PRESTOLITE ELECTRIC HOLDING INC - 10-Q Quarterly Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

(Mark one)
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 28, 2003.

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period From_______to_______.

Commission file Number 333-49429-01

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

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

2311 Green Road, Ste. B., Ann Arbor, Michigan 48105
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

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

Not Applicable
(Former name, address, and former fiscal year, if changed since last report)

Indicate whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.

Yes X No
----------- ------------

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:

Number of common shares outstanding
Class: as of August 13, 2003
Common Stock 1,969,000

This form 10Q may be found on Prestolite's website at
http://www.prestolite.com/literature/corp/2003_2q10q.pdf.

FORM 10-Q

TABLE OF CONTENTS

Part I: Item 1: Financial Information

Condensed Consolidated Balance Sheets
at June 28, 2003 (unaudited) and December 31, 2002 3

Condensed Consolidated Statements of Operations
Three and six months ended June 28, 2003 and June 29, 2002 4

Condensed Consolidated Statements of Cash Flows
Six months ended June 28, 2003 and June 29, 2002 5

Notes to Condensed Consolidated Financial Statements 6

Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14

Item 4: Internal Controls and Procedures 18

Part II: Other Information 19

Signatures 20

Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 21

Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 22

Page 2

PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

June 28, December 31,
2003 2002
------------ -----------
Assets (Unaudited)
Current Assets:

Cash $ 3,668 $ 4,386
Accounts receivable, net of allowances 29,987 28,264
Inventories, net 46,850 38,699
Prepaid and other current assets 3,209 2,675
--------- ---------
Total current assets 83,714 74,024

Property, plant and equipment, net 31,515 33,032
Investments 577 577
Goodwill 4,138 4,048
Other intangibles, net 3,367 3,393
Long-term receivables and pension assets 3,941 3,435
Net assets of discontinued operations 2,073 1,976
--------- ---------
Total assets $ 129,325 $ 120,485
========= =========

Liabilities
Current Liabilities:
Revolving credit $ 5,761 $ 3,575
Current portion of long-term debt 867 740
Accounts payable 17,893 16,118
Accrued liabilities 15,921 15,006
--------- ---------
Total current liabilities 40,442 35,439

Long-term debt 104,189 105,125
Other non-current liabilities 9,954 9,955
--------- ---------
Total liabilities 154,585 150,519

Minority interest 4,716 5,908

Stockholders' equity (deficit)
Common stock, par value $.01, 5,000,000 shares authorized,
1,969,000 shares issued and outstanding
at June 28, 2003 and December 31, 2002 2 2
Paid-in capital 17,538 16,957
Accumulated deficit (1,780) (5,151)
Notes receivable, employees' stock purchase, 7.74% due 2002 (105) (105)
Treasury stock, 1,334,000 shares on June 28, 2003
and December 31, 2002 (24,900) (24,900)
--------- ---------
Total stockholders' deficit before accumulated other
comprehensive income (loss) (9,245) (13,197)

Minimum pension liability (9,156) (9,156)
Foreign currency translation adjustment (11,575) (13,589)
--------- ---------
Accumulated other comprehensive income (loss) (20,731) (22,745)

Total stockholders' equity (deficit) (29,976) (35,942)

--------- ---------
Total liabilities and stockholders' equity (deficit) $ 129,325 $ 120,485
========= =========

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

Page 3

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts

For the three months ended For the six months ended
------------------------------ ------------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
----------- ----------- ----------- -----------

Net sales $ 46,037 $ 40,742 $ 88,414 $ 77,383
Cost of goods sold 34,626 30,608 65,712 58,717
----------- ----------- ----------- -----------
Gross profit 11,411 10,134 22,702 18,666

Selling, general and administrative 5,816 5,541 11,494 11,096
Stock option charges 581 - 581 -
Severance charges 61 89 83 180
----------- ----------- ----------- -----------
Operating income 4,953 4,504 10,544 7,390

Interest expense 2,818 2,745 5,544 5,616
Foreign exchange losses 284 387 78 963
Lease guarantee charge - 400 - 400
Minority interest expense 275 582 830 900
Other income (93) (105) (171) (38)
----------- ----------- ----------- -----------

Income (loss) before income taxes 1,669 495 4,263 (451)

Provision for income taxes 488 307 892 466

----------- ----------- ----------- -----------
Net income (loss) 1,181 188 3,371 (917)

Other comprehensive income (loss):
Foreign currency translation adjustment 1,751 504 2,014 (4,228)

----------- ----------- ----------- -----------
Comprehensive income (loss) $ 2,932 $ 692 $ 5,385 $ (5,145)
=========== =========== =========== ===========

Basic earnings (loss) per common share $ 0.60 $ 0.09 $ 1.71 $ (0.46)

Diluted earnings (loss) per common share $ 0.56 $ 0.09 $ 1.61 $ (0.46)

Basic weighted average shares outstanding 1,969,000 1,985,000 1,969,000 1,985,000
Diluted weighted average shares outstanding 2,091,007 1,985,000 2,091,007 1,985,000

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

Page 4

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

For the six months ended
------------------------
June 28, June 29,
2003 2002
------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ 3,371 $ (917)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation 3,369 2,965
Amortization 376 339
Option repurchase / extension 581
Minority interest income 830 900
Loss (gain) on sale of property, plant, and equipment (86) 3
Deferred gain on sale and leaseback (96) (96)
Changes in working capital items (8,164) (4,555)
------- -------
Net cash provided by (used in) continuing operating activities 181 (1,361)
Net cash provided by (used in) discontinued operations (97) 2,925
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 84 1,564

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures (2,359) (1,971)
Proceeds from disposal of fixed assets 294 -
Acquisition of Mosal - (179)
Investment in affiliates (155) -
------- -------
NET CASH USED IN INVESTING ACTIVITIES (2,220) (2,150)

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in revolving line of credit 2,180 158
Payments on long-term debt (432) (738)
Proceeds from borrowings - 362
Borrowings (payments) on capital leases (130) (190)
Other financing costs, net (377) (6)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,241 (414)

Effect of exchange rate changes on cash 177 186

------- -------
Net increase (decrease) in cash (718) (814)
Cash - beginning of period 4,386 2,907

------- -------
CASH - END OF PERIOD $ 3,668 $ 2,093
======= =======

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

Page 5

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

NOTE 1: GENERAL INFORMATION

Prestolite Electric Holding, Inc. conducts all of its operations through its
wholly-owned principal subsidiary, Prestolite Electric Incorporated. There are
no material differences between the financial statements of Prestolite Electric
Holding, Inc. and Prestolite Electric Incorporated (collectively, "Prestolite,"
"us," "we" or the "Company").

These unaudited consolidated financial statements have been prepared by us in
accordance with Rule 10-01 of Regulation S-X and have been prepared on a basis
consistent with our audited financial statements for the year ended December 31,
2002. These statements reflect all adjustments, including items of a normal
recurring nature, which are, in the opinion of management, necessary for the
fair presentation of the consolidated financial position, results of operations,
and cash flows for the interim periods presented.

Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial statements
and the related notes should be read in conjunction with our audited financial
statements, the notes to those statements and the other material included in our
Annual Report on Form 10-K for the year ended December 31, 2002. The results of
operations for the six-month period ended June 28, 2003 are not necessarily
indicative of the operating results that may be expected for the full year or
any other interim period.

On January 22, 2002, the 1,920,000 shares of Prestolite Electric Holding, Inc.
formerly held by Genstar Capital Corporation were distributed to the 39
shareholders of Genstar Capital Corporation. The voting power associated with
the shares is exercised by Genstar Capital Corporation.

NOTE 2: JOINT VENTURE

Prestolite Electric Beijing, Ltd. (PEBL) began operations in The People's
Republic of China on April 1, 2001. Prestolite initially contributed certain
technology to PEBL and agreed to contribute an additional $1.9 million in cash
to PEBL by the first quarter of 2004. In order to receive a dividend from PEBL,
the contributed capital was required to be made. Therefore in the second quarter
of 2003 the contribution of $1.9 million was made. Subsequently, we received a
dividend of $2.2 million from PEBL. The joint venture partners did not receive
their corresponding dividend at June 28, 2003 and as a result, $2.1 million is
included in accrued liabilities at June 28, 2003.

Page 6

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 3: GOODWILL AND INTANGIBLE ASSETS

Changes in goodwill for the six months ended June 28, 2003 follow (in
thousands):

Amortizable intangible assets consist of the following (in thousands):

The MOSAL change was caused by the impact of exchange rate changes for foreign
currency.

Page 7

PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4: INVENTORIES

Inventories are summarized as follows (in thousands):

NOTE 5: PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):

Page 8

NOTE 6: DEBT

Debt consists of the following (in thousands):

As of As of
June 28, December 31,
2003 2002
-------- -----------

North America
Float $ 371 $ 130
Senior unsecured notes, 9.625% 98,533 98,533
Revolving credit 2,484 -
-------- --------
Total 101,388 98,663

United Kingdom
Overdraft facility 1,417 1,425
Term loan 4,405 5,752
South Africa 1,489 990
Argentina - -
MOSAL obligation 982 1,040
China - -
-------- --------
Total 8,293 9,207

Total term, revolving credit and senior debt 109,681 107,870
Capital lease obligations 1,099 1,456
Other 37 114
-------- --------
Consolidated total 110,817 109,440
Less current maturities 6,628 4,315
-------- --------
Consolidated long term debt $104,189 $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 our Funded Debt Ratio. We were paying interest at prime, 4% at June 28,
2003. The letter of credit fee is 2% of amounts drawn. Both U.S. facilities are
collateralized by eligible accounts receivable and inventory. On June 28, 2003,
letters of credit totaling $0.7 million were outstanding.

The 9.625% (interest payable semiannually) senior notes are senior unsecured
obligations of Prestolite Electric Incorporated and are fully and
unconditionally guaranteed on a senior unsecured basis by Prestolite Electric
Holding, Inc. The notes mature on February 1, 2008, and are redeemable at our
option, in whole or in part, beginning on February 1, 2003 at amounts from
104.8125% to 100% of the principal plus accrued interest. The senior notes are
more fully described in our Prospectus dated June 26, 1998.

Page 9

NOTE 6: DEBT (CONTINUED)

Our U.K. agreement consists of a (pound)3.6 million variable rate term loan and
a (pound)2.3 million overdraft facility. Interest on the variable rate loan is
1.375% above the bank's base rate (3.75% at June 28, 2003) and interest on the
overdraft is at 1.25% above the base rate. The term loan is repayable in sixty
monthly payments through December 2007. The U.K. loans are collateralized by
eligible receivables and fixed assets in the United Kingdom.

At June 28, 2003 and December 31, 2002 we had no Argentine bank debt
outstanding. In March 2002 our Argentine subsidiary acquired an Argentine
corporation ("MOSAL") with certain tax benefits for 4.0 million Argentine pesos:
500,000 pesos in cash and 3.5 million pesos due over the next three years. The
3.5 million pesos are shown in the table above as $1.0 million of "MOSAL
obligation" at December 31, 2002 and 3.0 million pesos are recorded as $1.0
million at June 28, 2003.

In South Africa we borrow from a bank at the bank's prime lending rate. This
loan is supported by a pledge of South African receivables and fixed assets.

In China, our joint venture has a bank line of credit for Rmb 10.0 million ($1.2
million translated at 8.28 Rmb to one U.S. dollar on June 28, 2003). There were
no borrowings against this line at June 28, 2003 or December 31, 2002.

We classified $6.6 million of debt as current at June 28, 2003. This consisted
of principal payments of $1.0 million due in the United Kingdom, principal
payments of $0.3 million due on lease rental obligations, $0.6 million due for
the MOSAL obligation, and $4.7 million of revolving debt which we expect (but
are not obligated) to pay down over the following twelve months.

The senior notes and bank arrangements mentioned above contain various covenants
including 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 require us to maintain a Funded Debt Ratio of not more than 6.5:1
and a Fixed Charge Coverage Ratio of not less that 1:1, as those terms are
defined in our bank agreements. The foreign facilities contain covenants that
pertain to the foreign operations.

Page 10

NOTE 7: SEVERANCE

We record severance expense when plans are announced and employees notified. The
severance charged to operations in the table below is related to personnel
reductions in the United Kingdom and in Argentina for the first half of 2003.
The following is a summary of our severance liability charges and outlays (in
thousands):

Beginning balance, December 31, 2002 $ 1,915
Severance charged to operations 83
Payments (1,337)
Currency change (129)
---------

Ending balance, June 28, 2003 $ 532
=========

NOTE 8: DISCONTINUED OPERATIONS

Net assets related to discontinued operations at June 28, 2003 and December 31,
2002 are presented below (in thousands):

NOTE 9: 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). The peso traded at $0.3396 (2.94 pesos per dollar)
on March 30, 2002 and as a result of using this rate, we recorded a first
quarter 2002 foreign exchange loss of $585,000 and a charge to other
comprehensive income of $4.4 million representing the cumulative translation
adjustment. The Argentine peso ended 2002 with a value of $0.2972 and we used
that rate to translate the December 31, 2002 Argentina balance sheet. The peso
traded at $0.3552 (2.82 pesos per dollar) on June 27, 2003. As a result, we
recorded a first half 2003 foreign exchange gain of $0.1 million and other
comprehensive income of $1.1 million representing the cumulative translation
adjustment.

Page 11

NOTE 10: GEOGRAPHIC REGIONS

Prestolite operates in five principal geographic regions; each region'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) in each geographic region. 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 from Africa
and South America consist largely of products for automotive and light truck
applications while sales of products from North America and Europe consist
largely of products for heavy-duty applications. China sales are primarily
products for medium and heavy-duty applications.

Sales, assets and Adjusted EBITDA are summarized by geographic region as follows
(in thousands):

Page 12

NOTE 10: GEOGRAPHIC REGIONS (CONTINUED)

The senior notes and bank arrangements mentioned above contain various covenants
including 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 require us to maintain a Funded Debt Ratio of not more than 6.5:1
and a Fixed Charge Coverage Ratio of not less that 1:1, as those terms are
defined in our bank agreements. The foreign facilities contain covenants that
pertain to the foreign operations.

A reconciliation of adjusted EBITDA to net income follows (in thousands of U.S.
dollars):

For the quarter ended For the six months ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
-------- -------- -------- --------

Adjusted EBITDA of geographic regions $ 8,900 $ 7,901 $ 17,652 $ 13,938
Less:
Corporate costs 1,312 1,647 2,528 3,026
Depreciation and amortization 1,900 1,556 3,745 3,304
Lease guarantee charge - 400 - 400
Severance 61 89 83 180
Stock option charges 581 - 581 -
Interest expense 2,818 2,745 5,544 5,616
Foreign exchange loss 284 387 78 963
Minority interest expense 275 582 830 900
Provision for income taxes 488 307 892 466
-------- -------- -------- --------
Net income (loss) $ 1,181 $ 188 $ 3,371 $ (917)
======== ======== ======== ========

Page 13

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

OVERVIEW

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

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

The 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. In both South Africa
and Argentina a significant portion of our sales are to the automotive
aftermarket, and a portion of those aftermarket sales are products purchased for
resale.

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

RESULTS OF OPERATIONS
Quarter Ended June 28, 2003 Compared to Quarter Ended June 29, 2002

Sales to external customers for the quarter ended June 28, 2003 were $46.0
million, an increase of $5.3 million, or 13.0%, from $40.7 million in the second
quarter of 2002. Contributions to the sales increase were South American sales
of $5.4 million in the second quarter of 2003, an increase of $2.8 million, or
104.2%, from sales in the second quarter of 2002 of $2.7 million; North American
sales of $25.4 million, an increase of $2.5 million, or 11.1%, over sales in the
second quarter of 2002 of $22.8 million; African sales of $1.7 million, an
increase of $0.1 million or 8.8%; and European sales of $9.5 million, an
increase of $0.7 million or 8.4%. These sales increases were partially offset by
sales in China of $4.1 million, a decrease of $0.9 million, or 17.6%, from sales
of $5.0 million in the second quarter 2002, mostly due to the impact of SARS on
our bus manufacturing customers. The increases in Argentinean, European and
African sales were partially due to exchange rate changes. In local currencies,
South American sales rose approximately 102%, with aftermarket sales from South
America increasing 102.5% and export sales from South America increasing 99.2%;
European and African sales fell slightly across most markets.

Page 14

Gross profit was $11.4 million in the second quarter of 2003, or 24.8% of
sales. This compares to gross profit of $10.1 million, or 24.9% of sales, in the
second quarter of 2002. Increased sales volumes, control of product costs,
offset by the strengthening of the Argentine Peso and South African Rand
produced the improvement in gross profit.

Selling, general, and administrative expense was $5.8 million, or 12.6% of
sales for the second quarter of 2003, an increase of $0.3 million, or 4.9%, from
$5.5 million, or 13.6% of sales, in the second quarter of 2002. The dollar
increase in selling, general, and administrative expense is due to inflation
plus additional spending for sales and marketing.

Operating income in the second quarter of 2003 was $5.0 million, or 10.8%
of sales, an increase of $0.5 million, or 10.0%, from the $4.5 million, or 11.0%
of sales, in the second quarter of 2002. This was due to the factors discussed
above. In the second quarter a $0.6 million charge for options was recorded.

Interest expense was $2.8 million in the second quarter of 2003, an
increase of $0.1 million compared to $2.7 million in the second quarter of 2002.
This increase is due to an increase in South African debt and changes in the
interest rates on bank debt.

The provision for income taxes was $488,000, 29.2% of the income before
taxes, for the second quarter of 2003 compared to the $307,000 provision for
income taxes, 62.0% of income before tax, for the second quarter of 2002. During
the second quarter of 2003 we booked a benefit in the United Kingdom to adjust
for corrections to the 2002 provision. In 2002 we did not book a benefit in the
Unites States for the second quarter loss.

Six Months Ended June 28, 2003 Compared to Six Months Ended June 29, 2002

Sales for the six months ended June 28, 2003 were $88.4 million, an
increase of $11.0 million, or 14.3%, from $77.4 million in the first six months
of 2002. The sales increase is attributable to the North American sales of $48.5
million in the first six months of 2003, an increase of $3.8 million, or 8.4%,
from sales in the first six months of 2002 of $44.7 million; South American
sales of $9.0 million, an increase of $4.3 million or 91.0%; European sales of
$18.5 million, an increase of $1.4 million or 8.4%; and African sales of $3.1
million, an increase of $0.5 million or 19.1%; and Asian sales of $9.4 million,
an increase of $1.1 million, or 12.8%, from sales of $8.3 million in the first
six months of 2002. The increases in South American, European and African sales
were partially due to exchange rate changes. In local currencies, South American
sales grew 101.7%, with aftermarket sales from South America increasing 139.3%
and export sales from South America increasing 113.1%; European and African
sales fell slightly.

Gross profit was $65.7 million in the first six months of 2003, or 25.7%
of sales. This compares to gross profit of $58.7 million, or 24.1% of sales, in
the first six months of 2002. Increased sales volume, control of product costs,
and the weakening of the Argentine peso offset by the strengthening of the South
African Rand produced the improvement in gross profit.

Selling, general, and administrative expense was $11.5 million, or 13.0%
of sales for the first six months of 2003, an increase of $0.4 million, or 3.6%,
from $11.1 million, or 14.3% of

Page 15

sales, in the first six months of 2002. The dollar increase in selling, general,
and administrative expense is due to inflation plus additional spending for
sales and marketing.

Operating income in the first six months of 2003 was $10.5 million, or
11.9% of sales, an increase of $3.2 million, or 42.7%, from the $7.4 million, or
9.6% of sales, in the first six months of 2002. This was due to the factors
discussed above. In the second quarter of the 2003 a $0.6 million charge for
options was recorded.

Interest expense was $5.5 million in the first six months of 2003, a
decrease of $0.1 million compared to $5.6 million in the first six months of
2002. This decrease is due to the reductions in United States and United Kingdom
debt and lower interest rates on bank debt offset by a slight increase in
African debt in the second quarter of 2002.

The provision for income taxes was $892,000, 20.9% of the income before
taxes, for the first six months of 2003 compared to the $466,000 provision for
income taxes for the first six months of 2002 on a book loss of $451,000. In
2002 we did not record a tax benefit in the United States on a $2.4 million
pretax loss.

LIQUIDITY AND CAPITAL RESOURCES

Cash generated by operating activities in the first half of 2003 was $0.2
million. Capital spending for the first half of 2003 was $2.4 million, an
increase of $0.4 million from the first half of 2002, not including the MOSAL
transaction in 2002. Of the $2.4 million, $1.5 million was spent in the United
States and $0.9 million outside the United States. Planned capital expenditures
consist primarily of expenditures to reduce costs through automation, replace
existing equipment and enable us to manufacture new products.

Debt, net of cash, increased from $105.1 million at December 31, 2002 to
$107.1 million at June 28, 2003, an increase of $2.0 million. Factors
contributing to this increase were the $2.4 million of capital spending, a $1.7
million increase in accounts receivable, and a $8.1 million increase in
inventory, offset by a $0.9 million increase in accrued liabilities.

We had a cash balance of $3.7 million and revolving credit facilities with
banks in the United States and United Kingdom under which additional borrowings
of $10.5 million and $3.4 million were available based on the June 28, 2003
levels of eligible receivables (United States and United Kingdom) and inventory
(United States only) which are pledged to support that debt. As of June 28,
2003, we had no bank debt outstanding in China or Argentina.

We expect our liquidity needs to consist primarily of working capital
needs, scheduled payments under certain contractual obligations, and scheduled
payments of principal and interest on our indebtedness. We expect our short-term
liquidity needs to be provided by operating cash flows and borrowings under our
revolving credit facilities. We expect to fund our long-term liquidity needs
from our operating cash flows, the issuance of debt and/or equity securities,
and bank borrowings.

Page 16

We believe that cash flows from operations, our existing cash balances and
amounts available under these revolving credit facilities will provide adequate
funds for ongoing 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.

NEW ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." With the rescission of SFAS No. 4 and 64, only gains and losses
from extinguishments of debt that meet the criteria of APB Opinion No. 30 would
be classified as extraordinary items. Accordingly, we will reclassify to other
income the gains recorded on the repurchase of our senior notes previously
treated as extraordinary items.

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

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

On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133 and is to be applied prospectively to contracts entered into or
modified after June 30, 2003. The adoption of this statement will not have have
an impact on the Company's consolidated financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or as an asset in some circumstances). The adoption of this statement

Page 17

will not have an impact on the Company's consolidated financial position or
results of operations.

FORWARD-LOOKING STATEMENTS

This form 10-Q contains, in addition to historical information,
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements other than statements of
historical fact included herein 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 the "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.

ITEM 4: CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the President and Chief Executive Officer and
the Chief Financial Officer of the Company, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13-a14. Based upon that evaluation, the principal executive
officers and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.

Subsequent to the evaluation, there were no significant changes in internal
controls or other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

Page 18

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 2. Changes in Securities.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

Item 6. Exhibits and Reports on Form 8-K.

(a) Reports on Form 8-K filed in the three month period ended June 28,
2003, and incorporated by reference include:
1. 8K filed on April 7, 2003, accompanied by the press release of
April 4, 2003 announcing the election of Peter J. Corrigan to
the position of Executive Vice President and Chief Operating
Officer.
2. 8K filed on May 7, 2003 accompanied by the press release of
May 6, 2003 reporting results for the quarter ended March 29,
2003.
3. 8K filed on May 9, 2003 accompanied by the press release of
May 8, 2003 announcing the selection of CIBC World Markets
Corp. to assist in the potential sale of the company.

(b) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of 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

M:\aa_acct\ECKLEY\Quarter\2003\2nd Qtr\2Q-10Q\SIGNATURES.doc
M:\aa_acct\ECKLEY\Quarter\2003\2nd Qtr\2Q-10Q\CEO 302 Cert.doc
M:\aa_acct\ECKLEY\Quarter\2003\2nd Qtr\2Q-10Q\CFO 302 Cert.doc
M:\aa_acct\ECKLEY\Quarter\2003\2nd Qtr\2Q-10Q\CEO 906 Cert.doc

Page 19

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: August 15, 2003 By: /s/ Kenneth C. Cornelius
------------------------
Kenneth C. Cornelius
Executive Vice President and
Chief Financial Officer
(principal financial and
accounting officer)

Page 20

Exhibit Index

Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of 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