<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 33-73247
GENERAC PORTABLE PRODUCTS, INC.
GENERAC PORTABLE PRODUCTS, LLC
GPPW, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS)
DELAWARE 13-4006887
DELAWARE 39-1932782
WISCONSIN 13-4012695
(STATE OR OTHER JURISDICTION (I.R.S EMPLOYER
OF INCORPORATION OR IDENTIFICATION NUMBERS)
ORGANIZATION)
1 GENERAC WAY
JEFFERSON, WISCONSIN 53549
(920) 674-3750
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrants (1) have 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 registrants were required to file
such reports), and (2) have been subject to such filing requirements
for the past 90 days. Yes X No
The number of shares of common stock of Generac Portable Products, Inc.
and GPPW, Inc. outstanding as of August 10, 2000 is as follows:
Generac Portable Products, Inc. 8,500
GPPW, Inc. 1,000
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
July 1, December 31,
2000 1999
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,447 $ 384
Accounts receivable (less allowances of $387 and $548, respectively) 49,476 55,465
Inventories 78,045 58,372
Prepaid expenses and other current assets 5,961 1,315
--------- ---------
Total current assets 134,929 115,536
Property, plant and equipment, net 29,251 28,911
Intangible assets, net 204,486 206,229
Deferred financing costs 6,301 6,608
Other 15 205
--------- ---------
Total assets $ 374,982 $ 357,489
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,195 $ 8,869
Trade accounts payable 33,719 23,793
Accrued employee compensation, benefits and payroll withholdings 2,420 3,263
Other accrued liabilities 14,187 18,991
--------- ---------
Total current liabilities 58,521 54,916
Long-term debt obligations 195,316 180,520
Other long-term obligations 1,178 1,089
Deferred income taxes 7,885 5,717
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, $.01 par value, 12,000 shares authorized; 8,500 shares
issued and outstanding 1 1
Additional paid-in capital 109,999 109,999
Retained earnings 15,138 17,741
Accumulated other comprehensive loss (1,398) (836)
Excess of purchase price over book value of net assets acquired
from entities partially under common control (11,658) (11,658)
--------- ---------
Total stockholders' equity 112,082 115,247
--------- ---------
Total liabilities and stockholders' equity $ 374,982 $ 357,489
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 3
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(AMOUNTS IN $000'S)
<TABLE>
<CAPTION>
Quarter Ended Year-To-Date
----------------------------- -----------------------------
July 1, 2000 June 30, 1999 July 1, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 79,496 $ 105,563 $ 152,548 $ 198,450
Cost of sales 63,088 76,868 119,929 145,598
--------- --------- --------- ---------
Gross profit 16,408 28,695 32,619 52,852
Operating expenses:
Selling and service 9,359 12,489 18,886 23,641
General and administrative 1,779 2,142 4,082 4,143
Intangible asset amortization 1,353 1,341 2,694 2,682
--------- --------- --------- ---------
Income from operations 3,917 12,723 6,957 22,386
Other expense:
Interest expense 5,356 5,309 10,465 10,405
Deferred financing cost amortization 334 213 569 426
Expenses from withdrawn common stock offering (Note 10) -- 1,160 -- 1,160
Other expense (income), net (26) 44 (51) 49
--------- --------- --------- ---------
Income (loss) before income taxes (1,747) 5,997 (4,026) 10,346
Provision (benefit) for income taxes (618) 2,097 (1,423) 3,621
--------- --------- --------- ---------
Net income (loss) $ (1,129) $ 3,900 $ (2,603) $ 6,725
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 4
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(AMOUNTS IN $000'S)
<TABLE>
<CAPTION>
Year-To-Date
-----------------------------
July 1, 2000 June 30, 1999
------------ --------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (2,603) $ 6,725
Adjustments to reconcile net income (loss) to net cash used for operating activities
Depreciation 1,972 1,213
Amortization 3,263 3,108
Deferred income taxes (1,423) 1,512
Loss on sale of fixed assets -- 4
Increase (decrease) in cash due to changes in:
Accounts receivable 5,606 (21,202)
Inventories (19,874) (17,581)
Other assets (1,862) 143
Trade accounts payable 10,108 19,351
Accrued liabilities (5,425) 6,165
-------- --------
Net cash used for operating activities (10,238) (562)
-------- --------
Investing activities:
Capital expenditures (2,464) (6,546)
Proceeds from sale of fixed assets -- 7
-------- --------
Net cash used for investing activities (2,464) (6,539)
-------- --------
Financing activities:
Net borrowings under revolving loan facility 18,900 13,400
Payments on other long-term debt obligations (4,778) (4,910)
Payment of deferred financing costs (262) (247)
-------- --------
Net cash provided by financing activities 13,860 8,243
-------- --------
Effect of exchange rate changes on cash (95) (120)
-------- --------
Net increase in cash and cash equivalents 1,063 1,022
Cash and cash equivalents:
Beginning of period $ 384 $ 1,528
-------- --------
End of period $ 1,447 $ 2,550
======== ========
Supplemental cash flow information:
Cash paid for interest $ 10,429 $ 11,086
======== ========
Cash paid for taxes $ 139 $ 790
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 5
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2000
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED)
1. BASIS OF PRESENTATION
Generac Portable Products, Inc. (together with its subsidiaries,
including Generac Portable Products, LLC and GPPW, Inc. on a consolidated basis,
"Generac" or the "company"), has domestic operations located in Jefferson,
Wisconsin and branch operations in the United Kingdom, Germany and Spain, and is
a leader in the design, manufacture and sale of portable generators and pressure
washers for use in both industrial and residential applications. Generac sells
primarily to large home center retailers throughout the United States, Canada
and Europe.
These financial statements have been prepared by Generac pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC")
and, in the opinion of Generac's management, include all adjustments (all of
which are normal and recurring in nature) necessary to present fairly the
financial position, results of operations and cash flows of Generac for the
interim periods presented. These financial statements include the accounts of
Generac's wholly owned subsidiaries, and all significant intercompany
transactions have been eliminated. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed and omitted pursuant to such
rules and regulations. These unaudited consolidated financial statements should
be read in conjunction with Generac's audited financial statements for the year
ended December 31, 1999 included in the company's Form 10-K as filed with the
SEC on March 29, 2000.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
July 1, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials and sub-assemblies $43,004 $33,814
Finished goods 35,041 24,558
------- -------
$78,045 $58,372
======= =======
</TABLE>
3. INCOME TAXES
Generac recorded an income tax provision (benefit) by estimating the
annual effective income tax rate and applying that rate to pretax income (loss).
<PAGE> 6
4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
In the normal course of business, Generac is involved in certain legal
actions and claims. Management believes that such litigation and claims will be
resolved without material adverse effect on Generac's financial position,
results of operations or cash flows.
In connection with the purchase by Generac Portable Products, LLC of
substantially all of the assets of the Portable Products Division (the
"Predecessor") of Generac Power Systems, Inc. ("GPSI"), formerly known as
Generac Corporation, on July 9, 1998 (the "Acquisition"), Generac entered into
an OEM engine supply agreement with GPSI to supply the company with the engine
used in certain of Generac's pressure washers and portable generators. The
engine supply agreement allows for Generac to make minimum purchases of engines
from GPSI in each of the next nine years and gives Generac the right to increase
the amount of purchases based upon forecasted requirements. This agreement is an
exclusive arrangement related to such products subject to the minimum purchase
requirements. As Generac maintains relationships with other major engine
suppliers, management believes that the minimum purchase quantities and unit
prices under this agreement will not have an adverse effect on Generac.
Management also considers the provisions of the engine supply agreement to
reflect arms-length terms. The following schedule reflects approximate purchases
by Generac of GPSI product under this agreement and other components for the
quarterly and year-to-date periods ended July 1, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
(in millions)
Purchases Purchases
Under the Of Other
Agreement Components
--------------- ------------
<S> <C> <C>
For the quarter ended July 1, 2000 $ 2.8 $ -
For the quarter ended June 30, 1999 9.4 4.3
Year-to-date July 1, 2000 8.5 0.8
Year-to-date June 30, 1999 20.9 9.9
</TABLE>
Included in accounts payable are amounts due to GPSI of approximately
$.9 million and $6.7 million at July 1, 2000 and December 31, 1999,
respectively.
On September 29, 1999, Generac commenced an arbitration against GPSI,
entitled In the Matter of An Arbitration Between Generac Portable Products, Inc.
and Generac Power Systems, Inc., formerly known as Generac Corporation, under
the auspices of the American Arbitration Association in Milwaukee, Wisconsin.
The dispute concerned the respective rights of the company and GPSI to
manufacture and sell in the retail market portable generators with an output
level greater than ten kilowatts and home standby stationary generators. The
company alleged that GPSI had improperly taken the position with both the
company and the company's retail customers that a mutual agreement not to
compete executed by the parties in connection with the Acquisition prohibits the
company from manufacturing or selling those products. It was
<PAGE> 7
the company's position that the noncompete agreement did not preclude the
company from manufacturing or selling those products to retailers and that the
parties'contractual arrangements precluded GPSI from interfering with the
company's rights to do so by, among other things, attempting to sell home
standby stationary generators to retailers, including the company's retail
customers.
On May 18, 2000, the company and GPSI reached an agreement which
amended and further clarified the original non-compete agreement between the two
companies. The agreement provides that, among other things, the company has the
right to manufacture and sell certain portable air-cooled generators and
air-cooled home standby generators up to and including twenty kilowatts, GPSI is
restricted from manufacturing any portable air-cooled generator below 12.5
kilowatts and the company will pay a 2% royalty to GPSI on sales of home standby
stationary generators in excess of $15 million during the term of the agreement.
The company capitalized costs incurred in conjunction with the
development of the amended non-compete agreement approximating $702, and will
amortize these costs over the remaining life of the non-compete agreement.
5. COMPREHENSIVE INCOME (LOSS)
Components of total comprehensive income (loss) for the periods ended
July 1, 2000 and June 30, 1999, consist of the following:
<TABLE>
<CAPTION>
Accumulated Total
Net Other Comprehensive Comprehensive
Income (loss) Income (loss) Income (loss)
----------------- -------------------------- --------------------
<S> <C> <C> <C>
For the quarter ended July 1, 2000 $ (1,129) $ (165) $ (1,294)
For the quarter ended June 30, 1999 3,900 (529) 3,371
Year-to-date July 1, 2000 (2,603) (562) (3,165)
Year-to-date June 30, 1999 6,725 (1,431) 5,294
</TABLE>
Accumulated other comprehensive income and loss is comprised entirely
of foreign currency translation adjustments.
<PAGE> 8
6. SEPARATE FINANCIAL INFORMATION OF CO-ISSUERS AND GUARANTOR OF THE NOTES
In connection with the Acquisition, Generac Portable Products, LLC and
GPPW, Inc. ("GPPW") co-issued $110 million of 11 1/4% senior subordinated notes
due 2006 (the "Notes") which are guaranteed by Generac Portable Products, Inc.
While Generac Portable Products, LLC and GPPW are jointly and severally liable
for the obligations under the Notes, GPPW does not conduct any operations, or
have any assets of any kind other than its investment in Generac Portable
Products, LLC. The following unaudited condensed supplemental consolidating
financial information as of July 1, 2000 and December 31, 1999 and for the
periods ended July 1, 2000 and June 30, 1999, reflects the investments of
Generac Portable Products, Inc., GPPW and GPPD, Inc. ("GPPD") in Generac
Portable Products, LLC using the equity method. Generac Portable Products, Inc.,
GPPW and GPPD are dependent upon Generac Portable Products, LLC for cash flows
to fund their income tax liabilities arising from their respective investments.
GPPW and GPPD are wholly-owned subsidiaries of Generac Portable Products, Inc.,
and GPPW and GPPD hold a 5% and 95% ownership interest in Generac Portable
Products, LLC, respectively.
<TABLE>
<CAPTION>
AS OF JULY 1, 2000
------------------
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- --------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 5,095 $ 238 $ 4,524 $ 130,167 $ (5,095) $ 134,929
Investment in affiliates 123,740 6,361 120,835 -- (250,936) --
Noncurrent assets 7,885 -- -- 240,053 (7,885) 240,053
--------- --------- --------- --------- --------- ---------
$ 136,720 $ 6,599 $ 125,359 $ 370,220 $(263,916) $ 374,982
========= ========= ========= ========= ========= =========
Current liabilities $ 5,095 $ 17 $ 316 $ 58,188 $ (5,095) $ 58,521
Long-term debt -- -- -- 195,316 -- 195,316
Other long-term obligations 7,885 394 7,491 1,178 (7,885) 9,063
Stockholders' equity 123,740 6,188 117,552 115,538 (250,936) 112,082
--------- --------- --------- --------- --------- ---------
$ 136,720 $ 6,599 $ 125,359 $ 370,220 $(263,916) $ 374,982
========= ========= ========= ========= ========= =========
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- --------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 1,619 $ 59 $ 1,112 $ 114,365 $ (1,619) $ 115,536
Investment in affiliates 126,905 6,596 125,303 -- (258,804) --
Noncurrent assets 5,717 -- -- 241,953 (5,717) 241,953
--------- --------- --------- --------- --------- ---------
$ 134,241 $ 6,655 $ 126,415 $ 356,318 $(266,140) $ 357,489
========= ========= ========= ========= ========= =========
Current liabilities $ 1,619 $ 23 $ 425 $ 54,468 $ (1,619) $ 54,916
Long-term debt -- -- -- 180,520 -- 180,520
Other long-term obligations 5,717 286 5,431 1,089 (5,717) 6,806
Stockholders' equity 126,905 6,346 120,559 120,241 (258,804) 115,247
--------- --------- --------- --------- --------- ---------
$ 134,241 $ 6,655 $ 126,415 $ 356,318 $(266,140) $ 357,489
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JULY 1, 2000
----------------------------------
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- --------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $ 79,496 $ -- $ 79,496
Gross profit -- -- -- 16,408 -- 16,408
Operating expenses -- -- -- 12,491 -- 12,491
--------- ---------- -------- -------- --------- ----------
Operating income -- -- -- 3,917 -- 3,917
Interest expense -- -- -- 5,356 -- 5,356
Other expense (income), net -- -- -- 308 -- 308
Equity in earnings of affiliates (1,129) (87) (1,660) -- 2,876 --
--------- ---------- -------- -------- --------- ----------
Loss before income taxes (1,129) (87) (1,660) (1,747) 2,876 (1,747)
Benefit for income taxes -- (30) (588) -- -- (618)
--------- ---------- -------- -------- --------- ----------
Net loss $ (1,129) $ (57) $ (1,072) $ (1,747) $ 2,876 $ (1,129)
========= ========== ======== ======== ========= ==========
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1999
-----------------------------------
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- --------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $105,563 $ -- $ 105,563
Gross profit -- -- -- 28,695 -- 28,695
Operating expenses -- -- -- 15,972 -- 15,972
-------- --------- -------- -------- --------- ----------
Operating income -- -- -- 12,723 -- 12,723
Interest expense -- -- -- 5,309 -- 5,309
Other expense (income), net -- -- -- 1,417 -- 1,417
Equity in earnings of affiliates 3,900 300 5,697 -- (9,897) --
-------- --------- -------- -------- --------- ----------
Income before income taxes 3,900 300 5,697 5,997 (9,897) 5,997
Provision for income taxes -- 105 1,992 -- -- 2,097
-------- --------- -------- -------- --------- ----------
Net income $ 3,900 $ 195 $ 3,705 $ 5,997 $ (9,897) $ 3,900
======== ========= ======== ======== ========= ==========
<CAPTION>
YEAR-TO-DATE JULY 1, 2000
-------------------------
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- --------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $152,548 $ -- $ 152,548
Gross profit -- -- -- 32,619 -- 32,619
Operating expenses -- -- -- 25,662 -- 25,662
--------- --------- -------- -------- --------- ----------
Operating income -- -- -- 6,957 -- 6,957
Interest expense -- -- -- 10,465 -- 10,465
Other expense (income), net -- -- -- 518 -- 518
Equity in earnings of affiliates (2,603) (201) (3,825) -- 6,629 --
--------- --------- -------- -------- --------- ----------
Loss before income taxes (2,603) (201) (3,825) (4,026) 6,629 (4,026)
Benefit for income taxes -- (71) (1,352) -- -- (1,423)
--------- --------- -------- -------- --------- ----------
Net loss $ (2,603) $ (130) $ (2,473) $ (4,026) $ 6,629 $ (2,603)
========= ========= ======== ======== ========= ==========
<CAPTION>
YEAR-TO-DATE JUNE 30, 1999
--------------------------
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- --------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $ -- $ -- $198,450 $ -- $ 198,450
Gross profit -- -- -- 52,852 -- 52,852
Operating expenses -- -- -- 30,466 -- 30,466
--------- --------- -------- -------- ---------- ----------
Operating income -- -- -- 22,386 -- 22,386
Interest expense -- -- -- 10,405 -- 10,405
Other expense (income), net -- -- -- 1,635 -- 1,635
Equity in earnings of affiliates 6,725 517 9,829 -- (17,071) --
--------- --------- -------- -------- --------- ----------
Income before income taxes 6,725 517 9,829 10,346 (17,071) 10,346
Provision for income taxes -- 181 3,440 -- -- 3,621
--------- --------- -------- -------- --------- ----------
Net income $ 6,725 $ 336 $ 6,389 $ 10,346 $ (17,071) $ 6,725
========= ========= ======== ======== ========= ==========
</TABLE>
<PAGE> 10
7. LONG-TERM DEBT OBLIGATIONS
Effective May 10, 2000, the company amended its credit facility which,
among other things, revised requirements relating to certain financial ratios
and tests, including maximum levels of leverage, minimum levels of interest
coverage and minimum required levels of earnings before interest, income taxes,
depreciation and amortization.
Effective May 30, 2000, Generac obtained a commitment from The Beacon
Group III - Focus Value Fund, L.P. (the "Fund"), its majority stockholder, to
purchase up to $10 million of newly issued shares of convertible preferred stock
of Generac. This commitment requires the Fund to purchase the preferred stock
only upon Generac's election, which may occur at any point prior to October 15,
2000. If Generac chooses to issue the preferred stock, the proceeds from the
Fund's purchase will be used to repay the principal of, and interest on,
revolving indebtedness under Generac's credit facility.
The Company anticipates that the decreased portable generator demand,
discussed in "Management's Discussion and Analysis of Results of Operations"
following later in this document, will continue into the third quarter 2000,
which could result at the end of the third quarter 2000 in the company's
non-compliance with certain financial performance covenants contained in the
company's amended credit facility. Consequently, the company is currently
discussing with its lenders revisions to these financial performance covenants,
which would include changes to ratios and tests relating to maximum levels of
leverage, minimum levels of interest coverage and minimum required levels of
earnings before interest, income taxes, depreciation and amortization. Although
the future non-compliance with financial performance covenants in the credit
facility could allow the lenders to demand at the time immediate payment of all
amounts outstanding under the credit facility, based upon discussions with its
lenders to date, the company anticipates a satisfactory revision of these
requirements before the end of October 2000.
8. SEGMENT INFORMATION
Generac is a leader in the design, manufacture and sale of portable
generators and pressure washers. Engineering, manufacturing, marketing and
administrative resources are generally not product specific and Generac
evaluates operating performance based upon the combined results of these product
lines.
Information regarding Generac's geographic areas is summarized below:
<PAGE> 11
<TABLE>
<CAPTION>
UNITED
STATES EUROPE CONSOLIDATED
--------- -------- -------------
<S> <C> <C> <C>
Net sales - for the quarter ended July 1, 2000 $73,306 $ 6,190 $ 79,496
Net sales - for the quarter ended June 30, 1999 96,397 9,166 105,563
Net sales - year-to-date July 1, 2000 139,777 12,771 152,548
Net sales - year-to-date June 30, 1999 184,294 14,156 198,450
Long-lived assets - as of July 1, 2000 237,739 2,314 240,053
Long-lived assets - as of December 31, 1999 239,448 2,505 241,953
</TABLE>
Generac sells primarily to large home center retailers. Three customers
accounted for approximately 74% of net sales for the quarterly and year-to-date
periods ended July 1, 2000. Each of these three customers individually comprised
more than 10% of Generac's net sales for the respective periods. Accounts
receivable from these three customers approximated $32,943 at July 1, 2000. Two
customers accounted for approximately 61% and 63% of net sales for the quarterly
and year-to-date periods ended June 30, 1999, respectively. Both customers
individually comprised more than 10% of Generac's net sales for the respective
periods. Accounts receivable from these two customers approximated $29,314 at
December 31, 1999.
9. CHANGE IN INTERIM ACCOUNTING PERIODS
During the year-to-date period ended July 1, 2000, Generac changed its
interim accounting period from a calendar quarter-end to a 13-week period.
Consequently, the second quarter of 2000 covers the period from April 2, 2000 to
July 1, 2000 and year-to-date 2000 covers the period from January 1, 2000 to
July 1, 2000. Subsequent quarterly financial periods will also be 13 weeks. The
company's fourth quarter-end and fiscal year-end will continue to be December
31, 2000. This change did not have a material effect on reported results for the
quarter and year-to-date periods ended July 1, 2000, and the company does not
believe that this change in interim accounting periods will have a material
effect on its interim financial statements of future periods.
10. STOCK SPLITS
On May 20, 1999, the company effected a 1,250 for one common stock
split and on May 28, 1999, the company effected a 1.189 for one common stock
split. On June 9, 2000, the company effected a one for 1,486.25 reverse common
stock split. All share information in these consolidated financial statements
has been retroactively adjusted to reflect these stock splits.
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as part of the company's Form 10-K as filed with the SEC on
March 29, 2000. This report on Form 10-Q includes forward-looking statements
based on management's current expectations. Reference is made in particular to
the description of the company's plans and objectives for future operations,
assumptions underlying such plans and objectives and other forward-looking
statements in this report. Such forward-looking statements generally are
identifiable by words such as "believes," "intends," "estimates," "expects," and
similar expressions. Although management believes that the expectations
reflected in the forward-looking statements are reasonable, management cannot
guarantee future results, levels of activity, performance or achievements.
Moreover, neither management nor any other person assumes responsibility for the
accuracy and completeness of such statements.
OVERVIEW
Generac is a leader in the design, manufacture and sale of portable
generators and pressure washers for use in both consumer and commercial
applications. Generac has domestic operations located in Jefferson, Wisconsin
and branch operations in the United Kingdom, Germany and Spain. Generac sells
primarily to large home center retailers throughout the United States, Canada
and Europe. References to "Generac" or the "company" means Generac Portable
Products, Inc. and its subsidiaries, on a consolidated basis and, as the context
requires, Generac's Predecessor. The "Predecessor" refers to the Portable
Products Division of GPSI.
The table below sets forth the company's results of operations for the
periods indicated. Included in the table is a presentation of EBITDA, which
represents earnings before interest, taxes, depreciation, amortization and
certain other non-recurring charges. EBITDA is a widely recognized financial
indicator of a company's ability to service or incur debt. EBITDA is not a
measure of operating performance computed in accordance with generally accepted
accounting principles and should not be considered as a substitute for operating
performance computed in accordance with generally accepted accounting principles
or as a substitute for operating income, net income, cash flows from operations,
or other statement of operations or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of profitability or
liquidity. In addition, EBITDA may not be comparable to similarly titled
measures of other companies. EBITDA may not be indicative of the company's
historical operating results or of the company's Predecessor, nor is it meant to
be predictive of future results of operations or cash flows. See also the
statement of cash flows contained within the financial statements included
elsewhere in this document.
<PAGE> 13
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(unaudited - in millions)
For the Quarter Ended Year-To-Date
----------------------------------- ---------------------------------------
July 1, 2000 June 30, 1999 July 1, 2000 June 30, 1999
------------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales
Domestic $ 73.3 $ 96.4 $ 139.8 $ 184.3
International 6.2 9.2 12.8 14.2
------- -------- -------- --------
Total net sales 79.5 105.6 152.6 198.5
Gross profit 16.4 28.7 32.6 52.9
Operating expenses 12.5 16.0 25.7 30.5
Operating income 3.9 12.7 6.9 22.4
Net income (loss) (1.1) 3.9 (2.6) 6.7
EBITDA 6.3 14.7 11.7 26.2
</TABLE>
QUARTER ENDED JULY 1, 2000 COMPARED TO THE QUARTER ENDED JUNE 30, 1999
Net sales. Net sales decreased $26.1 million or 24.7%, to $79.5 million
for the quarter ended July 1, 2000 from $105.6 million for the quarter ended
June 30, 1999.
Domestic sales decreased $23.1 million, or 24.0%, to $73.3 million for
the quarter ended July 1, 2000 from $96.4 million for the quarter ended June 30,
1999. This decrease was primarily reflective of increased demand for generators
during 1999 resulting from consumer concerns relating to possible Year 2000
power outages. These consumer concerns were not present during the quarter ended
July 1, 2000, which combined with significant generator inventory levels at
retail customer locations has resulted in a lower volume of customer orders for
generators. The decrease in generator sales was partially offset by an increase
in pressure washer sales due primarily to the introduction of pressure washer
products at Sam's Club and an expanded pressure washer product offering at
Sears.
International sales decreased $3.0 million, or 32.6%, to $6.2 million
for the quarter ended July 1, 2000 from $9.2 million for the quarter ended June
30, 1999. This decrease was primarily reflective of increased generator sales in
1999 by the company's branch in the United Kingdom to meet the demand of
existing domestic customers as described above. This decrease in sales was
partially offset by increased generator sales into Spain resulting primarily
from the establishment of branch operations in Spain during July 1999.
Gross profit. Gross profit decreased $12.3 million, or 42.9%, to $16.4
million for the quarter ended July 1, 2000 from $28.7 million for the quarter
ended June 30, 1999. This decrease was reflective of decreased overall sales as
described above and decreased gross margins due to a greater sales mix of lower
margin pressure washers. Gross profit margin
<PAGE> 14
decreased to 20.6% for the quarter ended July 1, 2000 from 27.2% for the quarter
ended June 30, 1999.
Operating expenses. Operating expenses decreased $3.5 million, or
21.9%, to $12.5 million for the quarter ended July 1, 2000 from $16.0 million
for the quarter ended June 30, 1999. The decrease was due primarily to decreases
in both selling and service expenses and general and administrative expenses.
Selling and service expenses decreased due to decreases in selling and
distribution costs that are impacted by sales volume. The decrease in general
and administrative expenses was primarily reflective of a decrease in costs
incurred to support the company's new business software which was implemented
during 1999 and headcount reductions made during 2000 to more appropriately
match the company's sales volume. As a percentage of sales, operating expenses
increased to 15.7% for the quarter ended July 1, 2000 from 15.2% for the quarter
ended June 30, 1999.
Net income (loss). Net income decreased $5.0 million to a net loss of
$1.1 million for the quarter ended July 1, 2000 from net income of $3.9 million
for the quarter ended June 30, 1999. This decrease in net income was primarily
due to the decreased availability of operating earnings, resulting from
decreased sales volumes combined with lower gross margins, to cover certain
fixed charges. This decrease in net income was partially offset by approximately
$1.2 million in costs incurred during 1999 in conjunction with the company's
planned initial public offering of its common stock, which was withdrawn in July
1999. As a percentage of sales, net income decreased to a net loss of (1.4)% for
the quarter ended July 1, 2000 from net income of 3.7% for the quarter ended
June 30, 1999.
EBITDA. EBITDA decreased $8.4 million, or 57.1%, to $6.3 million for
the quarter ended July 1, 2000 from $14.7 million for the quarter ended June 30,
1999. This decrease was due to decreased sales volumes and gross margins as
described above. As a percentage of sales, EBITDA decreased to 7.9% for the
quarter ended July 1, 2000 from 13.9% for the quarter ended June 30, 1999.
YEAR-TO-DATE PERIOD ENDED JULY 1, 2000 COMPARED TO THE YEAR-TO-DATE
PERIOD ENDED JUNE 30, 1999
Net sales. Net sales decreased $45.9 million or 23.1%, to $152.6
million for the year-to-date period ended July 1, 2000 from $198.5 million for
the year-to-date period ended June 30, 1999.
Domestic sales decreased $44.5 million, or 24.1%, to $139.8 million for
the year-to-date period ended July 1, 2000 from $184.3 million for the
year-to-date period ended June 30, 1999. This decrease was primarily reflective
of increased demand for generators during 1999 resulting from consumer concerns
relating to possible Year 2000 power outages. These consumer concerns were not
present during the year-to-date period ended July 1, 2000, which combined with
significant generator inventory levels at retail customer locations has resulted
in a lower volume of customer orders for generators. The decrease in generator
sales was partially offset by
<PAGE> 15
an increase in pressure washer sales due primarily to the introduction of
pressure washer products at Sam's Club and an expanded pressure washer product
offering at Sears.
International sales decreased $1.4 million, or 9.9%, to $12.8 million
for the year-to-date period ended July 1, 2000 from $14.2 million for the
year-to-date period ended June 30, 1999. This decrease was primarily reflective
of increased generator sales in 1999 by the company's branch in the United
Kingdom to meet the demand of existing domestic customers as described above.
This decrease in sales was partially offset by increased generator sales to home
center retailers in Germany and an increase in generator sales into Spain
resulting primarily from the establishment of branch operations in Spain during
July 1999.
Gross profit. Gross profit decreased $20.3 million, or 38.4%, to $32.6
million for the year-to-date period ended July 1, 2000 from $52.9 million for
the year-to-date period ended June 30, 1999. This decrease was reflective of
decreased overall sales as described above and decreased gross margins due to a
greater sales mix of lower margin pressure washers. Gross profit margin
decreased to 21.4% for the year-to-date period ended July 1, 2000 from 26.6% for
the year-to-date period ended June 30, 1999.
Operating expenses. Operating expenses decreased $4.8 million, or
15.7%, to $25.7 million for the year-to-date period ended July 1, 2000 from
$30.5 million for the year-to-date period ended June 30, 1999. The decrease was
due primarily to decreases in both selling and service expenses and general and
administrative expenses. Selling and service expenses decreased due to decreases
in selling and distribution costs that are impacted by sales volume. The
decrease in general and administrative expenses was primarily reflective of a
decrease in costs incurred to support the company's new business software which
was implemented during 1999 and headcount reductions made during 2000 to more
appropriately match the company's sales volume. As a percentage of sales,
operating expenses increased to 16.8% for the year-to-date period ended July 1,
2000 from 15.4% for the year-to-date period ended June 30, 1999.
Net income (loss). Net income decreased $9.3 million to a net loss of
$2.6 million for the year-to-date period ended July 1, 2000 from net income of
$6.7 million for the year-to-date period ended June 30, 1999. This decrease in
net income was primarily due to the decreased availability of operating
earnings, resulting from decreased sales volumes combined with lower gross
margins, to cover certain fixed charges. This decrease in net income was
partially offset by approximately $1.2 million in costs incurred during 1999 in
conjunction with the company's planned initial public offering of its common
stock, which was withdrawn in July 1999. As a percentage of sales, net income
decreased to a net loss of (1.7)% for the year-to-date period ended July 1, 2000
from net income of 3.4% for the year-to-date period ended June 30, 1999.
EBITDA. EBITDA decreased $14.5 million, or 55.3%, to $11.7 million for
the year-to-date period ended July 1, 2000 from $26.2 million for the
year-to-date period ended June 30, 1999. This decrease was due to decreased
sales volumes and gross margins as described above. As a percentage of sales,
EBITDA decreased to 7.7% for the year-to-date period ended July 1, 2000 from
13.2% for the year-to-date period ended June 30, 1999.
<PAGE> 16
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES AT JULY 1, 2000
To finance its capital expenditure program and fund its operational and
liquidity needs, Generac has relied principally on cash flow generated from
operations and borrowings under the $30.0 million revolving credit portion of
the company's $115 million credit facility between it and its lenders, with
Bankers Trust Company as administrative agent. Generac's principal uses of
liquidity are to meet debt service requirements, finance its capital
expenditures and provide working capital.
Effective May 30, 2000, Generac obtained a commitment from The Beacon
Group III - Focus Value Fund, L.P. (the "Fund"), its majority stockholder, to
purchase up to $10 million of newly issued shares of convertible preferred stock
of Generac. This commitment requires the Fund to purchase the preferred stock
only upon Generac's election, which may occur at any point prior to October 15,
2000. If Generac chooses to issue the preferred stock, the proceeds from the
Fund's purchase will be used to repay the principal of, and interest on,
revolving indebtedness under Generac's credit facility.
At July 1, 2000, Generac had approximately $203.5 million of
outstanding debt, including $110.0 million of senior notes payable, $91.9
million under its credit facility (including $18.9 million under the revolving
credit portion) and $1.6 million under capital lease obligations. In addition,
as of July 1, 2000, Generac had available cash of approximately $1.4 million.
Cash used in operating activities totaled $10.2 million during the
year-to-date period ended July 1, 2000 compared to cash used of approximately
$.6 million during the year-to-date period ended June 30, 1999. The activity in
operating cash flows during the first two quarters of 2000 was primarily a
result of the decreased net income, higher levels of inventory for generators
and related components resulting from low levels of customer orders and a
decrease in accrued liabilities resulting primarily from the settlement of
significant 1999 year-end sales incentives with the company's major customers.
This increase was partially offset by other timing differences relating to
supplier payments and customer receipts. Due to seasonal factors related to
pressure washer sales, the company's level of receivables and inventory is
typically highest during the first and second quarters of the year as compared
to levels during the third and fourth quarters of the year.
Capital expenditures totaled $2.5 million and $6.5 million for the
year-to-date periods ended July 1, 2000 and June 30, 1999, respectively. Capital
expenditures during the first two quarters of 2000 related primarily to new
production machinery and costs incurred to update management information
systems. Generac expects to spend approximately $.5 million throughout the
remainder of 2000 for various capital projects, including cost improvement and
quality enhancement initiatives and updating management information systems.
Generac spent approximately $1.4 million and $1.2 million on research and
development during the year-to-date periods ended July 1, 2000 and June 30,
1999, respectively.
Effective May 10, 2000, the company amended its credit facility which,
among other things, revised requirements relating to certain financial ratios
and tests, including maximum
<PAGE> 17
levels of leverage, minimum levels of interest coverage and minimum required
levels of earnings before interest, income taxes, depreciation and amortization.
The Company anticipates that the decreased portable generator demand
discussed previously will continue into the third quarter 2000, which could
result at the end of the third quarter 2000 in the company's non-compliance with
certain financial performance covenants contained in the company's amended
credit facility. Consequently, the company is currently discussing with its
lenders revisions to these financial performance covenants, which would include
changes to ratios and tests relating to maximum levels of leverage, minimum
levels of interest coverage and minimum required levels of earnings before
interest, income taxes, depreciation and amortization. Although the future
non-compliance with financial performance covenants in the credit facility could
allow the lenders to demand at the time immediate payment of all amounts
outstanding under the credit facility, based upon discussions with its lenders
to date, the company anticipates a satisfactory revision of these requirements
before the end of October 2000.
The company expects its principal sources of liquidity to be from its
operating activities and funding from the revolving portion of the amended
credit facility. Furthermore, as discussed above, the company has the option to
sell $10 million in preferred convertible stock if needed to support its
liquidity needs. Based upon the current level of operations and anticipated
activities, Generac believes that future cash flow from operations, together
with available borrowings under the amended credit facility and proceeds from
the sale of preferred securities will be adequate to meet Generac's anticipated
requirements for capital expenditures, working capital, interest payments and
scheduled principal payments for at least the next 12 months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Generac is exposed to market risk from changes in interest rates and,
to a lesser extent, foreign exchange rates and commodities. To reduce such
risks, Generac selectively uses derivative financial instruments. All hedging
transactions are authorized and executed pursuant to clearly defined policies
and procedures, which strictly prohibit the use of derivative financial
instruments for trading purposes. There have been no material changes in the
company's market risk exposures from the end of the fiscal year ended December
31, 1999 (as set forth in the company's Form 10-K as filed with the SEC on March
29, 2000) to April 1, 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Generac is subject to legal proceedings and other
claims arising in the ordinary course of its business. Generac maintains
insurance coverage against claims in the amount which it believes to be
adequate. Generac believes that it is not presently a party to any
<PAGE> 18
litigation the outcome of which would have a material adverse effect on its
financial condition, the results of operations or cash flows.
On September 29, 1999, Generac commenced an arbitration against GPSI,
entitled In the Matter of An Arbitration Between Generac Portable Products, Inc.
and Generac Power Systems, Inc., formerly known as Generac Corporation, under
the auspices of the American Arbitration Association in Milwaukee, Wisconsin.
The dispute concerned the respective rights of the company and GPSI to
manufacture and sell in the retail market portable generators with an output
level greater than ten kilowatts and home standby stationary generators. The
company alleged that GPSI had improperly taken the position with both the
company and the company's retail customers that a mutual agreement not to
compete executed by the parties in connection with the Acquisition prohibits the
company from manufacturing or selling those products. It was the company's
position that the noncompete agreement did not preclude the company from
manufacturing or selling those products to retailers and that the parties'
contractual arrangements precluded GPSI from interfering with the company's
rights to do so by, among other things, attempting to sell home standby
stationary generators to retailers, including the company's retail customers.
On May 18, 2000, the company and GPSI reached an agreement which
amended and further clarified the original non-compete agreement between the two
companies. The agreement provides that, among other things, the company has the
right to manufacture and sell certain portable air-cooled generators and
air-cooled home standby generators up to and including twenty kilowatts,
GPSI is restricted from manufacturing any portable air-cooled generator below
12.5 kilowatts and the company will pay a 2% royalty to GPSI on sales of home
standby stationary generators in excess of $15 million during the term of the
agreement.
The company capitalized costs incurred in conjunction with the
development of the amended non-compete agreement approximating $702, and will
amortize these costs over the remaining life of the non-compete agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 20, 1999, the company effected a 1,250 for one common stock
split and on May 28, 1999, the company effected a 1.189 for one common stock
split. On June 9, 2000, the company effected a one for 1,486.25 reverse common
stock split. All share information in these consolidated financial statements
has been retroactively adjusted to reflect these stock splits.
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
------- -----------
10.1 Third Amendment, dated as of May 10, 2000, to
Credit Agreement dated July 9, 1998 among Generac
Portable Products, LLC, Generac Portable Products,
Inc., GPPW, Inc., various banks and Bankers Trust
Company, as administrative agent.
27.1 Financial Data Schedule
(b) No current reports on Form 8-K were filed during the quarter ended July 1,
2000.
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrants have duly caused this report to be signed on their behalf
by the undersigned thereunto duly authorized.
GENERAC PORTABLE PRODUCTS, INC.
(Registrant)
Date August 14, 2000 By /s/ ERIC R. WILKINSON
---------------------------------------------
Eric R. Wilkinson
PRESIDENT
(Authorized officer and principal financial
officer)
GENERAC PORTABLE PRODUCTS, LLC
(Registrant)
Date August 14, 2000 By /s/ DORRANCE J. NOONAN, JR
---------------------------------------------
Dorrance J. Noonan, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date August 14, 2000 By /s/ GARY J. LATO
---------------------------------------------
Gary J. Lato
CHIEF FINANCIAL OFFICER
GPPW, INC.
(Registrant)
Date August 14, 2000 By /s/ FAITH ROSENFELD
---------------------------------------------
Faith Rosenfeld
PRESIDENT
(Authorized officer and principal financial
officer)
