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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 July 1, 2001
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) (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 July 1, 2001.
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HOLLEY PERFORMANCE PRODUCTS INC.
Annual Report on Form 10-Q
For the Three Months Ended July 1, 2001
TABLE OF CONTENTS
Page No
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PART I
Item 1. Financial Statements................................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk.............................. 18
PART II
Item 1. Legal Proceedings...................................................................... 19
Item 5. Other Information...................................................................... 19
Item 6. Exhibits and Reports on Form 8-K....................................................... 19
SIGNATURES 20
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PART I- FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS.
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 31, July 1,
2000 2001
------------ ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,967 $ 287
Accounts receivable, net of reserves for doubtful accounts of
$964 and $895, respectively 27,573 29,553
Inventories 34,759 37,272
Deferred income taxes 3,514 3,287
Income taxes receivable 1,305 --
Other current assets 1,020 1,175
---------- ----------
Total current assets 75,138 71,574
PROPERTY, PLANT AND EQUIPMENT, NET 32,791 29,397
INTANGIBLE ASSETS, NET 156,700 153,493
---------- ----------
Total assets $ 264,629 $ 254,464
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,714 $ 3,708
Accounts payable 11,833 13,103
Accrued liabilities 19,257 15,733
---------- ----------
Total current liabilities 34,804 32,544
---------- ----------
LONG-TERM DEBT, NET OF CURRENT PORTION 180,668 177,579
---------- ----------
DEFERRED INCOME TAXES 16,841 15,441
---------- ----------
OTHER 537 491
---------- ----------
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 (20,721) (24,091)
---------- ----------
Total stockholder's equity 31,779 28,409
---------- ----------
Total liabilities and stockholder's equity $ 264,629 $ 254,464
========== ==========
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)
THREE MONTHS ENDED SIX MONTHS ENDED
July 2, 2000 July 1, 2001 July 2, 2000 July 1, 2001
------------ ------------ ------------ ------------
NET SALES $ 45,281 $ 42,052 $ 84,747 $ 77,471
COST OF SALES 29,898 28,085 56,783 52,570
-------- -------- -------- --------
Gross profit 15,383 13,967 27,964 24,901
-------- -------- -------- --------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 10,178 7,366 19,844 14,905
PLANT RELOCATION COSTS 108 -- 200 --
AMORTIZATION EXPENSE 1,376 1,447 2,740 2,859
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 11,662 8,813 22,784 17,764
-------- -------- -------- --------
Operating income 3,721 5,154 5,180 7,137
-------- -------- -------- --------
INTEREST EXPENSE 6,197 5,605 12,001 11,432
OTHER EXPENSE 1 80 1 108
-------- -------- -------- --------
LOSS BEFORE TAXES AND MINORITY INTEREST (2,477) (531) (6,822) (4,403)
INCOME TAX BENEFIT (990) (187) (2,227) (1,170)
-------- -------- -------- --------
LOSS BEFORE MINORITY INTEREST (1,487) (344) (4,595) (3,233)
MINORITY INTEREST, NET OF TAXES (133) (137) (133) (137)
-------- -------- -------- --------
NET LOSS $ (1,620) $ (481) $ (4,728) $ (3,370)
======== ======== ======== ========
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, 2000 $ 1 $ 52,499 $(20,721) $ 31,779
Net loss -- -- (3,370) (3,370)
---- -------- -------- --------
BALANCE, JULY 1, 2001 $ 1 $ 52,499 $(24,091) $ 28,409
==== ======== ======== ========
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, 2000 January 1, 2001
to to
July 2, 2000 July 1, 2001
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,728) $ (3,370)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 6,243 7,296
Amortization of debt discount 446 343
Deferred income taxes (2,418) (1,170)
Changes in assets and liabilities, net of assets purchased:
Accounts receivable 798 (1,980)
Inventories (5,515) (2,513)
Other assets 3,393 961
Accounts payable 840 1,270
Accrued liabilities 196 (3,570)
-------- --------
Net cash used in operating activities (745) (2,733)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,424) (527)
Net book value of capital dispositions -- 18
Other noncurrent assets 50 --
Cash paid for acquisitions (679) --
-------- --------
Net cash used in investing activities (3,053) (509)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on long-term obligations 3,802 (3,438)
Financing costs (575) --
-------- --------
Net cash provided by (used in) financing activities 3,227 (3,438)
-------- --------
NET CHANGE IN CASH $ (571) $ (6,680)
BALANCE AT BEGINNING OF PERIOD 1,359 6,967
-------- --------
BALANCE AT END OF PERIOD $ 788 $ 287
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 10,302 $ 10,415
======== ========
Cash paid for income taxes $ 4 $ --
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The consolidated balance sheets of Holley Performance Products Inc. (the
"Company" or Holley) as of December 31, 2000 and July 1, 2001, and the
consolidated statements of operations for the three and six month periods ended
July 2, 2000 and July 1, 2001, and the consolidated statements of cash flows for
the six month periods ended July 2, 2000 and July 1, 2001 have been prepared by
the Company in accordance with the accounting policies described in the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission on April 2, 2001 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 cash flows at July 2, 2000 and July 1, 2001 and for
all periods presented have been made. The results of operations for the periods
ended July 1, 2001 are not necessarily indicative of the operating results to be
expected for the full year.
In 2001, management has implemented actions designed to increase net sales and
gross profit while controlling operating expenses. The Company is dependent on
its revolving credit facility to fund its working capital needs. The Company's
ability to operate within the cash available under its revolving credit facility
and to comply with the restrictive financial covenants required under that
facility are dependent on improved net income and reductions in the level of
working capital necessary to operate the business.
The Company is in compliance with the revolving credit facility's quarterly
financial ratio covenant for the period ending July 1, 2001. Management believes
that the Company will be in compliance with the revolving credit facility's
quarterly financial ratio covenant during the remainder of 2001, and that the
revolving credit facility will be adequate to allow the Company to fund its
working capital needs during 2001. However, should the revolving credit facility
become unavailable or the Company fail to meet its projected results, the
Company may be forced to seek additional sources of financing in order to fund
its working capital needs.
The Company, a Delaware corporation based in Bowling Green, Kentucky, is a
leading manufacturer of a diversified line of performance automotive products,
including carburetors, fuel pumps, fuel injection systems, ignition systems,
remanufactured carburetors, camshafts, crankshafts, pistons, superchargers,
exhaust headers, mufflers, engine plumbing products, and nitrous oxide systems.
The products are designed to enhance street, off-road, recreational and
competitive vehicle performance through increased horsepower, torque and
driveability. In addition to its automotive performance line, Holley
manufactures performance marine, and performance products for the powersport and
motorcycle markets.
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2. INVENTORIES
Inventories of the Company consist of the following:
December 31, July 1,
2000 2001
------------ --------
Raw materials $ 10,697 $ 9,300
Work-in-progress 7,689 6,861
Finished Goods 16,373 21,111
-------- --------
$ 34,759 $ 37,272
======== ========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment of the Company consist of the following:
December 31, July 1,
2000 2001
------------ --------
Land $ 360 $ 360
Buildings and improvements 11,537 11,644
Machinery and equipment 28,928 29,141
Computer equipment 3,849 3,745
Furniture and fixtures 1,835 1,851
Construction in Process 800 1,031
-------- --------
47,309 47,772
Less: accumulated depreciation (14,518) (18,375)
-------- --------
$ 32,791 $ 29,397
======== ========
Depreciation expense was $3,500 and $3,903 for the six months and $1,875 and
$1,505 for the three months ended July 2, 2000 and July 1, 2001, respectively.
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4. ACCRUED LIABILITIES
Accrued liabilities of the Company consist of the following:
December 31, July 1,
2000 2001
------------ --------
Wages and benefits $ 4,719 $ 4,954
Reserve for product returns 3,423 3,100
Interest 5,391 5,536
Other 5,724 2,143
-------- --------
$ 19,257 $ 15,733
======== ========
5. LONG-TERM DEBT
Long-term debt of the Company consists of the following:
December 31, July 1,
2000 2001
------------ ----------
Secured revolving line of credit facility due to a bank;
Interest due quarterly at a variable rate based on
LIBOR or Prime at the Company's option, plus the
applicable margin rate (6.3% at July 1, 2001);
Maturing December 28, 2005. $ 34,650 $ 31,403
Senior notes, interest payable semi-annually in March
and September at 12.25%; maturing September 15,
2007; net of debt discount of $4,879 and $4,282
respectively 145,376 145,718
Other long-term obligations 4,356 4,166
---------- ----------
184,382 181,287
Less: current portion (3,714) (3,708)
---------- ----------
$ 180,668 $ 177,579
========== ==========
In December 2000, the Company entered into a credit arrangement with a bank (the
"Credit Arrangement") which includes both a revolving credit facility (the
"Revolving Credit Facility") and a term loan to be utilized for capital
expenditures (the "Term Loan"). Maximum borrowings available under the Revolving
Credit Facility are $36,000 subject to limitations based on eligible accounts
receivable and inventory as defined in the Credit Arrangement (the "Borrowing
Base"). Since April 2001, the Company is required to maintain minimum
availability levels under the Revolving Credit Facility of up to $2,000 based on
earnings levels as defined in the agreement. As of July 1, 2001, all amounts
outstanding under the Revolving Credit Facility that are in excess of
management's projected minimum Borrowing Base for 2001, have been classified as
current in the accompanying consolidated balance sheets. The Revolving Credit
Facility is secured by substantially all assets of the Company.
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Under the terms of the Credit Arrangement, upon achieving a minimum ratio of
earnings before interest, taxes, depreciation and amortization to fixed charges
(as defined in the Credit Arrangement), the Company will become eligible to
borrow up to $5,000 under the Term Loan to be used to fund capital expenditures.
Borrowings under the Term Loan will mature in 2005. As of July 1, 2001, no
amounts were outstanding or available under the Term Loan as the Company had not
achieved the required minimum financial ratio.
At July 1,2001, the Company had borrowings of $31.4 million outstanding under
the Revolving Credit Facility and $2.1 million of unused credit availability.
Beginning in 2001, the Revolving Credit Facility will require the Company to
comply with a minimum interest coverage ratio. Minimum interest coverage ratios
are 1.0:1 from closing to March 31, 1.0:1, to June 30, 2001 and September 30,
2001 and 1.15:1 to December 31, 2001. The company was in compliance with its
minimum interest coverage ratio at July 1, 2001. The Credit Arrangement also
requires mandatory principal prepayments from any proceeds from the sale of the
Company's assets or common stock.
On September 20, 1999, the Company issued $150,000 of 12 1/4% senior notes due
2007 at a discount of 3.7% (the "Senior Notes"). The debt discount is
amortized as a non-cash charge to interest expense using the effective interest
method over the term of the debt. The Senior Notes are unsecured and subordinate
to the Company's other indebtedness. The proceeds from the Senior Notes were
used to repay existing indebtedness and to fund the acquisitions of FlowTech,
NOS and Earl's in October 1999.
6. 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.
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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, 2000 TO JULY 2, 2000
Revenues $ 72,026 $ 12,721 $ 84,747
Gross margin 25,127 2,837 27,964
JANUARY 1, 2001 TO JULY 1, 2001
Revenues $ 67,475 $ 9,996 $ 77,471
Gross margin 23,170 1,731 24,901
Summary balance sheet data for inventory and fixed assets for each of the
Company's reportable segments as of December 31, 2000 and July 1, 2001 are shown
in the following table:
PERFORMANCE REMANUFACTURED
PARTS PARTS TOTAL
----------- -------------- -------
AS OF DECEMBER 31, 2000
Inventory $31,108 $ 3,651 $34,759
Fixed assets 30,467 2,324 32,791
AS OF JULY 1, 2001
Inventory $33,505 $ 3,767 $37,272
Fixed assets 27,331 2,066 29,397
7. COMMITMENTS AND CONTINGENCIES
The Company is a party to various lawsuits and claims in the normal course of
business. While the outcome of the lawsuits and claims against the Company
cannot be predicted with certainty, management believes that the ultimate
resolution of the matters will not have a material effect on the financial
position or results of operations of the Company.
In May 1999, Union Pacific filed an action against Weiand, a subsidiary of
Holley, and others in U.S. District Court for the Central District of
California, alleging that certain soil and groundwater contamination discovered
on the Union Pacific property in Los Angeles had migrated from the adjacent
former Weiand facility, and that Weiand therefore is responsible for costs
related to environmental response, investigation and remediation. In the
litigation, Union Pacific sought damages of approximately $3 million from all
defendants for past and expected future costs. In the same action, Joan F.
Weiand, owner of the property on which the facility which was operated by Weiand
Automotive is located and a co-defendant in this case, filed a cross-complaint
against Weiand Automotive for breach of written indemnity and declaratory
relief. Ms. Weiand alleged that written leases pursuant to which Weiand
Automotive leased the facility for its operations obligated Weiand Automotive to
indemnify Joan Weiand for the claims alleged by Union Pacific against Ms.
Weiand.
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Weiand has settled its claims with Joan Weiand and has reached a settlement in
principle with Union Pacific, which has not yet been finalized. All of the funds
needed for the settlement with Joan Weiand and with Union Pacific will be paid
out of Holley's insurance policy coverage at no cost to Holley.
Weiand is also required, as part of the settlements with Joan Weiand and with
Union Pacific, to participate in the environmental investigation and remediation
of the former Weiand facility property to prevent alleged off-site migration of
hazardous substances from the property. Weiand is engaged in discussions with
Joan Weiand and with the California Department of Toxic Substances Control
("DTSC") concerning appropriate and necessary investigation and remediation
activities at the site. Management has had environmental studies performed and
has provided an adequate reserve for the remediation based on the results of
those studies.
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.
8. COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," established standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income (loss) encompasses all changes in
stockholder's equity (except those arising from transactions with owners) and
includes net income, net unrealized capital gains or losses on available for
sale securities and foreign currency translation adjustments. Comprehensive loss
for the periods ending July 2, 2000 and July 1, 2001 was the same as net loss
for the Company.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective,
as amended, for fiscal years beginning after June 15, 2000. SFAS No. 133
requires that all derivative financial instruments, such as interest rate swap
agreements, be recognized in the consolidated financial statements and measured
at fair value regardless of their intended use. Changes in the fair value of the
derivative financial instruments would then be recognized periodically in
operations or stockholder's equity (as a component of other comprehensive
income) depending on whether the derivative is being used to hedge changes in
fair value or cash flows. The Company adopted the provisions of SFAS No. 133
effective January 1, 2001. Such adoption did not have a material effect on the
Company's results of operations or financial position.
In July 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 and prohibits
the use of the pooling-of-interests method. SFAS No. 142 changes the accounting
for goodwill from an amortization method to an impairment-only approach. The
amortization of goodwill from past business combinations will cease upon
adoption of this statement on January 1, 2002. Goodwill amortization for the six
months ended July 1, 2001 was approximately $1.3 million. Goodwill and
intangible assets acquired in business combinations completed after June 30,
2001 must comply with the provisions of this statement. Also under this
statement, companies will be required to evaluate all existing goodwill for
impairment within six months of adoption by comparing the fair value of each
reporting unit to its carrying value at the date of adoption. Any transitional
impairment losses will be recognized in the first interim period in the year of
adoption and will be recognized as the effect of a change in accounting
principle. Management is evaluating the potential impact of adopting these
pronouncements on the results of operations and financial position of the
Company.
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ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO
AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO
CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
2000.
"SAFE HARBOR" STATEMENT
This Report contains certain forward-looking statements with respect to the
Company's operations, industry, financial condition and liquidity. These
statements, which are typically introduced by phrases such as "the Company
believes", "anticipates", "estimates" or "expects" certain conditions to exist,
reflect management's best current assessment of a number of risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking financial statements as a result of
certain factors described in this report. See "Safe Harbor Statement."
The Management's Discussion and Analysis and other portions of this Report
include "forward looking" statements within the meaning of the federal
securities laws that are subject to future events, risks and uncertainties that
could cause actual results to differ materially from those expressed or implied.
Important factors that ether individually or in the aggregate could cause actual
results to differ materially from those expressed include, without limitation,
(1) that the Company will not grow its sales revenue or profit, (2) that the
Company will fail to be competitive with existing and new competitors, (3) that
the Company will not be able to sustain its current growth, (4) that needed
financing will not be available to the Company if and as needed, (5) that a
significant change in the growth rate of the overall U.S. economy will occur,
such that spending on performance automotive products will be materially
impacted, (6) that a drastic negative change in market conditions may occur, (7)
that emissions and other environmental regulations affecting us will increase
thereby limiting our ability to sell our automotive products and grow our
business, and (8) that some other unforeseen difficulties may occur. This list
is intended to identify only certain of the principal factors that could cause
actual results to differ materially from those describe in the forward-looking
statements included herein.
OVERVIEW
Founded in 1903, Holley is a leading manufacturer and marketer of specialty
products for the performance automotive, marine and powersports (motorcycle,
jet-ski, snowmobile and go-cart) aftermarkets. Holley designs, manufactures and
markets a diversified line of automotive performance racing products that
include fuel, air, spark (also known as ignition) 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 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.
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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.
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 JULY 1, 2001 AND JULY 2, 2000
Net Sales. Net sales equals gross revenues less provisions for volume
rebates, co-op advertising, and other sales allowances. Net sales for the
quarter ended July 1, 2001 totaled $42.1 million compared to $45.3 million for
the same period in 2000, a decrease of $3.2 million or 7.1%. Net sales in the
performance segment for the second quarter of 2001 were $37.4 million compared
to $39.6 million in the second quarter of 2000, a decrease of $2.2 million or
5.6% from the second quarter of 2000. Net sales in the remanufacturing segment
were $4.7 million in the second quarter of 2001 compared to $5.7 million in the
second quarter of 2000, a decrease of $1.0 million. Management attributes the
soft second quarter demand due to the continued customer inventory reduction
programs in response to the general economic slow down. The decreased sales in
the remanufacturing segment is the direct result of weak demand of the repair
market.
Gross Profits. Gross profits for the second quarter of 2001 totaled $14
million or 33.3% of net sales compared to gross profits of $15.4 million or
34.0% of net sales for the same quarter in 2000. This represents a decrease of
$1.4 million, or 9.1%. In the performance segment, gross profits were $13.4
million or 35.8% of net sales compared to $14.3 million or 36.1% of net sales
for the second quarter of 2000. This is a decrease of $0.9 million or 6.3% and
is the direct result of the impact of a $2.2 million reduction in net sales. In
the remanufacturing segment, gross profits were $0.6 million or 12.8% of net
sales in the second quarter of 2001 compared to $1.1 million or 19.3% of net
sales for the same period in 2000. This is a decrease of $0.5 million or 45.5%.
The decrease in the remanufacturing segment is due to the continued decline in
demand for special order repair products in the second quarter of 2001.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses for the three months ended July 1, 2001 totaled $7.4
million or 17.6% of net sales compared to $10.2 million or 22.5% of net sales in
the same period in 2000, a decrease of $2.8 million or 27.5%. The decrease is
mostly attributable to a $1.4 million reduction in marketing and advertising
expense and $1.2 million in administration costs reflecting reduction in
personnel and purchased services.
Amortization Expense. Amortization expense totaled $1.4 million or 3.3%
of net sales for the three months ended July 1, 2001 compared to $1.4 million or
3.1% of net sales for the same period in 2000. These expenses reflect the
amortization of goodwill, transaction fees, and other intangible assets
associated with the purchase of Holley by KHPP Holdings, and the subsequent
acquisitions of Weiand, Lunati, Hooker, FlowTech, NOS and Earl's.
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Operating Income. Operating income for the three months ended July 1,
2001 totaled $5.2 million or 12.4% of net sales compared to $3.7 million or 8.2%
of net sales in the same period in 2000, an increase of $1.5 million or 40.5%.
The increase primarily resulted from decreased selling, general and
administrative expenses partially offset by decreased sales and gross profits.
Interest Expense. Interest expense was $5.6 million or 13.3% of net
sales for the three months ended July 1, 2001 compared to $6.2 million or 13.7%
of net sales in the same period in 2000. The expense resulted from interest on
the Company's revolving credit facility, and the accrual of interest associated
with the Senior Notes. The revolving letter of credit is used to finance general
business and working capital needs.
Benefit for Income Taxes. Benefit for income taxes for the three months
ended July 1, 2001 was $(0.2) million or 0.5% of net sales compared to a
benefit of $(1.0) million or 2.2% of net sales in the same period in 2000.
Net Loss. Net loss for the three months ended July 1, 2001 was $(0.5)
million or 1.2% of net sales compared with net loss of $(1.6) million or 3.5% of
sales for the same period in 2000 attributable primarily to the reasons
discussed above. This represents a decrease of $1.1 million in the loss from the
prior period or 68.8%. The decrease reflects increased operating income of $1.5
million and decreased interest expense of $0.6 million offset by the decreased
income tax benefit of $0.8 million.
COMPARISON OF THE SIX MONTHS ENDED JULY 1, 2001 AND JULY 2, 2000
Net Sales. Net sales for the six months ended July 1, 2001 totaled
$77.5 million compared to $84.7 million for the same period in 2000, a decrease
of $7.2 million or 8.5%. For the six month period ended July 1, 2001, net sales
in the performance segment were $67.5 million compared to $72.0 million in the
same period in 2000, a decrease of $4.5 million or 6.3%. Net sales in the
remanufacturing segment were $10.0 million compared to $12.7 million in the same
period in 2000, a decrease of $2.7 million or 21.3%. Management attributes the
soft demand for performance products in the first six months to inventory
reduction programs at most of our larger customers in response to the general
economic slowdown. The decreased sales in the remanufacturing segment continued
as the result of weak demand in the repair market.
Gross Profits. Gross profits for the six months ended July 1, 2001
totaled $24.9 million or 32.1% of net sales compared to $28.0 million or 33.1%
of net sales for the same period in 2000. This is a difference of $3.1 million
or 11.1%. In the performance segment, gross profits were $23.2 million or 34.4%
of net sales compared to $25.1 million or 34.9% of net sales in the same period
in 2000. This is a decrease of $1.9 million or 7.6% and the result of a $4.5
million sales volume decrease compared to the first six months of 2000. In the
remanufacturing segment, gross profits were $1.7 million or 17.0% of net sales
compared to $2.8 million or 22.0% of net sales in the same period in 2000. This
is a decrease of $1.1 million or 39.3% reflecting the decline in demand for
special order repair products as compared to the first six months of 2000.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses ("S, G & A Expenses) for the six months ended July 1,
2001 totaled $14.9 million or 19.2% of net sales compared to $19.9 million or
23.5% of net sales in the same period in 2000, a decrease of $5.0 million or
25.1%. The decrease is mostly attributable to a $2.1 million reduction in
marketing and advertising expense, a $0.1 million reduction in R&D, and a $2.3
million reduction in administrative costs reflecting reduction in personnel and
purchased services.
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Amortization Expense. Amortization expense for the six months ended
July 1, 2001 totaled $2.9 million or 3.7% of net sales compared to $2.7 million
or 3.2% of net sales for the same period in 2000. These expenses reflect the
amortization of goodwill, transaction fees, and other intangible assets
associated with the purchase of Holley by KHPP Holdings, and the subsequent
acquisitions of Weiand, Lunati, Hooker, FlowTech, NOS and Earl's.
Operating Income. Operating income for the six months ended July 1,
2001 totaled $7.1 million or 9.2% of net sales compared to $5.2 million or 6.1%
of net sales in the same period in 2000, an increase of $1.9 million or 36.5%.
The increase primarily resulted from decreased selling, general and
administrative expenses partially offset by decreased sales and gross profits.
Interest Expense. Interest expense was $11.4 million or 14.7% of net
sales for the six months ended July 1, 2001 compared to $12.0 million or 14.2%
of net sales in the same period in 2000. The expense resulted from interest on
the Revolving Credit Facility, and the accrual of interest associated with the
Senior Notes. The Revolving Credit Facility is used to finance general business
and working capital needs.
Benefit for Income Taxes. Benefit for income taxes for the six months
ended July 1, 2001 was $(1.2) million or 1.5% of net sales compared to a $(2.2)
million or 2.6% of net sales benefit in the same period in 2000.
Net Loss. Net loss for the six months ended July 1, 2001 was $(3.4)
million compared with net loss of $(4.7) million for the same period in 2000, a
decrease of $1.3 million or 27.7%. The decrease in the loss reflects increased
operating income offset by the reduced income tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Net cash provided/(used) by operating activities
for the six months ended July 1, 2001 was $(2.7) million. The decrease in net
income and increased working capital requirements contributed primarily to the
increase in net cash used by operating activities in the period. Inflows from
depreciation and amortization of $7.3 million were offset by outflows due to
increased working capital of $5.6 million, deferred income taxes of $1.2 million
and a net loss of $3.4 million. The increase in working capital was primarily
attributable to increased inventories of $2.5 million resulting from lower than
anticipated sales, increased accounts receivable of $2.0 million; decreased
other assets of $1.0 million primarily due to receipt of income tax refunds;
decrease in accounts payable of $1.3 million, and increased accrued liabilities
of $3.6 million.
Investing Activities. Net cash used in investing activities for the six
months ended July 1, 2001 was $0.5 million for capital additions.
Financing Activities. Net cash payments to reduce long term debt for
the six months ended July 1, 2001 was $3.4 million.
Our primary sources of liquidity are funds generated by operations and
borrowings under our bank credit facility.
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Earnings before Interest Depreciation and Amortization (EBITDA) is a
non-GAAP concept which some investors use to measure cash generated from
operations within a given period. EBITDA for the three months ended July 1, 2001
was $8.0 million or 19.0% of net sales compared to $7.0 million or 15.5% of net
sales for the same period in 2000, an increase of $1.0 million or 14.3% over the
same period in 2000. This increase in funds is due to a $2.8 million reduction
in S,G & A expenses, a $2.2 million reduction in manufacturing expenses,
partially offset by a reduction in gross margin due to a $2.9 million decrease
in sales from 2000 levels.
EBITDA for the six month period ended July 1, 2001 was $13.8 million or
17.8% of sales compared to $11.4 million or 13.5% of sales for the same period
in 2000, an increase of $2.2 million or 20.0% over the same period in 2000. This
increase in funds is due to a $5.0 million reduction in S,G & A Expenses, a
$3.9 million reduction in manufacturing expenses, partially offset by a
reduction in gross margin due to a $7.2 million decrease in sales from 2000
levels.
Holley is dependent on the Revolving Credit Facility to fund
its working capital needs. Based on our projections, we believe that we will
continue to be in compliance with the quarterly financial ratio covenants during
2001 and that the Revolving Credit Facility will be adequate to fund our working
capital needs during 2001. However, should the Revolving Credit Facility 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.
There can be no assurance that we can obtain such additional financing on
satisfactory terms.
We historically have expanded our business through the acquisition of
other related and complementary businesses, and we continue to seek and evaluate
acquisition opportunities. We anticipate that our existing capital resources and
cash flow generated from future operations and drawings under our bank credit
facility will enable us to maintain our planned operations, capital expenditures
and debt service for the foreseeable future. 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.
In December 2000, we replaced our existing senior credit facility with
Credit Agricole IndoSuez, (consisting of a $35.0 million revolving credit
facility) with a 5 year, $41.0 million facility provided by Fleet Capital
Corporation that matures in December 2005. This facility is comprised of two
parts: a $36.0 million revolving credit portion and a $5.0 million term facility
to be used for fixed asset purchases as required. The revolving credit facility
has an interest coverage covenant only. During the term of the revolving credit
facility, Holley is required to have an interest coverage ratio of 1.0:1.0 from
the closing date to March 31, 2001, 1.10:1.0 from the closing date to June 30,
2001, 1.10:1.0 from the closing date to September 30, 2001, and 1.15:1.0 from
the closing date to December 31, 2001. The interest coverage ratios for the
remaining term of the loan are 1.20:1.0 for the four quarters each ending on
March 31, June 30, September 30, and December 31, 2002; 1.25:1.0 for the four
quarters each ending on March 31, June 30, September 30, and December 31, 2003,
2004 and 2005. Borrowings under the facility are limited to 75% of eligible
receivables and 55% of eligible inventories. Under the credit agreement, Holley
must have availability of $2.0 million if EBITDA on a trailing twelve month
basis is equal to or less than $28.0 million, $1.0 million if EBITDA is less
than or equal to $32.0 million but greater than $28.0 million, and $0 if greater
than $32.0 million. The initial $2.0 million availability requirement became
effective during April, 2001. Fleet Capital has a perfected security interest in
all the assets of Holley. Our liquidity as of July 1, 2001 consists of $2.1
million of revolving credit facility availability. The term facility can be
accessed when Holley has achieved a Fixed Charge Coverage Ratio of 1.0x on a
trailing twelve month basis. (Fixed Charge Coverage is defined as EBITDA less
non-financial fixed asset expenditures and cash taxes divided by cash interest
plus scheduled principle payments.) Under the agreement we may borrow either at
LIBOR or Base interest rates as shown in the table below.
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INTEREST RATE COVERAGE BASE RATE MARGIN LIBOR MARGIN
- ---------------------- ---------------- ------------
>1.25 .75 2.75
1.26 - 1.50 .50 2.50
1.51 - 1.75 .25 2.25
>1.75 .00 2.00
From the first six months following the Closing Date, the outstanding
principle balance under the facilities will have interest at LIBOR plus 2.50% on
Base Rate plus 0.5%. 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.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Holley's exposure to interest rate changes is primarily related to its
variable rate debt which may be outstanding from time to time under its $41.0
million credit facility with Fleet Capital. Both the revolving portion of the
$36.0 million credit facility and the $5.0 million term facility carry interest
rates which are based on the London Interbank Offered Rate or base rate. Because
the interest rate on the credit facility is variable, the Company's cash flow
may be affected by increases in either the LIBOR or 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 Holley. As of July 1, 2001, Holley's
outstanding balance on the revolving credit facility was $31.4 million.
Sensitivity Analysis. To assess exposure to interest rate changes,
Holley has performed a sensitivity analysis assuming that it had drawn the full
$36.0 million balance available under the Revolving Credit Facility. If the
prime rate rose 100 basis points, the increase in the monthly interest payment
would equal $30,000. Holley does not believe the risk resulting from such
fluctuations is material nor that the payment required would have material
effect on cash flow.
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PART II- OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS.
In May 1999, Union Pacific filed an action against Weiand and others in
U.S. District Court for the central district of California, alleging that
certain soil and groundwater contamination discovered on the Union Pacific
property in Los Angeles had migrated from the adjacent former Weiand Facility,
and that Weiand therefore is responsible for costs related to environmental
response, investigation and remediation. In the litigation, Union Pacific sought
damages of approximately $3 million from all defendants for past and expected
future costs. In the same action, Joan F. Weiand, owner of the property on which
the facility which was operated by Weiand Automotive is located and a
co-defendant in this case, filed a cross-complaint against Weiand Automotive for
breach of written indemnity and declaratory relief. Ms. Weiand alleged that
written leases pursuant to which Weiand Automotive leased the facility for its
operations obligated Weiand Automotive to indemnify Joan Weiand for the claims
alleged by Union Pacific against Ms. Weiand.
Weiand has settled its claims with Joan Weiand and has reached a
settlement in principle with Union Pacific. The court entered an order granting
Holley and Weiand protection from contribution claims to the maximum extent
permitted by law and dismissing all pending claims with prejudice. All of the
funds needed for the settlement with Joan Weiand and with Union Pacific will be
paid out of Holley's insurance policy coverage at no cost to Holley.
Weiand is also required, as part of the settlement with Joan Weiand and
with Union Pacific, to participate in the environmental investigation and
remediation of the former Weiand Facility property to prevent alleged off-site
migration of hazardous substances from the property. Weiand is engaged in
discussions with Joan Weiand and with the California Department of Toxic
Substances Control ("DTSC") concerning appropriate and necessary investigation
and remediation activities at the site. Weiand recently entered into a Voluntary
Cleanup Agreement with the DTSC to perform the work. Management has had
environmental studies performed and has provided an adequate reserve for the
remediation based on the results of those studies.
A satisfactory settlement agreement has been reached in the Hoeflick
Patent Infringement Action filed by Holley in 1998. This settlement did not have
any material effect on the financial position of the Company.
Holley has been named as defendants in a number of legal actions
arising from normal business activities. Although the amount of any ultimate
liability with respect to such matters cannot be precisely determined, we do not
expect any such liability to have a material adverse effect on our overall
operations.
ITEM 5- OTHER INFORMATION.
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method. SFAS 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. The amortization of
goodwill from past business combinations will cease upon adoption of this
Statement on January 1, 2002. Goodwill and intangible assets acquired in
business combinations completed after June 30, 2001 must comply with the
provisions of this Statement. Also under this Statement, companies will be
required to evaluate all existing goodwill for impairment within six months of
adoption by comparing the fair value of each reporting unit to its carrying
value at the date of adoption. Any transitional impairment losses will be
recognized in the first interim period in the year of adoption and will be
recognized as the effect of a change in accounting principle. Management is
evaluating the potential impact of adopting these pronouncements on the results
of operations and financial position of the Company.
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
3.1a Certificate of Incorporation of Holley Performance Products
Inc., as amended (filed as Exhibit 3.1a to the Registration
Statement on Form S-4, Commission File No. 333-89061, and
incorporated herein by reference).
3.1b Bylaws of Holley Performance Products Inc. (filed as Exhibit
3.1b to the Registration Statement on Form S-4, Commission
File No. 333-89061 and incorporated herein by reference).
3.2a Certificate of Incorporation of Holley Performance Systems,
Inc. (filed as Exhibit 3.2a to the Registration Statement on
Form S-4, Commission File No. 333-89061, and incorporated
herein by reference).
3.2b Bylaws of Holley Performance Systems, Inc. (filed as Exhibit
3.2b to the Registration Statement on Form S-4, Commission
File No. 333-89061, and incorporated herein by reference).
3.3a Articles of Incorporation of Weiand Automotive Industries,
Inc., as amended (filed as Exhibit 3.3a to the Registration
Statement on Form S-4, Commission File No. 333-89061, and
incorporated herein by reference).
3.3b Bylaws of Weiand Automotive Industries, Inc. (filed as Exhibit
3.3b to the Registration Statement on Form S-4, Commission
File No. 333-89061, and incorporated herein by reference).
3.4a Articles of Incorporation of Lunati Cams, Inc., as amended
(filed as Exhibit 3.4a to the Registration Statement on Form
S-4, Commission File No. 333-89061, and incorporated herein by
reference).
3.4b Bylaws of Lunati Cams, Inc. (filed as Exhibit 3.4b to the
Registration Statement on Form S-4, Commission File No.
333-89061 to the S-4 and incorporated herein by reference).
3.5a Articles of Incorporation of LMT Motor Sports Corporation
(filed as Exhibit 3.5a to the Registration Statement on Form
S-4, Commission File No. 333-89061, and incorporated herein by
reference).
3.5b Bylaws of LMT Motor Sports Corporation (filed as Exhibit 3.5b
to the Registration Statement on Form S-4, Commission File No.
333-89061, and incorporated herein by reference).
3.6a Articles of Incorporation of Lunati & Taylor Pistons (filed as
Exhibit 3.6a to the Registration Statement on Form S-4,
Commission File No. 333-89061, and incorporated herein by
reference).
3.6b Bylaws of Lunati & Taylor Pistons (filed as Exhibit 3.6b to
the Registration Statement on Form S-4, Commission File No.
333-89061, and incorporated herein by reference).
3.7a Articles of Incorporation of Hooker Industries, Inc. (filed as
Exhibit 3.7a to the Registration Statement on Form S-4,
Commission File No. 333-89061).
3.7b Bylaws of Hooker Industries, Inc., as amended (filed as
Exhibit 3.7b to the Registration Statement on S-4, Commission
File No. 333-89601).
3.8a Articles of Incorporation of Biggs Manufacturing, Inc. (filed
as Exhibit 3.8a to the Registration Statement on S-4,
Commission File No. 333-89601).
3.8b Bylaws of Biggs Manufacturing, Inc. (filed as Exhibit 3.8b to
the Registration Statement on S-4, Commission File No.
333-89601).
3.9a Articles of Incorporation of Nitrous Oxide Systems, Inc.
(filed as Exhibit 3.9a to the Registration Statement on S-4,
Commission File No. 333-89601).
3.9b Bylaws of Nitrous Oxide Systems, Inc. (filed as Exhibit 3.9b
to the Registration Statement on S-4, Commission File No.
333-89601).
3.10a Articles of Incorporation of Earl's Supply Company, Inc.
(filed as Exhibit 3.10a to Registration Statement on S-4,
Commission File No. 333-89601).
3.10b Bylaws of Earl's Supply Company, Inc. (filed as Exhibit 3.10b
to the Registration Statement on S-4, Commission File No.
333-89601).
4.1 Indenture for the 12-1/4% Senior Notes due 2007, dated as of
September 20, 1999, between Holley Performance Products Inc.,
the Guarantors and State Street Bank and Trust Company, as
Trustee (filed as Exhibit 4.1 to the Registration Statement on
S-4, Commission File No. 333-89601).
4.2 Form of Global Note for 12-1/4% Senior Note due 2007, Series B
(filed as Exhibit 4.3 to the Registration Statement on S-4,
Commission File No. 333-89601).
(B) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for
which this request was filed.
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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: August 14, 2001 /s/ JEFFREY G. KING
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Jeffrey G. King, President and Chief Executive Officer
Date: August 14, 2001 /s/ A. BRUCE REYNOLDS
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A. Bruce Reynolds, Chief Financial Officer
(principal financial officer)