-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M+Aeaq65opSnRS2pTlvNE/3Ksf+YYrO1OzkJ8z1tgwfDI4km9cS2CIYYVRTN24ar zkpfAFJJnXnNpyH+X4W1zw== 0000929624-99-001551.txt : 19990817 0000929624-99-001551.hdr.sgml : 19990817 ACCESSION NUMBER: 0000929624-99-001551 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRESTOLITE ELECTRIC HOLDING INC CENTRAL INDEX KEY: 0001057053 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 943142033 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-49429-01 FILM NUMBER: 99690250 BUSINESS ADDRESS: STREET 1: 2100 COMMONWEALTH BLVD CITY: ANN ARBOR STATE: MI ZIP: 48105 BUSINESS PHONE: 3139136600 MAIL ADDRESS: STREET 1: 2100 COMMONWEALTH BLVD CITY: ANN ARBOR STATE: MI ZIP: 48105 FORMER COMPANY: FORMER CONFORMED NAME: PEI HOLDINGS INC DATE OF NAME CHANGE: 19980304 10-Q 1 FORM 10-Q FOR PERIOD ENDED JULY 3, 1999 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark one) / X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended July 3, 1999. / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period From ______________to_________________. Commission file Number 333-49429-01 Prestolite Electric Holding, Inc. --------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-3142033 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 2100 Commonwealth Blvd., Ste 300, Ann Arbor, Michigan 48105 ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (734) 913 - 6600 ---------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name, address, and former fiscal year, if changed since last report) Indicate whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of common shares outstanding Class: as of August 11, 1999 Common Stock 1,993,000 Page 1 FORM 10-Q TABLE OF CONTENTS
Part I: Financial Information Item 1: Condensed Consolidated Balance Sheets 3 at July 3, 1999 (unaudited) and December 31, 1998 Condensed Consolidated Statement of Operations 4 Three months ended July 3, 1999 (unaudited) and July 4, 1998 (unaudited) Condensed Consolidated Statements of Cash Flows 5 Three months ended July 3, 1999 (unaudited) and July 4, 1998 (unaudited) Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial 12 Condition and Results of Operations Part II: Other Information 19 Signatures 20
Page 2 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS Prestolite Electric Holding, Inc. and Subsidiaries (including Prestolite Electric Incorporated) Condensed Consolidated Balance Sheet (in thousands, except share amounts)
July 3, December 31, 1999 1998 -------------- --------------- Assets Current Assets: Cash $ 1,614 $ 896 Accounts receivable, net of allowances 48,771 51,352 Inventories, net 54,283 52,082 Deferred tax asset 2,711 2,134 Prepaid and other current assets 2,469 2,286 -------------- --------------- Total current assets 109,848 108,750 Property, plant and equipment, net 55,241 56,064 Deferred tax asset 1,002 1,002 Investments 4,880 4,996 Intangible assets 11,128 11,528 Long-term receivables, pension assets and assets of discontinued operations 5,699 5,807 -------------- --------------- Total assets $187,798 $188,147 ============== =============== Liabilities Current Liabilities: Revolving credit $ 6,733 $ 4,935 Current portion of long-term debt 3,166 2,401 Accounts payable 23,839 26,088 Accrued liabilities 22,475 27,135 -------------- --------------- Total current liabilities 56,213 60,559 Long-term debt 141,209 133,416 Other non-current liabilities 2,133 3,090 -------------- --------------- Total liabilities 199,555 197,065 Stockholders' equity Common stock, par value $.01, 5,000,000 shares 2 2 authorized, 1,993,000 shares issued and outstanding at July 3, 1999 and December 31, 1998, respectivley Paid-in capital 16,623 16,623 Retained earnings (accumulated deficit) (1,221) (404) Notes receivable, employees' stock purchase, 7.74% due 2002 (513) (559) Foreign currency translation adjustment (2,199) (131) Treasury stock, 1,310,000 shares on July 3, 1999 and December 31, 1998, respectively (24,449) (24,449) -------------- --------------- Total stockholders' equity (11,757) (8,918) -------------- --------------- Total liabilities and stockholders' equity $187,798 $188,147 ============== =============== The accompanying notes are an integral part of the condensed consolidated financial statements.
Page 3 Prestolite Electric Holding, Inc. and Subsidiaries (including Prestolite Electric Incorporated) Condensed Consolidated Unaudited Statements of Operations (in thousands except share amounts)
For the three months ended For the six months ended -------------------------------- -------------------------------- July 3, July 4, July 3, July 4, 1999 1998 1999 1998 -------------- -------------- -------------- -------------- Net Sales $ 65,761 $ 72,848 $ 130,519 $ 147,373 Cost of goods sold 53,794 57,888 104,298 117,919 -------------- -------------- -------------- -------------- Gross profit 11,967 14,960 26,221 29,454 Selling, general and administrative 9,641 9,832 19,314 19,638 Costs associated with option repurchase - - - 2,101 Restructuring charge - - - 980 -------------- -------------- -------------- -------------- Operating income 2,326 5,128 6,907 6,735 Interest expense 4,114 3,245 7,886 6,526 Other expense (income) (917) (436) (1,048) (522) Income from continuing operations before extraordinary loss and income taxes -------------- -------------- -------------- -------------- (871) 2,319 69 731 Loss (benefit) from unconsolidated subsidiaries 26 - 116 - Provision for (benefit from) income taxes (202) 869 770 263 -------------- -------------- -------------- -------------- Income from continuing operations (695) 1,450 (817) 468 Extraordinary loss, net of taxes of $716 - - - 1,275 -------------- -------------- -------------- -------------- Net income (loss) $ (695) $ 1,450 $ (817) $ (807) ============== ============== ============== ============== Other comprehensive income (expense): Foreign currency translation adjustment $ (569) $ (968) $ (2,068) $ (927) -------------- -------------- -------------- -------------- Comprehensive income (expense) $ (1,264) $ 482 $ (2,885) $ (1,734) ============== ============== ============== ============== Basic earnings per common share Income from continuing operations $ (0.35) $ 0.73 $ (0.41) $ 0.22 Extraordinary item $ - $ - $ - $ (0.59) -------------- -------------- -------------- -------------- Net income (loss) $ (0.35) $ 0.73 $ (0.41) $ (0.37) ============== ============== ============== ============== Diluted earnings per common share Income from continuing operations $ (0.35) $ 0.69 $ (0.41) $ 0.20 Extraordinary item $ - $ - $ - $ (0.56) -------------- -------------- -------------- -------------- Net income (loss) $ (0.35) $ 0.69 $ (0.41) $ (0.36) ============== ============== ============== ============== Basic shares outstanding 1,993,000 1,993,000 1,993,000 2,160,774 Dilutive shares outstanding 2,126,314 2,103,860 2,126,386 2,284,495 The accompanying notes are an integral part of the condensed consolidated financial statements.
Page 4 Prestolite Electric Holding, Inc. and Subsidiaries (including Prestolite Electric Incorporated) Condensed Consolidated Unaudited Statement of Cash Flows (in thousands)
For the six months ended ------------------------------------ July 3, July 4, 1999 1998 -------------- -------------- Cash Flows from Operating Activities: Net income (loss) $ (817) $ (807) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Loss on debt refinancing - 1,991 Option repurchase - 2,101 Cash provided by (used in) discontinued operations - 1,548 Depreciation 5,196 5,391 Amortization 947 486 Loss (gain) on sale of property, plant, and equipment 65 (122) Loss from unconsolidated subsidiaries 116 - Deferred taxes (577) (1,431) Changes in working capital items (7,152) 3,707 -------------- -------------- Net cash provided by operating activities (2,222) 12,864 Cash Flows from Investing Activities: Capital expenditures (4,353) (5,557) Proceeds from disposal of fixed assets 5 12 Acquisition of: Lucas businesses - (48,209) Roberts Remanufacturing (2,958) - Investment in affiliates (650) (1,500) -------------- -------------- Net cash provided by investing activities (7,956) (55,254) Cash Flows from Financing Activities: Net increase (decrease) in revolving credit 9,505 (1,377) Payments on long-term debt - (31,146) Proceeds from borrowings 765 125,000 Costs related to new borrowings, including loss on refinancing - (5,785) Purchase of treasury stock, options and warrants, employee stock receivable 46 (29,895) Borrowings (payments) on capital leases 100 (33) Other financing costs, net (14) (6,773) -------------- -------------- Net cash from financing activities 10,402 49,991 Effect of exchange rate changes on cash 494 (237) -------------- -------------- Net increase (decrease) in cash 718 7,364 Cash - beginning of period 896 455 -------------- -------------- Cash - end of period $ 1,614 $ 7,819 ============== ============== The accompanying notes are an integral part of the condensed consolidated financial statements.
Page 5 Prestolite Electric Holding, Inc. and Subsidiaries (including Prestolite Electric Incorporated) Notes to Unaudited Condensed Consolidated Financial Statements Note 1: General Information Prestolite Electric Holding, Inc. conducts all of its operations through its wholly-owned principal subsidiary, Prestolite Electric Incorporated. There are no material differences between the financial statements of Prestolite Electric Holding, Inc. and Prestolite Electric Incorporated (collectively, "Prestolite," "us," "we" or the "Company"). These unaudited condensed consolidated financial statements have been prepared by us in accordance with Rule 10-01 of Regulation S-X and have been prepared on a basis consistent with our audited financial statements for the year ended December 31, 1998. These statements reflect all adjustments, consisting only of items of a normal recurring nature, which are, in the opinion of management, necessary for the fair statement of the consolidated financial condition and consolidated results of operations for the interim period presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements and the related notes should be read in conjunction with our audited financial statements, the notes to those statements and the other material included in our Annual Report on Form 10-K for the year ended December 31, 1998. The year-end 1998 condensed balance sheet data was derived from our audited financial statements, but does not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The results of operations for the three- and six-month periods ended July 3, 1999 are not necessarily indicative of the operating results that may be expected for the full year or any other interim period. Genstar Capital Corporation and Company management own all of the equity securities of Prestolite Electric Holding, Inc. Note 2: Acquisitions On January 15, 1999, we acquired a remanufacturing business unit from Roberts Generator for $2.9 million. This business unit operates as Roberts Remanufacturing and rebuilds alternators and starter motors for specialty applications. We financed this purchase with funds borrowed under our United States revolving line of credit. 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 Acquisition," for approximately $44.3 million in cash, net of cash acquired and including the assumption of approximately $3.2 million in debt, inventory purchases of approximately $1.4 million during 1998, and up to $4.1 million for certain accounts receivable as they are collected ($1,074,000 paid during 1998, no payments during the first quarter of 1999, and $0.1 million paid during the second quarter of 1999). In addition, Prestolite has agreed to pay Lucas up to an additional $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. No liability for this $11.5 million is accrued, as management does not consider Page 6 payment probable. Any future payments will be recorded as an adjustment to the purchase price. In addition, on January 22, 1998, Prestolite Electric Incorporated completed the offering of $125 million of 9.625% Senior Notes due 2008 (the "Notes"). The proceeds of the Notes funded the Lucas Acquisition and repaid approximately $42 million of our outstanding indebtedness. Approximately $29.7 million of the proceeds were also used for the repurchase of common stock, warrants and options to purchase common stock. These transactions are more fully described in our Annual Report on Form 10-K for the year ended December 31, 1998. In conjunction with these transactions, during the first quarter of 1998 the Company charged operations for $2.1 million for the repurchase of options and recorded an extraordinary charge of $1.275 million, net of tax benefit, related to the debt refinancing. The Company also recorded a $0.98 million restructuring charge in the first quarter of 1998 related to costs anticipated to be incurred at the Company's existing facilities as a result of the Lucas Acquisition. Note 3: Inventories Inventories are summarized as follows (in thousands of U.S. dollars):
As of As of July 3, December 31, 1999 1998 -------------- -------------- Raw Material $ 18,050 $ 15,014 Work in Progress 15,257 16,171 Finished Goods 20,976 20,897 -------------- -------------- $ 54,283 $ 52,082 ============== ==============
Note 4: Property, Plant and Equipment Property, Plant and Equipment consists of the following (in thousands of U.S. dollars):
As of As of July 3, December 31, 1999 1998 --------------- --------------- Land & Buildings $ 29,662 $ 29,433 Machinery & Equipment 59,825 54,863 Construction in Progress 3,618 2,699 --------------- --------------- Total, at Cost 93,105 86,995 Accumulated Depreciation (37,864) (30,931) --------------- --------------- Net $ 55,241 $ 56,064 =============== ===============
Page 7 Note 5: Investments Investments consist of the following (in thousands of U.S. dollars):
As of As of July 3, December 31, 1999 1998 --------------- --------------- DAX Industries, Inc. (35% interest) $1,715 $1,869 Ecoair Corp. (7% interest, at cost) 2,000 2,000 Prestolite Asia Ltd. (50% interest) 568 530 Auto Ignition, Ltd. (4% interest, at cost) 597 597 --------------- --------------- $4,880 $4,996 =============== ===============
Note 6: Debt In 1998 we issued $125 million of 9.625% (interest payable semiannually) unsecured senior notes. The senior notes mature on February 1, 2008 but may be redeemed earlier at our option under conditions specified in the indenture pursuant to which the senior notes were issued. The senior notes are senior unsecured obligations of Prestolite Electric Incorporated and are fully and unconditionally guaranteed on a senior unsecured basis by Prestolite Electric Holding, Inc. The senior notes are subordinated to our secured credit facilities, to the extent of the value of the assets securing such indebtedness, including the secured facilities described below. The senior notes are also subordinated to the indebtedness of any subsidiary of Prestolite Electric Incorporated, including the indebtedness of its United Kingdom subsidiary. The proceeds were used to refinance existing debt, fund the acquisition of the Lucas businesses and to repurchase certain Prestolite Electric Holding, Inc. securities. The senior notes are more fully described in our Prospectus dated June 26, 1998. In connection with the issuance of the Notes, we entered into new credit agreements in the U. S. and the U. K. The U. S. agreement consists of a $23.0 million revolving credit facility ($17.1 million available at July 3, 1999) which is advanced according to a formula based on eligible accounts receivable and inventory levels. The borrowings are collateralized by all U. S. accounts receivable and inventories and mature on July 31, 2000. Interest is payable at the bank's prime rate (7.75 percent at July 3, 1999) or at the "London Late Eurodollar" rate plus 2.75 percent at our option. In certain situations these rates may be increased by 0.125 percent. The U. K. agreement allows us to borrow up to (Pounds)7.0 million ((Pounds)5.5 million available at July 3, 1999) and is advanced based on eligible U. K. accounts receivable. Interest is payable at the bank's base rate, 6.75 percent at July 3, 1999. This agreement expires in April 2002. In Argentina and South Africa, we have arrangements with several banks which allow our subsidiaries in these countries to discount or borrow against accounts receivable, generally at the prime rates of the banks involved. Those rates ranged from 16.5 percent to 21.3 percent at July 3, 1999. Total available credit in Argentina and South Africa at July 3, 1999 was approximately $4.6 million. Page 8 Debt consists of the following (in thousands of U.S. dollars):
As of As of July 3, December 31, 1999 1998 --------------- -------------- U.S. Bank Debt $ 14,551 $ 3,366 U.S. Unpresented Checks 1,490 385 U.K. Bank Debt 4,761 8,132 Argentina Bank Debt 2,809 2,120 South Africa Bank Debt 931 269 Senior Notes 125,000 125,000 Capital Lease Obligations 1,296 1,196 Other Debt 270 284 --------------- -------------- Total Debt 151,108 140,752 Current Maturities 9,899 7,336 --------------- -------------- Long Term Debt $ 141,209 $ 133,416 =============== ============== Cash 1,614 896 --------------- -------------- Total Debt net of Cash $ 149,494 $ 139,856 =============== ==============
Note 7: Segment Reporting In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Prior quarter information is restated to conform with the provisions of SFAS No. 131. Prestolite operates in four principal geographic regions. Sales in South Africa and Argentina consist largely of products for the automotive market while sales of products in the United States and United Kingdom consist largely of products for non-automotive applications. Sales between geographic segments and between operating segments are priced at cost plus a standard markup. Sales to external customers, based on country of origin, is as follows (in thousands of U.S. dollars):
North United South America Kingdom Argentina Africa Total -------------- --------------- --------------- -------------- --------------- For quarter ended July 3, 1999 $ 35,401 $ 16,286 $ 10,809 $ 3,265 $ 65,761 For quarter ended July 4, 1998 34,066 17,767 17,555 3,460 72,848 For six months ended July 3, 1999 $ 70,988 $ 32,985 $ 20,120 $ 6,426 $130,519 For six months ended July 4, 1998 70,279 38,903 31,296 6,895 147,373
Page 9 During 1998, the Company began to manage itself on the basis of three business units (Heavy Duty Systems, Electric Vehicle Systems, and Automotive Systems) and to evaluate the performance of its segments based on earnings before interest expense, taxes, depreciation and amortization and excluding restructuring and option repurchase charges ("EBITDA"). Corporate overhead and certain other charges are not allocated to the divisions. Segment assets are not currently broken out in the normal course of managing segment operations; accordingly, such information is not available for disclosure. In accordance with SFAS No. 131, the operating results for the quarters ended July 3, 1999 and July 4, 1998 are summarized by operating segment (in thousands of U.S. dollars) below:
Heavy Electric Duty Vehicle Automotive Systems Systems Systems Unallocated Division Division Divison Costs Total -------------- --------------- -------------- ---------------- ---------------- Sales to external customers: For quarter ended July 3, 1999 $ 31,659 $ 18,262 $ 15,840 $ 65,761 For quarter ended July 4, 1998 32,466 18,771 21,611 72,848 EBITDA: For quarter ended July 3, 1999 4,231 1,856 1,655 $ (1,469) 6,273 For quarter ended July 4, 1998 4,500 2,941 2,431 (1,423) 8,449 Sales to external customers: For six months ended July 3, 1999 64,462 35,871 30,186 130,519 For six months ended July 4, 1998 68,119 39,813 39,441 147,373 EBITDA: For six months ended July 3, 1999 10,132 4,155 2,651 (2,956) 13,982 For six months ended July 4, 1998 9,941 6,095 3,370 (3,191) 16,215
Page 10 A reconciliation of EBITDA to income from continuing operations before income taxes follows (in thousands of U.S. dollars):
For the three months ended -------------------------------------- July 3, July 4, 1999 1998 --------------- --------------- EBITDA for reporting segments $ 6,273 $ 8,449 Depreciation and amortization 3,056 2,885 Loss (income) in unconsolidated subsidiaries 26 - Interest expense 4,114 3,245 --------------- --------------- Income from continuing operations before income taxes $ (871) $ 2,319 =============== =============== For the six months ended -------------------------------------- July 3, July 4, 1999 1998 --------------- --------------- EBITDA for reporting segments $13,982 $16,215 Depreciation and amortization 6,143 5,877 Loss (income) in unconsolidated subsidiaries 116 - Option repurchase - 2,101 Restructuring - 980 Interest expense 7,886 6,526 --------------- --------------- Income from continuing operations before income taxes $ 69 $ 731 =============== ===============
Page 11 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operation. 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 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 2 to the financial statements. The Lucas acquisition was financed 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. Proceeds from the offering of our senior notes were also used 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. In January 1999, we acquired a remanufacturing business that continues to operate in Saddlebrook, NJ. We purchased this business for $2.9 million, financed through our U.S. revolving line of credit. 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. The Electric Vehicle Systems Division produces motors (including starter motors, material handling motors, and pump and winch motors), controls (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. 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 Vehicles Systems Division are sold into the material handling market for installation on or use with lift trucks and other electric Page 12 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. The Automotive Systems Division manufactures automotive components, primarily alternators and starter motors. The division's major facilities are in South Africa and Argentina, with smaller remanufacturing facilities in Dearborn, MI and Saddlebrook, NJ. 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 Three Months Ended July 3, 1999 Compared to Three Months Ended July 4, 1998 Sales for the three months ended July 3, 1999 were $65.8 million, a decrease of $7.1 million, or 9.7%, from $72.8 million in the second quarter of 1998. The decrease in sales dollars is mainly attributable to the Automotive Systems Division. Automotive Systems sales declined approximately $5.5 million or 25.2%. An Argentina sales decline of $6.7 million was partially offset by $1.3 million in additional sales of the recently acquired Roberts Remanufacturing business in Saddlebrook, NJ. Heavy Duty Systems sales declined approximately $0.7 million or 2.2%. Heavy Duty Systems sales in the United Kingdom declined $2.1 million but were partially offset by a $1.3 million increase in Heavy Duty Systems sales in the United States. While Heavy Duty Systems defense sales in the United States declined $44,000, or 4.9%, other U.S. sales increased by $1.4 million, or 8.7%. Electric Vehicle Systems sales declined approximately $0.6 million or 3.3%. Contributing to this decline were both a defense sales decline of $0.9 million, or 41.0%, and a material handling decline of $0.3 million, or 13.3%. Gross profit was $12.0 million in the second quarter of 1999, or 18.2% of sales. This compares to gross profit of $14.9 million, or 20.5% of sales, in the second quarter of 1998. At several manufacturing facilities, we were unable to sufficiently reduce overhead expenses to match the decline in sales. In the United Kingdom, warranty costs were higher than normal. These factors caused a decline in gross profit as a percent of sales. We believe that the major factors contributing to these warranty claims have been addressed. However, we cannot assure you that we will not incur additional warranty costs in future periods. Selling, general, and administrative expense was $9.6 million, or 14.7% of sales, for the second quarter of 1999, a decrease of $0.2 million, or 1.9%, from $9.8 million, or 13.5% of sales, in the second quarter of 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 and in U.S. Automotive Systems due to the acquisition of the Roberts Remanufacturing business. Operating income in the second quarter of 1999 was $2.3 million, or 3.5% of sales, a decrease of $2.8 million, or 54.6%, from the $5.1 million, or 7.0% of sales, in the second quarter of 1998. This was due to the factors discussed above. Other income was $917,000 in the second quarter of 1999 versus $436,000 in the second quarter of 1998. This consists of the net effect of interest income, income from the elimination of a lawsuit-related reserve in Argentina in 1999, 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. Page 13 Interest expense was $4.1 million in the second quarter of 1999, an increase of $0.9 million, or 26.8%, compared to $3.2 million in the second quarter of 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 the second quarter of 1998. Benefit from income taxes was $202,000, 23.2% of income from continuing operations before taxes, for the second quarter of 1999 as compared to the $869,000 provision for income taxes for the second quarter of 1998, 37.5% of income from continuing operations before taxes and the extraordinary item. The change in the tax rate is due to losses in Argentina for which no tax benefit has been recorded. Six Months Ended July 3, 1999 Compared to Six Months Ended July 4, 1998 Sales for the six months ended July 3, 1999 were $130.5 million, a decrease of $16.8 million, or 11.4%, from $147.4 million in the first six months of 1998. The decrease in sales dollars is mainly attributable to the Automotive Systems Division. Automotive Systems sales declined approximately $8.8 million or 22.2%. An Argentina sales decline of $11.2 million was partially offset by $2.5 million in additional sales of the recently acquired Roberts Remanufacturing business. Heavy Duty Systems sales declined approximately $3.5 million or 5.2%. Heavy Duty Systems sales in the United Kingdom declined $5.9 million but were partially offset by a $2.3 million increase in Heavy Duty Systems sales in the United States. While Heavy Duty Systems defense sales in the United States declined $0.5 million, or 19.8%, other heavy Duty systems sales in the United States increased by $2.8 million, or 8.6%. Electric Vehicle Systems sales declined approximately $3.8 million or 9.5%. Contributing to this decline were both a defense sales decline of $2.7 million, or 53.1%, and a material handling decline of $1.2 million, or 24.4%. Gross profit was $26.2 million in the first six months of 1999, or 20.1% of sales. This compares to gross profit of $29.5 million, or 19.9% of sales, for the first six months of 1998. The increase 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, although the benefit of these reductions have been partly offset by declining volume. The Roberts Remanufacturing business, acquired in January 1999, has higher margins than the company average. Lower material costs, improved productivity, and a shift in sales to higher margin products have also enhanced our gross profit percentage. Selling, general, and administrative expense was $19.3 million, or 14.8% of sales, for the first six months of 1999, a decrease of $0.3 million, or 1.7%, from $19.6 million, or 13.3% of sales, in the first six months of 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 the U.S. Heavy Duty Systems and in U.S. Automotive Systems due to the acquisition of the Roberts Remanufacturing business. 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 first quarter charge in 1998 of $1.0 million to cover severance payments related to restructuring activities at our facilities in Leyland, England and Decatur, Alabama. Of this total, Page 14 $0.5 million was spent in 1998 and $0.1 million was spent in the first six months of 1999. The remainder is expected to be spent during the second half of 1999. Operating income in the first six months of 1999 was $6.9 million, or 5.3% of sales, an increase of $0.2 million, or 2.6%, from the $6.7 million, or 4.6% of sales, in the first six months of 1998. This was due to the factors discussed above. Other income was $1.0 million in the first six months of 1999 versus $522,000 in the first six months of 1998. This consists primarily of interest income, the elimination of a lawsuit-related reserve in Argentina in 1999, 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 $7.9 million in the first six months of 1999, an increase of $1.4 million, or 20.8%, compared to $6.5 million in the first six months of 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 the first six months of 1998. Provision for income taxes was $770,000, compared to a loss of $47,000 from continuing operations before taxes for the first six months of 1999. This compares to a provision for income taxes of $263,000 for the first six months of 1998, 35.6% of income from continuing operations before taxes and the extraordinary item. The high 1999 tax rate is due to losses in Argentina for which tax benefits have not been recorded. 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. Liquidity and Capital Resources Cash used by operating activities in the first six months of 1999 was $7.8 million. Capital spending for the first six months of 1999 was $4.4 million, a $1.2 million reduction from the $5.6 million of capital spending in the first six months of 1998. Capital spending for the first six months of 1999 in the United States was $2.2 million as compared to capital spending in 1998 of $3.7 million. Capital spending for the first six months of 1999 in the United Kingdom of $1.0 million, in Argentina of $0.9 million, and in South Africa of $0.2 million, compares to the first six months of 1998 levels in the United Kingdom of $1.0 million, in Argentina of $0.5 million, and in South Africa of $0.3 million. Planned capital expenditures consist primarily of expenditures to reduce costs through automation, replace existing equipment and enable us to manufacture new products. We spent $4.9 million in 1998 and $1.4 million in the first six months of 1999 on redundancy costs. We expect to spend approximately $1.4 million in the second half 1999 on redundancy costs. These amounts have been or will be charged to the reserves established in connection with the Lucas acquisition in 1998 or as a result of the 1998 restructuring charge discussed above. Page 15 In connection with the acquisition of our Argentina operations from Lucas in 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 1999, 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 1999 and 2000. Aggregate payments for receivables collected totaled $1.1 million in 1998 and $0.1 million in the first six months of 1999. We expect to pay any of these contingencies from the collection of receivables or from such earnings. Debt, net of cash, increased from $139.9 million at December 31, 1998 to $149.5 million at July 3, 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 $2.4 million and $3.9 million were available based on the July 3, 1999 levels of receivables (United States and United Kingdom) and inventory (United States only) which are pledged to support that debt. In addition, during July 1999, we modified our U.S. bank agreement to allow borrowings above the amount supported by receivables and inventory. The additional amount is $3.0 million effective July 30, 1999 declining in steps to zero at December 1, 1999. 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 July 3, 1999 was approximately $1.1 million. We expect our liquidity needs to consist primarily of working capital needs and scheduled payments of principal and interest on our indebtedness. We expect our short-term liquidity needs to be provided by operating cash flows and borrowings under our revolving credit facilities. We expect to fund our long-term liquidity needs from our operating cash flows, the issuance of debt and/or equity securities and bank borrowings. We believe that cash flows from operations, our existing cash balances and amounts available under these revolving credit facilities will provide adequate funds for on going operation, planned capital expenditures, investments, and debt service for at least the next twelve months. Estimates as to working capital needs and other expenditures may be materially affected if the foregoing sources are not available or do not otherwise provide sufficient funds to meet our obligations. Year 2000 Currently, many automated systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries or otherwise be modified to distinguish 21st century dates from 20th century dates. As a result, many companies' information systems and software need to be upgraded or replaced in order to function correctly after December 31, 1999. We have completed our Year 2000 assessments of our information technology and embedded systems, and are continuing efforts to prepare our systems and applications for the Year 2000 as part of a larger, general program to enhance all of our computer systems. The Year 2000 element of these efforts consists 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. Software remediation efforts in the United States are more than 99% complete as of June 30, 1999 and all actions are expected to be completed and all systems are expected to be Page 16 updated in the third quarter of 1999. Because the majority of our operations outside of the United States were acquired in early 1998 and these operations were not Year 2000 compliant, our efforts to deal with the Year 2000 issue outside the United States required a larger investment than our domestic programs. In Argentina, a new Year 2000 compliant system has been installed. In the United Kingdom, a system used in two locations has been replaced with Year 2000 compliant systems, while the system in use at a third location is being upgraded for Year 2000 compliance. These efforts were largely completed at July 31, 1999. We expect that the material aspects of the systems upgrades and remediation efforts at all of our facilities will be completed and accordingly will be Year 2000 compliant prior to December 31, 1999. In addition, we have reviewed our product base and believe that our products will not be affected by Year 2000 issues. In connection with the overall computer enhancement program, including Year 2000 compliance, we expect to incur aggregate internal and third party costs of approximately $3.0 million, of which approximately $2.4 million had been incurred by the second quarter of 1999. The $3.0 million total 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. We rely on third party vendors and service providers for certain products and services, including certain data processing capabilities. We are communicating with our principal vendors and service providers to assess the Year 2000 readiness of their products and services. Responses indicate that our significant providers currently have compliant versions available or are well into renovation and testing phases with completion scheduled prior to December 31, 1999. However, we can give no guarantee that the systems of these vendors and service providers in which we rely will be timely Year 2000 compliant. Our contingency planning for Year 2000 issues related primarily to securing backup vendors (which have been identified for key purchased products) and the possibility of stockpiling raw materials. Contingency planning will continue throughout 1999 and our plans will be modified based upon the progress of our remediation efforts, system updates and installations and based upon our communications with selected suppliers. While we believe that the estimated cost of becoming Year 2000 compliant will not be significant to our results of operations, failure to complete all the work in a timely manner could have a material adverse effect on our results of operations. While we expect all planned work to be completed, we cannot guarantee that all systems will be in compliance by the Year 2000, that the systems of suppliers and other companies and government agencies on which we rely will be converted in a timely manner or that our contingency planning will be able to fully address all potential interruptions. Therefore, date-related issues could cause delays in our ability to produce or ship our products, process transactions or otherwise conduct business in any of our markets. Forward-Looking Statements This form 10-Q contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included herein may contain forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", or "continue" or the Page 17 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 judgement about factors that they believe may materially affect our performance. We make the forward-looking statements in good faith and believe them to have a reasonable basis. However, such statements are speculative, speak only as of the date made and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could vary materially from those anticipated, estimated or expected. Factors that might cause actual results to differ materially from those in such forward-looking statements include, but are not limited to, those discussed in the "Management's Discussion and Analysis of Financial Condition and Results of Operations." All subsequent written and oral statements that we make are qualified in their entirety by these factors. Page 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K We have not filed any reports on Form 8-K during the quarterly period ended July 3, 1999. Page 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 12, 1999 By: /s/ Kenneth C. Cornelius ---------------------------------------- Kenneth C. Cornelius Senior Vice President and Chief Financial Officer (principal financial and accounting officer) Page 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR PRESTOLITE ELECTRIC HOLDINGS, INC., AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUL-03-1999 1,614 0 51,585 (2,814) 54,283 109,848 90,512 (35,271) 187,798 56,213 141,209 0 0 2 16,623 187,798 130,519 130,519 104,298 104,298 0 0 7,886 (47) 770 (817) 0 0 0 (817) (0.41) (0.41)
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