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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, 1999.
/ / 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)
2100 Commonwealth Blvd., Ste 300, Ann Arbor, Michigan 48105
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(Address of principal executive offices) (Zip Code)
(734) 913-6600
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(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 ______
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As of March 29, 2000, there were 1,993,000 shares of the registrant's
common stock outstanding. There is no public market for the registrant's common
stock.
This annual report on Form 10-K of Prestolite Electric Holding, Inc.
(formerly known as PEI Holding, Inc.) includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact included in this report may
contain forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "believe" or "continue" or the
negative thereof or variations thereon or similar terminology. Such forward-
looking statements are based upon information currently available in which our
management shares its knowledge and judgment about factors that they believe may
materially affect our performance. We make the forward-looking statements in
good faith and believe them to have a reasonable basis. However, such statements
are speculative, speak only as of the date made and are subject to certain
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results could vary materially from those anticipated, estimated or
expected. Factors that might cause actual results to differ materially from
those in such forward-looking statements include, but are not limited to, those
discussed in Item 1. "Business-- Risk Factors" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
subsequent written and oral statements that we make are qualified in their
entirety by these factors.
Readers are urged to carefully review and consider disclosures made in this
and other reports that we file with the Securities and Exchange Commission that
discuss factors germane to our business.
PART I
Item 1. Business
We are a global manufacturer and distributor of electro-mechanical power
conversion products and systems for niche markets, including vehicle, defense
and industrial applications. Our products are primarily used for diesel engines
and electric vehicles and include alternators, starter motors, and switches. We
sell our products primarily to the aftermarket and original equipment
manufacturers ("OEMs"). On January 22, 1998, we acquired three businesses from a
subsidiary of LucasVarity plc. As a result of the Lucas acquisition, we have
consolidated our 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. We believe our primary brand
names, Leece-Neville in the heavy duty vehicle market and Prestolite in the
industrial markets, are generally recognized as being of the highest quality in
their respective markets.
Attractive Aftermarket/Original Equipment Balance. In 1999 approximately
half of our net sales were to OEM 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."
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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. Our engineers work
closely with partners at a number of major universities in the areas of
electronics, magnetics, alternative materials and product testing. 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.
Manufacturing Excellence. We assembled our present management team
following Genstar Capital Corporation's acquisition of the company in 1991. This
team has instituted continuous improvement programs at all of our manufacturing
facilities. These programs have led to the adoption of techniques such as
synchronous manufacturing, cellular manufacturing and kanban-based just-in-time
inventory control. Changes in manufacturing methods have made floor space
available for expansion at most of our facilities. From 1992 to 1997, we
increased our sales per employee by approximately 65% and increased our sales
per square foot of manufacturing and warehouse space by approximately 160%.
Ongoing training programs for our experienced workforce are an integral part of
such continuous improvement efforts.
International Presence. We currently conduct business in the United States,
the United Kingdom, South Africa and Argentina, have partial interests in
companies in India and Korea, and have a licensee in China. (The partial
interest in the Korean company is considered part of our discontinued
operations.) Approximately 55% of our net sales in 1999 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 presence. We believe our global manufacturing and
distribution network provides an advantage over our competitors in servicing our
North American and European customers' foreign manufacturing operations. See "--
Risk Factors--We have risks because of foreign operations."
Products
We manufacture and distribute electro-mechanical power conversion products and
systems for heavy duty vehicles and defense, industrial and automotive
applications. We have historically manufactured alternators, starter motors, and
switches. The 1998 Lucas acquisition added truck, bus and automotive products
that complement our historic product portfolio. Although our products are
primarily used for diesel engines, electric vehicles and automobiles, they 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. Regulators are electronic devices that control
alternator output. Alternator output is directly related to frame size, or
diameter. We manufacture alternators in sizes ranging from 5 inches to 8-9/16
inches for use in off-road vehicles, refrigerated trucks, trucks, generator
sets, military vehicles, buses and special purpose vehicles such as ambulances.
We produce smaller alternators for a wide variety of cars, light to medium
trucks and agricultural vehicles.
Starter Motors. We manufacture a full line of starter motors which includes
products designed for the lower-end and mid-size segments of the market. In the
United Kingdom, we manufacture a range of heavy duty starter motors which are
sold primarily for trucks, buses and generator sets. Through the Lucas
acquisition we added starter motors for automobiles and light commercial
vehicles.
Switches. We manufacture switches, which include solenoids, contactors and
control boxes. A solenoid is an electromagnet used to move a plunger in and out
to operate contacts that make and
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break electric circuits. Our solenoid switches are typically used to control a
vehicle starter motor or a hydraulic pump motor. Contactors are similar to
solenoids, but are built for heavier duty applications and are more expensive.
Our contactors are primarily designed for material handling, defense, industrial
and telecommunications applications. A control box (called "switchgear" in the
United Kingdom), which includes solenoids and electronic circuits in an enclosed
case, assists the starting circuit of a diesel-powered vehicle. Our control
boxes are sold primarily for military applications.
Other Products. Other products we manufacture include ignition distributors
primarily for marine applications, 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 wide range of
automotive products manufactured by third parties.
Markets
Market Dynamics
Aftermarket. The aftermarket consists of the production and sale of both
new and remanufactured parts used in the maintenance and repair of vehicles. Our
aftermarket distribution channels consist of:
. the aftermarket arms of original equipment suppliers;
. independent distributors, who supply repair shops, dealers and
retailers; and
. government agencies that directly purchase our aftermarket products.
Our newly-manufactured aftermarket products compete with remanufactured
products, which consist of used components that are reassembled into finished
products. Distribution through independent distributors is an additional
important element of the aftermarket. Although the distributors' share of the
North American and European aftermarket has declined in recent years,
independent distributors remain an important distribution channel for us.
Original Equipment. The original equipment market consists of the
production and sale of new component parts for use in the manufacture of new
vehicles or equipment. Original equipment sales are generally made to the
vehicle OEM, although some sales may be to another component manufacturer which
in turn supplies the OEM. In response to pressure to improve product quality,
shorten design cycles and reduce capital spending, production and inventory
costs, OEMs are increasingly outsourcing design and production of non-strategic
components. The original equipment market has been impacted by recent
fundamental changes in OEM sourcing strategies. OEMs are consolidating their
supplier base and are seeking suppliers which can, among other things, meet
their shorter product design cycles, bring products to market on an expedited
basis, lower product and system costs and pass cost savings on to the OEM. As a
result, we believe that OEMs generally prefer to purchase components from a
small group of preferred suppliers. OEMs are becoming increasingly global. OEMs
are in turn requiring their preferred suppliers to establish global production
capabilities to meet their original equipment needs as they expand
internationally, and establish global distribution networks to provide
aftermarket support.
Markets Served
We sell our products to a variety of markets, including:
Heavy Duty. The heavy duty market, which represented approximately 59% of
our net sales in 1999, includes heavy duty trucks, school and shuttle buses,
emergency vehicles, off-road and special
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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. Our products (alternators, starter motors, starter solenoids,
in-line diesel pumps and the Thermostart brand pre-heater) usually fit multiple
applications with limited or no modification for a specific application.
Automotive. The automotive and light truck market represented
approximately 30% of our net sales in 1999. Products sold to automobile OEMs
include starter solenoids for light truck application in the United States, and
starter motors and alternators in Argentina and South Africa.
Defense. Our products sold to the defense market include alternators,
starter motors and control boxes for use in military vehicles including tanks,
trucks, personnel carriers and the HMMWV, and are generally designed for use
with a specific diesel engine. Although the defense market has declined in
recent years, it was still responsible for approximately 5% of our net sales in
1999.
Industrial, Marine and Other Applications. Approximately 6% of our 1999
net sales were to a wide range of other markets. These include starter motors,
alternators and ignition distributors for marine and other applications,
contactors sold to the telecommunications market for use with backup battery
systems.
Independent Distribution. A portion of sales to each of our markets are
through independent distributors. We have a network of automotive parts
distributors in Argentina and South Africa, many operating with a "Lucas"
franchise that includes distinctive signage and branded product. About half of
our sales through these automotive distribution networks represents products
manufactured by third parties and purchased by us for resale. Sales to
independent distributors represented approximately 24% of our 1999 net sales.
Customers and Competition
Most of our products are component parts used on diesel engines, electric
vehicles and automobiles. 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 half of our 1999 net sales, with the remaining net 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 its 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."
Alternators. Delco Remy International Inc. is our principal competitor in
the North American market for truck alternators in both the OEM and aftermarket
segments. Some national and many local remanufacturers also compete in the
aftermarket. 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
alternators. Our principal competitors in the South African and Argentine OEM
market include Bosch and other international corporations that import into such
markets. C.E. Niehoff is our major competitor in the market for military
alternators. Our principal competitors in the market for high-amperage (165 to
300 ampere) commercial alternators are Lestek and Powerline. At the lower end of
the heavy duty alternator market, automotive-based designs and foreign
competitors are a significant factor.
Motors. Our principal competitors in the North American and European
starter motor market are
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Delco and Bosch, respectively. Our principal competitors in the South African
and Argentine OEM market include Bosch and other international corporations that
import into such markets.
Relays and Controls. Principal competitors in the solenoid market are
Electromation and Automotive Controls (Echlin) in the light truck sector;
Stancor Electric (Emerson) in the heavy duty market; Stancor Electric and Clum
in the material handling market; and Stancor Electric in industrial markets. Our
principal competitors in the contactor market are Albright Engineers (primarily
in Europe), Contact Industries and, in the forklift aftermarket, Intrupa
Manufacturing.
Discontinued Operations
In the second half of 1999, we decided to sell our direct current motor
business and battery charger businesses. As discussed in Note 2 of our audited
financial statements, these businesses generated approximately $45 million of
sales in 1999. Because we have decided to sell these businesses, we treat them
as "discontinued operations" in the financial statements. Consequently, they are
not included in the discussion above and the sales of these businesses are not
included in the $214 million of consolidated sales shown in our financial
statements. The Company has retained an investment banker to assist in the
disposition of these businesses and expects to complete the sale transactions
during 2000. The agreement with the investment banker was filed as an exhibit to
this Form 10K with the SEC on March 30, 2000.
Products of our discontinued businesses include:
. Material handling motors, 5 to 13 inches in diameter, generally designed
for a specific forklift truck model.
. Pump and winch motors, 4.5 inches in diameter, generally used in
hydraulic pump operations.
. Motors, 3.3 inches in diameter, used for back-up braking systems on
school busses and other applications.
. Battery chargers, sold under the Hobart brand name, generally used in
the material handling market.
Markets for the products of our discontinued operations are mainly the
material handling market which includes motors and contactors for electric lift
trucks and other electrically-powered commercial vehicles such as golf carts.
The direct current electric motors sold to the material handling market are
generally designed for specific forklift truck models. Almost all of our battery
chargers are sold to distributors, which normally purchase lift trucks,
batteries and battery chargers from separate suppliers.
Our principal North American competitors in the material handling motor
market are General Electric and Advanced DC. Principal competitors in the
battery charger market include Hertner, Ferro Magnetic and Exide.
Seasonality, Raw Materials and Backlog
Our sales to OEMs accounted for approximately half of our net sales for
the year ended December 31, 1999. As a result, a significant portion of our
sales are related to the overall level of domestic and foreign new diesel and
electric 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 or material handling 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 diesel or electric vehicles, particularly in
North America, could have a materially adverse effect on our results of
operations. See Item 7. "Management's Discussion and Analysis of Financial
5
Condition and Results of Operations."
Principal raw materials for our business include copper, aluminum, steel
and electronic components. All materials are readily available from a number of
suppliers, and we do not foresee any difficulty in obtaining adequate inventory
supplies.
The majority of our products are not on a backlog status. They are
produced from readily available materials and have a relatively short
manufacturing cycle.
Patents, Trademarks and Licenses
We hold various patents and trademarks related to our products. No single
patent or trademark is currently of material importance to our operations. We
have applied for U.S. patents for our self-diagnostic alternator, for our
latching contactor and for the use of a conductive bearing to replace brushes in
alternators and other rotating machines.
We have exclusive right to use the "Prestolite Electric" trade name for
use with motor and ignition parts. "Prestolite Wire" and "Prestolite Batteries"
are sold by unrelated companies. We formerly had the right to the "Prestolite
Electric" name under a perpetual, royalty-free license from Allied Signal
Corporation (now Honeywell Incorporated). At the end of 1999, we formed a
limited liability company which acquired the rights to the "Prestolite" name
from Allied Signal. We own half of that company and Prestolite Wire owns half.
We have the use of the "Hobart" brand name for battery chargers until February
28, 2001.
Lucas Industries plc retained all rights to the "Lucas" trade name and
logo and certain other trademarks following the Lucas acquisition. We are
permitted for a transition period to brand products sold by us in Argentina and
South Africa with certain Lucas trademarks.
On April 8, 1998, we entered into an agreement with Hitachi, Ltd., a
Japanese corporation, for a seven-year non-exclusive, non-transferable license
to manufacture and sell certain starter motors and alternators utilizing
Hitachi's proprietary technology in exchange for a one-time fee of (Yen)30.0
million (approximately $0.2 million as of that date) and royalty payments based
on the net sales of such products.
On June 24, 1998, we entered into an agreement with Ecoair Corp., a
Delaware corporation, for a 99-year non-exclusive, non-transferable license
relating to the manufacture, use and sale of alternators utilizing Ecoair's
proprietary technology in exchange for royalty payments on products produced by
us and incorporating technology derived from this information.
Employees
We had approximately 2,500 employees as of December 31, 1999, including
300 that were part of our discontinued operations. There are no collective
bargaining agreements in effect with respect to any of our United States
employees. All of the employees at our Leyland, England facility and all of the
hourly and some of the salaried employees at the five facilities acquired in the
Lucas acquisition are members of unions. We have not experienced a strike or
work stoppage at any of our facilities, except in 1998 in South Africa for
approximately three weeks as part of a nationwide, industry-wide strike that
included our facility. We can not assure you that a strike or work stoppage will
not occur in the future at any of our facilities. See "--Risk Factors--We may
have difficulty integrating acquired operations." We believe that relations with
our employees are excellent.
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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 half of our net sales for
the year ended December 31, 1999. 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, particularly in North America could
materially adversely affect our results of operations. In addition, we are under
increasing pressure from our major OEM customers to reduce product costs. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
We have risks because of our foreign operations.
We currently conduct business in the United States, the United Kingdom,
South Africa and Argentina, have partial interests in companies in India and
Korea, and have a licensee in China. (The partial interest in the Korean company
is considered part of our discontinued operations.) Approximately 55% of our net
sales in 1999 were to customers outside of North America. We intend to expand
our international presence. Adverse results from our foreign operations could
adversely affect our results of operations. The success of our international
operations will depend on numerous factors, many of which are beyond our
control, including economic and political conditions in the countries in which
we operate. In particular, Argentina and South Africa have historically been
less economically and politically stable than the United States and the United
Kingdom. International operations may also increase our exposure to certain
risks inherent in doing business outside the United States, including slower
payments cycles, unexpected changes in regulatory requirements, potentially
adverse tax consequences, restrictions on the repatriation of profits and assets
and compliance with foreign laws and standards.
In addition, most of our employees outside of the United States are
represented by labor unions. We cannot assure you that a strike or work stoppage
will not occur or that actions taken by us will not adversely affect our
relations with our unionized employees.
We have risks related to currency fluctuations.
Due to our operations outside of the United States we experience foreign
currency exchange gains and losses. Fluctuations between the United States
dollar and other currencies may adversely affect our results of operations.
While we may engage in foreign currency hedging transactions which may moderate
the overall effect of such currency exchange rate fluctuations, we expect that
we will be affected by such fluctuations, and we cannot assure you that we will
be successful in any hedging activities. We also cannot assure you that such
exchange rate fluctuations will not cause significant fluctuations in quarterly
results of operations. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We face substantial competition.
We operate in highly competitive markets. While no single company competes
with us in all of
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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. Beginning in the fourth quarter of 1995, we began to
experience increased warranty claims due to a combination of reasons, including
increased sales, plant relocation activities and unexpected product failures. We
believe that the major factors contributing to these warranty claims have been
addressed. However, we cannot assure you that additional warranty claims or
requests for payment would not materially adversely affect our results of
operations. See Item 7. "Management's Discussion and Analysis of Financial
Condition and 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 indemnities provided by the sellers of the acquired
businesses will be applicable or available.
We believe that we comply with all relevant environmental laws and that we
have properly recorded the costs related to any known environmental claims
related to our properties. Based upon our experience to date, we believe that
the future cost of compliance with existing environmental laws (or liability for
known environmental claims) will not materially adversely affect our results of
operations. However, future events may give rise to additional compliance costs
or liabilities that could have a materially adverse affect on our results of
operations. We may be required in the future to spend material amounts to comply
with more stringent laws, as well as more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws.
We are highly leveraged and have significant debts which we may be unable to
pay.
We have a significant amount of debt. As a result, we are highly leveraged
and have significant interest expense. In addition, subject to the restrictions
contained in the Indenture governing our senior notes and in our bank credit
facilities, we may incur additional debt from time to time to pay for
acquisitions or capital expenditures or for other purposes. As of December 31,
1999, we had $151.1 million of consolidated indebtedness outstanding and our
stockholders' deficit was approximately $16.3 million.
Our ability to make scheduled payments of principal or interest on, or to
refinance, our debt will
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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:
. 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 capitalization levels, capitalization ratios, minimum
fixed charge coverage ratios and funded debt ratios. All of these restrictive
covenants may restrict our ability to expand or to pursue our business
strategies. Breaching 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
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repay borrowings, the lender could proceed against the collateral granted to it
to secure that debt. This collateral includes liens on our inventory, accounts
receivable and general intangibles.
In addition, our United States credit facility contains certain events of
default which are substantially similar to the events of default under the
Indenture, except that:
. our failure to pay other debt or judgments entered against us will
trigger a default at lower dollar amounts than in the Indenture;
. the failure of any security interest in collateral securing our United
States credit facility will trigger a default;
. a change of control (as defined in the Indenture) that triggers our
repurchase obligations under the Indenture will trigger a default;
. our United States credit facility prohibits the optional redemption of
our senior notes in certain circumstances; and
. our United States credit facility generally has shorter grace periods
and lower default thresholds than the Indenture.
If the debt under our United States credit facility were to be accelerated,
we cannot assure you that we would have sufficient assets to repay all of our
debt, including our senior notes.
We may not be able to repurchase our senior notes upon a change of control.
Upon the occurrence of a change of control (as defined in the Indenture),
each holder of our senior notes may require us to purchase its senior notes at
101% of their principal amount, plus accrued and unpaid interest, if any, to the
date of repurchase. However, our United States credit facility prohibits us from
purchasing our senior notes in the event of a change of control, unless and
until all of the debt under our United States credit facility is repaid. If we
did not purchase our senior notes we would default under the Indenture and our
United States credit facility. This would permit the trustee under the
Indenture, the holders of at least 25% in principal amount of the outstanding
senior notes or the lender under our United States credit facility to declare
the principal and accrued but unpaid interest to be due and payable. Our
inability to repay the debt under our United States credit facility, if
accelerated, would also constitute an event of default under the Indenture,
which could cause an acceleration of the debt under the Indenture. In the event
of a change of control, we cannot assure you that we would have either the
ability to refinance our United States credit facility or sufficient assets to
repay our United States credit facility and our senior notes.
We are controlled by Genstar Capital Corporation.
As of December 31, 1999, Genstar Capital Corporation owned approximately
91.3% (83.2% on a fully-diluted basis) of our common stock. Consequently,
Genstar has the ability to control our business and affairs by virtue of its
ability to elect a majority of our board of directors and its voting power with
respect to actions requiring stockholder approval. See Item 12. "Security
Ownership of Certain Beneficial Owners and Management."
Item 2. Properties
Our corporate headquarters are located at 2100 Commonwealth Boulevard, Ann
Arbor, Michigan 48105, which we lease. The phone number at that location is
(734) 913-6600. The
10
following table sets forth certain information regarding the major facilities we
operated as of December 31, 1999:
Square Owned/Leased (Lease
Location Use Feet expiriation date)
-------- --- ---- -----------------
Ann Arbor, MI Headquarters 11,000 Leased (Dec. 2003)
Ann Arbor, MI Technology Center 4,500 Leased (Dec. 2003)
Arcade, NY Manufacturing 342,800 Owned
Decatur, AL Manufacturing 258,000 Owned
Wagoner, OK Manufacturing 50,000 Leased (Apr. 2004)
Troy, OH Manufacturing 160,000 Leased (Oct. 2006)
Florence, KY Warehouse 108,800 Leased (June 2000)
Garfield, NJ Manufacturing 42,000 Leased (month to month)
Leyland, U.K. Manufacturing 250,000 Owned
Cardiff, U.K. Manufacturing 15,000 Owned
Acton, U.K. Manufacturing 368,000 Owned
Johannesburg, South Africa Manufacturing 118,400 Owned
Buenos Aires, Argentina Manufacturing 159,000 Owned
San Lorenzo, Argentina Manufacturing 76,676 Owned
San Luis, Argentina Manufacturing 30,800 Owned
The facility in Troy, Ohio produces battery chargers. The facility in
Wagoner, Oklahoma produces direct current motors. These two locations are part
of the businesses that we are treating as "discontinued operations." In Decatur,
Alabama and Leyland, England, we manufacture direct current motors and other
products. The operations at those two locations which manufacture direct current
motors are also treated as part of "discontinued operations."
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, will be material to our future financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
11
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 29, 2000, there were 1,993,000 shares of our common stock
outstanding, held by nine holders. As of March 29, 2000, there were employee
held options outstanding to purchase up to an additional 314,840 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 in the Indenture. 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.
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,
1999 and the balance sheet data as of December 31, 1998 and 1999 have been
derived from our audited financial statements included elsewhere in this annual
report on Form 10-K, and are restated to account for the discontinuance of
businesses, as discussed above and in Note 2 to our audited financial
statements. The statements of operations data for each of the fiscal years in
the two year period ended December 31, 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 have been derived from our audited financial
statements not included in this annual report on Form 10-K, restated to account
for the discontinuance of businesses, as discussed above. The information in the
table should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
annual report on Form 10-K.
12
Years Ended December 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except ratios, share and per share amounts)
(restated)
-------------------------------------------------------------------------------
Statement of Operations Data:
Net sales $ 109,760 $ 114,204 $ 125,585 $ 237,090 $ 213,982
Cost of goods sold 87,900 92,806 100,831 188,659 172,064
Selling, general and administrative expenses 17,122 17,049 17,817 32,271 31,134
Costs associated with option repurchase - - - 2,101 2
Restructuring charge 3,100 56 - 711 450
---------- ----------- ---------- ---------- ----------
Operating income 1,638 4,293 6,937 13,348 10,332
Other expense (income) (a) 234 158 294 (82) (1,003)
Interest expense 4,282 5,313 5,384 13,494 15,816
---------- ----------- ---------- ---------- -----------
Income (loss) from continuing operations
before income taxes and extraordinary items $ (2,878) $ (1,178) $ 1,259 $ (64) $ (4,481)
Provision for income taxes 188 (3,299) 950 685 293
---------- ----------- ---------- ---------- ----------
Income (loss) from continuing operations
before extraordinary items $ (3,066) $ 2,121 $ 309 $ (749) $ (4,774)
========== =========== ========== ========== ==========
Net earnings per common share from continuing
operations before extraordinary items (b):
Basic $ (0.88) $ 0.61 $ 0.09 $ (0.36) $ (2.40)
Diluted $ (0.88) $ 0.60 $ 0.09 $ (0.36) $ (2.40)
Shares used in computing earnings per share (b):
Basic 3,466,740 3,454,740 3,446,740 2,111,812 1,993,000
Diluted 3,466,740 3,553,800 3,628,020 2,231,273 1,993,000
Balance Sheet Data (at end of period):
Working Capital (excluding debt) $ 16,240 $ 17,275 $ 19,694 $ 44,057 $ 54,160
Total assets 72,473 93,604 88,685 183,773 182,056
Total debt 40,451 46,514 42,930 140,752 151,126
Stockholders' equity (deficit) 13,273 18,018 18,943 (8,918) (16,292)
Other Data:
EBITDA (c): $ 8,612 $ 8,508 $ 10,607 $ 26,209 $ 22,276
Cash flow from operating activities: 1,447 2,560 5,477 (2,009) (317)
Cash flow from investing activities: (3,777) (8,392) 3,755 (55,274) (11,637)
Cash flow from financing activities: 3,789 8,032 (9,582) 57,557 10,418
Ratio of earnings to fixed charges (d): - 1.3x 1.8x 1.2x -
13
(a) Other expense (income) in 1999 consists primarily of pension expense for
inactive United States defined benefit pension plans, gains on the sale of fixed
assets, interest income, foreign currency exchange losses, royalty expenses, and
South Africa trademark expense. Other expense (income) in 1998 consists
primarily of pension expense for inactive United States defined benefit pension
plans, gains on the sale of fixed assets, interest income, and in all other
years consists primarily of operating costs of idle facilities.
(b) Earnings per common share and shares used in the computation reflect the
20-for-1 stock split effective March 25, 1998.
(c) EBITDA for any period is calculated as the sum of income (loss) from
continuing operations plus the following to the extent deducted in
calculating such net income:
. minority interest;
. interest expense;
. income tax expense;
. depreciation expense;
. amortization expense; and
. extraordinary items and restructuring charges and in 1998 charges
associated with the repurchase of stock options.
We consider EBITDA to be a widely accepted financial indicator of a
company's ability to service debt, fund capital expenditures and expand its
business; however, EBITDA is not calculated the same by all companies and is
not a measurement required by generally accepted accounting principles.
EBITDA should not be considered by an investor as an alternative to net
income, as an indicator of our operating performance or as an alternative to
cash flow (as defined in accordance with generally accepted accounting
principles) as a measure of liquidity.
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before income taxes, discontinued operations and
extraordinary items plus fixed charges. Fixed charges consist of interest
expense and 33% of rental expense (deemed by management to be representative
of the interest factor of rental payments). Earnings were insufficient to
cover fixed charges in 1995 by approximately $1.6 million and in 1999 by
approximately $3.6 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We manufacture alternators, starter motors, direct current motors, battery
chargers, and switching devices. These are supplied under the "Prestolite,"
"Leece-Neville," "Hobart," "Lucas," and "Indiel" brand names for original
equipment and aftermarket application on a variety of vehicles and industrial
equipment. "Hobart" is used under license from a subsidiary of Illinois Tool
Works, Inc. "Lucas" is used under license from a subsidiary of LucasVarity plc.
Most of our products are component parts used on diesel engines, automobiles and
electric vehicles, sold to both aftermarket customers and original equipment
manufacturers. We sell our products to a variety of markets, in terms of both
end-use and geography.
In January 1998, we acquired three businesses from a subsidiary of
LucasVarity plc. These businesses operate in England, South Africa, and
Argentina. We purchased these businesses for
14
approximately $44.3 million in cash, net of cash acquired and including the
assumption of $3.2 million in debt, plus certain future obligations, as
described in Note 3 to the financial statements.
We financed the Lucas acquisition from the sale of $125.0 million of
9.625% senior notes due 2008 issued under Rule 144A of the Securities Act of
1933, as amended. We also used proceeds from the offering of our senior notes to
repay existing debt in the United States and United Kingdom, to repurchase all
the warrants issued to holders of the Company's subordinated debt, to repurchase
40% of the common stock held by Genstar Capital Corporation, to repurchase 8.5%
of the common stock held by management and to repurchase 40% of the options held
by management. The total cost associated with the repurchase of these securities
was approximately $29.7 million.
During 1998, we organized our business into three divisions. While the
three divisions bear the names of their principal markets, no division sells
exclusively into its target market. Further, each division has some sales into
the target markets of the other divisions.
The Heavy Duty Systems Division produces alternators, starter motors,
inline pumps, control boxes and other products, primarily for installation on
diesel engines used in the heavy duty, defense, marine and industrial markets.
The division's major facilities are in Arcade, NY; Florence, KY; Acton, England;
and Leyland, England. In January 1999, we acquired a remanufacturing business
that continues to operate in Garfield, NJ. We purchased this business for $2.9
million, financed through our U.S. revolving line of credit.
The Electric Vehicle Systems Division produces motors (including starter
motors, material handling motors, and pump and winch motors), switches
(including contactors, solenoids, relays, distributors, and control boxes),
battery chargers and other products. The division's major facilities are in
Decatur, AL; Wagoner, OK; Florence, KY; Troy, OH; and Leyland, England, with a
smaller remanufacturing facility in Dearborn, MI. We sell these products into
many of the same markets as the products of our Heavy Duty Systems Division. In
addition, the products of our Electric Vehicle Systems Division are sold into
the material handling market for installation on or use with lift trucks and
other electric vehicles; the truck accessory market for use in winches, snow
plow lifts and other applications; and the telecommunications market where
contactors are used in battery backup systems. In the fourth quarter of 1999, we
decided to sell the battery charger and direct current motor lines of business
that are part of this division. The remaining portion of this business
manufactures and sells switches, and with the completion of the sale of the
discontinued businesses, this division will be renamed to the Switch Division.
The Automotive Systems Division manufactures automotive components,
primarily alternators and starter motors. The division's facilities are in South
Africa and Argentina. The Argentina operation also manufactures steering columns
and distributors. Some of the products of this division are sold into the heavy
duty and material handling markets. In both South Africa and Argentina more than
half of our sales are to the automotive aftermarket, and about half of those
aftermarket sales are products purchased for resale.
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales from continuing operations were $214.0 million in 1999, a decrease
of $23.1 million, or 9.7%, from $237.1 million in 1998. These results exclude
the sales of the battery charger and direct current motor businesses of $45.2
million in 1999 and $45.7 million in 1998 due to the announced decision to sell
these lines of business. The decrease in sales is mostly attributable to the
Automotive Division, where Argentina sales declined $18.7 million, or 33.4%, and
South Africa sales declined $0.5 million, or 4.4%. Also contributing to the
sales decline was the Heavy Duty Systems decline of $2.1 million, or 1.5%. The
Heavy Duty Systems decline was due to a $9.5 million, or 15.5%, decline
15
in the U.K. and a decline in U.S. defense sales of $0.5 million, or 11.1%. These
declines were partly offset by $5.1 million of sales at the Roberts
Remanufacturing facility and by the other U.S. Heavy Duty sales increase of $2.9
million or 4.1%. The remaining Electric Vehicle Systems business, which
manufactures and sells switches, reported a sales decline of $1.9 million, or
5.8%, with this decline attributable to the U.S. defense sales decline of $2.6
million, or 31.1%, offset by small increases in U.K. sales of $0.2 million, or
4.15%, and in other U.S. sales of $0.8 million, or 4.8%.
Gross profit was $41.9 million in 1999, or 19.6% of sales. This compares to
gross profit of $48.4 million, or 20.4% of sales, in 1998. The decrease in gross
profit as a percent of sales results from several factors. Ongoing cost cutting
measures in the United Kingdom and Argentina have reduced overhead costs. The
benefit of these reductions was offset by declining volume and a shift in sales
to lower margin products at some locations. The Roberts Remanufacturing
business, acquired in January 1999, has higher margins than the company average,
mitigating some of the decline.
Selling, general, and administrative expense was $31.1 million, or 14.6% of
sales in 1999, a decrease of $1.1 million, or 3.5%, from $32.3 million, or 13.6%
of sales, in 1998. Reduction in selling, general, and administrative expense in
our international locations continues to reflect the cost control benefits of
the integration of the businesses acquired in the Lucas acquisition. This
reduction is offset in part by the increased selling, general, and
administrative expense in U.S. Heavy Duty Systems due to the Roberts
acquisition.
In 1999, we recorded a $2,000 charge to reflect the repurchase of options
to purchase our stock from management. We recorded a $2.1 million charge in
January of 1998 to reflect our repurchase from management of 40% of
then-outstanding options to purchase our common stock. We recorded a charge in
1999 of $0.5 million to cover severance payments related to restructuring in
Argentina and in the Corporate Tech Center in Ann Arbor, Michigan. In 1998, we
recorded a charge of $0.7 million to cover severance payments related to
restructuring activities at our facilities in Leyland, England and Decatur,
Alabama.
Operating income in 1999 was $10.3 million, or 4.8% of sales, a decrease of
$3.0 million, or 22.6%, from the $13.3 million, or 5.6% of sales in 1998. This
was due to the factors discussed above.
Other income was $1.0 million in 1999 versus $82,000 in 1998. This
consists of South Africa export rebate income, gain on the sale of fixed assets,
interest income, and miscellaneous income. These were partially offset by
pension expense for inactive defined benefit pension plans associated with
United States facilities that have been closed, foreign currency exchange
losses, royalty expenses, and South Africa trademark expense.
Interest expense was $15.8 million in 1999, an increase of $2.3 million,
or 17.2%, compared to $13.5 million in 1998. This increase is due to increases
in bank debt in the United States, United Kingdom and South Africa, as well as
increases in capital leases, as compared to levels of debt in 1998.
The provision for income taxes was $293,000 on the $4.5 million loss from
continuing operations before taxes and extraordinary items for 1999. This
compares to a provision for income taxes of $685,000 for 1998 on the $64,000
loss from continuing operations before taxes and the extraordinary item.
In conjunction with the incurrence of additional debt, the refinancing of
our existing debt and repurchase of warrants, we recorded an extraordinary item
of $1.3 million net-of-tax in 1998. On a pretax basis this charge covered
$728,000 in debt prepayment fees, $335,000 for the write-off of unamortized
financing costs, $733,000 to write off the unamortized discount on subordinated
debt and $195,000 related to the repurchase of warrants.
16
Discontinued Businesses - 1999 compared to 1998
In the second half of 1999, we decided to sell our direct current motor
business and battery charger businesses. Because we have decided to sell these
businesses, we treat them as "discontinued operations" in the financial
statements. Consequently, they are not included in the discussion above and the
sales of these businesses are not included in the $214 million of consolidated
sales shown in our financial statements.
Sales from discontinued operations were $45.2 million in 1999, a decrease
of $0.5 million, or 1.1%, from the 1998 sales of $45.7 million. Gross profit in
1999 was $8.2 million, a decrease of $1.6 million from the 1998 gross profit of
$9.8 million. Gross profit as a percent of sales declined from 21.5% in 1998 to
18.0% in 1999. Various factors, including decreased sales volume and lower
margin products, contributed to this decline.
Selling, general and administrative expense was $6.6 million, an increase
of $0.2 million, or 2.8%, from the 1998 selling, general and administrative
expense of $6.4 million. A major factor in the increase in selling, general and
administrative expense was the minimum royalty of $500,000 paid to DAX.
Operating income in 1999 was $1.6 million, a decrease of $1.8 million, or
52.9%, from the 1998 operating income of $3.4 million. This has resulted in
operating income as a percent of sales decreasing to 3.6% in 1999 as compared to
7.5% in 1998. The decline in operating income is due to the factors discussed
above.
Discontinued operations produced income before taxes of $1.3 million in 1999 and
$3.4 million in 1998. Income on an after-tax basis, and after recording the 1999
estimated loss on the disposal of these operations of $2.3 million ($3.5 million
on a pre-tax basis), is reported as income from discontinued operations in our
financial statements of $883,000 and $2,254,000 for 1999 and 1998, respectively.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales from continuing operations were $237.1 million in 1998, an increase
of $111.5 million, or 88.8%, from $125.6 million in 1997. The Lucas acquisition
was responsible for the increase in sales. These results exclude the sales of
the battery charger and direct current motor businesses of $45.7 million in 1998
and $46.1 million in 1997. Compared to pro forma results for 1997 to include the
Lucas acquisition, sales decreased $17.1 million, or 6.7%. From pro forma 1997
levels, 1998 sales in the Automotive Systems Division declined $13.3 million, or
16.2%. Both Argentina and South Africa declines in sales contributed to the
divisional decline. Also contributing to the pro forma decline in sales were
both the Heavy Duty Systems Division, with pro forma decline of $1.4 million, or
1.0%, and the Electric Vehicle Systems Division, with pro forma decline of $2.3
million, or 6.7%. United States defense sales were mostly responsible for the
Heavy Duty Systems and Electric Vehicle Systems Divisions declines.
Gross profit was $48.4 million in 1998, an increase of $23.7 million, or
95.6%, from $24.7 million in 1997. Compared to pro forma results to include the
Lucas acquisition, gross profit increased $4.0 million, or 8.1%, from $44.5
million. Cost cutting measures in the United Kingdom and Argentina were
primarily responsible for the pro forma improvement in gross profit. Lower
material cost, improved labor productivity in the United States, and favorable
product mix also contributed to the improvement in gross profit percentages.
Selling, general, and administrative expense was $32.3 million in 1998, an
increase of $14.5 million, or 81.1%, from $17.8 million in 1997. This increase
is due to the Lucas acquisition. Compared to pro forma results for 1997 to
include the Lucas acquisition, these expenses decreased $3.4 million, or 10.4%,
from $35.6 million. The reduction in selling, general and administrative
17
expense as compared to the 1997 pro forma results reflects the benefit on
integrating the businesses acquired in the Lucas acquisition.
We recorded a $2.1 million charge in January of 1998 to reflect our
repurchase from management of 40% of then-outstanding options to purchase our
common stock. We also recorded a charge in 1998 of $0.7 million to cover
severance payments related to restructuring activities at our facilities in
Leyland, England and Decatur, Alabama.
Operating income in 1998 was $13.3 million, an increase of $6.4 million, or
92.4%, from $6.9 million in 1997 due to the factors discussed above. Operating
income as a percentage of sales was 5.6% in 1998, compared to 5.5% in 1997. On a
pro forma basis to include the Lucas acquisition, 1997 operating income was $7.2
million, or 2.8% of sales.
Other income was $82,000 in 1998, versus other expense in 1997 of $294,000,
and other income in 1997 of $354,000 on a pro forma basis. These items in 1998
primarily consisted of pension expense for inactive United States defined
benefit pension plans, gains on the sales of fixed assets, interest income, and
in 1997 primarily of operating costs of idle facilities.
Interest expense was $13.5 million in 1998, an increase of $8.1 million,
or 150.0%, from $5.4 million in 1997. This increase is due to the incurrence of
additional debt in connection with the Lucas acquisition and the repurchase of
shares, options and warrants in the first quarter of 1998.
The provision for income taxes was $685,000 in 1998 compared to $950,000
in 1997. The decrease in income taxes largely resulted from a decrease in income
from continuing operations, before income taxes, offset by an increase in
effective tax rates, due primarily to higher effective tax rates in the foreign
jurisdictions in which we operate.
In conjunction with the incurrence of additional debt, the refinancing of
our existing debt and repurchase of warrants, we recorded an extraordinary item
of $1.3 million net-of-tax in 1998. On a pretax basis this charge covered
$728,000 in debt prepayment fees, $335,000 for the write-off of unamortized
financing costs, $733,000 to write off the unamortized discount on subordinated
debt and $195,000 related to the repurchase of warrants.
Discontinued Businesses - 1998 compared to 1997
Sales from discontinued operations were $45.7 million in 1998, a decrease
of $404,000, or 0.8%, from the 1997 sales of $46.1 million. Gross profit in 1998
was $9.8 million, an increase of $655,000 from the 1997 gross profit of $9.2
million. Gross profit as a percent of sales rose from 19.9% in 1997 to 21.5% in
1998. Various factors, including lower material costs, improved labor
productivity, and favorable product mix contributed to this improvement.
Selling, general and administrative expense was $6.4 million in 1998, an
increase of $1.0 million, or 18.7%, from the 1997 selling, general and
administrative expense of $5.4 million. A major factor in the increase in
selling, general and administrative expense was the minimum royalty paid to DAX.
Operating income in 1998 was $3.4 million, a decrease of $0.4 million, or
9.3%, from the 1997 operating income of $3.8 million. Operating income as a
percent of sales decreased to 7.5% in 1998 as compared to 8.2% in 1997. The
decline in operating income is due to the factors discussed above.
Discontinued operations produced income before taxes of $3.4 million in 1998 and
$3.9 million in 1997. Income on an after-tax basis is reported as income from
discontinued operations in our financial statements of $2,254,000 and $2,314,000
for 1998 and 1997, respectively.
18
Liquidity and Capital Resources
Cash used by operating activities in 1999 was $319,000. Capital spending,
net of discontinued businesses, was $7.5 million, a $1.9 million reduction from
1998 capital spending of $9.4 million. Capital spending in the U.S. was $3.6
million in 1999 compared to $4.1 million in 1998, a $0.5 million reduction.
Capital spending in the U.K. was $1.6 million in 1999 compared to $3.1 million
in 1998, a reduction of $1.5 million. Capital spending in Argentina and South
Africa was $1.9 million and $0.4 million, respectively, in 1999. These compare
to 1998 capital spending of $1.5 million in Argentina and $0.7 million in South
Africa. Argentina's increase of $0.4 million included approximately $1.0 million
to address Year 2000 issues. Capital expenditures for 2000 are expected to be
approximately $6.9 million. Planned expenditures include expenditures to enable
us to manufacture new product designs and replace existing equipment.
In connection with the acquisition of our Argentina operations from Lucas
in January 1998, we agreed to certain future obligations to Lucas. Remaining
obligations include post-closing payments to Lucas of up to $3.0 million upon
the collection of certain receivables expected to be collected in 2000, and
2001, up to $4.9 million contingent upon the collection of certain
fully-reserved receivables, and up to $6.6 million contingent upon the
achievement by our Argentina subsidiary of certain earnings targets in 2000.
Aggregate payments in 1999 totaled $0.1 million and in 1998 $1.1 million for
receivables collected. These contingent payments are expected to be paid from
the collection of the receivables or from such earnings.
Debt, net of cash, increased from $139.9 million at December 31, 1998 to
$150.7 million at December 31, 1999. The increase was due, in part, to the
acquisition of the Roberts Remanufacturing business in January 1999. We had
revolving credit facilities with banks in the United States and United Kingdom
under which additional borrowings of $10.2 million and $3.9 million were
available based on the December 31, 1999 levels of receivables (United States
and United Kingdom) and inventory (United States only) which are pledged to
support that debt. In Argentina and South Africa, we have arrangements with
several banks permitting discounting or borrowing against receivables. Total net
additional credit available in Argentina and South Africa as of December 31,
1999 was $1.4 million. The Company was in violation of certain covenants to the
credit agreements during 1999 and at December 31, 1999, which were cured as a
result of amending the credit agreement.
We expect our liquidity needs to consist primarily of working capital
needs and scheduled payments of principal and interest on our indebtedness. We
expect our short-term liquidity needs to be provided by operating cash flows and
borrowings under our revolving credit facilities. We expect to fund our long
term liquidity needs from our operating cash flows, the issuance of debt and/or
equity securities, bank borrowings, and the sale of our direct current motor and
battery charger businesses. 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 lease 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.
Year 2000
We completed our Year 2000 assessments of our information technology and
embedded systems. These efforts consisted primarily of installing or upgrading
enterprise resource planning systems to be Year 2000 compliant at our United
States, United Kingdom and Argentina facilities, and ensuring compliance by an
outside service bureau utilized by our South African facility. All software
remediation efforts were complete as of October 2, 1999. In Argentina, a Year
2000 compliant system was installed. In the United Kingdom, a system used in two
locations was replaced with Year 2000 compliant systems, while the system in use
at a third location was upgraded for Year 2000 compliance. In addition, we
reviewed our product base, and our products were not affected by
19
Year 2000 issues. We communicated with our principal vendors and service
providers to assess the Year 2000 readiness of their products and services. Our
contingency planning for Year 2000 issues related to these vendors consisted
primarily of securing backup vendors (which had been identified for key
purchased products) and the possibility of stockpiling raw materials
In connection with the overall computer enhancement program, including Year
2000 compliance, we incurred aggregate internal and third party costs of
approximately $3.0 million by December 31, 1999. This amount includes
approximately $0.5 million related to in-house efforts to enhance the
performance of our United States warehousing systems, approximately $1.0 million
for each of the United Kingdom and Argentina software conversions and
approximately $0.5 million related to ancillary Year 2000 efforts.
Our ability to produce or ship our products, process transactions or
otherwise conduct business in any of our markets were not affected by any date-
related issues. We believe that the estimated cost of becoming Year 2000
compliant was not significant to our results of operations.
Net Operating Losses
At December 31, 1999 we had net operating loss carryforwards for United
States tax reporting purposes of approximately $17.4 million, and approximately
$574,000 of alternative minimum tax benefit and $454,000 of foreign tax credit
carryforwards. These U. S. net operating losses expire beginning in 2006.
Inflation
We believe that the relatively moderate inflation over the last few years
has not has a significant impact on our revenues or profitability and that we
have been able to offset the effects of inflation by increasing prices or by
realizing improvements in operating efficiency.
Item 8. Financial Statements and Supplementary Data
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Prestolite Electric Holding, Inc.
In our opinion, the consolidated financial statements listed in the index,
appearing under Item 14(a) on page 58, present fairly, in all material respects,
the financial position of Prestolite Electric Holding, Inc. and its subsidiaries
at December 31, 1999 and 1998, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31,1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedule
listed in the index, appearing under item 14(a) on page 58, presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. We conducted our audits of these consolidated financial statements in
accordance with auditing standards generally accepted in the United States,
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 provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 18, 2000
Detroit, Michigan
21
Prestolite Electric Holding, Inc. and Subsidiaries
Consolidated Balance Sheet
(in thousands, except share amounts)
December 31, December 31,
1999 1998
------------ ------------
ASSETS
Current Assets:
Cash $ 432 $ 896
Accounts receivable, net of allowance for doubtful accounts of
$2,369 and $2,933 as of December 31, 1999 and 1998, respectively 37,807 43,883
Inventories, net 49,642 43,861
Deferred tax asset 6,429 2,134
Prepaid and other current assets 3,088 2,132
---------- ----------
Total current assets 97,398 92,906
Property, plant and equipment:
Land, building and improvements 28,686 28,049
Machinery and equipment 49,206 44,792
Construction in progress 3,716 2,556
----------- ----------
81,608 75,397
Less accumulated depreciation (33,738) (25,934)
---------- ----------
47,870 49,463
Deferred tax asset - 1,002
Investments 3,152 2,589
Intangible assets 10,908 10,485
Long-term receivables and pension assets 4,706 5,220
Net assets of discontinued operations 18,022 22,108
---------- ----------
Total assets $182,056 $183,773
========== ==========
LIABILITIES
Current Liabilities:
Revolving credit $ 19,214 $ 6,907
Current portion of long-term debt 666 429
Accounts payable 24,162 22,908
Accrued liabilities 19,076 25,941
---------- ----------
Total current liabilities 63,118 56,185
Long-term debt 131,246 133,416
Other non-current liabilities 1,845 3,090
Deferred tax liabilities 2,139 -
---------- ----------
Total liabilities 198,348 192,691
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01, 5,000,000 shares
authorized, 1,993,000 shares issued and outstanding
at December 31, 1999 and December 31, 1998, respectively 2 2
Paid-in capital 16,623 16,623
Accumulated deficit (6,595) (404)
Notes receivable, employees' stock purchase, 7.74% due 2002 (513) (559)
Foreign currency translation adjustment
Treasury stock, 1,310,000 shares at December 31, 1999 and (1,360) (131)
December 31, 1998, respectively (24,449) (24,449)
---------- ----------
Total stockholders' equity (deficit) (16,292) (8,918)
---------- ----------
Total liabilities and stockholders' equity (deficit) $182,056 $183,773
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
22
Prestolite Electric Holding, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands except share amounts)
For the year ended
--------------------------------------------------------
December 31, December 31, December 31,
1999 1998 1997
------------- ---------- -----------
Net sales $ 213,982 $ 237,090 $ 125,585
Cost of goods sold 172,064 188,659 100,831
----------- ---------- ----------
Gross profit 41,918 48,431 24,754
Selling, general and administrative 31,134 32,271 17,817
Costs associated with option repurchase 2 2,101 -
Restructuring charge 450 711 -
----------- ---------- ----------
Operating income 10,332 13,348 6,937
Interest expense 15,816 13,494 5,384
Other expense (income) (1,003) (82) 294
----------- ---------- ----------
Income (loss) from continuing operations
before extraordinary item and income taxes (4,481) (64) 1,259
Provision for income taxes 293 685 950
----------- ---------- ----------
Income (loss) from continuing operations
before extraordinary item (4,774) (749) 309
Income from discontinued operations, net of taxes 883 2,254 2,341
Estimated loss on disposal of discontinued
operations, net of taxes (2,300) (1,500)
Extraordinary item - loss on debt refinancing, net of
taxes of $716 - (1,275) -
----------- ---------- ----------
Net income (loss) $ (6,191) $ 230 $ 1,150
=========== ========== ==========
Basic earnings per common share
Income (loss) from continuing operations $ (2.40) $ (0.36) $ 0.09
Income from discontinued operations, including
estimated loss on disposal (0.71) 1.08 0.24
Extraordinary item - (0.61) -
----------- ---------- ----------
Net income (loss) $ (3.11) $ 0.11 $ 0.33
=========== ========== ==========
Diluted earnings per common share
Income (loss) from continuing operations $ (2.40) $ (0.36) $ 0.09
Income from discontinued operations, including
estimated loss on disposal (0.71) 1.08 0.23
Extraordinay item - (0.61) -
----------- ---------- ----------
Net income (loss) $ (3.11) $ 0.11 $ 0.32
=========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
23
Prestolite Electric Holding, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
(in thousands, except share amounts)
Retained Notes Foreign
Shares Earnings/ receivable/ currency
------------------------
Common Treasury Common Paid-in Stock (Accumulated employee translation
stock stock stock capital warrants deficit) stock adjustment
------------ --------- ------- -------- -------- ----------- ---------- ------------
Balance, January 1, 1997 3,303,000 24,000 $ 2 $ 16,623 $ 1,073 $ 382 $ (396) $ 550
Net income 1,150
Translation adjustment (171)
Comprehensive income
Transfer to stock warrants 2,166 (2,166)
Common stock repurchased and other - 8,000 50
------------ --------- ------- -------- ------- ------- ------ -------
Balance, December 31, 1997 3,303,000 32,000 2 16,623 3,239 (634) (346) 379
Net income 230
Translation adjustment (510)
Comprehensive loss
Purchase of stock warrants (3,239)
Common stock sold - (16,000) (251)
Common stock repurchased and other - 1,294,000 38
------------ --------- ------- -------- ------- ------- ------ -------
Balance, December 31, 1998 3,303,000 1,310,000 2 16,623 - (404) (559) 131)
Net loss (6,191)
Translation adjustment (1,229)
Comprehensive loss
Common stock repurchased and other
- - 46
------------ --------- ------- -------- ------- ------- ------ ------
Balance, December 31, 1999 3,303,000 1,310,000 $ 2 $ 16,623 $ - $(6,595) $ (513) $(1,360)
------------ --------- ------- -------- ------- ------- ------ -------
Treasury Comprehensive
stock Total Income
------------ -------- -------------
Balance, January 1, 1997 $ (216) $ 18,018
Net income 1,150 $ 1,150
Translation adjustment (171) (171)
--------
Comprehensive income - $ 979
========
Transfer to stock warrants -
(104) (54)
Common stock repurchased and other --------- --------
Balance, December 31, 1997 (120) 18,943
Net income 230 $ 230
Translation adjustment (510) (510)
--------
Comprehensive loss - $ (280)
========
Purchase of stock warrants (3,239)
Common stock sold 251 -
Common stock repurchased and other (24,380) (24,342)
--------- --------
Balance, December 31, 1998 (24,449) (8,118)
Net loss (6,191) $ (6,191)
Translation adjustment (1,229) (1,229)
--------
Comprehensive loss - $ (7,420)
Common stock repurchased and other 46 ========
--------- --------
Balance, December 31, 1999 $ (24,449) $(16,292)
--------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
24
Prestolite Electric Holding, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands)
For the years ended December 31,
1999 1998 1997
-------- --------- --------
Cash Flows from Operating Activities:
Net income (loss) $ (6,191) $ 230 $ 1,150
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Loss on debt refinancing - 1,991 -
Option repurchase 2 2,101 -
Estimated loss on sale of discontinued operations 3,561 - 2,500
Cash provided by discontinued operations 444 1,346 (1,240)
Write-down and loss on property, plant and equipment held for disposal - - 277
Deferred gain on sale and leaseback (233) (233) (233)
Depreciation 8,870 8,830 3,718
Amortization 1,619 1,137 246
Loss on sale of property, plant, and equipment 15 112 148
Deferred taxes (1,154) (1,464) 171
Changes in operating assets and liabilities:
Accounts receivable 5,109 (5,777) (2,117)
Inventories (5,158) (2,319) (960)
Prepaid and other current assets (594) 1,864 (224)
Accounts payable 1,420 (4,550) (411)
Accrued liabilities (8,027) (5,277) 2,452
-------- --------- --------
Net cash provided by (used in) operating activities (317) (2,009) 5,477
Cash Flows from Investing Activities:
Capital expenditures (7,451) (9,365) (3,866)
Proceeds from disposal of property, plant and equipment 122 21 1,140
Proceeds from sale of discontinued operations and assets held for disposal - - 7,500
Acquisition of:
Roberts Remanufacturing (2,924) - -
Lucas businesses, net of cash acquired of $2,858 - (41,086) -
Acquisition costs of Lucas businesses - (1,543) (1,019)
Other - (668) -
Investment in affiliates (1,384) (2,633) -
-------- --------- --------
Net cash (used in) provided by investing activities (11,637) (55,274) 3,755
Cash Flows from Financing Activities:
Net increase in revolving line of credit 3,840 (7,663) 3,691
Payments on long-term debt (52) (22,824) (6,799)
Proceeds from borrowings 6,461 125,000 -
Costs related to new borrowings, including loss on refinancing of $1,991 - (7,416) -
Purchase of treasury stock, options and warrants, employee stock receivable 44 (29,358) (54)
Borrowings (payments) on capital leases 153 (200) (194)
Payments on acquisition payable to Hobart - - (6,150)
Other financing costs, net (28) 18 (76)
-------- --------- --------
Net cash provided by (used in) financing activities 10,418 57,557 (9,582)
Effect of exchange rate changes on cash 1,072 167 10
-------- --------- --------
Net increase (decrease) in cash (464) 441 (340)
Cash - beginning of period 896 455 795
-------- --------- --------
Cash - end of period $ 432 $ 896 $ 455
======== ========= ========
Supplemental cash slow information:
Interest paid $ 13,358 $ 9,010 $ 5,017
======== ========= ========
Taxes paid $ 1,328 $ 494 $ 619
======== ========= ========
Non-cash financing transactions:
Debt assumed on acquisition of Lucas businesses $ 3,227
=========
The accompanying notes are an integral part of the consolidated financial
statements.
25
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: General Information
Prestolite Electric Holding, Inc. ("PEI" or the "Company"), a subsidiary of
Genstar Capital Corporation ("Genstar" or the "Parent") was formed in 1991 to
acquire substantially all of the assets and assume certain liabilities of
Prestolite Electric Incorporated and its wholly owned subsidiaries
("Prestolite"). PEI changed its name from "PEI Holdings, Inc." to "Prestolite
Electric Holding, Inc." on December 31, 1998. PEI includes the wholly owned
subsidiaries Prestolite Electric Incorporated and Prestolite Electric of
Michigan, Inc. Prestolite Electric Incorporated's wholly-owned subsidiaries
include Prestolite Electric Limited, a U.K. corporation, Prestolite electric
(Pty) Ltd., a South Africa corporation, and Prestolite Indiel Argentina S.A., an
Argentina corporation. Operations are generally conducted as Prestolite Electric
Incorporated. There are no material differences between the financial statements
of PEI and Prestolite. Separate financial statements of Prestolite have not been
presented because management has determined that they would not be material to
investors. Summary financial information of Prestolite is presented in Note 19.
The Company manufactures and distributes heavy duty alternators and starter
motors, direct current electric motors, battery chargers, and other electrical
components for aftermarket and original equipment applications in the heavy duty
vehicle, defense, material handling, marine, and other industries. Six
manufacturing facilities and one distribution warehouse are located in the
United States, three manufacturing facilities are located in the United Kingdom,
one manufacturing facility is located in South Africa, and three manufacturing
facilities are located in Argentina.
Note 2: Discontinued Operations
During 1999, the Company announced its intention to sell two business
segments, the direct current electric motor business ("DC motors") and the
battery charger business. In conjunction with that decision, the Company
recorded a charge of $2.3 million ($3,561,000 less a tax benefit of $1,261,000)
to recognize the expected loss on the sale of the net assets (including
estimated losses through the disposal date) of one of these business segments.
The Company has retained an investment banker to assist in the disposition of
these businesses and expects to complete the sales during 2000.
During 1997, the Company sold its welding equipment business segment unit
for $7.5 million plus a commitment from the buyer to subsequently purchase
certain inventory. In 1997, the Company recorded a $1.5 million loss on that
sale ($2.5 million less a $1.0 million tax benefit).
The DC motor, battery charger, and welding equipment businesses have been
treated as discontinued operations. Prior year financial statements, including
1998 diluted earnings per share, have been restated to reflect these businesses
as discontinued operations.
26
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Summary financial information related to those businesses is presented
below (in thousands).
1999 1998 1997
-------------- -------------- --------------
Net Sales
DC Motors $ 27,442 $ 27,621 $ 29,398
Battery Chargers 17,778 18,090 16,717
Welding Equipment - - 15,199
-------------- -------------- --------------
Total $ 45,220 $ 45,711 $ 61,314
============== ============== ==============
Operating and other income (loss)
DC Motors $ (1,308) $ 399 $ 1,766
Battery Chargers 2,647 3,015 2,101
Welding Equipment - - (289)
-------------- -------------- --------------
Total $ 1,339 $ 3,414 $ 3,578
Provision for income taxes 456 1,160 1,237
-------------- -------------- --------------
Income from discontinued operations $ 883 $ 2,254 $ 2,341
============== ============== ==============
Depreciation and amortization (included in determining operating income
above)
DC Motors $ 1,106 $ 1,018 $ 904
Battery Chargers 842 801 633
Welding Equipment - - 597
-------------- -------------- --------------
Total $ 1,948 $ 1,819 $ 2,134
============== ============== ==============
Net assets
DC Motors $ 15,217 $ 14,575
Battery Chargers 6,092 6,946
Welding Equipment 274 587
Writedown-loss on property, plant
and equipment held for disposal (3,561)
-------------- --------------
Total $ 18,022 $ 22,108
============== ==============
The net assets of the DC Motors and Battery Charger segments at December
31, 1999 consist primarily of accounts receivable, inventory, fixed assets,
investments in unconsolidated affiliates and intangible assets net of certain
accounts payable and accrued liabilities related to these segments. The 1998 net
assets of the Welding Equipment business primarily consist of unsold inventory
and amounts due from the buyer, part of which was liquidated during 1999.
27
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 3: Acquisitions
On January 15, 1999, the Company acquired a remanufacturing business unit
from Roberts Generator for $2.9 million. This business unit operates as Roberts
Remanufacturing and rebuilds alternators and starter motors for specialty
applications. This acquisition was accounted for under the purchase method and
goodwill recorded for this acquisition was $1.1 million.
On January 22, 1998 Prestolite acquired the heavy-duty products division of
Lucas Industries, plc. (a U. K. corporation), Lucas South Africa and Lucas
Indiel Argentina S. A. (collectively referred to as "the Lucas Businesses"). The
Lucas Businesses primarily manufacture alternators and starter motors for the
truck, bus and automotive markets in the United Kingdom, continental Europe,
South America and South Africa. The purchase price was as follows (in
thousands):
Fair value of assets acquired $ 86,052
Fair value of liabilities acquired (44,852)
Goodwill (excluding acquisition costs) 2,744
--------
Purchase price, including repayment of $3,393 of debt 43,944
Cash acquired (2,858)
--------
Purchase price, net of cash acquired 41,086
Assumption of Lucas Argentina debt 3,227
--------
$ 44,313
========
In addition, the Company purchased $1.4 million of inventory from Lucas
during 1998 and agreed to pay up to $4.1 million for certain accounts receivable
as they are collected ($187,000 and $1,074,000 collected in 1999 and 1998,
respectively, and $2.8 million due Lucas as of December 31, 1999). Prestolite
also agreed to pay Lucas up to $6.6 million if certain operating targets are
achieved in Argentina in 1999 and 2000 and up to $4.9 million if certain fully
reserved receivables are collected. The operating target was not achieved in
1999 and no amounts have been recorded for any future additional payments, as
management believes that further payments are not probable. Any future payments
will be recorded as an adjustment to the purchase price.
28
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The 1998 consolidated statement of operations includes a full year of
operating results of the Lucas Businesses. Unaudited pro forma 1997 information
as if the Lucas Businesses had been acquired on January 1, 1997 follows (in
thousands):
(Unaudited)
Net sales 300,287
Loss from continuing operations before income taxes (1,198)
Net loss (2,357)
Loss per common share (basic and fully diluted the same) (1.19)
Note 4: Summary of Significant Accounting Policies:
a. Principles of Consolidation: The consolidated financial statements
include the accounts of PEI and all subsidiaries in which the Company
has financial and operating control. All intercompany accounts and
transactions were eliminated in consolidation.
b. Foreign Currency Translation: The assets and liabilities of foreign
subsidiaries have been translated 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.
c. 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 owned by domestic companies and by the
first-in, first-out ("FIFO") method for all inventories owned by
foreign subsidiaries and divisions. Approximately $34,469 and $30,976
of net inventories at December 31, 1999 and 1998, respectively, have
been valued based on FIFO cost.
d. 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, betterments, 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).
29
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
e. Intangible Assets: Intangible assets are primarily comprised of
financing costs and goodwill. At each balance sheet date, management
assesses whether there has been impairment in the carrying value of
intangible assets. This assessment is based on comparing amortization
to anticipated undiscounted cash flows and operating income.
f. 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 the products to which such costs relate.
g. Engineering Expenses: Engineering costs are expensed as incurred and
are included in selling, general, and administrative expenses. Total
engineering expenses, including expenses of the discontinued
businesses, for the years ended December 31, 1999, 1998, and 1997 were
$6,583,000, $6,793,000, and $5,988,000, respectively. Included in
these engineering expenses are research and development costs (as
defined by Statement of Financial Accounting Standards No. 2) for the
years ended December 31, 1999, 1998, and 1997 of $4,986,000,
$5,415,000 and $4,947,000, respectively.
h. Earnings per share: Basic earnings per share is calculated by dividing
net income by the weighted average number of common shares
outstanding. Diluted earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding and
potentially issuable common shares. Common stock equivalents are
excluded from the diluted earnings per share calculation if a net loss
is incurred for the period, as they would be anti-dilutive.
i. Financial Instruments: The carrying amount of the Company's financial
instruments, which includes cash, accounts receivable, accounts
payable, and debt other than senior unsecured notes approximates their
fair value at December 31, 1999 and 1998. The fair value of the senior
unsecured notes was approximately $100 million at December 31, 1999.
Fair values have been determined based on management estimates and
information from market sources.
j. Comprehensive Income: Comprehensive Income, a measure that reflect all
non-owner changes in equity in addition to net income, consists of net
income and foreign currency translation adjustments and is presented
in the statement of stockholders' equity.
k. Estimates: The preparations 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