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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
[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 .
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Commission File Number: 333-89061
HOLLEY PERFORMANCE PRODUCTS INC.
(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 Rd.
Bowling Green, Kentucky 42101
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 270-782-2900
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 [ ]
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 registrant's 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. [ ]
Aggregate market value of voting stock held by non-affiliates of the
Registrant: None. (See Part II, Item 5.) Number of shares of Common Stock
outstanding as of March 31, 2001 was 1,000.
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HOLLEY PERFORMANCE PRODUCTS INC
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2000
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business........................................................................ 1
Item 2. Properties...................................................................... 7
Item 3. Legal Proceedings............................................................... 8
Item 4. Submission of Matters to a Vote of Security-Holders............................. 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........... 10
Item 6. Selected Financial Data......................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................... 24
Item 8. Financial Statements and Supplementary Data..................................... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant.............................. 25
Item 11. Executive Compensation.......................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................................... 29
Item 13. Certain Relationships and Related Transactions.................................. 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................ 30
Signatures................................................................................ 31
Index to Financial Statements............................................................. F-1
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ITEM 1 -- BUSINESS
GENERAL
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, and torque. Our products include both
throttle body and multi-port fuel injection systems, performance and
remanufactured carburetors, digital ignition systems, distributors, fuel pumps,
camshafts, crankshafts, intake manifolds, pistons, superchargers, headers,
mufflers, exhaust pipes, cylinder heads, water pumps, throttle bodies, nitrous
oxide injection systems and performance automotive plumbing products. Holley has
the most widely recognized brand name and a broad distribution network in the
performance automotive aftermarket. The performance automobile aftermarket
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
such leading companies as Advance Auto Parts, AutoZone, CSK Auto, Keystone,
O'Reilly, Summit Racing, Jeg's mail order, GM Service Parts, Volvo-Penta and
Mercury Marine.
We are committed to providing superior products and services to our
customers and believe that our comprehensive quality control and consumer
support programs position Holley as the industry leader in quality and service.
We are vertically integrated and endeavor to manufacture all critical product
components and systems. All products are fully tested on computer controlled
equipment prior to shipment to ensure maximum reliability and "out of the box
race readiness" Each product is 100% tested and tuned for maximum performance
and is ready for installation when purchased. In addition we have a significant
research and development effort ("R&D") focused on continual enhancement of our
technology and new products. R&D resources include a 14,000 square foot
laboratory staffed by 24 professional engineers, supported by highly trained
technicians. In 2000, we have introduced over 923 new products to leverage the
Holley brand name and capitalize on our superior R&D capability. Our commitment
to quality and reputation for superior performance is widely recognized by
performance enthusiasts and racers at all levels. For example, since 1969, every
race car on The National Association For Stock Car Auto Racing ("NASCAR")
circuit has been and continues to be equipped exclusively with a Holley
carburetor. Another testament to our quality is the many awards that we have won
over the years, including Car Craft All-Star Drag Racing Team Pro Sponsor and
Manufacturer of the Year, six-time International Hot Rod Association's ("IHRA")
Sportsman Sponsor of the Year award, Ford Q1 award and numerous other industry
and racing association awards.
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BUSINESS STRATEGY AND PRODUCTS
The primary components of our business strategy are as follows:
- - Leverage the Holley Brand Name Through New Product Introductions;
- - Market Our Products as Systems;
- - Continue to Diversify Product and System Offerings;
- - Improve Manufacturing Efficiency;
- - Leverage Distribution Channels; and
- - Pursue Strategic Acquisitions.
Our product line is broadly divided into two segments: (a) a full line
of performance products including induction, exhaust, internal engine components
and ignition components; and (b) remanufactured products, each of which is
described below.
PERFORMANCE PRODUCTS
We are a leading manufacturer of a diversified line of performance
automotive products that are designed to enhance street, off-road, recreational
and competitive vehicle performance through increased horsepower and torque. We
hold a strong position in the performance segment due to our brand preferences
among car enthusiasts and racers. Our performance product line, accounting for
80.4% of our net sales in 1999 and 85.4% of our net sales in 2000, consists
predominately of induction, exhaust, internal engine and ignition components.
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REMANUFACTURED CARBURETORS/FUEL INJECTORS.
We manufacture and market a line of remanufactured carburetors and fuel
injection components. Remanufacturing is the process of repairing,
reconditioning, recalibrating and cleaning used products. Our remanufactured
product line accounted for 19.6% of net sales in 1999 and 14.6% of net sales in
2000. In addition to remanufactured carburetors, we offer a line of
remanufactured fuel injectors for the fleet truck marketplace and have recently
begun offering a line of remanufactured turbochargers.
PERFORMANCE COMPONENT BRANDS
The Holley family of performance automotive aftermarket brands includes
the following:
FLOWTECH. Our FlowTech (Biggs Manufacturing, Inc. -- "FlowTech")
subsidiary is a leading manufacturer of performance exhaust systems, headers,
mufflers and exhaust accessories. The combination of FlowTech with our Hooker
exhaust systems and other air management products completes our comprehensive
air intake and exhaust management system offerings. FlowTech also offers
performance mufflers in the underhood performance market and exhaust headers for
the import performance market with its Airmass(tm) line of exhaust headers.
During 2000, FlowTech operations were moved from Mexico and Tempe, Arizona to a
new facility in Aberdeen, Mississippi resulting in reduced cost and increased
operating efficiency.
HOOKER HEADERS. Our Hooker (Hooker Industries, Inc. -- "Hooker")
subsidiary is a leading manufacturer of performance exhaust systems, headers,
mufflers and Harley-Davidson(tm) exhaust pipes under the well known brand
"Hooker Headers." The Hooker brand is the leading brand in racing exhaust
headers and is the most widely recognized brand in street performance headers.
The addition of the Hooker business to our other air management products
establishes Holley as the only company to offer a comprehensive and integrated
air intake and exhaust management system to the performance market.
LUNATI. Our Lunati (the Lunati Companies -- "Lunati") subsidiary
manufactures and distributes internal engine systems and components including
performance camshafts, crankshafts, pistons, rods and other automotive products
to the racing market under the "Lunati" brand name. Lunati also offers products
for the performance go-cart market and the junior dragster market. During
1999, Lunati pistons, rods, crankshaft finish machining was transferred to the
Bowling Green, Kentucky manufacturing plant.
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NITROUS OXIDE SYSTEMS. Our Nitrous Oxide Systems (Nitrous Oxide
Systems, Inc. -- "NOS") subsidiary is the leading manufacturer of nitrous
oxide injection systems to the performance aftermarket. Nitrous oxide injection
systems significantly increase engine horsepower by increasing the amount of
air/fuel mixture delivered to the cylinders. NOS also has a strong position in
the import performance market as well as in the drag racing market. NOS
complements our ability to offer full range of underhood systems to
substantially increase horsepower and engine performance. During 2000 the
Nitrous Oxide Systems, Inc. manufacturing was transferred to the Bowling Green,
Kentucky manufacturing plant and the Costa Mesa, California facility was closed.
WEIAND. Our Weiand (Weiand Automotive Industries -- "Weiand")
subsidiary is a leading manufacturer of performance induction systems components
including intake manifolds, super chargers and water pumps. Weiand is vertically
integrated, manufacturing its own castings at its aluminum foundry.
Additionally, we have consolidated all Weiand's manufacturing operations (other
than the foundry) into our Bowling Green, Kentucky operation.
EARL'S PERFORMANCE PRODUCTS. Our Earl's Performance Products (Earl's
Supply Company, Inc. -- "Earl's") subsidiary is a provider of underhood
performance fittings, brake lines and hoses. Our Earl's business completes our
fuel management systems product offerings and expands our cooling system
business.
RESEARCH AND DEVELOPMENT
We are constantly developing new products to respond to consumer
demand, to increase the performance characteristics of existing products, and to
expand into new product lines. Over the course of our history, we have expanded
our business operations by developing and adapting product lines in response to
changing engine technology, such as our development of the Annihilator(TM)
ignition system and our performance throttle body and multi-port fuel injection
systems. Focusing primarily on fuel injected vehicles, we introduced over 900
new part numbers in 2000. We were awarded the SEMA Best New Product Award in
1999 for our 500 gallon per hour electric fuel pump and again in 2000 for the
NOS annular discharge plate. During 1999 we completed the construction and
installation of a 14,000 square foot R&D laboratory at our Bowling Green
facility. Operated by 24 professional engineers who are supported by highly
trained technicians, this R&D facility has a full complement of engineering and
testing equipment including 8 state of the art dynamometers used for full scale
engine analysis, 18 computer modeling stations and a full range of environmental
testing capabilities. We have spent $2.7 million, $2.3 million, $2.4 million and
$2.2 million from 1997 through 2000 on R&D, respectively.
DISTRIBUTION
Holley has a broad distribution network throughout the industry and
sells through retail,
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wholesale, mail order, and original equipment manufacturer segments. Our
products are sold in all 50 states and Canada and to a lesser degree other
export markets. Our largest and fastest growing distribution channel is mail
order which includes our two largest customers, Summit Racing and Jeg's. In
2000, Summit Racing, our single largest customer, accounted for approximately
13.4% of our net sales, and our second largest customer, Jeg's, accounted for
approximately 7.8% of net sales in 2000. The retail channel includes mass
merchandisers and auto parts retailers with the majority of our retail sales
through auto parts retailers which include Advance Auto Parts, AutoZone, CSK
Auto and Pep Boys. We have been selected to be the performance induction system
category manager for Advance Auto Parts and increased sales of our performance
products to CSK Auto and expanded product coverage at AutoZone and Pep Boys.
During the fourth quarter of 2000, we have reached agreement with Balkamp to
become a supplier of performance products including Street Avenger carburetors.
Wholesale distribution is the industry's traditional channel and a
major outlet for our performance products. Significant customers include
Keystone, O'Reilly and the 3-Star, AAM and USP buying groups. We manufacture
performance products for and sell directly to original equipment manufacturers
including General Motors, Ford and DaimlerChrysler and manufacturers of marine
applications, material handling and stationary power equipment. Approximately
3.3% of our net sales in 2000 came from direct performance product sales to
original equipment manufacturers.
While not a specific distribution channel, we export products to
several U.S.-based suppliers that have worldwide distribution capabilities.
Export products are used for American-made automobiles throughout Europe,
Australia, Asia, South America and Central America and represented approximately
1.6% of our net sales in 2000.
MARKETING
During 2000, we reorganized our sales and marketing function by
replacing our 18 outside and 6 in-house salespersons with five manufacturer's
representative firms with 53 salespersons selling our products. The transition
to the manufacturer's sales force took place in the first quarter of 2000. We
support our sales efforts with extensive advertising and promotional programs,
focusing on NASCAR and the drag racing market (NHRA and IHRA) because of their
importance in the motorsports industry and influence on the performance
aftermarket. In addition, we sponsor many of the nation's other leading racing
sanctioning bodies, including the IHRA and the NHRA, as well as key motor sports
associations including the National Street Rod Association, the World Karting
Association and the National Muscle Car Association. We also sponsor different
national events including the Holley Spring Nationals drag racing event, Hot Rod
Magazine East and West Coast Power Tours, the Rod and Custom Americruise and the
Hot Rod Magazines' Power Club. For 2000, the IHRA Sportsman drag racing series
became the Holley Sportsman Drag Racing Championship. At the 2000 SEMA show, we
were awarded Best Packaging (for our Street Avenger carburetor), and Runner-Up
for Best Performance for Street Product (for NOS's LT1 throttle body).
To ensure that we understand and appreciate the needs of our customers,
we operate five touring display trailers carrying our products, catalogs and
personnel. These trailers, one 64 foot -- 18 wheel trailer, one 48 foot -- 18
wheel trailer, one 43 foot -- 5th wheel trailer, and two 35 foot -- 5th wheel
trailers, travel to
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approximately 125 events nationally including automotive racing events,
specialty automotive shows, retail store openings and distributor open houses.
We also maintain a technical hotline, e-mail address and web page
(www.holley.com) to assist consumers with installation and application
questions. A total of 22 qualified hotline technicians handle approximately
125,000 inquiries per year.
RAW MATERIALS
We purchase raw materials typically in the form of components for our
various products from many different suppliers. These materials include castings
and forgings, gaskets, plastic, hose, steel and other materials to produce our
products. Holley has one significant supplier of raw materials, Gerity-Schultz,
a zinc foundry vendor that supplies zinc castings for our performance carburetor
line. The rough casting bodies machined customized, and assembled into finished
carburetors. We buy castings in bulk on negotiated and fixed prices for six
month intervals regardless of change in the price of zinc and other base
materials during that period. These castings accounted for approximately 9%
of our total raw material purchases in 2000. There are several other zinc
foundries in the country, but the Holley owned tooling utilized by
Gerity-Schultz is specifically designed for our products and the Gerity-Schultz
equipment. Our top six suppliers, including Gerity-Schultz, accounted for
approximately 20% of our total raw material purchases in 2000. No one supplier
other than Gerity-Schultz accounted for more than 2.8% of our total raw material
purchases in 2000. We have two or more sources of supply for all of our
significant raw materials.
TRADEMARKS AND PATENTS
Holley and its subsidiaries have registered or are in the process of
registering approximately 167 trademarks on the names and logos of the various
companies and their products in the U.S. and other countries. Holley and its
subsidiaries have 60 issued or pending patents on various products registered in
the U. S. and other countries. None of Holley's significant patents are
scheduled to expire in the near term.
SEASONALITY
Holley experiences slight seasonal trends which are generally prevalent
in the overall automotive aftermarket industry. Historically, our revenues are
highest in the second fiscal quarter, marking the beginning of the racing season
and the weather is better suited for outdoor automotive repair activity. As
seasonality has a greater effect on our remanufacturing facility in Springfield,
Tennessee occasionally requiring temporary employees to respond to peak demand.
COMPETITION
There is significant competition in the performance automotive products
segment. Holley competes with many other companies and individuals in the
manufacture and sale of performance automotive parts. We compete primarily on
the basis of product performance, brand name, quality, service, and price.
Within our performance products line, our primary
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competitor is Edelbrock Corporation, a public company. Holley and Edelbrock are
the only two companies that currently provide products for nearly all product
segments of the performance market, although there are smaller, specialized
producers of performance products.
EMPLOYEES
As of December 31, 2000, we had 1,068 employees, including both
full-time, salaried and part-time employees. None of our employees are
represented by labor unions. We provide a comprehensive benefits program to all
full-time employees. During the fourth quarter of 2000, we implemented a
voluntary layoff of 58 hourly people in our Bowling Green, Kentucky
manufacturing plant. Hooker had approximately 362 employees, including
approximately 315 in Mexico and 47 in California. During the fourth quarter of
2000, the Hooker distribution center in California began to be relocated to our
new facility in Aberdeen, Mississippi and 21 employees were terminated. The
remaining 26 Hooker employees in California were terminated in January 2001. Our
FlowTech operations were transferred to our Aberdeen facility in the second
quarter of 2000, and 72 FlowTech employees in Arizona and Mexico were terminated
in 2001. Our NOS operations were transferred to our Bowling Green facility in
the first quarter of 2000, and 25 NOS employees in Costa Mesa, California were
terminated. Earl's has approximately 98 employees, including 79 hourly employees
and 19 salaried employees.
ITEM 2 -- PROPERTIES
As of December 31, 2000, we have manufacturing facilities located in
Bowling Green, Kentucky; Springfield, Tennessee; Los Angeles, California; Long
Beach, California; Memphis, Tennessee; Aberdeen, Mississippi and Tijuana,
Mexico. We believe that each is well maintained and suitable for its purpose. As
part of our business strategy, we endeavor to manufacture all critical
components and systems. However, to complete certain products, we outsource
certain processes to third parties.
Holley's headquarters are located in Bowling Green, Kentucky on the
same 15.4 acre site as our 220,000 square foot primary manufacturing facility.
At this location, we manufacture and package carburetors, intake manifolds,
superchargers, pistons, connecting rods, electric fuel pumps and fuel injection
systems in several manufacturing cells. Holley owns a 110,000 square foot
distribution facility in Bowling Green, Kentucky approximately five miles from
our headquarter location. We have moved all of our performance products
distribution functions to this facility, allowing us to expand our manufacturing
operations at our current facilities.
Our remanufactured carburetor operation is located in Springfield,
Tennessee. This approximately 95,000 square foot facility is also completely
cellularized with seven manufacturing cells that are managed by employee
self-directed teams. We lease the Springfield facility on a year to year basis
from the local industrial authority at a rate of $100 per year. The Springfield
local industrial authority financed the building's construction with an
industrial revenue bond, and in turn leases the building to Holley at sub-market
rates in
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order to attract Holley to Springfield. We are currently completing our purchase
of this facility.
Holley leases Weiand's approximately 30,000 square foot aluminum
foundry located in Los Angeles, California. The other manufacturing operations
of Weiand were moved to our Bowling Green facility. We employ over forty
employees at the foundry which operates four pouring stations and four mold
machines to produce components used in the manufacture of manifolds and other
performance parts.
Holley leases Lunati's approximately 30,000 square foot manufacturing
facility located in Memphis, Tennessee. During 1999, we relocated the
manufacturing of pistons and connecting rods to our Bowling Green facility.
Manufacturing of camshafts and crankshafts remain at the Memphis, Tennessee
facility. During 2000, we leased an approximately 335,000 square foot
manufacturing facility in Aberdeen, Mississippi in connection with certain
relocation and employment incentives offered by Monroe county, Mississippi with
a related Industrial Revenue Bond. This lease's term expires in May 2025, and
requires an annual rent payment of $7,500.
FlowTech's manufacturing facilities were relocated to our Aberdeen
facility in 2000, and Hooker's manufacturing operations were relocated to our
Aberdeen facility in December 2000 and January 2001.
Hooker has a manufacturing facility in Ciudad Industrial, Mexico.
Hooker's leased administrative offices in Ontario, California were closed in
January 2001, which property is currently being marketed for sublease.
FlowTech's manufacturing facility in Tempe, Arizona is currently idle
and is being marketed for sublease. We manufacture and distribute Earl's
products in a facility in Long Beach, California and have an administrative
office in Costa Mesa, California. Our NOS facility in Costa Mesa, California was
closed in the first quarter 2000 and has been subleased. We also have smaller
retail and distribution properties leased in Lawndale, California; Indianapolis,
Indiana; Towcester, Northants, United Kingdom; and Australia.
ITEM 3 -- LEGAL PROCEEDINGS
In May 1999, Union Pacific Railroad Company filed an action against
Weiand and others in the U. S. District Court for the Central District of
California, alleging that certain soil and groundwater contamination discovered
on Union Pacific property in Los Angeles had migrated from an adjacent Weiand
facility. Union Pacific claimed that Weiand is liable to Union Pacific for
certain investigation and remediation costs, as well as for other damages under
state law. Union Pacific sought damages in the amount of approximately $2.965
million from all defendants.
In December 2000, Union Pacific, Holley, Weiand and the other parties
to the litigation reached a comprehensive settlement in exchange for a cash
payment significantly less than the
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sought amount, resulting in a full dismissal of the lawsuit. A substantial
majority of the settlement payment was paid by Weiand's insurers. In connection
with the settlement, an additional $550,000 paid by the settling insurers has
been put into a Site Source Control Account to fund investigation and any
required remediation of the Weiand property, as may be required by the State of
California. Part of the attorney fees and litigation expenses of the parties
were also reimbursed by the settling insurers.
In 2000, Weiand discovered possibly significant soil contamination on
the Weiand property, which has not yet been fully analyzed by Weiand's
environmental consultants. Holley is working with the property owner, under the
supervision of the California Department of Toxic Substances Control, to
investigate and, if necessary, remediate the contamination. Although Holley
estimates that the Site Source Control Account will be sufficient to cover
Holley's costs for investigation and remediation of the site, there can be no
assurances that the final costs will not exceed such amount. Holley and Weiand
are working vigorously to address regulatory issues arising from the discovered
contamination. The funds received from Holley's insurers, as discussed above,
has been placed in a Site Source Control Account to fund investigation and any
required remediation of the Weiand property, as may be required by the State of
California.
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 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Holley does not have a class of capital stock registered pursuant to
the Securities Exchange Act of 1934, as amended, and there is no established
public trading market for its Common Stock. Holley is restricted from paying
dividends under its senior credit facility, and otherwise has no present
intentions to declare or pay dividends.
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ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data for Holley and its subsidiaries, based on Holley's audited consolidated
financial statements as of and for the periods presented.
1996 1997 1998 1999 2000
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(in thousands)
INCOME STATEMENT DATA:
Revenues $ 96,290 $ 98,803 $ 101,363 $ 130,091 $ 163,503
Cost of sales 65,368 69,192 69,997 87,727 114,220
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Gross profit 30,922 29,611 31,366 42,364 49,283
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Operating expenses
Selling, general, and administrative 18,868 22,759 19,411 28,089 43,812
Plant relocation costs -- -- 452 1,089 654
Amortization expense 113 113 1,671 4,536 5,542
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Total operating expenses 18,981 22,872 21,534 33,714 50,008
-------- -------- --------- --------- ---------
Operating income 11,941 6,739 9,832 8,650 (725)
Interest expense -- -- 4,705 11,848 23,109
Other income/(expense) (183) 45 (1,626) -- (122)
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Income/(loss) before taxes and extraordinary item 11,758 6,784 3,501 (3,198) (23,956)
Provision/(benefit) for income taxes 4,514 2,520 1,831 (171) (7,808)
-------- -------- --------- --------- ---------
Income/(loss) before extraordinary item 7,244 4,264 1,670 (3,027) (16,148)
Extraordinary item, net -- -- -- 1,654 511
-------- -------- --------- --------- ---------
Net income/(loss) $ 7,244 $ 4,264 $ 1,670 $ (4,681) $ (16,659)
======== ======== ========= ========= =========
OTHER FINANCIAL DATA:
Depreciation and amortization $ 1,150 $ 1,063 $ 4,123 $ 10,128 $ 12,993
Capital expenditures 466 942 4,007 4,642 4,290
Total assets 36,718 33,884 178,072 262,863 264,629
Total debt 13,428 9,081 93,088 164,705 184,382
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with our Consolidated Financial Statements and the notes thereto.
OVERVIEW
KHPP Acquisition Corporation ("Acquisition") and KHPP Holdings, Inc.
("Holdings"), both Delaware corporations, were formed by Kohlberg & Co., L.L.C.
("Kohlberg") in 1998 to effect the acquisition of Holley. Acquisition purchased
Holley in 1998 for approximately $100 million, and immediately thereafter merged
with and into Holley. The purchase of Holley and the merger of Acquisition into
Holley are together referred to herein as the "Holley Acquisition." The Holley
Acquisition was accounted for as a purchase. Accordingly, the consolidated
financial statements of Holley reflect the purchase method of accounting
effective May 15, 1998.
In connection with the October 1999 acquisitions of FlowTech, NOS and
Earl's and to repay existing indebtedness under its bank credit facility, in
September 1999 Holley issued $150,000,000 of 12 1/4% Senior Notes due 2007 at a
discount of 3.7% (the "Senior Notes") pursuant to an Indenture (the
"Indenture"). The Company completed an exchange of the Senior Notes for
identical, but publicly-tradeable notes pursuant to an exchange offer registered
with the Securities and Exchange Commission ("SEC").
Holley's results of operations for fiscal 2000, 1999 and 1998 (as
defined below) have been affected by the Holley Acquisition and the subsequent
acquisitions of Weiand, Lunati, Hooker, FlowTech, NOS, and Earl's (the
"Acquisitions"). Fiscal 1999 and 1998 results include the results of operations
from the Acquisitions subsequent to their acquisition dates. Consequentially,
comparisons of results between years will not be meaningful without a
comprehensive understanding of the information provided under "Results of
Operations." For the purposes hereof, "fiscal 1998" refers to the twelve-month
period ended December 31, 1998 and reflects the sum of Holley's results of
operations for the five months ended May 15, 1998 (before the allocation of
purchase price relating to the Holley Acquisition) and the results of operations
for the seven months ended December 31, 1998 (after the allocation of the
purchase price related to the Holley Acquisition).
The results of operations for the twelve months ended December 31, 2000
include the acquired businesses for the full twelve month period. During 2000,
the FlowTech manufacturing operations were relocated to the Aberdeen,
Mississippi exhaust manufacturing and distribution center. The relocation of the
Hooker distribution center to the Aberdeen, Mississippi exhaust facility began
during the fourth quarter as well. The original FlowTech and Hooker facilities
were leased facilities, and are in the process of being subleased.
During the fourth quarter of 2000, we changed the method of determining
the cost of inventories from the last-in, first-out ("LIFO") method to the
first-in, first-out ("FIFO") method. FIFO has been elected as all of the
acquired companies recorded their inventories under the
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FIFO method and only those inventories of the Bowling Green and Springfield
facilities were valued under the LIFO method. In addition, Holley's competitors
generally maintain their inventories under the FIFO method. The effect of the
change in accounting principle has been retroactively applied and results in a
reduction of the net loss reported for 1999 and 2000 by $248,000 and $372,000,
respectively.
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 (Earnings before interest, taxes, depreciation and
amortization, "EBITDA", divided by interest expense) 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 becomes effective during April, 2001. Fleet Capital has a perfected
security interest in all the assets of Holley. Our liquidity as of December 31,
2000 was $1.3 million revolving credit facility availability plus $7.0 million
of cash for a total of $8.3 million. 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.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31 1999
NET SALES. Net sales equals gross revenues less provisions for volume
rebates and co-op advertising allowances. Net sales for the year ended December
31, 2000 totaled $163.5 million compared to $130.1 million for the same period
in 1999, an increase of $33.4 million or 25.7%. Sales in the performance segment
for 2000 were $139.7 million compared to $104.6 million the same period in 1999,
an increase of $35.1 million or 33.6%. Sales in the remanufacturing segment for
2000 were $23.8 million compared to $25.5 million in the same period in 1999, a
decrease of $1.7 million or 6.7%.
The increase in the performance segment sales for 2000 was attributable
to the integration of the acquired businesses (Weiand, Lunati, Hooker, FlowTech,
NOS, and Earl's) for
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the twelve months of 2000 resulting in an increase of $37.8 million. In
addition, sales of performance products by the Holley core business ("base
business") decreased by $2.7 million or 2.5% over 1999.
Net sales for the three months ended December 31, 2000 totaled $35.8
million compared to $35.4 million for the same period in 1999, an increase of
$0.4 million or 1.1%. Sales for the performance segment for the three months
ended December 31, 2000 were $30.4 million compared to $29.1 million in the same
period in 1999, an increase of $1.3 million or 4.5%. Sales in the
remanufacturing segment for the three months ended December 31, 2000 were $5.4
million compared to $6.3 million in the same period in 1999, a decrease of $0.9
million or 14.3%. The increase in the performance segment for the three months
ended December 31, 2000 was attributable to the integration of the acquired
companies' sales while the decrease in the remanufacturing segment was
attributable to continuing declining market conditions.
GROSS PROFITS. Gross profits for the year ended December 31, 2000
totaled $49.3 million or 30.1% of net sales compared to $42.4 million or 32.6%
of net sales for the same period in 1999, an increase of $6.9 million or 16.3%.
Gross profits in the performance segment for 2000 were $43.8 million or 31.3% of
net sales, compared to $35.4 million or 33.8% of net sales for 1999, an increase
of $8.4 million or 23.7%. In the remanufacturing segment, gross profits for the
year ended December 31, 2000 were $5.5 million or 23.1% compared to $7.0 million
or 27.5% of net sales for the same period in 1999, a decrease of $1.5 million or
21.4%. The increase in the performance segment gross profit is primarily
attributable to increased sales volume, offset by costs associated with
additional inventory provisions of $3.0 million recorded in the fourth quarter
and costs incurred in connection with the closure of manufacturing operations
acquired during 1999 and their integration into existing facilities. As part of
the Company's overall initiative to decrease working capital and operating
expense, in the fourth quarter of 2000 management revised the Company's policy
for maintaining on hand inventory quantities and provided additional reserves
for the estimated loss that will be incurred in liquidating inventory that no
longer meets the Company's on hand inventory requirements. The decrease in
remanufacturing segment gross profit is attributable to reduced sales volume
offset by cost reductions.
Gross profits for the three months ended December 31, 2000 totaled $6.1
million or 17.0% of net sales compared to $10.2 million or 28.8% of net sales in
the same period in 1999, a decrease of $4.1 million or 40.2%. Gross profits in
the performance segment for the three months ended December 31, 2000 were $4.9
million or 16.1% of net sales compared to $8.8 million or 30.2% of net sales in
the same period in 1999, a decrease of $3.9 million or 44.3%. In the
remanufacturing segment, gross profits for the three months ended December 31,
2000 were $1.2 million or 22.2% of net sales compared to $1.4 million or 22.2%
of net sales in the same period in 1999, a decrease of $0.2 million or 14.3%.
The decrease in the performance segment was primarily attributable to the
increased inventory provision discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 2000 totaled $43.8
million or 26.8% of sales compared to $28.1 million or 21.6% for the same period
in 1999, an increase of $15.7 million or 55.9%. The increase is attributable to
spending for the support of the businesses acquired in 1999 (Hooker, FlowTech,
NOS and Earl's) including increased payroll of $3.4 million, increased
advertising and selling expenses of $7.6 million, increased depreciation expense
of $1.0 million, increased insurance premiums of $1.0 million and increased
professional services of $1.1 million.
Selling, general and administrative expense for the three months ended
December 31, 2000 totaled $14.7 million or 41.1% of sales, compared to $9.2
million or 26.0% of sales for the same period in 1999, an increase of $5.5
million or 59.8%. The increase is attributable to increased advertising and
selling expenses of $2.8 million, increased payroll of $1.4 million and
increased professional services of $1.1 million.
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PLANT RELOCATION COSTS. Plant relocation costs for the year ended
December 31, 2000 totaled $0.7 million compared to $1.1 million for the same
period in 1999, resulting from expenses incurred in the closure of acquired
facilities and the related movement of inventory and fixed assets to the
Company's manufacturing facilities in Bowling Green, Kentucky and Aberdeen,
Mississippi in 2000 and the partial integration of acquired companies in 1999.
AMORTIZATION EXPENSE. Amortization expense for the year ended December
31, 2000 totaled $5.5 million compared to $4.5 million for the same period in
1999. These expenses reflect the amortization of goodwill and other intangible
assets associated with the Holley Acquisition and the subsequent acquisitions of
Weiand, Lunati, Hooker, FlowTech, NOS, and Earl's.
INCOME (LOSS) FROM OPERATIONS. Loss from operations for the year ended
December 31, 2000 totaled ($0.7) million compared to income of $8.7 million for
the same period in 1999, a decrease of $9.4 million or 108.0%. The decrease is
primarily due to the increased amortization expense, increased inventory
reserves and increased selling general and administrative expenses partially
offset by increased sales and gross margins.
The loss from operations for the three months ended December 31, 2000
totaled ($10.2) million compared to ($0.9) million in same period in 1999, a
decrease of $9.3 million. The reduced operating results reflect increased
selling, general and administrative costs and increased inventory reserves.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2000
was $23.1 million compared to $11.8 million for the same period in 1999, an
increase of $11.3 million or 95.8%. The 2000 expense includes $18.4 million
resulting from the first full twelve months of interest associated with our
Senior Notes.
The 1999 interest expense of $11.8 resulted from the Company's term
loans, revolving credit facility, and the initial accrual of interest associated
with the Senior Notes. The term loans were incurred in May 1998, October 1998,
and July 1999 in connection with the Holley Acquisition and the subsequent
acquisitions of Weiand,
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Lunati and Hooker. The revolving credit facility is used to finance general
business and working capital needs. The proceeds from the sale of the Senior
Notes were used to pay back the existing term loans and to finance our 1999
acquisitions.
PROVISION (BENEFIT) FOR INCOME TAXES. Benefit for income taxes for the
year ended December 31, 2000 was ($7.8) million compared with ($0.2) million for
the year ended December 31, 1999. The tax benefits in 2000 and 1999 result from
pre-tax losses adjusted for non-deductible expenses (primarily amortization of
goodwill).
EXTRAORDINARY ITEM. An extraordinary item was recorded in 2000 to
reflect the write-off of $0.5 million (net of tax) of unamortized financing and
transaction fees associated with the Company's prior credit facility provided
through a group of banks led by Credit Agricole IndoSuez. This facility was paid
off in full in December 2000.
The 1999 extraordinary item reflects the write-off of $1.7 million (net
of tax) of unamortized financing and transaction fees associated with the
previous bank term debt. This previous bank debt was paid off in full in
September 1999 with the proceeds of our senior notes offering.
NET INCOME/(LOSS). Net loss for the year ended December 31, 2000 was
($16.7) compared with ($4.7) million for the same period in 1999, a decrease of
$12.0 million. The decrease in 2000 net income reflects decreased income from
operations and increased interest expense. In addition, net income was reduced
by the extraordinary item of $0.5 million reflecting the write-off of
unamortized Credit Agricole IndoSuez financing fees. These reductions were
partially offset by an increased income tax benefit of ($7.6) million.
The net loss for the three months ended December 31, 2000 totaled
($10.8) million compared to ($3.2) million for the same period in 1999, a
difference of $7.6 million. The difference is attributable to decreased
operating income of $9.3 million, and increased interest expense of $0.8 million
offset by increased income tax benefit of ($3.1) million, increased other
expense of $0.1 million and the extraordinary item of $0.5 million.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
NET SALES. Net sales equals gross revenues less provisions for volume
rebates and co-op advertising allowances. Net sales for the year ended December
31, 1999 totaled $130.1 million compared to $101.4 million for the same period
in 1998, an increase of $28.7 million or 28.3%. Net sales in the performance
segment for the year ended December 31, 1999 were $104.6 million compared to
$73.7 million for the same period in 1998, an increase of $30.9 million or
41.9%. Net sales in the remanufacturing segment were $25.5 million for the year
ended December 31, 1999 compared to $27.7 million for the same period in 1998, a
decrease of $2.2 million or 7.9%. In addition, sales of performance products in
the base business increased by $8.2 million or
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15.4% over the same period in 1998. This was partially offset by reduced sales
to original equipment manufacturers and bulk customers of $4.2 million or 28.6%,
and reduced sales from a product line that was sold of $1.7 million or 63.2% as
compared to the same period in 1998. The reduced sales from a product line that
was sold reflects the partial sale of our industrial ignition business in May
1998. The reduced original equipment and bulk sales of 1999 primarily resulted
from the final phasing out of component supply to the former automotive
operations of Coltec Industries that were acquired by Borg Warner in 1996 and
substantial price increases on components that are sold in bulk to assemblers or
modifiers. These assemblers and modifiers would assemble the purchased
components into finished products that would then compete with our products.
Remanufacturing sales were down due to continued remanufactured carburetor
market declines.
Net sales for the three months ended December 31, 1999 totaled $35.4
million compared to $25.6 million for the same period in 1998, an increase of
$9.8 million or 38.3%. Net sales for the performance segment in 1999 were $29.1
million compared to $18.4 million for the same period in 1998, an increase of
$10.7 million or 58.1%. Net sales in the remanufacturing segment for the year
ended December 31, 1999 were $6.3 million compared to $7.2 million for the same
period in 1998, a decrease of $0.9 million or 12.5%. The decrease in the
remanufacturing segment was attributable to continuing declining market
conditions in 1999. The increase in the performance segment was largely
attributable to additional net sales from the acquired businesses of $10.1
million and increased sales of performance products in the base business of $2.1
million. Some of the 1999 sales increase in the performance segment was also due
to dating and other special programs that were offered in the fourth quarter.
The increase was partially offset by reduced sales to original equipment
manufacturers and bulk customers of $1.2 million and reduced sales from a
product line that was sold of $0.3 million.
GROSS PROFITS. Gross profits for the year ended December 31, 1999
totaled $42.4 million or 32.6% of net sales compared to $31.4 million or 31.0%
of net sales for the same period in 1998, an increase of $11.0 million or 35.0%.
Gross profits in the performance segment in 1999 were $35.4 million or 33.8% of
net sales compared to $24.3 million or 33.0% of net sales for the same period in
1998, an increase of $11.1 million or 45.7%. In the remanufacturing segment,
gross profits in 1999 were $7.0 million or 27.5% of net sales compared to $7.1
million or 25.6% of net sales for the same period in 1998, a decrease of $0.1
million or 1.4%. The increase in the performance segment is attributable to
gross profits contributed by the full integration of our acquired companies of
$10.0 million in 1999 and additional gross profits in the base business of $0.6
million. The increase in the base business is primarily attributable to
increased sales volume, while in the remanufacturing segment, the decrease was
mostly attributable to reduced sales volume offset by cost reductions.
Gross profits for the three months ended December 31, 1999 totaled
$10.2 million or 28.8% of net sales compared to $7.4 million or 28.9% of net
sales for the same period in 1998, an increase of $2.8 million or 37.8%.
Gross profits in the performance segment for the three months ended
December 31, 1999 were $8.8 million or 30.2% of net sales compared to $5.7
million or 31.0% of net sales for the same period in 1998, an increase of $3.1
million or 54.4%.
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In the remanufacturing segment, gross profits for the three months
ended December 31, 1999 were $1.4 million or 22.2% of net sales compared to $1.7
million or 23.6% of net sales for the same period in 1998, a decrease of $0.3
million or 17.6%.
The increase in the performance segment was mostly attributable to $2.5
million of additional gross profits from the acquired businesses and $0.7
million due to higher volume in the base business. This was partially offset by
reduced gross profits of $0.4 million due to reduced sales to original equipment
manufacturers and bulk customers, and from a product line that was sold. The
reduction in the gross profit percentage to net sales in the performance segment
was largely attributable to decreased gross profits at the acquired businesses
due to customer and product mix issues and increased warranty and depreciation
expense. The increased depreciation expense resulted from the write-up of
acquired assets to fair market value in purchase accounting. The decrease in the
remanufacturing segment was due to reduced sales volume and increased warranty
expense. The reduction in the gross profit percentage to net sales in the
remanufacturing segment was largely attributable to increased warranty expense.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1999 totaled $28.1
million or 21.6% of net sales compared to $19.4 million or 19.1% of net sales
for the same period in 1998, an increase of $8.7 million or 44.8%. The increase
is primarily attributable to spending at the acquired businesses (Weiand,
Lunati, Hooker, FlowTech, NOS, and Earl's) of $3.2 million, increased marketing
spending of $3.6 million, increased depreciation of $1.3 million and increased
professional services of $0.6 million.
Selling, general and administrative expense for the three months ended
December 31, 1999 totaled $9.2 million or 26.0% of net sales compared to $4.7
million or 18.4% of net sales for the same period in 1998, an increase of $4.5
million or 95.7%. The increase is largely attributable to $2.7 million in
additional expenses from the acquired businesses, $1.1 million in increased
marketing costs, and $0.9 million in increased other administrative costs.
PLANT RELOCATION COSTS. Plant relocation costs for the year ended
December 31, 1999 totaled $1.1 million resulting from expenses incurred in
the integration of acquisitions compared to $0.5 million for the same period in
1998.
AMORTIZATION EXPENSE. Amortization expense for the year ended December
31, 1999 totaled $4.5 million compared to $1.7 million for the same period in
1998. These expenses reflect the amortization of goodwill and other intangible
assets associated with the Holley Acquisition and the subsequent acquisitions of
Weiand, Lunati, Hooker, FlowTech, NOS, and Earl's.
INCOME (LOSS) FROM OPERATIONS. Income from operations for the year
ended December 31, 1999 totaled $8.7 million compared to $9.8 million for the
same period in 1998, a decrease of $1.1 million or 11.2%. The decrease is
primarily due to the increased amortization expense, increased selling, general
and administrative expenses partially offset by increased sales and gross
margins.
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The loss from operations for the three months ended December 31, 1999
totaled ($0.9) million compared to income of $1.5 million for the same period in
1998, a reduction of $2.4 million. The reduced operating results reflect
increased selling, general and administrative costs of $4.5 million and
increased amortization expense of $0.8 million offset by increased gross profits
of $2.8 million and reduced plant relocation costs of $0.1 million.
INTEREST EXPENSE. Interest expense was $11.8 million for the year ended
December 31, 1999 compared to $4.7 million for the same period in 1998. The
expense resulted from Company's term loans, revolving credit facility, and the
initial accrual of interest associated with the Senior Notes. The term loans
were incurred in May 1998, October 1998, and July 1999 in connection with the
Holley Acquisition and the subsequent acquisitions of Weiand, Lunati and Hooker.
The revolving letter of credit is used to finance general business and working
capital needs. The proceeds from the sale of the Senior Notes were used to pay
back the existing term loans and to finance our 1999 acquisitions.
OTHER INCOME / (EXPENSE). Other income / (expense) was $0 for the year
ended December 31, 1999 compared to ($1.6) million for the same period in 1998.
The 1998 expense includes $1.0 million in fees paid to Coltec under a licensing
agreement.
PROVISION (BENEFIT) FOR INCOME TAXES. Benefit for income taxes for the
year ended December 31, 1999 was ($0.2) million compared to provision of $1.8
million for the same period in 1998. The benefit in 1999 results from taxable
loss due to increased interest expense.
EXTRAORDINARY ITEM. An extraordinary item was booked to reflect the
write-off of $1.7 million (net of tax) of unamortized financing and transaction
fees associated with our bank term debt. This bank debt was paid off in full in
September 1999 with the proceeds of the Senior Notes.
NET INCOME / (LOSS). Net loss for the year ended December 31, 1999 was
($4.7) million compared with net income of $1.7 million for the same period in
1998, a decrease of $6.4 million. The decrease reflects increased interest
expense of $7.1 million and increased amortization expense of $2.8 million,
expense items associated with the Acquisitions that were not incurred prior to
the Acquisitions. In addition, net income was reduced by the extraordinary item
of $1.7 million reflecting the write-off of financing fees. These reductions
were partially offset by increased operating income before amortization expense
of $1.6 million, reduced other expense of $1.7 million, and reduced provision
for income taxes of $2.0 million.
The net loss for the three months ended December 31, 1999 totaled
($3.2) million compared to ($0.7) million for the same period in 1998,
a difference of ($2.5) million. The difference is attributable to decreased
operating income of $2.4 million and increased interest expense of $2.4 million
offset by increased income tax benefit of ($2.3) million and increased other
income of $0.2 million.
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QUARTERLY RESULTS
The following table summarizes the unaudited results of operations for
each of the specified quarters of fiscal years 1999 and 2000. This quarterly
information has been prepared in accordance with the accounting policies
described in the Company's annual consolidated financial statements and, in the
opinion of management, contains all adjustments necessary to state fairly the
information set forth herein.
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999
------------------------------------------ ----------------------------------------
(in $000's) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
Revenues $39,466 $45,281 $42,949 $35,807 $30,801 $34,131 $29,807 $35,352
Cost of Sales 26,885 29,898 27,725 29,712 20,249 22,322 20,039 25,117
------- ------- ------- ------- ------- ------- ------- -------
Gross Profit 12,581 15,383 15,224 6,095 10,552 11,809 9,768 10,235
------- ------- ------- ------- ------- ------- ------- -------
Operating Expenses
Selling, general,
and administrative 9,666 10,311 9,136 14,699 6,232 6,026 6,593 9,238
Plant relocation 92 108 259 195 360 64 331 334
Costs
Amortization Expense 1,364 1,376 1,400 1,402 928 851 1,157 1,600
------- ------- ------- ------- ------- ------- ------- -------
Total operating
Expenses 11,122 11,795 10,795 16,296 7,520 6,941 8,081 11,172
------- ------- ------- ------- ------- ------- ------- -------
Operating income/ (loss) 1,459 3,588 4,429 (10,201) 3,032 4,868 1,687 (937)
Interest expense 5,804 6,197 5,853 5,255 2,004 2,337 3,071 4,436
Other income/ (expense) -- (1) -- (121) (2) (5) (2) 9
------- ------- ------- ------- ------- ------- ------- -------
Income/ (loss) before
taxes and extraordinary
item (4,345) (2,610) (1,424) (15,577) 1,026 2,526 (1,386) (5,364)
Provision/ (benefit) (1,237) (990) (288) (5,293) 796 1,208 34 (2,209)
for income taxes
------- ------- ------- ------- ------- ------- ------- -------
Income/ (loss) before (3,108) (1,620) (1,136) (10,284) 230 1,318 (1,420) (3,155)
extraordinary item
Extraordinary item -- -- -- 511 -- -- 1,654 --
------- ------- ------- ------- ------- ------- ------- -------
Net income/ (loss) $(3,108) $(1,620) $(1,136) $(10,795) $ 230 $ 1,318 $(3,074) $(3,155)
======= ======= ======= ======== ======= ======= ======= =======
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LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Net cash provided/(used) by operating activities
for fiscal 2000, 1999 and 1998 was ($7.4) million, ($7.6) million and $4.6
million, respectively. The decrease in net income partially offset by deferred
tax benefits and the non-cash effect of depreciation and amortization and
increased working capital requirements contributed primarily to the increase in
net cash used by operating activities in fiscal 2000. The increase in working
capital was primarily attributable to higher inventories of $3.6 million due to
lower than anticipated sales volume in the fourth quarter driven by weaker sales
in the quarter and decreased receivables of $0.6 million; decreased other
current assets of $1.6 million, decreased accounts payable of $2.2 million,
offset by increased accrued liabilities of $1.9 million.
INVESTING ACTIVITIES. Net cash used in investing activities for fiscal
2000, 1999 and 1998 were $5.0 million, $65.3 million and $133.3 million,
respectively. The primary use of cash during fiscal 2000 was for capital
additions, primarily for maintenance and replacement items and the purchase of
the Tenneco exhaust manufacturing equipment at the Aberdeen Exhaust Products
facility of $0.8 million, while 1999 expenditures were to fund the acquisitions
of Hooker, FlowTech, NOS, and Earl's. In addition, we spent $4.6 million on
maintenance and replacement capital additions in 1999.
During 2000, we entered into a 25 year lease with the city of Aberdeen,
Mississippi for the Aberdeen Exhaust Products facility. The facility is a
335,000 square foot manufacturing facility previously utilized by Tenneco to
manufacture exhaust products. The lease rate is $7,500 per year with a
termination date after May 1, 2025 per the lease terms. Flowtech operations in
Mexico and Tempe, Arizona, and the Hooker operations in Ontario, California were
relocated to Aberdeen during 2000.
Construction was completed on our new distribution center near Bowling
Green, Kentucky in October, 1999 which is leased under a capital lease
arrangement. The new facility was financed by the local Economic Development
Authority, allowing us to take advantage of certain state and local tax
incentives granted for generating new employment.
FINANCING ACTIVITIES. Net cash provided by / (used in) financing
activities for fiscal 2000, 1999, and 1998 was $18.0 million, $72.3 million, and
$130.8 million, respectively. Cash provided in 2000 was primarily due to the
increase in the revolving credit facility of $17.8 million and $1.0 million in
long-term debt financing provided by certain agencies in Mississippi for the
purchase of equipment and relocation expenses associated with the Aberdeen
Exhaust Products facility, offset by financing costs of $0.8 million.
Cash provided in 1999 was primarily due to the proceeds from additional
equity contributions of $10.1 million, additional bank debt incurred for
acquisitions and working capital needs of $37.6 million, and economic
development equipment loan related to our new
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distribution center of $0.6 million and the net proceeds from the Senior Notes
of $144.5 million. Such amounts were primarily used to pay for acquisitions, pay
back existing bank debt and to fund working capital requirements, as discussed
above. Cash outflows included retirement of bank debt equal to $113.7 million
and the payment of fees associated with debt issuance, stock issuance, and
acquisitions of $6.8 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 2001 and that the revolving line of credit
facility will be adequate to fund our working capital needs during 2001.
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 Senior Notes, 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 continuing 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 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 becomes effective during April, 2001. Fleet Capital has a perfected
security interest in all the assets of Holley. Our liquidity as of December 31,
2000 was $1.3 million revolving credit facility availability plus $7.0 million
of cash for a total of $8.3 million. 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.
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%.
22
25
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.
YEAR 2000 COMPLIANCE
As of January 1, 2001, Holley was fully Y2K compliant and did not incur
any disruption of operations due to the Y2K issues of our customers or
suppliers.
INFLATION
General inflation over the last four years has not had a material
effect on the Company's cost of doing business and it is not expected to have a
material effect in the foreseeable future.
FORWARD-LOOKING STATEMENTS
Any statements set forth above which are not historical facts are
forward-looking statements that involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. Forward-looking statements are typically defined
by words such as "believe", "expect", "anticipate", "estimate" and similar
expressions and include (among others) statements concerning :
- our strategy;
- our liquidity and capital requirements;
- our debt levels and ability to obtain financing and service
our debt;
- competitive pressures and trends in the performance automotive
products industry;
- cyclicality and economic condition of the industries we
currently serve;
- our ability to successfully integrate acquired companies;
- prevailing levels of interest rates;
23
26
- legal proceedings and regulatory matters;
- general economic conditions; and
- other risks identified herein and in other documents filed by
the Company with the Securities and Exchange Commission.
In light of these risks and uncertainties, there can be no assurance
that the results and events contemplated by the forward-looking information in
this document will in fact transpire. You are cautioned not to place undue
reliance on these forward-looking statements. We undertake no obligation to
update or revise any forward-looking statements. All subsequent written or oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), effective, as amended, for
fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133
requires all derivatives to be recognized in the statement of financial position
and to be measured at fair value. The Company adopted the provisions of SFAS 133
effective January 1, 2001 . Such adoption did not have a material effect on the
Company's results of operations or financial position.
ITEM 7A- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. 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 credit facility $36.0 million and the $5.0 million term facility
interest rates 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 the end of 2000,
Holley's outstanding balance on the revolving credit facility was $34.7 million
(offset by existing cash reserves of $7.0 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 line of credit. 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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27
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 for an index to Holley's consolidated financial statements
and supplementary financial information which are included herewith.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each
person who is an executive officer or a member of the Board of Directors (a
"Director") of Holley as of March 31, 2001. Directors are elected for a one year
term of office at the annual stockholders' meeting.
NAME AGE POSITION
- ---- --- --------
Jeffrey G. King 39 Chief Executive Officer, President and Director
A. Bruce Reynolds 60 Vice President, Chief Financial Officer and
Secretary
John H. Nickoloff 48 Vice President and General Manager -
Remanufacturing Business
Christopher Lacovara 36 Vice President, Treasurer, Assistant Secretary and
Director
Evan D. Wildstein 30 Assistant Secretary and Director
James A. Kohlberg 43 Director
Marion H. Antonini 70 Chairman of the Board and Director
William F. Andrews 69 Director
James D. Wiggins 53 Director
Samuel P. Frieder 36 Director
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28
JEFFREY G. KING. Chief Executive Officer, President and Director. Mr. King
joined Holley as Chief Executive Officer in 1997. Prior to joining Holley, Mr.
King was Executive Vice President and Chief Operating Officer of Lincoln Brass
Works, where he began in 1994 as Vice President of Sales and Marketing. From
1984 to 1994, he held positions with increasing responsibility at Arvin
Industries, an automotive systems and components company, ultimately becoming
the manager of new business development for its electronics unit, director of
sales and marketing and business unit manager for Arvin's Gabriel Ride Control
Products.
A. BRUCE REYNOLDS. A Bruce Reynolds. Vice President, Chief Financial Officer,
and Secretary. Mr. Reynolds joined Holley in August, 2000. Prior to joining
Holley, Mr. Reynolds has most recently served as Chief Financial Officer of
Powell Building Group 1999-2000 and Saba Medical Technology, Inc. 1997 through
1999. Mr. Reynolds also served as Chief Financial Officer and Treasurer of
National Auto/Truckstops Inc. from 1993 through 1997, a nationwide truckstop and
travel center company. In addition, Mr. Reynolds has also held senior financial
positions in the automotive, electronics, packaging and chemical conversion
industries, including Chrysler Corporation, Bunker-Ramo Corporation, United
States Can Inc. and Woodbridge Holdings, Inc. Mr. Reynolds filed for Chapter 11
personal bankruptcy in 1999, which was closed and resolved in 2000.
JOHN H. NICKOLOFF. Vice President and General Manager - Remanufacturing
Business. Mr. Nickoloff joined Holley as Vice President in 1995. Prior to
joining Holley, Mr. Nickoloff was with Frigidaire (AB Electrolux) from 1975 to
1995. With them, he served in various financial and manufacturing positions,
the most recent as Plant Manager.
CHRISTOPHER LACOVARA. Vice President, Treasurer, Assistant Secretary and
Director. Mr. Lacovara has been a Director since 1998. Since 1995, he has been a
Principal of Kohlberg & Company, a private equity firm. Prior to that, he was an
associate at Kohlberg & Company, which he joined in 1988. Mr. Lacovara is also a
director of Northwestern Steel and Wire Company.
EVAN D. WILDSTEIN. Assistant Secretary and Director. Mr. Wildstein has been an
Assistant Secretary and Director since 1999. Since December 1999, Mr. Wildstein
has been a Principal of Kohlberg & Company, a private equity firm. Prior to
that, he was an associate with Kohlberg & Company, which he joined in 1994. Mr.
Wildstein is also a director of Magnavision Corp.
JAMES A. KOHLBERG. Director. Mr. Kohlberg has been a Director since 1998, and is
the Managing Principal of Kohlberg & Company, a private equity firm, which he
co-founded in 1987.
MARION H. ANTONINI. Chairman of the Board and Director. Mr. Antonini has been
Chairman and a Director since 1998, and joined Kohlberg & Company, a private
equity firm, as a Principal in 1998. Prior to joining the firm, since 1990 Mr.
Antonini was Chairman, President and Chief Executive Officer of Welbilt
Corporation, a diversified manufacturer and distributor of commercial
foodservice equipment and kitchen appliances. Mr. Antonini is also a director of
Vulcan Materials Company, Engelhard Corporation and Scientific-Atlanta.
26
29
WILLIAM F. ANDREWS. Director. Mr. Andrews has been a Director since 1998, and
has been Chairman of Corrections Corporation of America since 2000, Chairman of
Scovill Fasteners, Inc. since 1995 and Chairman of Northwestern Steel and Wire
Corporation since 1999. From 1993 to 1995, Mr. Andrews was Chairman and Chief
Executive Officer of Amdura Corporation, a manufacturer of hardware and
industrial equipment. Mr. Andrews is also a director of Black Box Corporation,
Johnson Controls, Inc., Katy Industries, Navistar International Corporation
and Trex Corporation.
JAMES D. WIGGINS. Director. Mr. Wiggins has been a Director since 1998. Mr.
Wiggins is President and CEO of The Gates Group of Companies, an industrial and
automotive systems manufacturer, which includes The Gates Rubber Company, Stant
Manufacturing, Schrader-Bridgeport, Int'l. and Trico Products Corporation. The
Gates Group of Companies is a subsidiary of Tomkins PLC. Prior to his current
appointment, Mr. Wiggins was Group President of the Stant/Schrader Group of
Gates. He was President and CEO of Schrader, Inc. from 1996 through its
acquisition by Tomkins PLC in 1998, and prior to that, was President and CEO of
Bridge Products Inc.
SAMUEL P. FRIEDER. Director. Mr. Frieder has been a Director since 1998 and a
Principal of Kohlberg & Company, a private equity firm, since 1995. Prior to
that, he was an associate at Kohlberg & Company, which he joined in 1989.
ITEM 11 -- EXECUTIVE COMPENSATION
Compensation of Directors. Directors who are officers or employees of
Holley receive no additional compensation for serving on the Board of Directors.
Our non-employee members of the Board of Directors receive reimbursement for
expenses incurred in attending meetings of the directors and any committees of
the Board.
Compensation of Executive Officers. The following table shows, for the
three most recent fiscal years, the compensation paid to or earned by our Chief
Executive Officer and the four other most highly compensated executive officers
who were serving at the end of fiscal year 2000.
SUMMARY COMPENSATION TABLE
NAME AND
PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTIONS (6)
- ------------------ ------- ------ ----- -----------
Jeffrey G. King(2) 2000 $226,437 $ -0- -0-
Chief Executive Officer 1999 219,500 -0- -0-
1998 112,241 250,000 1,467,304
James R. Vance(2) 2000 $161,338 $ -0- -0-
Chief Operating Officer 1999 126,250 -0- -0-
1998 68,571 103,500 1,024,216
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William H. Bass(2)(3) 2000 $125,671 $ -0- -0-
Vice President--Marketing 1999 105,424 -0- 150,000
A. Bruce Reynolds(2)(4) 2000 $ 54,281 $ -0- 200,000
Chief Financial Officer
John H. Nickoloff(2) 2000 $ 111,335 $ -0- -0-
Vice President-Remanufacturing 1999 110,906 -0- -0-
1998 64,316 74,025 440,235
William H. Houghton(2)(5) 2000 $114,458 $ -0- 100,000
Executive Vice President--
Sales and Marketing
- ---------------
(1) Holley's current corporate ownership structure did not exist in 1997.
(2) Certain of the executives participate in Holley's 401(k) plan. Under the
plan, Holley matches contributions 100% up to a maximum of 6% of the
participant's total salary and bonus for that year. In 2000, Holley paid
the following amounts in 401(k) matches: Jeffrey G. King--$10,200; James R.
Vance--$9,550; William H. Bass--$-0-; A. Bruce Reynolds--$2,600; John H.
Nickoloff--$6,941; William H. Houghton--$5,110. Each of the executives also
participates in Holley's group health and dental insurance plan.
(3) Mr. Bass joined Holley in 1999.
(4) Mr. Reynolds joined Holley in August 2000.
(5) Mr. Houghton's employment with Holley ceased in March 2001.
(6) Options to buy stock of Holdings, the direct parent of Holley.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value
Number of Percent of at Assumed Annual Rates
Securities Total Options of Stock Price
Executive Underlying Granted to Employees Exercise of Expiration Appreciation for Stock
Officer Options In 2000 Base Price Date Option Term
- ---------- ------- ------- ---------- ---------- ----------------------------
5% 10%
----- -------
A. Bruce Reynolds 200,000 35% $2.25 August 2010 $284,000 $718,000
William H. Houghton(1) 300,000 52% $2.25 May 2010 $426,000 $1,077,000
---------------------------------------------------------------------------------------------------------------------------
(1) Mr. Houghton forfeited 200,000 of his 300,000 options in connection with
termination of his employment with Holley. As a result, his potential
realizable values based on 100,000 options are $142,000 (5%) and $359,000
(10%).
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ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of Holley's common stock
as of March 31, 2001 by our directors, executive officers, persons known by us
to own more than 5.0% of our voting common stock and all our directors and
executive officers as a group.
Aggregate Number of Shares
Beneficially Owned
Name and Address of -----------------------------
Beneficial Owner Number Percentage
- ------------------- ------ ----------
KHPP Holdings, Inc. (1) 1,000 100%
Directors and executive officers
as a group (10 persons) (2)
1. KHPP Holdings, Inc.'s business address is: c/o Kohlberg & Company, L.L.C.,
111 Radio Circle, Mt. Kisco, New York, 10549. The voting common stock of KHPP
Holdings, Inc. is owned beneficially and of record as follows: KHPP Acquisition
Company, L.P.--97.14%; Jeffrey G. King--0.40%; Robert L. Wineland--0.21%; James
R. Vance--0.34%; John Nickoloff--0.19%; and other unaffiliated investors--1.71%.
James A. Kohlberg indirectly owns 100% of KHPP Acquisition Company, L.P. Mr.
King and Mr. Nickoloff also hold the same officer positions with KHPP Holdings,
Inc. as they hold with Holley. The business address of each such persons is: c/o
Holley Performance Products Inc., 1801 Russellville Rd., Bowling Green, Kentucky
42101.
2. The directors and officers of Holley do not own (beneficially or of record)
common stock of Holley, but own common stock of KHPP Holdings, Inc. as indicated
in footnote (1) above, which owns all of the common stock of Holley. See
footnote (1) above.
ITEM 13 -- CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Pursuant to a fee arrangement, Holley pays Kohlberg & Company, L.L.C.
an annual management fee (plus expenses) of $942,000 plus ancillary expenses
for certain management and advisory services, which is subject to increase if
Kohlberg & Company, L.L.C. invests additional
29
32
capital in Holley. The management fee agreement terminates on the earlier of
Kohlberg terminating the agreement by written notice to Holley, April 1, 2009 or
the end of the fiscal year in which Kohlberg beneficially owns less than 25% of
Holley's outstanding common stock. In 2000, we paid Kohlberg an aggregate of
$942,000 under this management fee agreement. We believe these terms are as
favorable to Holley as those that could have been obtained from independent
third parties and arms-length negotiations.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements And Schedules. See Index to Financial Statements
and Financial Statements which begin on page F-1 hereof. See also the
Selected Consolidated Financial Data, which appears in "Item 6 --
Selected Financial Data" herein.
(b) Reports on Form 8-K. None.
(c) Exhibits. The exhibits listed on the Exhibit Index following the
signature page hereof are filed herewith in response to this Item.
(d) Financial Statement Schedules. See Financial Statement Schedule (and
related audit report) attached to the audited consolidated financial
statements.
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33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ A. Bruce Reynolds
Chief Financial Officer
Date: March 30, 2001
Each person whose signature appears below hereby constitutes and
appoints A. Bruce Reynolds and Jeffrey G. King, or either of them, the true and
lawful attorney-in-fact and agents of the undersigned, with full power of
substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Report, and to file the same, with
all exhibits thereto, and other documents in connection herewith, with the
Commission, and hereby grants to such attorney-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or its substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities set forth below as of March 30, 2001.
SIGNATURE TITLE
- --------- -----
/s/ Jeffrey G. King Chief Executive Officer, President and
- ------------------------------ Director
(principal executive officer)
/s/ A. Bruce Reynolds Vice President, Chief Financial Officer
- ----------------------------- and Secretary
(principal financial officer and principal
accounting officer)
/s/ Christopher Lacovara Vice President, Treasurer, Assistant
- ------------------------------ Secretary and Director
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34
/s/ Evan D. Wildstein Assistant Secretary and Director
- -------------------------------
/s/ James A. Kohlberg Director
- -------------------------------
/s/ Marion H. Antonini Director
- -------------------------------
/s/ William F. Andrews Director
- --------------------------------
/s/ James D. Wiggins Director
- --------------------------------
/s/ Samuel P. Frieder Director
- --------------------------------
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The following is an index of the exhibits included in this Report or
incorporated herein by reference.
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
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).
33
36
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).
10.1* Loan and Security Agreement, dated December 29, 2000, by and among Holley
Performance Products Inc., Holley Performance Systems, Inc., Weiand Automotive
Industries, Inc., Lunati Cams, Inc., Lunati & Taylor Pistons, Inc., LMT Motor
Sports Corporation, Nitrous Oxide Systems, Inc., Earl's Supply Company, Biggs
Manufacturing, Inc. and Hooker Industries, Inc., as Borrowers, and Fleet
Capital Corporation, as Agent and Lender.
18* Letter on Change in Accounting Principles.
24* Power of attorney (included on signature page hereto).
* Filed herewith
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INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-3
Consolidated Statements of Operations for the periods from January 1, 1998
to May 15, 1998 and May 16, 1998 to December 31, 1998 and the years
ended December 31, 1999 and December 31, 2000 F-4
Consolidated Statements of Stockholder's Equity for the periods from January 1,
1998 to May 15, 1998 and May 16, 1998 to December 31, 1998
and the years ended December 31, 1999 and December 31, 2000 F-5
Consolidated Statements of Cash Flows for the periods from January 1, 1998 to
May 15, 1998 and May 16, 1998 to December 31, 1998 and the years
ended December 31, 1999 and December 31, 2000 F-6
Notes to Consolidated Financial Statements F-8
F-1
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Holley Performance Products Inc.:
We have audited the accompanying consolidated balance sheets of HOLLEY
PERFORMANCE PRODUCTS INC. (a Delaware corporation) AND SUBSIDIARIES (the
"Company") as of December 31, 1999 and 2000, and the related consolidated
statements of operations, stockholder's equity and cash flows for the period
from inception, May 16, 1998, to December 31, 1998, and the years ended December
31, 1999 and 2000. We have also audited the accompanying statements of
operations, stockholder's equity and cash flows of the Predecessor (business
identified in Note 1) for the period from January 1, 1998 to May 15, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Holley Performance Products
Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for the period from inception, May 16, 1998, to
December 31, 1998, and for the years ended December 31, 1999 and 2000, and the
results of operations and cash flows of the Predecessor for the period from
January 1, 1998 to May 15, 1998, in conformity with accounting principles
generally accepted in the United States.
As explained in Note 2 to the consolidated financial statements, the Company has
given retroactive effect to a change in accounting for certain inventories from
the last-in, first-out method to the first-in, first-out method.
Arthur Andersen LLP
Nashville, Tennessee
March 9, 2001
F-2
39
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(Dollars in Thousands)
December 31, DECEMBER 31,
ASSETS 1999 2000
------------ ------------
(Note 2)
CURRENT ASSETS:
Cash and cash equivalents $ 1,359 $ 6,967
Accounts receivable, net of reserves for doubtful accounts of 28,320 27,573
$1,293 and $964, respectively
Inventories 31,923 34,759
Deferred income taxes 4,531 3,514
Income taxes receivable 4,112 1,305
Other current assets 2,583 1,020
--------- ---------
Total current assets 72,828 75,138
PROPERTY, PLANT AND EQUIPMENT, NET 35,712 32,791
INTANGIBLE ASSETS, NET 154,323 156,700
--------- ---------
Total assets $ 262,863 $ 264,629
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 257 $ 3,714
Accounts payable 9,633 11,833
Accrued liabilities 19,880 19,257
--------- ---------
Total current liabilities 29,770 34,804
--------- ---------
LONG-TERM DEBT, NET OF CURRENT PORTION 164,448 180,668
--------- ---------
DEFERRED INCOME TAXES 19,403 16,841
--------- ---------
OTHER NONCURRENT LIABILITIES 804 537
--------- ---------
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 (4,062) (20,721)
--------- ---------
Total stockholder's equity 48,438 31,779
--------- ---------
Total liabilities and stockholder's equity $ 262,863 $ 264,629
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
F-3
40
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND
THE PREDECESSOR ARE NOT COMPARABLE IN CERTAIN RESPECTS.
(Dollars in Thousands)
THE
PREDECESSOR THE COMPANY
----------- ----------------------------------------------
January 1, May 16, 1998
1998 to to Year Ended December 31,
May 15, December 31, ---------------------------
1998 1998 1999 2000
---------- ------------ --------- ---------
(Note 2)
NET SALES $ 36,632 $ 64,731 $ 130,091 $ 163,503
COST OF SALES 25,728 44,269 87,727 114,220
--------- --------- --------- ---------
Gross profit 10,904 20,462 42,364 49,283
--------- --------- --------- ---------
SELLING EXPENSES 4,018 6,895 16,386 24,631
GENERAL AND ADMINISTRATIVE EXPENSES 2,756 4,495 10,810 18,239
MANAGEMENT FEES TO RELATED PARTY 842 405 893 942
PLANT RELOCATION COSTS -- 452 1,089 654
AMORTIZATION EXPENSE 45 1,626 4,536 5,542
--------- --------- --------- ---------
Operating income (loss) 3,243 6,589 8,650 (725)
--------- --------- --------- ---------
INTEREST EXPENSE -- 4,705 11,848 23,109
OTHER EXPENSE 1,395 231 -- 122
--------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES AND EXTRAORDINARY
ITEM 1,848 1,653 (3,198) (23,956)
INCOME TAX PROVISION (BENEFIT) 797 1,034 (171) (7,808)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,051 619 (3,027) (16,148)
EXTRAORDINARY ITEM, NET -- -- 1,654 511
--------- --------- --------- ---------
NET INCOME (LOSS) $ 1,051 $ 619 $ (4,681) $ (16,659)
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
41
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND
THE PREDECESSOR ARE NOT COMPARABLE IN CERTAIN RESPECTS.
(Dollars in Thousands)
RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
--------- --------- --------- ---------
THE PREDECESSOR
-------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 1 $ -- $ 11,508 $ 11,509
Net income -- -- 1,051 1,051
--------- --------- --------- ---------
BALANCE, MAY 15, 1998 $ 1 $ -- $ 12,559 $ 12,560
========= ========= ========= =========
THE COMPANY
--------------------------------------------------------------
Acquisition - elimination of Predecessor
equity (Note 1) $ (1) -- $ (12,559) $ (12,560)
Issuance of common stock 1 42,419 -- 42,420
Net income -- -- 619 619
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 1 42,419 619 43,039
Equity contributions -- 10,080 -- 10,080
Net loss (Note 2) -- -- (4,681) (4,681)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1999 (Note 2) 1 52,499 (4,062) 48,438
Net loss -- -- (16,659) (16,659)
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 2000 $ 1 $ 52,499 $ (20,721) $ 31,779
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
42
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND
THE PREDECESSOR ARE NOT COMPARABLE IN CERTAIN RESPECTS.
(Dollars in Thousands)
THE
PREDECESSOR THE COMPANY
------------ ---------------------------------------------
January 1, May 16, 1998
1998 to to Year Ended December 31,
May 15, December 31, ---------------------------
1998 1998 1999 2000
------------- ------------- ---------- ---------
(Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,051 $ 619 $ (4,681) $ (16,659)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 576 3,547 10,128 12,993
Amortization of debt discount -- -- 197 685
Gain on disposal of fixed assets -- -- (37) --
Deferred income taxes (919) (959) 547 (6,515)
Write-off of existing finance costs, net -- -- 1,654 511
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (3,686) 1,401 (6,482) 582
Inventories 1,198 (3,464) (3,518) (3,634)
Other current assets 501 (770) (1,407) 1,563
Income taxes receivable -- -- (4,112) 2,807
Bank overdraft (131) -- -- --
Accounts payable 2,719 265 (762) 2,200
Accrued liabilities 1,704 936 853 (1,970)
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities 3,013 1,575 (7,620) (7,437)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,188) (2,819) (4,642) (4,290)
Proceeds on disposal of fixed assets -- 1,053 10 --
Cash paid for acquisitions -- (130,380) (60,685) (670)
--------- --------- --------- ---------
Net cash used in investing activities (1,188) (132,146) (65,317) (4,960)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations -- 94,376 182,727 55,987
Principal payments on long-term obligations -- (2,362) (113,713) (37,232)
Changes in payable to parent (1,825) -- -- --
Financing costs -- (1,850) (6,811) (750)
Proceeds from issuance of common stock -- 42,420 -- --
Equity contributions -- -- 10,080 --
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities $ (1,825) $ 132,584 $ 72,283 $ 18,005
--------- --------- --------- ---------
(Continued)
F-6
43
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND
THE PREDECESSOR ARE NOT COMPARABLE IN CERTAIN RESPECTS.
(Dollars in Thousands)
(Continued)
THE
PREDECESSOR THE COMPANY
------------- ----------------------------------------------
January 1, May 16, 1998
1998 to to Year Ended December 31,
May 15, December 31, ---------------------------
1998 1998 1999 2000
------------ ------------- --------- ---------
NET CHANGE IN CASH $ -- $ 2,013 $ (654) $ 5,608
BALANCE AT BEGINNING OF PERIOD -- -- 2,013 1,359
--------- --------- --------- ---------
BALANCE AT END OF PERIOD $ -- $ 2,013 $ 1,359 $ 6,967
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ -- $ 3,818 $ 6,581 $ 21,095
========= ========= ========= =========
Cash paid (received) for income taxes $ -- $ 2,350 $ 2,921 $ (4,354)
========= ========= ========= =========
NONCASH TRANSACTIONS:
Transfer of assets to parent $ (1,594) $ -- $ -- $ --
========= ========= ========= =========
Issuance of debt for distribution facility under
capital lease $ -- $ -- $ 2,395 $ 237
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
44
HOLLEY PERFORMANCE PRODUCTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
1. ORGANIZATION AND BASIS OF PRESENTATION
Holley Performance Products Inc. ("Holley") is incorporated under the laws of
Delaware and headquartered in Bowling Green, Kentucky. Holley and its
wholly-owned subsidiaries (referred to collectively as the "Company") 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, the Company 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.
The Company incurred net losses in 1999 and 2000. Management is continually
evaluating the performance of the Company's business both in the aggregate and
at the separate divisional levels. 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.
Management believes that the Company will be in compliance with the revolving
credit facility's quarterly financial ratio covenants during 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.
Effective May 15, 1998, all outstanding shares of Holley common stock were
purchased by KHPP Acquisition Corporation ("KHPP"), a wholly-owned subsidiary of
KHPP Holdings Corporation ("Holdings"), for $100,000 (the "Acquisition"). At the
time of the Acquisition, KHPP was merged into Holley. The consolidated balance
sheets as of December 31, 1999 and 2000, and the consolidated statements of
operations, stockholder's equity and cash flows for the period from May 16, 1998
to December 31, 1998, and for the years ended December 31, 1999 and 2000,
reflect the accounts of Holley subsequent to the change in ownership which
resulted from the Acquisition. The Acquisition was accounted for using the
purchase method of accounting. The allocation of purchase price was allocated
based upon the fair value of the net assets acquired (Note 3).
Prior to January 1, 1996, Holley was a division of Coltec Industries, Inc.
("Coltec"). Effective January 1, 1996, Holley was incorporated, and from January
1, 1996 to May 15, 1998, Holley was a wholly-owned subsidiary of Coltec. The
statements of operations, stockholder's equity and cash flows for the period
from January 1, 1998 to May 15, 1998, are the financial statements of Holley
when it was a wholly-owned subsidiary of Coltec (referred to herein as the
"Predecessor"). The Acquisition and the related application of purchase
accounting (Note 3) resulted in changes to the capital structure of the
Predecessor and the historical basis of various assets and liabilities. The
effect of such changes significantly impairs the comparability of the results of
operations of Holley and the Predecessor.
F-8
45
In August of 1998, Holley purchased the outstanding common stock of Weiand
Automotive Industries, Inc. ("Weiand") and, in October of 1998, Holley purchased
a group of companies under common ownership: Lunati Cams, Inc., Lunati & Taylor
Pistons, Inc., and LMT Motor Sports Corporation (referred to collectively as
"Lunati"). Weiand is a manufacturer and distributor of induction systems, and
Lunati is a manufacturer of camshafts, crankshafts, pistons and automotive
specialty parts. Both Weiand and Lunati sell their products to automotive parts
retailers throughout the United States.
In July of 1999, Holley purchased the outstanding common stock 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 common stock 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Holley and its wholly-owned subsidiaries - Weiand, Lunati, Hooker, FlowTech, NOS
and Earl's. All significant intercompany transactions and balances between
Holley and its subsidiaries have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments, purchased with
an original maturity of three months or less.
REVENUES AND ACCOUNTS RECEIVABLE
The Company's customers are located throughout the United States and operate
primarily in the automotive parts and specialty automotive equipment parts
industries. The Company generally grants credit to customers on an unsecured
basis. Revenues from sales are recognized at the time products are shipped to
the customer. Estimated sales returns and allowances are recorded as a charge
against revenue in the period in which the related sales are recognized.
Accounts receivable represent receivables from customers in the ordinary course
of business. The Company is subject to losses from uncollectible receivables in
excess of its reserves. The Company's management believes that all appropriate
reserves have been provided.
INVENTORIES
Cost elements included in inventory are material, labor and factory overhead.
Inventories are stated at the lower of cost or market.
During the fourth quarter of 2000, the Company changed its method of determining
the cost of inventories for two of its facilities from the last-in, first-out
("LIFO") method to the first-in, first-out ("FIFO") method. This change was made
to arrive at a consistent costing methodology throughout all of the Company's
facilities. Additionally, management believes the conversion will be useful to
financial statement users because the FIFO method is used by substantially all
of the Company's competitors. This change in accounting had no material impact
on quarterly results and as a result, quarterly information is not restated.
F-9
46
The effect of the change in accounting principle was to reduce the net loss
reported for 1999 and 2000 by $248 and $372, respectively. The change in
accounting principle has been applied to the prior year by retroactively
restating the financial information. The change in accounting principle had no
effect on the period from May 16, 1998 to December 31, 1998, as all inventories
were revalued to fair value at May 16, 1998 in connection with the Acquisition
and, as a result, approximated the FIFO method of determining inventory value as
of December 31, 1998.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment purchased in the Acquisition, as well as the
acquisitions of Holley's subsidiaries, are stated at estimated fair market value
as prescribed by the purchase method of accounting. Subsequent purchases of
property, plant and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which are as follows (in years):
Buildings and improvements 10-45
Machinery and equipment 3-5
Furniture and fixtures 3-10
Computer equipment 3-5
Expenditures for maintenance and repairs are generally charged to expense as
incurred, whereas expenditures for improvements and replacements are
capitalized.
The cost and accumulated depreciation of assets sold or otherwise disposed of
are removed from the accounts and the resulting gain or loss is reflected in the
consolidated statements of operations.
INTANGIBLE ASSETS
Financing costs are amortized over the term of the related outstanding debt
using the effective interest method. The excess of the aggregate purchase price
over the fair value of net assets of businesses acquired (goodwill) is being
amortized on a straight-line basis over a period of 40 years. Trade names are
being amortized on a straight-line basis over their estimated useful lives of 40
years. In connection with acquisitions, the Company has entered into various
covenants not to compete with certain individuals. The estimated values
allocated to such agreements are amortized on a straight-line basis over the
terms of the respective agreements.
Subsequent to an acquisition, the Company continually evaluates whether events
and circumstances have occurred that indicate the remaining estimated useful
life of its intangible assets may warrant revision or that the remaining balance
of such assets may not be recoverable. When factors indicate that such assets
should be evaluated for possible impairment, the Company uses an estimate of the
acquired operation's undiscounted cash flows over the remaining life of the
asset in measuring whether the asset is recoverable.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109. Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the fiscal years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on the deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
F-10
47
Prior to the Acquisition, the Predecessor was included in the consolidated
federal income tax return of Coltec. For financial reporting purposes, the
Predecessor provided income taxes as if it filed separately from Coltec while it
was a subsidiary of Coltec. Subsequent to the Acquisition, the Company will be
included in the consolidated federal income tax return of Holdings.
ACCRUED CLAIMS
The Company is partially self-insured for claims arising from employee health
benefits and, prior to May 16, 1998, was partially self-insured for claims
arising from workers' compensation. Excess insurance coverage is maintained for
per-incident and cumulative liability losses for these risks in amounts
management considers adequate. Amounts are currently accrued for the estimated
cost of claims incurred, including related expenses. Management considers the
accrued liabilities for unsettled claims to be adequate; however, there is no
assurance that the amounts accrued will not vary from the ultimate amounts
incurred upon final disposition of all outstanding claims. As a result, periodic
adjustments to the reserves will be made as events occur which indicate that
changes are necessary.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for employee stock-based compensation using the intrinsic value method as
prescribed in Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. As of December 31,
2000, no options to purchase common stock of the Company have been granted.
PLANT RELOCATION COSTS
Plant relocation costs include expenses related to the closure of acquired
manufacturing facilities and the related movement of inventory and fixed assets
to the Company's manufacturing facilities in Bowling Green, Kentucky or
Aberdeen, Mississippi.
ADVERTISING
Advertising production costs are expensed the first time the advertising takes
place. Total advertising expenses were $436, $958, $2,319 and $3,103 for the
periods from January 1, 1998 to May 15, 1998 and May 16, 1998 to December 31,
1998 and the years ended December 31, 1999 and 2000, respectively, and are
classified as a component of selling expenses in the accompanying consolidated
statements of operations.
SHIPPING AND HANDLING COSTS
Amounts billed to customers for shipping and handling costs are classified as a
component of net sales whereas amounts incurred by the Company for shipping and
handling costs are classified as cost of sales in the accompanying consolidated
statement of operations.
RESEARCH AND DEVELOPMENT COSTS
Research, development, pre-production and start-up costs related to both present
and future products are expensed as incurred. Such costs amounted to $884,
$1,387, $2,380 and $2,170 for the periods from January 1, 1998 to May 15, 1998
and from May 16, 1998 to December 31, 1998, and the years ended December 31,
1999 and 2000, respectively, and are classified as a component of general and
administrative expenses in the accompanying consolidated statements of
operations.
F-11
48
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure 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.
LONG-LIVED ASSETS
When factors are present which indicate the cost of assets may not be recovered,
the Company evaluates the realizability of its long-lived assets based upon the
anticipated future undiscounted cash flows generated by the asset.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments using quoted or
estimated market prices based upon the current interest rate environment and the
remaining term to maturity. At December 31, 1999, there were no material
differences between the book values of the Company's financial instruments and
their related fair values. At December 31, 2000, there were no material
differences between the book values of the Company's financial instruments and
their related fair values except for the fair value of the Company's Senior
notes, which have a carrying value of $145,376 was approximately $75,000.
COMPREHENSIVE INCOME
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 income (loss) for the periods from January 1, 1998 to May 15, 1998
and May 16, 1998 to December 31, 1998 and the years ended December 31, 1999 and
2000 was the same as net income (loss) for the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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.
F-12
49
3. ACQUISITIONS
HOLLEY
The Acquisition was accounted for as a purchase. Accordingly, the accompanying
consolidated financial statements of the Company include the results of
operations of Holley subsequent to May 15, 1998. The purchase price was
$100,000, excluding certain costs related to financing and consummating the
Acquisition. The purchase price was funded from the sale of common stock and the
proceeds from three term notes and a revolving line of credit.
The allocation of the purchase price to the underlying net assets acquired was
based on estimates of the fair value of the net assets as follows:
Purchase price $ 100,000
Financing and other transaction costs 5,511
---------
Total purchase price 105,511
---------
Less: value assigned to assets and liabilities
Current assets 26,266
Property, plant and equipment 17,686
Financing costs 1,700
Trade name 23,180
Deferred tax liability, net (10,179)
Current liabilities (16,867)
Non-current liabilities (814)
---------
40,972
---------
Goodwill $ 64,539
=========
As of the acquisition date, the Predecessor had net working capital of $9,179
and property, plant and equipment of $5,773. The trade name, finance costs and
deferred tax liability shown above resulted from the allocation of the purchase
price and the resulting deferred tax effect.
F-13
50
WEIAND
Effective August 21, 1998, Holley acquired 100% of the outstanding stock of
Weiand for cash of $5,607, excluding certain costs related to consummating the
transaction. The transaction has been accounted for as a purchase. The principal
stockholders of Weiand also entered into covenants not to compete with the
Company. The accompanying consolidated financial statements include the results
of operations of Weiand subsequent to August 21, 1998. The purchase price was
allocated to the assets acquired and liabilities assumed based on their fair
values as follows:
Purchase price $ 5,607
Financing and other transaction costs 115
-------
Total purchase price 5,722
-------
Less: value assigned to assets and liabilities:
Current assets 1,958
Property, plant and equipment 3,957
Covenants not to compete 500
Deferred tax liability, net (1,078)
Long-term debt (1,074)
Current liabilities (873)
-------
3,390
-------
Goodwill $ 2,332
=======
LUNATI
Effective October 29, 1998, Holley acquired 100% of the outstanding stock of
Lunati. The transaction has been accounted for as a purchase. The accompanying
consolidated financial statements include the results of operations of Lunati
subsequent to October 29, 1998. The purchase price was $20,000, excluding
certain costs related to financing and consummating the transaction. The
principal stockholders of Lunati also entered into agreements not to compete
with the Company. The purchase price was allocated to the assets acquired and
liabilities assumed based on their fair values as follows:
Purchase price $ 20,000
Financing and other transaction costs 997
--------
Total purchase price 20,997
--------
Less: value assigned to assets and liabilities:
Current assets 5,683
Property, plant and equipment 5,076
Financing costs 150
Other assets 65
Trade name 5,290
Covenants not to compete 4,000
Deferred tax liabilities, net (4,650)
Current liabilities (386)
Non-current liabilities (441)
--------
14,787
--------
Goodwill $ 6,210
========
F-14
51
HOOKER
Effective July 29, 1999, Holley acquired 100% of the outstanding stock of
Hooker. The transaction has been accounted for as a purchase. The accompanying
consolidated financial statements include the results of operations of Hooker
subsequent to July 29, 1999. The purchase price was $22,082, excluding certain
costs related to financing and consummating the transaction. The principal
stockholders of Hooker also entered into agreements not to compete with the
Company. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as follows:
Purchase price $ 22,082
Financing and other transaction costs 1,406
--------
Total purchase price 23,488
--------
Less: value assigned to assets and liabilities:
Current assets 4,685
Property, plant and equipment 1,993
Financing costs 800
Trade name 3,830
Covenants not to compete 700
Deferred tax liabilities, net (2,091)
Current liabilities (1,956)
--------
7,961
--------
Goodwill $ 15,527
========
FLOWTECH
Effective October 1, 1999, Holley acquired 100% of the outstanding stock of
FlowTech. The transaction has been accounted for as a purchase. The accompanying
consolidated financial statements include the results of operations of FlowTech
subsequent to October 1, 1999. The purchase price was $6,569, excluding certain
costs related to financing and consummating the transaction. The principal
stockholders of FlowTech also entered into covenants not to compete with the
Company. The purchase price was allocated to the assets acquired and liabilities
assumed based on their estimated fair values as follows:
Purchase price $ 6,569
Financing and other transaction costs 306
-------
Total purchase price 6,875
-------
Less: value assigned to assets and liabilities:
Current assets 3,170
Property, plant and equipment 1,339
Other assets 90
Trade name 4,240
Covenants not to compete 800
Deferred tax liabilities, net (1,955)
Current liabilities (1,591)
-------
6,093
-------
Goodwill $ 782
=======
F-15
52
NOS
Effective October 26, 1999, Holley acquired 100% of the outstanding stock of
NOS. The transaction has been accounted for as a purchase. The accompanying
consolidated financial statements include the results of operations of NOS
subsequent to October 26, 1999. The purchase price was $12,500, excluding
certain costs related to financing and consummating the transaction. The
principal stockholders of NOS also entered into covenants not to compete with
the Company. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as follows:
Purchase price $ 12,500
Financing and other transaction costs 386
--------
Total purchase price 12,886
--------
Less: value assigned to assets and liabilities:
Current assets 2,195
Property, plant and equipment 106
Trade name 3,150
Covenants not to compete 1,400
Deferred tax liabilities, net (1,341)
Current liabilities (1,321)
Non-current liabilities (11)
--------
4,178
--------
Goodwill $ 8,708
========
EARL'S
Effective October 28, 1999, Holley acquired 100% of the outstanding stock of
Earl's. The transaction has been accounted for as a purchase. The accompanying
consolidated financial statements include the results of operations of Earl's
subsequent to October 28, 1999. The purchase price was $14,500, excluding
certain costs related to financing and consummating the transaction. The
principal stockholders of Earl's also entered into covenants not to compete with
the Company. The purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as follows:
Purchase price $ 14,500
Financing and other transaction costs 519
--------
Total purchase price 15,019
--------
Less: value assigned to assets and liabilities:
Current assets 4,432
Property, plant and equipment 1,542
Trade name 3,700
Covenants not to compete 1,450
Deferred tax assets, net (999)
Current liabilities (3,723)
--------
6,402
--------
Goodwill $ 8,617
========
In 1999, the Company finalized its purchase price allocations for the
Acquisition and the acquisitions of Weiand and Lunati. In 2000, the Company
finalized its purchase price allocations for the acquisitions of Hooker,
FlowTech, NOS and Earl's, with the primary changes resulting from the allocation
of purchase price to reflect trade names on the acquired entities and the
related deferred tax liabilities.
F-16
53
The following unaudited pro forma information combines the consolidated results
of the Company as if the acquisitions of Holley, Weiand, Lunati, Hooker,
FlowTech, NOS and Earl's had occurred on January 1, 1999. While the Company
believes it will realize certain long-term synergies through the integration of
certain operating functions, there can be no assurances that such synergies can
be realized.
Year Ended
December 31,
1999
------------
(unaudited)
Net sales $ 167,837
=========
Net loss $ (7,084)
=========
4. INVENTORIES
Inventories as of December 31, 1999 and 2000 consisted of the following:
1999 2000
------- -------
Raw materials $16,861 $10,697
Work-in-progress 5,357 7,689
Finished goods 9,394 15,903
Other 311 470
------- -------
$31,923 $34,759
======= =======
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1999 and 2000 consisted of the
following:
1999 2000
------- -------
Land $ 380 $ 360
Buildings and improvements 11,209 11,537
Machinery and equipment 25,525 28,928
Computer equipment 3,501 3,849
Furniture and fixtures 1,348 1,835
Construction in process 763 800
------- -------
42,726 47,309
Less: accumulated depreciation (7,014) (14,518)
------- -------
$35,712 $32,791
======= =======
Depreciation expense was $531, $1,921, $5,592 and $7,451 for the periods from
January 1, 1998 to May 15, 1998 and May 16, 1998 to December 31, 1998 and the
years ended December 31, 1999 and 2000, respectively.
F-17
54
6. INTANGIBLE ASSETS
Intangible assets as of December 31, 1999 and 2000 consisted of the following:
1999 2000
-------- --------
Costs in excess of net assets acquired $117,980 $111,658
Trade names 27,980 42,900
Covenants not to compete 8,150 8,150
Financing costs 5,985 6,191
Other 563 563
-------- --------
160,658 169,462
Less: accumulated amortization (6,335) (12,762)
-------- --------
$154,323 $156,700
======== ========
Amortization, including amortization of finance costs which is classified as
interest expense in the accompanying consolidated statements of operations, was
$45, $1,626, $4,836 and $6,427 for the periods from January 1, 1998 to May 15,
1998 and May 16, 1998 to December 31, 1998 and the years ended December 31, 1999
and 2000, respectively.
7. ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1999 and 2000 consisted of the following:
1999 2000
------- -------
Wages and benefits $ 5,196 $ 4,719
Reserve for product returns 4,294 3,423
Allowance for outstanding rebate programs 1,504 1,856
Interest 5,177 5,391
Other 3,709 3,868
------- -------
$19,880 $19,257
======= =======
8. LONG-TERM DEBT
Long-term debt as of December 31, 1999 and 2000 consisted of the following:
1999 2000
-------- --------
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 (10% at December 31, 2000);
maturing December 28, 2005 $ -- $ 34,650
Revolving line of credit, repaid in full during 2000 17,000 --
Senior notes; interest payable semi-annually in March
and September at 12.25%; maturing September 15,
2007; net of debt discount of $5,284 and $4,624,
respectively 144,716 145,376
Long-term lease obligation 2,330 1,754
Other long-term obligations 659 2,602
-------- --------
164,705 184,382
Less: current portion (257) (3,714)
-------- --------
$164,448 $180,668
======== ========
F-18
55
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"). Beginning in April 2001, the Company will be 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 December 31, 2000,
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.
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 December 31 2000, no
amounts were outstanding or available under the Term Loan as the Company had not
achieved the required minimum financial ratio.
Proceeds from the Revolving Credit Facility were used to repay balances
outstanding under the previous revolving line of credit. Upon repayment of
amounts outstanding under the previous revolving line of credit, the Company
recognized an extraordinary charge to write-off the deferred financing costs of
$825 in 2000. This charge has been included in the accompanying consolidated
statement of operations, net of the associated tax benefit of $314, as an
extraordinary item.
At December 31, 2000, the Company had borrowings of $34,650 outstanding under
the Revolving Credit Facility and $1,350 of unused credit availability.
Beginning in 2001, the Revolving Credit Facility will require the Company to
comply with a minimum interest coverage ratio. 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 will be
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. Upon repayment of amounts outstanding under the
existing indebtedness, the Company recognized an extraordinary charge to
write-off the deferred financing costs of $2,668 in 1999. This charge has been
included in the accompanying consolidated statement of operations, net of the
associated tax benefit of $1,014, as an extraordinary item.
Future maturities of long-term debt for the years following December 31, 2000
are as follows:
2001 $ 3,714
2002 331
2003 336
2004 360
2005 31,621
Thereafter 152,644
---------
Total maturities 189,006
Less debt discount (4,624)
---------
$ 184,382
=========
F-19
56
9. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
THE -------------------------------------------
PREDECESSOR THE COMPANY
------------------ -------------------------------------------
May 16, 1998
January 1, 1998 to Year Ended December 31,
to December 31, -------------------------
May 15, 1998 1998 1999 2000
------------------ ------------- --------- ---------
Current tax expense $ 1,716 $ 1,993 $ -- $ (1,293)
Deferred tax benefit (919) (959) (171) (6,515)
---------- --------- -------- ----------
Income tax provision (benefit) $ 797 $ 1,034 $ (171) $ (7,808)
========== ========= ======== =========
The Company also realized deferred tax benefits of $1,014 in 1999 and $314 in
2000 associated with extraordinary items resulting from the writeoff of deferred
financing costs.
A reconciliation of the U.S. federal statutory rate to the effective rate is as
follows:
THE ------------------------------------------
PREDECESSOR THE COMPANY
------------------ ------------------------------------------
May 16, 1998
January 1, 1998 to Year Ended December 31,
to December 31, -----------------------
May 15, 1998 1998 1999 2000
------------------ ------------- --------- ---------
U.S. federal statutory rate 34.0% 34.0% (34.0%) (34.0%)
State taxes on income, net of
federal benefit 4.0% 4.0% (4.0%) (4.0%)
Expenses not deductible 3.1% 3.4% -- --
Other 2.0% -- 0.4% 1.5%
Non-deductible amortization -- 21.2% 17.5% 3.7%
---- ---- ---- ----
Income tax provision (benefit) 43.1% 62.6% (20.1%) (32.8%)
==== ==== ==== ====
Significant components of deferred tax assets and liabilities are as follows:
1999 2000
-------- --------
Reserves on assets $ 3,648 $ 2,686
LIFO reserve (2,697) (2,523)
Liabilities not yet deductible 3,580 3,351
-------- --------
Total current deferred income taxes, net 4,531 3,514
-------- --------
Other 418 204
Trade name (10,216) (15,194)
Covenants not to compete (2,635) (1,517)
Property, plant and equipment (6,970) (5,644)
Net operating loss carryforwards -- 5,310
-------- --------
Total noncurrent deferred income taxes, net (19,403) (16,841)
-------- --------
Total net deferred liability $(14,872) $(13,327)
======== ========
F-20
57
At December 31, 2000, the Company had net operating loss carryforwards of
$13,974 that expire beginning in 2019.
SFAS No. 109 requires the Company to record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax assets will
not be realized." The ultimate realization of deferred income tax assets depends
on the Company's ability to generate sufficient taxable income in the future. If
the Company is unable to generate sufficient taxable income in the future
through operating results or tax planning opportunities, increases in the
valuation allowance will be required through a charge to expense (decreasing
stockholder's equity).
10. BENEFIT PLANS
HOLLEY 401(K) PLAN
Effective May 16, 1998, Holley established a 401(k) savings plans for salaried
and non-salaried employees. Participation in the plans is optional.
Employer contributions to the plans are discretionary. During the period from
May 16, 1998 to December 31, 1998 and the years ended December 31, 1999 and
2000, the Company's contribution expense related to these plans totaled $375,
$865 and $956, respectively.
LUNATI 401(K) PLAN
Lunati maintains a profit sharing and a 401(k) savings plan for its employees.
Employer contributions to the plan are discretionary. During the period from
October 29, 1998 to December 31, 1998 and the years ended December 31, 1999 and
2000, the Company made no contributions to this plan.
DEFINED BENEFIT PENSION PLAN
Effective May 16, 1998, the Company established a defined benefit pension plan
for its employees. The Projected Unit Credit Actuarial Cost Method is used to
determine the normal cost of the pension plan and estimate pension benefit
obligations.
1999 2000
------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of period $ 3,120 $ 3,913
Service cost 928 1,126
Interest cost 263 249
Benefit payments (36) (228)
Actuarial gain (549) (770)
Prior service costs 187 --
------- -------
Benefit obligation, end of period $ 3,913 $ 4,290
======= =======
FAIR VALUE OF PLAN ASSETS
Fair value of plan assets, beginning of period $ -- $ 521
Employer contributions 550 1,460
Return on assets 7 (15)
Benefit payments (36) (228)
------- -------
Fair value of plan assets, end of period $ 521 $ 1,738
======= =======
F-21
58
1999 2000
------- -------
FUNDED STATUS
Funded status $(3,913) $(2,552)
Plan assets 521 --
Unrecognized prior service costs 187 173
Unrecognized actuarial (gain) loss 307 (349)
------- -------
Net accrued benefit liability recognized $(2,898) $(2,728)
======= =======
May 16, 1998
to YEAR ENDED DECEMBER 31
December 31, -----------------------
1998 1999 2000
------------ ------ -------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $560 $ 928 $ 1,126
Interest cost 75 263 249
Expected return on plan assets -- -- (99)
Amortization of prior service cost -- -- 15
---- ------ -------
Net periodic benefit cost $635 $1,191 $ 1,291
==== ====== =======
The actuarial assumptions include a discount rate of 7.25% and an annual rate of
compensation increase of 4% as of December 31, 2000.
Prior to May 16, 1998, the Predecessor participated in the defined benefit
pension plan of Coltec. Under this plan, eligible retired employees were
provided certain health care and life insurance benefits, with some of those
retirees paying a portion of the related costs. The Company's liability under
this plan was not separately calculated; therefore, expense is reflected based
on cash funding requirements. Company contributions to the plan totaled $0 for
the period from January 1, 1998 to May 15, 1998.
11. LEASE COMMITMENTS
The aggregate future minimum fixed lease obligations under operating leases for
the Company as of December 31, 2000, are as follows:
OPERATING
LEASES
---------
2001 $ 1,713
2002 1,420
2003 835
2004 603
2005 150
Thereafter 506
---------
Total minimum lease payments $ 5,227
=========
Total rent expense for the Company's operating leases was approximately $215,
$444, $1,280 and $2,374 for the periods from January 1, 1998 to May 15, 1998 and
May 16, 1998 to December 31, 1998 and the years ended December 31, 1999 and
2000, respectively.
F-22
59
12. MAJOR CUSTOMERS
The Company's customers include many large and well-known automotive parts
retailers and distributors. One customer, Auto Sales, Inc. (d/b/a Summit
Racing), represented 13.8%, 13.5% and 13.4% of total sales from May 16, 1998 to
December 31, 1998 and the years ended December 31, 1999 and 2000, respectively.
Approximately 3.8% and 2.3% of the Company's accounts receivable at December 31,
1999 and 2000, respectively, were from this customer. Management believes the
credit risk associated with this customer is minimal.
13. COMMITMENTS AND CONTINGENCIES
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 same action, Joan F. Weiand, owner of the
property on which the facility which was operated by Weiand is located and a
co-defendant in this case, filed a cross-complaint against Weiand for breach of
written indemnity and declaratory relief. Ms. Weiand alleged that written leases
pursuant to which Weiand leased the facility for its operations obligated Weiand
to indemnify Joan Weiand for the claims alleged by Union Pacific against Ms.
Weiand.
During 2000, Weiand 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.
Under the terms of the settlement agreements, Weiand is also required 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. An escrow account totaling $550 has been established for this matter
using insurance proceeds. Based on the results of environmental studies
performed, management believes this amount will be adequate to fund anticipated
costs related to this matter.
In October 1998, Southdown, Inc. ("Southdown") filed a claim against
approximately forty parties, including Coltec, for remediation costs incurred
and to be incurred at Southdown's Alabama solvent recycling facility (the
"Facility"). Southdown alleges that the defendants shipped hazardous substances
to the Facility which were released and contributed to contamination at the
Facility. During 2000, the Company reached an agreement in principle with Coltec
under the terms of which the Company will share a portion of the legal costs
related to this matter. Depending upon the ultimate outcome of the litigation,
the Company may bear partial responsibility for any costs that may be allocated
to Coltec, depending upon which facilities, if any, originally held by Coltec
are determined to have contributed to the contamination at the Facility.
In addition to the above matters, 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.
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.
F-23
60
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.
14. RELATED-PARTY TRANSACTIONS
The Company paid a fee of $2,000 to Kohlberg & Co., L.L.C. (the majority
shareholder of Holdings and "Kohlberg") in conjunction with the Acquisition. In
1998, the Company paid fees totaling $750 to Kohlberg in conjunction with the
acquisitions of Weiand and Lunati (Note 3). In 1999, the Company paid fees
totaling $766 to Kohlberg in conjunction with the acquisitions of Hooker,
Flowtech, NOS and Earl's (Note 3). These fees have been capitalized along with
other acquisition costs incurred in the transactions.
Pursuant to a management agreement, Kohlberg provides the Company with general
corporate administrative services. Kohlberg receives a management fee to recover
its operating expenses based upon an allocation of time devoted to the Company.
Prior to May 15, 1998, Coltec's staff and management provided certain operating,
corporate and management services to the Predecessor in exchange for a
management fee. Management believes the fees were fair based on the services
provided.
Subsequent to the Acquisition, Holdings issued 3,668,480 stock options to buy
common stock of Holdings to certain members of management of the Company.
During 1999 and 2000, Holdings issued additional options to members of
management totaling 150,000 and 575,000, respectively. The options are
exercisable at prices ranging from $1.50 to $2.25 per share, which represents
estimated fair value at the date of grant, and vest at the end of nine years or
at an accelerated rate if certain performance measurements are met. During 2000
and in January 2001, 513,608 and 888,235 options, respectively, were forfeited
prior to vesting. As of December 31, 2000, 2,991,637 options remain outstanding.
15. ROYALTY AGREEMENT
Effective December 31, 1997, the Predecessor entered into a License Agreement
(the "Agreement") with Coltec. Under the terms of the Agreement, Coltec granted
the Predecessor the use of certain intellectual property, including but not
limited to copyrights, patents, and trademarks, in exchange for a fee. Fees paid
to Coltec under this Agreement from January 1, 1998 to May 15, 1998 totaled
$1,054 and are included in other expense in the accompanying consolidated
statements of operations. The agreement terminated on May 15, 1998 in connection
with the Acquisition.
16. 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: High Performance Parts and
Remanufactured Parts. The Company manufactures high performance aftermarket
automotive parts through its High 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 policies of the reportable segments are the same as those
described in Note 2. The Company evaluates the performance of its reportable
segments based on gross margin. Intersegment sales and transfers are not
significant.
F-24
61
Summarized financial information concerning the Company's operating measures for
the reportable segments are shown in the following table:
HIGH
PERFORMANCE REMANUFACTURED
PARTS PARTS TOTAL
=========== ================ =========
THE PREDECESSOR
---------------------------------------------------------
JANUARY 1, 1998 TO MAY 15, 1998
Revenues $ 26,651 $ 9,981 $ 36,632
Gross margin 8,901 2,003 10,904
THE COMPANY
---------------------------------------------------------
MAY 16, 1998 TO DECEMBER 31, 1998
Revenues $ 47,032 $ 17,699 $ 64,731
Gross margin 15,339 5,123 20,462
YEAR ENDED DECEMBER 31, 1999
Revenues $ 104,562 $ 25,529 $ 130,091
Gross margin 35,373 6,991 42,364
YEAR ENDED DECEMBER 31, 2000
Revenues $ 139,669 $ 23,834 $ 163,503
Gross margin 43,789 5,494 49,283
Summary balance sheet data for inventory and property, plant and equipment for
each of the Company's reportable segments as of December 31, 1999 and 2000 are
shown in the following table:
HIGH
PERFORMANCE REMANUFACTURED
PARTS PARTS TOTAL
=========== ================ =========
AS OF DECEMBER 31, 1999
Inventories $ 27,615 $ 4,308 $ 31,923
Property, plant and equipment 33,043 2,669 35,712
AS OF DECEMBER 31, 2000
Inventories $ 31,108 $ 3,651 $ 34,759
Property, plant and equipment 30,467 2,324 32,791
17. KEY SUPPLIER
The Company is dependent on one supplier for the zinc castings used in its
production process. Purchases from this supplier account for approximately 12%,
12% and 9% of annual raw material purchases for the twelve month periods ended
December 31, 1998, 1999 and 2000, respectively.
F-25
62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Holley Performance Products Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the accompanying consolidated balance sheets of HOLLEY
PERFORMANCE PRODUCTS INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1999 and 2000 and the related consolidated statements of
operations, stockholder's equity and cash flows for the period from inception,
May 16, 1998, to December 31, 1998 and the years ended December 31, 1999 and
2000. We have also audited the accompanying statements of income, stockholder's
equity and cash flows of the Predecessor (businesses identified in Note 1) for
the period from January 1, 1998 to May 15, 1998 included in this Form 10-K and
have issued our report thereon dated March 9, 2001.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedule of valuation and
qualifying accounts is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. The information presented in this schedule as of and for the periods
ended May 15, 1998, December 31, 1998, December 31, 1999 and December 31, 2000
has been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects, the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Arthur Andersen LLP
Nashville, Tennessee
March 9, 2001
S-1
63
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS DEDUCTIONS RESERVES BALANCE AT
CLASSIFICATION PERIOD AND EXPENSES FROM RESERVED ACQUIRED END OF PERIOD
- ---------------------------------------- ------------ ---------------- ------------- -------- -------------
Allowance for doubtful accounts;
For the year ended December 31, 2000 $1,293 $ 322 $ (651) - $ 964
For the year ended December 31, 1999 1,686 100 (769) 276 1,293
For the period from May 16, 1998
to December 31, 1998 1,575 397 (286) - 1,686
For the period from January 1, 1998
to May 15, 1998 1,118 457 - - 1,575
Allowance for outstanding rebate programs:
For the year ended December 31, 2000 $1,504 $ 5,273 $(4,921) $ - $1,856
For the year ended December 31, 1999 1,434 3,831 (3,761) - 1,504
For the period from May 16, 1998
to December 31, 1998 1,071 1,940 (1,577) - 1,434
For the period from January 1, 1998
to May 15, 1998 467 1,193 (589) - 1,071
Reserve for product returns:
For the year ended December 31, 2000 $4,294 $ - $ (871) $ - $3,423
For the year ended December 31, 1999 3,894 200 - 200 4,294
For the period from May 16, 1998
to December 31, 1998 3,629 265 - - 3,894
For the period from January 1, 1998
to May 15, 1998 3,706 - (77) - 3,629