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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended April 2, 2000
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-89061
HOLLEY PERFORMANCE PRODUCTS INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 61-1291482
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(State of Incorporation) (I.R.S. Employer Identification Number)
1801 Russellville Road, Post Office Box 10360, Bowling Green, KY 42102-7360
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(Address Of Principal Executive Offices, Including Zip Code)
270-782-2900
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(Registrant's Telephone, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
There were 1,000 shares of Common Stock outstanding as of April 2,
2000.
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HOLLEY PERFORMANCE PRODUCTS INC.
Quarterly Report on Form 10-Q
For the Three Months Ended April 2, 2000
TABLE OF CONTENTS
PART I Page No
-------
Item 1. Financial Statements................................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 14
PART II
Item 1. Legal Proceedings...................................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................................... 15
SIGNATURES 16
3
PART I- FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 31, APRIL 2,
ASSETS 1999 2000
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,359 $ 743
Accounts receivable, net of reserves for doubtful accounts of
$1,293 and $1,076, respectively 28,320 29,089
Inventories 31,523 36,493
Deferred income taxes 4,531 3,267
Income taxes receivable 4,112 3,164
Other current assets 2,583 2,382
--------- ---------
Total current assets 72,428 75,138
PROPERTY, PLANT AND EQUIPMENT, NET 35,712 35,407
INTANGIBLE ASSETS, NET 154,323 154,096
--------- ---------
Total assets $ 262,463 $ 264,641
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 257 $ 293
Accounts payable 9,633 15,661
Accrued liabilities 19,880 16,493
--------- ---------
Total current liabilities 29,770 32,447
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 164,448 169,591
--------- ---------
DEFERRED INCOME TAXES 19,403 16,879
--------- ---------
OTHER 652 642
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDER'S EQUITY:
Common stock, $1.00 par value; 1,000 shares authorized, issued
and outstanding 1 1
Paid-in capital 52,499 52,499
Retained deficit (4,310) (7,418)
--------- ---------
Total stockholder's equity 48,190 45,082
--------- ---------
Total liabilities and stockholder's equity $ 262,463 $ 264,641
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
January 1, 1999 JANUARY 1, 2000
to TO
March 28, 1999 APRIL 2, 2000
--------------- ---------------
NET SALES $ 30,801 $ 39,051
COST OF SALES 20,249 26,470
------------ ------------
Gross profit 10,552 12,581
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,232 9,666
PLANT RELOCATION COSTS 360 92
AMORTIZATION EXPENSE 928 1,364
------------ ------------
Operating income 3,032 1,459
------------ ------------
INTEREST EXPENSE 2,004 5,804
OTHER EXPENSE 2 -
------------ ------------
INCOME (LOSS) BEFORE TAXES 1,026 (4,345)
INCOME TAX PROVISION (BENEFIT) 796 (1,237)
------------ ------------
NET INCOME (LOSS) $ 230 $ (3,108)
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
(Unaudited)
COMMON PAID-IN RETAINED
STOCK CAPITAL DEFICIT TOTAL
------ ------- ------- --------
BALANCE, DECEMBER 31, 1999 $ 1 $52,499 $(4,310) $ 48,190
Net loss - -- (3,108) (3,108)
------ ------- ------- --------
BALANCE, APRIL 2, 2000 $ 1 $52,499 $(7,418) $ 45,082
====== ======= ======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
January 1, 1999 JANUARY 1, 2000
to TO
March 28, 1999 APRIL 2, 2000
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 230 $(3,108)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,160 2,989
Amortization of debt discount -- 211
Deferred income taxes 272 (1,260)
Changes in assets and liabilities, net of assets purchased:
Accounts receivable (4,295) (769)
Inventories 2,007 (4,970)
Other assets (224) 1,149
Accounts payable (2,077) 6,028
Accrued liabilities 208 (3,398)
------- -------
Net cash used in operating activities (1,719) (3,128)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (318) (1,320)
Cash paid for acquisitions (623) (679)
------- -------
Net cash used in investing activities (941) (1,999)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on long-term obligations 3,000 4,968
Financing costs -- (457)
------- -------
Net cash provided by financing activities 3,000 4,511
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NET CHANGE IN CASH 340 (616)
BALANCE AT BEGINNING OF PERIOD 2,013 1,359
------- -------
BALANCE AT END OF PERIOD $ 2,353 $ 743
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 9,810
======= =======
Cash paid for income taxes $ -- $ --
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheets as of April 2, 2000 and December 31, 1999 and
the consolidated statements of operations and cash flows for the three months
ended March 28, 1999 and April 2, 2000 have been prepared by the Company in
accordance with the accounting policies described in its annual financial
statements and should be read in conjunction with the notes thereto.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and changes in cash flows at March 28, 1999 and April 2,
2000 and for all periods presented have been made. The results of operations for
the three months ended April 2, 2000 are not necessarily indicative of the
operating results to be expected for the full year.
Holley Performance Products Inc. (a Delaware corporation and "Holley"), based
in Bowling Green, Kentucky, is a leading manufacturer of a diversified line of
performance automotive products, including carburetors, fuel pumps, fuel
injection systems, ignition systems and remanufactured carburetors. The products
are designed to enhance street, off-road, recreational and competitive vehicle
performance through increased horsepower, torque and driveability. In addition
to its automotive performance line, Holley manufactures performance marine,
mobile and stationary industrial engine components and markets a new line of
performance in-tank fuel pumps as well as a recently introduced specialty
chemical line.
In July of 1999, Holley purchased the outstanding shares of Hooker Industries,
Inc. ("Hooker"), a manufacturer of performance exhaust systems, headers,
mufflers and Harley-Davidson exhaust pipes. In October of 1999, Holley purchased
the outstanding shares of Biggs Manufacturing, Inc. (also known as "FlowTech"),
Nitrous Oxide Systems, Inc. ("NOS"), and Earl's Supply Company, Inc. (also known
as Earl's Performance Products, "Earl's"). FlowTech is a manufacturer of
performance exhaust systems, headers, mufflers and exhaust accessories. NOS is a
manufacturer of nitrous oxide injection systems for the performance aftermarket.
Earl's is a provider of underhood performance fittings, brake lines and hoses.
2. INVENTORIES
Inventories of the Company consist of the following:
December 31, APRIL 2,
1999 2000
------------ --------
Raw materials $16,861 $15,300
Work-in-progress 5,357 5,195
Finished goods 8,994 15,651
Other 311 347
------- -------
$31,523 $36,493
======= =======
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3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment of the Company consist of the following:
December 31, APRIL 2,
1999 2000
-------- --------
Land $ 380 $ 377
Buildings and improvements 11,209 11,274
Machinery and equipment 25,525 24,977
Computer equipment 3,501 3,502
Furniture and fixtures 1,348 1,276
Construction in process 763 1,939
-------- --------
42,726 43,345
Less: accumulated depreciation (7,014) (7,938)
-------- --------
$ 35,712 $ 35,407
======== ========
Depreciation expense was $1,178 and $1,625 for the three months ended March 28,
1999 and April 2, 2000, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities of the Company consist of the following:
December 31, APRIL 2,
1999 2000
------- -------
Wages and benefits $ 5,196 $ 6,145
Reserve for product returns 4,294 4,294
Allowance for outstanding rebate programs 1,504 1,966
Interest 5,177 820
Other 3,709 3,268
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$19,880 $16,493
========== ========
5. LONG-TERM DEBT
Long-term debt of the Company consists of the following:
December 31, APRIL 2,
1999 2000
--------- ---------
Revolving line of credit, maturing June 27, 2003 $ 17,000 $ 22,000
Senior notes, maturing September 15, 2007, net of debt
discount of $5,284 and $5,088 144,716 144,912
Other 659 685
Long-term lease obligation 2,330 2,287
--------- ---------
164,705 169,884
Less current portion (257) (293)
--------- ---------
$ 164,448 $ 169,591
========= =========
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On September 20, 1999, the Company issued $150,000 of 12 1/4% Senior Notes due
2007 at a discount of 3.7%. The debt discount will be amortized as a non-cash
charge to interest expense using the effective interest method over the term of
the debt. The notes are unsecured and subordinate to the Company's other
indebtedness. The proceeds from the notes were used to repay existing
indebtedness and to fund the acquisitions of NOS and Earl's in October 1999.
6. PLANT RELOCATION COSTS
Plant relocation costs include expenses related to the closure of a
manufacturing facility and the related movement of inventory and fixed assets to
the Company's manufacturing facility in Bowling Green, Kentucky.
7. SEGMENT DATA
The Company's reportable segments have a common management team and
infrastructure, however, due to the different nature of the products sold by
each segment, the Company monitors each segment's revenues and gross margin on a
standalone basis when making strategic decisions regarding the allocation of
Company resources.
The Company has two reportable segments: Performance Parts and Remanufactured
Parts. The Company manufactures high performance aftermarket automotive parts
through its Performance Parts segment. Under its Remanufactured Parts segment,
the Company refurbishes used automotive part cores and then resells the parts as
remanufactured products. Both segments sell primarily to automotive parts
distributors throughout the United States.
The accounting polices of the reportable segments are the same as those
described in the Company's annual financial statements and should be read in
conjunction with the notes thereto. The Company evaluates the performance of its
reportable segments based on gross margin. Intersegment sales and transfers are
not significant.
Summarized financial information concerning the Company's operating measures for
the reportable segments are shown in the following table:
PERFORMANCE REMANUFACTURED
PARTS PARTS TOTAL
----------- --------------- -------
JANUARY 1, 1999 TO MARCH 28, 1999
Revenues $24,978 $5,823 $30,801
Gross margin 9,174 1,378 10,552
JANUARY 1, 2000 TO APRIL 2, 2000
Revenues $32,135 $6,916 $39,051
Gross margin 10,820 1,761 12,581
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Summary balance sheet data for inventory and fixed assets for each of the
Company's reportable segments as of December 31, 1999 and April 2, 2000 are
shown in the following table:
PERFORMANCE REMANUFACTURED
PARTS PARTS TOTAL
----------- -------------- -------
AS OF DECEMBER 31, 1999
Inventory $27,315 $4,208 $31,523
Fixed assets 33,043 2,669 35,712
AS OF APRIL 2, 2000
Inventory $32,168 $4,325 $36,493
Fixed assets 32,967 2,440 35,407
8. COMMITMENTS AND CONTINGENCIES
The Company is a party to various lawsuits and claims in the normal course of
business. While the outcome of the lawsuits and claims against the Company
cannot be predicted with certainty, management believes that the ultimate
resolution of the matters will not have a material effect on the financial
position or results of operations of the Company.
In May 1999, the Union Pacific Railroad Company ("Union Pacific") filed an
action against the Company alleging that certain soil and groundwater
contamination found on Union Pacific's property had migrated from an adjacent
facility owned by Weiand. Union Pacific seeks damages of approximately $3,000
from all defendants for past and expected costs. At this time, the Company is
unable to assess the likelihood of an unfavorable outcome, or in the event of
such an outcome, the amount of any resulting liability. The Company is
investigating Union Pacific's claims and is defending them vigorously. Recently,
the Company discovered possible soil contamination on the Weiand property, which
has not yet been confirmed or assessed. The property owner may assert claims for
damage to the property. The Company intends to defend any such claims
vigorously.
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The Company, like others in similar businesses, is subject to extensive
federal, state and local environmental laws and regulations. Although
Company environmental policies and practices are designed to ensure
compliance with these laws and regulations, future developments and
increasingly stringent regulation could require the Company to make
unforeseen environmental expenditures.
The Company has established a severance plan for certain members of
management. Under the terms of the severance plan, the participants are
entitled to certain severance benefits, which include salary
continuation, in the event the participant is terminated by the Company
without cause.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains certain forward-looking statements with respect to
the Company's operations, industry, financial condition and liquidity.
These statements, which are typically introduced by phrases such as
"the Company believes", "anticipates", "estimates" or "expects" certain
conditions to exist, reflect management's best current assessment of a
number of risks and uncertainties. The Company's actual results could
differ materially from the results anticipated in these forward-looking
financial statements as a result of certain factors described in this
report. See "Safe Harbor Statement."
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
ACCOMPANYING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES THERETO AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND THE NOTES THERETO CONTAINED IN THE ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1999.
"SAFE HARBOR" STATEMENT
The Management's Discussion and Analysis and other portions of this
Report include "forward looking" statements within the meaning of the
federal securities laws that are subject to future events, risks and
uncertainties that could cause actual results to differ materially from
those expressed or implied. Important factors that ether individually
or in the aggregate could cause actual results to differ materially
from those expressed include, without limitation, (1) that the Company
will not grow its sales revenue or profit, (2) that the Company will
fail to be competitive with existing and new competitors, (3) that the
Company will not be able to sustain its current growth, (4) that needed
financing will not be available to the Company if and as needed, (5)
that a significant change in the growth rate of the overall U.S.
economy will occur, such that spending on performance automotive
products will be materially impacted, (6) that a drastic negative
change in the market conditions may occur, (7) that emissions and other
environmental regulations affecting us will increase thereby limiting
our ability to sell our automotive products and grow our business, and
(8) that some other unforeseen difficulties may occur. This list is
intended to identify only certain of the principal factors that could
cause actual results to differ materially from those describe in the
forward-looking statements included herein.
OVERVIEW
Founded in 1903, Holley is a leading manufacturer and marketer of
specialty products for the performance automotive, marine and
powersports (motorcycle, jet-ski, snowmobile and go-cart) aftermarkets.
Our Company designs, manufactures and markets a diversified line of
automotive performance racing products that include fuel, air, spark
(also known as ignition) and internal engine management systems. We
design our products to enhance vehicle performance through generating
increased horsepower, torque and acceleration. Our products include
both throttle body and multi-port fuel injection systems, performance
and remanufactured carburetors, digital ignition systems, distributors,
fuel pumps, camshafts, crankshafts, intake manifolds, pistons, super
chargers, exhaust systems, headers, mufflers and motorcycle exhaust
pipes, cylinder heads, water pumps and throttle bodies. With the
October, 1999 acquisitions of FlowTech, NOS and Earl's, our product
offerings also
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include nitrous oxide injection systems and performance automotive
plumbing products. In the performance automotive aftermarket, we have
the most widely recognized brand name and a broad distribution network,
which includes specialized retailers, performance wholesale
distributors, mail order retailers and original equipment manufacturers
("OEM's"). We have developed strong relationships with our customers in
each distribution channel, including leading companies such as Advance
Auto Parts, AutoZone, CSK Auto, Keystone, O'Reilly, Summit Racing,
Jeg's mail order, GM Service Parts, Volvo-Penta and Mercury Marine.
SEASONALITY
Our operations experience slight seasonal trends, which generally
affect the overall automotive aftermarket industry. Historically, our
revenues are highest in the spring, during our second fiscal quarter,
which marks the beginning of the racing season and when the weather is
better suited for outdoor automotive repair activity. Seasonality has a
more prevalent effect on our remanufacturing facility in Springfield,
and accordingly, we occasionally hire temporary employees to respond to
peak demand.
COMPARISON OF THE THREE MONTHS ENDED APRIL 2, 2000 AND MARCH 28, 1999
Net Sales. Net sales equals gross revenues less provisions for
volume rebates, co-op advertising, freight-out expenses, and other
sales allowances. Net sales for the three months ended April 2, 2000
totaled $39.1 million compared to $30.8 million for the same period in
1999, an increase of $8.3 million or 26.9%. Sales in the performance
segment were $32.2 million compared to $25.0 million in the same period
in 1999, an increase of $7.2 million or 28.8%. Sales in the
remanufacturing segment were $6.9 million compared to $5.8 million in
the same period in 1999, an increase of $1.1 million or 19.0%. The
increase in the performance segment was largely attributable to
additional sales from the Hooker, FlowTech, NOS and Earl's acquisitions
of $12.6 million, offset by reduced sales in the base business (the
business owned in both periods) of $5.4 million. Management attributes
the weak first quarter demand in the base business to special dating
and discounting programs offered in the fourth quarter of 1999 that
shifted orders out of the first quarter 2000. In addition, sales at our
Lunati operations were down by $1.6 million, resulting from the
transition from direct consumer sales to selling through our existing
distributor network. The increased sales in the remanufacturing segment
primarily resulted from increased demand.
Gross Profits. Gross profits for the three months ended April
2, 2000 totaled $12.6 million or 32.3% of net sales compared to $10.6
million or 34.3% of sales for the same period in 1999. This is a
difference of $2.0 million or 18.9%. In the performance segment, gross
profits were $10.8 million or 33.5% of sales compared to $9.2 million
or 36.8% in the same period in 1999. This is an increase of $1.6
million or 17.4%. In the remanufacturing segment, gross profits were
$1.8 million or 26.1% of sales compared to $1.4 million or 24.1% of
sales in the same period in 1999. This is increase of $0.4 million or
28.6%. The increase in the performance segment is attributable to gross
profits contributed by the Hooker, FlowTech, NOS and Earl's
acquisitions of $4.6 million offset by reduced gross profit in the base
business of $3.0 million. Of the base business decrease, $2.0 million
is attributable to decreased volume, $0.5 million is due to reduced
gross profit margins at our Lunati operations and $0.4 million is due
to increased warranty expense. The reduced gross margins at Lunati and
the increased warranty expense were primarily responsible for the
decrease in gross profits as a percentage of sales in the preformance
segment. Of the increased gross profit in the remanufacturing segment,
$0.3 million is attributable to increased sales volume and $0.1 million
is due to improved productivity and absorption of fixed costs.
Selling, General and Administrative Expenses. Selling,
general, and administrative expenses for the three months ended April
2, 2000 totaled $9.7 million compared to $6.2 million in the same
period in 1999, an increase of $3.5 million or 56.5%. The increase is
mostly attributable to $2.0 million of additional expenses from the
Hooker, FlowTech, NOS and Earl's acquisitions, and $1.5 million of
additional expenses from the base
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business. The increased expenses in the base business include $0.6
million in increased marketing and advertising expense, increased cash
discounts of $0.5 million as a result of increased sales, higher
payroll costs of $0.3 million, and higher depreciation expense of $0.1
million.
Plant relocation costs. Plant relocation costs for the three
months ended April 2, 2000 totaled $0.1 million compared to $0.4
million in the same period in 1999. These costs result from one-time
expenses incurred in the integration of acquisitions.
Amortization Expense. Amortization expense for the three
months ended April 2, 2000 totaled $1.4 million compared to $0.9
million for the same period in 1999. These expenses reflect the
amortization of goodwill, transaction fees, and other intangible assets
associated with the purchase of Holley by KHPP Holdings; the subsequent
acquisitions of Weiand, Lunati, Hooker, FlowTech, NOS and Earl's; and
the valuation of intellectual property.
Operating Income. Operating income for the three months ended
April 2, 2000 totaled $1.5 million compared to $3.0 million in the same
period in 1999, a decrease of $1.5 million or 50.0%. The decrease
primarily resulted from increased selling, general and administrative
expenses and increased amortization expenses partially offset by
increased sales and gross profits.
Interest Expense. Interest expense was $5.8 million for the
three months ended April 2, 2000 compared to $2.0 million in the same
period in 1999. The expense resulted from interest on our Company's
revolving credit facility, and the accrual of interest associated with
our 12 1/4 % senior notes due 2007 issued in September 1999. The
revolving letter of credit is used to finance general business and
working capital needs. The proceeds from the sale of our senior notes
were used to pay back the existing bank term loans and to finance our
1999 acquisitions.
Provision/(benefit) for Income Taxes. Benefit for income taxes
for the three months ended April 2, 2000 was $(1.2) million compared to
a $0.8 million provision in the same period in 1999. The benefit in
2000 results from taxable income being negative primarily due to
increased interest expense.
Net Income/(Loss). Net loss for the three months ended April
2, 2000 was $(3.1) million compared with net income of $0.2 million for
the same period in 1999, a decrease of $3.3 million. The decrease
reflects increased interest expense of $3.8 million and reduced
operating income of $1.5 million partially offset by the increased
income tax benefit of $2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Net cash provided/(used) by operating
activities for the three months ended April 2, 2000 was $(3.1) million.
The decrease in net income and increased working capital requirements
contributed primarily to the increase in net cash used by operating
activities in the period. Inflows from depreciation & amortization of
$3.2 million were offset by outflows due to increased working capital
of $1.9 million, deferred income taxes of $1.3 million and a net loss
of $3.1 million. The increase in working capital was primarily
attributable to increased inventories of $5.0 million; increased
accounts receivable of $0.7 million due to higher sales volume; and
decreased accrued liabilities of $3.4 million resulting primarily from
the excess of interest payments over accruals offset by increased
accounts payable of $6.0 million and decreased other current assets of
$1.2 million due to receipt of income tax refunds.
Investing Activities. Net cash used in investing activities
for the three months ended April 2, 2000 was $2.0 million. We spent
$1.3 million on capital additions during the period and another $0.7
million on asset purchases.
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Financing Activities. Net cash provided by/(used in)
financing activities the three months ended April 2, 2000 was $4.5
million. Cash provided in the period was primarily due to the proceeds
from additional bank debt incurred for acquisitions and working capital
needs of $5.0 million offset by the payment of fees associated with the
amendment of our existing bank facility of $0.5 million.
Our primary sources of liquidity are funds generated by
operations and borrowings under our bank credit facility. Holley is
dependent on the revolving line of credit facility to fund its working
capital needs. Based on our projections, we believe that we will be in
compliance with the quarterly financial ratio covenants during 2000 and
that the revolving line of credit facility will be adequate to fund our
working capital needs during 2000. However, should the revolving line
of credit become unavailable or should we fail to meet our projected
results, we may be forced to seek additional sources of financing in
order to fund our working capital needs.
We historically have expanded our business through the
acquisition of other related and complementary businesses, and we
continue to seek and evaluate acquisition opportunities. We anticipate
that our existing capital resources and cash flow generated from future
operations, proceeds from the offering, and drawings under our bank
credit facility will enable us to maintain our planned operations,
capital expenditures and debt service for the foreseeable future. We
also anticipate that implementing our acquisition strategy will require
us to incur additional indebtedness. However, our current indenture and
bank credit facility terms, as well as our current level of
indebtedness, would significantly limit or prevent incurrence of any
substantial indebtedness.
Bank Credit Facility. In May 1998, we established a senior
secured credit facility with a group of banks led by Credit Agricole
Indosuez, which after certain amendments consists of a $35.0 million
revolving credit facility. On March 8, 2000, this facility was amended
to increase the available amount from $25.0 million to $35.0 million.
The text of the amendment has been filed as an exhibit.
We may borrow from time to time under the revolving credit
facility for working capital purposes, and all outstanding borrowings
thereunder must be repaid in full by June 2003. Loans under our bank
credit facility bear interest, at our option, at one of two floating
rates which can be changed at our option from time to time: either a
base rate, based on Credit Agricole Indosuez' announced "prime rate,"
or 1/2% per annum in excess of the Federal Funds Rate, plus an
additional 1.0% per annum, or the reserve adjusted London Interbank
Offered Rate plus an additional 2.5%. The bank credit facility contains
various covenants made by Holley, including covenants prohibiting or
limiting our ability to:
- incur additional debt;
- grant liens; or
- sell our assets, together with financial covenants and
information reporting requirements we must meet.
During the term of the bank credit facility, Holley, on a
consolidated basis, will be required to maintain a minimum EBITDA level
as well as certain financial ratios, including: (1) a ratio of debt to
EBITDA, whereby EBITDA is defined as net income before provision for
interest, tax, depreciation or amortization expense and (2) a ratio of
EBITDA to interest expense, in each case, on a trailing four-quarter
basis. Any borrowings under the revolving credit facility will be
limited to the lesser of $35.0 million or 75% of the eligible accounts
receivable and 55% of the eligible inventory of Holley and its
subsidiaries.
Our bank credit facility is guaranteed by all of Holley's
subsidiaries, and is secured by a first priority security interest in
favor of the bank lenders in the capital stock of Holley and its
subsidiaries and in each of their accounts receivable and inventory.
15
Senior Notes Offering. On September 20, 1999, the Company issued $150.0
million of 12 1/4% senior notes due 2007 at a discount of 3.7% (the
"Senior Notes"). The debt discount will be amortized as a non-cash
charge to interest expense using the effective interest method over the
term of the debt. The notes are unsecured and subordinate to the
Company's other indebtedness. The proceeds from the notes were used to
repay existing indebtedness under the Bank Credit Facility described
above and to fund the acquisitions of FlowTech, NOS and Earl's in
October 1999.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to interest rate changes is primarily
related to its variable rate debt which may be outstanding from time to
time under the Company's Revolving Credit Facility with a group of
banks led by Credit Agricole Indosuez. The Company's Revolving Credit
Facility is a $35 million line of credit with an interest rate based on
the London Interbank Offered Rate (LIBOR) (currently 6.38%) or the
prime rate (currently 9.00%). The term of this facility is through June
2003. Because the interest rate on the Revolving Credit Facility is
variable, the Company's cash flow may be affected by increases in the
prime rate. Management does not, however, believe that any risk
inherent in the variable-rate nature of the loan is likely to have a
material effect on the Company. As of the end of the first quarter of
2000, the Company's outstanding balance on the Revolving Credit
Facility was $22.0 million. Even if the Company was to draw down on the
entire available amount of the line prior and an unpredicted increase
in the prime rate occurred, it would not be likely to have a material
effect.
SENSITIVITY ANALYSIS. To assess exposure to interest rate
changes, the Company has performed a sensitivity analysis assuming the
Company had drawn the full $35 million balance available under the
Revolving Line of Credit. If the prime rate rose 100 basis points, the
increase in the monthly interest payment would equal $29,167. The
Company does not believe the risk resulting from such fluctuations is
material nor that the payment required would have material effect on
cash flow.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In May 1999, Union Pacific Railroad Company filed an action
against Weiand and others in federal district court for the Central
District of California alleging that certain soil and groundwater
contamination discovered on the Union Pacific property in Los Angeles
migrated from the adjacent Weiand facility and, therefore, Weiand is
responsible for costs related to investigation and remediation. Union
Pacific seeks damages of approximately $3 million from all defendants
for past and expected future costs. At this time, we are unable to
assess the likelihood of an unfavorable outcome or, in the event of
such an outcome, the amount of any resulting liability. We are
investigating the claims of Union Pacific and the property owner and
are defending them vigorously. Recently, we discovered possibly
significant soil contamination on the Weiand property, which has not
yet been confirmed or assessed. The property owner may assert claims
for damage to the property. Holley intends to defend any such claims
vigorously.
We have been named as defendants in a number of legal actions
arising from normal business activities. Although the amount of any
ultimate liability with respect to such matters cannot be precisely
determined, we do not expect any such liability to have a material
adverse effect on our overall operations.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule;
(b) Reports on Form 8-K - None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Holley Performance Products Inc.
Date: May 16, 2000 /s/ JEFFREY G. KING
-----------------------------------
Jeffrey G. King, President and
Chief Executive Officer
Date: May 16, 2000 /s/ ROBERT L. WINELAND
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Robert L. Wineland, Chief Financial
Officer (principal financial
officer)