10-Q 1 e10-q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 33-73247 GENERAC PORTABLE PRODUCTS, INC. GENERAC PORTABLE PRODUCTS, LLC GPPW, INC. (EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS) DELAWARE 13-4006887 DELAWARE 39-1932782 WISCONSIN 13-4012695 (STATE OR OTHER JURISDICTION (I.R.S EMPLOYER OF INCORPORATION OR IDENTIFICATION NUMBERS) ORGANIZATION) 1 GENERAC WAY JEFFERSON, WISCONSIN 53549 (920) 674-3750 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No The number of shares of common stock of Generac Portable Products, Inc. and GPPW, Inc. outstanding as of August 10, 2000 is as follows: Generac Portable Products, Inc. 8,500 GPPW, Inc. 1,000 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENERAC PORTABLE PRODUCTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN 000'S, EXCEPT SHARE DATA)

The accompanying notes are an integral part of the financial statements. 3 GENERAC PORTABLE PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (AMOUNTS IN $000'S)

The accompanying notes are an integral part of the financial statements. 4 GENERAC PORTABLE PRODUCTS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (AMOUNTS IN $000'S)

The accompanying notes are an integral part of the financial statements. 5 GENERAC PORTABLE PRODUCTS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JULY 1, 2000 (DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED) 1. BASIS OF PRESENTATION Generac Portable Products, Inc. (together with its subsidiaries, including Generac Portable Products, LLC and GPPW, Inc. on a consolidated basis, "Generac" or the "company"), has domestic operations located in Jefferson, Wisconsin and branch operations in the United Kingdom, Germany and Spain, and is a leader in the design, manufacture and sale of portable generators and pressure washers for use in both industrial and residential applications. Generac sells primarily to large home center retailers throughout the United States, Canada and Europe. These financial statements have been prepared by Generac pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") and, in the opinion of Generac's management, include all adjustments (all of which are normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows of Generac for the interim periods presented. These financial statements include the accounts of Generac's wholly owned subsidiaries, and all significant intercompany transactions have been eliminated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed and omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with Generac's audited financial statements for the year ended December 31, 1999 included in the company's Form 10-K as filed with the SEC on March 29, 2000. 2. INVENTORIES Inventories consist of the following:

3. INCOME TAXES Generac recorded an income tax provision (benefit) by estimating the annual effective income tax rate and applying that rate to pretax income (loss). 6 4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS In the normal course of business, Generac is involved in certain legal actions and claims. Management believes that such litigation and claims will be resolved without material adverse effect on Generac's financial position, results of operations or cash flows. In connection with the purchase by Generac Portable Products, LLC of substantially all of the assets of the Portable Products Division (the "Predecessor") of Generac Power Systems, Inc. ("GPSI"), formerly known as Generac Corporation, on July 9, 1998 (the "Acquisition"), Generac entered into an OEM engine supply agreement with GPSI to supply the company with the engine used in certain of Generac's pressure washers and portable generators. The engine supply agreement allows for Generac to make minimum purchases of engines from GPSI in each of the next nine years and gives Generac the right to increase the amount of purchases based upon forecasted requirements. This agreement is an exclusive arrangement related to such products subject to the minimum purchase requirements. As Generac maintains relationships with other major engine suppliers, management believes that the minimum purchase quantities and unit prices under this agreement will not have an adverse effect on Generac. Management also considers the provisions of the engine supply agreement to reflect arms-length terms. The following schedule reflects approximate purchases by Generac of GPSI product under this agreement and other components for the quarterly and year-to-date periods ended July 1, 2000 and June 30, 1999:

Included in accounts payable are amounts due to GPSI of approximately $.9 million and $6.7 million at July 1, 2000 and December 31, 1999, respectively. On September 29, 1999, Generac commenced an arbitration against GPSI, entitled In the Matter of An Arbitration Between Generac Portable Products, Inc. and Generac Power Systems, Inc., formerly known as Generac Corporation, under the auspices of the American Arbitration Association in Milwaukee, Wisconsin. The dispute concerned the respective rights of the company and GPSI to manufacture and sell in the retail market portable generators with an output level greater than ten kilowatts and home standby stationary generators. The company alleged that GPSI had improperly taken the position with both the company and the company's retail customers that a mutual agreement not to compete executed by the parties in connection with the Acquisition prohibits the company from manufacturing or selling those products. It was 7 the company's position that the noncompete agreement did not preclude the company from manufacturing or selling those products to retailers and that the parties'contractual arrangements precluded GPSI from interfering with the company's rights to do so by, among other things, attempting to sell home standby stationary generators to retailers, including the company's retail customers. On May 18, 2000, the company and GPSI reached an agreement which amended and further clarified the original non-compete agreement between the two companies. The agreement provides that, among other things, the company has the right to manufacture and sell certain portable air-cooled generators and air-cooled home standby generators up to and including twenty kilowatts, GPSI is restricted from manufacturing any portable air-cooled generator below 12.5 kilowatts and the company will pay a 2% royalty to GPSI on sales of home standby stationary generators in excess of $15 million during the term of the agreement. The company capitalized costs incurred in conjunction with the development of the amended non-compete agreement approximating $702, and will amortize these costs over the remaining life of the non-compete agreement. 5. COMPREHENSIVE INCOME (LOSS) Components of total comprehensive income (loss) for the periods ended July 1, 2000 and June 30, 1999, consist of the following:

Accumulated other comprehensive income and loss is comprised entirely of foreign currency translation adjustments. 8 6. SEPARATE FINANCIAL INFORMATION OF CO-ISSUERS AND GUARANTOR OF THE NOTES In connection with the Acquisition, Generac Portable Products, LLC and GPPW, Inc. ("GPPW") co-issued $110 million of 11 1/4% senior subordinated notes due 2006 (the "Notes") which are guaranteed by Generac Portable Products, Inc. While Generac Portable Products, LLC and GPPW are jointly and severally liable for the obligations under the Notes, GPPW does not conduct any operations, or have any assets of any kind other than its investment in Generac Portable Products, LLC. The following unaudited condensed supplemental consolidating financial information as of July 1, 2000 and December 31, 1999 and for the periods ended July 1, 2000 and June 30, 1999, reflects the investments of Generac Portable Products, Inc., GPPW and GPPD, Inc. ("GPPD") in Generac Portable Products, LLC using the equity method. Generac Portable Products, Inc., GPPW and GPPD are dependent upon Generac Portable Products, LLC for cash flows to fund their income tax liabilities arising from their respective investments. GPPW and GPPD are wholly-owned subsidiaries of Generac Portable Products, Inc., and GPPW and GPPD hold a 5% and 95% ownership interest in Generac Portable Products, LLC, respectively.

10 7. LONG-TERM DEBT OBLIGATIONS Effective May 10, 2000, the company amended its credit facility which, among other things, revised requirements relating to certain financial ratios and tests, including maximum levels of leverage, minimum levels of interest coverage and minimum required levels of earnings before interest, income taxes, depreciation and amortization. Effective May 30, 2000, Generac obtained a commitment from The Beacon Group III - Focus Value Fund, L.P. (the "Fund"), its majority stockholder, to purchase up to $10 million of newly issued shares of convertible preferred stock of Generac. This commitment requires the Fund to purchase the preferred stock only upon Generac's election, which may occur at any point prior to October 15, 2000. If Generac chooses to issue the preferred stock, the proceeds from the Fund's purchase will be used to repay the principal of, and interest on, revolving indebtedness under Generac's credit facility. The Company anticipates that the decreased portable generator demand, discussed in "Management's Discussion and Analysis of Results of Operations" following later in this document, will continue into the third quarter 2000, which could result at the end of the third quarter 2000 in the company's non-compliance with certain financial performance covenants contained in the company's amended credit facility. Consequently, the company is currently discussing with its lenders revisions to these financial performance covenants, which would include changes to ratios and tests relating to maximum levels of leverage, minimum levels of interest coverage and minimum required levels of earnings before interest, income taxes, depreciation and amortization. Although the future non-compliance with financial performance covenants in the credit facility could allow the lenders to demand at the time immediate payment of all amounts outstanding under the credit facility, based upon discussions with its lenders to date, the company anticipates a satisfactory revision of these requirements before the end of October 2000. 8. SEGMENT INFORMATION Generac is a leader in the design, manufacture and sale of portable generators and pressure washers. Engineering, manufacturing, marketing and administrative resources are generally not product specific and Generac evaluates operating performance based upon the combined results of these product lines. Information regarding Generac's geographic areas is summarized below: 11

Generac sells primarily to large home center retailers. Three customers accounted for approximately 74% of net sales for the quarterly and year-to-date periods ended July 1, 2000. Each of these three customers individually comprised more than 10% of Generac's net sales for the respective periods. Accounts receivable from these three customers approximated $32,943 at July 1, 2000. Two customers accounted for approximately 61% and 63% of net sales for the quarterly and year-to-date periods ended June 30, 1999, respectively. Both customers individually comprised more than 10% of Generac's net sales for the respective periods. Accounts receivable from these two customers approximated $29,314 at December 31, 1999. 9. CHANGE IN INTERIM ACCOUNTING PERIODS During the year-to-date period ended July 1, 2000, Generac changed its interim accounting period from a calendar quarter-end to a 13-week period. Consequently, the second quarter of 2000 covers the period from April 2, 2000 to July 1, 2000 and year-to-date 2000 covers the period from January 1, 2000 to July 1, 2000. Subsequent quarterly financial periods will also be 13 weeks. The company's fourth quarter-end and fiscal year-end will continue to be December 31, 2000. This change did not have a material effect on reported results for the quarter and year-to-date periods ended July 1, 2000, and the company does not believe that this change in interim accounting periods will have a material effect on its interim financial statements of future periods. 10. STOCK SPLITS On May 20, 1999, the company effected a 1,250 for one common stock split and on May 28, 1999, the company effected a 1.189 for one common stock split. On June 9, 2000, the company effected a one for 1,486.25 reverse common stock split. All share information in these consolidated financial statements has been retroactively adjusted to reflect these stock splits. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included as part of the company's Form 10-K as filed with the SEC on March 29, 2000. This report on Form 10-Q includes forward-looking statements based on management's current expectations. Reference is made in particular to the description of the company's plans and objectives for future operations, assumptions underlying such plans and objectives and other forward-looking statements in this report. Such forward-looking statements generally are identifiable by words such as "believes," "intends," "estimates," "expects," and similar expressions. Although management believes that the expectations reflected in the forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither management nor any other person assumes responsibility for the accuracy and completeness of such statements. OVERVIEW Generac is a leader in the design, manufacture and sale of portable generators and pressure washers for use in both consumer and commercial applications. Generac has domestic operations located in Jefferson, Wisconsin and branch operations in the United Kingdom, Germany and Spain. Generac sells primarily to large home center retailers throughout the United States, Canada and Europe. References to "Generac" or the "company" means Generac Portable Products, Inc. and its subsidiaries, on a consolidated basis and, as the context requires, Generac's Predecessor. The "Predecessor" refers to the Portable Products Division of GPSI. The table below sets forth the company's results of operations for the periods indicated. Included in the table is a presentation of EBITDA, which represents earnings before interest, taxes, depreciation, amortization and certain other non-recurring charges. EBITDA is a widely recognized financial indicator of a company's ability to service or incur debt. EBITDA is not a measure of operating performance computed in accordance with generally accepted accounting principles and should not be considered as a substitute for operating performance computed in accordance with generally accepted accounting principles or as a substitute for operating income, net income, cash flows from operations, or other statement of operations or cash flow data prepared in accordance with generally accepted accounting principles, or as a measure of profitability or liquidity. In addition, EBITDA may not be comparable to similarly titled measures of other companies. EBITDA may not be indicative of the company's historical operating results or of the company's Predecessor, nor is it meant to be predictive of future results of operations or cash flows. See also the statement of cash flows contained within the financial statements included elsewhere in this document. 13 RESULTS OF OPERATIONS

QUARTER ENDED JULY 1, 2000 COMPARED TO THE QUARTER ENDED JUNE 30, 1999 Net sales. Net sales decreased $26.1 million or 24.7%, to $79.5 million for the quarter ended July 1, 2000 from $105.6 million for the quarter ended June 30, 1999. Domestic sales decreased $23.1 million, or 24.0%, to $73.3 million for the quarter ended July 1, 2000 from $96.4 million for the quarter ended June 30, 1999. This decrease was primarily reflective of increased demand for generators during 1999 resulting from consumer concerns relating to possible Year 2000 power outages. These consumer concerns were not present during the quarter ended July 1, 2000, which combined with significant generator inventory levels at retail customer locations has resulted in a lower volume of customer orders for generators. The decrease in generator sales was partially offset by an increase in pressure washer sales due primarily to the introduction of pressure washer products at Sam's Club and an expanded pressure washer product offering at Sears. International sales decreased $3.0 million, or 32.6%, to $6.2 million for the quarter ended July 1, 2000 from $9.2 million for the quarter ended June 30, 1999. This decrease was primarily reflective of increased generator sales in 1999 by the company's branch in the United Kingdom to meet the demand of existing domestic customers as described above. This decrease in sales was partially offset by increased generator sales into Spain resulting primarily from the establishment of branch operations in Spain during July 1999. Gross profit. Gross profit decreased $12.3 million, or 42.9%, to $16.4 million for the quarter ended July 1, 2000 from $28.7 million for the quarter ended June 30, 1999. This decrease was reflective of decreased overall sales as described above and decreased gross margins due to a greater sales mix of lower margin pressure washers. Gross profit margin 14 decreased to 20.6% for the quarter ended July 1, 2000 from 27.2% for the quarter ended June 30, 1999. Operating expenses. Operating expenses decreased $3.5 million, or 21.9%, to $12.5 million for the quarter ended July 1, 2000 from $16.0 million for the quarter ended June 30, 1999. The decrease was due primarily to decreases in both selling and service expenses and general and administrative expenses. Selling and service expenses decreased due to decreases in selling and distribution costs that are impacted by sales volume. The decrease in general and administrative expenses was primarily reflective of a decrease in costs incurred to support the company's new business software which was implemented during 1999 and headcount reductions made during 2000 to more appropriately match the company's sales volume. As a percentage of sales, operating expenses increased to 15.7% for the quarter ended July 1, 2000 from 15.2% for the quarter ended June 30, 1999. Net income (loss). Net income decreased $5.0 million to a net loss of $1.1 million for the quarter ended July 1, 2000 from net income of $3.9 million for the quarter ended June 30, 1999. This decrease in net income was primarily due to the decreased availability of operating earnings, resulting from decreased sales volumes combined with lower gross margins, to cover certain fixed charges. This decrease in net income was partially offset by approximately $1.2 million in costs incurred during 1999 in conjunction with the company's planned initial public offering of its common stock, which was withdrawn in July 1999. As a percentage of sales, net income decreased to a net loss of (1.4)% for the quarter ended July 1, 2000 from net income of 3.7% for the quarter ended June 30, 1999. EBITDA. EBITDA decreased $8.4 million, or 57.1%, to $6.3 million for the quarter ended July 1, 2000 from $14.7 million for the quarter ended June 30, 1999. This decrease was due to decreased sales volumes and gross margins as described above. As a percentage of sales, EBITDA decreased to 7.9% for the quarter ended July 1, 2000 from 13.9% for the quarter ended June 30, 1999. YEAR-TO-DATE PERIOD ENDED JULY 1, 2000 COMPARED TO THE YEAR-TO-DATE PERIOD ENDED JUNE 30, 1999 Net sales. Net sales decreased $45.9 million or 23.1%, to $152.6 million for the year-to-date period ended July 1, 2000 from $198.5 million for the year-to-date period ended June 30, 1999. Domestic sales decreased $44.5 million, or 24.1%, to $139.8 million for the year-to-date period ended July 1, 2000 from $184.3 million for the year-to-date period ended June 30, 1999. This decrease was primarily reflective of increased demand for generators during 1999 resulting from consumer concerns relating to possible Year 2000 power outages. These consumer concerns were not present during the year-to-date period ended July 1, 2000, which combined with significant generator inventory levels at retail customer locations has resulted in a lower volume of customer orders for generators. The decrease in generator sales was partially offset by 15 an increase in pressure washer sales due primarily to the introduction of pressure washer products at Sam's Club and an expanded pressure washer product offering at Sears. International sales decreased $1.4 million, or 9.9%, to $12.8 million for the year-to-date period ended July 1, 2000 from $14.2 million for the year-to-date period ended June 30, 1999. This decrease was primarily reflective of increased generator sales in 1999 by the company's branch in the United Kingdom to meet the demand of existing domestic customers as described above. This decrease in sales was partially offset by increased generator sales to home center retailers in Germany and an increase in generator sales into Spain resulting primarily from the establishment of branch operations in Spain during July 1999. Gross profit. Gross profit decreased $20.3 million, or 38.4%, to $32.6 million for the year-to-date period ended July 1, 2000 from $52.9 million for the year-to-date period ended June 30, 1999. This decrease was reflective of decreased overall sales as described above and decreased gross margins due to a greater sales mix of lower margin pressure washers. Gross profit margin decreased to 21.4% for the year-to-date period ended July 1, 2000 from 26.6% for the year-to-date period ended June 30, 1999. Operating expenses. Operating expenses decreased $4.8 million, or 15.7%, to $25.7 million for the year-to-date period ended July 1, 2000 from $30.5 million for the year-to-date period ended June 30, 1999. The decrease was due primarily to decreases in both selling and service expenses and general and administrative expenses. Selling and service expenses decreased due to decreases in selling and distribution costs that are impacted by sales volume. The decrease in general and administrative expenses was primarily reflective of a decrease in costs incurred to support the company's new business software which was implemented during 1999 and headcount reductions made during 2000 to more appropriately match the company's sales volume. As a percentage of sales, operating expenses increased to 16.8% for the year-to-date period ended July 1, 2000 from 15.4% for the year-to-date period ended June 30, 1999. Net income (loss). Net income decreased $9.3 million to a net loss of $2.6 million for the year-to-date period ended July 1, 2000 from net income of $6.7 million for the year-to-date period ended June 30, 1999. This decrease in net income was primarily due to the decreased availability of operating earnings, resulting from decreased sales volumes combined with lower gross margins, to cover certain fixed charges. This decrease in net income was partially offset by approximately $1.2 million in costs incurred during 1999 in conjunction with the company's planned initial public offering of its common stock, which was withdrawn in July 1999. As a percentage of sales, net income decreased to a net loss of (1.7)% for the year-to-date period ended July 1, 2000 from net income of 3.4% for the year-to-date period ended June 30, 1999. EBITDA. EBITDA decreased $14.5 million, or 55.3%, to $11.7 million for the year-to-date period ended July 1, 2000 from $26.2 million for the year-to-date period ended June 30, 1999. This decrease was due to decreased sales volumes and gross margins as described above. As a percentage of sales, EBITDA decreased to 7.7% for the year-to-date period ended July 1, 2000 from 13.2% for the year-to-date period ended June 30, 1999. 16 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES AT JULY 1, 2000 To finance its capital expenditure program and fund its operational and liquidity needs, Generac has relied principally on cash flow generated from operations and borrowings under the $30.0 million revolving credit portion of the company's $115 million credit facility between it and its lenders, with Bankers Trust Company as administrative agent. Generac's principal uses of liquidity are to meet debt service requirements, finance its capital expenditures and provide working capital. Effective May 30, 2000, Generac obtained a commitment from The Beacon Group III - Focus Value Fund, L.P. (the "Fund"), its majority stockholder, to purchase up to $10 million of newly issued shares of convertible preferred stock of Generac. This commitment requires the Fund to purchase the preferred stock only upon Generac's election, which may occur at any point prior to October 15, 2000. If Generac chooses to issue the preferred stock, the proceeds from the Fund's purchase will be used to repay the principal of, and interest on, revolving indebtedness under Generac's credit facility. At July 1, 2000, Generac had approximately $203.5 million of outstanding debt, including $110.0 million of senior notes payable, $91.9 million under its credit facility (including $18.9 million under the revolving credit portion) and $1.6 million under capital lease obligations. In addition, as of July 1, 2000, Generac had available cash of approximately $1.4 million. Cash used in operating activities totaled $10.2 million during the year-to-date period ended July 1, 2000 compared to cash used of approximately $.6 million during the year-to-date period ended June 30, 1999. The activity in operating cash flows during the first two quarters of 2000 was primarily a result of the decreased net income, higher levels of inventory for generators and related components resulting from low levels of customer orders and a decrease in accrued liabilities resulting primarily from the settlement of significant 1999 year-end sales incentives with the company's major customers. This increase was partially offset by other timing differences relating to supplier payments and customer receipts. Due to seasonal factors related to pressure washer sales, the company's level of receivables and inventory is typically highest during the first and second quarters of the year as compared to levels during the third and fourth quarters of the year. Capital expenditures totaled $2.5 million and $6.5 million for the year-to-date periods ended July 1, 2000 and June 30, 1999, respectively. Capital expenditures during the first two quarters of 2000 related primarily to new production machinery and costs incurred to update management information systems. Generac expects to spend approximately $.5 million throughout the remainder of 2000 for various capital projects, including cost improvement and quality enhancement initiatives and updating management information systems. Generac spent approximately $1.4 million and $1.2 million on research and development during the year-to-date periods ended July 1, 2000 and June 30, 1999, respectively. Effective May 10, 2000, the company amended its credit facility which, among other things, revised requirements relating to certain financial ratios and tests, including maximum 17 levels of leverage, minimum levels of interest coverage and minimum required levels of earnings before interest, income taxes, depreciation and amortization. The Company anticipates that the decreased portable generator demand discussed previously will continue into the third quarter 2000, which could result at the end of the third quarter 2000 in the company's non-compliance with certain financial performance covenants contained in the company's amended credit facility. Consequently, the company is currently discussing with its lenders revisions to these financial performance covenants, which would include changes to ratios and tests relating to maximum levels of leverage, minimum levels of interest coverage and minimum required levels of earnings before interest, income taxes, depreciation and amortization. Although the future non-compliance with financial performance covenants in the credit facility could allow the lenders to demand at the time immediate payment of all amounts outstanding under the credit facility, based upon discussions with its lenders to date, the company anticipates a satisfactory revision of these requirements before the end of October 2000. The company expects its principal sources of liquidity to be from its operating activities and funding from the revolving portion of the amended credit facility. Furthermore, as discussed above, the company has the option to sell $10 million in preferred convertible stock if needed to support its liquidity needs. Based upon the current level of operations and anticipated activities, Generac believes that future cash flow from operations, together with available borrowings under the amended credit facility and proceeds from the sale of preferred securities will be adequate to meet Generac's anticipated requirements for capital expenditures, working capital, interest payments and scheduled principal payments for at least the next 12 months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Generac is exposed to market risk from changes in interest rates and, to a lesser extent, foreign exchange rates and commodities. To reduce such risks, Generac selectively uses derivative financial instruments. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of derivative financial instruments for trading purposes. There have been no material changes in the company's market risk exposures from the end of the fiscal year ended December 31, 1999 (as set forth in the company's Form 10-K as filed with the SEC on March 29, 2000) to April 1, 2000. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, Generac is subject to legal proceedings and other claims arising in the ordinary course of its business. Generac maintains insurance coverage against claims in the amount which it believes to be adequate. Generac believes that it is not presently a party to any 18 litigation the outcome of which would have a material adverse effect on its financial condition, the results of operations or cash flows. On September 29, 1999, Generac commenced an arbitration against GPSI, entitled In the Matter of An Arbitration Between Generac Portable Products, Inc. and Generac Power Systems, Inc., formerly known as Generac Corporation, under the auspices of the American Arbitration Association in Milwaukee, Wisconsin. The dispute concerned the respective rights of the company and GPSI to manufacture and sell in the retail market portable generators with an output level greater than ten kilowatts and home standby stationary generators. The company alleged that GPSI had improperly taken the position with both the company and the company's retail customers that a mutual agreement not to compete executed by the parties in connection with the Acquisition prohibits the company from manufacturing or selling those products. It was the company's position that the noncompete agreement did not preclude the company from manufacturing or selling those products to retailers and that the parties' contractual arrangements precluded GPSI from interfering with the company's rights to do so by, among other things, attempting to sell home standby stationary generators to retailers, including the company's retail customers. On May 18, 2000, the company and GPSI reached an agreement which amended and further clarified the original non-compete agreement between the two companies. The agreement provides that, among other things, the company has the right to manufacture and sell certain portable air-cooled generators and air-cooled home standby generators up to and including twenty kilowatts, GPSI is restricted from manufacturing any portable air-cooled generator below 12.5 kilowatts and the company will pay a 2% royalty to GPSI on sales of home standby stationary generators in excess of $15 million during the term of the agreement. The company capitalized costs incurred in conjunction with the development of the amended non-compete agreement approximating $702, and will amortize these costs over the remaining life of the non-compete agreement. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 20, 1999, the company effected a 1,250 for one common stock split and on May 28, 1999, the company effected a 1.189 for one common stock split. On June 9, 2000, the company effected a one for 1,486.25 reverse common stock split. All share information in these consolidated financial statements has been retroactively adjusted to reflect these stock splits. 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Description ------- ----------- 10.1 Third Amendment, dated as of May 10, 2000, to Credit Agreement dated July 9, 1998 among Generac Portable Products, LLC, Generac Portable Products, Inc., GPPW, Inc., various banks and Bankers Trust Company, as administrative agent. 27.1 Financial Data Schedule (b) No current reports on Form 8-K were filed during the quarter ended July 1, 2000. 20 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. GENERAC PORTABLE PRODUCTS, INC. (Registrant) Date August 14, 2000 By /s/ ERIC R. WILKINSON --------------------------------------------- Eric R. Wilkinson PRESIDENT (Authorized officer and principal financial officer) GENERAC PORTABLE PRODUCTS, LLC (Registrant) Date August 14, 2000 By /s/ DORRANCE J. NOONAN, JR --------------------------------------------- Dorrance J. Noonan, Jr. PRESIDENT AND CHIEF EXECUTIVE OFFICER Date August 14, 2000 By /s/ GARY J. LATO --------------------------------------------- Gary J. Lato CHIEF FINANCIAL OFFICER GPPW, INC. (Registrant) Date August 14, 2000 By /s/ FAITH ROSENFELD --------------------------------------------- Faith Rosenfeld PRESIDENT (Authorized officer and principal financial officer)

GENERAC PORTABLE PRODUCTS INC 10-Q