PRESTOLITE ELECTRIC HOLDING INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

COMMISSION FILE NUMBER 333-49429-01

PRESTOLITE ELECTRIC HOLDING, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 94-3142033
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

2311 GREEN RD., STE B, ANN ARBOR, MICHIGAN 48105
(Address of principal executive offices) (Zip Code)

(734) 913-6600
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, address, and former fiscal year, if changed since last report)

Indicate 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 the filing requirements for
the past 90 days.

Yes X No ____

As of March 28, 2002, there were 1,985,000 shares of the registrant's
common stock outstanding. There is no public market for the registrant's common
stock.

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This annual report on Form 10-K of Prestolite Electric Holding, Inc.
includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements other than statements of
historical fact included in this report may contain forward-looking statements.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or "continue" or the negative thereof or
variations thereon or similar terminology. Such forward-looking statements are
based upon information currently available in which our management shares its
knowledge and judgment about factors that they believe may materially affect our
performance. We make the forward-looking statements in good faith and believe
them to have a reasonable basis. However, such statements are speculative, speak
only as of the date made and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results could vary
materially from those anticipated, estimated or expected. Factors that might
cause actual results to differ materially from those in such forward-looking
statements include, but are not limited to, those discussed in Item 1.
"Business -- Risk Factors" and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations." All subsequent written and oral
statements that we make are qualified in their entirety by these factors.

Readers are urged to carefully review and consider disclosures made in this
and other reports that we file with the Securities and Exchange Commission that
discuss factors germane to our business.

PART I

ITEM 1. BUSINESS

We are a global manufacturer and distributor of alternators and starter
motors for heavy duty, automotive, defense and industrial markets. We sell our
products primarily to the aftermarket and original equipment manufacturers
("OEMs"). On January 22, 1998, we acquired three businesses from a subsidiary of
LucasVarity plc. As a result of the Lucas acquisition, we consolidated a
leadership position in our primary markets, expanded our global reach and
improved our aftermarket distribution capabilities. We conduct our business
through our operating subsidiary Prestolite Electric Incorporated and its
subsidiaries.

We believe that our position in our primary markets can be attributed to
the following factors:

Product Quality and Brand Recognition. We believe our products are
generally recognized by our customers as superior based on their advanced
technology, reliability, durability and quality.

Attractive Aftermarket/Original Equipment Balance. In 2001 approximately
42% of our net sales were to OEM customers and 58% to aftermarket customers. The
aftermarket is generally a more stable source of sales and generates higher
margins than sales to our OEM customers. See "-- Risk Factors -- We depend on
original equipment manufacturers, whose businesses are cyclical." We believe
that our aftermarket and original equipment businesses are complementary and
provide us with a competitive advantage in meeting customer needs and in
maintaining the high levels of expertise necessary to compete successfully in
both markets. The engineering and manufacturing capabilities necessary to meet
the requirements for original equipment technology and quality are transferable
to our aftermarket operations. The use of our products as original components in
OEM products is a major factor in generating aftermarket demand. Further, the
understanding of replacement activity gained through the aftermarket enhances
our understanding of the needs of OEMs. See "-- Market Dynamics."

Applied Technological and Engineering Capabilities. We have built an
engineering team with in-depth design and application experience, which allows
us to introduce innovative new products and applications. Product design,
development and application are performed by dedicated engineering teams, which
work closely with customers to design products and systems that meet each
customer's specifications.

International Presence. We currently conduct business in the United States,
the United Kingdom, South Africa, China and Argentina. Approximately 55% of our
net sales in 2001 were to customers outside of North America. As our original
equipment customers expand their manufacturing operations in foreign countries,
we expect that these customers will increasingly turn to suppliers who can
support their locally-manufactured OEM products and aftermarket requirements.
See "-- Risk Factors -- We have risks because of foreign operations."

PRODUCTS

We manufacture and distribute alternators and starter motors, primarily for
use in heavy duty vehicles and automobiles. Our products are also used in a
broad range of industrial applications.

Alternators. We manufacture alternators and regulators primarily for heavy
duty applications, generally under the Leece-Neville or Prestolite brand names,
and for automotive applications. Alternators are electric generators that
produce rectified direct current. Alternator output is directly related to frame
size, or diameter. We manufacture alternators in sizes ranging from 5 inches to
8 9/16 inches for use in off-road vehicles, refrigerated trucks, trucks,
generator sets, military vehicles, buses and special purpose vehicles such as
ambulances. We produce smaller alternators for a wide variety of cars, light to
medium trucks and agricultural vehicles.

Starter Motors. We manufacture a full line of starter motors which includes
products designed for the lower-end and mid-size segments of the market. In the
United Kingdom, we manufacture a range of heavy duty starter motors which are
sold primarily for trucks, buses and generator sets. Through the Lucas
acquisition we added starter motors for automobiles and light commercial
vehicles.

1

Other Products. Other products we manufacture include ignition
distributors, the TrekStar line of speedometers and odometers, in-line diesel
pumps, and Thermostart brand pre-heaters for diesel engines. We also
redistribute in Argentina and South Africa a range of automotive products
manufactured by third parties.

MARKETS

Market Dynamics

Aftermarket. The aftermarket consists of the production and sale of both
new and remanufactured parts used in the maintenance and repair of vehicles. Our
aftermarket distribution channels consist of:

- the aftermarket arms of original equipment suppliers;

- independent distributors, who supply repair shops, dealers and retailers;
and

- government agencies that directly purchase our aftermarket products.

Our newly-manufactured aftermarket products compete with remanufactured
products, which consist of used components that are reassembled into finished
products. Distribution through independent distributors is an additional
important element of the aftermarket. Although the distributors' share of the
North American and European aftermarket has declined in recent years,
independent distributors remain an important distribution channel for us.

Original Equipment. The original equipment market consists of the
production and sale of new component parts for use in the manufacture of new
vehicles or equipment. Original equipment sales are generally made to the
vehicle OEM, although some sales may be to another component manufacturer which
in turn supplies the OEM. In response to pressure to improve product quality,
shorten design cycles and reduce capital spending, production and inventory
costs, OEMs are increasingly outsourcing design and production of non-strategic
components.

Markets Served

We sell our products to a variety of markets, including:

Heavy Duty. The heavy duty market includes heavy duty trucks, school and
shuttle buses, emergency vehicles, off-road and special purpose vehicles,
refrigerated trucks and generator sets. Our heavy duty products are designed
primarily for use with diesel engines, generally 2.5 liters or larger.

Automotive. Products sold to automobile OEMs are primarily starter motors
and alternators in Argentina and South Africa.

Defense. Our products sold to the defense market include alternators and
starter motors for use in military vehicles.

Industrial, Marine and Other Applications. These sales include starter
motors and alternators for marine and other applications.

Independent Distribution. A portion of sales to each of our markets are
through independent distributors. About half of our automotive sales through
these distribution networks represents products manufactured by third parties
and purchased by us for resale.

CUSTOMERS AND COMPETITION

Most of our products are component parts used on diesel or gasoline
engines. Vehicle components often do not last for the entire life of the
vehicle. As a result, sales are made to both aftermarket and original equipment
customers. Our sales to OEM customers represented approximately 42% of our 2001
net sales, with the remaining sales derived from aftermarket customers.

No single customer individually accounts for more than ten percent of our
consolidated revenues.

2

We operate in highly competitive markets. While no single competitor
competes with us in all of our product lines, we face significant competition in
each of our product lines. In addition, we are under constant pressure from our
major OEM customers to reduce product costs. We believe that our experience in
engineering and implementing cost reduction programs and our ability to develop
new and improved products and to control manufacturing and development costs
should allow our products and prices to remain competitive. See "-- Risk
Factors -- We face substantial competition."

Delco Remy International Inc. is our principal competitor in the North
American market for truck alternators and starter motors in both the OEM and
aftermarket segments. Some national and many local remanufacturers also compete
in the aftermarket segment. Our principal competitor in the North American
transportation refrigeration and off-road portions of the market for heavy duty
alternators is Bosch. Bosch is also our principal competitor in the European
market for truck and bus alternators and starters. Our principal competitors in
the South African and Argentine OEM market include Bosch and other international
corporations that import into those markets. C.E. Niehoff is our major
competitor in the North American market for military alternators. Our principal
competitors in the market for high-amperage (165 to 320 ampere) commercial
alternators are Lestek and Powerline. At the lower end of the heavy duty
alternator market, automotive-based designs and foreign competitors are a
significant factor.

DISCONTINUED OPERATIONS

In August of 2000 we sold our direct current motor business, switch
business and battery charger business. As discussed in Note 3 of our audited
financial statements, these businesses generated approximately $71.3 million of
sales in 1999 and $44.0 million of sales during the seven months of our
ownership in 2000. We treat these as "discontinued operations" in the financial
statements. Consequently, they are not included in the discussion above and the
sales of these businesses are not included in the consolidated sales shown in
our financial statements.

Products of our discontinued businesses included:

- Material handling motors, 5 to 13 inches in diameter, generally designed
for a specific forklift truck model.

- Pump and winch motors, 4.5 inches in diameter, generally used in
hydraulic pump operations.

- Motors, 3.3 inches in diameter, used for back-up braking systems on
school busses and other applications.

- Battery chargers, sold under the Hobart brand name, generally used in the
material handling market.

- Switches, sold to a wide variety of markets, including material handling
and automotive.

We sold these businesses for a total contract price of $62.0 million, less
certain receivables and subject to certain adjustments. The adjusted sale price
was approximately $57.4 million.

SEASONALITY, RAW MATERIALS AND BACKLOG

Our sales to OEMs accounted for approximately 42% of our net sales for the
year ended December 31, 2001. As a result, a significant portion of our sales
are related to the overall level of domestic and foreign vehicle production. New
vehicle sales and production are cyclical and can be affected by the strength of
the economy generally or in specific regions, by prevailing interest rates and
other factors which may have an effect on our sales. In addition, strikes,
lock-outs, work stoppages or other production interruptions in the vehicle
industries may adversely affect the demand for our products. The balance of our
aftermarket and OEM sales, as well as the diversity of our OEM markets served
(both in terms of end-use and geography), help stabilize our revenues. However,
a decline in the demand for or production of new vehicles could have a
materially adverse effect on our results of operations. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

3

Principal raw materials for our business include copper, aluminum, steel
and electronic components. All materials are readily available from a number of
suppliers, and we do not foresee any difficulty in obtaining adequate inventory
supplies.

The majority of our products are not on a backlog status. They are produced
from readily available materials and have a relatively short manufacturing
cycle.

PATENTS, TRADEMARKS AND LICENSES

We hold various patents and trademarks related to our products. No single
patent or trademark is currently of material importance to our operations. We
have applied for U.S. patents for our self-diagnostic alternator and for the use
of a conductive bearing to replace brushes in alternators and other rotating
machines.

We have the exclusive right to use the "Prestolite Electric" trade name for
use with alternator and starter motors. "Prestolite Wire", "Prestolite
Batteries", "Prestolite Motors", and "Prestolite Switches" are sold by unrelated
companies. We formerly had the right to the "Prestolite Electric" name under a
perpetual, royalty-free license from AlliedSignal Corporation (now Honeywell
Incorporated). At the end of 1999, we formed a limited liability company which
acquired the rights to the "Prestolite" name from AlliedSignal. Lucas Industries
plc retained all rights to the "Lucas" trade name and logo and certain other
trademarks following the Lucas acquisition. We are permitted for a transition
period to brand products sold by us in Argentina and South Africa with certain
Lucas trademarks.

On April 8, 1998, we entered into an agreement with Hitachi, Ltd., a
Japanese corporation, for a seven-year non-exclusive, non-transferable license
to manufacture and sell certain starter motors and alternators utilizing
Hitachi's proprietary technology in exchange for a one-time fee of Y30.0 million
(approximately $0.2 million as of that date) and royalty payments based on the
net sales of such products.

EMPLOYEES

We had approximately 2,000 employees as of December 31, 2001. There are no
collective bargaining agreements in effect with respect to any of our United
States employees. All of the hourly employees at our United Kingdom, South
African, Argentine, and Chinese facilities are members of unions. We have not
experienced a strike or work stoppage at any of our facilities, except in South
Africa. The actions in South Africa were part of nationwide, industry-wide
actions that included our facility. We cannot assure you that a strike or work
stoppage will not occur in the future at any of our facilities.

RISK FACTORS

In addition to other information in this annual report on Form 10-K,
readers evaluating us and our business should carefully consider the following
risk factors for our company as a whole. These risks may impair our results of
operations and business prospects. The risks set forth below and elsewhere in
this annual report on Form 10-K could cause actual results to differ materially
from those that we project.

We depend on original equipment manufacturers, whose businesses are cyclical.

Our sales to OEMs accounted for approximately 42% of our net sales for the
year ended December 31, 2001. As a result, a significant portion of our sales
are related to the overall level of domestic and foreign vehicle production. New
vehicle sales and production are cyclical and can be affected by the strength of
the economy generally or in specific regions, by prevailing interest rates and
other factors. In addition, strikes, lock-outs, work stoppages or other
production interruptions in the vehicle or material handling industries may
adversely affect the demand for our products. A decline in the demand for or
production of new vehicles could materially adversely affect our results of
operations. In addition, we are under increasing pressure from our major OEM
customers to reduce product costs. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

4

We have risks because of our foreign operations.

We currently conduct business in the United States, the United Kingdom,
South Africa, China and Argentina. Approximately 55% of our net sales in 2001
were to customers outside of North America. Adverse results from our foreign
operations could adversely affect our results of operations. The success of our
international operations will depend on numerous factors, many of which are
beyond our control, including economic and political conditions in the countries
in which we operate. In particular, Argentina and South Africa have historically
been less economically and politically stable than the United States and the
United Kingdom. International operations may also increase our exposure to
certain risks inherent in doing business outside the United States, including
slower payment cycles, unexpected changes in regulatory requirements,
potentially adverse tax consequences, restrictions on the repatriation of
profits and assets and compliance with foreign laws and standards.

In addition, most of our employees outside of the United States are
represented by labor unions. We cannot assure you that a strike or work stoppage
will not occur or that actions taken by us will not adversely affect our
relations with our unionized employees.

We have risks related to currency fluctuations.

Due to our operations outside of the United States we experience foreign
currency exchange gains and losses. Fluctuations between the United States
dollar and other currencies may adversely affect our results of operations.
While we may engage in foreign currency hedging transactions which may moderate
the overall effect of such currency exchange rate fluctuations, we expect that
we will be affected by such fluctuations, and we cannot assure you that we will
be successful in any hedging activities. We also cannot assure you that such
exchange rate fluctuations will not cause significant fluctuations in quarterly
results of operations. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

We face substantial competition.

We operate in highly competitive markets. While no single company competes
with us in all of our product lines, we face significant competition in each of
our product lines. Many of our competitors are significantly larger and have
substantially greater financial and other resources, and we cannot assure you
that our products will continue to compete successfully.

We may have exposure under our warranties.

We warrant to our customers that our products are defect-free and meet
certain specifications. These customers in turn often offer warranties to their
customers on the products they sell, including products of our OEM customers
which include our products as component parts. As a result, we receive claims
and requests for payment from our customers to remedy complaints made by the
ultimate consumers. We cannot assure you that additional warranty claims or
requests for payment would not materially adversely affect our results of
operations.

We depend on our key personnel.

Our performance depends in part upon the continued service of our executive
officers, including P. Kim Packard, our chief executive officer. The loss of the
services of any of our key employees could materially adversely affect our
results of operations. We do not maintain a "key man" life insurance policy on
any of our executives or employees. Our future success also depends on the
ability to identify, hire, train, and retain other highly qualified technical
and managerial personnel. Competition for qualified personnel is intense, and we
cannot assure you that we will be able to attract or retain necessary personnel
in the future. Failure to attract and retain the necessary technical and
managerial personnel could materially adversely affect our results of
operations.

5

We face environmental risks.

Our operations and properties are subject to various environmental laws.
The nature of our operations exposes us to the risk that we will be liable for
environmental matters, including off-site disposal matters. We cannot assure you
that we will not incur material costs in connection with environmental
liabilities or that the contractual indemnities provided by the sellers of the
acquired businesses will be applicable or available.

We believe that we comply with all relevant environmental laws and that we
have properly recorded the costs related to any known environmental claims
related to our properties. Based upon our experience to date, we believe that
the future cost of compliance with existing environmental laws (or liability for
known environmental claims) will not materially adversely affect our results of
operations. However, future events may give rise to additional compliance costs
or liabilities that could have a materially adverse affect on our results of
operations. We may be required in the future to spend material amounts to comply
with more stringent laws, as well as more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws.

We are highly leveraged and have significant debts which we may be unable to
pay.

We have a significant amount of debt. As a result, we are highly leveraged
and have significant interest expense. In addition, subject to the restrictions
contained in the Indenture governing our senior notes and in our bank credit
facilities, we may incur additional debt from time to time to pay for
acquisitions or capital expenditures or for other purposes. As of December 31,
2001, we had $112.2 million of consolidated indebtedness outstanding and our
stockholders' deficit was approximately $25.3 million.

Our ability to make scheduled payments of principal or interest on, or to
refinance, our debt will depend on future operating performance and cash flow.
Our operating performance and cash flow are subject to prevailing economic
conditions, prevailing interest rate levels and financial, competitive, business
and other factors which may be beyond our control. The degree to which we are
leveraged could have important consequences to holders of our senior notes,
including, but not limited to, those discussed below under "-- Our debt
agreements have restrictive covenants and limitations" and:

- our ability to obtain additional financing may be impaired;

- a substantial portion of our cash flow from operations must be dedicated
to paying interest on our debt which reduces funds available to us for
other purposes;

- we are substantially more leveraged than certain of our competitors which
may place us at a competitive disadvantage;

- we may be hindered in our ability to adjust rapidly to changing market
conditions;

- our substantial degree of leverage may affect certain suppliers'
willingness to give us favorable payment terms; and

- our substantial leverage could make us more vulnerable in the event of an
economic downturn.

We cannot assure you that our future cash flow will be sufficient to meet
our obligations and commitments. If we cannot generate sufficient cash flow from
operations to service our debt and to meet our other obligations and
commitments, we might be required to refinance our debt or to sell assets to
obtain the funds we need. We cannot assure you that refinancing or asset sales
could be completed on a timely basis or on satisfactory terms, if at all, or
would be permitted by the terms of our credit facilities or the Indenture. In
the event that we are unable to refinance our credit facilities or raise funds
through asset sales, sales of equity securities or otherwise, our ability to pay
principal of, and interest on, our senior notes would be adversely affected.

6

Our debt agreements have restrictive covenants and limitations.

Our credit facilities in the United States and United Kingdom include
certain negative covenants and restrictions on our actions including, without
limitation, restrictions on:

- making investments, loans and advances and paying of dividends and other
restricted payments;

- incurring additional debt;

- granting most liens;

- entering into mergers, consolidations and sales of all or a substantial
part of our business or property;

- selling receivables or repaying other debt; and

- guaranteeing certain obligations.

Our credit facilities also require us to meet certain financial covenants,
including maintaining minimum fixed charge coverage ratios and funded debt
ratios. These restrictive covenants may restrict our ability to expand or to
pursue our business strategies. A breach of any of these covenants could result
in a default under our credit facilities, in which case, debt under our credit
facilities could be declared due and payable. If we were unable to repay
borrowings, the lender could proceed against the collateral granted to it to
secure that debt.

We may not be able to repurchase our senior notes upon a change of control.

Upon the occurrence of a change of control (as defined in the Indenture),
each holder of our senior notes may require us to purchase its senior notes at
101% of their principal amount, plus accrued and unpaid interest, if any, to the
date of repurchase. If we did not purchase our senior notes we would default
under the Indenture. This would permit the trustee under the Indenture or the
holders of at least 25% in principal amount of the outstanding senior notes to
declare the principal and accrued but unpaid interest to be due and payable.

We are controlled by Genstar Capital Corporation.

As of December 31, 2001, Genstar Capital Corporation controlled 96.7%
(83.8% on a fully-diluted basis) of our common stock. Consequently, Genstar has
the ability to control our business and affairs by virtue of its ability to
elect a majority of our board of directors and its voting power with respect to
actions requiring stockholder approval. See Item 12. "Security Ownership of
Certain Beneficial Owners and Management."

7

ITEM 2. PROPERTIES

Our corporate headquarters are located at 2311 Green Road, Ann Arbor,
Michigan 48105, which we lease. The phone number at that location is (734)
913-6600. The following table sets forth certain information regarding the major
facilities we operated as of December 31, 2001:

We continually evaluate our facility requirements and believe that suitable
additional space, if needed, will be available on commercially reasonable terms.
We believe that we comply with all relevant environmental regulations related to
our properties.

ITEM 3. LEGAL PROCEEDINGS

From time to time we are involved in various litigation matters arising in
the ordinary course of our business. Management believes that none of the
matters in which we are currently involved, either individually or in the
aggregate, is or will be material to our future financial condition or results
of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Market Information

There is no established public trading market for our common stock.

As of March 28, 2002, there were 1,985,000 shares of our common stock
outstanding. Management shareholders owned 65,000 shares. The other 1,920,000
shares were in a trust controlled by Genstar Investment Corporation. As of March
28, 2002, there were employee-held options outstanding to purchase up to an
additional 326,660 shares of our common stock.

Dividends

From time to time we may pay dividends from funds that are legally
available to pay dividends. Our ability to declare and pay dividends on our
common stock is restricted by certain covenants. We intend to retain all of our
earnings to finance the development and growth of our business. Accordingly, we
do not anticipate that any dividends will be declared on our common stock for
the foreseeable future. Future payments of cash dividends, if any, will depend
on the financial condition, results of operations, business conditions, capital
requirements, restrictions contained in agreements, future prospects and other
factors deemed relevant by our board of directors.

8

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated historical
financial data as of and for the periods indicated. The statements of operations
data for each of the fiscal years in the three-year period ended December 31,
2001 and the balance sheet data as of December 31, 2000 and 2001 have been
derived from our audited financial statements included elsewhere in this annual
report on Form 10-K, and are restated to account for the discontinuance of
businesses, as discussed above and in Note 3 to our audited financial
statements. The statements of operations data for each of the fiscal years in
the two year period ended December 31, 1998 and the balance sheet data as of
December 31, 1997, 1998 and 1999 have been derived from our audited financial
statements not included in this annual report on Form 10-K, restated to account
for the discontinuance of businesses, as discussed above. The information in the
table should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
annual report on Form 10-K.

9

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a) Other expense (income) consists primarily of pension expense for inactive
United States defined benefit pension plans, gains on the sale of fixed
assets, interest income, royalty expenses, trademark expense.

b) Earnings per common share and shares used in the computation reflect the
20-for-1 stock split effective March 25, 1998.

c) EBITDA for any period is calculated as the sum of income (loss) from
continuing operations plus the following to the extent deducted in
calculating such net income:

- minority interest;

- interest expense;

- income tax expense;

- depreciation expense;

- amortization expense;

- foreign exchange losses;

- charges associated with the repurchase or extension of stock options;

- and other items as shown in Note 19 of the accompanying financial
statements.

We consider EBITDA to be a widely used financial indicator of a company's
ability to service debt, fund capital expenditures and expand its business;
however, EBITDA is not calculated the same by all companies and is not a
measurement required by generally accepted accounting principles. EBITDA
should not be considered by an investor as an alternative to net income, as
an indicator of our operating performance or as an alternative to cash flow
(as defined in accordance with generally accepted accounting principles) as
a measure of liquidity.

d) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before income taxes, discontinued operations and
extraordinary items plus fixed charges. Fixed charges consist of interest
expense and 33% of rental expense (deemed by management to be representative
of the interest factor of rental payments). Earnings were insufficient to
cover fixed charges in 2001 by $11.5 million, in 2000 by approximately $13.8
million, in 1999 by $7.4 million, in 1998 by $4.0 million, and in 1997 by
$4.0 million.

e) Special charges in 2001 are $1.5 million for Argentina bad debt expense and
in 2000 are the costs associated with the write down of the investment in
Ecoair Corp. and two specialty alternator projects.

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We manufacture alternators, starter motors and other items for heavy duty,
automotive, defense and industrial markets. These are supplied under the
"Prestolite," "Leece-Neville," "Lucas," and "Indiel" brand names for original
equipment and aftermarket application on a variety of vehicles and industrial
equipment. ("Lucas" is used under license from a subsidiary of TRW, Inc.) Most
of our products are component parts used on diesel engines and automobiles, sold
to both aftermarket customers and original equipment manufacturers. We sell our
products to a variety of markets, in terms of both end-use and geography.

We operate in five principal geographic regions. Sales from Africa and
South America consist largely of products for the automotive market while sales
of products from North America and Europe consist largely of products for
non-automotive applications. While each region primarily sells in its own area,
no region sells exclusively into its target market. Further, each region has
some sales into the target markets of the other regions. In order to increase
our sales into China, in 2001 we began operation of a joint venture in China,
Prestolite Electric Beijing, Ltd., selling products for both automotive and
heavy duty vehicle applications.

Our North American and European facilities produce alternators, starter
motors, inline pumps, and other products, primarily for installation on diesel
engines used in the heavy duty, defense, marine and industrial markets. These
facilities are located in Arcade, NY; Florence, KY; Garfield, NJ; Acton,
England; and Leyland, England.

The African and South American facilities manufacture automotive
components, primarily alternators and starter motors. These facilities are
located in Johannesburg, South Africa; and in Buenos Aires, San Lorenzo, and San
Luis, Argentina. The Argentina operation also manufactures distributors. In both
South Africa and Argentina more than half of our sales are to the automotive
aftermarket, and about half of those aftermarket sales are products purchased
for resale.

Prestolite Electric Beijing, Ltd. manufactures automotive products in China
and generally relies on our U.S. and U.K. facilities for heavy duty products.

RESULTS OF OPERATIONS

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Sales from continuing operations were $159.3 million in 2001, a decrease of
$12.6 million, or 7.3%, from $171.9 million in 2000. The increase in sales
attributable to the recently established joint venture in China, $8.9 million,
was more than offset by the decreases in sales in our other locations. North
American sales decreased $2.9 million, or 3.7%. European sales decreased $7.3
million, a 16.5% decline. South African sales decreased $3.5 million for a 33.6%
decline, and Argentina sales decreased $6.8 million for an 18.1% decline.
Worldwide economic factors resulted in lower volumes of sales in most locations.
China, being a new market for us, has no comparison to determine an increase or
decrease.

Gross profit was $32.3 million in 2001, or 20.3% of sales. This compares to
gross profit of $32.2 million in 2000, or 18.8% of sales. The increase of gross
profit as a percent of sales is a result of cost savings, an increase in
higher-margin sales in China and a decrease in lower margin sales in Argentina.

Selling, general, and administrative expense was $22.3 million, or 14.0% of
sales in 2001, a decrease of $2.4 million, or 10%, from $24.7 million, or 14.4%
of sales in 2000. Reduction in selling, general, and administrative expense is
attributable to cost savings recognized from continuing programs that offset the
increases resulting from the startup of the China operation.

In 2001, we recorded a charge of $1.5 million to cover anticipated bad debt
charges in Argentina related to the Argentine economic and monetary crisis, as
discussed in Note 2 of our financial statements. We also recorded a charge of
$0.6 million in costs associated with the extension of expiration of options to
purchase company stock issued to specific employees. In 2001, we recorded a
charge for severance of $4.6 million. During 2001 the Company announced and
implemented restructuring plans including employee cutbacks in

11

Argentina and the United Kingdom resulting in severance charges of $2.3 million
and $1.7 million respectively. We also recorded $0.5 million in North America
and $0.1 million in South Africa. In 2000 the Company recorded $2.2 million in
severance charges primarily for employee cutbacks in Argentina and the United
Kingdom. In 2000, we also recorded a charge of $3.5 million to write off the
investment and costs of two specialty alternator projects and $0.2 million in
costs associated with the repurchase of options from departed employees.

Operating income in 2001 was $3.3 million, or 2.1% of sales, an increase of
$1.6 million, or 93.9%, from the $1.7 million, or 1.0% of sales, in 2000. This
was due to the factors discussed above.

Other expense was $78,000 in 2001 compared to other income of $0.6 million
in 2000. This consists primarily of gains on the sale of fixed assets, interest
income, royalty expenses and trademark expense.

Interest expense was $13.2 million in 2001, a decrease of $1.8 million, or
11.9%, compared to $15.0 million in 2000. This decrease is a result of decreases
in debt in the second half of 2000 because of the proceeds of the sale of three
businesses in August, 2000.

The benefit from income taxes was $1.6 million on the $11.5 million loss
from continuing operations before taxes and extraordinary items for 2001. This
compares to a benefit from income taxes of $4.5 million for 2000 on a $13.8
million loss from continuing operations before taxes and an extraordinary item.

Extraordinary income of $0.4 million, net of taxes, was recorded in 2001
related to the gain on the repurchase of senior notes. In 2000, we recorded
extraordinary income of $4.1 million, net of taxes, related to gains on the
repurchase of senior notes.

Effective August 4, 2000, we sold our discontinued businesses, providing
for expected costs related to that transaction. In 2001, we recorded a $1.6
million loss on disposal of discontinued operations, to cover costs related to
the closing of a facility used by Ametek for a period of time after the sale,
but retained by us, and currently categorized as held for sale.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Sales from continuing operations were $171.9 million in 2000, a decrease of
$16.0 million, or 8.5%, from $187.9 million in 1999. These results exclude the
sales of the discontinued businesses of $43.9 million in 2000 and $71.3 million
in 1999 due to the sale of these businesses. The decrease in sales is
attributable to overseas decreases, where European sales declined $7.5 million,
or 14.6%, primarily due to reduced military sales, but also due to the reduced
exchange rates in 2000, and a $1.7 million, or 13.9%, decline in South Africa
mostly due to exchange rate fluctuations in 2000. In North America, sales
declined $7.0 million, or 8.1%, primarily due to reduced aftermarket sales to
our OEM customers. These sales declines were offset by an increase in Argentina
sales of $0.2 million, or 0.6%.

Gross profit was $32.2 million in 2000, or 18.8% of sales. This compares to
gross profit of $36.3 million, or 19.3% of sales, in 1999. The decrease in gross
profit as a percent of sales is a result of lower sales volume, a shift in mix
toward products with lower profit margins and inventory reduction.

Selling, general, and administrative expense was $24.7 million, or 14.4% of
sales in 2000, a decrease of $3.7 million, or 13.2%, from $28.5 million, or
15.2% of sales, in 1999. Reduction in selling, general, and administrative
expense is partially attributable to cost savings recognized from prior and
continuing programs. In conjunction with those cost reductions, we recorded a
$2.2 million charge in 2000 to reflect the cost of severance payments to
terminated employees. The employees in question were terminated or given notice
of termination of employment prior to September 30, 2000. We recorded a charge
in 1999 of $0.5 million to cover severance payments related to restructuring in
Argentina and in the Corporate Tech Center in Ann Arbor, Michigan.

In 2000, we recorded a charge of $3.5 million to write off the investment
and costs of two specialty alternator projects. We also recorded $0.2 million in
costs associated with the repurchase of options to purchase our stock from
departed employees.

12

Operating income in 2000 was $1.7 million, or 1.0% of sales, a decrease of
$5.7 million, or 77.0%, from the $7.3 million, or 3.9% of sales in 1999. This
was due to the factors discussed above.

Other income was $0.6 million in 2000 versus $1.0 in 1999. This consists of
export rebate income, gain on the sale of fixed assets, interest income, and
miscellaneous income. These were partially offset by pension expense for
inactive defined benefit pension plans associated with United States facilities
that have been closed, royalty expenses, and trademark expense.

Interest expense was $15.0 million in 2000, a decrease of $0.8 million, or
5.0%, compared to $15.8 million in 1999. This decrease is a result of decreases
in bank debt and senior notes beginning in the third quarter of 2000. Senior
notes with a face value of $23.1 million were purchased and retired in the
second half of 2000.

The benefit from income taxes was $4.5 million on the $13.8 million loss
from continuing operations before taxes and extraordinary items for 2000. This
compares to a benefit from income taxes of $715,000 for 1999 on a $7.4 million
loss from continuing operations before taxes and an extraordinary item.

Extraordinary income of $4.1 million, net of taxes, was recorded in 2000
related to the gain on the repurchase of the senior notes.

Discontinued Businesses -- 2000 compared to 1999

During 1999, we announced our intention to sell two business segments, the
direct current electric motor business ("DC motors") and the battery charger
business. In conjunction with that decision, we recorded a charge of $2.3
million ($3,561,000 less a tax benefit of $1,261,000) to recognize the expected
loss on the sale of the net assets (including estimated losses through the
disposal date) of one of these business segments.

Effective August 4, 2000, we sold those two businesses plus our switch
business to Ametek, Inc. The $62 million contractual price of this asset sale
will be adjusted for changes in net operating assets from a target amount and
for the sales to a key customer during a three month period of 2001. We estimate
that the adjusted sale price will be approximately $57.4 million, including $7.0
million in escrow at December 31, 2000.

We also committed to provide Ametek with certain services at no charge for
periods of six to twelve months following closing. After providing for the
no-charge services and for other costs related to the transaction, we recorded a
gain on disposition of $23.3 million pretax and $14.5 million after tax.

In our financial statements we treat the DC motor, battery charger, and
switch businesses as discontinued operations. Prior year financial statements,
including 1999 and 1998 earnings per share, have been restated to reflect these
businesses as discontinued operations.

Sales from discontinued operations were $44.0 million in the seven months
of operation in 2000, while sales of these operations were $71.3 million in
1999. Operating and other income (before income tax) in the seven months of 2000
was $3.6 million, while operating income for 1999 was $4.5 million.

Provision for income taxes of $1.3 million for the seven months of 2000 and
$1.6 million for 1999 resulted in after tax income from discontinued operations
of $2.3 million in 2000 and $2.8 million in 1999.

LIQUIDITY AND CAPITAL RESOURCES

Cash used by continuing operating activities in 2001 was $1.3 million
compared to cash usage of $4.9 million in 2000 and $7.3 million in 1999.
Discontinued operations used $1.4 million of cash on 2001 as we provided
transition services associated with the sale of those businesses. That compares
of cash usage related to the discontinued operations of $2.9 million in 2000
(before sale proceeds of $51.6 million) and cash generations from those
operations of $6.2 million in 1999. Capital spending of continuing activities
was $4.6 million in 2001 compared to $6.4 million in 2000 and $6.7 million in
1999. In 2001 capital spending was $2.5 million in the United States, $1.0
million in the United Kingdom, $0.7 million in Argentina and $0.2 million in
South Africa compared to $3.1, $1.0, $1.6, and $0.7 million respectively in
2000. In addition, we spent $0.2 million in china in 2001; we did not have that
operation in 2000. Capital expenditures for 2002 are expected to be
approximately $5 million. These expenditures are primarily for capacity
increases, new product designs, and cost reduction.
13

Debt, net of cash, increased by $6.5 million in 2001. We had revolving
credit facilities in the United States and United Kingdom under which additional
borrowings of $10.7 million and $0.3 million, respectively, were available based
on the December 31, 2001 levels of eligible receivables (United States and
United Kingdom) and inventory (United States only) which are pledged to support
that debt. At the end of 2001, banks in Argentina were generally not lending and
in South Africa, no additional borrowings were available under our South African
credit facility.

Beginning in 1991 the Argentine government maintained the value of its
currency such that one Argentine peso equaled one U.S. dollar. During the second
half of 2001, Argentina suffered a severe economic and monetary crisis. During
most of December 2001 and early January 2002 the banks in Argentina were closed.
On January 14, 2002, the banks reopened and the Argentina peso traded at $0.606
per peso (1.65 pesos per dollar). We used that $0.606 rate to translate the
December 31, 2001 balance sheet of our Argentine subsidiary. We translated the
accompanying income statements for 1999, 2000, and 2001 and the balance sheet at
December 31, 2000 at $1.00 per peso. As the result of using the $0.606 rate, we
recorded a foreign exchange loss of $276,000 and a charge to other comprehensive
income of $6.2 million representing the cumulative translation adjustment. On
March 1, 2002 the peso traded at a value of $0.4706 (2.12 pesos per dollar).
Also, because of the impact of the financial crisis we provided financial
support to our Argentine subsidiary from North America, increasing the amount
lent to that subsidiary by $5.3 million during the year. During 2001 our
Argentine subsidiary reduced the non-debt discounted checks outstanding by $3.7
million and bank debt outstanding by $1.2 million.

Management expects the liquidity needs to be primarily working capital and
scheduled payments under certain contractual obligations. We expect these short
term liquidity needs to be provided by operating cash flows and borrowings under
the revolving credit facilities. The following table provides the contractual
obligations as of December 31, 2001:

- -------------------------
(a) Certain conditions of default under the long-term agreement in the United
Kingdom may allow our United Kingdom bank to cancel debt commitments or to
require repayment of drawn amounts.

(b) Lessors of capital leases have been granted a first priority security
interest in all of the Company's right, title and interest in the equipment
covered under the lease obligations.

We have other commercial commitments that secure foreign purchases, VAT
obligations, custom bonds and insurance coverage. The table below summarizes
these commitments as of December 31, 2001:

- -------------------------
(a) Lines of credit represent the amount outstanding at December 31, 2001 on
credit facilities in the United States, United Kingdom, South Africa and
Argentina. Although the revolving credit agreements may

14

extend beyond one year, note outstanding amounts have been reported in current
liabilities on the balance sheet.

(b) Other commercial commitments include a $1.9 million contribution to the
joint venture, Prestolite Electric Beijing, Ltd.

We do not expect to fund foreign subsidiary operations in 2002, but there
is a risk that economic conditions or country political policy changes may
require transfers of funds to provide for working capital needs. We do not
expect these amounts to be material or affect the availability of funds to
impair the working capital or capital expenditure needs.

In April 2001, we began operating a joint venture in China, Prestolite
Electric Beijing, Ltd. We own 52% of the equity and have committed to provide
$1.9 million in cash by 2004. This joint venture generated sales and operating
income of $8.9 million and $2.0 million, respectively during 2001. However, we
will not be able to repatriate funds until we have contributed the $1.9 million

We expect our liquidity needs to consist primarily of working capital needs
and scheduled payments of principal and interest on our indebtedness. We expect
our short-term liquidity needs to be provided by operating cash flows and
borrowings under our revolving credit facilities. We expect to fund our long
term liquidity needs from our operating cash flows, the issuance of debt and/or
equity securities, or from bank borrowings. We believe that cash flows from
operations, our existing cash balances and amounts available under the various
revolving credit facilities will provide adequate funds for on going operations,
planned capital expenditures, investments, and debt service for at least the
next twelve months. Estimates as to working capital needs and other expenditures
may be materially affected if the foregoing sources are not available or do not
otherwise provide sufficient funds to meet our obligations.

INFLATION

We believe that the relatively moderate inflation over the last few years
has not has a significant impact on our revenues or profitability and that we
have been able to offset the effects of inflation by increasing prices or by
realizing improvements in operating efficiency.

SIGNIFICANT ACCOUNTING POLICIES

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, liabilities, revenues and
expenses. The Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of the
consolidated financial statements.

Estimating valuation allowances, including customer items and
inventory. On a quarterly basis, the Company evaluates its significant reserves
and valuation allowances and makes revisions in estimates as required. The
ultimate cost or loss to the Company changes as additional information regarding
the uncertainty becomes available. The Company considers the following in
establishing these reserves:

- Management analyzes accounts receivable balances on an on-going basis,
including historical bad debt information, customer credit-worthiness and
current economic trends when evaluating the adequacy of the allowances
for accounts receivable. An analysis of the current ageing of accounts
receivable is reviewed on a by customer basis.

- Management analyzes inventory on an on-going basis, including the
adequacy of the reserve for excess and slow moving inventory. Management
utilizes computer modeling techniques to analyze inventory movements but
historical trends involve risk and uncertainties regarding the
anticipated mix of products sold.

Estimating warranty reserves. The Company warrants to their customers that
products are defect-free and meet certain specifications and these customers in
turn often offer warranties to their customers. As a result, the company
receives claims and requests for payments from their customers to remedy
complaints. On an on-going basis management reviews historical trends of the
warranty costs by product and customer and

15

estimates the anticipated liability. The adequacy of the warranty reserve may be
affected by an unanticipated product failure and request for payments from the
customer, but this would not materially adversely affect the results of
operations.

Foreign currency transactions and translations. The Company has significant
operations overseas, located in the United Kingdom, South Africa, Argentina and
China. Management evaluates the appropriate functional currency based on the
volume of intercompany transactions and volume of exports. Each reporting period
the results of operations of the Company's foreign subsidiaries are translated
at the appropriate functional currency (currently the local currency for each
location). Foreign currency translation gains or losses on intercompany loans
that are of a long-term investment nature that are not included in net income
for the period are reported separately as a component of equity. Foreign
currency gains and losses on third party transactions and intercompany
transactions that are not of a long-term investment nature are reported in the
operating statement.

NEW ACCOUNTING PRONOUNCEMENTS

We adopted the provisions of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
effective January 1, 2001. This statement did not have an impact on the
financial results of the Company.

In July 2001 the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 141, "Business Combinations" (SFAS 141), and No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 replaces APB No. 16
and eliminates the pooling-of-interests method for any business combinations
after June 30, 2001. SFAS 142 supercedes APB No. 17 and eliminated the current
requirement to amortize goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with a defined life and
impairment testing and recognition for goodwill and intangible assets. SFAS No.
142 is effective for 2002. Accordingly, we will no longer amortize goodwill of
$3.9 million at December 31, 2001. This goodwill will instead be assessed for
impairment at least annually.

In June and August of 2001, the Financial Accounting Standards Board
approved Statements of Financial Accounting Standards No. 143 "Accounting for
Asset Retirement Obligations" ("SFAS 143") and No. 144 "Accounting for the
Impairment or Disposal of Long Lived Assets" ("SFAS 144") which are effective
January 1, 2003 and January 1, 2002, respectively, for the Company. SFAS 143
requires that an existing legal obligation associated with the retirement of a
tangible long-lived asset be recognized as a liability when incurred and the
amount of the liability be initially measured at fair value. Under SFAS 144, a
single accounting method was established for long-lived assets to be disposed
of. SFAS 144 requires the Company to recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and the loss is the difference between carrying amount and fair
value. The Company is currently reviewing the provisions of SFAS 143 and 144 and
assessing the impact of adoption.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

16

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES

CONTENTS

F-1

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
Prestolite Electric Holding, Inc.

In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, shareholders' equity (deficit), and of cash flows present fairly,
in all material respects, the financial position of Prestolite Electric Holding,
Inc. and its subsidiaries at December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. We did not audit the financial statements of Prestolite Indiel Argentina
S.A., a wholly owned subsidiary, which statements reflect total assets of
$20,497,000 and $37,120,000 as of December 31, 2001 and 2000, respectively, and
total revenues of $33,884,000, $40,785,000 and $39,366,000 for each of the three
years in the period ended December 31, 2001. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts for Prestolite Indiel
Argentina S.A., is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

February 22, 2002
Detroit, Michigan

F-2

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The accompanying notes are an integral part of the consolidated financial
statements.

F-3

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The accompanying notes are an integral part of the consolidated financial
statements.

F-4

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial
statements.

F-5

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial
statements.

F-6

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Prestolite Electric Holding, Inc. ("PEI" "We", "Us" or the "Company"), was
formed in 1991 to acquire substantially all of the assets and assume certain
liabilities of Prestolite Electric Incorporated and its wholly owned
subsidiaries ("Prestolite"). PEI includes the wholly-owned subsidiaries
Prestolite Electric Incorporated and Prestolite Electric of Michigan, Inc. The
wholly-owned subsidiaries of Prestolite Electric Incorporated include Prestolite
Electric Limited, a U.K. corporation; Prestolite Electric (Pty) Ltd., a South
Africa corporation; Prestolite Indiel Argentina S.A., an Argentina corporation;
and Prestolite Electric Holding (China) LLC, a U.S. limited liability company.
Prestolite Electric Holding (China) LLC in turn owns 52% of Prestolite Electric
Beijing Ltd., a Chinese corporation. Operations are generally conducted as
Prestolite Electric Incorporated. There are no material differences between the
financial statements of PEI and Prestolite.

On January 22, 2002, the shares of Prestolite Electric Holding, Inc.
formerly held by Genstar Capital Corporation, the parent company were
distributed to the 39 shareholders of Genstar Capital Corporation. Those shares
were placed into a trust. Under the terms of the trust agreement, all voting
power associated with the shares is exercised by Genstar Capital Corporation.

We manufacture and distribute alternators, starter motors, and other
electrical components for aftermarket and original equipment applications in the
heavy duty vehicle, automotive, defense, material handling, marine, and other
industries. Two manufacturing facilities and one distribution warehouse are
located in the United States; two manufacturing facilities are located in the
United Kingdom; one manufacturing facility is located in South Africa; and three
manufacturing facilities are located in Argentina.

2. ARGENTINA

Beginning in 1991 the Argentine government maintained the value of its
currency such that one Argentine peso equaled one U.S. dollar. During the second
half of 2001, Argentina suffered a severe economic and monetary crisis. During
most of December 2001 and early January 2002 the banks in Argentina were closed.
On January 14, 2002, the banks reopened and the Argentina peso traded at $0.606
per peso (1.65 pesos per dollar). We used that $0.606 rate to translate the
December 31, 2001 balance sheet of our Argentine subsidiary. We translated the
accompanying income statements for 1999, 2000, and 2001 and the balance sheet at
December 31, 2000 at $1.00 per peso. As the result of using the $0.606 rate, we
recorded a foreign exchange loss of $276,000 and a charge to other comprehensive
income of $6.2 million representing the cumulative translation adjustment. On
March 1, 2002 the peso traded at a value of $0.4706 (2.12 pesos per dollar).
Also, because of the impact of the financial crisis on our customers, we
recorded a $1.5 million charge to cover anticipated bad debts in Argentina.

As discussed in Note 11, our practice in Argentina has been to borrow funds
by discounting post-dated checks received from our customers. Because Argentine
banks stopped lending during the second half of 2001, we provided financial
support to our Argentine subsidiary from North America, increasing the amount
lent to that subsidiary by $5.3 million during the year. During 2001 our
Argentine subsidiary reduced the non-debt discounted checks outstanding by $3.7
million and bank debt outstanding by $1.2 million.

3. DISCONTINUED OPERATIONS

During 1999, we announced our intention to sell two business segments, the
direct current electric motor business ("DC motors") and the battery charger
business. In conjunction with that decision, we recorded a charge of $2.3
million ($3.6 million less a tax benefit of $1.3 million) to recognize the
expected loss on the sale of the net assets (including estimated losses through
the disposal date) of one of these business segments.

Effective August 4, 2000, we sold those two businesses plus our switch
businesses to Ametek, Inc. The $62.0 million contractual price of this asset
sale was adjusted for changes in net operating assets from a target

F-7

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. DISCONTINUED OPERATIONS -- (CONTINUED)

amount and for the sales to a key customer during the second quarter of 2001.
The adjusted sale price was approximately $57.4 million, including $3.8 million
in escrow at December 31, 2001.

We also committed to provide Ametek with certain services at no charge for
periods of six to twelve months following closing. After providing for the
no-charge services and for other costs related to the transaction, we recorded a
gain on disposition of $23.3 million before tax and $14.5 million after tax in
2000.

During 2001 we reduced the gain-on-sale by recording a charge of $1.6
million before tax. No tax benefit associated with this charge was recorded as
management believes that realization of those benefits is not probable. A
portion of this change adjusts the carrying value of a manufacturing facility
previously used by some of the operations sold. The charge also includes $0.4
million to write-off receivables and to provide for certain benefits that may
not be delivered to Ametek because of the October 2001 Chapter 11 filing of
Thermadyne Holdings Corporation. Thermadyne, which purchased our welding
equipment business in 1997, shares a facility with the battery charger business
sold to Ametek in 2000. In addition, we guaranteed the lease on the Thermadyne
portion of that facility through October 31, 2006. Annual lease payments are
$447,000. Since its bankruptcy filing Thermadyne has operated and paid rent at
the facility, but has provided no assurance that it will continue to do so. We
have recorded no provision for the contingent lease-guarantee exposure at
December 31, 2001.

Net assets related to discontinued operations at December 31 are summarized
below (in thousands):

Summary financial information related to the discontinued operations is
presented below (in thousands). Amounts for 2000 are through August 4, 2000.

F-8

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of PEI and all
subsidiaries in which we have financial and operating control. All intercompany
accounts and transactions are eliminated in consolidation.

FOREIGN CURRENCY TRANSLATION

The assets and liabilities of foreign subsidiaries have been translated
from their functional currencies into U.S. dollars at the rates of exchange
existing as of the balance sheet date. Revenues and expenses have been
translated at the average monthly exchange rates. Translation adjustments are
recorded as a separate component of stockholders' equity. Transactions in
foreign currencies not settled at the balance sheet date are translated at the
exchange rates prevailing at that date with a resulting charge or credit to
income. Foreign exchange gains and losses related to inter-company obligations
are recorded to the extent they are not considered long term in nature. See also
Note 2.

INVENTORIES

Inventories are stated at the lower of cost or market with cost being
established by the last-in, first-out ("LIFO") method for substantially all
United States inventory and by the first-in, first-out ("FIFO") method for all
inventory located outside the United States. Approximately $28,639,000 and
$30,814,000 of net inventories at December 31, 2001 and 2000, respectively, have
been valued based on FIFO cost.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Costs of maintenance and
repairs are charged to operations when incurred; costs of renewals, betterment,
and additions are capitalized. The cost and accumulated depreciation applicable
to assets retired or sold are removed from the accounts, and the gain or loss on
disposition is recognized as income.

Depreciation is computed on a straight-line basis over the estimated useful
lives of the buildings and improvements (11 to 31) years and the machinery and
equipment (3 to 10 years).

INTANGIBLE ASSETS AND DEFERRED FINANCING FEES

Intangible assets are primarily comprised of goodwill. At each balance
sheet date, management assesses whether there has been impairment in the
carrying value of intangible assets. This assessment is based on comparing
carrying value to anticipated undiscounted cash flows and operating income.

Deferred financing fees associated with the issuance of the senior notes
are being amortized over the terms of the related notes. Accumulated
amortization is $2,076,912 and $1,608,342 at December 31, 2001 and 2000,
respectively. Amortization expense for the years ended December 31, 2001, 2000
and 1999 is $468,570, $545,999 and $548,676 respectively, and is included in
selling, general and administrative expense in the Statement of Operations.

PRODUCT WARRANTY COSTS AND SERVICE RETURNS

Anticipated costs related to product warranty and service returns are
provided for based upon management's estimate of such costs, after consideration
of historical trends and sales of products to which such costs relate.

F-9

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

ENGINEERING EXPENSES

Engineering costs are expensed as incurred and are included in selling,
general, and administrative expenses. Total engineering expenses for the year
ended December 31, 2001 and including expenses of the discontinued businesses
for the years ended December 31, 2000 and 1999 were $3,475,000, $5,630,000 and
$6,583,000, respectively. Included in these engineering expenses are research
and development costs (as defined by Statement of Financial Accounting Standards
No. 2) for the years ended December 31, 2001, 2000 and 1999 of $2,251,000,
$3,677,000 and $4,986,000.

EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
is calculated by dividing net income by the weighted average number of common
shares outstanding and potentially issuable common shares. Common stock
equivalents are excluded from the diluted earnings per share calculation if a
net loss is incurred for the period, as they would be anti-dilutive.

FINANCIAL INSTRUMENTS

The carrying amount of our financial instruments, which includes cash,
accounts receivable, accounts payable, and debt other than senior unsecured
notes approximates their fair value at December 31, 2001 and 2000. The fair
value of the senior unsecured notes was approximately $65 million at December
31, 2001. Fair values have been determined based on management estimates and
information from market sources.

REVENUE RECOGNITION

We recognize revenues on the sale of our products, net of estimated costs
of returns, allowances and sales incentives, when product title transfers to the
customer, primarily upon shipment. We generally sell our products on open
account under credit terms customary to the region of distribution. We perform
ongoing credit evaluation of our customers and generally do not require
collateral to secure our customers' receivables.

COMPREHENSIVE INCOME

Comprehensive income, a measure that reflect all non-owner changes in
equity in addition to net income, consists of net income and foreign currency
translation adjustments and is presented in the statement of stockholders'
equity.

MINORITY INTEREST

Minority interest included in the results of operations represents the
minority shareholders' share of the income of Prestolite Electric Beijing, Ltd.
(PEBL). The minority interest included in the Consolidated Balance Sheet
reflects the original investment by PEBL along with the proportional share of
the earnings of PEBL.

ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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.

F-10

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS

We adopted the provisions of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
effective January 1, 2001. Pursuant to this statement, all derivative
instruments are recognized as assets or liabilities in the balance sheet and
measured at fair value. This statement does not have a material impact on our
results for the year ended December 31, 2001.

In July 2001 the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 141, "Business Combinations" (SFAS 141), and No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 replaces APB No. 16
and eliminates the pooling-of-interests method for any business combinations
after June 30, 2001. SFAS 142 supercedes APB No. 17 and eliminated the current
requirement to amortize goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with a defined life and
impairment testing and recognition for goodwill and intangible assets. SFAS No.
142 is effective for 2002. Accordingly, we will no longer amortize goodwill of
$3.9 million at December 31, 2001. This goodwill will instead be assessed for
impairment at least annually.

In June and August 2001, the Financial Accounting Standards Board approved
Statements of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS 143") and No. 144 "Accounting for the Impairment
or Disposal of Long Lived Assets" ("SFAS 144") which are effective January 1,
2003 and January 1, 2002, respectively, for the Company. SFAS 143 requires that
an existing legal obligation associated with the retirement of a tangible
long-lived asset be recognized as a liability when incurred and the amount of
the liability be initially measured at fair value. Under SFAS 144, a single
accounting method was established for long-lived assets to be disposed of. SFAS
144 requires the Company to recognize an impairment loss only if the carrying
amount of a long-lived asset is not recoverable from its undiscounted cash flows
and the loss is the difference between carrying amount and fair value. The
Company is currently reviewing the provisions of SFAS 143 and 144 and assessing
the impact of adoption.

5. ACQUISITIONS AND JOINT VENTURES

Prestolite Electric Beijing, Ltd. (PEBL) began operations in The People's
Republic of China on April 1, 2002. Prestolite owns 52% of PEBL, and we have
included the results of PEBL in our consolidated financial statements after
eliminating intercompany activity. Beijing JinHu Auto-Electric Company Limited
owns the other 48% of PEBL. The managers of PEBL own JinHu. Prestolite
contributed certain technology to PEBL and agreed to contribute an additional
$1.9 million in cash to PEBL by the first quarter of 2004. JinHu contributed
certain technology and agreed to contribute certain fixed assets to PEBL; the
timing of the JinHu contributions occur as Prestolite makes its contributions in
order to maintain the 52/48 ownership share. Until Prestolite and JinHu make
these contributions, JinHu is leasing the fixed assets to PEBL. The fixed assets
to be contributed by JinHu are included in our consolidated balance sheet at
December 31, 2001 as additional machinery and equipment and as minority
interest.

On January 15, 1999, we acquired a remanufacturing business unit from
Roberts Generator for $2.9 million. This business unit operates as Roberts
Remanufacturing and rebuilds alternators and starter motors for specialty
applications. This acquisition was accounted for under the purchase method.
Goodwill recorded for this acquisition was $1.1 million.

Investments at December 31, 2001 consist of a 4% interest, recorded at
cost, in Auto Ignition, Ltd., an Indian corporation.

F-11

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. CHARGES RELATED TO CERTAIN SPECIALTY ALTERNATORS

We charged $3,450,000 to income in 2000 to write off all our assets related
to Ecoair Corp. ($3.2 million) and to record the settlement of a lawsuit related
to the development and manufacture of a special regulator used in certain
alternators ($250,000). During 1998 and 1999 we committed to a $2.6 million
investment for a 9% interest in the equity of Ecoair Corp. We also purchased a
license for $0.6 million covering a specialty alternator patented by Ecoair, and
we acquired approximately $0.1 million in equipment and inventory related to the
production of the Ecoair alternator. Production of the Ecoair alternator proved
to be far more difficult than originally anticipated. In addition, Ecoair Corp.
must secure new investment if it is to continue as a going concern. During 2000
we decided not to invest further in Ecoair Corp. and accordingly wrote off all
our assets related to Ecoair.

7. EARNINGS PER SHARE ("EPS")

In computing income available to common stockholders, no adjustments were
required to the amounts reported in the statement of income. Shares of common
stock (available and potentially issuable) used in the computation are comprised
of the following (in thousands):

For all three years, stock options were not considered in calculating
dilutive earnings per share since the effect of inclusion would be anti-dilutive
to earnings per common share from continuing operations.

8. INVENTORIES

Inventories consist of the following at December 31 (in thousands):

During 2001 we adjusted our procedure of estimating inventory reserves in
the United Kingdom. As the result of that change we charged $522,000 to cost of
sales in 2001.

F-12

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INTANGIBLE ASSETS

Intangible assets consist of the following at December 31 (in thousands):

10. ACCRUED LIABILITIES

Accrued liabilities consist of the following at December 31 (in thousands):

11. DEBT

Debt consists of the following at December 31 (in thousands):

Our U.S. bank borrowing arrangements consist of a $10 million revolving
credit facility and a $3.5 million letter of credit facility. Interest is
payable on amounts borrowed under the revolving credit facility at the

F-13

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. DEBT -- (CONTINUED)

bank's prime rate plus up to another 0.75% depending upon amounts borrowed and
upon our Funded Debt Ratio. We are currently paying interest at prime, 4.75% at
December 31, 2001. The letter of credit fee is 2% of amounts drawn. Both U.S.
facilities are collateralized by eligible accounts receivable and inventory. On
December 31, 2000 letters of credit totaling $1.7 million were outstanding.

Our U. K. agreement consists of a L2.0 million fixed rate term loan, a L2.0
million floating rate term loan, a L1.4 million floating rate term loan and a
L2.8 million overdraft facility. Interest on the fixed rate term loan is 8.144%
while interest on the floating-rate term loans and the overdraft facilities are
at 1.375% above the bank's base rate (4.0% at December 31, 2001). The term loans
are repayable in sixty monthly payments through January 2004 (fixed rate),
November 2003 and January 2005. The U. K. loans are collateralized by eligible
receivables and fixed assets in the United Kingdom.

In Argentina we have had arrangements with several banks that allow us to
borrow by discounting post-dated checks given to us by our customers. Depending
on the details of the arrangement with each bank, the resulting borrowing may be
recorded as debt or as the sale of the underlying receivable. At December 31,
2001 and 2000 we had, in addition to the debt shown in the table above, $263,000
and $3,957,000 of discounted checks which we recorded as the sale of a
receivable. As discussed in Note 2, the banks in Argentina were effectively
closed at the end of 2001; consequently, new borrowing was not possible. In
South Africa we borrow from a bank on an unsecured basis at the bank's prime
lending rate.

At December 31, 2001 we could have borrowed an additional $10.7 million in
the U.S. and $0.3 million (L0.2 million, translated at $1.4560 per pound
sterling) in the U.K.

The 9.625% senior unsecured notes are guaranteed by PEI. The notes mature
on February 1, 2008. We have the option to redeem them beginning February 1,
2003 with the net proceeds of a public equity offering at our option, in whole
or in part, at amounts from 104.8125% to 100% of the principle plus accrued
interest. During 2000, we purchased and retired Senior Notes with a face value
of $23.1 million for $15.9 million plus accrued interest. After writing off $0.7
of the unamortized financing cost associated with the Senior Notes, we recorded
a $4.1 million extraordinary after-tax gain on these transactions. During 2001
we recorded a $0.4 million extraordinary after-tax gain on the purchase of
Senior Notes with a face value of $1.8 million.

The senior notes and bank arrangements mentioned above contain various
covenants including the maintenance of certain financial ratios and limits on
(a) issuance of additional debt or preferred stock; (b) the payment of dividends
and purchases, redemptions or retirements of common stock; (c) investments; (d)
sale of assets and capital stock of subsidiaries; and (e) certain
consolidations, mergers, transfers of assets and certain other transactions with
affiliates. Our U.S. bank covenants at December 31 require us to maintain a
Funded Debt Ratio of not more than 7:1 and a Fixed Charge Coverage Ratio of not
less than 1:1, as those terms are defined in our bank credit agreement. The
foreign facilities contain covenants that pertain to the foreign operations.

Maturities of debt obligations at December 31 are as follows (in
thousands):

F-14

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. INCOME TAXES

Income (loss) from continuing operations, before minority interests and
income taxes, consists of the following (in thousands):

The components of income tax benefit related to continuing operations are
as follows (in thousands):

A reconciliation of the U.S. statutory tax rate to the effective tax rate
is as follows:

Our operation in China will enjoy a tax holiday through 2002 and is
scheduled to pay taxes at 15% for the following three years.

F-15

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. INCOME TAXES -- (CONTINUED)

The major components of deferred taxes (stated on an after tax basis) on
the balance sheet are as follows (in thousands):

Our Argentina subsidiary has NOL carryforwards at December 31, 2001 of
approximately $25.5 million, which expire in 2002 through 2005. The valuation
reserve represents a full reserve against the net deferred tax asset position of
the Argentina operation and a reserve against the U.S. foreign tax credit, as
management believes that realization of these benefits is not probable.

13. EMPLOYEE BENEFIT PLANS

We have a retirement savings plan for substantially all of our United
States employees. This plan has a deferred salary arrangement and matching
contributions by the Company. Our matching contributions to this plan were
$421,000, $475,000, and $635,000 for 2001, 2000 and 1999, respectively,
including contributions for employees associated with the operations sold in
2000.

We also have defined benefit plans that cover certain former United States
employees. Benefits under these defined plans are based on years of service. Our
funding policy is to meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974, as amended. Our subsidiaries in the
United Kingdom and South Africa provide retirement benefits based on the
employee's earnings. Our funding policy is to meet the minimum funding
requirements imposed by current statutes or tax regulations.

F-16

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)

The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the United States defined benefit plans at December
31, 2001 and 2000, based upon most recent actuarial valuations (December, 31,
2000 and 1999), (in thousands):

F-17

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)

The following provides a reconciliation of benefit obligations, plan assets
and funded status of the U.K. and South Africa defined benefit plans at December
31, 2001 and 2000, based upon the most recent actuarial valuations (December 31,
2001 and 2000), (in thousands):

F-18

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)

In 2001, a portion of the plan assets were transferred to an insurance
company to purchase annuities and related pension obligations were reduced. This
resulted in a pension settlement gain.

Our subsidiary, Prestolite Indiel (Argentina), has a noncontributory
unfunded pension plan which provides retirement benefits for nine former
employees. The plan was established in June, 1987 and terminated in June 1995.
The following provides a reconciliation of benefit obligations and funded
status, based upon the most recent actuarial valuations:

F-19

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. LEASES

We lease certain office and manufacturing facilities, data processing
equipment and automobiles under long-term operating lease agreements. In the
current year, we entered into capital leases for certain manufacturing and
engineering equipment and improvements related to real property. The leases
expire on various dates through 2006. Future minimum lease payments for
operating and capital leases (with terms in excess of one year) at December 31,
2001 were (in thousands):

Rent expense for the operating leases of continuing operations was
$1,177,415, $1,168,815 and $1,330,750 for the years ended December 31, 2001,
2000 and 1999.

Scheduled payments on capital leases as of December 31, 2001 were (in
thousands):

The book value, as of December 31, 2001, of equipment under capital leases
was $1,372,995, which is net of amortization of $640,852.

15. STOCK OPTIONS AND WARRANTS

PEI has a stock option plan for certain employees. We have reserved 350,280
shares for the plan. Options issued have exercise prices of $5.00 to $22.00 per
share, and no options have been exercised. Options generally vest 20 percent per
year over five years but may not be exercised until 90 days following the
effective date of a registration statement under the Securities Act of 1933 or
upon receipt by PEI of a legal opinion that registration is not required. The
exercise date may be accelerated upon a change of control.

F-20

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. STOCK OPTIONS AND WARRANTS -- (CONTINUED)

The changes in stock options outstanding for the years ended December 31,
2001, 2000, and 1999 are as follows:

During 2001 we extended to January 30, 2004 the expiration date on options
to purchase 58,760 shares at $5.00 per share. Those options would have expired
in 2001, 2002 and 2003 had we not extended them. We recorded a charge of
$647,000 to recognize the difference between the fair market value and the
aggregate exercise price of the options extended. All other options expire ten
years from the date of the grant

Information with respect to stock options outstanding at December 31, 2001
follows:

We continue to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees" ("APB 25") in accounting for our
stock option plan.

Under APB 25, we do not recognize compensation expense on the issuance of
our stock options because the option terms are fixed and the exercise price
equals the fair value of the underlying stock on the grant date.

As required by SFAS 123, we have determined the pro-forma information as if
the Company had accounted for stock options granted since January 1, 1995, under
the fair value method of SFAS 123.

F-21

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. STOCK OPTIONS AND WARRANTS -- (CONTINUED)

Principal assumptions used in calculating the pro forma information were as
follows:

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Pro forma
information follows (in thousands except for earnings per share information):

16. RELATED PARTY TRANSACTIONS

We have a management consulting agreement with Genstar Investment
Corporation ("GIC") which controls 96.7% of our outstanding stock. Under the
agreement, we pay GIC a management consulting fee. For the years ended December
31, 2001, 2000, and 1999, we charged $600,000, $825,000, and $900,000,
respectively, to operations under this agreement. At both December 31, 2001 and
2000, $150,000 of these fees were accrued and unpaid.

17. LITIGATION AND CLAIMS

Various legal actions and claims are pending or may be instituted or
asserted in the future against us. The outcome of individual matters is not
predictable at this time. The potential aggregate amount of liability at
December 31, 2001 and 2000 with respect to these matters cannot be ascertained;
however, we believe that any resulting unrecorded liability would not materially
affect our future consolidated financial statements.

We record a liability for environmental remediation costs when a clean-up
program becomes probable and the costs can be reasonably estimated. The extent
and amounts of the liabilities can change substantially due to factors such as
the nature or extent of contamination, changes in remedial requirements and
technological improvements.

F-22

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. SEVERANCE

We record severance expenses when plans are announced and employees
notified. The following is a summary of the severance charges and outlays (in
thousands):

The announcement and implementation of restructuring plans in 2001 included
employee cutbacks in Argentina and the United Kingdom, resulting in severance
charges of $2.3 million and $1.7 million respectively. We also recorded North
American charges of $0.5 million and South African charges of $0.1 million.
Employee cutbacks primarily in Argentina and the United Kingdom in 2000 resulted
in $2.2 million of severance charges for that year.

19. SEGMENT REPORTING

As the result of the sale of three businesses in 2000 we restructured our
segment reporting in the year 2001. We operate in five geographic locations;
each location's revenue and operating performance is managed and reported
separately. We evaluate operating performance based on earnings before interest
expense, taxes, depreciation, amortization and certain other charges (EBITDA).
Corporate overhead and certain other charges are not allocated to the
business/geographic units. Sales, assets and EBITDA for those units are
summarized below.

Sales are as follows (in thousands):

F-23

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. SEGMENT REPORTING -- (CONTINUED)

A reconciliation of EBITDA to income from continuing operations before
income taxes follows (in thousands):

F-24

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES

SCHEDULE II

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

- -------------------------
(1) Deductions related to the allowance for doubtful accounts relate to the
write-off of uncollectable accounts and to changes to the reserves for the
return of used parts. Deductions related to inventory obsolescence relate
primarily to the disposal of obsolete inventory. Included in the inventory
deductions in 2001 is $375,000 that relates to the Argentina devaluation and
other exchange rate changes at the balance sheet dates of December 31, 2000
to December 31, 2001.

F-25

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

None.

F-26

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information as of December 31, 2001
with respect to our executive officers and directors:

- -------------------------
(a) Member of audit committee
(b) Member of compensation committee

Kim Packard began service as our President, Chief Executive Officer and a
director in December 1991. Previously, Mr. Packard was President and Chief
Operating Officer of Hobart Brothers Company of Troy, Ohio for six years and
prior to that President of Warner & Swasey and an officer or executive of
various divisions of Allied/Bendix. He also served in various marketing, sales
and executive capacities with GTE Sylvania. Mr. Packard holds a B.S. in
electrical engineering from Pennsylvania State University and an M.S. from the
Massachusetts Institute of Technology, where he was a Sloan Fellow. He is also a
director of Kurz-Kasch Corporation, Dayton, Ohio.

Kenneth C. Cornelius began service as our Vice President and Chief
Financial Officer in August 1992 and has been our Secretary since 1993.
Previously, he was Chief Financial Officer with M-C Industries for three years
after spending 17 years with Maremont Corporation in various financial
positions, including eight years as Vice President and Chief Financial Officer.
Mr. Cornelius holds a B.A. from Carleton College and an M.B.A. from the
University of Michigan.

Dennis P. Chelminski began service as our Controller, Treasurer and
Assistant Secretary in February 1992. He was named Corporate Vice President in
2001. He held the position of our Chief Accounting Officer from October 1991 to
February 1992 and was our Manager of Financial Analysis under our prior
ownership. Prior to 1986, he held various financial positions with Eltra
Corporation and AlliedSignal Corporation. Mr. Chelminski holds a B.S. in
accounting from the University of Toledo and is a C.P.A.

Michael Lea began service as our Vice President and Managing Director of
our United Kingdom subsidiary in December 1993. He had previously been Sales and
Marketing Director of Polypenco Ltd. From 1977 to 1990 he served in various
positions with GKN, leading to Managing Director of GKN Composites Ltd. Mr. Lea
is a Chartered Engineer holding Bachelor of Technology in Metallurgy and Doctor
of Philosophy in Engineering degrees from Brunel University in West London,
England.

Peter J. Corrigan joined Prestolite in 1992 as Director of Quality
Assurance in the Corporate Office. Subsequently he was promoted to Vice
President of Engineering, Vice President of Operations and Corporate Vice
President of Sales and Marketing. Mr. Corrigan was named President of our
subsidiary in Argentina, Prestolite Electric Indiel, in 2001. Mr. Corrigan holds
a BA in Physics from Wake Forest University and an MBA from Case Western Reserve
University.

F-27

John Jenkins came to Prestolite as Finance Manager in South Africa, as a
result of the Lucas acquisition in January of 1998. At that time, he was
promoted to Managing Director of the South African operation. He was
subsequently promoted to Managing Director of Heavy Duty Systems, Europe, and is
located in Acton, England.

Richard D. Paterson has been a director and Chairman of the board of
directors since 1991. Mr. Paterson has been Executive Vice President and a
director of Genstar Investment Corporation, an affiliate of Genstar Capital
Corporation, since 1987 and was a director of Genstar Capital Corporation from
1988 through August 1995. In addition, he is currently a director of a number of
privately held corporations.

Ross J. Turner has been a director since 1991. Mr. Turner has been Chairman
of the board of directors of Genstar Investment Corporation since 1987 and was a
director of Genstar Capital Corporation from 1988 through August 1995. Mr.
Turner is a director of Rio Algom Limited in Canada. In addition, he is
currently a director of a number of privately held corporations.

John A. West has been a director since 1991. Mr. West has been Executive
Vice President and a director of Genstar Investment Corporation, an affiliate of
Genstar Capital Corporation, since 1987 and was a director of Genstar Capital
Corporation from 1988 through August 1995. In addition, he is currently a
director of a number of privately held corporations.

Directors are elected annually to serve until the next annual meeting of
shareholders or until their successors have been elected and qualified.
Executive officers are appointed by, and serve at the discretion of, our board
of directors. None of the executive officers or directors is related by blood,
marriage or adoption to any other executive officer or director.

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes all compensation paid for the years ended
December 31, 2001, 2000, and 1999 to the Chief Executive Officer and the four
other highest compensated executive officers who were serving executive officers
at December 31, 2001:

- -------------------------
(a) Amounts in 2001 and 1999 reflect bonuses earned during 2000 and 1998 but
paid during 2001 and 1999 respectively. No payments were made during 2000
for amounts earned in 1999. Amounts earned in 2001 have not yet been
determined.

F-28

(b) Other annual compensation in the form of perquisites and other personal
benefits has been omitted where aggregate amount of such perquisites and
other personal benefits constituted the lesser of $50,000 or 10% of the
total annual salary and bonus for the officer for the year.

(c) The company did not make any long-term incentive awards to any of these
officers in 2001, 2000, or 1999.

(d) Amounts in 2001, 2000, and 1999 reflect premiums paid for life insurance
coverage in excess of $50,000 and contributions by us pursuant to our 401(k)
and one other pension plan. Includes for Messrs, Packard, Cornelius and
Chelminski in 2001, 2000, and 1999 interest on deferred compensation (Mr.
Packard -- $7,500; Mr. Cornelius -- $2,500; Mr. Chelminski -- $3,500)
payable pursuant to a Deferred Compensation Agreement between us and each of
Messrs. Packard, Cornelius and Chelminski. Amounts in 2001 also include
payment of deferred compensation for Mr. Cornelius of $25,000 and for Mr.
Chelminski of $35,000.

OPTION GRANTS IN LAST FISCAL YEAR

There were no grants of stock options during the fiscal year to the Chief
Executive Officer and the four other highest compensated executive officers who
were serving executive officers at December 31, 2001.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table summarizes the exercise of options during the year
ended December 31, 2001 and number and value of all unexercised options held by
certain executive officers as of December 31, 2001.

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(a) Value is based upon the fair market value of our common stock as of December
31, 2001 determined by our board of directors, minus the exercise price.
Fair market value was determined by our board of directors and was based
upon our historical and projected financial performance.

COMPENSATION OF DIRECTORS

Our directors do not receive any compensation for their services as
directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The current members of the compensation committee of our board of directors
are Messrs. Richard A. Paterson, chairman, Ross J. Turner and John A. West. Each
is an executive officer and currently a director of Genstar Investment
Corporation and was a director of Genstar Capital Corporation at various times
from 1988 through August 1995.

EMPLOYMENT AGREEMENTS

We have entered into agreements with each of Messrs. Packard, Cornelius,
Lea, Corrigan and Chelminski. The agreements provide that if the employee's
employment is terminated for any reason other than by the employee voluntarily
except in the event of a substantial diminution in responsibilities, for cause
(as defined in the respective employment agreements) or as a result of death or
disability, the terminated individual shall receive for a period of one year
following the date of termination the then-current salary and

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benefits that the employee would otherwise have been entitled to receive (except
for Mr. Packard who would receive two years salary and benefits).

Each of the agreements provides that if the employee's employment is
terminated within twelve months following a change of control (as defined in the
respective employment agreements) for any reason other than for cause, the
respective individual would be entitled to receive an additional one year period
of salary and benefits following the expiration of the salary and benefits the
employee is entitled to receive in the event of termination for any other
reason.

Any benefits payable under the agreements, absent mutual agreement of the
parties, will be payable at such time and in such manner as if the employee
remained employed, and such benefits, if any, shall continue notwithstanding
re-employment and/or death of the employee following termination of employment.

1991 OPTION PLAN

In 1991, the PEI Holding, Inc. Management Stock Option Plan was adopted.
The Management Stock Option Plan is designed to provide an incentive to those
designated employees to continue in their employment and to increase their
efforts for our success. The designated employees are selected in the sole
discretion of the compensation committee of our board of directors. As of
December 31, 2001, an aggregate of 350,280 shares of our common stock were
reserved for issuance under the Management Stock Option Plan.

The purchase price of each share of common stock subject to the options is
the fair market price of our common stock on the date of the grant as determined
by our board of directors. All options granted are subject to the terms of an
agreement entered into by the recipient of the options.

Each agreement entered into requires the recipient of the options to be
bound by the terms of any stockholders' agreement entered into between us and
certain of our stockholders. Options vest beginning on January 1 of the first
calendar year following granting of the option (or on the first anniversary of
the date of grant if granted in connection with hiring) and vest at a rate of
20% per year on each subsequent January 1. Options are not transferable by the
recipient other than by will or by the laws of descent and distribution and are
exercisable during the recipient's lifetime only by the recipient. All options
terminate on the tenth anniversary of the date of grant although during 2001 we
extended the termination date on certain options as described in Note 15 of the
financial statements. Options are exercisable within 90 days after a
registration statement pertaining to our common stock has been filed with (and
declared effective by) the Securities and Exchange Commission under the
Securities Act of 1933, as amended, or when we otherwise determine in our sole
discretion.

If the recipient is terminated without cause (as defined in the agreement)
or for permanent disability or death then all unvested options are terminated
and canceled on the date of termination. Within 30 days of termination we may
make a cash payment to the recipient in the amount of the excess of the fair
market value of the common stock subject to such options over the exercise price
for such shares, or make such other decisions with respect to such options as in
our sole discretion. If the recipient is terminated for cause then all options,
both vested and unvested, are canceled.

In the event of a merger or consolidation (subsequent to which our present
stockholders own less than 50% of the voting stock of the surviving entity), a
sale of all or substantially all of our assets to an entity not affiliated with
Genstar Capital Corporation or our dissolution or liquidation, then the plan
administrator may provide for the vesting of up to all options outstanding
within 30 days of such event or authorize a cash payment to each option holder
equal to the excess of the fair market value of the shares of common stock
subject to such holder's option over the applicable exercise price. The options
are subject to anti-dilution provisions in the event of a change in our capital
structure.

As of December 31, 2001, options to purchase an aggregate of 326,660 shares
of Common Stock at prices from $5.00 to $22.00 were outstanding under the
Management Stock Option Plan.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below sets forth certain information regarding beneficial
ownership of our common stock as of March 15, 2002 by each person or entity
known by us to own beneficially 5% of more of our common stock, each director
and certain of our executives officers and all executive officers and directors
as a group. As of March 15, 2002 , there were 1,985,000 shares of our common
stock outstanding.

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* Less than 1%

(a) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or warrants currently exercisable or convertible, or exercisable
or convertible within 60 days of March 15, 2002, are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock
beneficially owned.

(b) On January 22, 2002, the shares of Prestolite Electric Holding, Inc.
formerly held by Genstar Capital Corporation were distributed to the 39
shareholders of Genstar Capital Corporation. Those shares were placed into a
trust. Under the terms of the trust agreement, all voting power associated
with the shares is exercised by Genstar Capital Corporation. Among the
shares so distributed were 89,300 distributed to Genstar Investment
Corporation.

(c) Voting rights associated with these shares have been ceded to Genstar
Capital Corporation via an agreement as of December 31, 2001.

(d) Consists of 17,000 shares of common stock and 132,600 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of March 15, 2002. Does not include 35,300 shares issuable upon
exercise of options which vest more than 60 days after March 15, 2002.

(e) Consists of 8,000 shares of common stock and 31,020 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of March 15, 2002. Does not include 7,080 shares issuable upon exercise
of options which vest more than 60 days after March 15, 2002.

(f) Consists of 8,000 shares of common stock owned by Mrs. Rhonda Lea, Mr. Lea's
wife, as to which Mr. Lea may be deemed to be beneficial owner, and 24,340
shares issuable upon exercise of options that

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are currently exercisable or exercisable within 60 days of March 15, 2002.
Does not include 5,960 shares issuable upon exercise of options which vest
more than 60 days after March 15, 2002.

(g) Consists of 8,000 shares of common stock and 14,880 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of March 15, 2002. Does not include 3,120 shares issuable upon exercise
of options which vest more than 60 days after March 15, 2002.

(h) Consists of 8,000 shares of common stock and 13,880 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60
days of March 15, 2002. Does not include 3,420 shares issuable upon exercise
of options which vest more than 60 days after March 15, 2002.

(i) Consists of 4,200 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 2002. Does
not include 3,300 shares issuable upon exercise of options which vest more
than 60 days after March 15, 2002.

(j) Consists of 89,300 shares of common stock owned by Genstar Investment
Corporation as to which Messrs. Paterson, Turner and West may be deemed to
be beneficial owners. Excludes the remaining shares of Common Stock
controlled by Genstar Capital Corporation as to which Messrs. Paterson,
Turner and West disclaim beneficial ownership. See Item 13. "Certain
Relationships and Related Transactions." Genstar Capital Corporation
controls 83.8% of our common stock on a fully-diluted basis.

(k) Amount shown includes an aggregate of 138,280 shares of common stock
issuable upon the exercise of options exercisable within 60 days of March
15, 2002. Does not include an aggregate of 58,180 shares issuable upon
exercise of options which vest more than 60 days after March 15, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Three of our directors, Messrs. Paterson, Turner and West, are executive
officers and shareholders of Genstar Investment Corporation. Genstar Investment
Corporation manages Genstar Capital Corporation and owns 89,300 of our
outstanding shares.

Our principal operating subsidiary, Prestolite Electric Incorporated,
entered into a management agreement with Genstar Investment Corporation
terminating on December 31, 2002, under which Genstar Investment Corporation has
agreed to provide Prestolite with ongoing management and financial advisory
services. Prestolite has agreed to pay Genstar Investment Corporation a fee of
$900,000 or .03% of Prestolite's annual sales as compensation for services
rendered by Genstar Investment Corporation under the agreement, plus all
out-of-pocket costs and expenses. Effective October 1, 2000, this management
agreement was revised with the annual management and financial advisory services
fee being reduced to $600,000 per annum. Payments are made quarterly. In 1999
and 2000 Prestolite paid management and advisory fees of $900,000, in each case,
plus out-of-pocket expenses, to Genstar Investment Corporation. In 2001,
Prestolite paid management and advisory fees of $600,000, plus out-of-pocket
expenses, to Genstar Investment Corporation.

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS OF FORM 8-K

(a) Financial Statements

Reports on form 8-K.

None.

(b) Exhibits.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Prestolite Electric Holding, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Ann Arbor, State of Michigan on the twenty-eighth day of March,
2002.

PRESTOLITE ELECTRIC HOLDING, INC.
By: /s/ P. KIM PACKARD
------------------------------------
P. Kim Packard
Director, President, and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Prestolite Electric
Holding, Inc. and in the capacities and on the dates indicated.

F-34