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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Prestolite Electric Holding, Inc.

(734) 913-6600

Not Applicable

     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  ü                No      

     As of March 26, 2003, there were 1,969,000 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.

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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 to 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 2002 approximately 46% of our net sales were to OEM customers and 54% 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 47% of our net sales in 2002 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 (127mm to 217mm) 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.

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      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 continue to be important.

      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.

     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.

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 46% of our 2002 net sales, with the remaining sales derived from aftermarket customers.

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

      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.”

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      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 $44 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.

      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 46% of our net sales for the year ended December 31, 2002. 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.”

      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 that acquired the rights to the “Prestolite” name from AlliedSignal.

      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

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Employees

      We had approximately 2,100 employees as of December 31, 2002. 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.

      Our sales to OEMs accounted for approximately 46% of our net sales for the year ended December 31, 2002. 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.”

      We currently conduct business in the United States, the United Kingdom, South Africa, China and Argentina. Approximately 47% of our net sales in 2002 were to customers outside of North America. Adverse results from our foreign operations could hurt the results of our 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.

      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 that 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

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      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 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.

      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.

      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 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, 2002, we had $109.4 million of consolidated indebtedness outstanding and our stockholders’ deficit was approximately $35.9 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

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	•	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.

      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.

      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.

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      As of December 31, 2002, Genstar Capital Corporation controlled 97.5% (87.6% 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.”

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, 2002:

      We 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.

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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 20, 2003, there were 1,969,000 shares of our common stock outstanding. Management shareholders owned 49,000 shares. The other 1,920,000 shares were in a trust controlled by Genstar Capital Corporation. As of March 20, 2003, there were employee-held options outstanding to purchase up to an additional 222,514 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.

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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, 2002 and the balance sheet data as of December 31, 2001 and 2002 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, 1999 and the balance sheet data as of December 31, 1998, 1999 and 2000 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.

      Schedule of selected financial data:

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Overview

      We manufacture alternators, starter motors and other items for the heavy duty, automotive, defense and industrial markets. These are supplied under the “Prestolite,” “Leece-Neville,” and “Indiel” brand names for original equipment and aftermarket application on a variety of vehicles and industrial equipment. We sell our products to a variety of markets, in terms of both end-use and geography.

      We operate in five principal geographic regions. While each region primarily sells in its own area, no region sells exclusively into its geographic region.

      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.

      Our South African and South American facilities manufacture lighter duty alternators and starter motors. These facilities are located in Johannesburg, South Africa; and in Buenos Aires and San Luis, Argentina. The Argentina operation also manufactures distributors. In both South Africa and Argentina a significant portion of our sales are to the automotive aftermarket, and a portion of those aftermarket sales consist of products purchased for resale.

      Prestolite Electric Beijing, Ltd. manufactures alternators in China, selling primarily into the heavy duty (non-automotive) market.

Results of Operations

     Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      Net sales were $167.3 million in 2002, an increase of $8.0 million, or 5.0%, from $159.3 million in 2001. The increase in sales of our China and North American activities offset the decrease in sales of our other locations. China sales increased $8.7 million to more than double the reported sales of 2001. North American sales increased $20.9 million, or 27.2%. European sales decreased $0.7 million, a 1.8% decline; South African sales decreased $1.8 million, a 25.1% decline; and Argentina sales decreased $19.2 million; a 62.4% decline. The decline in the value of the Argentine peso was the major cause of the Argentina sales decline. China, a relatively new market in an economically controlled environment, experienced volume increases. In addition, the China joint venture only began operations in April of 2001.

      Gross profit was $40.7 million in 2002, or 24.3% of sales. This compares to gross profit of $32.3 million in 2001, or 20.3% 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 the benefit of the devaluation of the Argentine peso, which reduced the cost of product produced in Argentina.

      Selling, general, and administrative expense was $22.2 million, or 13.3% of sales in 2002, approximately the same as the $22.3 million, or 14.0% of sales recorded in 2001. The slight reduction in selling, general, and administrative expense is attributable to the reduction of amortization on goodwill due to the implementation of Statement of Financial Accounting Standard No. 142 for 2002 and to cost savings recognized from continuing programs.

      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.

      During 2001 we extended the expiration date on certain outstanding stock options and recorded a charge of $0.6 million to recognize the difference between the fair market value and the aggregate exercise price of the options extended. During 2002 we reduced the number of options outstanding as part of a reduction in the exercise price of all options. This triggered variable accounting for our options. As a result of the decline of the estimated fair market value of our shares we recorded a benefit of $0.3 million related to the option program.

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      During 2002 we recorded severance and restructuring expense of $2.9 million, primarily related to personnel reductions in the United Kingdom and the closing of a plant in Argentina. This compares to severance charges of $4.6 million in 2001. The 2001 charges were also primarily because of personnel reductions in the United Kingdom and Argentina.

      Operating income in 2002 was $16.0 million, an increase of $12.7 million, or 389.4%, from the $3.3 million in 2001. This was due to the factors discussed above.

      Other income was $62,000 in 2002 compared to other expense of $78,000 million in 2001. This consists primarily of export rebates offset by royalty and trademark expenses.

      In 2002 we recorded a $1.0 million loss on foreign exchange, compared to a $0.5 million loss in 2001. In each case more than half of the charge resulted from the decline in the value of the Argentina peso. In 2002 we expensed $1.0 million to write down the value of an idle facility held for sale and to cover anticipated costs associated with a lease guarantee issued as part of our sale of a business in 1997.

      Interest expense was $11.3 million in 2002, a decrease of $1.9 million, or 15.0%, compared to $13.2 million in 2001. This decrease is a result of decreases in debt and the elimination of high cost borrowings in Argentina.

      The benefit from income taxes was $0.3 million on the $0.3 million income from continuing operations before taxes and extraordinary items for 2002. Our operation in China enjoyed a tax holiday through 2002 and is scheduled to pay taxes at 12% for the next three years. This compares to a benefit from income taxes of $1.6 million for 2001 on an $11.5 million loss from continuing operations before taxes and an extraordinary item.

      Extraordinary income of $0.4 million, net of taxes, was recorded in 2002 and 2001 related to a gain 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 the buyer of those businesses for a period of time after the sale, but retained by us and currently categorized as held for sale.

     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 new China activity, $8.0 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 operation for us, had no 2000 comparison to determine an increase or decrease.

      Gross profit was $32.3 million in 2001, or 20.3% of sales. This compares to 2000 gross profit of $32.2 million, or 18.8% of sales. The increase of gross profit as a percent of sales was 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 $2.5 million, or 10%, from $24.7 million, or 14.4% of sales in 2000. Reduction in selling, general, and administrative expense was 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 resulting from the extension of the expiration of options to purchase company stock issued to specific employees. In 2000, we recorded a charges of $3.5 million to write off the

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      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 export subsidies offset by royalty 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 was the result of a decrease in debt 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, recording a gain of $14.5 million after 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 the buyer of those businesses for a period of time after the sale, but retained by us.

Liquidity and Capital Resources

      Cash provided by continuing operating activities in 2002 was $8.5 million compared to cash usage of $1.3 million in 2001 and $4.9 million in 2000. Discontinued operations provided $2.7 million of cash in 2002 as we received funds from escrow and continued to maintain facilities previously used by those businesses. That compares to cash usage related to the discontinued operations of $1.4 million in 2001. Capital spending of continuing activities was $5.1 million in 2002 compared to $4.6 million in 2001 and $6.4 million in 2000. In 2002 capital spending was $2.0 million in the United States, $1.3 million in the United Kingdom, $1.1 million in Argentina, $0.1 million in South Africa, and $0.1 million in China compared to $2.5, $1.0, $0.7, $0.2, and $0.2 million respectively in 2001. Capital expenditures for 2003 are expected to be approximately $6.0 million. These expenditures are primarily for capacity increases, new product designs, and cost reduction.

      Debt, net of cash, $105.1 million at December 31, 2002, decreased by $4.3 million in 2002. We had revolving credit facilities in the United States and United Kingdom under which additional borrowings of $11.5 million and $2.3 million, respectively, were available based on the December 31, 2002 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 2002, we had no bank debt or discounted checks outstanding in Argentina. In South Africa we borrow from a bank on an unsecured basis.

      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 2000, and 2001 at $1.00 per peso. The Argentine peso ended 2002 with a value of $0.2972 and we used that rate to translate the December 31, 2002 Argentina balance sheet. We translated the income statement at various monthly peso values ranging from a high of $0.597 (January) to a low of $0.274 (June). As the result of using the devalued rate, we recorded in 2002 and 2001 a foreign exchange loss of $0.9 million and $0.3 million, respectively and a charge to other comprehensive income of $5.1 million and $6.2 million, respectively, representing the cumulative translation

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     Pension plans

      In the United States, we offer our current employees a defined contribution (401k) pension plan. In 2002 we recorded $0.4 million of expense related to this plan. We also cover certain previous employees under a defined benefit plan. At December 31, 2002, that plan has estimated obligations of $3.4 million and assets of $2.5. During 2002 we recorded no expense related to this plan. We recorded an additional minimum liability of $0.9 million representing the unfunded pension obligation as an element of comprehensive income.

      In England and South Africa our employees are covered by defined benefit pension plans to which both Prestolite and the employees contribute. At December 31, 2002, these plans have estimated obligations of $37.7 million and assets of $30.0 million. During 2002 we recorded expense of $0.8 million related to these plans. We recorded an additional minimum liability of $8.3 million representing the unfunded pension obligation as an element of comprehensive income.

      In Argentina, we have unfunded pension obligations to nine former employees. That obligation is estimated at $0.6 million as of December 31, 2002, which we have accrued as a liability. During 2002 we recorded expense of $0.1 million related to this plan.

      The table below summarizes the change in our benefit obligation and in plan assets during 2002.

      Additional information about our pension plans is provided in Footnote 13 of our financial statements.

      We expect our liquidity needs to consist primarily of working capital needs and scheduled payments on certain contractual obligations. 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.

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     Contractual cash obligations

      Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our long-term debt agreements and rent payments required under lease agreements. The following table summarizes our fixed cash obligations over various future periods as of December 31, 2002:

      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, 2002:

      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 had 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.

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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 estimates the anticipated liability. The adequacy of the warranty reserve may be affected by an unanticipated product failure and requests for payments from the customers, 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.

      Pensions. Annual net periodic expense and benefit liabilities under our defined plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Each December, we review the actual experience compared to the more significant assumptions used and make adjustments to the assumptions, if warranted. Discount rates are based upon an expected benefit payments duration analysis and the equivalent average yield rate for high-quality fixed income investments. Pension benefits are funded through deposits with trustees and the expected long-term rate of return on fund assets is based upon actual historical returns modified for known changes in the market and any expected change in investment policy.

New accounting pronouncements

      In 2001 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. SFAS 142 eliminated the requirement to amortize goodwill and indefinite-lived intangible assets, addressed the amortization of intangible assets with a defined life and required impairment testing and recognition for goodwill and intangible assets. SFAS No. 142 is effective for 2002. Accordingly, we no longer amortize goodwill of $3.7 million as of December 31, 2001. This goodwill will instead be assessed for impairment at least annually.

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      The FASB also issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” during 2001. This standard requires the Company to recognize an impairment loss if the carrying value of a long-lived asset is not recoverable from its undiscounted cash flows. The loss is the difference between the carrying value and the fair value. The adoption of this statement did not have any impact on our financial position or results of operations.

      In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” With the rescission of SFAS No. 4 and 64, only gains and losses from extinguishments of debt that meet the criteria of APB Opinion No. 30 would be classified as extraordinary items. This statement also rescinds SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers.” This statement amends SFAS No. 13, “Accounting for Leases,” to eliminate the inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meaning or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Upon adoption on January 1, 2003, any gain or loss from extinguishments of debt recorded in prior periods will be reclassified to income from continuing operations. We are currently reviewing the other provisions of this Statement and will adopt them effective in 2003.

      In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of the commitment to an exit or disposal plan. SFAS No. 146 is effective for all exit or disposal activities initiated after December 29, 2002. We are currently reviewing the provisions of this Statement and will adopt it effective with our 2003 fiscal year.

      In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 clarifies disclosures that are required to be made for certain guarantees and establishes a requirement to record a liability at fair value for certain guarantees at the time of the guarantee’s issuance. The disclosure requirements of FIN No. 45 are effective for our 2002 financial statements. The requirement to record a liability applies to guarantees issued or modified after December 31, 2002. We do not believe the adoption of this portion of the Interpretation will have a material effect on our financial condition or results of operations.

      In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS No. 148 effective for the fiscal year ended December 31, 2002.

      In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51.” FIN No. 46 requires that the primary beneficiary in a variable interest entity consolidate the entity even if the primary beneficiary does not have a majority voting interest. The consolidation requirements of this Interpretation are required to be implemented for any variable interest entity created on or after January 31, 2003. In addition, FIN No. 46 requires disclosure of information regarding guarantees or exposures to loss relating to any variable interest entity existing prior to January 31, 2003 in financial statements issued after January 31, 2003. We have not yet determined the impact that this Interpretation will have on our financial position or results of operations.

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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES

CONTENTS

Item 8. Financial Statements and Supplementary Data

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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES

To the Board of Directors of

      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, stockholders’ 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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 $14,642,000 and $20,497,000 and as of December 31, 2002 and 2001, respectively, and total revenues of $15,831,000, $33,884,000, and $40,785,000 for each of the three years in the period ended December 31, 2002. Those statements were audited by other auditors whose report thereon has been furnished to us, and in 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.

      As discussed in Note 9 to the Consolidated Financial Statements, the Company changed its method of accounting for goodwill resulting from its adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002.

PRICEWATERHOUSECOOPERS LLP

February 28, 2003

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

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

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