchase agreement, and if there are no
breaches of warranties and representations, up to 838,662 additional common
shares may be issued to the Gen-X stockholders. In addition, the acquired
companies immediately redeemed $4,970 of preferred stock at face value and
refinanced their existing bank debt. Included in the assets acquired are
trademarks, patents and licensing agreements recorded at their fair values of
$45,800, $1,285 and $940, respectively, as well as goodwill in the amount of
$12,104. Gen-X is a designer, marketer and distributor of branded sports
equipment, including action sports products, winter sports products and golf
products, and is a purchaser and reseller of excess sporting goods and athletic
footwear inventories. The Company believes that the combination of Huffy and
Gen-X will create a stronger, more competitive sporting goods company capable of
achieving greater financial strength, earnings power, operational efficiency and
growth potential than either company would on its own. It will also broaden each
company's brand portfolios and sporting goods product offerings and will broaden
and diversify the customer base. Finally, the combination has the potential to
decrease seasonal fluctuations in sales and earnings.
The table below presents unaudited pro forma condensed combining statements of
operations from the Company and Gen-X Sports Inc. for the years ended December
31, 2002 and 2001. The unaudited pro Forma condensed combining statements of
operations are presented as if the merger had occurred on January 1, 2002 and
2001, respectively.
22
Huffy Corporation, Gen-X Sports Inc. and Gen-X Sports, Inc.
Summary Unaudited Pro Forma Condensed Combining Statement of Operations
(Dollar amounts in thousands, except per share data)
PRO FORMA YEAR ENDED PRO FORMA YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------------------- ------------------------------
HUFFY PRO FORMA HUFFY PRO FORMA
CORPORATION COMBINED CORPORATION COMBINED
----------- --------- ----------- ---------
Net sales $ 372,896 $ 466,540 $ 331,138 $ 438,606
Earnings from continuing operations 4,592 6,318 (8,410) (4,094)
Earnings from continuing operations per common
share
Basic $ 0.44 $ 0.43 $ (0.82) $ (0.27)
Diluted $ 0.43 $ 0.43 $ (0.82) $ (0.27)
Shares used in calculation of earnings per share
Basic 10,446,133 14,607,374 10,298,076 14,459,317
Diluted 10,591,667 14,752,908 10,298,076 14,459,317
The following table summarized the estimated fair value of the assets acquired
and the liabilities assumed at the date of acquisition.
September 19, 2002
------------------
Accounts receivable $ 41,531
Inventories 23,877
Prepaid expense 3,234
Property, plant and equipment 7,979
Intangible assets 48,025
Goodwill 12,104
Other assets 1,544
------------
Total assets acquired 138,294
------------
Accounts payable 30,441
Accrued liabilities 8,998
Debt Obligations 42,952
------------
Total liabilities assumed 82,391
------------
Net assets acquired $ 55,903
============
Of the $48,025 of acquired intangible assets, $45,800 was assigned to registered
trademarks that are not subject to amortization. The remaining $2,225 of
acquired intangible assets have weighted-average useful lives of approximately
seven years. The intangible assets that make up that amount include patents of
$1,285, (approximately ten-year weighted-average useful lives), and license
agreements of $940, (approximately two-year weighted-average useful lives).
During the fourth quarter of 2002, goodwill was increased $1,332 for additional
legal costs and other professional fees associated with the acquisition.
On March 27, 2002, Huffy Service First acquired the stock of McCalla Company and
its subsidiaries, Creative Retail Services Inc. and Creative Retail Services
(Canada), Inc. ("McCalla") for $5,400, less $500 net cash acquired, subject to
certain post-closing adjustments. Of the total purchase price, $4,876 was
recorded as goodwill and $300 was recorded as a covenant not-to-compete. McCalla
provides merchandising, including cycle and periodic product resets, stocking
and sales training for a number of well-known manufacturers serving Home Depot,
including, among others, Philips Lighting, Duracell, and Spectrum Brands. The
purchase agreement calls for an annual earn-out payment for 2002 and 2003
results in excess of contractual projections. The 2003 payment for 2002 results
is expected to be $1,645, and is recorded as an addition to goodwill and an
accrued liability in the accompanying 2002 consolidated balance sheet.
Both of these acquisitions were accounted for on the purchase method of
accounting in accordance with SFAS No. 141.
23
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
2002 2001 2000
-------------- ------------ ------------
Cash paid (received) during the period for:
Interest $ 1,645 $ 845 $ 14,145
Taxes (8,229) 1,532 4,646
=========== ========= =========
Details of acquisitions:
Fair value of assets acquired 138,294 -- --
Liabilities assumed 82,391 -- --
----------- --------- ---------
Net assets acquired 55,903 -- --
Less: common shares issued 31,932 -- --
Less: preferred shares redeemed 4,970 -- --
----------- --------- ---------
Cash paid for Gen-X common shares 19,001 -- --
----------- --------- ---------
Cash paid for McCalla acquisition 5,400 -- --
Less: cash acquired 500 -- --
----------- --------- ---------
Net cash paid for McCalla acquisition 4,900 -- --
----------- --------- ---------
Net cash paid for acquisitions $ 23,901 $ -- $ --
=========== ========= =========
NOTE 4. INVENTORIES
The components of inventories are as follows:
2002 2001
------------- ------------
Finished goods $ 36,104 $ 10,768
Work-in-process 147 105
Raw materials and supplies 5,596 1,610
---------- ---------
$ 41,847 $ 12,483
========== =========
NOTE 5. CLAIMS AND ALLOWANCES
The Company's policy is to fully reserve for claims that have been or may be
incurred on all products that have been shipped. The reserves are calculated
based on claims that have been submitted but not settled. The calculation also
considers anticipated claims based upon historical performance. Some major
retailers have chosen to manage the warranty process in exchange for a claims
allowance based on sales volume. The portion of the reserve related to retailer
claims allowances is netted against accounts receivable while the balance of the
reserve is classified as an accrued liability on the balance sheet. Additions to
the reserve are treated as a deduction from net sales if they related to a
negotiated claim allowance and as selling, general and administrative costs if
they related to a general warranty expense.
The following is a roll-forward of the Company's claims and allowance activity
for 2002:
RETAILER CLAIMS
ALLOWANCES GENERAL WARRANTY TOTAL
--------------- ---------------- -----
Beginning balance December 31, 2001 $ 499 $ 89 $ 588
Additions to reserves 463 2,785 3,248
Settled claims (160) (2,731) (2,891)
----------- ------------ ----------
Ending balance December 31, 2002 $ 802 $ 143 $ 945
=========== ============ ==========
NOTE 6. LINES OF CREDIT AND LONG-TERM OBLIGATIONS
In January 2000, the Company signed a $170 million, 18-month borrowing facility
secured by all of the assets of the Company. The facility consisted of $40
million of senior term debt, $30 million of subordinated debt, and a $100
million revolving credit facility. In November 2000, the senior term debt and
subordinated debt were repaid.
In September 2002, the Company entered into an Amended and Restated Loan and
Security Agreement with Congress Financial Corporation (Central), which has
subsequently been amended. The amended $75 million revolving credit facility is
secured by all assets of the Company and its affiliates and will expire on
December 31, 2004, with a 12-month renewal option. The interest rate under the
revolving credit facility varies, based upon excess availability, from the prime
rate to prime rate plus .25%, or London Interbank Offertory Rate (LIBOR) plus
1.75% to LIBOR plus 2.75%. The revolving credit facility contains covenants,
which require the Company to maintain a minimum of $50,000 of net worth,
restrict certain business activities, including the payment of dividends and
limit capital expenditures. As of December 31, 2002, the Company is in
compliance with these covenants. The Company assumed three long-term obligations
in the Gen-X acquisition with a combined outstanding balance of $5,153. The
mortgage loan assumed in the Gen-X acquisition is secured by net assets held
24
for sale as described in Note 1. Sale proceeds from the disposal of this
property would be used to retire the unpaid balance on the mortgage.
2002 2001
------------ ----------
SHORT-TERM BORROWINGS:
Revolving credit facility $ 54,069 $ --
Maximum borrowings 62,543 N/A
Average borrowings 55,881 N/A
Weighted average interest rate 5.00% N/A
LONG-TERM OBLIGATIONS:
6% Term loan due July 2003 $ 326 $ --
Mortgage loan due monthly 4,744 --
Capital lease due monthly through 2005 505 --
--------- -------
5,575 --
Less: current installments 5,258 --
--------- -------