1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ COMMISSION FILE NUMBER: 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) SECURITIES OF GENERAC PORTABLE PRODUCTS, INC. REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES OF GENERAC PORTABLE PRODUCTS, INC. REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE SECURITIES OF GENERAC PORTABLE PRODUCTS, LLC REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES OF GENERAC PORTABLE PRODUCTS, LLC REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 11-1/4 % Senior Subordinated Notes Due 2006 SECURITIES OF GPPW, INC. REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES OF GPPW, INC. REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: 11-1/4 % Senior Subordinated Notes Due 2006 2 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) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of voting stock held by non-affiliates of Generac Portable Products, Inc. is not determinable as such shares were privately placed and there is currently no public market for such shares. None of the voting or non-voting common equity of either Generac Portable Products, LLC or GPPW, Inc. is held by non-affiliates. The number of shares of common stock of each of Generac Portable Products, Inc. and GPPW, Inc. outstanding as of March 15, 2001 is as follows: Generac Portable Products, Inc. 8,500 GPPW, Inc. 1,000 2 3 PART I ITEM 1. BUSINESS THE COMPANY Generac Portable Products, Inc. (together with its direct and indirect wholly owned subsidiaries, the "company" or "Generac") was incorporated in the state of Delaware on April 29, 1998. Generac Portable Products, Inc. is a holding company that owns 100% of the stock of each of GPPW, Inc, a Wisconsin corporation, and GPPD, Inc, a Delaware corporation. GPPW,Inc. and GPPD, Inc. hold, respectively, 5% and 95% member interests in Generac Portable Products, LLC, a Delaware limited liability company. The company's predecessor, Generac Power Systems, Inc. ("GPSI"), formerly known as Generac Corporation, was founded in 1959. On July 9, 1998, Generac purchased the business and substantially all of the assets of GPSI's Portable Products Division (the "Predecessor"). The company's principal executive offices are located at 1 Generac Way, Jefferson, Wisconsin, 53549 and its telephone number is (920) 674-3750. BUSINESS Generac is a leading designer, manufacturer and marketer of engine-powered tools and related accessories for use in both consumer and commercial applications. The company 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. Generac's two principal product lines are portable generators and pressure washers. The company sells its products through multiple channels of retail distribution, including the leading home center chains, mass merchants and warehouse clubs as well as independent dealers. Generac has been a major supplier of portable generators to Sears since 1961, and is one of two suppliers to Sears of pressure washers, both marketed under the Craftsman label. The company is also a core supplier of portable generators and pressure washers, both marketed under the Generac label, to Home Depot. In addition, the company is a core supplier for many of the leading retail home centers and do-it-yourself retailers. In addition to the manufacture of portable generators and pressure washers, Generac also manufactures core components for those products, including alternators and pressure washer pumps, in cases where such integration improves operating profitability by providing lower costs, streamlined production processes or the standardization of components. PRODUCTS The company primarily produces portable generators and pressure washers built around commercially available small gasoline powered engines. 3 4 PORTABLE GENERATORS. Applications for portable generators include running power tools and other appliances at residential as well as remote construction sites, providing electrical power in connection with the use of recreational vehicles and at camping sites and, more recently, providing homeowners with back-up power and home security. The company's portable generator product offerings range from premium-priced models, incorporating advanced operating features and performance characteristics built around the proprietary Generac-Nagano engine, to value-priced products built around conventional commercially available lawn mower-type engines. Generac's generator line includes the most basic units without protective frames to complete units, and the simplest electrical outlet features to full control panels with related features that are attractive to the industrial and contractor markets. The entire portable generator product line incorporates various value-added features such as low oil shutdown and reduced noise levels. Many of the company's premium Generac-Nagano engine-powered generators are equipped with voltage regulators which provide superior voltage control and surge capacity for starting large electrical loads. The Generac-Nagano engine-powered units also feature lighter weight for portability, compact size, reduced maintenance and lower fuel consumption. Electric start is available on certain models and the contractor units incorporate a unique idle control device which further reduces noise, greatly extends engine operating life and additionally reduces fuel consumption. Oversized fuel tanks for longer operating times are standard with these units. PRESSURE WASHERS. Pressure washers have been used in commercial applications for over 50 years. In recent years, the consumer pressure washer market has evolved, driven by increased awareness of the utility and the ease of use of the product. Consumer applications include car washing, deck cleaning, and pre-treating exterior surfaces prior to painting. Common commercial applications include stripping paint, removing graffiti, farm and agricultural uses, automotive uses, and factory and warehouse applications. The company's engine-driven pressure washers incorporate unique value added features such as push-button electric start, a thermal overload device, which prevents overheating and resulting failures and an exclusive unloading circuit which makes starting easier. Generac's electric pressure washer product line offers reduced noise levels, a long operating life and an automatic start-stop feature that protects against damage from overheating or running dry. The company's proprietary pump, based on different combinations of internally designed components and a low-cost aluminum pump head, promotes greater manufacturing flexibility and a faster response to evolving end-user needs. As with the company's portable generators, end-users are offered a premium Generac-Nagano engine-powered product which features lower fuel consumption, longer life and lower noise levels. NEW AND RELATED PRODUCTS. All of the company's new product initiatives are based on its core manufacturing and marketing strengths. The company has identified several new product and business opportunities in which it can provide added value to end-users and attractive profit margins to retailers. These include residential power transfer systems to complement portable generators and engine-driven air compressors. Generac has recently introduced its residential power transfer system to the market and anticipates significant growth potential for this product. In addition, Generac entered into a long-term supply, licensing and distribution agreement with Thomas Industries Inc. ("Thomas"). Thomas is the recognized leader in the design and manufacture of pumps and compressors for use in global OEM applications. Thomas is also the leading producer of contractor duty air compressors utilizing oil-less pump technology. Under 4 5 the agreement, Generac will manufacture and sell the existing line of Thomas air compressor products utilizing the Thomas (R) and Ultra Air-Pac (R) trademarks. DISTRIBUTION AND MARKETING The company's two largest customers are Home Depot and Sears, which individually accounted for more than 10% of sales, and combined accounted for approximately 61% of sales, in 2000. The company also sells to other consumer home centers and warehouse clubs, as well as mass merchants, hardware stores and outdoor power equipment dealers. In addition to traditional retail distribution, Generac offers its products through national catalog companies such as Northern Hydraulic, Sears Power Tool catalog and its own "special-order" service. The company has been a major supplier of portable generators to Sears since 1961 and one of two suppliers to Sears of pressure washers since Sears first introduced that product category in 1994. Generac has developed a longstanding partnership with Sears involving the development of exclusive product offerings under the Craftsman label, high levels of in-store sales support, well-coordinated merchandising and promotional campaigns and access to Sears' nationwide service network. The company continues to increase its sales through Sears' expanding hardware distribution channels including its new local hardware stores, dealer stores and Orchard Supply. Over the past five years, Generac has expanded the distribution of its products, marketed under the Generac name, to home centers and warehouse clubs. Borrowing from its experience at Sears, Generac offers to its customers a total category management approach, including value-added, in-store services such as merchandising, informational materials, sales associate training and product support. Major U.S. retail customers now include B.J.'s Wholesale Club, Costco, Home Base, Home Depot, Lowe's, Sam's Club, Sears and Tru-Serv Incorporated. Generac is well-represented in six of the leading home center retailers in Europe. The company employs a two-tiered sales force to sell its products through mass merchants, home centers and independent dealer channels. Product managers are responsible for developing sales programs tailored to retailer-specific needs in the home center and warehouse club channels. Territory sales managers are responsible for establishing new independent dealers, training sales associates at a store level, and managing and reducing product returns. Territory sales managers also serve as the primary interface between the company's manufacturing operation and its independent dealer network. Generac has assembled a comprehensive after-sales service network in North America for portable generators and pressure washers comprised of (1) approximately 3,000 authorized independent dealers, (2) five independently owned master parts distributors and (3) a company-owned fleet of mobile service training vehicles. Although most independent dealers do not generate the traffic to be competitive with mass merchants, home centers or warehouse clubs, Generac continues to maintain its independent dealer network for the express purpose of providing the after sales service capability that supports its products. Most of the master part distributors have their own sales force, which effectively broadens the availability of the company's products and spare parts. 5 6 PRODUCT TECHNOLOGY AND DEVELOPMENT The majority of the company's new product development initiatives are based on the generator and pressure washer markets. However, the company has new product categories under development, and its research and development group is continually developing and field-testing various products. Generac incurred research and development costs of $2.6 million in 2000, $2.7 million in 1999 and $1.9 million in 1998. The company's product development program for the generator product line includes manual and automatic power transfer systems for residential use, residential back-up power generators and generators designed to operate on gaseous fuels such as natural gas and liquid petroleum gas. The company's product development program for the pressure washer product line includes a new and improved pump design which will allow for easier starting on Generac's core line of pressure washers and an expanded line of accessories. In both categories research and development is continuing to focus on product cost reductions and performance enhancements to existing models. INTERNATIONAL OPERATIONS The company has been successful in building long-term customer relationships with the leading home center retailers in European markets located in the U.K., Germany, Switzerland, Spain, Belgium and France. To support the company's growing European power generator business, local sales offices have been established in Winsford, U.K., Cologne, Germany and Barcelona, Spain. To service Generac's European customer base more effectively, the company designs and assembles its European products in its Cheshire, England facility. This facility imports alternators, engines and other components and assembles portable generators to meet local product requirements and quality assurance regulations. Generac's international operations have contributed approximately 9% of total net sales for fiscal year 2000. See Note 12 to the company's consolidated financial statements. COMPETITION The U.S. engine powered tools industry has experienced significant consolidation over the last ten to 15 years. The number of competitors in its products categories has decreased from approximately 20 in 1985 to approximately ten today, of which only four companies have national distribution capabilities. The principal competitive factors in the engine powered tools industry include price, service, product performance, technical innovation and delivery. In the manufacture and sale of portable generators, Generac competes primarily with Coleman Powermate, a division of The Coleman Company, Inc., and Honda Engine Company. In the manufacture and sale of pressure washers, Generac competes primarily with DeVilbiss Air Power Company, an affiliate of Pentair, Inc., and, to a lesser extent, with The Coleman Company, Inc., Alfred Karcher GmbH & Co. and Campbell Hausfeld, an affiliate of Scott & Fetzer, Inc. As measured by net sales, the company believes it was the largest supplier of both portable generators and consumer pressure washers in the North American market in 2000. 6 7 RAW MATERIALS AND SUPPLIERS The company has used the Generac-Nagano overhead valve industrial engine in certain of its products since 1992. Currently, approximately 19% of the company's sales are from products that incorporate the Generac-Nagano engine. At the time of the acquisition of the Portable Products Division of GPSI, the company entered into an engine supply agreement with GPSI. This agreement provides that GPSI will supply the company with certain models of the Generac-Nagano engine for use in the company's pressure washers and consumer portable generators on an exclusive basis as long as the company makes minimum annual purchases of Generac-Nagano engines. This agreement also gives the company the right to increase the number of engines purchased based on the company's forecast requirements. The initial term of the engine supply agreement is until 2007, with provision for three year renewals, subject to certain conditions. The company also purchases engines from Briggs & Stratton, Tecumseh Products and Honda. The company manufactures many of the other components used in its products. It also purchases a variety of basic materials and component parts. The company has not experienced any difficulty obtaining necessary purchased supplies. EMPLOYEE AND LABOR RELATIONS As of December 31, 2000, the company had approximately 630 employees, the majority of whom were involved in production and distribution, with the balance engaged in technical, administration, sales and clerical work. Of these employees, 568 were employed in the United States and 62 in international operations. All of the company's production employees are covered by a collective bargaining agreement which was renegotiated in October 1999 and expires on February 15, 2003. The company considers its relations with its employees to be good. ENVIRONMENTAL MATTERS The company's operations are subject to a variety of federal, state and local laws and regulations governing, among other things, emissions to air, discharge to waters, the generation, handling, storage, transportation, treatment and disposal of waste and other materials and health and safety matters. The company believes that its business, operations and facilities have been and are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. The company does not currently anticipate any material adverse effect on its business, financial condition or results of operations as a result of compliance with federal, state or local environmental laws or regulations or remediation costs. However, the operation of manufacturing plants entails risks in these areas, and there can be no assurance that the company will not incur material costs or liabilities in the future. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations or requirements that may be adopted or imposed in the future. 7 8 INTELLECTUAL PROPERTY The company's patents and trademarks taken individually, and as a whole, are not critical to the ongoing success of its business. SEASONALITY Sales of certain products of Generac are subject to seasonal variation. Due to seasonal and regional weather factors, sales of pressure washers and related working capital requirements are typically higher during the first and second quarters than at other times of the year. The residential and commercial construction markets are sensitive to cyclical changes in the economy. FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENTS UNDER THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report, including the "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") sections, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may," "intend," "will," "expect," "anticipate," "plan," "management believes," "estimate," "continue" or "position" or the negatives of or other variations on those terms or comparable terminology. In particular, any statement, expressed or implied, concerning future operating results or the ability to generate revenues, income or cash flow are forward-looking statements. Readers are cautioned that reliance on any forward-looking statements involves risks and uncertainties and that, although the company believes that the assumptions on which the forward-looking statements contained in this report are based are reasonable, any of those assumptions could prove to be inaccurate. As a result, the forward-looking statements based on those assumptions also could be incorrect, and actual results may differ materially from any results indicated or suggested by those forward-looking statements. The uncertainties in this regard include, but are not limited to, the impact of leverage, dependence on major customers, fluctuating demand for portable generators and pressure washers, risks in product and technology development, competition, litigation and capital requirements and those discussed in "Environmental Matters" in this section, Item 3 of this report and other cautionary statements contained throughout the "Business" and "MD&A" sections of this report. All forward-looking statements are expressly qualified by the cautionary statements set forth therein. In light of these and other uncertainties, the inclusion of a forward-looking statement in this report should not be regarded as a representation by the company that the company's plans and objectives will be achieved. 8 9 ITEM 2. PROPERTIES The principal properties of the company, the location, the primary use, the square feet and the ownership status thereof as of December 31, 2000 are set forth in the table below: OWNED/ LOCATION USE SQUARE FEET LEASED LEASE EXPIRATION - --------------------------- ------------------------------- ------------- ------------- --------------------- Jefferson, WI Corporate Office/ 250,000 Owned - Manufacturing/ Warehouse Jefferson, WI Warehouse 106,000 Leased December 2001 Sullivan, WI Office/Warehouse 52,000 Leased October 2002 Cambridge, WI Warehouse 20,000 Leased Monthly Watertown, WI Warehouse 52,000 Leased December 2001 Waukesha, WI Warehouse 40,000 Leased Monthly Waukesha, WI Office 760 Leased May 2001 Cheshire, England Manufacturing/Office 45,000 Owned - Cologne, Germany Sales Office 6,000 Leased December 2005 Barcelona, Spain Sales Office 1,100 Leased April 2003 The company believes that its existing leased facilities are adequate for the operations of the company. The company does not believe that it will have any difficulty renewing any real property lease or readily obtaining an alternative facility. ITEM 3. 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 litigation the outcome of which would have a material adverse effect on its financial condition, the results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the company's security holders during the last quarter of its fiscal year ended December 31, 2000. 9 10 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established trading market for the common stock of Generac Portable Products, Inc. As of March 15, 2001, 18 persons held the 8,500 outstanding shares of common stock of Generac Portable Products, Inc. Generac Portable Products, Inc. has not declared or paid dividends since its inception in April 1998 and has no intention to pay dividends for the foreseeable future. There is no established trading market for the common equity of either GPPW, Inc. or Generac Portable Products, LLC. All of the issued and outstanding shares of common stock of GPPW, Inc. are held by Generac Portable Products, Inc. All of the member interests in Generac Portable Products, LLC are held by GPPW, Inc. and GPPD, Inc. No cash dividends or distributions have been paid or made by either GPPW, Inc. or Generac Portable Products, LLC since their respective formations. The indenture, dated as of July 1, 1998, by and among Generac Portable Products, LLC , GPPW, Inc. and HSBC Bank USA (formerly known as Marine Midland Bank), as trustee, with respect to the 11-1/4% Senior Subordinated Notes due 2006, contains restrictions on the ability of GPPW, Inc. and Generac Portable Products, LLC to declare or pay dividends or make distributions on their respective equity securities. 10 11 ITEM 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA The selected historical financial information of Generac for the years ended December 31, 2000, 1999 and for the period July 10, 1998 through December 31, 1998 has been derived from, and should be read in conjunction with, the audited historical financial statements of Generac (including the related notes) included elsewhere herein. The selected historical financial information of the Predecessor from January 1, 1998 through July 9, 1998 have been derived from, and should be read in conjunction with, the audited historical financial statements of GPSI's Portable Products Division (including the related notes) included elsewhere herein. The selected historical financial information for the years ended December 31, 1997 and 1996 have been derived from the audited historical financial statements of GPSI's Portable Products Division. The selected Pro Forma financial information for the year ended December 31, 1998 combines the results of the Predecessor for the period January 1, 1998 through July 9, 1998 with the Company's results for the period July 10, 1998 through December 31, 1998 and have been prepared to reflect the consummation of the acquisition of the Portable Products Division of GPSI on July 9, 1998, as if it had occurred on January 1, 1998, using the purchase method of accounting. The following table should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" that appears later in this report. 11 12 (dollars in millions) Predecessor Company Pro Forma Company --------------------------------- ----------------- -------------- ----------------- January 1, 1998 July 10, 1998 through through 1996 1997 July 9, 1998 December 31, 1998 1998 1999 2000 ------- ------- -------------- ----------------- ------- ------- ------- (unaudited) STATEMENT OF OPERATIONS DATA: Net sales $122.6 $178.0 $139.6 $136.9 $276.4 $398.1 $242.5 Gross profit 27.3 46.9 35.0 38.6 73.8 107.2 50.4 Selling & service expense 13.9 21.7 16.6 16.9 33.6 47.3 32.4 General and administrative expense 4.4 4.2 2.4 2.9 5.3 10.1 7.9 Intangible asset amortization - - - 2.5 5.3 5.4 5.4 ------- ------- ------- ------- ------- ------- ------- Income from operations 9.0 21.0 16.0 16.3 29.6 44.4 4.7 Interest Expense 2.2 2.1 1.4 9.7 20.0 20.8 21.3 Deferred financing cost amortization - - - 0.4 0.8 0.9 1.2 Other (income) expense - 0.2 0.1 (.2) (0.1) 1.8 (0.1) Income Taxes (a) - - - 2.2 3.1 7.4 (6.2) ------- ------- ------- ------- ------- ------- ------- Net Income (loss) $ 6.8 $ 18.7 $ 14.5 $ 4.2 $ 5.8 $ 13.5 $(11.5) ======= ======= ======= ======= ======= ======= ======= BALANCE SHEET DATA: Working capital 29.3 40.5 68.5 57.5 60.6 76.6 Total assets 53.1 65.3 105.8 332.0 357.5 350.8 Total debt, including current portion - - - 197.8 189.4 207.7 Stockholders' equity (b) 41.6 52.8 81.9 103.3 115.2 105.6 OTHER FINANCIAL DATA: EBITDA (c) 10.5 22.3 16.7 20.0 37.0 52.1 14.3 Depreciation and amortization 1.5 1.5 0.8 3.9 8.1 9.2 10.7 Interest expense 2.2 2.1 1.4 9.7 20.0 20.8 21.3 Capital expenditures 2.3 1.4 1.6 3.8 5.4 12.5 2.9 CASH FLOW DATA: Net cash provided by (used in) operating activities 17.3 8.2 (13.6) 16.2 20.3 (19.1) Net cash provided by (used in) investing activities (2.3) (1.4) (1.6) (3.8) (12.5) (2.9) Net cash provided by (used in) financing activities (14.2) (6.8) 14.8 (11.5) (8.9) 22.1 12 13 NOTES TO SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA (a) Historically, the Predecessor's taxable income was included in GPSI's taxable income. GPSI and its stockholders elected to be treated as an S Corporation for federal and certain state income tax purposes. Accordingly, no provision for income taxes is included in the Predecessor's financial statements. Generac has been subject to state and federal income taxes since July 9, 1998. (b) Stockholders' equity represents business unit investment for all Predecessor periods shown and represents common stock, paid-in-capital, retained earnings, accumulated other comprehensive income and excess of purchase price over book value of net assets acquired from entities partially under common control for periods subsequent to July 9, 1998. (c) EBITDA represents earnings before interest, taxes, depreciation, amortization and certain other non-recurring charges (principally the expenses from the withdrawn common stock offering). 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 accounting principles generally accepted in the United States of America and should not be considered as a substitute for operating performance computed in accordance with accounting principles generally accepted in the United States of America and should not be considered as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in conformity 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 historical operating results of Generac or the 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 historical financial statements included elsewhere in this report. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS References to Generac means Generac Portable Products, Inc. and its subsidiaries, on a consolidated basis, and, as the context requires, the Predecessor. The "Predecessor" refers to the Portable Products Division of GPSI. GENERAL The company is a leading designer, manufacturer and marketer of engine-powered tools and related accessories for use in both consumer and commercial applications. In 2000, the company generated $242.5 million in net sales, $4.7 million in operating income and $14.3 million in EBITDA. In 2000, domestic sales represented 90.9% of total net sales and international sales represented 9.1% of total net sales. 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 (principally the expenses from the withdrawn common stock offering). EBITDA is included herein because management believes that certain investors find it to be a useful tool for measuring a company's ability to service its debt. EBITDA is not a measure of operating performance computed in accordance with accounting principles generally accepted in the United States of America and should not be considered as a substitute for operating performance computed in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America, 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 those of the 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 report. 14 15 (dollars in millions) Pro Forma Company ----------------------------- ---------------------------------------------------------------- (unaudited) 1998 % of Sales 1999 % of Sales 2000 % of Sales ------------ -------------- ------------- ------------- ----------- --------------- Net Sales Domestic $ 255.4 92.4% $359.0 90.2% $220.4 90.9% International 21.0 7.6% 39.1 9.8% 22.1 9.1% ------------ -------------- ------------- ------------- ----------- --------------- Total net sales 276.4 100.0% 398.1 100.0% 242.5 100.0% Gross profit 73.8 26.7% 107.2 26.9% 50.4 20.8% Operating expenses 44.2 16.0% 62.8 15.8% 45.7 18.8% Operating income 29.6 10.7% 44.4 11.2% 4.7 1.9% Net income (loss) 5.8 2.1% 13.5 3.4% (11.5) -4.7% EBITDA 37.0 13.4% 52.1 13.1% 14.3 5.9% The company sells its portable generators, pressure washers and other products primarily to home center chains, mass merchants and warehouse clubs as well as to independent dealers. Generac's two largest customers, Home Depot and Sears, accounted for approximately 61% of total net sales in 2000, 62.5% in 1999 and 65.7% of total net sales in 1998. Generac's international sales represented approximately 9% of total net sales in 2000, 10% in 1999 and 8% in 1998. Cost of sales consists of the cost of engines and raw materials and costs to manufacture and package Generac's products. These costs may vary based on the volume of production for any given period. Prior to 2000, physical inventories had been taken during the fourth quarter to supplement the company's count procedures during the year. As a result, cost of sales and gross margins may be affected by adjustments recorded after physical inventories to reflect variances between actual and estimated costs. Operating expenses consist of costs incurred to sell and distribute Generac's products, including volume, promotional and other sales incentives, shipping, commissions and warranty costs. These costs are impacted by sales volume as other sales and service support costs, including personnel and training, research and development costs and general and administrative costs, are generally not impacted by incremental volume changes in the short run. The company's business dates back to 1959, when it was part of GPSI. In 1997, the company became a separately identifiable division of GPSI with separate financial reporting. On 15 16 July 9, 1998, Generac Portable Products, LLC acquired the production, marketing, sales, engineering, research and development (and in the U.K., Spain and Germany, importation) and administrative operations of GPSI's Portable Products Division located at its facilities in Wisconsin, England, Spain and Germany. The purchase price was approximately $314.2 million in cash, including $8.7 million in fees and expenses, after post-closing adjustments of $1.0 million. This was funded primarily through the issuance of $110.0 million of 11 1/4% Senior Subordinated Notes due 2006, borrowings of $94.2 million under a new bank credit facility and the issuance of $110.0 million of common stock of Generac Portable Products, Inc., constituting 100% of the outstanding Generac Portable Products, Inc. common stock, to The Beacon Group III - Focus Value Fund, L.P., members of management and other investors. Additionally, Generac Portable Products, LLC entered into a capital lease arrangement with GPSI for certain manufacturing equipment with a fair value of approximately $2.6 million. As a result of purchase accounting in connection with the acquisition, goodwill of approximately $214 million was recorded, which is being amortized on a straight-line basis over a period of 40 years. In addition, since the acquisition, the company's net income has been affected by an increase in interest expense as a result of the borrowings in connection with the acquisition. The pro forma results of operations for the year ended December 31, 1998 combines the results of the Predecessor for the period January 1, 1998 through July 9, 1998 with the company's results for the period July 10, 1998 through December 31, 1998 and have been prepared to reflect the consummation of the acquisition of the Predecessor on July 9, 1998, as if it had occurred on January 1, 1998, using the purchase method of accounting. As a result of the use of purchase accounting for the acquisition of the Predecessor, pro forma adjustments reflect increased goodwill and intangible asset amortization. In addition, pro forma adjustments were made to reflect increased interest expenses incurred on borrowings made in connection with the acquisition. Prior to July 10, 1998, the Predecessor's taxable income was included in GPSI's taxable income. GPSI and its stockholders elected to be treated as an S Corporation for federal and state income tax purposes. Accordingly, no provision for income taxes is included in the Predecessor's financial statements for periods prior to July 10, 1998. The company has been subject to state and federal income taxes since July 10, 1998. Consequently, a pro forma adjustment was made to reflect income taxes that would have been incurred prior to July 9, 1998. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Net sales. Net sales decreased $155.6 million, or 39.1%, to $242.5 million for 2000 from $398.1 million for 1999. Domestic sales decreased $138.6 million, or 38.6%, to $220.4 million for 2000 from $359.0 million for 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 2000, which combined with higher than normal generator inventory levels at retail customer locations has resulted in a lower 16 17 volume of customer orders for generators. Furthermore, the lack of tropical storms and weather events in 2000 as compared to 1999 adversely effected generator demand. 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 Menards, and an expanded pressure washer product offering at Sears. International sales decreased $17.0 million, or 43.5%, to $22.1 million for 2000 from $39.1 million for 1999. This decrease was primarily reflective of increased generator sales in 1999 by the company's branch in the United Kingdom to meet the strong demand of existing domestic customers as described above. This decrease in sales was partially offset by 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 $56.8 million, or 53.0%, to $50.4 million for 2000 from $107.2 million for 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 20.8% for 2000 from 26.9% for 1999. Operating expenses. Operating expenses decreased $17.1 million, or 27.2%, to $45.7 million for 2000 from $62.8 million for 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 18.8% for 2000 from 15.8% for 1999. Net income (loss). Net income decreased $25.0 million to a net loss of $11.5 million in 2000 from a net income of $13.5 million for 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 (4.7)% for 2000 from net income of 3.4% for 1999. EBITDA. EBITDA decreased $37.8 million, or 72.6%, to $14.3 million for 2000 from $52.1 million for 1999. This decrease was due to decreased sales volumes and gross margins as described above. As a percentage of sales, EBITDA decreased to 5.9% for 2000 from 13.1% for 1999. 17 18 YEAR ENDED DECEMBER 31, 1999 (COMPANY) COMPARED TO YEAR ENDED DECEMBER 31, 1998 (PRO FORMA) Net sales. Net sales increased $121.7 million, or 44.0%, to $398.1 million for 1999 from $276.4 million for 1998 pro forma. Domestic sales increased $103.6 million, or 40.6%, to $359.0 million for 1999 from $255.4 million for 1998 pro forma. This increase was primarily due to increased sales of generators and related accessories to existing customers resulting from new store additions and sales to new customers. A significant portion of the increased demand for generators resulted from consumer concerns relating to possible Year 2000 power outages. International sales increased $18.1 million, or 86.2%, to $39.1 million for 1999 from $21.0 million for 1998 pro forma. This increase was due to increased generator sales by the company's branch in the United Kingdom to meet the demand of existing domestic customers. Gross profit. Gross profit increased $33.4 million, or 45.3%, to $107.2 million for 1999 from $73.8 million for 1998 pro forma. This increase was due to increased overall sales as described above and improved gross margins due to a greater sales mix of higher margin generators, partially offset by higher costs incurred for certain engines. Gross profit margin increased slightly to 26.9% for 1999 from 26.7% for 1998 pro forma. Operating expenses. Operating expenses increased $18.6 million, or 42.1%, to $62.8 million for 1999 from $44.2 million for 1998 pro forma. The increase was due to increases in selling and service expenses and general and administrative expenses. Selling and service expenses increased due to selling and distribution costs that are impacted by sales volume and increases in sales force personnel, promotional expenses for new pressure washer product offerings, certain sales incentives offered to new domestic customers and incentives for sales into home centers in Germany. The increase in general and administrative expenses was reflective of increased training and support costs related to the company's new business software implementation and increases in personnel to support certain finance, accounting and human resource functions which had previously been shared with GPSI. As a percentage of sales, operating expenses decreased slightly to 15.8% for 1999 from 16.0% for 1998 pro forma. Net income. Net income increased $7.7 million, or 132.8%, to $13.5 million for 1999 from $5.8 million for 1998 pro forma. This increase in net income was primarily due to the availability of operating earnings from the increased sales volume to cover certain fixed charges. The increase was partially offset by approximately $1.2 million in costs incurred on a pretax basis 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 increased to 3.4% for 1999 from 2.1% for 1998 pro forma. EBITDA. EBITDA increased $15.1 million, or 40.8%, to $52.1 million for 1999 from $37.0 million for 1998 pro forma. This increase was due to increased sales volume and improved gross margins as described above. As a percentage of sales, EBITDA decreased slightly to 13.1% for 1999 from 13.4% for 1998 pro forma. 18 19 LIQUIDITY AND CAPITAL RESOURCES To finance its capital expenditure program and fund its operational and liquidity needs, Generac has relied principally on cash flow generated from operations and the $30 million revolving credit portion of its credit facility. Generac principally requires liquidity to meet debt service requirements, finance its capital expenditures and provide working capital. At December 31, 2000, Generac had approximately $207.7 million of outstanding debt, including $110.0 million of senior notes payable, $85.8 million under its credit facility, $10.5 million of senior zero coupon notes and $1.4 million under capital lease obligations. Cash interest paid during 2000 was approximately $21.4 million. Generac Portable Products, LLC is a party to a credit facility with a group of lenders and Bankers Trust Company, as Administrative Agent, under which it is able to borrow up to $115 million. The original credit facility consisted of a $45 million senior secured term loan facility, a $40 million senior secured term loan facility and a $30 million senior secured revolving credit facility, less the amount outstanding under letters of credit. Effective October 30, 2000, the company amended its credit facility which, among other things, waived existing financial covenant violations at September 30, 2000 and revised requirements relating to certain financial ratios and tests for periods through December 31, 2001 including maximum levels of leverage, minimum levels of interest coverage and minimum required levels of earnings before interest, income taxes, depreciation and amortization. Additionally, the amendment provides certain limits on the amount of outstanding revolving loans through March 31, 2001. As of March 15, 2001, Generac Portable Products, LLC had approximately $8.6 million of available funds under this credit facility. On July 2, 1998, Generac Portable Products, LLC and GPPW, Inc. issued $110.0 million of their 11-1/4% Senior Subordinated Notes (the "Notes") due 2006, which are guaranteed by Generac Portable Products, Inc. The senior notes are redeemable at the option of the issuers at any time after July 1, 2002 at an initial redemption price of 107.625% of the principal amount of the notes at maturity, plus accrued and unpaid interest, with declining redemption prices thereafter. Interest on the senior notes is payable semi-annually on January 1 and July 1 in the amount of $6,187,500. On November 20, 2000, The Beacon Group III - Focus Value Fund, L.P. (the "Fund"), Generac's majority stockholder, purchased a unit (the "Unit") consisting of a newly issued senior zero coupon note with an aggregate principal amount of $19.5 million, due July 1, 2006 and a warrant to purchase 340 shares of the common stock of Generac in exchange for an aggregate of $15 million in cash. The proceeds from the sale of the Unit were used by Generac to repay the principal of, and interest on, revolving indebtedness, and for general corporate purposes. Both the senior zero coupon notes and the warrants have been recorded in the financial statements at their estimated fair market values. Cash used in operating activities for the year ended December 31, 2000 totaled $19.1 million. The activity in operating cash flows during 2000 was primarily a result of the decreased 19 20 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 decrease was partially offset by other timing differences relating to supplier payments and customer receipts. Cash provided by operating activities for the year ended December 31, 1999 totaled $20.3 million. The activity in operating cash flows was primarily a result of 1999 earnings plus non-cash charges. Positive cash flows were partially offset by a net increase in working capital to support increased sales activity. Cash provided by operating activities totaled $16.2 million for the period July 10, 1998 through December 31, 1998 and cash used for operating activities totaled $13.6 million for the period January 1, 1998 through July 9, 1998. Capital expenditures were $2.9 million, $12.5 million and $5.4 million in 2000, 1999 and 1998, respectively. The capital expenditures related primarily to plant expansions at the company's facilities, new production machinery, and updating the company's business software. Generac expects to spend approximately $2.5 million in 2001 for various capital projects, including cost improvement and quality enhancement initiatives and updating management information systems. Generac spent approximately $2.6 million, $2.7 million and $1.9 million in 2000, 1999 and 1998, respectively, on research and development. The company expects its principal sources of liquidity to be from its operating activities and funding from the revolving portion of the credit facility. Based upon the current level of operations and anticipated growth, Generac believes that future cash flow from operations, together with available borrowings under the credit facility 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. INITIAL PUBLIC OFFERING COSTS During 1999, Generac incurred approximately $1.2 million of expenses in conjunction with its efforts to complete an initial public offering of its common stock. Generac withdrew its offering during July 1999 as it did not believe that the price at which the stock could be sold adequately represented the value of the company at that time. Consequently, these costs were expensed during the year ended December 31, 1999. RAW MATERIAL COSTS AND INFLATION The rate of inflation over recent years has been relatively low and has not had a significant effect on Generac's results of operations. Approximately 47% of Generac's cost of goods sold relate to small gasoline engines which in total have not been subject to material price fluctuations. Generac purchases steel, copper, paperboard, and plastics from various suppliers. While all such materials are available from numerous independent suppliers, commodity raw materials are subject to price fluctuations. 20 21 EURO CONVERSION On January 1, 1999, member countries of the European Monetary Union (EMU) began a three-year transition from their national currencies to a new common currency, the "Euro". In the first phase, the permanent rates of exchange between the members' national currency and the Euro were established and monetary, capital, foreign exchange, and interbank markets were converted to the Euro. National currencies will continue to exist as legal tender and may continue to be used in commercial transactions. By January 2002, Euro currency will be issued and by July 2002, the respective national currencies will be withdrawn. Generac has operations in member countries of the EMU and, accordingly, has established action plans that are continuing to be implemented to address the Euro's impact on information systems, currency exchange rate risk, taxation, contracts, competition and pricing. Based on its current assessment, management believes that the costs of the Euro conversion will not have a material impact on Generac's operations, cash flows or financial condition. FUTURE ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires all derivative instruments to be recorded in the consolidated balance sheets at their fair value. Changes in fair value of derivatives are required to be recorded each period in current earnings or other comprehensive income (loss), depending on whether the derivative is designated as part of a hedge transaction and if it is, the type of hedge transaction. In June 1999, the statement's effective date was delayed by one year, and it will be effective January 1, 2001 for Generac. Given the company's current derivative and hedging activities, the effect of adoption will not have a material effect on the company's results of operations or financial position. In January 2001, the Emerging Issues Task Force ("EITF") reached a consensus on a subset of EITF No. 00-22, "Accounting for "Points" and Certain Other Time- or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future." This issue requires recognition of the liability associated with time- or volume-based incentives as earned by the customer and classification of these incentives as a reduction of net revenue. EITF 00-22 is effective for the Company in the first quarter of 2001. The Company classifies these incentives as selling and service expense and is currently evaluating the impact of implementing EITF 00-22. SUBSEQUENT EVENTS On March 21, 2001, Generac Portable Products, Inc. entered into an Agreement and Plan of Merger (the "Merger Agreement") with Briggs & Stratton Corporation ("Briggs"), GPP Merger Corporation, a wholly owned direct subsidiary of Briggs, and The Beacon Group III - Focus Value Fund, L.P., the majority shareholder of Generac ("Beacon"), providing for the merger of GPP Merger Corporation into Generac, with Generac as the surviving corporation. The closing of the Merger is expected to occur on (a) the later of April 30, 2001 or (b) the second business day after satisfaction of the conditions of the Merger. 21 22 Pursuant to the terms of the Merger Agreement, the existing shareholders of Generac and the holders of warrants to purchase Generac stock (collectively, the "Shareholders") will receive (a) $55 million, adjusted downward for purchase price adjustments related to the failure, if any, to meet certain targets for shareholders' equity and working capital minus the transaction costs of Generac and the Shareholders (the "Base Price"), plus (b) an amount (the "Earnout") equal to (A) 40% of the amount by which Generac's consolidated earnings before interest, taxes, depreciation and amortization, excluding unusual gains and losses, for the 12-month period ending June 30, 2002, multiplied by 6, exceeds the sum of the Base Price plus the transaction costs of Generac and the Shareholders plus the aggregate amount of indebtedness of Generac on a consolidated basis as of the closing of the Merger, minus (B) the amount, if any, payable to holders of options for Generac stock, which options will be cancelled in connection with the Merger. In no event, however, will the sum of the Base Price plus the transaction costs of Generac and the Shareholders plus the aggregate amount of indebtedness of Generac on a consolidated basis as of the closing of the Merger plus the Earnout plus the option payments exceed $350 million. It is expected that the Merger will constitute a "change of control" under the Indenture dated as of July 1, 1998 (the "Indenture") between Generac Portable Products, LLC ("LLC") and GPPW Inc. ("GPPW" and together with LLC, the "Offerors") and HSBC Bank USA (formerly Marine Midland Bank), as trustee, with respect to the 11-1/4% Senior Subordinated Notes due 2006 (the "Notes") of the Offerors. The Offerors are wholly owned subsidiaries of Generac. As a consequence of the "change of control", the Offerors will be obligated within 30 days after the Merger is consummated to make an offer to purchase all or a portion of the Notes at a purchase price equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the date of payment. In addition, it is expected that consummation of the Merger will constitute an event of default under Generac's existing credit facility under the Credit Agreement dated as of July 9, 1998 among LLC, GPPW, Bankers Trust Company, as administrative agent, and the various banks and financial institutions parties thereto (as amended, the "Credit Agreement"). If LLC is unable to obtain a waiver of such event of default, LLC's lenders under the Credit Agreement may cause the loans thereunder to become immediately due and payable. In addition, it is also expected that consummation of the Merger will constitute an event of default under LLC's zero coupon notes due July 1, 2006 under the Unit Purchase Agreement, dated as of November 20, 2000, among Generac, LLC and Beacon. If LLC is unable to obtain a waiver of such event of default, Beacon may cause such zero coupon notes to become immediately due and payable. In the event LLC defaults on the Credit Agreement or the zero coupon notes and the lenders or Beacon, as the case may be, cause the loans or zero coupon notes to become immediately due and payable, there can be no assurance that LLC will be able to make its respective payments thereunder or that LLC will be able to pay the Notes upon the occurrence of an event of default following the acceleration of amounts owing under the Credit Agreement or the zero coupon notes. LLC expects that an event of default will occur under the Credit Agreement on March 31, 2001 arising from a failure by Generac to comply with one or more financial covenants set forth in the Credit Agreement. LLC intends to seek a waiver of such event of default from the lenders party to the Credit Agreement. If such event of default occurs and LLC is unable to obtain a 22 23 waiver of such event of default, the lenders under the Credit Agreement may cause the loans thereunder to become immediately due and payable, which would constitute an event of default under the zero coupon notes and the Notes. There can be no assurance that LLC would be able to make payments under the Credit Agreement, the zero coupon notes and the Notes in such circumstances. On March 27, 2001, Generac Portable Products, LLC and GPPW, Inc. commenced a cash tender offer and consent solicitation (the "Offer") for all of the Notes, upon the terms and subject to the conditions set forth in the Offer, for $1,010 for each $1,000 principal amount of Notes validly tendered pursuant to the Offer. In addition, tendering holders of the Notes will receive accrued and unpaid interest on their Notes accepted for purchase to, but not including, the payment date. The Offer will expire at on April 27, 2001, unless extended. In conjunction with the Offer, the company is soliciting consents of the registered holders of Notes to the adoption of certain proposed amendments to the Indenture relating to the Notes. The proposed amendments will be effective when the Offer is consummated as to all Notes that are not purchased in the Offer, provided all other conditions to the Offer have otherwise been satisfied. The Offer is being made in connection with the Merger Agreement entered into on March 21, 2001 and is conditioned upon, among other things, the completion of the merger and the receipt of the consents necessary to adopt the proposed amendments as well as certain other conditions. ITEM 7A. 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 financial instruments. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of financial instruments for trading purposes. A discussion of the company's accounting policies for derivative financial instruments is included in the summary of Significant Accounting Policies in Note 2 to the Consolidated Financial Statements included elsewhere in this report. The fair value of the Notes is estimated at $28.1 million as of December 31, 2000 based upon market quotations as of that date. Generac estimates that this fair value would increase by approximately $3.9 million based upon an assumed 10% decrease in market interest rates and that the fair value would decrease by approximately $3.1 million based upon an assumed 10% increase in market interest rates, compared with the average, effective yield at December 31, 2000. Generac uses interest rate swaps to modify the company's exposure to interest rate movements. Net interest payments or receipts from interest rate swaps are recorded as adjustments to interest expense in the consolidated statement of operations on a current basis. The company's earnings exposure related to adverse movements in interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to Eurodollar money rates. A 10% increase/decrease in the average interest rate of 10.0% at December 31, 2000 on the company's debt under its bank credit facility would result in an increase/decrease in annual pre-tax interest expense of approximately $513,000 after giving effect to an outstanding interest rate 23 24 swap. A 10% increase/decrease in Eurodollar rates would increase/decrease the fair value of the interest rate swap by approximately $425,000 as compared to its fair value at December 31, 2000. Generac has manufacturing, sales and distribution facilities throughout Europe and sources raw materials from around the world. Accordingly, Generac Portable Products makes investments and enters into transactions denominated in various foreign currencies. Generac is primarily exposed to fluctuations in various European currencies. Due to the relative stability of these currencies, management has not deemed it necessary to currently pursue a foreign currency hedging strategy. Management does not believe the company's foreign currency exposure is material. The company's exposure to commodity price changes relates to certain manufacturing operations that utilize raw commodities. Generac manages its exposure to changes in those prices primarily through its procurement and sales practices. This exposure is not material to Generac. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The company's financial statements are included in this report as indicated in the Index to Financial Statements and Financial Statement Schedules on page 38 and incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 24 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS The following table sets forth the name, age and position of each of the directors and executive officers of Generac. NAME AGE POSITION - ---- --- -------- Dorrance J. Noonan, Jr 48 President, Chief Executive Officer and Director of Generac Portable Products, LLC; Director and Vice President of Generac Portable Products, Inc.; Vice President of GPPW, Inc . Gary J. Lato 41 Chief Financial Officer and Secretary of Generac Portable Products, LLC; Secretary and Vice President of Generac Portable Products, Inc.; Vice President of GPPW, Inc. James H. Deneffe 57 Senior Vice President - Sales, Generac Portable Products, LLC Wesley C Sodemann 57 Vice President of Engineering, Generac Portable Products, LLC J. David Bramhill 45 Vice President of Operations, Generac Portable Products, LLC Robert M. Saeger 55 Vice President of Service and Planning, Generac Portable Products, LLC Timothy J. Lemont 47 Vice President of Marketing, Generac Portable Products, LLC Rosemary A. Wallner 44 Vice President of Human Resources of Generac Portable Products Portable Products, LLC Faith Rosenfeld 49 President of GPPW, Inc. Eric R. Wilkinson(1) 45 President and Director of Generac Portable Products, Inc. Richard A. Aube 32 Secretary, Treasurer and Director of GPPW, Inc.; Treasurer of Generac Portable Products, Inc.; Director of Generac Portable Products, LLC R. Eugene Cartledge(1)(2) 71 Chairman of the Board of Generac Portable Products, Inc. Thomas A. Commes(2) 58 Director of Generac Portable Products, Inc. Thomas G. Mendell 54 Director of Generac Portable Products, Inc. R. Ralph Parks(1) 57 Director of Generac Portable Products, Inc. James P. Schadt(2) 62 Director of Generac Portable Products, Inc. - ------------------------- (1) MEMBER OF THE COMPENSATION COMMITTEE (2) MEMBER OF THE AUDIT COMMITTEE 25 26 DORRANCE J. NOONAN, JR., President, Chief Executive Officer and Director of Generac Portable Products, LLC and Director of Generac Portable Products, Inc. since July 1998 and Vice President of Generac Portable Products, Inc. and GPPW, Inc. since September 1999, served in various management positions with GPSI from 1990 to 1998, most recently as Chief Operating Officer from 1997 to 1998. Prior to joining GPSI, Mr. Noonan was Manager of Sales and Marketing at Artcraft Industries from 1988 to 1990, a registered securities broker at Prudential-Bache Securities from 1985 to 1988, and Manager of International Sales and Marketing at the Perfex Division of McQuay-Perfex from 1981 to 1985. GARY J. LATO, Chief Financial Officer and Secretary of Generac Portable Products, LLC since July 1998 Vice President of Generac Portable Products, Inc. and GPPW, Inc. since September 1999 and Secretary of Generac Portable Products, Inc. since June 2000, joined GPSI in 1991, serving as Director of Finance in 1991 and as Vice President -- Finance from 1992 to 1998. Prior to joining GPSI, Mr. Lato held various positions, including most recently as Senior Audit Manager, at Price Waterhouse LLP from 1981 to 1991. JAMES H. DENEFFE, Senior Vice President -- Sales of Generac Portable Products, LLC since July 1998, held that position at GPSI from 1996 to 1998. Mr. Deneffe joined GPSI in 1978, serving as Vice President -- Consumer Products Sales and Marketing from 1982 to 1995 and as Group Sales Manager from 1978 to 1981. WESLEY C. SODEMANN, Vice President of Engineering of Generac Portable Products, LLC since July 1998, held that position at GPSI from 1996 to 1998. Mr. Sodemann also served as Chief Engineer of GPSI from 1979 to 1996 and as Associate Engineer from 1965 to 1979. J. DAVID BRAMHILL, Vice President of Operations of Generac Portable Products, LLC since December 2000. Mr. Bramhill served as Vice President of International Operations since July 1998, held that position at GPSI from 1997 to 1998 and served as European Operations Manager for GPSI from 1992 to 1996. Prior to joining GPSI, Mr. Bramhill served in various management and engineering positions at Heulins Manufacturing, Crewe, Cheshire, England (1991 to 1992) and Rolls-Royce Motor Car Company, Ltd. and Rolls-Royce Aerospace, Crewe, Cheshire, England (1972 to 1991). ROBERT M. SAEGER, Vice President of Service and Planning of Generac Portable Products, LLC, has held that position since July 1998. From 1997 to 1998, Mr. Saeger served as Director of Accounting/Controller with GPSI and also served as Director of Accounting and Financial Control from 1990 to 1996, as Accounting Manager from 1983 to 1990 and as Assistant Controller from 1976 to 1983. TIMOTHY J. LEMONT, Vice President of Marketing of Generac Portable Products, LLC, joined Generac in March 1999. Prior to this he was with Harnischfeger Industries, Inc. from 1985 to 1999, most recently as Vice President of Business Development for the P&H Mining Equipment Division. In addition, Mr. Lemont has held various positions, including most recently as Senior Tax Manager, at Price Waterhouse LLP in Milwaukee, Wisconsin from 1980 through 1985. ROSEMARY A. WALLNER, Vice President of Human Resources of Generac Portable Products, LLC, joined Generac in July 1999. Prior to this she served as Vice President of Human Resources with RVSI Systemation Engineered Products from 1998 to 1999. In addition, 26 27 Ms. Wallner served as Vice President of Human Resources for GB Electrical, a wholly-owned subsidiary of Applied Power, Inc., from 1989 to 1997, with a one year assignment as Director of Manufacturing. FAITH ROSENFELD, President of GPPW, Inc. since July 1998, has been a Managing Director of The Beacon Group, LLC (an affiliate of The Beacon Group III -- Focus Value Fund, L.P.) since its inception in 1993. Prior to joining The Beacon Group, LLC, Ms. Rosenfeld was employed by Goldman, Sachs & Co. for 14 years where she held various positions, including, most recently, Vice President, Investment Banking Division. Ms. Rosenfeld is a director of SBL, Inc. and Savia International, Ltd. ERIC R. WILKINSON, President and Director of Generac Portable Products, Inc. since July 1998, has been a Managing Director of The Beacon Group, LLC since 1994. Prior to joining The Beacon Group, LLC, Mr. Wilkinson was a partner of Apax Partners & Cie SA, a European private equity firm, from 1989 to 1994 and a partner of Bain & Company, the strategy-consulting firm, from 1983 to 1989. Mr. Wilkinson is a director of Doctors Health Systems, Etinuum Inc., EyeWeb, Inc., The Identity Group, OnCare Inc., National Century Financial Enterprises, Inc. and International Components Corporation. RICHARD A. AUBE, Treasurer of Generac Portable Products, Inc., Director of Generac Portable Products, LLC and Secretary, Treasurer and Director of GPPW, Inc. since July 1998, has been with The Beacon Group, LLC since 1993, most recently as a Managing Director. Prior to joining The Beacon Group, LLC, Mr. Aube was a financial analyst in the Natural Resources Group of Morgan Stanley & Co. Incorporated. Mr. Aube is a director of Capstone Turbine Corporation. R. EUGENE CARTLEDGE, Chairman of the Board of Generac Portable Products, Inc. since July 1998, was Chairman of the Board and Chief Executive Officer of Union Camp Corp. from 1986 until his retirement in June 1994. Mr. Cartledge is a director of Blount, Inc., Chase Brass Industries, Inc., Delta Airlines Incorporated, Sunoco, Inc., Union Camp Corp. and UCAR International Inc. THOMAS A. COMMES, Director of Generac Portable Products, Inc. since March 1999, served as President, Chief Operating Officer and director of The Sherwin-Williams Company from 1986 until his retirement in 1999. Mr. Commes is also a director of KeyCorp, and is a trustee of The Cleveland Clinic Foundation and Vocational Guidance Services. THOMAS G. MENDELL, Director of Generac Portable Products, Inc. since July 1998, has been a Managing Director of The Beacon Group, LLC since 1994. Prior to joining The Beacon Group, LLC, Mr. Mendell was a partner of Goldman, Sachs & Co. where he served as a member of the firm's Investment Committee and head of GS Capital. Mr. Mendell is a director of Doctors Health Systems, Wallace Theaters, Inc., Coherent Networks, Inc., The Identity Group and OnCare Inc. R. RALPH PARKS, Director of Generac Portable Products, Inc. since July 1998, has been a Managing Director of The Beacon Group, LLC , since 1999. Mr. Parks was previously a 27 28 limited partner of the The Beacon Group, LP (an affiliate of The Beacon Group III -- Focus Value Fund, L.P.) since 1997. Prior to joining The Beacon Group, LP, Mr. Parks was a partner of Goldman, Sachs & Co. and head of its Investment Banking Services for Europe and Canada. JAMES P. SCHADT, Director of Generac Portable Products, Inc. since July 1999, had been active with the management of Reader's Digest Association, Inc. from 1991 until his retirement in 1997, serving as director and as the President and Chief Operating Officer and, later, as the Chairman and Chief Executive Officer. Mr. Schadt is currently the Chairman of Dailey Capital Management, L.P., and he is a trustee and Chairman of the Weinberg College of Arts and Sciences Board of Advisors. Mr. Schadt is also a trustee of the American Enterprise Institute and a director of TSI International Inc. Directors of each of Generac Portable Products, LLC, GPPW, Inc. and Generac Portable Products, Inc. will hold office until his or her successor has been elected and qualified. Officers of each of Generac Portable Products, LLC, GPPW, Inc. and Generac Portable Products, Inc. are elected by their respective boards of directors and serve at the discretion of such boards of directors. 28 29 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information regarding the compensation paid during the company's last three completed fiscal years to the Chief Executive Officer and each of the other four most highly compensated executive officers of Generac as of December 31, 2000. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION (1) NAME AND ------------------- ALL OTHER PRINCIPAL POSITION YEAR SALARY ($) BONUS($) COMPENSATION ($) - ------------------ ---- ---------- -------- ---------------- Dorrance J. Noonan, Jr. Chief Executive Officer 2000 200,000 156,000 9,912 1999 160,000 23,169 13,132 1998 136,500 26,340 5,287 Gary J. Lato Chief Financial Officer 2000 175,000 131,250 4,730 1999 150,000 22,336 6,977 1998 131,250 25,500 3,127 James H. Deneffe Senior Vice President Sales and Marketing 2000 175,000 131,250 18,287 1999 150,000 22,336 20,072 1998 131,250 25,500 11,737 Wesley C. Sodemann Vice President of Engineering 2000 140,000 64,625 20,925 1999 110,000 18,963 17,896 1998 101,923 24,000 56,258 Timothy J. Lemont Vice President of Marketing 2000 140,000 73,438 9,174 1999 91,346 - 3,313 (1) All other compensation includes the value of deferred compensation agreements maintained with the officers of Generac Portable Products, LLC. 29 30 OPTION GRANTS IN LAST FISCAL YEAR There were no options granted during fiscal 2000 to the executive officers named in the Summary Compensation Table. Furthermore, there were no options granted to board members and certain key employees during 2000. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the executive officers named in the Summary Compensation Table concerning the options granted during fiscal 1999 and 1998 and outstanding at fiscal year-end 2000. To date, no such options have been exercised. NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FY-END AT FY-END (1) ACQUIRED ON VALUE --------------------------------- ------------------------------------ NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------- ------------ ------------ -------------- ----------------- --------------- ------------------ Dorrance J. Noonan, Jr. - - 101.190 151.786 $ - $ - Gary J. Lato - - 80.952 121.429 - - James H. Deneffe - - 40.476 60.714 - - Wesley C. Sodemann - - 40.476 60.714 - - Timothy J. Lemont - - 40.476 60.714 - - (1) Assumes the fair market value of the shares underlying the options is $6,221.72 as compared to the exercise prices (ranging from $12,941 to $16,349 per share) payable for such shares. The fair market value at fiscal year-end 2000 of $6,221.72 is approximately the price per share at which the company was valued in conjunction with the sale of the company's stock to Briggs and Stratton Corporation subsequent to December 31, 2000. See also discussion at "Subsequent Event" in Part II, Item 7 of this report. DIRECTOR'S COMPENSATION Directors of Generac do not receive director's fees or attendance fees. Directors are reimbursed for their reasonable expenses incurred in connection with attending meetings and performing their duties as directors. Outside directors are eligible to receive options to purchase Generac Portable Products, Inc. common stock pursuant to the the company's stock option plan. See "-- Stock Option Plan." Options to purchase 202.380 shares of Generac Portable Products, Inc. common stock were granted to certain directors during 1998. Options to purchase 101.190 shares of common stock were granted to certain directors during 1999. A total of 50.595 of options to purchase shares of Generac Portable Products, Inc. common stock were forfeited by a director during 1999. 30 31 BENEFIT PLANS Generac has established two non-contributory defined benefit plans covering substantially all employees: bargaining/hourly and non-bargaining/salaried groups. Participants begin vesting after three years of service and fully vest after seven years of service. The benefits paid under the salaried plan are based upon years of service and the participant's defined final monthly compensation. Benefits paid under the hourly plan are based on a unit amount at the date of termination multiplied by the participants' credited service. The plans provide for a continuation of participant's years of service credited with GPSI. Generac Portable Products has also established 401(k) employee retirement savings plans for the benefit of its employees. Generac pays all administrative costs of the plan. The company contribution for the year ended December 31, 2000 was approximately $132,000. No contributions were made to the plan for the year ended December 31, 1999 or for the period ended December 31, 1998. Additionally, there are unfunded deferred compensation plans for certain key employees. STOCK OPTION PLAN In order to attract, retain and motivate selected employees, officers and directors, and to encourage such persons to devote their best efforts to the business and financial success of Generac, Generac has adopted the Generac Portable Products, Inc. Stock Option Plan. Under this Plan, stock options to acquire up to 1,619 shares of common stock, in the aggregate, may be granted under a time-vesting formula at an exercise price equal to the fair market value of the common stock at the date of grant. The options become exercisable in equal increments beginning on the first anniversary of the grant date over a three to five-year period and expire ten years subsequent to the grant date. Stock option transactions for the years ended December 31, 2000, 1999 and the period from July 9, 1998 through December 31, 1998 are summarized as follows: 2000 1999 1998 ------------------------- -------------------------- -------------------- Options granted - 304 1,164 Exercise price - options granted N/A $ 16,349 $ 12,945 Options forfeited 101 51 - Exercise price - options forfeited $ 12,945 $ 12,945 N/A Options outstanding 1,316 1,417 1,164 Exercised options - - - Exercisable options 557 243 - Remaining contractual life (years) 8.4 9.4 8.5 Fair value at grant date N/A $ 5,469 $ 4,340 31 32 The fair value was estimated using the minimum value method in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", assuming an expected option life of 7 years and a risk-free interest rate of 6%. The stock option plan is administered by Generac Portable Products, Inc.'s board of directors. The board of directors designates which employees of Generac are eligible to receive awards under the stock option plan, and the amount, timing and other terms and conditions applicable to such awards. As of December 31, 2000 approximately 3.6% of the outstanding shares of such stock were reserved for future grants. Options are exercisable in accordance with the terms established by the board of directors. COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION The Compensation Committee of the board of directors of Generac Portable Products, Inc. establishes salary, incentives and other forms of compensation. During the year ending December 31, 2000, the Compensation Committee was composed of Messrs. Cartledge and Wilkinson. During the year ended December 31, 2000, none of the company's executive officers served on the board of directors or on the compensation committee of any other entity which has one or more executive officers serving as a member of Generac Portable Products, Inc.'s board of directors or the Compensation Committee. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of the common stock of GPPW, Inc. is held by Generac Portable Products, Inc. All of the equity interest in Generac Portable Products, LLC is held indirectly by Generac Portable Products, Inc. through two wholly owned subsidiaries: GPPD, Inc. and GPPW, Inc. GPPD, Inc. holds 95% of the limited liability company interests in Generac Portable Products, LLC and GPPW, Inc. holds the remaining 5% interest. The following table sets forth certain information as of March 1, 2001, with respect to the beneficial ownership of Generac Portable Products, Inc.'s common stock by (1) each person who beneficially owns more than 5% of such shares; (2) each of Generac's directors; (3) each of the executive officers named in the Summary Compensation Table; and (4) all executive officers and directors of Generac as a group. Unless otherwise indicated, the address for each of our officers and directors is c/o Generac Portable Products, Inc., 1 Generac Way, Jefferson, Wisconsin 53549. Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days are deemed outstanding, while such shares are not deemed outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated in the footnotes below, the following persons and entities have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable. 32 33 SHARES BENEFICIALLY OWNED -------------------------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT - ------------------------------------- ------------------- ------------ 5% HOLDERS: The Beacon Group III - Focus Value Fund, L.P. (1) 5,038.182 (14) 59.3% California Public Employees' Retirement System (2) 1,931.818 22.7% Capital d' Amerique CDPQ Inc. (3) 571.818 6.7% DIRECTORS: R. Eugene Cartledge (4) 80.094 (5) * Thomas G. Mendell 5,038.182 (6) 59.3% R. Ralph Parks 67.460 (7) * Thomas A. Commes 33.730 (5) * Eric R. Wilkinson 5,038.182 (6) 59.3% James P. Schadt 16.865 (13) * OFFICERS: Dorrance J. Noonan, Jr. 178.463 (8) 2.1% Gary J. Lato 158.225 (9) 1.9% James H. Deneffe 117.749 (10) 1.4% Wesley C. Sodemann 42.408 (10) * Timothy M. Lemont 40.476 (10) * Faith Rosenfeld 5,038.182 (6) 59.3% All directors and executive officers as a group (15 individuals) (12) 840.525 (11) 9.9% - ---------------- * Less than 1%. (1) The address of The Beacon Group III -- Focus Value Fund, L.P. is 399 Park Avenue, New York, New York 10022. (2) The address of California Public Employees' Retirement System is Lincoln Plaza -- 400 P Street, P.O. Box 942707, Sacramento, California 94229. (3) The address of Capital d'Amerique CDPQ Inc. is 1981, Avenue McGill College, 9th Floor, Montreal, Quebec H3A3C7. (4) 23.182 shares are owned by the Cartledge Family Limited Partnership, of which Mr. Cartledge is the general partner. 33 34 (5) Includes options to purchase 33.730 shares of common stock currently exercisable. (6) Messrs. Wilkinson and Mendell and Ms. Rosenfeld may be deemed to share beneficial ownership of shares of common stock owned of record by The Beacon Group III -- Focus Value Fund, L.P. by virtue of their status as partners of The Beacon Group, an affiliate of the general partner of The Beacon Group III -- Focus Value Fund, L.P. Messrs. Wilkinson and Mendell and Ms.Rosenfeld disclaim beneficial ownership of the shares of common stock owned by The Beacon Group III -- Focus Value Fund, L.P. The business address of Messrs. Wilkinson and Mendell and Ms. Rosenfeld is c/o The Beacon Group III -- Focus Value Fund, L.P., 399 Park Avenue, New York, New York 10022. (7) Includes options to purchase 67.460 shares of common stock currently exercisable. (8) Includes options to purchase 101.190 shares of common stock currently exercisable. (9) Includes options to purchase 80.952 shares of common stock currently exercisable. (10) Includes options to purchase 40.476 shares of common stock currently exercisable. (11) Includes options to purchase 556.548 shares of common stock currently exercisable. (12) Does not include 5,038.182 shares as to which Messrs. Wilkinson and Mendell and Ms. Rosenfeld may be deemed to have beneficial ownership by virtue of their indirect control of The Beacon Group III -- Focus Value Fund, L.P. (13) Includes options to purchase 16.865 shares of common stock currently exercisable. (14) Includes warrants to purchase 340 shares of common stock currently exercisable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PRINCIPAL STOCKHOLDERS' AGREEMENT The Beacon Group III -- Focus Value Fund, L.P., certain other of Generac Portable Products, Inc.'s stockholders and Generac Portable Products, Inc. entered into a stockholders' agreement for the purposes, among others, of establishing the composition of the board of directors of Generac Portable Products, Inc. and limiting the manner and terms by which the common stock owned by the stockholders may be transferred. The provisions of the stockholders' agreement generally terminate upon the occurrence of a registered underwritten public offering of common stock having an aggregate offering price of at least $100 million. The following summary of the material terms of the stockholders' agreement is not intended to be exhaustive and is qualified in its entirety by reference to the provisions of the stockholders' agreement. 34 35 ELECTION OF DIRECTORS. Until the occurrence of a public offering as described above or at the time Beacon ceases to hold 25% or more of the outstanding shares of common stock, each stockholder has agreed to vote all of its shares so that: - at least four members of the board are designated by Beacon; - the chief executive officer of Generac Portable Products, LLC is a member of the board; - the removal from the board, with or without cause, of any Beacon-designated director is only at Beacon's written request; and - in the event that any Beacon-designated director for any reason ceases to serve as a member of the board during his or her term of office, the resulting vacancy is filled by an individual designated by Beacon. RESTRICTIONS ON TRANSFER OF SHARES. The minority stockholders have agreed that they will not sell or transfer any interest in any of their shares except pursuant to a public sale or as otherwise permitted or required in accordance with the terms of the stockholders' agreement. FIRST OFFER RIGHT. If a minority stockholder desires to sell any of its shares other than to a permitted transferee or pursuant to a public sale, then Generac Portable Products, Inc. has the right to elect to purchase all, but not less than all, of the offered shares on substantially the same terms and conditions as the proposed sale. Generac Portable Products, Inc. may elect to assign its right to purchase the offered shares to the non-selling stockholders on a pro rata basis. In the event an assignment by Generac Portable Products, Inc. is made and any non-selling stockholder fails to elect to participate in the selling stockholder's sale of shares, the participating stockholders each have the right to purchase such non-participating stockholder's pro rata share of the unsubscribed portion of offered shares. If Generac Portable Products, Inc. or, in the event an assignment by Generac Portable Products, Inc. is made, the non-selling stockholders do not elect to purchase all of the offered shares, the selling stockholder is free to sell the offered shares to any person other that Generac Portable Products, Inc. at a price no less than and upon terms and conditions no more favorable than the price, terms and conditions set forth in the selling stockholder's notice to Generac Portable Products, Inc. and each other stockholder. TAG-ALONG RIGHTS. In the event of a sale of its shares by a minority stockholder to a third party purchaser, each non-selling minority stockholder has the right to participate in the proposed sale of shares in an amount up to such non-selling stockholder's pro rata share of shares, on the same terms and conditions as the proposed sale. If Beacon desires to sell any of its shares other than to a permitted transferee or pursuant to a public sale, each non-selling stockholder has the right to participate in the sale by Beacon of its shares, in a percentage of such non-selling stockholder's shares equal to the same percentage of Beacon's shares being sold by Beacon, at the same price, on the same terms and conditions as the proposed sale. 35 36 To the extent any of the non-selling stockholders exercises its tag-along rights, the number of shares proposed to be sold by Beacon or the selling stockholder, as the case may be, will be correspondingly reduced. If any non-selling stockholder fails to elect to participate in Beacon's or the selling stockholder's sale, Beacon or the selling stockholder, as the case may be, will give notice of such failure to the remaining non-selling stockholders who did so elect. Each participating stockholder shall have the right to sell its pro rata share of the unsubscribed portion of shares proposed to be sold. LIMITATION ON CERTAIN ACTIONS BY GENERAC PORTABLE PRODUCTS, INC. Without the prior affirmative vote of the stockholders who hold at least a majority of the outstanding common stock, Generac Portable Products, Inc. has agreed not to: - adopt or effect any plan of sale, merger, consolidation, dissolution, reorganization or recapitalization of Generac Portable Products, Inc.; - offer for sale or sell all or substantially all of the assets of Generac Portable Products, Inc.; - amend or restate the certificate of incorporation or the bylaws other than in conformity with the stockholders' agreement; - redeem any shares of capital stock of Generac Portable Products, Inc. other than pursuant to the stockholders' agreement or on a pro rata basis among all stockholders; or - change the type of business activities in which Generac Portable Products, Inc. is engaged. SALE OF GENERAC/COME-ALONG RIGHT. Each stockholder has agreed, if the board and the stockholders holding at least a majority of the outstanding shares approve a sale of Generac Portable Products, Inc., to vote for such sale and to take all actions, at Generac Portable Products, Inc.'s expense, reasonably requested by Generac Portable Products, Inc. in order to consummate such sale. PARTICIPATION/PREEMPTIVE RIGHTS. Generac Portable Products, Inc. has agreed to grant to each stockholder the right to purchase all or any part of such stockholder's proportionate percentage of any future eligible offering. REGISTRATION RIGHTS. Beacon and certain other stockholders of Generac Portable Products, Inc. are entitled, under the Stockholders' Agreement, to certain rights with respect to the registration of their shares of common stock under the Securities Act of 1933 following an initial public offering of Generac Portable Products, Inc. common stock. Beacon may require that Generac Portable Products, Inc. use its best efforts to register its registrable securities for public resale, provided that the anticipated offering price would exceed $25 million. Generac Portable Products, Inc. must bear all the registration expenses for two of the registrations that Beacon is entitled to. The other holders of registrable securities may require that Generac Portable 36 37 Products, Inc. use its best efforts to register their registrable securities for public resale on Form S-3, provided that the expected offering price would exceed $10 million. Generac Portable Products, Inc. must bear all the registration expenses for all of the Form S-3 registrations that are not underwritten and for three of the Form S-3 registrations that are underwritten. If Generac Portable Products, Inc. registers any of its common stock for its own account, the holders of registrable securities are entitled to include their shares of common stock in the registration, subject to the ability of the underwriters to limit the number of shares included in the offering. Generac Portable Products, Inc. must bear all registration expenses. EMPLOYEE STOCKHOLDERS' AGREEMENT Employees who own stock of Generac Portable Products, Inc. are also subject to an employee stockholders' agreement. This agreement restricts their right to transfer their stock except with the written consent of Beacon or otherwise in compliance with the terms of the agreement. In addition, under certain conditions, this agreement will require them to sell a pro rata portion of their stock in a transaction in which Beacon is selling its stock. This agreement also provides the employees with tag-along rights if Beacon sells its stock and provides Generac Portable Products, Inc. the right to purchase stock held by terminated employees or employees that have filed for personal bankruptcy or have been declared insolvent. UNIT PURCHASE AGREEMENT On November 20, 2000, The Beacon Group III - Focus Value Fund, L.P. (the "Fund"), Generac's majority stockholder, purchased a unit (the "Unit") consisting of a newly issued senior zero coupon note with an aggregate principal amount of $19.5 million, due July 1, 2006 and a warrant to purchase 340 shares of the common stock of Generac in exchange for an aggregate of $15 million in cash. The warrants have an exercise price of $.01 per share and are exercisable at any time through November 20, 2010. The proceeds from the sale of the Unit were used by Generac to repay the principal of, and interest on, revolving indebtedness, and for general corporate purposes. Both the senior zero coupon notes and the warrants have been recorded in the financial statements at their estimated fair market values at the issuance date. The difference between the consideration paid by the Fund ($15 million) and the combined fair market values of the zero coupon notes and attached warrants approximated $2.5 million and has been recorded as an increase in additional paid-in capital. 37 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed, incorporated by reference, as part of this report: 1. Financial Statements: See "Index to Financial Statements and Financial Statement Schedules" on page 38, the Reports of Independent Accountants on pages 40 and 65 and the Consolidated Financial Statements on pages 41 to 63 and pages 66 to 71. 2. Financial Statement Schedules: See "Index to Consolidated Financial Statements and Financial Statement Schedules" on page 39, the Reports of Independent Accountants on pages 40 and 65 and the Financial Statement Schedules on pages 64 and 72. 3. Exhibits See "Index to Exhibits" on pages 76 to 77. (b) No Current Reports on Form 8-K were filed during the last quarter of the year ended December 31, 2000. 38 39 INDEX TO FINANCIAL STATEMENTS PAGE CONSOLIDATED FINANCIAL STATEMENTS OF GENERAC PORTABLE PRODUCTS, INC. Report of Independent Accountants 40 Consolidated Balance Sheets as of December 31, 2000 and 1999 41 Consolidated Statements of Income (Loss) for the years ended December 31, 2000, 1999 and for the period July 10, 1998 through December 31, 1998 42 Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and for the period July 10, 1998 through December 31, 1998 43 Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and for the period July 10, 1998 through December 31, 1998 44 Notes to Consolidated Financial Statements 45 - 63 Schedule I - Generac Portable Products, Inc. Schedule of Combined Valuation Accounts 64 FINANCIAL STATEMENTS OF PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT OF GENERAC CORPORATION Independent Auditors' Report 65 Statement of Income for the Six Months and Nine Days Ended July 9, 1998 66 Statement of Cash Flows for the Six Months and Nine Days Ended July 9, 1998 67 Notes to Financial Statements 68 - 71 Schedule II - Portable Products Division, A Business Unit of Generac Corporation Schedule of Combined Valuation Accounts 72 39 40 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Generac Portable Products, Inc. In our opinion, the consolidated financial statements listed in the accompanying index under Item 14(a)(1) present fairly, in all material respects, the financial position of Generac Portable Products, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for the years ended December 31, 2000 and 1999 and for the period July 10, 1998 through December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index under Item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of Generac Portable Products, Inc.'s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 7 to the consolidated financial statements, the Company expects that an event of default will occur under its bank credit agreement on March 31, 2001 as a result of a failure to comply with one or more required financial covenants. In addition, as discussed in Note 16 to the financial statements, the Company has entered into a merger agreement for the sale of all outstanding shares of the Company's capital stock to Briggs & Stratton Corporation. Consummation of the pending merger is expected to also constitute an event of default under its bank credit agreement and zero coupon notes. If one or more events of default occur and the Company is unable to obtain a waiver, the lenders under the bank credit agreement may cause all amounts thereunder to become immediately due and payable, which would also constitute an event of default under the Company's zero coupon notes and senior subordinated notes, and could lead to an acceleration of amounts payable under such notes. In such circumstances, there can be no assurance that the Company would be able to make the required payments under the bank credit agreement and its zero coupon and senior subordinated notes, or, if necessary, to obtain suitable alternative financing. PRICEWATERHOUSECOOPERS LLP Milwaukee, Wisconsin February 26, 2001, except as to Note 16 which is as of March 27, 2001 40 41 GENERAC PORTABLE PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 (AMOUNTS IN 000'S, EXCEPT SHARE DATA) 2000 1999 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 281 $ 384 Accounts receivable (less allowances of $193 and $548, respectively) 38,762 55,465 Inventories 69,908 58,372 Deferred income taxes 1,557 1,171 Prepaid expenses and other current assets 4,749 144 --------- --------- Total current assets 115,257 115,536 Property, plant and equipment, net 27,609 28,911 Intangible assets, net 201,791 206,229 Deferred financing costs, net 6,134 6,608 Other 41 205 --------- --------- Total assets $350,832 $357,489 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 8,218 $ 8,869 Trade accounts payable 17,635 23,793 Accrued employee compensation, benefits and payroll withholdings 1,924 3,263 Other accrued liabilities 10,900 18,991 --------- --------- Total current liabilities 38,677 54,916 Long-term debt obligations 199,521 180,520 Other long-term obligations 1,049 1,089 Deferred income taxes 3,908 5,717 --------- --------- Total liabilities 243,155 242,242 Commitments and contingencies (Note 13) Common stock warrants 2,115 - Stockholders' equity: Common stock, $.01 par value, 12,000 shares authorized; 8,500 shares issued and outstanding 1 1 Additional paid-in capital 112,481 109,999 Retained earnings 6,276 17,741 Accumulated other comprehensive (loss) income (1,538) (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 105,562 115,247 --------- --------- Total liabilities and stockholders' equity $350,832 $357,489 ========= ========= The accompanying notes are an integral part of the financial statements. 41 42 GENERAC PORTABLE PRODUCTS, INC. CONSOLIDATED STATEMENTS OF INCOME (LOSS) (AMOUNTS IN $000'S) FOR THE PERIOD FOR THE YEAR FOR THE YEAR JULY 10, 1998 ENDED ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 1998 --------------- --------------- --------------- Net sales $ 242,489 $ 398,096 $ 136,862 Cost of sales 192,061 290,885 98,245 --------------- --------------- --------------- Gross profit 50,428 107,211 38,617 Operating expenses: Selling and service 32,356 47,251 16,935 General and administrative 7,911 10,118 2,865 Intangible asset amortization 5,440 5,368 2,531 --------------- --------------- --------------- Income from operations 4,721 44,474 16,286 Other expense: Interest expense 21,333 20,823 9,674 Deferred financing cost amortization 1,213 909 401 Expenses from withdrawn common stock offering (Note 15) - 1,160 - Other expense (income), net (107) 619 (171) --------------- --------------- --------------- Income (loss) before income taxes (17,718) 20,963 6,382 Provision (benefit) for income taxes (6,253) 7,424 2,180 --------------- --------------- --------------- Net income (loss) $ (11,465) $ 13,539 $ 4,202 =============== =============== =============== The accompanying notes are an integral part of the financial statements. 42 43 GENERAC PORTABLE PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND FOR THE PERIOD JULY 10, 1998 THROUGH DECEMBER 31, 1998 (AMOUNTS IN 000'S, EXCEPT SHARE DATA) Accumulated Common Stock Additional Other --------------------- Paid-in Retained Comprehensive Shares Amount Capital Earnings Income (Loss) Other (A) Total ------ ---------- ---------- --------- ------------- --------- --------- Balances, July 9, 1998 8,500 $ 1 $109,999 $ - $ - $(11,658) $ 98,342 Comprehensive income: Net income - - - 4,202 - - 4,202 Translation adjustments - - - - 723 - 723 ------ ----------- --------- --------- -------- --------- --------- Total comprehensive income - - - 4,202 723 - 4,925 ------ ----------- --------- --------- -------- --------- --------- Balances, December 31, 1998 8,500 $ 1 $109,999 $ 4,202 $ 723 (11,658) $103,267 ====== =========== ========= ========= ======== ========= ========= Balances, December 31, 1998 8,500 $ 1 $109,999 $ 4,202 $ 723 (11,658) $103,267 Comprehensive income (loss): Net income - - - 13,539 - - 13,539 Translation adjustments - - - - (1,559) - (1,559) ------ ----------- --------- --------- -------- --------- --------- Total comprehensive income (loss) - - - 13,539 (1,559) - 11,980 ------ ----------- --------- --------- -------- --------- --------- Balances, December 31, 1999 8,500 $ 1 $109,999 $ 17,741 $ (836) $(11,658) $115,247 ====== =========== ========= ========= ======== ========= ========= Balances, December 31, 1999 8,500 $ 1 $109,999 $ 17,741 $ (836) $(11,658) $115,247 Capital contribution - - 2,482 - - - 2,482 Comprehensive income (loss): Net loss - - - (11,465) - - (11,465) Translation adjustments - - - - (702) - (702) ------ ----------- --------- --------- -------- --------- --------- Total comprehensive income (loss) - - - (11,465) (702) - (12,167) ------ ----------- --------- --------- -------- --------- --------- Balances, December 31, 2000 8,500 $ 1 $112,481 $ 6,276 $(1,538) $(11,658) $105,562 ====== =========== ========= ========= ======== ========= ========= (A) Amount represents the excess of the purchase price paid in connection with the Acquisition over the book value of net assets acquired not recognized as a result of certain continuing shareholder interests. The accompanying notes are an integral part of the financial statements. 43 44 GENERAC PORTABLE PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN $000'S) FOR THE PERIOD FOR THE YEAR FOR THE YEAR JULY 10, 1998 ENDED ENDED THROUGH DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- ----------------- Operating activities: Net income (loss) $(11,465) $ 13,539 $ 4,202 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Depreciation 4,050 2,881 1,022 Amortization 6,653 6,277 2,932 Accretion on senior zero coupon notes 116 - - Deferred income taxes (2,195) 3,180 1,366 Loss on sale of fixed assets - 5 - Increase (decrease) in cash due to changes in: Accounts receivable 16,281 (11,253) 6,696 Inventories (11,882) (12,791) (3,627) Other assets (5,683) 582 (726) Trade accounts payable (5,873) 11,226 (2,106) Accrued liabilities (9,139) 6,688 6,454 --------- --------- --------- Net cash provided by (used in) operating activities (19,137) 20,334 16,213 --------- --------- --------- Investing activities: Capital expenditures (2,938) (12,463) (3,814) Proceeds from sale of fixed assets - 17 34 --------- --------- --------- Net cash used for investing activities (2,938) (12,446) (3,780) --------- --------- --------- Financing activities: Net borrowings (payments) under revolving loan facility 16,700 (600) (11,008) Payments on other long-term debt obligations (8,868) (7,794) (434) Issuance of zero coupon notes and common stock warrants 15,000 - - Payment of deferred financing costs (739) (532) (77) --------- --------- --------- Net cash provided by (used for) financing activities 22,093 (8,926) (11,519) --------- --------- --------- Effect of exchange rate changes on cash (121) (106) 15 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (103) (1,144) 929 Cash and cash equivalents: Beginning of period $ 384 $ 1,528 $ 599 --------- --------- --------- End of period $ 281 $ 384 $ 1,528 ========= ========= ========= Supplemental cash flow information: Cash paid for interest $ 21,413 $ 21,708 $ 2,260 ========= ========= ========= Cash paid for taxes $ 356 $ 4,610 $ - ========= ========= ========= The accompanying notes are an integral part of the financial statements. 44 45 GENERAC PORTABLE PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED) 1. FORMATION OF GENERAC PORTABLE PRODUCTS AND NATURE OF BUSINESS Generac Portable Products, Inc. ("Generac" or the "company"), a Delaware corporation, was formed on April 29, 1998 by an investor group organized by The Beacon Group III--Focus Value Fund L.P. for the purpose of acquiring, through its indirect wholly-owned limited liability company, Generac Portable Products, LLC, net assets of the Portable Products Division of Generac Power Systems, Inc. ("GPSI"), formerly known as GPSI. The primary business activity of Generac consists of its indirect ownership of 100% of the limited liability company interests in Generac Portable Products, LLC, a Delaware limited liability company (the "Operating Company"), through two wholly-owned subsidiaries: GPPW, Inc. a Wisconsin corporation ("GPPW"), and GPPD, Inc., a Delaware corporation ("GPPD"). GPPW and GPPD hold, respectively, 5% and 95% limited liability company interests in Generac Portable Products, LLC. Generac had no operations during the period April 29, 1998 through July 8, 1998; its only business activity involved the issuance of $110 million of common stock to finance a portion of the purchase price discussed below. On July 9, 1998, Generac caused Generac Portable Products, LLC to purchase substantially all of the assets, and assume certain of the liabilities, of the Portable Products Division (the "Predecessor") of GPSI (the "Acquisition"). The aggregate consideration paid for the net assets of the Predecessor was approximately $330 million, which included cash acquired of $0.6 million, direct acquisition costs of $1.4 million and assumed liabilities of $23.9 million. The purchase price paid for the Predecessor was adjusted for a post-closing adjustment of $1.0 million based on net working capital at July 9, 1998, as defined. The Acquisition has been accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to identifiable assets acquired and liabilities assumed based upon their estimated fair values, subject to certain limitations (see Note 2), with the excess purchase price recorded as goodwill. Goodwill of approximately $214 million has been recorded as a result of the Acquisition. The following table sets forth the pro forma information for Generac as if the Acquisition had occurred on January 1, 1998. This information is unaudited and does not purport to represent actual sales or net income had the Acquisition actually occurred on January 1, 1998. PRO FORMA INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1998 ----------------- Net sales $ 276,413 Net income 5,835 45 46 In addition to the issuance of common stock by Generac, the purchase price was financed through the issuance of Senior Subordinated Notes of $110 million and borrowings of $96.6 million under a $115 million bank credit facility (see Note 7). Generac, with domestic operations located in Jefferson, Wisconsin and branch operations in the United Kingdom, Germany and Spain, is a leading designer, manufacturer and marketer of engine-powered tools and related accessories for use in both consumer and commercial applications. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES: Generac prepares its financial statements in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION: Generac's consolidated financial statements include the accounts of its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. BASIS OF ACCOUNTING: Pursuant to the Financial Accounting Standards Board's Emerging Issues Task Force Issue No. 88-16, "Basis in Leveraged Buyout Transactions," Generac has limited its accounting basis resulting from the Acquisition as a result of certain shareholders which also held an interest in the Predecessor through ownership interests in GPSI. Such limitation was based upon the lesser of each continuing shareholder's interest in Generac or the Predecessor, and the Predecessor's historical book value at July 9, 1998. The difference between the continuing shareholders' basis in the Predecessor and their proportionate equity in the book value of the Predecessor was not material. The difference between the total consideration paid in connection with the Acquisition and the accounting basis recognized is reported as a separate component of stockholders' equity. CASH AND CASH EQUIVALENTS: Generac considers all investments with a maturity of three months or less at the date of purchase to be cash equivalents. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market (replacement cost or estimated net realizable value). RESEARCH AND DEVELOPMENT COSTS: Generac has an ongoing program of new product development and existing product enhancement through redesign of existing products and the addition of new models. Costs related to these programs are expensed as incurred and totaled $2,553, $2,682 and $1,011 for the years ended December 31, 2000 and 1999 and for the period ended December 31, 1998, respectively. Costs related to manufacturing start-up activities for new products are included in cost of sales as incurred. 46 47 PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is recorded at cost and includes equipment under leases which have been capitalized. Maintenance and repair costs are charged to expense as incurred. Gains and losses on disposition of property, plant and equipment are reflected in income. Depreciation of property, plant and equipment are recorded using principally the straight-line method for financial reporting purposes over the estimated useful lives of the assets or terms of related leases as follows: Land improvements 20 Buildings 40 Machinery and equipment 7-10 Dies and tools 3-5 Office equipment 5-10 Vehicles 3-5 CAPITALIZED SOFTWARE: Generac capitalizes purchased software as well as internally developed software. Internal software development costs are capitalized from the time the internal use software is considered probable of completion until the software is ready for use. Business analysis, system evaluation, selection and software maintenance costs are expensed as incurred. Capitalized software costs are amortized using the straight-line method over the estimated useful life of the software. Capitalized software costs are recorded as office equipment for financial statement purposes. INTANGIBLE ASSETS: Goodwill, representing the recognized portion of the cost of the Acquisition in excess of the fair values assigned to identifiable net assets acquired, is being amortized on a straight-line basis over 40 years. The non-compete agreement and patents and trademarks are being amortized on a straight-line basis over 10 years. Generac assesses the carrying value of goodwill and other intangibles at each balance sheet date. Consistent with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", such assessments include, as appropriate, a comparison of (a) the estimated future nondiscounted cash flows anticipated to be generated during the remaining amortization period to (b) the net carrying value of the asset. Impairment assessments of goodwill made in accordance with SFAS No. 121 are made in connection with an analysis of related long-lived assets acquired in the Acquisition when events or changes in circumstances indicate the carrying amount of either asset may not be recoverable. Generac recognizes impairment losses resulting from diminution in value, if any, on a current basis based upon estimated fair value of the related assets. DEFERRED FINANCING COSTS: Expenses associated with the issuance of debt instruments are capitalized and are being amortized over the terms of the respective financing arrangement using the effective interest rate and straight-line methods over periods ranging from 5 to 8 years. 47 48 INTEREST RATE SWAPS: To limit the effect of increases in interest rates, Generac has entered into an interest rate swap arrangement. The differential between the contract floating and fixed rates is accrued each period and recorded as an adjustment of interest expense. PRODUCT WARRANTIES: Generac provides that warranted products are merchantable and free of defects in workmanship and material generally for a period of one year. Warranty reserves are provided as charges to operations under selling and service expense for estimated normal warranty costs and, if applicable, for any significant problems known to exist on products sold. Warranty expense totaled $3,950, $5,793 and $1,989 for the years ended December 31, 2000 and 1999 and for the period ended December 31, 1998, respectively. INCOME TAXES: Deferred income tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities, as measured by enacted tax rates which will be in effect when these differences are expected to reverse. Deferred income tax expense is the result of changes in the deferred tax assets and liabilities. A valuation allowance is provided when it is considered more likely than not that some portion or all of recorded deferred income tax assets will not be realized. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings approximate fair value due to the short-term maturity of these financial instruments. The amounts reported for borrowings under the bank credit facility approximate fair value since the underlying instruments bear interest at a variable rate that reprices frequently. The fair value of Generac's Senior Subordinated Notes at December 31, 2000 and 1999 is based upon market quotations as of such date. The fair value of the interest rate swap arrangement is the amount at which it could be settled, based on a quote obtained from the respective financial institution (see Note 7). REVENUE RECOGNITION: Revenue is recognized by the company when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred and ownership has transferred to the customer; the price to the customer is fixed or determinable; and collectability is reasonably assured. These criteria are satisfied, and accordingly, revenue is recognized, upon shipment by the company. Provisions for estimated product returns and sales incentives are recorded in the period in which the sales are recognized. In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 was effective for the Company in the fourth quarter of 2000 and did not have a material effect on the company's financial statements. SHIPPING AND HANDLING FEES AND COSTS: During the fourth quarter of 2000, the company adopted the provisions of the Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." In accordance with EITF 00-10, revenue from shipping and handling costs is reflected in net sales. The costs associated with shipping and handling of product for the years ended December 31, 2000 and 1999 and for the period ended December 31, 1998 were $4,219, $8,021, and $3,128, respectively, and are reflected in selling and service expense. 48 49 FOREIGN CURRENCY TRANSLATION: The translation of the assets and liabilities of Generac's international branch operations into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The gains or (losses) resulting from such translation are reflected as translation adjustments in accumulated other comprehensive income (loss). FUTURE ACCOUNTING CHANGES: In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires all derivative instruments to be recorded in the consolidated balance sheets at their fair value. Changes in fair value of derivatives are required to be recorded each period in current earnings or other comprehensive income (loss), depending on whether the derivative is designated as part of a hedge transaction and if it is, the type of hedge transaction. In June 1999, the statement's effective date was delayed by one year, and it will be effective January 1, 2001 for Generac. Given the company's current derivative and hedging activities, the effect of adoption will not have a material effect on the company's results of operations or financial position. In January 2001, the Emerging Issues Task Force ("EITF") reached a consensus on a subset of EITF No. 00-22, "Accounting for "Points" and Certain Other Time- or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future." This issue requires recognition of the liability associated with time- or volume-based incentives as earned by the customer and classification of these incentives as a reduction of net revenue. EITF 00-22 is effective for the Company in the first quarter of 2001. The Company classifies these incentives as selling and service expense and is currently evaluating the impact of implementing EITF 00-22. 3. INVENTORIES Inventories consist of the following at December 31, 2000 and 1999: 2000 1999 ----------------- ----------------- Raw materials and sub-assemblies $ 43,488 $ 33,814 Finished goods 26,420 24,558 ----------------- ----------------- $ 69,908 $ 58,372 ================= ================= 49 50 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following at December 31, 2000 and 1999: 2000 1999 ----------------- ----------------- Land and land improvements $ 1,061 $ 1,095 Buildings 9,565 9,642 Machinery and equipment 13,188 12,438 Dies and tools 3,806 3,194 Office equipment 7,866 5,899 Vehicles 28 24 ----------------- ----------------- 35,514 32,292 Accumulated depreciation (7,905) (3,875) ----------------- ----------------- 27,609 28,417 Construction in progress - 494 ----------------- ----------------- $ 27,609 $ 28,911 ================= ================= 5. INTANGIBLE ASSETS Intangible assets consist of the following at December 31, 2000 and 1999: 2000 1999 ----------------- ----------------- Goodwill $ 214,179 $ 213,928 Trademarks and patents 100 100 Noncompete agreement 852 100 ----------------- ----------------- 215,131 214,128 Accumulated amortization (13,340) (7,899) ----------------- ----------------- $ 201,791 $ 206,229 ================= ================= 6. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following at December 31, 2000 and 1999: 2000 1999 ----------------- ----------------- Sales incentives $ 3,248 $ 9,370 Product warranty 1,023 1,984 Accrued interest 6,333 6,529 Other 296 1,108 ----------------- ----------------- $ 10,900 $ 18,991 ================= ================= 50 51 7. LONG-TERM DEBT OBLIGATIONS Long-term debt consists of the following at December 31, 2000 and 1999: 2000 1999 ----------------- ----------------- Bank credit facility $ 85,854 $ 77,493 Senior zero coupon notes 10,519 - Senior subordinated notes 110,000 110,000 Capital lease obligations 1,366 1,896 ----------------- ----------------- 207,739 189,389 Less: current portion (8,218) (8,869) ----------------- ----------------- $ 199,521 $ 180,520 ================= ================= In connection with the Acquisition, Generac Portable Products, LLC entered into a $115 million bank credit facility (the "Senior Secured Credit Facility"). The Senior Secured Credit Facility provides for maximum borrowings under two term loans of $45 million ("A Term Loan") and $40 million ("B Term Loan"), respectively, with balances outstanding at December 31, 2000 of $31.4 million and $37.7 million, respectively. The Senior Secured Credit Facility also provides for maximum borrowings of $30 million, less the amount outstanding under letters of credit, under revolving loan arrangements due December 31, 2003, with a balance outstanding at December 31, 2000 of $16,700. The A Term Loan Facility will mature 5 1/2 years from July 9, 1998. The B Term Loan Facility will mature seven years from July 9, 1998. The A Term Loan Facility will provide for amortization of $2.5 million in the first year, $6.25 million in the second year, $7.5 million in the third year, $10.0 million in the fourth year, $12.5 million in the fifth year and $6.25 million in the sixth year. The B Term Loan Facility will provide for nominal annual amortization in the first five years and amortization of $19 million in each of the sixth and seventh years. Additionally, Generac is also required to make an annual principal payment equal to its excess cash flow, as defined. There is no required excess cash flow payment for the year ended December 31, 2000. The interest rates under the A Term Loan Facility and the revolving loan portion of the facility will be based, at the option of Generac Portable Products, LLC, on either a Eurodollar rate plus 3.25% per annum or a base rate plus 2.25% per annum, subject to a pricing grid that will provide for reductions in the applicable interest rate margins based on Generac's consolidated debt to earnings before interest, income taxes, depreciation and amortization ("EBITDA") ratio. The interest rate under the B Term Loan Facility is based, at the option of Generac Portable Products, LLC, on a Eurodollar rate plus 3.75% or a base rate plus 2.75%, subject to a pricing grid that will provide for reductions in the applicable interest rate margins based on Generac's consolidated debt to EBITDA ratio. The weighted average interest rate for the term loans as of December 31, 2000 was 10.0%. Borrowings under the revolving loans bear interest at the prime rate plus 2.25%. A commitment fee of 0.50% per annum is charged on the unused revolving loan portion of the Senior Secured Credit Facility, subject to a pricing grid that will provide for reductions in the applicable commitment fee margin based on 51 52 Generac's consolidated debt to EBITDA ratio. Substantially all of Generac's assets are pledged as collateral under the Senior Secured Credit Facility. Effective October 15, 1998, Generac entered into an interest rate swap agreement with a major financial institution to reduce the impact of changes in interest rates on its floating rate long-term debt. The notional amount of this agreement was $30 million at December 31, 2000. Interest expense has been adjusted for the net amount payable under this agreement. This agreement decreased Generac's interest expense for the year ended December 31, 2000 by $230. The fair value of the interest rate swap agreement was $35 at December 31, 2000, which is the amount Generac would have received to settle the instrument at such date. Generac is exposed to credit loss in the event of non-performance by the financial institution, however, management does not anticipate such non-performance. Also on July 9, 1998, Generac Portable Products, LLC and GPPW issued $110 million of 11.25% Senior Subordinated Notes due June 30, 2006 (the "Notes") to BT Alex. Brown Incorporated (the "Initial Purchaser"). The Initial Purchaser subsequently resold the Notes to qualified institutional buyers pursuant to Rule 144A of the Securities Exchange Act and to a limited number of institutional accredited investors that agreed to comply with certain transfer restrictions and other conditions. The estimated fair value of the Notes at December 31, 2000 is approximately $28.1 million. The Notes are redeemable, at Generac's option, in whole at any time or in part from time to time, on and after July 1, 2002, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on July 1 of the year set forth below, plus, in each case, accrued and unpaid interest thereon, if any, to the date of redemption: Year Percentage - ---- ---------- 2002 107.625% 2003 104.750% 2004 102.875% 2005 and thereafter 100.000% At any time, or from time to time, on or prior to July 1, 2001, Generac may, at its option, use the net cash proceeds of one or more Public Equity Offerings, as defined, to redeem the Notes at a redemption price equal to 111.25% of the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of redemption; provided that at least 65% of the principal amount of Notes originally issued remains outstanding immediately after any such redemption. The Senior Secured Credit Facility and the indenture governing the Notes contain a number of covenants that, among other things, restrict the ability of Generac to dispose of assets, repay other indebtedness, incur additional indebtedness, pay dividends, prepay subordinated 52 53 indebtedness (including, in the case of the Senior Secured Credit Facility, the Notes), incur liens, make capital expenditures and make certain investments or acquisitions, engage in mergers or consolidations, engage in certain transactions with affiliates and otherwise restrict the activities of Generac. In addition, under the Senior Secured Credit Facility, Generac Portable Products, LLC will be required to satisfy specified financial ratios and tests, including a minimum level of EBITDA. Effective October 30, 2000, the company amended its credit facility which, among other things, waived existing financial covenant violations at September 30, 2000 and revised requirements relating to certain financial ratios and tests for periods through December 31, 2001 including maximum levels of leverage, minimum levels of interest coverage and minimum required levels of earnings before interest, income taxes, depreciation and amortization. Additionally, the amendment provides certain limits on the amount of outstanding revolving loans through March 31, 2001. On November 20, 2000, The Beacon Group III - Focus Value Fund, L.P. (the "Fund"), Generac's majority stockholder, purchased a unit (the "Unit") consisting of a newly issued senior zero coupon note with an aggregate principal amount of $19.5 million, due July 1, 2006, and a warrant to purchase 340 shares of the common stock of Generac in exchange for an aggregate of $15 million in cash. The warrants have an exercise price of $.01 per share and are exercisable at any time through November 20, 2010. The proceeds from the sale of the Unit were used by Generac to repay the principal of, and interest on, revolving indebtedness, and for general corporate purposes. Both the senior zero coupon notes and the warrants have been recorded in the financial statements at their estimated fair market values at the issuance date. The difference between the consideration paid by the Fund ($15 million) and the combined fair market values of the zero coupon notes and attached warrants totaled $2,482 and has been recorded as an increase in additional paid-in capital. Generac expects that an event of default will occur under the Senior Secured Credit Facility on March 31, 2001 arising from a failure by Generac to comply with one or more financial covenants set forth in the Senior Secured Credit Facility. Generac intends to seek a waiver of such event of default from the lenders party to the Senior Secured Credit Facility. If such event of default occurs and Generac is unable to obtain a waiver of such event of default, the lenders under the Senior Secured Credit facility may cause the loans thereunder to become immediately due and payable, which would constitute an event of default under the zero coupon notes and the Notes. There can be no assurance that Generac would be able to make payments under the Senior Secured Credit Facility, the zero coupon notes and the Notes in such circumstances. Capital lease obligations relate to Generac's obligations on leases for industrial equipment. These obligations are due in monthly installments including principal and interest at a rate of 8.6% and mature November 30, 2002. The aggregate scheduled maturities of long-term debt and capital lease obligations in subsequent years are as follows: 2001 $ 8,218 2002 13,266 2003 38,172 2004 18,376 2005 9,188 Thereafter 120,519 ----------------- $ 207,739 ================= 53 54 8. EMPLOYEE RETIREMENT AND SAVINGS PLANS In connection with the Acquisition, Generac established noncontributory defined benefit pension plans (salaried and hourly) covering substantially all of its employees. The unfunded benefit obligation assumed as of the Acquisition date totaled $678. Benefits under the salaried plan are based upon years of service and the participants' defined final average monthly compensation. Benefits under the hourly plan are based on a unit amount at the date of termination multiplied by the participants' credited service. The plans provide for a continuation of participants' years of service as credited with GPSI. Generac's funding policy is to contribute amounts that equal or exceed the minimum requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Net pension expense is comprised of the following components: FOR THE PERIOD JULY 10, 1998 THROUGH 2000 1999 DECEMBER 31, 1998 ------------------ ----------------- --------------------------- Service cost $ 414 $ 340 $ 48 Interest cost on projected benefit obligation 110 88 24 Return on assets (26) (1) - Amortization of net loss from earlier periods 53 21 - ------------------ ----------------- --------------------------- $ 551 $ 448 $ 72 ================== ================= =========================== The following table summarizes those items comprising the change in the benefit obligation: JULY 10, 1998 THROUGH 2000 1999 DECEMBER 31, 1998 -------------- --------------- --------------------------- Benefit obligation as of the beginning of the period $ 1,614 $ 750 $ 678 Service cost 414 340 48 Interest cost 110 88 24 Actuarial loss (gain) (422) 436 - -------------- --------------- --------------------------- Benefit obligation as of the end of the period $ 1,716 $ 1,614 $ 750 ============== =============== =========================== The following table summarizes those items comprising the change in the fair value of plan assets during 2000 and 1999. There were no assets contributed to the plans as of December 31, 1998: 2000 1999 -------------- --------------- Fair value of plan assets as of the beginning of the period $ 101 $ - Company contributions 525 100 Actual return on plan assets 26 1 -------------- --------------- Fair value of plan assets as of the end of the period $ 652 $ 101 ============== =============== 54 55 The following table summarizes the funded status of the plans as of December 31, 2000 and 1999: 2000 1999 -------------- --------------- Funded status of plan $ (1,064) $ (1,513) Unrecognized net loss (gain) (19) 415 -------------- --------------- Net amount recognized $ (1,083) $ (1,098) ============== =============== The assumptions used in developing the pension information as of December 31, 2000 and 1999 were as follows: 2000 1999 ------------------ ----------------- Discount rate 7.50% 8.00% Return on plan assets 8.00% 8.00% Rate of compensation increase 5.50% 5.50% In connection with the Acquisition, Generac established deferred compensation plans for certain key employees and at December 31, 2000 and 1999, approximately $469 and $401, respectively, was included in other long-term obligations related to such plans. Deferred compensation expense charged to operations was $68, $61 and $23 for the years ended December 31, 2000 and 1999 and the period ended December 31, 1998, respectively. In connection with the Acquisition, Generac established a qualified 401(k) profit sharing plan covering substantially all full-time employees. The company contribution for the year ended December 31, 2000 was $132. No contributions were made to the plan for the year ended December 31, 1999 or for the period ended December 31, 1998. 55 56 9. INCOME TAXES The provision for income taxes consists of the following: FOR THE PERIOD JULY 10, 1998 THROUGH DECEMBER 31, 2000 1999 1998 ----------------- -------------- ------------- Current: Federal $ (4,014) $ 3,799 $ 781 State (44) 295 33 Foreign - 150 - ----------------- -------------- ------------- Total current (4,058) 4,244 814 Deferred: Federal and state (2,195) 3,180 1,366 ----------------- -------------- ------------- Total provision for income taxes $ (6,253) $ 7,424 $ 2,180 ================= ============== ============= The components of consolidated pretax income (loss) for the years ended December 31, 2000 and 1999 are as follows: 2000 1999 -------------------- ------------------ United States $ (16,015) $ 21,247 Europe (1,703) (284) -------------------- ------------------ Total $ (17,718) $ 20,963 ==================== ================== The following reconciles the U.S. federal statutory income tax rate with Generac's effective tax rate: FOR THE PERIOD JULY 10, 1998 THROUGH 2000 1999 DECEMBER 31, 1998 -------------------------- -------------------- --------------------------- U.S. federal statutory income tax rate (34.0%) 34.0% 34.0% State income taxes, net of federal benefit (0.3) 1.8 1.0 Foreign income taxes, net of federal benefit - 0.7 - Amortization of excess tax goodwill (1.5) (1.3) (2.0) Other 0.5 0.2 1.2 -------------------------- -------------------- --------------------------- (35.3%) 35.4% 34.2% ========================== ==================== =========================== 56 57 Deferred income taxes reflected in the balance sheet consist of the following at December 31, 2000 and 1999: 2000 1999 --------------------------- -------------------------- Deferred tax assets: Net operating loss carryforwards $ 4,830 $ - Inventories and receivables 1,003 271 Sales incentives 141 197 Accrued warranty 331 607 Employee benefits 171 203 Other 824 - --------------------------- -------------------------- 7,300 1,278 Deferred tax liabilities: Fixed assets (1,344) (688) Intangible assets (8,307) (5,105) Other - (31) --------------------------- -------------------------- (9,651) (5,824) --------------------------- -------------------------- $ (2,351) $ (4,546) =========================== ========================== The company has approximately $13,625 in both federal and state net operating loss carryforwards. These carryforwards expire at various dates through fiscal 2020. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of net operating losses in the event of an "ownership change" as defined in Section 382 of The Internal Revenue Code of 1986. 10. STOCKHOLDERS' EQUITY In connection with the initial capitalization of Generac, The Beacon Group III--Focus Value Fund, L.P., management of Generac and certain other investors purchased an aggregate of $110 million of common stock, par value of $.01 per share, constituting 100% of Generac's outstanding common stock. Upon consummation of the Acquisition, The Beacon Group III--Focus Value Fund, L.P. and the other stockholders of Generac, and Generac, entered into a Stockholders' Agreement which includes certain transfer restrictions, voting agreements and registration rights. Employees who own stock of Generac are also subject to agreements that restrict their right to transfer their stock and, under certain conditions, require them to sell a pro rata portion of their stock in a transaction in which The Beacon Group III--Focus Value Fund, L.P. is selling its stock. Generac is not obligated to purchase this stock. As discussed in footnote 7, the Unit consisting of a zero coupon note and attached warrants were recorded in the financial statements at their respective fair market values at issuance. The difference between the consideration paid by the Fund ($15 million) and the 57 58 combined fair market values of the zero coupon notes and attached warrants totaled $2,482 and has been recorded as an increase in additional paid-in capital. Effective July 9, 1998, Generac's board of directors approved the Generac Portable Products, Inc. Stock Option Plan which provides for the granting of stock options as an incentive to members of the board of directors and certain key employees. Under this Plan, stock options to acquire up to 1,619 shares of common stock, in the aggregate, may be granted under a time-vesting formula at an exercise price equal to the fair market value of the common stock at the date of grant. The options become exercisable in equal increments beginning on the first anniversary of the grant date over a three to five-year period and expire ten years subsequent to the grant date. Stock option transactions for the years ended December 31, 2000 and 1999 and the period ended December 31, 1998 are summarized as follows: 2000 1999 1998 ------------------------- -------------------------- -------------------- Options granted - 304 1,164 Exercise price - options granted N/A $ 16,349 $ 12,945 Options forfeited 101 51 - Exercise price - options forfeited $ 12,945 $ 12,945 N/A Options outstanding 1,316 1,417 1,164 Exercised options - - - Exercisable options 557 243 - Remaining contractual life (years) 8.4 9.4 8.5 Fair value at grant date N/A $ 5,469 $ 4,340 The fair value was estimated using the minimum value method in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", assuming an expected option life of 7 years and a risk-free interest rate of 6%. Generac applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation expense has been recognized in the statement of income for the years ended December 31, 2000 and 1999 and during the period ended December 31, 1998. If compensation cost had been determined in accordance with SFAS No.123, net income would have decreased approximately $892, $843 and $351 during the years ended December 31, 2000 and 1999 and during the period ended December 31, 1998, respectively. 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. 58 59 11. LEASES Generac leases certain manufacturing equipment, computer equipment and vehicles under operating leases with lease terms ranging up to 5 years. Additionally, in connection with the Acquisition, Generac entered into a capital lease arrangement with GPSI for certain manufacturing equipment. Property, plant and equipment at December 31, 2000 and 1999 includes $1,753 and $2,102, respectively, for equipment under capital leases, which is net of $863 and $514 in accumulated depreciation, respectively. Following is a summary of future minimum payments under capitalized leases and operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2000: Operating Capital Leases Leases ----------------- ----------------- 2001 $ 724 $ 673 2002 233 830 2003 90 - 2004 29 - Thereafter 15 - ----------------- ----------------- $ 1,091 1,503 ================= Less amount representing interest (137) ----------------- Present value of minimum lease payments $ 1,366 ================= Total rent expense recognized by Generac for the years ended December 31, 2000 and 1999 and for the period ended December 31, 1998 was $2,472, $2,521 and $559, respectively. 12. SEGMENT INFORMATION Generac is a leading designer, manufacturer and marketer of engine-powered tools and related accessories for use in both consumer and commercial applications. 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: United States Europe Consolidated ----------------- -------------- ------------------ As and for the year ended December 31, 2000: Net sales to unaffiliated customers $ 220,428 $22,061 $ 242,489 Long-lived assets 233,371 2,204 235,575 As and for the year ended December 31, 1999: Net sales to unaffiliated customers 358,999 39,097 398,096 Long-lived assets 239,448 2,505 241,953 As and for the period ended December 31, 1998: Net sales to unaffiliated customers 126,740 10,122 136,862 Long-lived assets 235,517 2,574 238,091 59 60 Generac sells primarily to large home center retailers. Two customers accounted for approximately 61% of net sales for the year ended December 31, 2000. Both customers individually comprise more than 10% of Generac's net sales. Included in accounts receivable at December 31, 2000 are amounts due from these two customers aggregating $20,854. Three customers accounted for approximately 73% and 74% of net sales for the year ended December 31, 1999 and for the period ended December 31, 1998, respectively. All three customers individually comprise more than 10% of Generac's net sales. Included in accounts receivable at December 31, 1999 are amounts due from these three customers aggregating $33,236. Generac purchases its materials from a broad supplier base. Three suppliers accounted for approximately 46% of purchases for the year ended December 31, 2000. Accounts payable to these three suppliers approximated $8,867 at December 31, 2000. Two suppliers accounted for approximately 44% and 41% of purchases for the year ended December 31, 1999 and the period ended December 31, 1998, respectively. Accounts payable to these two suppliers approximated $7,049 at December 31, 1999. Each of these suppliers individually comprised more than 10% of Generac's purchases for the respective periods. 13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS In the normal course of business Generac is involved in certain legal actions and claims. It is the opinion of management that such litigation and claims will be resolved without material adverse effect on Generac's financial position, results of operations or cash flows. On September 29, 1999, Generac commenced an arbitration against Generac Power Systems, Inc. ("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. 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 for, among other things, that 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, that GPSI is restricted from manufacturing any portable air-cooled generator below 12.5 kilowatts and that the company will pay a 2% royalty on sales of home standby stationary generators in excess of $15 million during the term of the agreement to GPSI. 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. 60 61 14. SEPARATE FINANCIAL INFORMATION OF CO-ISSUERS AND GUARANTOR OF THE NOTES In connection with the Acquisition, Generac Portable Products, LLC and GPPW co-issued the Notes, and 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. Generac has provided a full and unconditional guarantee of the Notes. However, because Generac has no operating activities independent of Generac Portable Products, LLC, Generac's consolidated financial statements are essentially the same as those of Generac Portable Products, LLC. The following condensed supplemental consolidating financial information reflects the investments of Generac, GPPW and GPPD in Generac Portable Products, LLC using the equity method. Generac, 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, and GPPW and GPPD hold a 5% and 95% ownership interest in Generac Portable Products, LLC, respectively. AS OF DECEMBER 31, 2000 GENERAC PORTABLE GENERAC PORTABLE PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED ------------------ --------- ------------- ------------------ -------------- --------------- Current assets $ 5,523 $ 276 $ 5,247 $ 109,734 $ (5,523) $ 115,257 Investment in affiliates 117,220 5,785 109,820 - (232,825) - Noncurrent assets 3,908 - - 235,575 (3,908) 235,575 ------------------ --------- ------------- ------------------ -------------- --------------- $ 126,651 $ 6,061 $ 115,067 $ 345,309 $ (242,256) $ 350,832 ================== ========= ============= ================== ============== =============== Current liabilities $ 5,523 $ - $ - $ 38,677 $ (5,523) $ 38,677 Long-term debt - - - 199,521 - 199,521 Other long-term obligations 3,908 195 3,713 1,049 (3,908) 4,957 Common stock warrants - - - 2,115 - 2,115 Stockholders' equity 117,220 5,866 111,354 103,947 (232,825) 105,562 ------------------ --------- ------------- ------------------ -------------- --------------- $ 126,651 $ 6,061 $ 115,067 $ 345,309 $ (242,256) $ 350,832 ================== ========= ============= ================== ============== =============== AS OF DECEMBER 31, 1999 GENERAC PORTABLE GENERAC PORTABLE PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED ------------------ --------- ------------- ------------------ -------------- --------------- 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 ================== ========= ============= ================== ============== =============== 61 62 FOR THE YEAR ENDED DECEMBER 31, 2000 GENERAC PORTABLE PRODUCTS, INC. GPPW GPPD ------------------- --------- ------------- Net sales $ - $ - $ - Gross profit - - - Operating expenses - - - ------------------- --------- ------------- Income from operations - - - Interest expense - - - Other expense (income), net - - - Equity in earnings of affiliates (11,465) (886) (16,909) ------------------- --------- ------------- Income (loss) before income taxes (11,465) (886) (16,909) Provision (benefit) for income taxes - (317) (6,013) ------------------- --------- ------------- Net income (loss) $ (11,465) $ (569) $ (10,896) =================== ========= ============= FOR THE YEAR ENDED DECEMBER 31, 1999 GENERAC PORTABLE PRODUCTS, INC. GPPW GPPD ------------------- --------- ------------- Net sales $ - $ - $ - Gross profit - - - Operating expenses - - - ------------------- --------- ------------- Income from operations - - - Interest expense - - - Other expense (income), net - - - Equity in earnings of affiliates 13,539 1,045 19,856 ------------------- --------- ------------- Income before income taxes 13,539 1,045 19,856 Provision for income taxes - 368 6,994 ------------------- --------- ------------- Net income $ 13,539 $ 677 $ 12,862 =================== ========= ============= FOR THE PERIOD ENDED DECEMBER 31, 1998 GENERAC PORTABLE PRODUCTS, INC. GPPW GPPD ------------------- --------- ------------- Net sales $ - $ - $ - Gross profit - - - Operating expenses - - - ------------------- --------- ------------- Income from operations - - - Interest expense - - - Other expense (income), net - - - Equity in earnings of affiliates 4,202 319 6,063 ------------------- --------- ------------- Income before income taxes 4,202 319 6,063 Provision for income taxes - 109 2,071 ------------------- --------- ------------- Net income $ 4,202 $ 210 $ 3,992 =================== ========= ============= FOR THE YEAR ENDED DECEMBER 31, 2000 GENERAC PORTABLE PRODUCTS, LLC ELIMINATIONS CONSOLIDATED ------------------ -------------- --------------- Net sales $ 242,489 $ - $ 242,489 Gross profit 50,428 - 50,428 Operating expenses 45,707 - 45,707 ------------------ -------------- --------------- Income from operations 4,721 - 4,721 Interest expense 21,333 - 21,333 Other expense (income), net 1,106 - 1,106 Equity in earnings of affiliates - 29,260 - ------------------ -------------- --------------- Income (loss) before income taxes (17,718) 29,260 (17,718) Provision (benefit) for income taxes 77 - (6,253) ------------------ -------------- --------------- Net income (loss) $ (17,795) $ 29,260 $ (11,465) ================== ============== =============== FOR THE YEAR ENDED DECEMBER 31, 1999 GENERAC PORTABLE PRODUCTS, LLC ELIMINATIONS CONSOLIDATED ------------------- --------- ------------- Net sales $ 398,096 $ - $ 398,096 Gross profit 107,211 - 107,211 Operating expenses 62,737 - 62,737 ------------------ -------------- --------------- Income from operations 44,474 - 44,474 Interest expense 20,823 - 20,823 Other expense (income), net 2,688 - 2,688 Equity in earnings of affiliates - (34,440) - ------------------ -------------- --------------- Income before income taxes 20,963 (34,440) 20,963 Provision for income taxes 62 - 7,424 ------------------ -------------- --------------- Net income $ 20,901 $ (34,440) $ 13,539 ================== ============== =============== FOR THE PERIOD ENDED DECEMBER 31, 1998 GENERAC PORTABLE PRODUCTS, LLC ELIMINATIONS CONSOLIDATED ------------------ -------------- --------------- Net sales $ 136,862 $ - $ 136,862 Gross profit 38,617 - 38,617 Operating expenses 22,331 - 22,331 ------------------ -------------- --------------- Income from operations 16,286 - 16,286 Interest expense 9,674 - 9,674 Other expense (income), net 230 - 230 Equity in earnings of affiliates - (10,584) - ------------------ -------------- --------------- Income before income taxes 6,382 (10,584) 6,382 Provision for income taxes - - 2,180 ------------------ -------------- --------------- Net income $ 6,382 $ (10,584) $ 4,202 ================== ============== =============== 15. EXPENSES FROM WITHDRAWN COMMON STOCK OFFERING During the year ended December 31, 1999, Generac incurred certain fees and expenses in conjunction with its efforts to complete an initial public offering of its common stock. Generac withdrew its initial public stock offering during July 1999. Expenses related to this offering of approximately $1.2 million were recorded during the year ended December 31, 1999. 62 63 16. SUBSEQUENT EVENTS On March 21, 2001, Generac Portable Products, Inc. entered into an Agreement and Plan of Merger (the "Merger Agreement") with Briggs & Stratton Corporation, ("Briggs"), GPP Merger Corporation, a wholly owned direct subsidiary of Briggs, and The Beacon Group III -- Focus Value Fund, L.P., the majority shareholder of Generac ("Beacon"), providing for the merger of GPP Merger Corporation into Generac, with Generac as the surviving corporation. The closing of the Merger is expected to occur on (a) the later of April 30, 2001 or (b) the second business day after satisfaction of the conditions of the Merger. Pursuant to the terms of the Merger Agreement, the existing shareholders of Generac and the holders of warrants to purchase Generac stock (collectively, the "Shareholders") will receive (a) $55 million, adjusted downward for purchase price adjustments related to the failure, if any, to meet certain targets for shareholders' equity and working capital minus the transaction costs of Generac and the Shareholders (the "Base Price"), plus (b) an amount (the "Earnout") equal to (A) 40% of the amount by which Generac's consolidated earnings before interest, taxes, depreciation and amortization, excluding unusual gains and losses, for the 12-month period ending June 30, 2002, multiplied by 6, exceeds the sum of the Base Price plus the transaction costs of Generac and the Shareholders plus the aggregate amount of indebtedness of Generac on a consolidated basis as of the closing of the Merger, minus (B) the amount, if any, payable to holders of options for Generac stock, which options will be cancelled in connection with the Merger. In no event, however, will the sum of the Base Price plus the transaction costs of Generac and the Shareholders plus the aggregate amount of indebtedness of Generac on a consolidated basis as of the closing of the Merger plus the Earnout plus the option payments exceed $350 million. It is expected that the Merger will constitute a "change of control" under the Indenture dated as of July 1, 1998 (the "Indenture") between Generac Portable Products, LLC ("LLC") and GPPW Inc. ("GPPW" and together with LLC, the "Offerors") and HSBC Bank USA (formerly Marine Midland Bank), as trustee, with respect to the 11-1/4% Senior Subordinated Notes due 2006 (the "Notes") of the Offerors. The Offerors are wholly owned subsidiaries of Generac. As a consequence of the "change of control", the Offerors will be obligated within 30 days after the Merger is consummated to make an offer to purchase all or a portion of the Notes at a purchase price equal to 101% of the principal amount of the Notes plus accrued and unpaid interest to the date of payment. In addition, it is expected that consummation of the Merger will constitute an event of default under Generac's existing credit facility under the Credit Agreement dated as of July 9, 1998 among LLC, GPPW, Bankers Trust Company, as administrative agent, and the various banks and financial institutions parties thereto (as amended, the "Credit Agreement"). If LLC is unable to obtain a waiver of such event of default, LLC's lenders under the Credit Agreement may cause the loans thereunder to become immediately due and payable. In addition, it is also expected that consummation of the Merger will constitute an event of default under LLC's zero coupon notes due July 1, 2006 under the Unit Purchase Agreement, dated as of November 20, 2000, among Generac, LLC and Beacon. If LLC is unable to obtain a waiver of such event of default, Beacon may cause such zero coupon notes to become immediately due and payable. In the event LLC defaults on the Credit Agreement or the zero coupon notes and the lenders or Beacon, as the case may be, cause the loans or zero coupon notes to become immediately due and payable, there can be no assurance that LLC will be able to make its respective payments thereunder or that LLC will be able to pay the Notes upon the occurrence of an event of default following the acceleration of amounts owing under the Credit Agreement or the zero coupon notes. On March 27, 2001, Generac Portable Products, LLC and GPPW, Inc. commenced a cash tender offer and consent solicitation (the "Offer") for all of the Notes, upon the terms and subject to the conditions set forth in the Offer, for $1,010 for each $1,000 principal amount of Notes validly tendered pursuant to the Offer. In addition, tendering holders of the Notes will receive accrued and unpaid interest on their Notes accepted for purchase to, but not including, the payment date. The Offer will expire at on April 27, 2001, unless extended. In conjunction with the Offer, the company is soliciting consents of the registered holders of Notes to the adoption of certain proposed amendments to the Indenture relating to the Notes. The proposed amendments will be effective when the Offer is consummated as to all Notes that are not purchased in the Offer, provided all other conditions to the Offer have otherwise been satisfied. The Offer is being made in connection with the Merger Agreement entered into on March 21, 2001 and is conditioned upon, among other things, the completion of the merger and the receipt of the consents necessary to adopt the proposed amendments as well as certain other conditions. 63 64 SCHEDULE I GENERAC PORTABLE PRODUCTS, INC. SCHEDULE OF COMBINED VALUATION ACCOUNTS BALANCE AT BEGINNING CHARGES TO BALANCE AT OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD --------------- -------------- -------------- ----------------- ACCOUNTS RECEIVABLE: For the Year Ended December 31, 2000 548 157 512 193 For the Year Ended December 31, 1999 242 372 66 548 For the Period July 10, 1998 through December 31, 1998 225 17 - 242 BALANCE AT BEGINNING CHARGES TO BALANCE AT OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD --------------- -------------- -------------- ----------------- INVENTORY For the Year Ended December 31, 2000 1,511 581 811 1,281 For the year ended December 31, 1999 774 2,089 1,352 1,511 For the period July 10, 1998 through December 31, 1998 500 593 319 774 64 65 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Generac Corporation: We have audited the accompanying statements of income and cash flows for the six months and nine days ended July 9, 1998. Our audit also included the financial statement schedule listed at Item 14 (a) 2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying financial statements have been prepared from the separate records maintained by the Business Unit and may not necessarily be indicative of the conditions that would have existed or the results of operations if the Business Unit had been operated as an unaffiliated company. Portions of certain income and expenses represent allocations made from Generac Corporation of items applicable to the Company as a whole. In our opinion, such financial statements present fairly, in all material respects, the results of operations and cash flows of the Portable Products Division, a Business Unit of Generac Corporation for the six months and nine days ended July 9, 1998 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Milwaukee, Wisconsin January 29, 1999 65 66 PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT OF GENERAC CORPORATION STATEMENT OF INCOME (IN 000'S) FOR THE SIX MONTHS AND NINE DAYS ENDED JULY 9, 1998 -------------------------- Net sales $ 139,551 Cost of sales 104,537 -------------------------- Gross profit 35,014 -------------------------- Expenses Selling and service 16,624 General and administative 2,380 -------------------------- Total expenses 19,004 -------------------------- Income from operations 16,010 Other expenses Interest expense 1,409 Foreign currency 108 -------------------------- Total other expense 1,517 -------------------------- Net income $ 14,493 ========================== Comprehensive income Net income $ 14,493 Translation adjustments (535) -------------------------- Total comprehensive income $ 13,958 ========================== See notes to financial statements. 66 67 PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT OF GENERAC CORPORATION STATEMENT OF CASH FLOWS (IN 000'S) FOR THE SIX MONTHS AND NINE DAYS ENDED JULY 9, 1998 --------------------------- Operating Activities: Net income $ 14,493 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 796 (Increase) decrease in assets: Accounts receivable (29,943) Inventories (10,054) Prepaid expenses (224) Increase in liabilities: Accounts payable 7,936 Accrued liabilities 3,428 --------------------------- Net cash used in operating activities (13,568) Investing Activities--Capital expenditures (1,553) Financing Activities--Increase in business unit investment, net 14,787 Effect of exchange rate changes on cash (132) --------------------------- Net decrease in cash and cash equivalents (466) Cash and cash equivalents: Beginning of Period 1,065 --------------------------- End of Period $ 599 =========================== See notes to financial statements. 67 68 PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT OF GENERAC CORPORATION NOTES TO FINANCIAL STATEMENTS SIX MONTHS AND NINE DAYS ENDED JULY 9, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements include the accounts of the Portable Products Division located in Jefferson, Wisconsin and its branches in the United Kingdom and Germany, a Business Unit ("Business Unit") of Generac Corporation ("Generac"). The Business Unit designs and manufactures portable generators, pressure washers and other engine-powered tools for the world market. CASH EQUIVALENTS -- The Business Unit considers all investments purchased with a maturity of three months or less to be cash equivalents. REVENUE RECOGNITION -- Net sales and costs of sales are recognized as the related products are shipped. A provision for estimated sales returns is recorded in the period in which the sales are recognized. SHIPPING AND HANDLING FEES AND COSTS: During the fourth quarter of 2000, the Business Unit adopted the provisions of the Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." In accordance with EITF 00-10, revenue from shipping and handling costs is reflected in net sales. The costs associated with shipping and handling of product for the six months and nine days ended July 9, 1998 were $3,471 and are reflected in selling and service expense. RESEARCH AND DEVELOPMENT COSTS -- The Business Unit has an ongoing program of new product development and existing product enhancement through redesign of existing products and the addition of new models. Costs related to these programs are expensed as incurred and totaled $925,000 for the six months and nine days ended July 9, 1998. DEPRECIATION -- Costs of property, plant and equipment are depreciated using the straight-line method over the estimated useful lives of the assets as follows: Years ----- Land improvements 20 Buildings 40 Machinery and equipment 10 Dies and tools 3 to 5 Vehicles 4 Office equipment 5 to 10 68 69 PRODUCT WARRANTIES -- The Business Unit provides that warranted products are merchantable and free of defects in workmanship and material generally for a period of one year. Warranty reserves are provided as charges to operations under selling and service expense for estimated normal warranty costs and, if applicable, for any significant problems known to exist on products sold. Warranty expense totaled $1,848,000 for the six months and nine days ended July 9, 1998. FOREIGN CURRENCY TRANSLATION -- The translation of the branch accounts into U.S. dollars is performed for revenue and expense accounts using an average exchange rate during the period. The gains or (losses) resulting from such translation are reflected as "cumulative translation adjustments" in business unit investment. Such adjustments amounted to $(703,000) through July 9, 1998. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. BUSINESS UNIT INVESTMENT The Business Unit is an operating unit of Generac with separate financial reporting. The financial statements for the six months and nine days ended July 9, 1998 include allocations by Generac for certain operating and employee benefit costs incurred on behalf of the Business Unit. These costs are allocated based on estimates of time and services provided, specifically identifiable charges, or relevant criteria that establish the Business Unit's pro rata charge of costs common to all Generac operating units. Allocated support costs from Generac to the Business Unit during the six months and nine days ended July 9, 1998 included manufacturing support of $125,000, service support of $11,000, research and development support of $21,000, general and administrative support of $152,000 and human resource and employee benefits support of $76,000. Research and development expenses totaling $131,000 were incurred by the Business Unit's United Kingdom branch during the six months and nine days ended July 9, 1998 on behalf of Generac and charged to Generac. The Business Unit and Generac supply each other with certain inventories. Total inventories transferred during the six months and nine days ended July 9, 1998 were $7,855,000 from Generac to the Business Unit and $350,000 from the Business Unit to Generac. Commencing February 1, 1998, certain production was transferred from the Business Unit to Generac. During the five months and nine days ended July 9, 1998, the Business Unit purchased $12,223,000 of inventories related to such transferred production. The Business Unit is also charged a portion of Generac's interest expense based upon levels of Business Unit investment. This interest charge aggregated $1,354,000 during the six months and nine days ended July 9, 1998. Management believes the allocations and activities between the Business Unit and Generac are reasonable under the circumstances; however, they may not 69 70 be indicative of amounts that would be required to be incurred if the Business Unit operated on a stand-alone basis. The changes (in $000's) within the business unit investment for the period ended July 9, 1998 are as follows: Balance at January 1, 1998 $ 52,763 Net income 14,493 Cumulative translation adjustments (535) Activity with parent, net 15,189 ------------ Balance at July 9, 1998 $ 81,910 ============ 3. S CORPORATION ELECTION Generac and its Stockholders have elected for federal and certain state income tax purposes to be treated as a S Corporation under provisions of the Internal Revenue Code. Accordingly, Generac's taxable income is includable in the individual tax returns of its Stockholders and no provision for income taxes is included in the accompanying financial statements. 4. PROVISION FOR DOUBTFUL ACCOUNTS The provision for doubtful accounts charged to operations was $67,000 for the six months and nine days ended July 9, 1998. 5. EMPLOYEE RETIREMENT AND SAVINGS PLANS Generac has noncontributory pension plans (salaried and hourly) covering substantially all of its employees including the employees of the Business Unit. The benefits under the salaried plan are based upon years of service and the participants' defined final average monthly compensation. The benefits under the hourly plan are based on a unit amount at the date of termination multiplied by the participants' credited service. Generac's funding policy for these plans is to contribute amounts at least equal to the minimum annual amount required by applicable regulations. Total pension expense allocated to the Business Unit for the six months and nine days ended July 9, 1998 was $231,000. Generac maintains deferred compensation plans for key employees of the Business Unit. Deferred compensation expense charged to operations was $18,000 for the six months and nine days ended July 9, 1998. 70 71 6. RENT EXPENSE Generac leases certain manufacturing equipment, computer equipment and vehicles used in the Business Unit under operating leases for lease terms ranging up to five years. Total rent expense for the six months and nine days ended July 9, 1998 was approximately $476,000. 7. MAJOR CUSTOMERS Two customers accounted for approximately 69% of net sales for the six months and nine days ended July 9, 1998. 8. FOREIGN OPERATIONS Sales for the Business Unit's European operations accounted for approximately 8% of net sales for the six months and nine days ended July 9, 1998. 9. CONTINGENCIES In the normal course of business the Business Unit is involved in certain legal actions and claims. It is the opinion of management that such litigation and claims will be resolved without material effect on the Business Unit's results of operations. 10. SUBSEQUENT EVENT On July 9, 1998, Generac completed the sale of substantially all of the assets and the assumption of certain liabilities of the Business Unit to Generac Portable Products, LLC (a company formed by The Beacon Group III -- Focus Value Fund, L.P.) for a net purchase price of approximately $305 million, including expenses. 71 72 SCHEDULE II PORTABLE PRODUCTS DIVISION, A BUSINESS UNIT OF GENERAC CORPORATION SCHEDULE OF COMBINED VALUATION ACCOUNTS BALANCE AT BEGINNING CHARGES TO BALANCE AT OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD ------------ ------------ ------------ --------------- ACCOUNTS RECEIVABLE: Six Months and Nine Days Ended July 9, 1998 172 67 14 225 BALANCE AT BEGINNING CHARGES TO BALANCE AT OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD ------------ ------------ ------------ --------------- INVENTORY Six Months and Nine Days Ended July 9, 1998 350 412 262 500 72 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENERAC PORTABLE PRODUCTS, INC. (Registrant) Date: March 30, 2001 By /s/ ERIC R. WILKINSON ----------------------- Eric R. Wilkinson President POWER OF ATTORNEY The undersigned officers and directors of Generac Portable Products, Inc. hereby severally constitute Eric R. Wilkinson, President of Generac Portable Products, Inc., or Richard A. Aube, Secretary and Treasurer of Generac Portable Products, Inc., and each of them singly our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below the Annual Report on Form 10-K filed herewith and any and all amendments thereto, and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable Generac Portable Products, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any one of them, on the Annual Report on Form 10-K and any and all amendments thereto. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Generac Portable Products, Inc. and in the capacities and on the date indicated. Date: March 30, 2001 By /s/ ERIC R. WILKINSON ----------------------- Eric R. Wilkinson President Date: March 30, 2001 By /s/ RICHARD A. AUBE ------------------------ Richard A. Aube Treasurer Date: March 30, 2001 By /s/ R. EUGENE CARTLEDGE ------------------------- R. Eugene Cartledge Chairman of the Board Date: March 30, 2001 By /s/ THOMAS A. COMMES ---------------------- Thomas A. Commes Director 73 74 Date: March 30, 2001 By /s/ GARY J. LATO ------------------ Gary J. Lato Vice President and Secretary Date: March 30, 2001 By /s/ THOMAS G. MENDELL ---------------------- Thomas G. Mendell Director Date: March 30, 2001 By /s/ DORRANCE J. NOONAN, JR. ----------------------------- Dorrance J. Noonan, Jr. Vice President and Director Date: March 30, 2001 By /s/ R. RALPH PARKS -------------------- R. Ralph Parks Director Date: March 30, 2001 By /s/ JAMES P. SCHADT --------------------- James P. Schadt Director Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENERAC PORTABLE PRODUCTS, LLC (Registrant) Date: March 30, 2001 By /s/ DORRANCE J. NOONAN, JR. ----------------------------- Dorrance J. Noonan, Jr. President and Chief Executive Officer POWER OF ATTORNEY The undersigned officers and directors of Generac Portable Products, LLC hereby severally constitute Gary J. Lato, Chief Financial Officer of Generac Portable Products, LLC, our true and lawful attorney, with full power to him, to sign for us in our names in the capacities indicated below the Annual Report on Form 10-K filed herewith and any and all amendments thereto, and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable Generac Portable Products, LLC to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney on the Annual Report on Form 10-K and any and all amendments thereto. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Generac Portable Products, LLC and in the capacities and on the date indicated. 74 75 Date: March 30, 2001 By /s/ DORRANCE J. NOONAN, JR. ----------------------------- Dorrance J. Noonan, Jr. President, Chief Executive Officer and Director Date: March 30, 2001 By /s/ GARY J. LATO ------------------ Gary J. Lato Chief Financial Officer Date: March 30, 2001 By /s/ RICHARD A. AUBE ------------------------ Richard A. Aube Director Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GPPW, INC. (Registrant) Date March 30, 2001 By /s/ FAITH ROSENFELD --------------------- Faith Rosenfeld President POWER OF ATTORNEY The undersigned officers and directors of GPPW, Inc. hereby severally constitute Richard A. Aube, Secretary and Treasurer of GPPW, Inc., our true and lawful attorney, with full power to him, to sign for us in our names in the capacities indicated below the Annual Report on Form 10-K filed herewith and any and all amendments thereto, and generally to do all such things in our name and on our behalf in our capacities as officers and directors to enable GPPW, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney on the Annual Report on Form 10-K and any and all amendments thereto. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of GPPW, Inc. and in the capacities and on the date indicated. Date March 30, 2001 By /s/ FAITH ROSENFELD --------------------- Faith Rosenfeld President Date: March 30, 2001 By /s/ RICHARD A. AUBE ------------------------ Richard A. Aube Secretary, Treasurer and Director 75 76 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 2.1 Agreement and Plan of Merger by and Among Briggs and Stratton Corporation, GPP Merger Corporation, Generac Portable Products, Inc. and The Beacon Group III - Focus Value Fund, L.P. (incorporated by reference to Exhibit 2.1 to the Registrants' Form 8-K Current Report dated March 23, 2001). 3.1 Certificate of Incorporation of GPPC, Inc. (incorporated by reference to Exhibit 3.1 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 3.2 Certificate of Amendment of Certificate of Incorporation Before Payment of Any Part of the Capital of GPPC, Inc. (incorporated by reference to Exhibit 3.2 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 3.3 Certificate of Amendment of Certificate of Incorporation Before Payment of Any Part of the Capital of Generac Portable Products, Inc. (incorporated by reference to Exhibit 3.3 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 3.4 By-Laws of Generac Portable Products, Inc. (incorporated by reference to Exhibit 3.4 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 3.5 Certificate of Formation of Generac Portable Products, LLC (incorporated by reference to Exhibit 3.5 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 3.6 Limited Liability Company Agreement of Generac Portable Products, LLC (incorporated by reference to Exhibit 3.6 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 3.7 Articles of Incorporation of GPPW, Inc. (incorporated by reference to Exhibit 3.7 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 3.8 By-laws of GPPW, Inc. (incorporated by reference to Exhibit 3.8 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 3.9 Certificate of Amendment of Restated Certificate of Incorporation of Generac Portable Products, Inc. 4.1 Indenture, dated as of July 1, 1998 among Generac Portable Products, LLC, GPPW, Inc. and Marine Midland Bank, as trustee (incorporated by reference to Exhibit 4.1 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 4.2 Registration Rights Agreement, dated as of July 2, 1998 among Generac Portable Products, LLC, GPPW, Inc. and Deutsche Bank Securities Inc. (incorporated by reference to Exhibit 4.2 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 4.3 Form of Security for 11 1/4% senior subordinated notes due 2006 issued by Generac Portable Products, LLC and GPPW, Inc. (including the form of Guarantee) (incorporated by reference to Exhibit 4.4 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 77 77 4.4 Stockholders' Agreement by and among Generac Portable Products, Inc., The Beacon Group III - Focus Value Fund L.P. and other stockholders dated as of July 9, 1998 (incorporated by reference to Exhibit 4.1 to the Registrants' Registration Statement on Form S-1 dated May 21, 1999). 4.5 Unit Purchase Agreement, dated as of November 20, 2000 by and among Generac Portable Products, Inc., Generac Portable Products, LLC and The Beacon Group - Focus Value Fund III. 10.1 OEM Engine Supply Agreement dated July 9, 1998 between Generac Corporation and Generac Portable Products, Inc. (incorporated by reference to Exhibit 10.1 to the Registrants' Registration Statement on Form S-4 dated July 26, 1999). 10.2 Fourth Amendment, dated as of October 18, 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. 24.1 Powers of Attorney (included in the signature pages of this Form 10-K). 78