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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 October 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-89061
HOLLEY PERFORMANCE PRODUCTS INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 61-1291482
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(State of Incorporation) (I.R.S. Employer Identification Number)
1801 Russellville Road, Post Office Box 10360, Bowling Green, KY 42102-7360
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(Address Of Principal Executive Offices, Including Zip Code)
270-782-2900
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(Registrant's Telephone, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
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 [ ]
There were 1,000 shares of Common Stock outstanding as of October 1,
2000.
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HOLLEY PERFORMANCE PRODUCTS INC.
Annual Report on Form 10-Q
For the Three Months Ended October 1, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No
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<S> <C> <C>
PART I
Item 1. Financial Statements.................................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 16
PART II
Item 1. Legal Proceedings....................................................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................................ 17
SIGNATURES 18
</TABLE>
2
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PART I- FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 1,
1999 2000
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,359 $ 49
Accounts receivable, net of reserves for doubtful accounts of
$1,293 and $784, respectively 28,320 29,220
Inventories 31,523 37,971
Deferred income taxes 4,531 3,646
Income taxes receivable 4,112 1,565
Other current assets 2,583 1,908
---------- ----------
Total current assets $ 72,428 $ 74,359
PROPERTY, PLANT AND EQUIPMENT, NET 35,712 34,517
INTANGIBLE ASSETS, NET 154,323 150,592
---------- ----------
Total assets $ 262,463 $ 259,468
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 257 $ 734
Accounts payable 9,633 13,868
Accrued liabilities 19,880 13,902
---------- ----------
Total current liabilities $ 29,770 $ 28,504
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 164,448 171,874
---------- ----------
DEFERRED INCOME TAXES 19,403 16,222
---------- ----------
OTHER 652 537
---------- ----------
COMMITMENTS AND CONTINGENCIES -- --
---------- ----------
TOTAL LIABILITIES $ 214,273 $ 217,137
---------- ----------
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value; 1,000 shares authorized, issued
and outstanding 1 1
Paid-in capital 52,499 52,499
Retained deficit (4,310) (10,169)
---------- ----------
Total stockholder's equity 48,190 42,331
---------- ----------
Total liabilities and stockholder's equity $ 262,463 $ 259,468
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
3
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 3, 1999 OCTOBER 1, 2000 OCTOBER 3, 1999 OCTOBER 1, 2000
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET SALES $ 29,807 $ 42,006 $ 94,739 $ 125,266
COST OF SALES 20,039 26,782 62,610 82,077
---------- ---------- ---------- ----------
Gross profit 9,768 15,224 32,129 43,189
---------- ---------- ---------- ----------
SELLING, ENGINEERING,
GENERAL AND
ADMINISTRATIVE EXPENSES 6,593 9,136 18,851 28,979
PLANT RELOCATION COSTS 331 259 755 459
AMORTIZATION EXPENSE 1,157 1,400 2,936 4,138
---------- ---------- ---------- ----------
Operating income 1,687 4,429 9,587 9,613
---------- ---------- ---------- ----------
INTEREST EXPENSE 3,071 5,853 7,412 17,854
OTHER EXPENSE (2) -- (9) --
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES,
MINORITY INTEREST AND
EXTRAORDINARY ITEM (1,386) (1,424) 2,166 (8,241)
INCOME TAX PROVISION/
(BENEFIT) 34 (288) 2,038 (2,515)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
MINORITY INTEREST AND
EXTRAORDINARY ITEMS (1,420) (1,136) 128 (5,726)
MINORITY INTEREST, NET OF
TAXES -- -- -- (133)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (1,420) (1,136) 128 (5,859)
EXTRAORDINARY ITEM 1,654 -- 1,654 --
---------- ---------- ---------- ----------
NET LOSS $ (3,074) $ (1,136) $ (1,526) $ (5,859)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL DEFICIT TOTAL
------ -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 $ 1 $ 52,499 $ (4,310) $ 48,190
Net loss -- -- (5,859) (5,859)
---- -------- -------- --------
BALANCE, OCTOBER 1, 2000 $ 1 $ 52,499 $(10,169) $ 42,331
==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
JANUARY 1, 1999 JANUARY 1, 2000
TO TO
OCTOBER 3, 1999 OCTOBER 1, 2000
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,526) $ (5,859)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 6,585 9,414
Amortization of debt discount -- 642
Deferred income taxes 1,277 (2,295)
Writeoff of existing finance costs 1,654 --
Changes in assets and liabilities, net of assets purchased:
Accounts receivable (2,223) (900)
Inventories (1,006) (6,034)
Other assets (3,022) 3,222
Accounts payable (1,550) 3,738
Accrued liabilities (4,004) (5,595)
---------- ----------
Net cash used in operating activities (3,815) (3,667)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions (29,527) (679)
Capital expenditures (3,024) (4,081)
Proceeds from the sale of fixed assets 10 --
Loss on the disposal of fixed assets (59) --
Other noncurrent assets -- 390
---------- ----------
Net cash used in investing activities (32,600) (4,370)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds on long-term obligations 49,389 7,261
Financing costs (5,500) (534)
Proceeds from the issuance of equity 5,000 --
---------- ----------
Net cash provided by financing activities 48,889 6,727
---------- ----------
NET CHANGE IN CASH $ 12,474 $ (1,310)
BALANCE AT BEGINNING OF PERIOD 2,013 1,359
---------- ----------
BALANCE AT END OF PERIOD $ 14,487 $ 49
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 6,673 $ 20,259
========== ==========
Cash paid for income taxes $ 2,884 $ 4
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheets as of December 31, 1999 and October 1, 2000, and
the consolidated statements of operations for the nine month periods and three
month periods ended October 3, 1999 and October 1, 2000, and the statements of
cash flows for the nine month periods ended October 3, 1999 and October 1, 2000
have been prepared by the Company in accordance with the accounting policies
described in its annual financial statements and should be read in conjunction
with the notes thereto.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and changes in cash flows at October 3, 1999 and October
1, 2000 and for all periods presented have been made. The results of operations
for the periods ended October 1, 2000 are not necessarily indicative of the
operating results to be expected for the full year.
Holley Performance Products Inc., a Delaware corporation ("Holley" or the
"Company") based in Bowling Green, Kentucky, is a leading manufacturer of a
diversified line of performance automotive products, including carburetors, fuel
pumps, fuel injection systems, ignition systems, remanufactured carburetors,
camshafts, crankshafts, pistons, superchargers, exhaust headers, mufflers,
engine plumbing products, tubing, and nitrous oxide systems. The products are
designed to enhance street, off-road, recreational and competitive vehicle
performance through increased horsepower, torque and driveability. In addition
to its automotive performance line, Holley manufactures performance marine,
mobile and stationary industrial engine components, and performance products for
the powersport and motorcycle markets.
In July of 1999, Holley purchased the outstanding shares of Hooker Industries,
Inc. ("Hooker"), a manufacturer of performance exhaust systems, headers,
mufflers and Harley-Davidson exhaust pipes. In October of 1999, Holley purchased
the outstanding shares of Biggs Manufacturing, Inc. (also known as "FlowTech"),
Nitrous Oxide Systems, Inc. ("NOS"), and Earl's Supply Company, Inc. (also known
as Earl's Performance Products, "Earl's"). FlowTech is a manufacturer of
performance exhaust systems, headers, mufflers and exhaust accessories. NOS is a
manufacturer of nitrous oxide injection systems for the performance aftermarket.
Earl's is a provider of underhood performance fittings, brake lines and hoses.
2. INVENTORIES
Inventories of the Company consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 1,
1999 2000
------------ ----------
<S> <C> <C>
Raw materials $ 16,861 $ 11,557
Work-in-progress 5,357 5,493
Finished Goods 8,994 20,921
Other 311 --
-------- --------
$ 31,523 $ 37,971
======== ========
</TABLE>
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3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment of the Company consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 1,
1999 2000
------------ ----------
<S> <C> <C>
Land $ 380 $ 380
Buildings and improvements 11,209 11,975
Machinery and equipment 25,525 25,956
Computer equipment 3,501 3,592
Furniture and fixtures 1,348 1,317
Construction in process 763 2,737
-------- --------
42,726 45,957
Less: accumulated depreciation (7,014) (11,440)
-------- --------
$ 35,712 $ 34,517
======== ========
</TABLE>
Depreciation expense was $3,518 and $5,276 for the nine months and $1,169 and
$1,779 for the three months ended October 3, 1999 and October 1, 2000,
respectively.
4. ACCRUED LIABILITIES
Accrued liabilities of the Company consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 1,
1999 2000
------------ ----------
<S> <C> <C>
Wages and benefits $ 5,196 $ 5,168
Reserve for product returns 4,294 4,108
Allowance for outstanding rebate programs 1,504 1,314
Interest 5,177 1,517
Other 3,709 1,795
-------- --------
$ 19,880 $ 13,902
======== ========
</TABLE>
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5. LONG-TERM DEBT
Long-term debt of the Company consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 1,
1999 2000
------------ ----------
<S> <C> <C>
Revolving line of credit, maturing June 27, 2003 $ 17,000 $ 24,000
Senior notes, maturing September 15, 2007, net of debt
Discount of $5,284 and $4,697 144,716 145,303
Other 659 1,092
Long-term lease obligation 2,330 2,213
---------- ----------
164,705 172,608
Less current portion (257) (734)
---------- ----------
$ 164,448 $ 171,874
========== ==========
</TABLE>
On September 20, 1999, the Company issued $150,000 of 12 1/4% Senior Notes due
2007 at a discount of 3.7%. The debt discount will be amortized as a non-cash
charge to interest expense using the effective interest method over the term of
the debt. The notes are unsecured and subordinate to the Company's other
indebtedness. The proceeds from the notes were used to repay existing
indebtedness and to fund the acquisitions of NOS, Flow Tech, Biggs
Manufacturing, and Earl's in October 1999.
6. PLANT RELOCATION COSTS
Plant relocation costs include expenses related to the closure of a
manufacturing facility and the related movement of inventory and fixed assets to
the Company's manufacturing facility in Bowling Green, Kentucky.
7. SEGMENT DATA
The Company's reportable segments have a common management team and
infrastructure, however, due to the different nature of the products sold by
each segment, the Company monitors each segment's revenues and gross margin on a
stand alone basis when making strategic decisions regarding the allocation of
Company resources.
The Company has two reportable segments: Performance Parts and Remanufactured
Parts. The Company manufactures high performance aftermarket automotive parts
through its Performance Parts segment. Under its Remanufactured Parts segment,
the Company refurbishes used automotive part cores and then resells the parts as
remanufactured products. Both segments sell primarily to automotive parts
distributors throughout the United States.
The accounting polices of the reportable segments are the same as those
described in the Company's annual financial statements and should be read in
conjunction with the notes thereto. The Company evaluates the performance of its
reportable segments based on gross margin. Intersegment sales and transfers are
not significant.
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Summarized financial information concerning the Company's operating measures for
the reportable segments are shown in the following table:
<TABLE>
<CAPTION>
PERFORMANCE REMANUFACTURED
PARTS PARTS TOTAL
----------- -------------- --------
<S> <C> <C> <C>
JANUARY 1, 1999 TO OCTOBER 3, 1999
Revenues $ 75,490 $ 19,249 $ 94,739
Gross margin 26,854 5,275 32,129
JANUARY 1, 2000 TO OCTOBER 1, 2000
Revenues $106,833 $ 18,433 $125,266
Gross margin 38,886 4,303 43,189
</TABLE>
Summary balance sheet data for inventory and fixed assets for each of the
Company's reportable segments as of December 31, 1999 and July 2, 2000 are shown
in the following table:
<TABLE>
<CAPTION>
PERFORMANCE REMANUFACTURED
PARTS PARTS TOTAL
----------- -------------- --------
<S> <C> <C> <C>
AS OF DECEMBER 31, 1999
Inventory $ 27,315 $ 4,208 $ 31,523
Fixed assets 33,043 2,669 35,712
AS OF OCTOBER 1, 2000
Inventory $ 33,293 $ 4,678 $ 37,971
Fixed assets 32,072 2,445 34,517
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company is a party to various lawsuits and claims in the normal course of
business. While the outcome of the lawsuits and claims against the Company
cannot be predicted with certainty, management believes that the ultimate
resolution of the matters will not have a material effect on the financial
position or results of operations of the Company.
In May 1999, Union Pacific filed an action against Weiand and others in U.S.
District Court for the Central District of California, alleging that certain
soil and groundwater contamination discovered on the Union Pacific property in
Los Angeles had migrated from the adjacent former Weiand facility, and that
Weiand therefore is responsible for costs related to environmental response,
investigation and remediation. In the litigation, Union Pacific sought damages
of approximately $3 million from all defendants for past and expected future
costs. In the same action, Joan F. Weiand, owner of the property on which the
facility which was operated by Weiand Automotive is located and a co-defendant
in this case, filed a cross-complaint against Weiand Automotive for breach of
written indemnity and declaratory relief. Ms. Weiand alleged that written leases
pursuant to which Weiand Automotive leased the facility for its operations
obligated Weiand Automotive to indemnify Joan Weiand for the claims alleged by
Union Pacific against Ms. Weiand.
Weiand has settled its claims with Joan Weiand and has reached a settlement in
principle with Union Pacific, which has not yet been finalized. All of the funds
needed for the settlement with Joan Weiand and with Union Pacific will be paid
out of Holley's insurance policy coverage at no cost to Holley.
Weiand is also required, as part of the settlements with Joan Weiand and with
Union Pacific, to participate in the environmental investigation and remediation
of the former Weiand facility property to prevent alleged off-site migration of
hazardous substances from the property. Weiand is engaged in discussions with
Joan Weiand and with the California Department of Toxic Substances Control
("DTSC") concerning appropriate and necessary investigation and remediation
activities at the site. Management has had environmental studies performed and
has provided an adequate reserve for the remediation based on the results of
those studies.
A satisfactory settlement agreement has been reached in the Hoeflick patent
infringement action filed by Holley in 1998. This settlement did not have any
material effect on the financial position of the Company.
The Company, like others in similar businesses, is subject to extensive federal,
state and local environmental laws and regulations. Although Company
environmental policies and practices are designed to ensure compliance with
these laws and regulations, future developments and increasingly stringent
regulation could require the Company to make unforeseen environmental
expenditures.
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The Company has established a severance plan for certain members of management.
Under the terms of the severance plan, the participants are entitled to certain
severance benefits, which include salary continuation, in the event the
participant is terminated by the Company without cause.
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO
AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1999.
"SAFE HARBOR" STATEMENT
This Report contains certain forward-looking statements with respect to the
Company's operations, industry, financial condition and liquidity. These
statements, which are typically introduced by phrases such as "the Company
believes", "anticipates", "estimates" or "expects" certain conditions to exist,
reflect management's best current assessment of a number of risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking financial statements as a result of
certain factors described in this report. See "Safe Harbor Statement."
The Management's Discussion and Analysis and other portions of this Report
include "forward looking" statements within the meaning of the federal
securities laws that are subject to future events, risks and uncertainties that
could cause actual results to differ materially from those expressed or implied.
Important factors that ether individually or in the aggregate could cause actual
results to differ materially from those expressed include, without limitation,
(1) that the Company will not grow its sales revenue or profit, (2) that the
Company will fail to be competitive with existing and new competitors, (3) that
the Company will not be able to sustain its current growth, (4) that needed
financing will not be available to the Company if and as needed, (5) that a
significant change in the growth rate of the overall U.S. economy will occur,
such that spending on performance automotive products will be materially
impacted, (6) that a drastic negative change in the market conditions may occur,
(7) that emissions and other environmental regulations affecting us will
increase thereby limiting our ability to sell our automotive products and grow
our business, and (8) that some other unforeseen difficulties may occur. This
list is intended to identify only certain of the principal factors that could
cause actual results to differ materially from those describe in the
forward-looking statements included herein.
OVERVIEW
Founded in 1903, Holley is a leading manufacturer and marketer of specialty
products for the performance automotive, marine and powersports (motorcycle,
jet-ski, snowmobile and go-cart) aftermarkets. Holley designs, manufactures and
markets a diversified line of automotive performance racing products that
include fuel, air, spark (also known as ignition), exhaust and internal engine
management systems. We design our products to enhance vehicle performance
through generating increased horsepower, torque and acceleration. Our products
include both throttle body and multi-port fuel injection systems, performance
and remanufactured carburetors, digital ignition systems, distributors, fuel
pumps, camshafts, crankshafts, intake manifolds, pistons, superchargers, exhaust
systems, headers, mufflers and motorcycle exhaust pipes, cylinder heads, water
pumps, billet throttle bodies, nitrous oxide injection systems and performance
automotive plumbing products. In the performance automotive aftermarket, we have
the most widely recognized brand names and a broad distribution network, which
includes specialized retailers, performance wholesale distributors, mail order
retailers and original equipment manufacturers ("OEM's"). We have developed
strong relationships with our customers in
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each distribution channel, including leading companies such as Advance Auto
Parts, AutoZone, CSK Auto, Keystone, O'Reilly, Summit Racing, Jeg's mail order,
GM Service Parts, Volvo-Penta and Mercury Marine.
Senior Notes Offering. On September 20, 1999, the Company issued $150.0 million
of 12 1/4% senior notes due 2007 at a discount of 3.7% (the "Senior Notes"). The
debt discount will be amortized as a non-cash charge to interest expense using
the effective interest method over the term of the debt. The notes are unsecured
and subordinate to the Company's other indebtedness. The proceeds from the notes
were used to repay existing indebtedness under the Company's previous credit
facilities and to fund the acquisitions of FlowTech, NOS and Earl's in October
1999.
SEASONALITY
Our operations experience slight seasonal trends, which generally affect the
overall performance automotive aftermarket industry. Historically, our revenues
are highest in the spring, during our second fiscal quarter, which marks the
beginning of the racing season and when the weather is better suited for outdoor
automotive repair activity. Seasonality has a more prevalent effect on our
remanufacturing operation in Springfield, Tennessee and accordingly, we
occasionally hire temporary employees to respond to peak demand.
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999
Net Sales. Net sales equals gross revenues less provisions for volume
rebates, co-op advertising, freight-out expenses, and other sales allowances.
Net sales for the quarter ended October 1, 2000 totaled $42.0 million compared
to $29.8 million for the same period in 1999, an increase of $12.2 million or
40.9%. Sales in the performance segment for the third quarter of 2000 were $36.1
million compared to $23.7 million in the third quarter of 1999, an increase of
$12.4 million or 52.5% over the third quarter of 1999. Sales in the
remanufacturing segment were $5.9 million in the third quarter of 2000 compared
to $6.1 in the third quarter of 1999, a decrease of $0.2 million, or 3.8%. The
increase in the performance segment was largely attributable to strong increased
demand for Holley's core businesses (the businesses owned in both periods) of
$0.9 million, and the additional sales gain from the Hooker, Flow Tech, NOS and
Earl's acquisitions which accounted for $11.5 million of sales growth.
Gross Profits. Gross profits for the third quarter of 2000 totaled
$15.2 million or 36.2% of net sales compared to gross profits of $9.7 million or
32.8% of net sales for the same quarter in 1999. This represents an increase of
$5.5 million, or 55.9%. In the performance segment, gross profits were $13.8
million or 38.1% of net sales compared to $8.2 million or 34.7% of net sales for
the third quarter of 1999. This is an increase of $5.6 million or 67.4%. In the
remanufacturing segment, gross profits were $1.5 million or 24.9% of sales in
the third quarter of 2000 compared to $1.4 million or 25.3% of sales for the
same period in 1999. This is a decrease of $0.1 million or 5.3%. The increase in
the performance segment is attributable to gross profits contributed by the
Hooker, FlowTech, NOS and Earl's acquisitions of $4.9 million as well as
increased gross profit in the base business of $0.6 million. Of the base
business increase, $0.3 million is attributable to increased sales volume and
$0.3 is due to the improved gross profit margin.
Selling, Engineering, General and Administrative Expenses. Selling,
engineering, general, and administrative expenses for the three months ended
October 1, 2000 totaled $9.1 million compared to $6.6 million in the same period
in 1999, an increase of $2.5 million or 38.6%. The increase is attributable to
$1.3 million of additional expenses from the Hooker, FlowTech, NOS and Earl's
acquisitions, and $1.2 million of additional expenses from the base business.
The increased expenses in the base business include increased marketing and
advertising expenses of $0.7 million, increased commissions of $0.5 million,
increased insurance costs of $0.4 million, $0.4 million in increased cash
discounts as the result of increased sales, and higher depreciation expense of
$0.3 million, partially offset by a decrease in legal expenses of $0.8 million
due to settlement of a pending lawsuit, and a
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reduction of $0.3 million in professional services. The higher commissions
reflected the changeover from an internal field sales force to independent third
party sales representatives. On a pro forma basis, total S, E, G, & A expense
decreased $1.4 million or 15.8% reflecting the benefits of Holley's integration
programs.
Plant relocation costs. Plant relocation costs for the three months
ended October 1, 2000 totaled $0.3 million compared to $0.3 million in the same
period in 1999. These costs result from expenses incurred in the integration of
acquisitions.
Amortization Expense. Amortization expense for the three months ended
October 1, 2000 totaled $1.4 million compared to $1.2 million for the same
period in 1999. These expenses reflect the amortization of goodwill, transaction
fees, and other intangible assets associated with the purchase of Holley by KHPP
Holdings, and the subsequent acquisitions of Weiand, Lunati, Hooker, FlowTech,
NOS and Earl's.
Operating Income. Operating income for the three months ended October
1, 2000 totaled $4.4 million compared to $1.7 million in the same period in
1999, an increase of $2.7 million or 162.5%. The increase primarily resulted
from increased sales and gross profit levels, partially offset by increased
selling, engineering, general and administrative expenses and increased
amortization expense.
Interest Expense. Interest expense was $5.9 million for the three
months ended October 1, 2000 compared to $3.1 million in the same period in
1999. The expense resulted from interest on our Company's revolving credit
facility, and the accrual of interest associated with our 12 1/4% senior notes
due 2007 issued in September 1999. The revolving letter of credit is used to
finance general business and working capital needs. The proceeds from the sale
of our senior notes were used to pay back the existing bank term loans and to
finance our 1999 acquisitions.
Provision/(benefit) for Income Taxes. Benefit for income taxes for the
three months ended October 1, 2000 was $0.3 million compared to a $0.0 million
provision in the same period in 1999.
Extraordinary Item. An extraordinary item during 1999 was booked to
reflect the write off of $1.7 million (net of tax) of unamortized financing and
transaction fees associated with our bank term debt. This bank debt was paid off
in full in September 1999 with the proceeds of our senior notes offering.
Net Loss. Net loss for the three months ended October 1, 2000 was
$(1.1) million compared with a net loss of $(3.1) million for the same period in
1999. This represents a decrease in the loss for the period of $1.9 million.
This improvement reflects increased operating income, reduced by increases in
interest expense and income tax provision, and the $1.7 million extraordinary
item that occurred in 1999.
COMPARISON OF THE NINE MONTHS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999
Net Sales. Net sales for the nine months ended October 1, 2000 totaled
$125.3 million compared to $94.7 million for the third quarter period in 1999,
an increase of $30.5 million or 32.2%. For the nine-month period ended October
1, 2000, sales in the performance segment were $106.8 million compared to $75.5
million in the same period in 1999, an increase of $31.3 million or 41.5%. Sales
in the remanufacturing segment were $18.4 million compared to $19.2 million in
the same period in 1999, a decrease of $0.8 million or 4.2%. The increase in the
performance segment was largely attributable to additional sales from the
Hooker, FlowTech, NOS and Earl's acquisitions of $40.9 million, offset by
reduced sales in the base business (the business owned in both periods) of $9.6
million. Management attributes the weak demand in base business to inventory
reduction programs at some of our larger customers in response to higher
interest rates and our improved order fill rates, which occurred in the first
six months of 2000 as well as special dating and discounting programs offered in
the fourth quarter of 1999 which pulled orders from first six months of 2000.
The decreased sales in the remanufacturing segment primarily resulted from
decreased demand.
Gross Profits. Gross profits for the nine months ended October 1, 2000
totaled $43.2 million or 34.5% of net sales compared to $32.1 million or 33.9%
of sales for the same period in 1999. This is a difference of $11.1 million or
34.4%. In the performance segment, gross profits were $38.9 million or 36.4% of
sales
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compared to $26.9 million or 35.6% of sales in the same period in 1999. This is
an increase of $12.0 million or 44.8%. In the remanufacturing segment, gross
profits were $4.3 million or 23.3% of sales compared to $5.3 million or 27.4% of
sales in the same period in 1999. This is a decrease of $1.0 million or 18.4%.
The increase in the performance segment is attributable to gross profits
contributed by the Hooker, FlowTech, NOS and Earl's acquisitions of $17.3
million, reduced by decreased gross profit in the base business of $5.2 million
due to reduced volume levels. The remanufacturing segment reduction is
attributable to decreased sales volume of $0.3 million and additional
manufacturing costs of $0.7 million.
Selling, Engineering, General and Administrative Expenses. Selling,
engineering, general, and administrative expenses for the nine months ended
October 1, 2000 totaled $29.0 million compared to $18.9 million in the same
period in 1999, an increase of $10.1 million or 53.7%. The increase is
attributable to $4.7 million of additional expenses from the Hooker, FlowTech,
NOS and Earl's acquisitions, and $5.4 million of additional expenses from the
base business. The increased expenses in the base business include $1.4 million
in increased cash discounts allowed as a result of increased sales, $1.2 million
in increased sales commissions, $1.2 million in increased advertising, exhibits
and promotions, $0.9 million in increased freight costs, increased insurance
costs of $0.6 million, increased depreciation of $0.5 million, increased general
and administrative salaries of $0.4 million, partially offset by lowered legal
expenses of $0.8 million due to the settlement of a lawsuit.
Plant relocation costs. Plant relocation costs for the nine months
ended October 1, 2000 totaled $0.5 million compared to $0.8 million in the same
period in 1999. These costs result from expenses incurred in the integration of
acquisitions.
Amortization Expense. Amortization expense for the nine months ended
October 1, 2000 totaled $4.1 million compared to $2.9 million for the same
period in 1999. These expenses reflect the amortization of goodwill, transaction
fees, and other intangible assets associated with the purchase of Holley by KHPP
Holdings, and the subsequent acquisitions of Weiand, Lunati, Hooker, FlowTech,
NOS and Earl's.
Operating Income. Operating income for the nine months ended October 1,
2000 totaled $9.6 million compared to $9.6 million in the same period in 1999.
Increased sales and gross profits were offset by increased selling, general and
administrative expenses and increased amortization expenses.
Interest Expense. Interest expense was $17.9 million for the nine
months ended October 1, 2000 compared to $7.4 million in the same period in
1999. The expense resulted from interest on our Company's revolving credit
facility, and the accrual of interest associated with our 12 1/4% senior notes
due 2007 issued in September 1999. The revolving letter of credit is used to
finance general business and working capital needs. The proceeds from the sale
of our senior notes were used to pay back the existing bank term loans and to
finance our 1999 acquisitions.
Provision/(benefit) for Income Taxes. Benefit for income taxes for the
nine months ended October 1, 2000 was $2.5 million compared to a $2.0 million
provision in the same period in 1999. The benefit in 2000 results from taxable
income being negative primarily due to increased interest expense.
Extraordinary Item. An extraordinary item during 1999 was booked to
reflect the write off of $1.7 million (net of tax) of unamortized financing and
transaction fees associated with our bank term debt. This bank debt was paid
off in full in September 1999 with the proceeds of our senior notes offering.
Net Loss. Net loss for the nine months ended October 1, 2000 was $(5.9)
million compared with a net loss of $(1.5) million for the same period in 1999,
an increase of $4.3 million. The increase reflects increased interest expense of
$10.4 million partially offset by the increased income tax benefit of $4.6
million, and the $1.7 million extraordinary item that occurred in 1999.
LIQUIDITY AND CAPITAL RESOURCES
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Operating Activities. Net cash used in operating activities for the
nine months ended October 1, 2000 was $(3.7) million. The decrease in net income
and increased working capital requirements contributed primarily to the increase
in net cash used by operating activities in the period. Inflows from
depreciation and amortization of $10.1 million were offset by outflows due to
increased working capital of $(5.6) million, deferred income taxes of $(2.3)
million and a net loss of $5.9 million. The increase in working capital was
primarily attributable to increased inventories of $6.0 million resulting from
lower than anticipated sales, increased accounts receivable of $0.9 million, and
decreased accrued liabilities of $5.6 million, partially offset by decreased
other current assets of $3.2 million and increased accounts payable of $3.7
million.
Investing Activities. Net cash used in investing activities for the
nine months ended October 1, 2000 was $4.0 million. We spent $4.1 million on
capital additions during the period, and $0.7 million on asset purchases,
partially offset by a decrease in other long-term assets of $0.4 million.
Financing Activities. Net cash provided by financing activities for the
nine months ended October 1, 2000 was $6.7 million. Cash provided in the period
was primarily due to the proceeds from additional bank debt incurred for
acquisitions and working capital needs of $7.3 million offset by the payment of
fees associated with the amendment of our existing bank facility of $0.5
million.
Our primary sources of liquidity are funds generated by operations and
borrowings under our bank credit facility. Holley is dependent on the revolving
line of credit facility to fund its working capital needs. Based on our
projections, we believe that we will be in compliance with the quarterly
financial ratio covenants during 2000 and that the revolving line of credit
facility will be adequate to fund our working capital needs during 2000.
However, should the revolving line of credit become unavailable or should we
fail to meet our projected results, we may be forced to seek additional sources
of financing in order to fund our working capital needs.
We historically have expanded our business through the acquisition of
other related and complementary businesses, and we continue to seek and evaluate
acquisition opportunities. We anticipate that our existing capital resources and
cash flow generated from future operations, and drawings under our bank credit
facility will enable us to maintain our planned operations, capital expenditures
and debt service for the foreseeable future. We also anticipate that
implementing our acquisition strategy will require us to incur additional
indebtedness. However, our current indenture and bank credit facility terms, as
well as our current level of indebtedness, would significantly limit or prevent
incurrence of any substantial indebtedness.
Bank Credit Facility. In May 1998, we established a senior secured
credit facility with a group of banks led by Credit Agricole Indosuez, which
after certain amendments consists of a $35.0 million revolving credit facility.
On March 8, 2000, this facility was amended to increase the available amount
from $25.0 million to $35.0 million. On August 9, 2000, the credit facility was
further amended to revise certain financial and other covenants effective June
30, 2000, and as of October 1, 2000, the company is in compliance with all the
facility's covenant and other requirements, as amended. As of October 1, the
Company had $24.0 million outstanding and $11.0 million available under this
facility.
We may borrow from time to time under the revolving credit facility for
working capital purposes, and all outstanding borrowings thereunder must be
repaid in full by June 2003. Loans under our bank credit facility bear interest,
at our option, at one of two floating rates which can be changed at our option
from time to time: either a base rate, based on Credit Agricole Indosuez'
announced "prime rate," or 1/2% per annum in excess of the Federal Funds Rate,
plus an additional 1.0% per annum, or the reserve adjusted London Interbank
Offered Rate plus an additional 3.0%. The bank credit facility contains various
covenants, including covenants prohibiting or limiting our ability to:
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- incur additional debt;
- grant liens; or
- sell our assets, together with financial covenants and information
reporting requirements we must meet.
During the term of the bank credit facility, Holley, on a consolidated
basis, will be required to maintain a minimum EBITDA level as well as certain
financial ratios, including: (1) a ratio of debt to EBITDA, whereby EBITDA is
defined as net income before provision for interest, tax, depreciation or
amortization expense and (2) a ratio of EBITDA to interest expense, in each
case, on a trailing four-quarter basis. Any borrowings under the revolving
credit facility will be limited to the lesser of $35.0 million or 75% of the
eligible accounts receivable and 55% of the eligible inventory of Holley and its
subsidiaries.
Our bank credit facility is guaranteed by all of Holley's subsidiaries,
and is secured by a first priority security interest in favor of the bank
lenders in the capital stock of Holley and its subsidiaries and in each of their
accounts receivable and inventory.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate changes is primarily related to
its variable rate debt which may be outstanding from time to time under the
Company's revolving credit facility with a group of banks led by Credit Agricole
Indosuez. The Company's revolving credit facility is a $35 million line of
credit with an interest rate based on the London Interbank Offered Rate (LIBOR)
(currently 6.63%) or the prime rate (currently 9.50%). The term of this facility
is through June 2003. Because the interest rate on the revolving credit facility
is variable, the Company's cash flow may be affected by increases in the prime
rate. Management does not, however, believe that any risk inherent in the
variable-rate nature of the loan is likely to have a material effect on the
Company. As of the end of the third quarter of 2000, the Company's outstanding
balance on the Revolving Credit Facility was $25.0 million. Even if the Company
was to draw down on the entire available amount of the line and an unpredicted
increase in the prime rate occurred, it would not be likely to have a material
effect.
SENSITIVITY ANALYSIS. To assess exposure to interest rate changes, the
Company has performed a sensitivity analysis assuming the Company had drawn the
full $35 million balance available under the Revolving Line of Credit. If the
prime rate rose 100 basis points, the increase in the monthly interest payment
would equal $29,167. The Company does not believe the risk resulting from such
fluctuations is material nor that the payment required would have material
effect on cash flow.
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PART II- OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS
In May 1999, Union Pacific filed an action against Weiand and
others in U.S. District Court for the Central District of California,
alleging that certain soil and groundwater contamination discovered on
the Union Pacific property in Los Angeles had migrated from the
adjacent former Weiand facility, and that Weiand therefore is
responsible for costs related to environmental response, investigation
and remediation. In the litigation, Union Pacific sought damages of
approximately $3 million from all defendants for past and expected
future costs. In the same action, Joan F. Weiand, owner of the property
on which the facility which was operated by Weiand Automotive is
located and a co-defendant in this case, filed a cross-complaint
against Weiand Automotive for breach of written indemnity and
declaratory relief. Ms. Weiand alleged that written leases pursuant to
which Weiand Automotive leased the facility for its operations
obligated Weiand Automotive to indemnify Joan Weiand for the claims
alleged by Union Pacific against Ms. Weiand.
Weiand has settled its claims with Joan Weiand and has reached
a settlement in principle with Union Pacific, which has not yet been
finalized. All of the funds needed for the settlement with Joan Weiand
and with Union Pacific will be paid out of Holley's insurance policy
coverage at no cost to Holley.
Weiand is also required, as part of the settlement with Joan
Weiand and with Union Pacific, to participate in the environmental
investigation and remediation of the former Weiand facility property to
prevent alleged off-site migration of hazardous substances from the
property. Weiand is engaged in discussions with Joan Weiand and with
the California Department of Toxic Substances Control ("DTSC")
concerning appropriate and necessary investigation and remediation
activities at the site. Management has had environmental studies
performed and has provided an adequate reserve for the remediation
based on the results of those studies.
A satisfactory settlement agreement has been reached in the
Hoeflick patent infringement action filed by Holley in 1998. This
settlement did not have any material effect on the financial position
of the Company.
Holley has been named as defendants in a number of legal
actions arising from normal business activities. Although the amount of
any ultimate liability with respect to such matters cannot be precisely
determined, we do not expect any such liability to have a material
adverse effect on our overall operations.
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule;
(b) Reports on Form 8-K - None.
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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.
Holley Performance Products Inc.
Date: November 15, 2000 /s/ JEFFREY G. KING
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Jeffrey G. King, President and Chief Executive Officer
Date: November 15, 2000 /s/ A. BRUCE REYNOLDS
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A. Bruce Reynolds, Chief Financial Officer
(principal financial officer)
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