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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, 2003.
/ / 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.
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(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
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(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 10, 2004, 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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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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.
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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 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 2003
approximately 50% of our net sales were to OEM customers and 50% 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. As described
elsewhere, we are closing the South African operation which accounted for 3.3%
of our 2003 sales. Approximately 51% of our net sales in 2003 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."
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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, mid-size and heavy duty segments
of the market.
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.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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 50% of our 2003
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."
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
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
North American market for military alternators. At the lower end of the heavy
duty alternator market, automotive-based designs and foreign competitors are a
significant factor.
SEASONALITY, RAW MATERIALS AND BACKLOG
Our sales to OEMs accounted for approximately 50% of our net sales for
the year ended December 31, 2003. 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.
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.
EMPLOYEES
We had approximately 2,000 employees as of December 31, 2003. 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, and Argentine 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.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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 50% of our net sales for
the year ended December 31, 2003. 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.
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 50% of our sales in 2003 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.
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 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 exchange rate fluctuations will not cause significant fluctuations in
quarterly results of operations.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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.
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.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
We are highly leveraged and have significant debts that 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, 2003, we had $107.8 million of consolidated indebtedness outstanding and our
stockholders' deficit was approximately $29.2 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.
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:
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
- 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 will call our senior notes for redemption at the closing of the sale of the
company, but there can be no guarantee that the sale of the company will occur
in a timely manner, or at all.
On March 3, 2004, the company and the owners of the company reached a
definitive agreement to sell the stock of Prestolite Electric Holding, Inc.
Pursuant to the terms of the sale agreement and the indenture governing our
senior notes, on the closing date, the Company will call the senior notes for
redemption. Although the closing is scheduled to be completed in April 2004,
the sale agreement is subject to customary closing conditions, including
standard regulatory filings, the buyer's obligation to obtain third party
financing, the accuracy of the Company's representations and warranties made in
the sale agreement, the compliance by the Company with the covenants contained
in the sale agreement and the absence of any governmental order preventing
consummation of the sale, any of which, if not satisfied in a timely manner,
could delay the closing of the sale of the company, or, if not satisfied, could
cause the closing of the sale not to occur. If the closing of the sale of the
company does not occur, the senior notes will not be called for redemption (in
connection with the sale of the company) and will remain outstanding and will
continue to be governed by the terms of the indenture.
We are controlled by Genstar Capital ULC.
As of December 31, 2003, Genstar Capital ULC controlled 97.5% (87.3% 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."
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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:
Square Owned/Leased (Lease
Location Use Feet expiration date)
-------- --- ---- -----------------
Ann Arbor, MI Headquarters 8,000 Leased (Dec. 2008)
Arcade, NY Manufacturing 342,800 Owned
Florence, KY Warehouse 90,365 Leased (June 2004)
Garfield, NJ Manufacturing 42,000 Leased (month to month)
Leyland, England (U.K.) Manufacturing 250,000 Leased (April 2006)
Acton, England (U.K.) Manufacturing 368,000 Owned (see below)
Johannesburg, South Africa Manufacturing 118,400 Owned (see below)
Buenos Aires, Argentina Manufacturing 159,000 Owned
San Lorenzo, Argentina Manufacturing 76,676 Owned
San Luis, Argentina Manufacturing 30,800 Owned
Beijing, China Manufacturing 110,000 Leased
In January 2004 we sold our facility in Acton, England for
approximately (pound)25.2 million. We have the right to occupy the facility
through the end on 2004. We intend to discontinue during the second quarter of
2004 the manufacture of inline pumps previously produced at that facility,
transfer some production performed at the Acton facility to other Prestolite
locations, and move the balance of the Acton operations into a leased facility
within five miles of the Acton facility previously owned.
In December 2003 we announced the closing of our operation in South
Africa. The facility we own in South Africa is currently for sale, and is
classified as "Assets held for disposal" in our December 31, 2003 balance sheet.
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.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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 10, 2004, 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 ULC. As of March 10, 2004,
there were employee-held options outstanding to purchase up to an additional
231,514 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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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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,
2003 and the balance sheet data as of December 31, 2002 and 2003 have been
derived from our audited financial statements included elsewhere in this annual
report on Form 10-K. The statements of operations data for each of the fiscal
years in the two year period ended December 31, 2000 and the balance sheet data
as of December 31, 1999, 2000 and 2001 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 sold in 2000. 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.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Schedule of selected financial data (in thousands except share data and earning
per share):
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Net sales $ 187,874 $ 171,890 $ 159,295 $ 167,261 $ 195,150
Cost of goods sold 151,613 139,641 127,025 126,543 148,141
Selling, general and administrative expenses 28,462 24,713 22,253 22,171 23,995
Costs associated with stock options 2 173 647 (313) 4,997
Special charges (d) - 3,450 1,500 - 6,322
Gain on senior note transactions - (4,063) (660) (431) -
Severance 450 2,226 4,599 2,853 1,765
----------- ----------- ----------- ----------- -----------
Operating income 7,347 5,750 3,931 16,438 9,930
Other (income) expense (a) (1,024) (618) 78 (62) (292)
Real estate provision 1,000 -
Loss on foreign exchange - 1,121 461 1,017 501
Interest expense 15,816 15,025 13,241 11,252 11,046
Minority interest - - 950 2,541 2,611
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations
before income taxes $ (7,445) $ (9,778) $ (10,799) $ 690 $ (3,936)
(Benefit from) provision for income taxes (715) (4,485) (1,378) (290) 1,880
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations $ (6,730) $ (5,293) $ (9,421) $ 980 $ (5,816)
=========== =========== =========== =========== ===========
Net (loss) earnings per common share from
continuing operations:
Basic $ (3.38) $ (2.67) $ (4.75) $ 0.50 $ (2.95)
Diluted $ (3.38) $ (2.67) $ (4.75) $ 0.48 $ (2.95)
Shares used in computing earnings per share:
Basic 1,993,000 1,985,000 1,985,000 1,969,000 1,969,000
Diluted 1,993,000 1,985,000 1,985,000 2,036,000 1,969,000
BALANCE SHEET DATA (at end of period):
Working Capital (excluding debt) $ 47,844 $ 52,931 $ 40,618 $ 42,900 $ 50,403
Total assets 179,604 144,319 124,373 120,485 134,453
Total debt 151,126 113,035 112,244 109,440 107,766
Stockholders' equity (deficit) (16,292) (7,083) (25,350) (35,942) (29,153)
OTHER DATA:
Adjusted EBITDA: $ 18,388 $ 16,878 $ 19,079 $ 25,398 $ 31,181
Cash flow from operating activities: (1,107) (7,745) (2,756) 11,251 10,520
Cash flow from investing activities: (10,847) 47,791 (4,473) (5,384) (4,776)
Cash flow from financing activities: 10,418 (30,584) 268 (4,226) (2,250)
Ratio of earnings to fixed charges (c): - - - 1.0 -
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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 and trademark expenses.
b) Adjusted EBITDA is defined as operating profit plus depreciation,
amortization and other charges. Adjusted EBITDA-related information is
presented in the manner as defined herein because we believe it is a
widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. Adjusted EBITDA is the financial performance
measure used by the Chief Executive Officer, Chief Financial Officer
and management to evaluate the Company's operating performance.
Operating profit is the most closely applicable financial measure
calculated based on generally accepted accounting principles. However,
Adjusted EBITDA-related information should not be considered as an
alternative to net income as a measure of operating results or to cash
flows as a measure of liquidity in accordance with generally accepted
accounting principles. Because Adjusted EBITDA-related information is
not calculated identically by all companies, the presentation in this
report is not likely to be comparable to those disclosed by other
companies.
c) 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 2003 by $3.9 million, in
2001 by $10.8 million, in 2000 by approximately $9.8 million, and in
1999 by $7.4 million.
d) Special charges in 2003 are costs related to the sale of the company
and costs associated with the shutdown of operation in South Africa, 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.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, including South
Africa. As discussed below, we are closing our South African operation. 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, 2003 Compared to Year Ended December 31, 2002
Net sales were $195.2 million in 2003, an increase of $27.9 million, or
16.7%, from $167.3 million in 2002. The increase in sales reflects increases in
all geographic regions. China sales increased $2.5 million, or 11.0%; Argentine
sales increased $8.0 million, or 69.4%; North American sales increased $10.9
million, or 11.8%; European sales increased $5.2 million, a 14.8% increase; and
South African sales increased $1.3 million, a 23.9% increase.
Gross profit was $47.0 million in 2003, or 24.1% of sales. This
compares to gross profit of $40.7 million in 2002, or 24.3% of sales. The
increase of gross profit is a result of increased sales. The decrease in gross
profit as a percent of sales resulted from poor operating performance in South
Africa.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Selling, general, and administrative expense was $24.0 million, or
12.3% of sales in 2003, an increase over the $22.2 million, or 13.3% of sales
recorded in 2002. The slight increase in selling, general, and administrative
expense in dollars and the slight decrease in selling, general and
administrative expense as a percent of sales reflect increased volume.
Due to continuing losses in South Africa, we announced at the end of
2003 our intention to close our South African subsidiary, effectively ended
production at that location and terminated most of our hourly employees in that
country. We expect to complete the closing and liquidation of this operation in
the first half of 2004. As a result of this decision, we recorded charges of
$5.2 million related to impairment and write down of assets, cumulative
translation adjustments not previously recognized, and other costs incurred in
2003 related to the closing, excluding severance. We anticipate approximately
$0.4 million in additional closing costs in 2004. However, we expect these costs
to be offset by a gain on the sale of the land and building we own in South
Africa.
During 2003 we recorded severance and restructuring charges of $1.8
million, primarily related to personnel reductions and restructuring in the
United Kingdom and South Africa. This compares to severance and restructuring
expense of $2.9 million in 2002, primarily related to personnel reductions in
the United Kingdom and the closing of a plant in Argentina.
We adopted variable accounting for our stock option program in 2002.
Because of the increase in the value of our shares in 2003 we recorded stock
option expense of $5.0 million. We also extended the expiration date on certain
options to purchase shares. No additional charge was associated with the
extensions.
In May 2003 we announced that we retained CIBC World Markets Corp. to
assist in the potential sale of the company. In 2003 $1.1 million in costs were
incurred in the process of selling the company. On March 3, 2004 the Company and
the owners of the Company reached a definitive agreement to sell the stock of
Prestolite Electric Holding, Inc. We expect the sale of the company to be
completed in April 2004, whereupon the $98.5 million of senior notes outstanding
is expected to be called for redemption under the terms of the indenture that
governs those notes.
Operating income in 2003 was $9.9 million, a decrease of $6.5 million,
or 39.6%, from $16.4 million in 2002. This was due to the factors discussed
above.
Other income was $292,000 in 2003 compared to other income of $62,000
in 2002. This consists primarily of export rebates partly offset by royalty and
trademark expenses.
In 2003 we recorded a $0.5 million charge for loss on foreign exchange,
down from a $1.0 million charge in 2002. The lower charge resulted from reduced
currency volatility and the strengthening of the Argentina peso against the U.S.
dollar.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Interest expense was $11.0 million in 2003, a decrease of $0.2 million,
or 1.8%, compared to $11.3 million in 2002. This decrease is a result of
reduction in debt.
Our provision for income taxes was $1.9 million in 2003 on the $3.9
million loss from continuing operations before income taxes. This compares to
the benefit from income taxes of $0.3 million on the $0.7 million income from
continuing operations before taxes 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.
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 $13.6 million to more than double the reported sales of 2001.
North American sales increased $16.6 million, or 21.7%. European sales decreased
$1.3 million, a 3.5% 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.
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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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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.
Gain on senior note transactions of $0.4 million and $0.7 million, net
of taxes, was recorded in 2002 and 2001 respectively related to the repurchase
of senior notes. In accordance with SFAS 145, we now display that benefit as an
element of operating income.
Operating income in 2002 was $16.4 million, an increase of $12.5
million, or 318.2%, from the $3.9 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 partly 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 $0.7 million
income from continuing operations before income taxes 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in 2003 was $12.2 million
compared to cash provided of $11.3 million in 2002 and cash usage of $2.8
million in 2001. Discontinued operations used $0.5 million of cash in 2003
compared to the provision of $2.7 million in
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
2002. We received funds from escrow and continued to maintain a facility
previously used by those businesses. Cash usage related to the discontinued
operations was $1.4 million in 2001. Capital spending was $4.8 million in 2003
compared to $5.1 million in 2002 and $4.6 million in 2001. In 2003 capital
spending was $2.6 million in the United States, $0.6 million in the United
Kingdom, $1.0 million in Argentina, $0.3 million in South Africa, and $0.4
million in China compared to $2.0, $1.3, $1.1, $0.1, and $0.1 million
respectively in 2002. Capital expenditures for 2004 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, decreased by $6.0 million in 2003 to $99.1 million
at December 31, 2003. We had revolving credit facilities in the United States
and United Kingdom under which additional borrowings of $11.5 million and $2.6
million, respectively, were available based on the December 31, 2003 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 2003, we had
no bank debt or discounted checks outstanding in Argentina. In South Africa we
borrowed from a bank, supported by a pledge of receivables and the land and
building that we own in South Africa .
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 translated the accompanying income
statements for 2001 at $1.00 per peso. The Argentine peso ended 2003 and 2002
with respective values of $0.3418 and $0.2972 and we used those rates to
translate the December 31, 2003 and December 31, 2002 Argentina balance sheet.
We translated the income statement at various monthly peso values ranging from a
high of $0.597 (January, 2002) to a low of $0.274 (June, 2002). As the result of
using the devalued rate, we recorded in foreign exchange losses of $0.1 million,
$0.9 million and $0.3 million and a charge to other comprehensive income of $0.1
million, $5.1 million and $6.2 million representing the cumulative translation
adjustments in 2003, 2002, and 2001 respectively. Because of the impact of the
financial crisis on our customers, in 2001 we recorded a $1.5 million charge to
cover anticipated bad debts in Argentina.
PENSION PLANS
In the United States, we offer our current employees a defined
contribution (401k) pension plan. In 2003 and 2002 we recorded $0.4 million of
expense related to this plan. We also cover certain previous employees under a
defined benefit plan. In 2003 and 2002 we recorded no expense related to this
plan. At December 31, 2003, the United States plans have estimated obligations
of $3.5 million and assets of $2.6 million. We recorded an additional minimum
liability of $0.8 million representing the unfunded pension obligation as an
element of comprehensive income.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
In the United Kingdom our employees are covered by defined benefit
pension plans to which both Prestolite and the employees contribute. At December
31, 2003, this plan has estimated obligations of $44.3 million and assets of
$36.7 million. At December 31, 2002, this plan had estimated obligations of
$35.5 million and assets of $26.7 million. During 2003 and 2002, respectively,
we recorded expenses of $1.5 million and $0.7 million related to this plan. The
additional minimum liability recorded on our balance sheet was $8.8 million at
December 31, 2003 and $8.2 million at December 31, 2002 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, 2003,
which we have accrued as a liability. During 2003 we recorded expense of $43,000
related to this plan.
The table below summarizes the change in our benefit obligation and in plan
assets during 2003 (in thousands).
United United
States Kingdom Argentina Total
--------- --------- ---------- ---------
Assets
January 1, 2003 $ 2,484 $ 26,727 $ - $ 29,211
Return on assets 371 5,359 - 5,730
Contributions, net of benefits (213) 1,259 - 1,046
Currency change - 3,623 - 3,623
All other - (241) - (241)
-------- -------- -------- --------
December 31, 2003 2,642 36,727 - 39,369
Obligation
January 1, 2003 3,377 35,489 581 39,447
Costs * 300 4,940 68 5,308
Benefits paid (213) (1,223) (84) (1,520)
Participants' contributions - 728 - 728
Currency change - 4,371 84 4,455
All other - -
-------- -------- -------- --------
December 31, 2003 3,464 44,305 649 48,418
-------- -------- -------- --------
Net (Liability) $ (822) $ (7,578) $ (649) $ (9,049)
======== ======== ======== ========
- ----------
* Includes service cost, interest cost, and actuarial costs.
Additional information about our pension plans is provided in Footnote 14 of our
financial statements.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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.
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, 2003
(in thousands):
Payments due by period
Less than 1 - 3 4 - 5 After 5
Contractual Obligations Total 1 year years years years
-------- --------- -------- -------- --------
Debt ( a) $ 5,356 $ 1,149 $ 3,610 $ 587 $ 10
Lines of credit (a) 2,238 2,238 - - -
9.625% Senior unsecured notes 98,533 - - 98,533 -
Capital lease obligations ( b) 998 604 394 - -
Operating leases 2,314 846 1,296 172 -
Other long term obligations ( c) 641 513 128 - -
-------- -------- -------- -------- --------
Total contractual cash obligations $110,080 $ 5,350 $ 5,428 $ 99,292 $ 10
======== ======== ======== ======== ========
(a) Certain conditions of default under the long-term debt agreements in
the United Kingdom may allow our United Kingdom bank to cancel the debt
commitments or to require repayment of drawn amounts. Lines of credit
represent the amounts outstanding at December 31, 2003 on credit
facilities in the United States, United Kingdom, South Africa and in
Argentina. Although the revolving credit agreements may extend beyond
one year, outstanding amounts have been reported as current liabilities
on the balance sheet.
(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.
(c) Includes the debt incurred with the Mosal acquisition in Argentina and
other miscellaneous commitments.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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, 2003 (in thousands):
Amount of commitment expiration per period
Less than 1 to 3 4 to 5 After 5
Total 1 year years years years
----- ------ ----- ------ -----
Letters of credit 946 $ 946 $ - $ - $ -
Other commercial commitments 250 250 - - -
------- ------- ------ ------ ------
Total commercial commitments $ 1,196 $ 1,196 $ - $ - $ -
======= ======= ====== ====== ======
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.
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.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
- 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
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
effective for 2002. Accordingly, we no longer amortize goodwill of $3.7 million
as of December 31, 2001. Instead we assess goodwill for impairment at least
annually.
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 Nos. 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. In 2003, we have reclassified our gain from
extinguishments of debt recorded in prior periods to income from continuing
operations.
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 have accounted for our 2003 decision to close our South Africa operation in
accordance with SFAS No. 146.
In December 2003, the FASB issued Interpretation No. (FIN) 46R, Consolidation of
Variable Interest Entities. The objective of FIN 46 is to improve financial
reporting by companies involved with variable interest entities. Prior to FIN
46R, companies have generally included another entity in its consolidated
financial statements only if it controlled the entity through voting interest.
FIN 46R changes that by requiring a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk or loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. Consolidation by a primary beneficiary of
the assets, liabilities and results of activities if variable interest entities
will provide more complete information about the resources, obligations, risks
and opportunities of the consolidated company. We have not yet determined the
impact that this Interpretation will have on our financial position or results
of operations.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." The revision to SFAS No. 132
requires enhanced disclosures regarding pensions and other postretirement
benefits. We have made the additional disclosures required by SFAS 132.
Page 24
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE(S)
REPORT OF INDEPENDENT AUDITORS....................................... F2
FINANCIAL STATEMENTS
Consolidated Balance Sheet........................................... F3
Consolidated Statement of Operations................................. F4
Consolidated Statement of Stockholders' Equity (Deficit)............. F5
Consolidated Statement of Cash Flows................................. F6
Notes to Consolidated Financial Statements........................... F7-F33
Financial Statement Schedule - Valuations and Qualifying Accounts.... F34
Page 25
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
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, 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, 2003 and 2002, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these 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 $16,078,000 and $14,642,000 as of December 31, 2003 and
2002, respectively, and total revenues of $24,689,000, $15,831,000 and
$33,884,000 for each of the three years in the period ended December 31, 2003.
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 10 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
March 22, 2004
Detroit, Michigan
F2
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(In thousands, except share amounts)
2003 2002
ASSETS
CURRENT ASSETS
Cash $ 8,657 $ 4,386
Accounts receivable, net of allowance for doubtful accounts of
$1,551 and $1,801 at December 31, 2003 and 2002, respectively 34,797 28,264
Inventories, net 41,854 38,699
Prepaid and other current assets 2,601 2,675
---------- ----------
Total current assets 87,909 74,024
Property, plant and equipment
Land, building and improvements 16,679 16,649
Machinery and equipment 59,530 53,471
Construction in progress 1,817 1,617
---------- ----------
78,026 71,737
Less - accumulated depreciation (47,439) (38,705)
---------- ----------
30,587 33,032
Deferred tax asset 2,982 -
Investments 577 577
Goodwill 4,441 4,048
Other intangible assets, net 3,030 3,393
Long-term receivables and pension assets 2,102 3,435
Assets held for disposal 368 -
Net assets related to discontinued operations 2,457 1,976
---------- ----------
TOTAL ASSETS $ 134,453 $ 120,485
========== ==========
LIABILITIES
CURRENT LIABILITIES
Revolving credit $ 3,382 $ 3,575
Current portion of long-term debt 1,122 740
Accounts payable 20,581 16,118
Accrued liabilities 16,925 15,006
---------- ----------
Total current liabilities 42,010 35,439
Long-term debt 103,262 105,125
Deferred tax liabilities 1,263 -
Other non-current liabilities 10,574 9,955
---------- ----------
Total liabilities 157,109 150,519
Minority interest 6,497 5,908
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01; 5,000,000 shares authorized;
1,969,000 shares issued and outstanding at
31, December 2003 and 2002, respectively 2 2
Paid-in capital 21,954 16,957
Retained earnings (accumulated deficit) (10,967) (5,151)
Notes receivable, employees' stock purchase, 7.74% (37) (105)
Treasury stock, 1,334,000 shares at December 31,
2003 and 2002, respectively (24,900) (24,900)
---------- ----------
Total stockholders' deficit before accumulated other
comprehensive income (loss) (13,948) (13,197)
Minimum pension liability (7,058) (9,156)
Foreign currency translation adjustment (8,147) (13,589)
---------- ----------
Accumulated other comprehensive income (loss) (15,205) (22,745)
Total stockholders' equity (deficit) (29,153) (35,942)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 134,453 $ 120,485
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F3
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
2003 2002 2001
Net sales $ 195,150 $ 167,261 $ 159,295
Cost of goods sold 148,141 126,543 127,025
---------- ---------- ----------
Gross profit 47,009 40,718 32,270
Selling, general and administrative expenses 23,995 22,171 22,253
Writedown of South Africa 5,192 - -
Stock options charges 4,997 (313) 647
Severance and restructuring 1,765 2,853 4,599
Costs incurred to sell company 1,130 - -
Gain on senior note transactions - (431) (660)
Additional Argentina bad debt provision - - 1,500
---------- ---------- ----------
Operating income 9,930 16,438 3,931
Other (income) expense (292) (62) 78
Loss on foreign exchange 501 1,017 461
Real estate provision - 1,000 -
Interest expense 11,046 11,252 13,241
Minority interest (net of income taxes) 2,611 2,541 950
---------- ---------- ----------
(Loss) income from continuing operations,
before income taxes (3,936) 690 (10,799)
Income taxes (benefit) 1,880 (290) (1,378)
---------- ---------- ----------
(Loss) income from continuing operations (5,816) 980 (9,421)
Loss on sale of discontinued operations - - (1,600)
---------- ---------- ----------
Net (loss) income $ (5,816) $ 980 $ (11,021)
========== ========== ==========
Basic earnings per common share
(Loss) income from continuing operations $ (2.95) $ 0.50 $ (4.75)
Income from discontinued operations, including
loss on sale of discontinued operations - - (0.81)
---------- ---------- ----------
Net (loss) income $ (2.95) $ 0.50 $ (5.56)
========== ========== ==========
Diluted earnings per common share
(Loss) income from continuing operations $ (2.95) $ 0.48 $ (4.75)
Income from discontinued operations, including
loss on sale of discontinued operations - - (0.81)
---------- ---------- ----------
Net (loss) income $ (2.95) $ 0.48 $ (5.56)
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F4
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income from continuing operations, including $ (5,816) $ 980 $ (9,421)
extraordinary gain
Adjustments to reconcile net (loss) income to
net cash provided by (used in) continuing operating
activities
Gain on senior note purchase - (431) (391)
Minority interest 2,611 2,541 950
Option repurchase / extensions 4,997 (313) 647
South Africa writeoff 5,192 - -
Real estate provision - 1,000 -
Argentina bad debt write-off - - 1,500
Deferred gain on sale and leaseback (192) (192) (306)
Depreciation 7,171 6,044 7,385
Amortization 704 745 1,235
Loss on sale of property, plant and equipment 18 7 33
Deferred taxes 3 - (2,830)
Changes in operating assets and liabilities
Accounts receivable (5,189) (4,277) 2,614
Inventories (2,193) 224 (2,550)
Prepaid and other current assets 561 (253) (3,154)
Accounts payable 3,273 (795) 1,085
Accrued liabilities 1,515 3,229 1,887
-------- -------- --------
Net cash provided by (used in) continuing operating
activities 12,655 8,509 (1,316)
Net cash (used in) provided by discontinued operations (481) 2,742 (1,440)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 12,174 11,251 (2,756)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,816) (5,068) (4,573)
Proceeds from disposal of property, plant and equipment 579 6 225
Acquisition of Mosal - (179) -
Investment in affiliates (171) (143) (125)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (4,408) (5,384) (4,473)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in revolving line of credit (366) (3,071) 1,040
Payments on long-term debt (1,620) (6,051) (1,465)
Proceeds from borrowings - 5,752 2,016
Payment of dividends (2,022) - -
Purchase of treasury stock, options and warrants, employee
stock receivable 68 15 51
(Payments) borrowings on capital leases (253) 248 (202)
Senior note purchase, net - (1,110) (1,065)
Other financing costs, net (79) (9) (107)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (4,272) (4,226) 268
-------- -------- --------
Effect of exchange rate changes on cash 777 (162) (313)
-------- -------- --------
Net increase (decrease) in cash 4,271 1,479 (7,274)
Cash beginning of year 4,386 2,907 10,181
-------- -------- --------
Cash, end of year $ 8,657 $ 4,386 $ 2,907
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 11,044 $ 11,292 $ 13,485
======== ======== ========
Taxes paid $ 1,025 $ 601 $ 862
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F5
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(In thousands)
SHARES RETAINED NOTES
----------------- EARNINGS RECEIVABLE
COMMON TREASURY COMMON PAID-IN (ACCUMULATED EMPLOYEE
STOCK STOCK STOCK CAPITAL DEFICIT) STOCK
Balance, January 1, 2001 3,303 1,318 2 16,623 4,890 (446)
Net income (11,021)
Translation adjustment
Comprehensive income (loss)
Repayment on employee notes
and stock options extended 646 51
----- ----- ------ -------- --------- -------
Balance, December 31, 2001 3,303 1,318 2 17,269 (6,131) (395)
Net income 980
Translation adjustment
Minimum pension liability
Comprehensive income (loss)
Repayment on employee notes
and stock options extended 16 (312) 290
----- ----- ------ -------- --------- -------
Balance, December 31, 2002 3,303 1,334 $ 2 $ 16,957 $ (5,151) $ (105)
Net income (5,816)
Translation adjustment
Minimum pension liability
Comprehensive income (loss)
Repayment on employee notes
and stock options extended - 4,997 68
----- ----- ------ -------- --------- -------
Balance, December 31, 2003 3,303 1,334 $ 2 $ 21,954 $ (10,967) $ (37)
===== ===== ====== ======== ========= =======
FOREIGN
MINIMUM CURRENCY
TREASURY PENSION TRANSLATION COMPREHENSIVE
STOCK LIABILITY ADJUSTMENT TOTAL INCOME
Balance, January 1, 2001 (24,625) - (3,527) (7,083)
Net income (11,021) (11,021)
Translation adjustment (7,943) (7,943) (7,943)
---------
Comprehensive income (loss) - (18,964)
---------
Repayment on employee notes -
and stock options extended 697
--------- ------ --------- ---------
Balance, December 31, 2001 (24,625) - (11,470) (25,350)
Net income 980 980
Translation adjustment (2,119) (2,119) (2,119)
Minimum pension liability (9,156) (9,156) (9,156)
---------
Comprehensive income (loss) - $ (10,295)
---------
Repayment on employee notes -
and stock options extended (275) (297)
--------- ------ --------- ---------
Balance, December 31, 2002 $ (24,900) (9,156) $ (13,589) $ (35,942)
Net income (5,816) (5,816)
Translation adjustment 5,442 5,442 5,442
Minimum pension liability 2,098 2,098 2,098
---------
Comprehensive income (loss) - $ 1,724
---------
Repayment on employee notes -
and stock options extended - 5,065
--------- ------ --------- ---------
Balance, December 31, 2003 $ (24,900) (7,058) $ (8,147) $ (29,153)
========= ====== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F6
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
NOTES TO 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 subsidiaries
("Prestolite"). The wholly-owned subsidiaries of Prestolite Electric
Incorporated now include Prestolite Electric Limited, a U.K. corporation;
Prestolite Indiel Argentina S.A., an Argentina corporation; Prestolite Electric
(Pty) Ltd., a South Africa 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.
Prestolite Electric (Pty) Ltd. has substantially ceased operations as of
December 31, 2003. Operations are generally conducted as Prestolite Electric
Incorporated. There are no material differences between the financial statements
of PEI and Prestolite.
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; two manufacturing facilities are located in Argentina; and one
manufacturing facility is located in China.
In December 2003 we announced the closing of our operation in South
Africa. The facility we own in South Africa is currently for sale, and is
classified as "Assets held for disposal" in our December 31, 2003 balance sheet.
2. SUBSEQUENT EVENTS
On March 3, 2004 the Company and the owners of the Company agreed to
sell the stock of Prestolite Electric Holding, Inc. The transaction is expected
to close during April 2004. Following the close of the transaction we plan to
call the $98.5 million of senior notes outstanding, under the terms of the
indenture governing the notes at a redemption price of 103.21% of par.
On January 15, 2004 we sold our facility in Acton, England for
(pound)25.2 million in cash, net of costs related to the sale. The sale
agreement gives us the right to occupy the building without paying rent through
December 31, 2004. During 2004 we intend to discontinue Acton's production of
in-line fuel pumps, move certain production to other Prestolite locations and
move the remaining Acton operations into a nearby leased facility. The book
value of the facility sold, including (pound)0.3 million of fixed assets that
will be written off because of the sale, was (pound)5.3 million at December 31,
2003. At December 31, 2003 the value of the pound sterling was $1.786.
F7
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
3. SOUTH AFRICA
As the result of continuing losses in South Africa, we advised our
employees, customers, and suppliers at the end of 2003 of our intentions to
close our South African subsidiary. We effectively ended production in South
Africa, and we terminated most of our hourly employees in that country. We
expect to complete the closing and liquidation of that subsidiary during the
first half of 2004. The South African operation recorded sales of $9.5 million,
including $3.0 million of inter-company sales, and incurred an operating loss
(before redundancy, write-offs and other closing-related charges) of $0.8
million for the year ended December 31, 2003.
We recognized $5.8 million of charges in 2003 related to this closing.
This reflects an impairment charge of $2.9 million to write down our South
African assets, excluding land and building, to their estimated realizable
value, $0.6 million in severance charges relating to the termination of 262
South African employees, $1.5 million of cumulative translation adjustments
which were not previously charged to net income, and $0.8 million of other costs
incurred during 2003 relating to the closing. We anticipate additional closing
costs of $0.4 million to be incurred in 2004. However, we expect those costs to
be offset by a gain on the sale of the land and building that we own in South
Africa.
In our December 31, 2003 balance sheet, we included the $0.4 million
book value of the South African land and building in "Assets held for disposal."
4. 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
Argentine income statement for 2001 at $1.00 per peso. The Argentine peso ended
2003 and 2002 with respective values of $.3418 and $0.2972 and we used those
rates to translate the December 31, 2003 and December 31, 2002 Argentina balance
sheets. We translated the income statements at various monthly peso values
ranging from a high of $0.597 (January, 2002) to a low of $0.274 (June, 2002).
As the result of the devalued rate, we recorded foreign exchange losses of $0.1
million, $0.9 million, $0.3 million and a charges to other comprehensive income
of $0.1 million, $5.1 million, and $6.2 million representing the cumulative
translation adjustments in 2003, 2002 and 2001, respectively. Because of the
impact of the financial crisis on our customers, in 2001 we recorded a $1.5
million charge to cover anticipated bad debts in Argentina.
F8
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
4. ARGENTINA (CONTINUED)
Our practice in Argentina had 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 2001. Also during 2001 our Argentine
subsidiary reduced its non-debt discounted checks outstanding by $3.7 million
and bank debt outstanding by $1.2 million. During 2002 we lent an additional
$2.1 million to our Argentine subsidiary and the subsidiary reduced its bank
debt and discounted checks to zero. In 2003 the Argentine subsidiary repaid $1.9
million of the loan received from North America.
5. DISCONTINUED OPERATIONS
On August 4, 2000, we sold our direct current electric motor business,
battery charger business and switch business to Ametek, Inc. The adjusted sale
price was approximately $57.4 million, including $0.5 million in escrow at
December 31, 2003.
During 2001 we reduced the gain recorded in 2000 by recording a charge
of $1.6 million; no tax benefit associated with this charge was recorded. A
portion of this charge adjusted the carrying value of a manufacturing facility
previously used by some of the operations sold. The charge also included $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.
We guaranteed the lease on the Thermadyne portion of that facility
through October 31, 2006. Annual lease payments are $447,000. During 2002
Thermadyne advised us that they intend to vacate the facility at the end of
2003. We recorded a $1.0 million charge in 2002 to further reduce the value of
the idle manufacturing facility we own and to provide for an anticipated loss on
the guaranteed lease. During 2003 we reached an agreement with Thermadyne and
the building owner. Under the terms of that agreement, we will have no further
obligations under the lease guarantee after mid-2004. No charge or credit to
income resulted from that agreement.
Net assets related to discontinued operations at December 31 are
summarized below (in thousands):
2003 2002
--------- --------
In escrow $ 539 $ 536
Facility held for sale 3,246 3,246
Accrued transaction costs,
estimated sale price reductions, and
provision for lease guarantee (1,328) (1,806)
--------- --------
$ 2,457 $ 1,976
========= ========
F9
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
6. 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
inter-company accounts and transactions are eliminated in consolidation. Certain
previously reported amounts have been reclassified to conform to the current
period presentation.
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.
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
inventory manufactured in the United States and by the first-in, first-out
("FIFO") method for all inventory located or manufactured outside the United
States. Approximately $25,333,000 and $28,948,000 of net inventories at December
31, 2003 and 2002, 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).
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.
ENGINEERING EXPENSES
Engineering costs are expensed as incurred and are included in selling,
general, and administrative expenses. Total engineering expenses for the years
ended December 31, 2003, 2002 and 2001 were $3,487,000, $3,175,000, and
$3,475,000, respectively. Included in these engineering expenses were research
and development costs (as defined by Statement of Financial Accounting Standards
No. 2) for the years ended December 31, 2003, 2002, and 2001 of $2,107,000,
$1,958,000, and $2,251,000.
F10
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 from continuing operations 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, 2003 and 2002. The fair
value of the senior unsecured notes was approximately $100.8 million at December
31, 2003. 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 reflects all non-owner changes in
equity in addition to net income, consists of net income, foreign currency
translation adjustments and minimum pension liability and is presented in the
statement of stockholders' equity.
MINORITY INTEREST
Minority interest included in the consolidated 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 the minority shareholders of PEBL
along with their 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.
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.
F11
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Instead
we assess goodwill for impairment at least annually.
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 Nos. 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. In 2003, we have reclassified our gain
from extinguishments of debt recorded in prior periods to income from continuing
operations.
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 have accounted for our 2003 decision to close our South
African operation in accordance with SFAS No. 146.
In December 2003, the FASB issued Interpretation No. (FIN) 46R,
Consolidation of Variable Interest Entities. The objective of FIN 46 is to
improve financial reporting by companies involved with variable interest
entities. Prior to FIN 46R, companies have generally included another entity in
its consolidated financial statements only if it controlled the entity through
voting interest. FIN 46R changes that by requiring a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk or loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. Consolidation by a
primary beneficiary of the assets, liabilities and results of activities if
variable interest entities will provide more complete information about the
resources, obligations, risks and opportunities of the consolidated company. We
have not yet determined the impact that this Interpretation will have on our
financial position or results of operations.
In December 2003, the FASB revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The revision to
SFAS No. 132 requires enhanced disclosures regarding pensions and other
postretirement benefits. We have made the additional disclosures required by
SFAS 132.
F12
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
7. JOINT VENTURE
Prestolite Electric Beijing, Ltd. (PEBL) began operations in The People's
Republic of China on April 1, 2001. Prestolite owns 52% of PEBL, and we have
included the results of PEBL in our consolidated financial statements after
eliminating intercompany activity. Shangdu Diwei Economy Development Co., Ltd
(Diwei) owns the other 48% of PEBL. The managers of PEBL own Diwei. Prestolite
contributed certain technology to PEBL and agreed to contribute an additional
$1.9 million in cash to PEBL. The predecessor to Diwei, Beijing Jin-Hu Auto
Electric Company Limited, contributed certain technology and agreed to
contribute certain fixed assets to PEBL. All of the remaining contributions to
PEBL were made during 2003.
In 2002 the company eliminated the one month lag previously employed in
reporting the results of its operations in China, adding $0.9 million to
reported sales and $0.2 million to operating income and EBITDA in that year.
8. 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):
2003 2002 2001
Weighted average number of shares of common
stock used in computing basic EPS 1,969 1,969 1,985
Weighted average number of shares of common
stock used in computing dilutive EPS 1,969 2,036 1,985
Stock options were not considered in calculating diluted earnings per share for
2003 and 2001 since the effect of inclusion would be anti-dilutive to earnings
per common share from continuing operations. Had the Company been in a net
income position for 2003 and 2001 the number of weighted average shares used to
compute diluted earnings per share would have included an additional 205,537
shares for 2003 and 93,419 shares for 2001. For 2002 there were 66,754 stock
options included in calculating diluted earnings per share amounts.
F13
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
9. INVENTORIES
Inventories consist of the following at December 31 (in thousands):
2003 2002
FIFO cost
Raw materials $ 21,110 $ 19,519
Work in process 5,662 3,919
Finished goods 17,702 18,315
-------- --------
Total FIFO cost 44,474 41,753
Adjustment to LIFO cost 857 778
Reserves for excess and obsolescence (3,477) (3,832)
-------- --------
$ 41,854 $ 38,699
======== ========
10. GOODWILL AND INTANGIBLE ASSETS
In 2001 the Financial Accounting Standards Board issued Statement of Accounting
Standard 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. Effective
January 1, 2002, we adopted SFAS 142 and accordingly, we no longer amortize
goodwill. This goodwill is instead assessed for impairment at least annually. At
December 31, 2003, the goodwill balance was approximately $4.4 million. For
purposes of testing this goodwill for potential impairment, fair values were
determined based upon the anticipated earnings multiples of the operating units.
The initial assessment indicated that the fair value exceeded the corresponding
carrying value. This analysis was completed again for the year ended December
31, 2003, which indicated that the fair value continued to exceed the carrying
values.
Goodwill changes in 2003 (in thousands):
Balance December 31, 2002 $4,048
Impact of foreign currency 393
------
Balance December 31, 2003 $4,441
======
SFAS 142 does not provide for restatement of our results of operations for
periods ending prior to January 2002. Our results of operations for the year
ended December 31, 2001 included goodwill amortization expense, net of taxes, of
$699,000. Excluding the effect of goodwill amortization, our reported net loss
for the year 2001 would have been reduced from $11.0 million to $10.3 million.
Our net loss per common share would have been reduced from $5.55 to $5.20 per
common share.
F14
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
10. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
Intangible assets consist of the following (in thousands, except weighted
average life):
December 31, 2003 December 31, 2002
----------------------------------- -------------------------------------
Gross Weighted Gross Weighted
Carrying Accum Average Carrying Accum Average
Amounts Amort Life (years) Amounts Amort Life (years)
------- ----- ------------ ------- ----- ------------
Licenses $ 226 $ (183) 7 $ 226 $ (151) 7
MOSAL 887 (314) 10 699 (135) 10
Financing costs 4,613 (2,940) 10 4,613 (2,533) 10
Technology 972 (231) 10 801 (127) 10
------- ------- ------- -------
Total $ 6,698 $(3,668) $ 6,339 $(2,946)
======= ======= ======= =======
Aggregate amortization expense (included in S G & A)
For the year ended December 31, 2003 $ 704
Estimated amortization expense
For the year ended December 31, 2004 $ 882
For the year ended December 31, 2005 $ 768
For the year ended December 31, 2006 $ 514
For the year ended December 31, 2007 $ 514
11. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31 (in
thousands):
2003 2002
Accrued compensation $ 2,869 $ 2,177
Accrued warranty 2,302 2,131
Accrued severance 1,005 1,915
Accrued interest 4,010 3,969
Accrued taxes 2,623 2,459
Non refundable deposit (U.K.) 1,786 -
Other accrued liabilities 2,330 2,355
-------- --------
$ 16,925 $ 15,006
======== ========
F15
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
12. DEBT
Debt consists of the following at December 31 (in thousands):
2003 2002
North America
Float $ 372 $ 130
Revolving credit - -
Senior unsecured notes, 9.625% 98,533 98,533
-------- --------
Subtotal North America 98,905 98,663
-------- --------
United Kingdom
Overdraft facility 771 1,425
Term loan 5,320 5,752
South Africa Bank Debt 1,096 990
MOSAL Obligation (Argentina) 641 1,040
-------- --------
Subtotal International 7,828 9,207
-------- --------
Total term, revolving credit and senior notes 106,733 107,870
Capital lease obligations 998 1,456
Other 35 114
-------- --------
Consolidated total 107,766 109,440
Less - current maturities 4,504 4,315
-------- --------
Consolidated long-term debt $103,262 $105,125
======== ========
Our U.S. bank borrowing arrangements consist of a $10 million revolving
credit facility and a $3.5 million revolving credit and letter of credit
facility. Interest is payable on amounts borrowed under the revolving credit
facility at the 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, 4.0% at December 31, 2003. 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, 2003 letters of credit totaling $0.8
million were outstanding.
Our U. K. agreement consists of a E3.6 million variable rate term loan
and a E2.3 million overdraft facility. Interest on the variable rate term loan
is 1.375% above the bank's base rate (3.75% at December 31, 2003), and interest
on the overdraft is at 1.25% above the base rate. The term loan is repayable in
sixty monthly payments through January 2008. The U. K. loans are collateralized
by eligible receivables and fixed assets in the United Kingdom. The Company was
in violation of certain U.K. debt covenants at December 31, 2003 and 2002, which
were waived by the U.K. bank.
In March 2002 our Argentine subsidiary acquired an Argentine
corporation ("MOSAL") for 4.0 million Argentine pesos, 500,000 pesos in cash and
3.5 million pesos
F16
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
12. DEBT (CONTINUED)
due over the next three years. The 3.5 million peso obligation has been paid
down to 1.9 million pesos as of December 31, 2003 and is shown in the table
above as $0.6 million of "MOSAL obligation."
In South Africa we borrow from a bank at the bank's prime lending rate,
11.5% at December 31, 2003. This loan is supported by a pledge of South African
receivables and the land and building that we own in South Africa.
In China, our joint venture obtained a bank line of credit in October
2002 for Rmb 10.0 million ($1.2 million translated at 8.28 Rmb to one U.S.
dollar on December 31, 2003). This one-year agreement was renewed in 2003. No
amounts were outstanding at December 31, 2003 and 2002.
At December 31, 2003 we classified amounts due under the U.K. overdraft
facility and South African bank facility as "current" debt because we intend to
repay those loans during 2004.
At December 31, 2003 we could have borrowed an additional $11.5 million
in the U.S. and $2.6 million (E1.5 million, translated at $1.79 per pound
sterling) in the U. K.
The 9.625% senior unsecured 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. We purchased and
retired senior notes with a face value of $1.6 million and $1.8 million in 2002,
and 2001, recording gain on the senior note transactions of $0.4 million and
$0.7 million, respectively. As described in Note 2, we intend to call these
notes following the sale of the company.
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 6.5:1 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):
YEAR
2004 $ 4,504
2005 1,479
2006 1,336
2007 1,317
2008 99,120
Thereafter 10
--------
$107,766
========
F17
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
13. INCOME TAXES
(Loss) income from continuing operations, before minority interest and
income taxes, consists of the following (in thousands):
2003 2002 2001
United States $(3,080) $(2,297) $(4,455)
Foreign 1,755 5,528 (5,394)
------- ------- -------
$(1,325) $ 3,231 $(9,849)
======= ======= =======
The components of income tax related to continuing operations are as
follows (in thousands):
2003 2002 2001
United States
Current $ (258) $ - $ (690)
Deferred - (1,049)
State and local (150) (142) (181)
Foreign
Current (1,469) (148) 273
Deferred (3) - -
------- ------- -------
$(1,880) $ (290) $(1,647)
======= ======= =======
A reconciliation of the U. S. statutory tax rate to the effective tax
rate is as follows:
2003 2002 2001
Statutory rate 34.0% 34.0% 34.0%
Change in valuation reserve (168.7) - -
Basis Differences 98.5 - -
State and local, net of federal benefit (7.5) (5.9) 1.7
Difference in foreign tax rates (91.1) (57.4) 5.3
Permanent difference - 2.5 (0.4)
NOLs - 17.8 (23.9)
Other (7.1) - -
------ ------ ------
(141.9)% (9.0)% 16.7%
====== ====== ======
F18
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
13. INCOME TAXES (CONTINUED)
Our operation in China enjoyed a tax holiday through 2002 and is
scheduled to pay taxes at 12% for the next three years.
The major components of deferred taxes (stated on an after tax basis)
on the balance sheet are as follows (in thousands):
2003 2002
Deferred tax assets
Accrued tax benefit carryforwards $ 4,248 $ 9,441
Accounts receivable 201 246
Current liabilities 1,243 869
Assets of discontinued operations 628 437
Minimum pension liabilities 2,982 --
Other 1,812 1,110
-------- --------
Gross deferred tax assets 11,114 12,103
Valuation reserve (4,327) (9,083)
-------- --------
Net deferred tax assets $ 6,787 $ 3,020
Deferred tax liabilities
Inventory (2,278) (1,826)
Property, plant and equipment (2,461) (960)
Other (329) (234)
-------- --------
Gross deferred tax liabilities (5,068) (3,020)
-------- --------
Net deferred tax assets and liabilities 1,719 -
======== ========
Our Argentina subsidiary has NOL carry-forwards at December 31, 2003 of
approximately $19.6 million, which expire in 2004 through 2008. 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.
U.S. foreign tax credits are $3.5 million at December 31, 2003. These
credits will begin to expire in 2006. These tax credits have a full valuation
reserve against them as a result of the Company's overall foreign loss position
as management believes that realization of these benefits is not probable.
F19
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
14. 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
$425,000, $422,000, and $421,000 for 2003, 2002, and 2001, respectively.
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. As a result of our
decision to close the South Africa subsidiary, we wrote down the pension asset,
valued at $1.1 million at December 31, 2003, to zero.
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the United States defined benefit plans at December
31, 2003 and 2002, based upon most recent actuarial valuations (December, 31,
2002 and 2001), (in thousands):
2003 2002
Change in benefit obligation
Benefit obligation at beginning of year $ 3,377 $ 3,108
Service cost 13 12
Interest cost 218 224
Actuarial (gain) loss 69 242
Benefits paid (213) (209)
------- -------
Benefit obligation at end of year 3,464 3,377
------- -------
Change in plan assets
Fair value of plan assets at beginning of year 2,484 2,840
Actual return on plan assets 371 (147)
Employer contribution - -
Benefits paid (213) (209)
------- -------
Fair value of plan assets at end of year 2,642 2,484
------- -------
Funded status (822) (893)
Unrecognized net actuarial (gain) loss 717 849
------- -------
Net amount recognized $ (105) $ (44)
======= =======
F20
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table provides the amounts recognized in the Consolidated Balance
Sheet for the United States plan as of December 31, 2003 and 2002 (in
thousands):
Pension Benefits
--------------------------
December 31, December 31,
2003 2002
---- ----
Accrued benefit liability $(822) $(894)
Accumulated other comprehensive income 717 850
----- -----
Net amount recognized $(105) $ (44)
===== =====
The following table provides the amounts recognized in the Statements of
Financial Operations for the United States defined benefit plans for the years
ended December 31, 2003, 2002, and 2001 (in thousands):
PENSION BENEFITS
----------------------------
2003 2002 2001
---- ---- ----
Components of net periodic benefit cost
Service cost $ 13 $ 12 $ 12
Interest cost 218 224 227
Expected return on plan assets (189) (228) (237)
Amortization of net (gain) loss 20 - (4)
----- ----- -----
Net periodic benefit cost $ 62 $ 8 $ (2)
===== ===== =====
Other information regarding the United States plan for the periods
ending December 31, 2003, 2002, and 2001 is summarized below (in thousands):
2003 2002 2001
---- ---- ----
Projected benefit obligation $ 3,464 $ 3,377 $ 3,108
Accumulated benefit obligation 3,464 3,377 3,108
Fair value of plan assets 2,642 2,484 2,840
(Decrease) Increase in minimum liability
included in other comprehensive income (132) 617 -
F21
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
The key assumptions of the United States plan were:
2003 2002 2001
---- ---- ----
Measurement date Dec. 31 Dec. 31 Dec. 31
Actuarial valuation by Aon Aon Aon
Weighted-average assumptions:
Discount rate 6.25% 6.75% 7.50%
Rate of asset return 8.00% 8.00% 8.00%
Rate of compensation increase - - -
The Trust for the United States plan invests in equity securities,
fixed income securities and cash equivalents and other short term investments.
The Trust may invest in these investments directly or through pooled vehicles,
including mutual funds. The fair value of the total plan assets as of the
measurement date was invested as follows:
2003 2002
---- ----
Equity securities 62% 52%
Fixed income securities 37% 48%
Cash equivalents 1%
The objective of the investment committee of the company is to provide
for growth of capital with a moderate level of volatility. The committee
currently has specified a target allocation of 60% equity and 40% fixed income
investments. The assets are reallocated periodically to meet this target
allocation. The target allocation is reviewed periodically, under the advisement
of a certified investment advisor, to determine if the policy should be changed.
The expected long-term rate of return for the plan's assets is based on
the expected return of each of the investment categories, weighted based upon
the median of the target allocation for each class. Equity securities are
expected to return 10% to 11% over the long term, while cash and fixed income
securities are expected to return between 4% and 6%. Based on historical
experience, the Committee expects that the plan's assets will provide a modest
(0% to 0.5% per annum) premium to their respective market benchmark indices.
Our best estimate of total contributions to the plan for the next
fiscal year is nil ($0).
F22
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following provides a reconciliation of benefit obligations, plan
assets and funded status of the United Kingdom defined benefit plans at December
31, 2003 and 2002, based upon the most recent actuarial valuations (December 31,
2003 and 2002), (in thousands):
2003 2002
Change in benefit obligation
Benefit obligation at beginning of year $ 35,489 $ 28,836
Service cost 874 1,072
Interest cost 2,112 1,754
Plan participants' contributions 728 590
Actuarial loss 1,954 362
Benefits paid (1,223) (514)
Change in currency 4,371 3,389
-------- --------
Benefit obligation at end of year 44,305 35,489
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year 26,727 28,539
Actual return on plan assets 5,359 (5,510)
Employer contribution 1,755 1,070
Plan participants' contributions 727 590
Benefits paid (1,223) (514)
Cost of insurance - -
Administration expenses (241) -
Change in currency 3,623 2,552
-------- --------
Fair value of Plan assets at end of year 36,727 26,727
-------- --------
Funded status (7,578) (8,762)
Unrecognized transition (asset) obligation (339) (431)
Unrecognized prior-service cost 145 169
Unrecognized actuarial (gain)/loss 9,242 10,082
-------- --------
Prepaid benefit cost $ 1,470 $ 1,058
======== ========
F23
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table provides the amounts recognized in the Consolidated
Balance Sheets for the United Kingdom plan as of December 31, 2003 and 2002 (in
thousands):
Pension Benefits
--------------------------
December 31, December 31,
2003 2002
---- ----
Prepaid benefit cost $ 354 $ 232
Deferred tax asset 2,642 -
Accrued benefit liability (7,837) (7,528)
Intangible asset 145 169
Accumulated other comprehensive income 6,166 8,185
------- -------
Net amount recognized $ 1,470 $ 1,058
======= =======
The following table provides the amounts recognized in the Statements
of Financial Operations for the United Kingdom plan for the years ended December
31, 2003, 2002, and 2001 (in thousands):
PENSION BENEFITS
----------------------------------
2003 2002 2001
Components of net periodic benefit cost
Service cost $ 874 $ 1,072 $ 1,647
Interest cost 2,112 1,754 1,723
Expected return on plan assets (1,869) (2,034) (2,159)
Amortization of transition (asset) obligation (126) (116) (129)
Amortization of prior-service cost 39 35 40
Recognized net actuarial loss 457 (3) (15)
------- ------- -------
Net periodic benefit cost $ 1,487 $ 708 $ 1,107
======= ======= =======
The increase in the minimum liability included in other comprehensive
income was $623,000. The minimum liability of $8.8 million was reported as net
of tax in 2003 whereas in 2002 the $8.2 million was reported as gross. The tax
adjustment of $2.6 million was netted against the $623,000.
F24
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
Key assumptions of the United Kingdom plan were:
2003 2002 2001
---------- ---------- ----------
Measurement date Dec. 31 Dec. 31 Dec. 31
Actuarial valuation by Mercers Mercers Mercers
Exchange rate 1.7859 1.6097 1.4560
Weighted average assumptions:
Discount rate 5.50% 6.00% 6.00%
Expected return on plan 6.91% 7.00% 7.00%
Rate of compensation increase 3.00% 3.50% 3.50%
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 (in thousands):
2003 2002
----- ------
Change in benefit obligation:
Benefit obligation at beginning of year $ 581 $ 1,189
Interest cost 35 97
Actuarial loss 33 116
Benefits paid (84) (213)
Effect of exchange rate changes 84 (608)
----- -------
Benefit obligation at end of year $ 649 $ 581
===== =======
Funded status $(649) $ (581)
Unrecognized transition obligation 83 78
Unrecognized actuarial loss 177 122
----- -------
Net amount recognized $(389) $ (381)
===== =======
2003 2002
----- -----
Amounts recognized in the balance sheet:
Accrued benefit liability $(649) $(581)
Intangible asset 83 78
Accumulated other comprehensive loss 177 122
----- -----
$(389) $(381)
===== =====
Weighted average assumptions:
Discount rate 6.25% 6.75%
===== =====
F25
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
Year ended
December 31 December 31 December 31
2003 2002 2001
--------------- --------------- ---------------
Components of net periodic pension cost:
Interest cost $ 35 $ 97 $ 151
Amortization of transition obligation 8 20 28
--------------- --------------- ---------------
$ 43 $ 117 $ 179
=============== =============== ===============
We provide for certain former United States employees post-retirement
life insurance. This life insurance covers 200 employees with benefits ranging
from $1,000 to $23,000 per individual. This coverage is insured at a current
annual cost of $48,000. Although insured coverage during 2003 was restated as a
result of an insurance carrier omission, no previous year actuarial valuation
was completed.
The following is the actuarial valuation of this life insurance
coverage (in thousands):
2003
-------
Actuarial loss $ 444
Obligation at end of year 444
=======
Fair value of plan assets -
=======
Funded status at end of year (444)
=======
Key assumptions used in the actuarial valuation:
Measurement date Dec. 31
Weighted average assumptions:
Discount rate 6.25%
F26
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
15. 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 2008. Future minimum lease payments for
operating leases at December 31, 2003 were (in thousands):
OPERATING LEASES
- ----------------
2004 $ 846
2005 607
2006 503
2007 186
2008 172
-------
Total $ 2,314
=======
Rent expense for the operating leases of continuing operations was
$1,510,000, $1,470,000, and $1,177,000 for the years ended December 31, 2003,
2002 and 2001.
Scheduled payments on capital leases as of December 31, 2003 were (in
thousands):
CAPITAL LEASES(YEAR ENDED DECEMBER 31)
- -------------------------------------
2004 $ 675
2005 143
2006 128
2007 113
2008 -
2009 -
------
Total minimum lease payments 1,059
Less - imputed interest 61
------
Present value of net minimum lease payments $ 998
======
The net book value, as of December 31, 2003 and 2002, of equipment
under capital leases was $997,810 and $1,455,748, which is net of amortization
of $634,186 and $500,370, respectively.
F27
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
16. STOCK OPTIONS AND WARRANTS
We have reserved 350,280 shares of common stock for issuance under the
Prestolite stock option plan. Exercise prices were adjusted to $3.50 per share
in 2002. No options have been exercised. Options 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. Options expire ten years from the date
of grant.
The changes in stock options outstanding for the years ended December
31, 2003, 2002, and 2001 are as follows:
AVERAGE
EXERCISE
OPTIONS PRICE
---------- ----------
Outstanding at December 31, 2000 335,660 $ 13.92
Granted 6,000 $ 16.00
Forfeited (15,000) $ 21.48
----------
Outstanding at December 31, 2001 326,660 $ 13.61
Granted 31,288 $ 3.50
Forfeited upon employment termination (24,200) $ 18.12
Forfeited in conjunction with
reduction in exercise price (111,234) $ -
----------
Outstanding at December 31, 2002 222,514 $ 3.50
Granted 10,000 $ 5.00
Forfeited (1,000) $ 3.50
----------
Outstanding at December 31, 2003 231,514 $ 3.56
Exercisable at December 31, 2003 - $ -
==========
Vested at December 31, 2003 188,648 $ 3.50
==========
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
$646,000 in 2001 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 these options and for the options issued during 2002. Under
variable accounting, the increase or decrease in option value is recorded as
expense or income in the current period. As a
F28
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
16. STOCK OPTIONS AND WARRANTS (CONTINUED)
result of the decline of the estimated fair market value per share in 2002 we
recorded a benefit of $313,000. Because of the increase in the estimated fair
market value per share in 2003, we recorded a 2003 charge of $5.0 million
related to stock options.
During 2003 we extended to January 30, 2005 the expiration date on
options to purchase 73,716 shares at $3.50 per share. Those options would have
expired in 2004 had we not extended them. We also extended until June 30, 2004
certain options held by departing employees. Because we adopted variable
accounting in 2002 and continued to use variable accounting with respect to
options in 2003, no additional charge was associated with the extension.
Information with respect to stock options outstanding at December 31,
2003 follows:
AVERAGE
OPTIONS REMAINING
EXERCISE OUTSTANDING AT CONTRACTUAL
PRICE DECEMBER 31, 2003 LIFE (YEARS)
- ---------- ----------------- ------------
$ 3.50 4,458 0.50
$ 3.50 99,161 1.00
$ 3.50 39,399 2.00
$ 3.50 24,551 4.25
$ 3.50 9,663 5.50
$ 3.50 11,324 6.83
$ 3.50 3,170 7.75
$ 3.50 29,788 8.75
$ 3.50 10,000 9.25
------------
Total 231,514
============
During 2001 we did not recognize compensation expense on the issuance
of our stock options because the option terms were fixed and the exercise price
equaled the fair value of the underlying stock on the grant date.
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. Principal assumptions used in calculating the pro forma
information were a 6% risk-free interest rate, a seven year expected life, zero
percent volatility, zero percent yield and fair values of options granted of
$16.00 in 2001.
F29
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Financial Statements
16. STOCK OPTIONS AND WARRANTS (CONTINUED)
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):
2001
----------
Net income (loss), as reported $ (11,021)
Net income (loss), pro forma $ (11,141)
Earnings (loss) per common share, as reported
Basic and diluted $ (5.55)
Earnings (loss) per common share, pro forma
Basic and diluted $ (5.61)
Proforma information is not shown for 2003 and 2002 because we are accounting
for the options issued in those years on a variable accounting basis.
17. RELATED PARTY TRANSACTIONS
We have a management consulting agreement with Genstar Investment
Corporation ("GIC"); an affiliate of GIC controls 97.5% of the votes on our
outstanding stock. Under the agreement, we pay GIC a management consulting fee.
For the years ended December 31, 2003, 2002, and 2001, we charged $600,000,
$600,000, and $600,000, respectively, to operations under this agreement. At
both December 31, 2003 and 2002, $150,000 of these fees were accrued and unpaid.
18. 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, 2003 and 2002 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.
F30
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
19. GUARANTEES AND WARRANTIES
As discussed in footnote 3, Prestolite guaranteed certain third-party
lease obligations in conjunction with the sale of a business in 1997. We have
guaranteed no other third-party obligations.
Prestolite provides warranties to its customers. We accrue the
estimated future costs of those warranties at the time the sale occurs. Warranty
reserve activity is summarized below (in thousands):
2003 2002
------- -------
Beginning balance $ 2,131 $ 1,666
Expense 5,568 4,913
Credits to customers (5,397) (4,448)
------- -------
Ending balance $ 2,302 $ 2,131
======= =======
20. SEVERANCE
We record severance expenses when plans are announced and employees
notified. The severance charged to operations in the table below is related to
personnel reductions primarily in the United Kingdom and in Argentina for both
2003 and 2002. The following is a summary of the severance charges and outlays
(in thousands):
2003 2002
------- -------
Beginning balance $ 1,915 $ 1,617
Severance charged to operations 1,765 2,853
Payments (2,779) (1,990)
Currency change 104 (565)
------- -------
Ending balance $ 1,005 $ 1,915
======= =======
21. SEGMENT AND GEOGRAPHIC REPORTING
We operate in five geographic locations (including South Africa - see Note 3);
each location's revenue and operating performance is managed and reported
separately. We evaluate operating performance based on adjusted earnings before
interest expense, taxes, depreciation, and amortization (Adjusted EBITDA). The
Company defines Adjusted EBITDA as operating income plus depreciation,
amortization, and other special charges. Corporate overhead and certain other
charges are not allocated to the business/geographic units. Sales, assets and
Adjusted EBITDA for those units are summarized below.
F31
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
21. SEGMENT AND GEOGRAPHIC REPORTING (CONTINUED)
Sales are as follows (in thousands):
NORTH SOUTH
AMERICA EUROPE AMERICA AFRICA ASIA OTHER TOTAL
-------- -------- -------- ------- -------- ----------- ----------
Sales to external customers,
based on country of domicile
2003 $103,762 $ 40,369 $ 19,591 $ 6,486 $ 24,942 $ - $ 195,150
2002 $ 92,817 $ 35,179 $ 11,568 $ 5,233 $ 22,464 $ - $ 167,261
2001 $ 76,248 $ 36,454 $ 30,740 $ 6,985 $ 8,868 $ - $ 159,295
Long-lived assets
2003 $ 11,333 $ 14,071 $ 2,222 $ 761 $ 2,200 $ - $ 30,587
2002 $ 11,726 $ 15,094 $ 2,301 $ 1,233 $ 2,678 $ - $ 33,032
2001 $ 12,413 $ 14,673 $ 3,354 $ 1,084 $ 2,307 $ - $ 33,831
Sales to external customers,
based on location of
customers
2003 $ 95,243 $ 37,499 $ 19,447 $ 6,441 $ 34,131 $ 2,389 $ 195,150
2002 $ 89,091 $ 32,294 $ 11,123 $ 4,258 $ 27,649 $ 2,846 $ 167,261
2001 $ 71,761 $ 32,911 $ 30,456 $ 7,175 $ 5,532 $ 11,460 $ 159,295
Unallocated
Adjusted EBITDA Costs
2003 $ 20,091 $ 6,600 $ 4,813 $ (799) $ 6,277 $ (5,801) $ 31,181
2002 $ 16,812 $ 4,516 $ 3,608 $ 116 $ 5,772 $ (5,426) $ 25,398
2001 $ 13,292 $ 5,792 $ 1,012 $ 523 $ 1,999 $ (3,539) $ 19,079
A reconciliation of Adjusted EBITDA to operating income follows (in
thousands):
2003 2002 2001
-------- -------- --------
Total Adjusted EBITDA for reporting segments $ 31,181 $ 25,398 $ 19,079
Less:
Depreciation and amortization 7,875 6,789 8,620
Severance 1,765 2,853 4,599
Gain on senior note transactions - (431) (660)
Option repurchase and extension costs 4,997 (313) 647
Other expense (income) 292 62 (78)
South Africa writedown 5,192 - -
Costs related to sale of company 1,130
Argentina bad debt - 1,500
UK inventory reserve charge - - 520
-------- -------- --------
Operating income $ 9,930 $ 16,438 $ 3,931
======== ======== ========
F32
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
SCHEDULE II
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
VALUATIONS AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
---------------------------------
BALANCE AT CHARGE TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (1) OF PERIOD
--------------- --------------- --------------- --------------- ---------------
Allowance for Doubtful Accounts:
Year ended December 31, 2003 $ 1,801 $ 724 $ 974 $ 1,551
Year ended December 31, 2002 $ 2,138 $ 1,095 $ 1,432 $ 1,801
Year ended December 31, 2001 $ 2,447 $ 970 $ 1,279 $ 2,138
Reserve for Inventory Obsolescence:
Year ended December 31, 2003 $ 3,832 $ 1,113 $ 1,468 $ 3,477
Year ended December 31, 2002 $ 3,488 $ 1,630 $ 1,286 $ 3,832
Year ended December 31, 2001 $ 4,229 $ 1,221 $ 1,962 $ 3,488
- ------------
(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 devaluations
and other exchange rate changes at the balance sheet dates of December 31,
2000 to December 31, 2001
F33
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
Page 58
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of December 31,
2003 with respect to our executive officers and directors:
NAME AGE POSITION
- ------------------------- --- -------------------------------------------------------------------
P. Kim Packard 65 President, Chief Executive Officer and Director
Peter J. Corrigan 45 Executive Vice President, Chief Operating Officer
Kenneth C. Cornelius 59 Executive Vice President, Chief Financial Officer and Secretary
Dennis P. Chelminski 51 Vice President, Controller, Treasurer and Assistant Secretary
Michael Lea 60 Vice President and Division President, Heavy Duty Products Division
John Jenkins 45 Corporate Vice President and Managing Director, Heavy Duty Europe
Kenneth C. Wilson 56 Vice President Manufacturing Services
Richard D. Paterson (a)(b) 61 Chairman of the Board and Director
Ross J. Turner (b) 73 Director
John A. West (a) (b) 76 Director
- -----------
(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.
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. In 2003 Mr.
Corrigan was promoted to Executive Vice President/Chief Operating Officer. Mr.
Corrigan holds a BA in Physics from Wake Forest University and an MBA from Case
Western Reserve University.
Kenneth C. Cornelius began service as our Executive 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
Page 59
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
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.
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.
Kenneth C. Wilson, Vice President Manufacturing Services, joined
Prestolite in April 2001. Mr. Wilson was most recently employed by Manufacturing
Consultants in Port Elizabeth, South Africa and Sarasota, Florida. Prior to
consulting, Mr. Wilson spent ten years in various executive positions with TRW
in Australia and Japan. Before joining TRW, Mr. Wilson worked for 19 years at
General Motors Corporation, most recently as a Vice President. Mr. Wilson
received his BSME from Michigan State University and did MBA work at Wayne State
University and Harvard.
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 ULC,
since 1987 and was a director of the predecessor of Genstar Capital ULC 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 the predecessor of Genstar Capital ULC from 1988 through
August 1995. 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 ULC, since 1987 and was a director of the
predecessor of Genstar Capital ULC from 1988 through August 1995. In addition,
he is currently a director of a number of privately held corporations.
BOARD OF DIRECTORS
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.
Page 60
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Board Committees
Our Board of Directors currently has an audit committee and a
compensation committee. The audit committee consists of Richard D. Paterson and
John A. West. The Board of Directors has determined that Mr. Paterson is
considered an audit committee financial expert. Both Mr. Paterson and Mr. West
are affiliated with Genstar Investment Corporation as described in Item 13 and
therefore are not considered independent.
Our compensation committee consists of Richard D. Paterson, Ross J.
Turner and John A. West. The compensation committee makes recommendations to the
Board of Directors regarding our stock plans and compensation of officers. The
compensation committee uses outside consultants to help determine salary ranges
for the senior officers of the company. Compensation for our Chief Executive
Officer is based on those salary ranges, the performance of the Company against
its business plans and when compared to its competitors, and judgmental factors.
Board Compensation
Our directors do not receive any compensation for their services as
directors.
CODE OF ETHICS
The Company's Code of Business Ethics, which applies to all employees,
officers and directors including the Principal Executive Officer, Principal
Financial Officer and Principal Accounting Officer, is posted on the Company's
intranet site. The Code of Business Ethics is compliant with Item 406 of
Regulation S-K as required by the SEC. Any change to the Code of Business Ethics
that affects the provisions required by Item 406 of Regulation S-K will also be
disclosed on our intranet and in an 8-K Current Report within five business days
following such amendment. Any waivers of the Code of Business Ethics for our
executive officers or senior financial officers must be approved by the
Company's Audit Committee or by the Board of Directors. Those waivers, if any
were ever granted, would be disclosed on our intranet and in an 8-K Current
Report within five business days following such waiver. Our Code of Business
Ethics is filed with this Form 10-K as Exhibit 99.1.
Page 61
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid for the years
ended December 31, 2003, 2002, and 2001 to the Chief Executive Officer and the
four other highest compensated employees who were serving as executive officers
at December 31, 2003:
Other Annual Long-Term All Other
Name and Compensation Compensation Compensation
Principal Position Year Salary ($) Bonus ($)(a) ($) (b) Awards (c) ($) (d)
------------------ ---- ---------- ------------ ------------ ------------ ------------
P. Kim Packard 2003 429,808 350,000 - - 87,110
President and 2002 405,000 120,000 - - 14,500
Chief Executive Officer 2001 404,642 70,000 - - 13,450
Kenneth C. Cornelius 2003 209,928 135,000 - - 8,351
Executive Vice President 2002 200,567 46,500 - - 8,267
Chief Financial Officer 2001 192,000 38,000 - - 34,678
Peter J. Corrigan 2003 189,034 90,000 - - 5,579
Executive Vice President 2002 153,400 27,000 - - 5,369
Chief Operating Officer 2001 133,154 8,000 - - 4,660
Michael Lea 2003 164,937 80,000 - - 53,406
Vice President and 2002 156,744 25,000 - - 27,020
Division President 2001 150,000 - - - 39,764
Kenneth C. Wilson 2003 160,372 70,000 - - 5,825
Vice President 2002 153,400 14,000 - - 4,187
Manufacturing Services 2001 106,761 - - - -
(a) Amounts in 2003, 2002 and 2001 reflect bonuses earned during 2002, 2001
and 2000 but paid during 2003, 2002 and 2001 respectively. Amounts earned in
2003 have not yet been determined.
(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 in 2003, 2002,
or 2001.
(d) Amounts in 2003, 2002, and 2001 reflect (i) premiums paid for life
insurance coverage in excess of $50,000, (ii) contribution to our United Kingdom
pension plan and national health plan for Mr. Lea, and pursuant to our 401(k)
plan for the other four individuals, (iii) for Messrs. Packard (2002 and 2001)
and Cornelius (2001), interest on deferred compensation (Mr. Packard - $7,500;
Mr. Cornelius - $2,500) payable pursuant to a Deferred Compensation Agreement
between us and each of Messrs. Packard and Cornelius, (iv) payment of deferred
compensation for Mr. Packard (2003) of $75,000, Mr. Cornelius (2001) of $25,000
and (v) tax equalization payments in 2003, 2002 and 2001 to Mr. Lea of $12,648,
$8,896, and $20,522 respectively.
Page 62
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
OPTION CHANGES IN LAST FISCAL YEAR
During 2003 the Company extended to January 30, 2005 the expiration
date on options to purchase 73,716 shares at $3.50 per share. Those options
would have expired in 2004 had they not been extended. The Company also extended
until June 30, 2004 certain options held by departing employees. Because the
Company adopted variable accounting in 2002 and continues to use variable
accounting with respect to options in 2003, no additional charge was associated
with this extension.
OPTION GRANTS IN LAST FISCAL YEAR
The table below summarizes the options granted in 2003.
Potential
Realization Value
Number of % of Options at Assumed Rates of
Securities Granted to Exercise Stock Price
Underlying Employees in Price per Expiration Appreciation for
Name Options 2003 Share (a) Date Option Term (b)
- ---- ------- ---- --------- ---- ---------------
5% 10%
------- -------
Peter J. Corrigan 10,000 100.0% $5.00 4/1/2013 $31,445 $79,685
(a) The exercise price was equal to the fair market value of the common
stock on the date of the grant, as determined by our board of directors
based upon our historical and projected financial performance.
(b) The 5% and 10% assumed rates are prescribed by the rules and
regulations of the Securities and Exchange Commission and do not
represent our estimate or projection of the future trading price of our
common stock. We cannot assure that any of the values reflected in this
table will be achieved. Actual gains, if any, on stock option exercises
are dependent on numerous factors, including our future performance,
overall conditions and the option holder's continued employment
throughout the entire vesting period and option term, which factors are
not reflected in this table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table summarizes the exercise of options during the year
ended December 31, 2003 and number and value of all unexercised options held by
certain executive officers as of December 31, 2003.
Shares Value Number of Securities Value of Unexercised
Acquired on Realized Underlying Unexercised In-The-Money Options at
Name Exercise (#) ($) Options at FY-End (#) FY-End ($) (a)
- -------------------- ------------ -------- ------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
P. Kim Packard - - 116,304 6,196 3,287,914 175,161
Peter J. Corrigan - - 9,949 11,351 281,258 305,893
Kenneth C. Cornelius - - 23,323 9,177 659,340 259,434
Michael Lea - - 16,397 1,203 463,542 34,009
Kenneth C. Wilson - - 1,002 1,898 28,326 53,657
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
(a) Value is based upon the fair market value of our common stock as of
December 31, 2003 determined by our board of directors, minus the exercise
price. Fair market value was determined by our board of directors based upon our
historical and projected financial performance.
MANAGEMENT STOCK OPTION PLAN
In 1998, the PEI Holding, Inc. Management Stock Option Plan was amended
and restated. 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, 2003, a total 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 20% on January 1 of the first calendar
year following granting of the option and 20% 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. Options are exercisable 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 other decisions with respect to such
options. 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 ULC, or our dissolution or liquidation, then the
compensation committee 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.
Options outstanding and remaining available for future issuance under all
equity compensation plans of the Company are summarized below.
Page 64
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Number of Number of common shares
common shares to Weighted remaining available for
be issued upon average exercise future issuance under
exercise of price of equity compensation plans
outstanding outstanding excluding securities
options options reflected in column (a)
Plan Category (a) (b) (c)
- ---------------------- ---------------- ---------------- --------------------------
Equity compensation 231,514 $3.565 118,766
plans approved by
security holders
Equity compensation none n/a none
plans not approved
by security holders
Total 231,514 $3.565 118,766
EMPLOYMENT AGREEMENTS
We have entered into agreements with each of Messrs. Packard,
Cornelius, Lea, and Corrigan. 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 employment agreements) or as a result of death or disability,
the individual shall receive for a period of one year following the date of
termination the then-current salary and benefits that he would otherwise have
been entitled to receive (except for Mr. Packard who would receive salary and
benefits for two years).
Each of the agreements provides that if the individual's employment is
terminated within twelve months following a change of control (as defined in the
employment agreements) for any reason other than for cause, he 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 will be payable at such time
and in such manner as if the employee remained employed, and such benefits shall
continue notwithstanding re-employment and/or death of the employee following
termination of employment.
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, 2003 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, 2003, there were 1,969,000 shares of our common
stock outstanding.
Page 65
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Name Number (a) Percent (a)
---- ---------- -----------
Genstar Capital ULC (b) 1,920,000 97.5%
North Bay Limited (c) 178,580 9.1
Crown Life Insurance Company (c) 142,880 7.3
P. Kim Packard (d) 133,304 6.4
Paul Capital Partners VI Holdings (c) 107,140 5.4
Kenneth C. Cornelius (e) 31,323 1.6
Michael Lea (f) 24,397 1.2
Dennis P. Chelminski (g) 19,101 1.0
Peter J. Corrigan (h) 17,949 *
John Jenkins (i) 2,051 *
Kenneth C. Wilson (j) 1,002 *
Richard D. Paterson (c) (k) 89,300 4.5
Ross J. Turner (c) (k) 89,300 4.5
John A. West (c) (k) 89,300 4.5
All executive officers and directors as a group (10 persons) (l) 318,428 14.8
- ---------
* 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, 2004, 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 Holding, Inc. formerly
held by Genstar Capital ULC were distributed to the 39 shareholders of Genstar
Capital ULC. 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 ULC. 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 ULC.
(d) Consists of 17,000 shares of common stock and 116,304 shares issuable
upon exercise of options that are currently exercisable or exercisable within 60
days of March 15, 2004. Does not include 6,196 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2004.
(e) Consists of 8,000 shares of common stock and 23,323 shares issuable
upon exercise of options that are currently exercisable or exercisable within 60
days of March 15, 2004. Does not include 9,177 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2004.
(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 16,397
shares issuable upon exercise of options that are currently exercisable or
exercisable within 60 days of March 15, 2004. Does not include 1,203 shares
issuable upon exercise of options which vest more than 60 days after March 15,
2004.
(g) Consists of 8,000 shares of common stock and 11,101 shares issuable
upon exercise of options that are currently exercisable or exercisable within 60
days of March 15, 2004. Does not include 899 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2004.
(h) Consists of 8,000 shares of common stock and 9,949 shares issuable
upon exercise of options that are currently exercisable or exercisable within 60
days of March 15, 2004. Does not include 11,351 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2004.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
(i) Consists of 2,051 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 2004. Does not
include 1,149 shares issuable upon exercise of options which vest more than 60
days after March 15, 2004.
(j) Consists of 1,002 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 2004. Does not
include 1,898 shares issuable upon exercise of options which vest more than 60
days after March 15, 2004.
(k) 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 ULC as to which Messrs. Paterson, Turner and West disclaim
beneficial ownership. See Item 13. "Certain Relationships and Related
Transactions." Genstar Capital ULC controls 87.3% of our common stock on a
fully-diluted basis.
(l) Amount shown includes an aggregate of 318,428 shares of common stock
issuable upon the exercise of options exercisable within 60 days of March 15,
2004. Does not include an aggregate of 31,872 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2004.
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 ULC and owns 89,300 of our
outstanding shares.
We have a management agreement with Genstar Investment Corporation
under which Genstar Investment Corporation has agreed to provide Prestolite with
ongoing management and financial advisory services. Payments are made quarterly.
In 2001, 2002 and 2003, Prestolite paid management and advisory fees of
$600,000, plus out-of-pocket expenses, to Genstar Investment Corporation.
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PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
ITEM 14. AUDIT ISSUES
AUDIT FEES.
PricewaterhouseCoopers LLP served as our independent accountants for
the years ended December 31, 2003 and 2002 in North America, the United Kingdom,
China and South Africa. Deloitte and Touche LLP served as the independent
accountant in Argentina and also as our tax accountants in the United States.
Amounts paid for these services is detailed below:
2003 2002
-------- ---------
Audit $503,555 $ 419,376
Audit related 62,934 24,200
Tax 240,298 218,267
Other 93,683 -
-------- ---------
$900,470 $ -
======== =========
Audit fees were for professional services rendered in connection with
the audits and quarterly reviews of the subsidiaries and consolidated financial
statements of the Company, review of and preparation of consents for
registration statements with the Securities and Exchange Commission and country
statutory audits.
Audited related fees were for assurance and services related to
employee benefit plan audits. Audit related fees for the year ended December 31,
2003 include fees related to internal audit reviews.
Tax fees related to services for tax compliance and consulting.
All other fees for 2003 include the tax consulting as it related to the
sale of the Company.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES.
At their regularly scheduled and special meetings the Audit Committee
of the Board of Directors considers and pre-approves any audit and non-audit
services to be performed for the Company by the Company's independent
accountants.
Promptly after July 30, 2002, the effective date of the Sarbanes-Oxley
Act of 2002, the Audit Committee of the Board of Directors approved all
non-audit services being performed at that time by the Company's principal
accountant and adopted is pre-approval policies and procedures as set forth
above.
Page 68
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS OF FORM 8-K
(a) Financial Statements
Consolidated Balance Sheet as of December 31, 2003 and 2002...................................... Part II, Item 8
Consolidated Statement of Operations for each of the years in the three year
period ended December 31, 2003.......................................................... Part II, Item 8
Consolidated Statement of Stockholders' (Deficit) Equity for each of the three
years in the three year period ended December 31, 2003.................................. Part II, Item 8
Consolidated Statement of Cash Flows for each of the three years in the three
year period ended December 31, 2003..................................................... Part II, Item 8
Notes to the Consolidated Financial Statements................................................... Part II, Item 8
Independent Accountant's Report.................................................................. Part II, Item 8
Schedule II -Valuation and Qualifying Accounts.................................................. Part II, Item 8
(b) Reports on form 8-K.
The following reports have been filed on Form 8-K in the fourth quarter
of 2003 and in the first quarter of 2004 prior to filing of this Form
10-K:
Current Report (8-K), dated November 12, 2003, reporting the issuance
of Prestolite's third quarter and first nine months of 2003 earnings
press release, the subsequent distribution to select contacts, and the
posting of this press release to Prestolite's web site. This Form 8-K
was accepted by the SEC on November 14, 2003.
Current Report (8-K), dated January 26, 2004, reporting the issuance of
a press release announcing the sale of a manufacturing facility in the
United Kingdom and the separate and unrelated closing of South African
operations, the subsequent distribution of this press release to select
contacts, and the posting of this press release to Prestolite's web
site. This Form 8-K was accepted by the SEC on January 26, 2004.
Current Report (8-K), dated March 5, 2004, reporting the issuance of a
press release announcing that Genstar Capital, ULC and Prestolite
Electric Holding, Inc. had signed a definitive agreement with First
Atlantic Capital, Ltd. to sell Prestolite Electric. This press release
also announced that upon closing this sale transaction, Prestolite
would call its 9 5/8% Senior Notes Due 2008 for redemption. This press
release was subsequently distributed to select contacts and added to
Prestolite's web site.
Current Report (8-K), dated March 15, 2004, reporting the issuance of
Prestolite's 2003 year end earnings press release, the subsequent
distribution of that press release to select contacts, and the addition
of this press release to Prestolite's web site.
Page 69
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
(c) Exhibits.
Exhibit
Number Description
- ------ -----------
31.1 Certification on the chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Prestolite Electric's Code of Business Ethics dated November XX, 2003.
Page 70
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 19th day of March, 2004.
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.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ P. Kim Packard President, Chief Executive Officer March 19, 2004
- ---------------------------- (principal executive officer)
P. Kim Packard Director
/s/ Richard D. Paterson Chairman of the Board, Director March 19, 2004
- ----------------------------
Richard D. Paterson
/s/ Kenneth C. Cornelius Senior Vice President, Chief March 19, 2004
- ---------------------------- Financial Officer (principal
Kenneth C. Cornelius accounting and financial officer)
and Secretary
/s/ Ross J. Turner Director March 19, 2004
- ----------------------------
Ross J. Turner
/s/ John A. West Director March 19, 2004
- ----------------------------
John A. West
Exhibit Index
Exhibit No. Description
- ----------- -----------
31.1 Certification on the chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.1 Prestolite Electric's Code of Business Ethics dated November
XX, 2003.