FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Quarter Ended September 29, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5325
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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
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(Address of principal executive offices) (Zip Code)
(937) 866-6251
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(Registrant's telephone number, including area code)
No Change
---------
(Former name, former address and former fiscal year,
if changed since last report)
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
----- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding Shares: 10,380,475 as of November 13, 2001
------------------------ -----------------------------
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS COMPANY FOR WHICH REPORT IS FILED:
--------------------
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar Amounts in Thousands, Except Per Share Data)
(unaudited)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September September September September
29, 2001 30, 2000 29, 2001 30, 2000
------------ ------------ ------------ ------------
Net sales $ 77,945 $ 123,875 $ 246,052 $ 345,972
Cost of sales 70,268 102,034 214,663 292,305
------------ ------------ ------------ ------------
Gross profit 7,677 21,841 31,389 53,667
Selling, general and administrative expenses 11,150 12,536 32,282 37,032
Plant closure and manufacturing
reconfiguration - (1,817) - 1,511
------------ ------------ ------------ ------------
Operating income (loss) (3,473) 11,122 (893) 15,124
Other expense (income)
Interest expense 377 2,885 1,293 7,440
Interest income (110) (171) (534) (219)
Other 870 1,364 116 1,228
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (4,610) 7,044 (1,768) 6,675
Income tax expense (benefit) (1,809) 2,175 (729) 2,291
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations (2,801) 4,869 (1,039) 4,384
------------ ------------ ------------ ------------
Discontinued operations:
Earnings from discontinued operations, net of
income tax expense of $71 and $2,541 - 160 - 4,864
Extraordinary gain (loss) from early
extinguishment of debt, net of income
tax expense (benefit) of $130 and $(369) - 213 - (635)
------------ ------------ ------------ ------------
Net earnings (loss) $ (2,801) $ 5,242 $ (1,039) $ 8,613
============ ============ ============ ============
Earnings per common share:
Basic:
Weighted average number of common shares 10,323,058 10,199,664 10,269,891 10,178,679
============ ============ ============ ============
Earnings (loss) from continuing
operations $ (0.27) $ 0.48 $ (0.10) $ 0.43
Earnings from discontinued operations - 0.02 - 0.48
Extraordinary earnings (loss) from early
extinguishment of debt - 0.02 - (0.06)
------------ ------------ ------------ ------------
Net earnings (loss) per common share $ (0.27) $ 0.52 $ (0.10) $ 0.85
============ ============ ============ ============
Diluted:
Weighted average number of common shares 10,323,058 10,385,678 10,269,891 10,303,365
============ ============ ============ ============
Earnings (loss) from continuing operations $ (0.27) $ 0.47 $ (0.10) $ 0.43
Earnings from discontinued operations - 0.01 - 0.47
Extraordinary gain (loss) from early
extinguishment of debt - 0.02 - (0.06)
------------ ------------ ------------ ------------
Net earnings (loss) per common share $ ( 0.27) $ 0.50 $ (0.10) $ 0.84
============ ============ ============ ============
2
HUFFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
September 29, December 31,
2001 2000
(Unaudited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,315 $ 4,334
Accounts and notes receivable, net 52,461 79,811
Inventories 34,685 43,324
Prepaid expenses and federal income taxes 26,238 28,344
--------- ---------
Total current assets 127,699 155,813
--------- ---------
Property, plant and equipment, at cost 45,268 43,421
Less: Accumulated depreciation and amortization 33,839 30,741
--------- ---------
Net property, plant and equipment 11,429 12,680
Excess of cost over net assets acquired, net 8,218 8,764
Other assets 4,652 3,236
--------- ---------
$ 151,998 $ 180,493
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 17,656
Current installments of long-term obligations - -
Accounts payable 35,201 28,015
Accrued expenses and other current liabilities 27,438 43,999
--------- ---------
Total current liabilities 62,639 89,670
--------- ---------
Long-term obligations, less current installments - -
Other long-term liabilities 16,256 17,692
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Total liabilities 78,895 107,362
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Shareholders' equity:
Common stock 16,825 16,704
Additional paid-in capital 67,037 66,204
Retained earnings 81,813 83,557
Accumulative comprehensive income (2,323) (2,676)
Less: cost of treasury shares 90,249 90,658
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Total shareholders' equity 73,103 73,131
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$ 151,998 $ 180,493
========= =========
3
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Nine Months Ended
-----------------------------
September 29, September 30,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations $ (1,039) $ 4,384
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,801 4,178
Loss (gain) on sale of property, plant and equipment 64 (3,050)
Extraordinary charge for early extinguishment of debt - (635)
Deferred federal income tax expense 2,904 4,045
Changes in assets and liabilities:
Accounts and notes receivable, net 27,350 (16,785)
Inventories 8,639 (14,555)
Prepaid expenses and federal income taxes (798) (3,119)
Other assets (1,417) (1,157)
Accounts payable 7,186) 13,646
Accrued expenses and other current liabilities (16,561) (281)
Other long-term liabilities (1,788) (4,120)
Other - 154
-------- --------
Net cash provided by (used in) continuing operating activities 28,341 (17,295)
Discontinued operations:
Earnings from discontinued operations - 4,864
Items not affecting cash, net - 3,266
Cash used in discontinued operations - (10,864)
-------- --------
Net cash used in discontinued operating activities - (2,734)
-------- --------
Net cash provided by (used in) operating activities 28,341 (20,029)
============================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,067) (1,889)
Acquisition of businesses - -
Proceeds from sale of property, plant and equipment - 5,754
-------- --------
Net cash provided by (used in) investing activities (2,067) 3,865
============================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings (17,656) 17,559
Reduction of long-term debt - (17,262)
Issuance of common shares 1,363 855
Dividends paid - (856)
-------- --------
Net cash provided by (used in) financing activities (16,293) 296
============================================================================================================
Net change in cash and cash equivalents 9,981 (15,868)
Cash and cash equivalents:
Beginning of the year 4,334 20,190
-------- --------
End of the nine month period $ 14,315 $ 4,322
============================================================================================================
4
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
Note 1: Footnote disclosure, which would substantially duplicate the
disclosure contained in the Annual Report to Shareholders for the
year ended December 31, 2000, has not been included. The unaudited
interim consolidated financial statements reflect all adjustments,
which, in the opinion of management, are necessary to a fair
statement of the results for the periods presented and to present
fairly the consolidated financial position of Huffy Corporation as of
September 29, 2001. All such adjustments are of a normal recurring
nature.
Note 2: Huffy Corporation disclosed in the second quarter 10-Q that it had
executed a purchase agreement to purchase the trademarks and selected
cycling assets of Schwinn/GT Corp. In September 2001, the United
States Bankruptcy Court for the District of Colorado conducted an
auction for the assets of Schwinn/GT Corporation in accordance with
Section 363 of the Bankruptcy Code. At the auction, the purchase
price increased to a level at which Huffy elected to withdraw from
the auction. The purchase agreement provided for a break-up fee of
$1.25 million that was received in late September. Costs incurred
exceeded the break-up fee by $820 and were included in the third
quarter 2001 as other expense on the Consolidated Statement of
Earnings.
Note 3: Inventories of Huffy Bicycle Company and Huffy Sports Company are at
cost (not in excess of market) determined by the FIFO method. The
components of inventories are as follows:
September 29, December 31,
2001 2000
--------------- ---------------
Finished Goods $30,714 $39,284
Work-in-Progress 148 147
Raw Materials & Supplies 3,823 3,893
--------------- ---------------
$34,685 $43,324
=============== ===============
Note 4: During the fourth quarter of 1999, the Company closed its remaining
domestic bicycle manufacturing facilities in Farmington, Missouri and
Southaven, Mississippi and reconfigured its bicycle operations.
During the first quarter of 2000, the Company increased imports from
a global network of sourcing partners to offset this loss of
production capacity. Closing the plants eliminated the costs required
to operate the facilities and completed Huffy Bicycle Company's
transformation from a single brand manufacturer and marketer of
bicycles, to a multi-brand design, marketing and distribution
company. During the third quarter of 2000, reconfiguration charges
included severance and related benefits ($195); and facility shutdown
and related benefits $2,012. During the first nine months of 2000,
reconfiguration charges included severance and related benefits
($1,067); and facility shutdown and related costs ($444).
Note 5. The Company classifies its operations into a single integrated
business segment.
Note 6: The Company adopted SFAS 133 as of January 1, 2001, which did not
have a material impact on the Company's financial position or results
of operations. The Company's use of derivative financial instruments
is de minimis.
In July 2001, the FASB issued Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Tangible
Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001
as well as all
5
purchase method business combinations completed after June 30, 2001.
Statement 141 also specifies the criteria that intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of Statement 142.
Statement 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment
in accordance with FAS Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $8,038, which will be subject to the
transition provisions of Statements 141 and 142. Amortization
expenses related to goodwill was $726 and $547 for the year ended
December 31, 2000 and the nine months ended September 29, 2001,
respectively. Because of the extensive effort needed to comply with
adopting Statement 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether it
will be required to recognize any transitional impairment losses as
the cumulative effect of a change in accounting principle.
In June 2001, the Financial Accounting Standards Board issued
Statement No. 143, Accounting for Asset Retirement Obligations, 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.
Statement 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
Statement 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. Because of the effort necessary to comply with the
adoption of Statement No. 143, it is not practicable for management
to estimate the impact of adopting this Statement at the date of this
report.
On October 3, 2001, the Financial Accounting Standards Board issued
Statement No. 144, Accounting for the Impairment of Disposal of
Long-Lived Assets, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. While Statement
No. 144 supersedes Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for
6
Long-Lived Assets to be Disposed of, it retains many of the
fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting
provisions of Accounting Principles Board No. 30, Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business.
However, it retains the requirement in Option No. 30 to report
separately discontinued operations and extends that reporting to a
component of an entity that either has been disposed by sale,
abandonment, or in a distribution to owners, or is classified as held
for sale.
The Company is required and plans to adopt the provisions of
Statement No. 144 for the quarter ending March 31, 2002. Because of
the effort necessary to comply with the adoption of Statement No.
144, it is not practicable for management to estimate the impact of
adopting this Statement at the date of this report.
Note 7: The components of comprehensive income are immaterial and are
therefore not disclosed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2001
COMPARED TO THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
(Dollar Amounts in Thousands, Except Per Share Data)
NET EARNINGS
------------
For the third quarter of 2001, Huffy Corporation ("Huffy" or "Company") had a
net loss from continuing operations of $2,801, or $0.27 per common share, versus
net earnings from continuing operations of $4,869 or $0.47 for the same period
last year. Earnings for the third quarter of 2000 include a pretax benefit of
$1,670, or approximately $0.11 per common share, for the reconfiguration of the
bicycle business. The third quarter 2000 net earnings from discontinued
operations were $160, or $0.01 per common share, while an extraordinary gain
from the early extinguishment of debt added $213, or $0.02, per common share.
For the nine months ended September 29, 2001, the net loss from continuing
operations was $1,039, or $0.10 per common share, compared to earnings from
continuing operations of $4,384, or $0.43, per common share, in the first nine
months of 2000. The nine months of 2000 included a pretax charge of $1,511 ($992
after tax), or $0.10 per common share, for charges related to the bicycle
reconfiguration and a pretax charge of $688 ($452 after tax), or $0.04 per
common share for refinancing charges. Net earnings from discontinued operations
were $4,864, or $0.47 per common share in the first three quarters of 2000. An
extraordinary loss of $635 or $0.06 per common share, related to early debt
extinguishments, was also recorded in the first nine months of 2000.
7
NET SALES
---------
Consolidated net sales for the quarter ended September 29, 2001 were $77,945, a
decrease of 37.1% over sales of $123,875 for the same quarter in 2000. This
sales decrease was almost all attributable to lower sales of Micro(R) scooters.
Huffy sold almost $44,000 of scooters in the third quarter of 2000 and had only
minimal scooter sales in the third quarter of 2001. Basketball products
experienced improved sales during the third quarter of 2001 with sales 10.6%
over the same period last year, while improving merchandising revenue
contributed to a 2.7% increase in retail service revenue compared to the same
period last year.
For the nine months ended September 29, 2001, consolidated net sales were
$246,052, a decrease of 28.9% from $345,972 in the same period last year. The
events of September 11 and continuing weakness in the overall economy, coupled
with unfavorable product mix shifts toward lower priced bicycles, and decreased
demand for scooters resulted in lower sales in 2001. Lower bicycle sales also
created weaker demand for assembly services in 2001.
GROSS PROFIT
------------
Gross profit for the quarter ended September 29, 2001 was $7,677, or 9.8% of net
sales, compared to $21,841 or 17.6% of net sales, for the quarter ended
September 30, 2000. Basketball products and retailer services provided a strong
margin contribution during the third quarter. That contribution, along with
aggressive cost control throughout the Company, offset weaker bicycle margins.
For the first nine months of 2001, gross profit was $31,389, or 12.8% of net
sales, compared to $53,667, or 15.5% of net sales, last year. Improved year to
date 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 the current year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
--------------------------------------------
Selling, general and administrative expenses were $11,150 for the third quarter
of 2001, compared to $12,536 for the same period in 2000. This result was driven
by lower volume related selling expenses and effective cost controls implemented
during the third quarter of 2001.
Selling, general and administrative expenses for the first nine months of 2001
were $32,282 versus $37,032 in the first nine months of 2000. These lower
current year expenses are reflective of steps taken throughout the year to
properly align SG&A expense with the revised operating structure and sales
volume.
NET INTEREST EXPENSE
--------------------
Net interest costs for the third quarter of 2001 dropped to $267 from $2,714 for
the same period last year. The Company has been debt free, with cash invested
since the first quarter of 2001, interest expense is comprised of amortization
of financing costs, letter of credit and non-usage revolver fees.
During the nine months of 2001, cash flow from operations was sufficient to
repay all outstanding debt, and to generate a positive cash balance of $14,315
on September 29, 2001. In addition, the amended loan facility, put in place in
January 2001, reduced incremental borrowing rates.
8
SCHWINN/GT CORP. ACQUISITION
----------------------------
Huffy Corporation disclosed in the second quarter 10-Q that it had executed a
purchase agreement to purchase the trademarks and selected cycling assets of
Schwinn/GT Corp. In September 2001, the United States Bankruptcy Court for the
District of Colorado conducted an auction for the assets of Schwinn/GT
Corporation in accordance with section 363 of the Bankruptcy Code. The purchase
agreement provided for a break-up fee of $1,250 that was received in late
September. Costs incurred exceeded the break-up fee by $820 and were included in
the third quarter results. The expenses not covered by the breakup fee are
classified as other expense on the Consolidated Statement of Earnings.
SALE OF WASHINGTON INVENTORY SERVICE
------------------------------------
On November 3, 2000, the Company sold its Washington Inventory Service
subsidiary to WIS Acquisition Corp., a subsidiary of WIS Holdings Corp.,
pursuant to a previously announced Agreement and Plan of Reorganization, dated
September 20, 2000, for $84,750 cash, subject to certain post-closing
adjustments. The results for Washington Inventory Service have been classified
as discontinued operations in the Consolidated Statement of Earnings. The
Company applied the proceeds from the sale, net of expenses, to repayment of all
of its senior notes and senior subordinated notes and a portion of its revolving
credit facility.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
On January 31, 2001, the Company entered into an Amended and Restated Loan and
Security Agreement. The $75 million revolving credit facility is secured by all
assets of the Company and its affiliates and will expire on December 31, 2002,
with a 12-month renewal option.
As of September 29, 2001, the Company had $50,676 available on its revolving
credit facility and had no outstanding balance. The Company expects existing
cash, cash flow from operations, and its revolving credit facility will be
sufficient to finance seasonal working capital needs and capital expenditures in
the coming year.
ENVIRONMENTAL
-------------
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Remediation costs that relate to an existing
condition caused by past operations are accrued when it is probable that these
costs will be incurred and can be reasonably estimated.
The Company, along with others, has been designated as a potentially responsible
party (PRP) by the U.S. Environmental Protection Agency (the "EPA") with respect
to claims involving the discharge of hazardous substances into the environment
in the Baldwin Park operable unit of the San Gabriel Valley Superfund site
("Superfund"). Currently, the Company, along with other PRPs, the Main San
Gabriel Basin Watermaster, 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.
9
The Company has recorded environmental accruals, based upon the information
available, that are adequate to satisfy known remediation requirements. The
total accrual for estimated environmental remediation costs related to the
Superfund site and other potential environmental liabilities was approximately
$7,419 at September 29, 2001. This accrual has not been discounted, and
management expects that the majority of expenditures relating to costs currently
accrued will be made over the next year. As a result of factors such as the
continuing evolution of environmental laws and regulatory requirements, the
availability and application of technology, the identification of presently
unknown remediation sites, and the allocation of costs among potentially
responsible parties, estimated costs for future environmental compliance and
remediation are necessarily imprecise and it is not possible to fully predict
the amount or timing of future environmental remediation costs which may
subsequently be determined.
Based upon information presently available, such future costs are not expected
to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
----------------------------------------------
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Tangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies the
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FAS Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $8,038, which will be subject to the transition provisions of
Statements 141 and 142. Amortization expenses related to goodwill was $726 and
$547 for the year ended December 31, 2000 and the nine months ended September
29, 2001, respectively. Because of the extensive effort needed to comply with
adopting Statement 141 and 142, it is not practicable to reasonably estimate the
impact of adopting these Statements on the Company's financial statements at the
date of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
Accounting for Asset Retirement Obligations, 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.
10
Statement 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 Statement 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. Because
of the effort necessary to comply with the adoption of Statement No. 143, it is
not practicable for management to estimate the impact of adopting this Statement
at the date of this report.
On October 3, 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets, which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. While Statement No. 144 supersedes Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, it retains many of the fundamental provisions of that Statement.
Statement No. 144 also supersedes the accounting and reporting provisions of
Accounting Principles Board No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, it retains the requirement in
Option No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed by sale,
abandonment, or in a distribution to owners, or is classified as held for sale.
The Company is required and plans to adopt the provisions of Statement No. 144
for the quarter ending March 31, 2002. Because of the effort necessary to comply
with the adoption of Statement No. 144, it is not practicable for management to
estimate the impact of adopting this Statement at the date of this report.
PART II - OTHER INFORMATION
ITEM 1. 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 (see Note 10 to the Company's financial statements in
Exhibit 13 of the Company's report on form 10K, dated March 6, 2001) have been
named in thirteen civil lawsuits which allege claims related to the contaminated
groundwater in the Azusa, California area (collectively, the "San Gabriel
Cases").
As of January 2001, the cases have 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 are
currently under review
11
by the California Supreme Court, and thus a stay is still technically in place
over all of the aforementioned cases. The court had also ordered that a stay of
certain of the cases would remain in place until such time as a coordination
judge was formally assigned to those cases. The Coordination Judge assignment
took place in January 2001, and thus, the explicit stay was lifted. However, the
cases remain inactive as the California Supreme Court continues its
consideration of the demurrers and writs. The California Supreme Court held oral
arguments on November 7, 2001. No decision has been issued.
The Company, along with the other PRPs for the Baldwin Park Operable Unit of the
San Gabriel Valley Superfund Site (the "BPOU"), has also been named in four
civil lawsuits filed by water purveyors. The water purveyor lawsuits allege
CERCLA, property damage, nuisance, trespass and other claims related to the
contaminated groundwater in the BPOU (collectively, the "Water Entity Cases").
The Company was named as a direct defendant by the water purveyor in two of
these cases, and was added as a third party defendant in the two others by
Aerojet General Corporation, which, in those cases, was the only PRP sued by the
water purveyors.
As of this date, the Water Entity Cases have been filed, but not served and are
in their initial stages. Thus, it is impossible to currently predict the outcome
of any of the actions. 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.
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.
The toxic tort cases are in their initial stages. Thus, it is impossible to
currently predict the outcome of any of the actions. Based upon information
presently available, such future costs are not expected to have a material
adverse effect on the Company's financial condition, liquidity, or its ongoing
results of operations. However, such costs could be material to results of
operations in a future period.
ITEM 5: OTHER INFORMATION
-----------------
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits - The exhibits, as shown in the "Index of Exhibits" attached
hereto are applicable to be filed as a part of this report.
b. There were no reports on Form 8-K filed for the quarter ending
September 29, 2001.
Please see the Company's meaningful cautionary statements regarding forward
looking statements contained in the Company's report on Form 10-K filed with the
Securities and Exchange Commission on March 6, 2001 which is hereby incorporated
herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUFFY CORPORATION, Registrant
November 13, 2001 /s/ Timothy G. Howard
--------------------------- -------------------------------------
Date Timothy G. Howard
Vice President - Corporate Controller
(Principal Accounting Officer)
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INDEX OF EXHIBITS
Exhibit
No. Item
------- ---------------------------------------------
(2) Not applicable
(3) Not applicable
(4) Not applicable
(10) Not applicable
(11) Not applicable
(15) Not applicable
(18) Not applicable
(19) Not applicable
(22) Not applicable
(23) Not applicable
(24) Not applicable
(99) Not applicable
15