10-Q 1 k66104e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 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 September 29, 2001. / / 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 November 14, 2001 Common Stock 1,985,000 FORM 10-Q TABLE OF CONTENTS Part I: Financial Information Item 1: Condensed Consolidated Balance Sheets 3 at September 29, 2001 (unaudited) and December 31, 2000 Condensed Consolidated Statement of Operations 4 Nine months ended September 29, 2001 (unaudited) and September 30, 2000 (unaudited) Condensed Consolidated Statements of Cash Flows 5 Nine months ended September 29, 2001 (unaudited) and September 30, 2000 (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 17 Signatures 18
Page 2 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except share amounts)
September 29, December 31, 2001 2000 -------------- --------------- Assets (Unaudited) Current Assets: Cash $ 818 $ 10,181 Accounts receivable, net of allowances 32,396 31,098 Inventories, net 41,586 42,293 Prepaid and other current assets 4,303 2,938 -------------- --------------- Total current assets 79,103 86,510 Property, plant and equipment, net 36,381 37,517 Investments 577 577 Intangible assets, net 7,310 7,970 Long-term receivables and pension assets 5,830 5,752 Net assets of discontinued operations 5,952 5,993 -------------- --------------- Total assets $135,153 $144,319 ============== =============== Liabilities Current Liabilities: Revolving credit $ 8,387 $ 5,747 Current portion of long-term debt 590 555 Accounts payable 16,088 18,744 Accrued liabilities 11,650 14,835 -------------- --------------- Total current liabilities 36,715 39,881 Long-term debt 106,567 106,733 Other non-current liabilities 2,442 2,321 Deferred tax liabilities 1,930 2,467 -------------- --------------- Total liabilities 147,654 151,402 Minority interest 1,108 - Stockholders' equity (deficit) Common stock, par value $.01, 5,000,000 shares authorized, 1,985,000 shares issued and outstanding at September 29, 2001 and December 31, 2000 2 2 Paid-in capital 16,623 16,623 Retained earnings (810) 4,890 Notes receivable, employees' stock purchase, 7.74% due 2002 (395) (446) Foreign currency translation adjustment (4,404) (3,527) Treasury stock, 1,318,000 shares on September 29, 2001 and December 31, 2000 (24,625) (24,625) -------------- --------------- Total stockholders' equity (deficit) (13,609) (7,083) -------------- --------------- Total liabilities and stockholders' equity (deficit) $135,153 $144,319 ============== ===============
The accompanying notes are an integral part of the condensed consolidated financial statements. Page 3 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts)
For the 3 months ended For the 9 months ended ------------------------------------ -------------------------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2001 2000 2001 2000 ---------------- ----------------- ------------------ ----------------- Net Sales $ 39,144 $ 42,709 $ 123,326 $ 131,173 Cost of goods sold 31,080 34,326 98,721 107,300 ---------------- ----------------- ------------------ ----------------- Gross profit 8,064 8,383 24,605 23,873 Selling, general and administrative 5,623 5,571 16,200 19,658 Costs associated with option repurchase - 168 - 168 Special charges* 1,500 3,450 1,500 3,450 Severance charges 2,127 419 3,237 2,119 ---------------- ----------------- ------------------ ----------------- Operating income (loss) (1,186) (1,225) 3,668 (1,522) Interest expense 3,501 3,656 9,844 11,958 Minority interest expense 398 - 398 - Unrealized foreign exchange (gains) losses (13) 106 19 720 Other expense (income) (46) (73) (11) (419) ---------------- ----------------- ------------------ ----------------- Income (loss) from continuing operations before income taxes (5,026) (4,914) (6,582) (13,781) Benefit from income taxes (398) (2,315) (491) (4,241) ---------------- ----------------- ------------------ ----------------- Income (loss) from continuing operations (4,628) (2,599) (6,091) (9,540) Income from discontinued operations, net of taxes - 15,044 - 17,395 Extraordinary item - Gain on senior note repurchase - 3,667 391 3,667 ---------------- ----------------- ------------------ ----------------- Net income (loss) $ (4,628) $ 16,112 $ (5,700) $ 11,522 Other comprehensive income (expense): Foreign currency translation adjustment $ 619 $ (544) $ (877) $ (2,621) ---------------- ----------------- ------------------ ----------------- Comprehensive income (loss) $ (4,009) $ 15,568 $ (6,577) $ 8,901 ================ ================= ================== ================= Basic and diluted earnings per common share Income (loss) from continuing operations $ (2.33) $ (1.31) $ (3.07) $ (4.81) Income (loss) from discontinued operations $ - $ 7.58 $ - $ 8.76 Extraordinary item - Gain on sr note repurchase $ - $ 1.85 $ 0.20 $ 1.85 ---------------- ----------------- ------------------ ----------------- Net income (loss) $ (2.33) $ 8.12 $ (2.87) $ 5.80 ================ ================= ================== ================= Basic and dilutive weighted average shares outstanding 1,985,000 1,985,000 1,985,000 1,985,000
*Special charges in 2001 reflect Argentina bad debt adjustment, in 2000 reflect specialty alternator cost write-off. The accompanying notes are an integral part of the condensed consolidated financial statements. Page 4 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS (in thousands)
For the nine months ended ------------------------------------ Sept. 29, Sept. 30, 2001 2000 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (5,700) $ 11,522 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 5,415 5,913 Amortization 931 1,054 Gain on senior note purchase (660) (5,914) Minority interest expense 398 - Loss (gain) on sale of property, plant, and equipment (44) (313) Gain on sale of discontinued business - (24,348) Deferred gain on sale and leaseback (258) 114 Specialty alternator charges - 3,450 Option repurchase - 168 Deferred taxes (484) 6,429 Changes in working capital items (8,219) (3,804) -------------- -------------- Net cash provided by (used in) continuing operating activities (8,621) (5,729) Net cash provided by (used in) discontinued operations (180) (66) -------------- -------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (8,801) (5,795) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (3,252) (4,522) Proceeds from disposal of fixed assets 203 293 Proceeds from sale of discontinued businesses - 50,933 Other investing activities - 5 -------------- -------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,049) 46,709 CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in revolving line of credit 2,290 (14,832) Payments on long-term debt (1,113) (724) Proceeds from borrowings 2,016 - Senior note repurchase (1,065) (13,202) Purchase of treasury stock, options and warrants, employee stock receivable 51 (109) Borrowings (payments) on capital leases (120) 607 Other financing costs, net (33) (22) -------------- -------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,026 (28,282) Effect of exchange rate changes on cash 461 2,437 -------------- -------------- Net increase (decrease) in cash (9,363) 15,069 Cash - beginning of period 10,181 432 -------------- -------------- CASH - END OF PERIOD $ 818 $ 15,501 ============== ==============
The accompanying notes are an integral part of the condensed consolidated financial statements. Page 5 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES Notes to Unaudited Condensed Consolidated Financial Statements NOTE 1: GENERAL INFORMATION Prestolite Electric Holding, Inc. conducts all of its operations through its wholly-owned principal subsidiary, Prestolite Electric Incorporated. There are no material differences between the financial statements of Prestolite Electric Holding, Inc. and Prestolite Electric Incorporated (collectively, "Prestolite," "us," "we" or the "Company"). These unaudited 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, 2000. 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, 2000. The results of operations for the three- and nine-month periods ended September 29, 2001 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: DISCONTINUED OPERATIONS On August 4, 2000, we sold our direct current electric motor business, our battery charger business, and our switch business to Ametek, Inc. The $62.0 million contractual price of this sale was adjusted for changes in net operating assets from a target amount and for the sales to a key customer during the second quarter of 2001. The adjusted sale price was approximately $58.0 million, including $7.0 million in escrow at December 31, 2000 and $3.6 million in escrow at September 29, 2001, plus accrued interest. We treated the DC motor, battery charger, and switch businesses as discontinued operations. Page 6 Summary financial information related to the discontinued businesses is presented below (in thousands):
As of As of Sept 29, December 31, 2001 2000 --------------- --------------- Net assets related to the discontinued businesses: (Unaudited) Decatur facility held for sale $ 3,355 $ 3,576 Escrow and receivable 3,600 7,750 Accrued transaction costs and estimated sale price reductions (1,252) (5,582) Other 249 249 --------------- --------------- Total $ 5,952 $ 5,993 =============== ===============
NOTE 3: INVESTMENTS On April 2, 2001, we began operating a joint venture in China known as Prestolite Electric Beijing Ltd., or PEBL. We own 52% of the equity, for which we have committed certain technology and committed $1.8 million in cash. No cash has yet been contributed, but by Chinese law we must pay this cash before the third anniversary date of the beginning of the joint venture's operations. Prestolite Electric Incorporated, which has financial and operating control, has recorded the results of these operations in the consolidated results for the quarter and nine months ended September 29, 2001, and related minority interest has been reported. All intercompany accounts and transactions are eliminated in consolidation. NOTE 4: INVENTORIES Inventories are summarized as follows (in thousands):
As of As of September 29, December 31, 2001 2000 -------------- ---------------- (Unaudited) FIFO Cost: Raw Material $15,127 $ 17,931 Work in Progress 7,025 6,230 Finished Goods 22,181 20,982 -------------- ---------------- Total FIFO cost $44,333 $ 45,143 Adjustment to LIFO cost 837 601 Reserves for Excess and Obsolete (3,584) (3,451) -------------- ---------------- $41,586 $ 42,293 ============== ================
Page 7 NOTE 5: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (in thousands):
As of As of September 29, December 31, 2001 2000 --------------- --------------- (Unaudited) Land & Buildings $ 21,231 $ 21,249 Machinery & Equipment 48,475 44,823 Construction in Progress 3,115 3,435 --------------- --------------- Total, at Cost 72,821 69,507 Accumulated Depreciation (36,440) (31,990) --------------- --------------- Net $ 36,381 $ 37,517 =============== ===============
NOTE 6: DEBT Debt consists of the following (in thousands):
As of As of September 29, December 31, 2001 2000 --------------- --------------- (Unaudited) North America Senior unsecured notes, 9.625% $ 100,108 $ 101,883 Commitment for outstanding checks 270 - Revolving credit 880 - --------------- --------------- Total 101,258 101,883 United Kingdom Overdraft facility 3,375 2,160 Term loans 5,850 4,904 South Africa 1,060 1,126 Argentina 1,350 1,356 --------------- --------------- Total 11,635 9,546 Total term, revolving credit and senior debt 112,893 111,429 Capital lease obligations 2,454 1,376 Other 197 230 --------------- --------------- Consolidated total 115,544 113,035 Less current maturities 8,977 6,302 --------------- --------------- Consolidated long term debt $ 106,567 $ 106,733 =============== =============== Cash 818 10,181 --------------- --------------- Total debt net of cash $ 114,726 $ 102,854 =============== ===============
Page 8 The 9.625% (interest payable semiannually) senior notes are senior unsecured obligations of Prestolite Electric Incorporated and are fully and unconditionally guaranteed on a senior unsecured basis by Prestolite Electric Holding, Inc. The notes mature on February 1, 2008, and are redeemable at our option, in whole or in part, beginning on February 1, 2003 at amounts from 104.8125% to 100% of the principal plus accrued and unpaid interest. The senior notes are more fully described in our Prospectus dated June 26, 1998. During the first half of 2001 we purchased $1,775,000 of Senior Notes on the open market for 60% of face value or $1,065,000. After a charge of $50,000 to write off associated unamortized financing costs and after providing for income taxes, we recognized a gain, shown as an extraordinary item, of $391,000 on this transaction. Our U. S. bank facility consisted of a revolving credit facility of $6.5 million with interest payable at the bank's prime rate (6% at September 29, 2001) and a $2 million letter of credit facility with a fee equal to 2% of amounts drawn. The U.S. facility is collateralized by eligible accounts receivable. At September 29, 2001, $0.9 million of borrowings and $1.8 million of letters of credit were outstanding. On October 31, 2001 we amended this facility to provide an additional $5.0 million and to include inventory in the collateral. Our U.K. agreement consists of a pound sterling 2.0 million ($2.9 million) fixed rate term loan, a pound sterling 2.0 million ($2.9 million) floating rate term loan, a pound sterling 1.4 million ($2.1 million) floating rate term loan and a pound sterling 2.8 million ($4.1 million) overdraft facility. At September 29, 2001, U.K. term loan borrowings were $5.9 million (pound sterling 4.0 million) and overdraft borrowings were $3.4 million (pound sterling 2.3 million). Interest on the fixed rate loan is 8.144% while interest on the floating-rate term loans and the overdraft facilities are at 1.375% above the bank's base rate (4.0% at September 29, 2001). The term loans are repayable in sixty monthly payments through January 2004 (fixed rate), November 2003 and January 2005. The U.K. Loans are collateralized by eligible receivables and fixed assets in the United Kingdom. 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 14.5 percent to 35.0 percent at September 29, 2001. Total unused available credit in South Africa at September 29, 2001 was approximately $0.1 million. In Argentina we also discount without recourse post-dated checks from our customers. At September 29, 2001 we had $3.6 million available in discounting facilities. The senior notes contain various covenants including maintenance of certain financial ratios and limits on (a) issuance of additional debt or preferred stock; (b) the payment of dividends and purchases, redemptions or retirements of common stock; (c) investments; (d) sale of assets and capital stock of subsidiaries; and (e) certain consolidations, mergers, transfers of assets and certain other transactions with affiliates. The revised U.S. facility includes covenants relating to EBITDA coverage of fixed charges and debt to EBITDA. The foreign facilities contain covenants that pertain to the foreign operations. Page 9 NOTE 7: SEGMENT REPORTING Prestolite operates in five principal geographic regions. Sales from Africa and South America consist largely of products for the automotive market while sales of products from North America and Europe consist largely of products for non-automotive applications. Sales in China are products for both automotive and non-automotive applications. These geographic units are those management uses to evaluate performance. We evaluate that performance based on earnings before interest expense, taxes, depreciation and amortization and excluding severance and option repurchase charges ("EBITDA"). Corporate overhead and certain other charges are not allocated to the business/geographic units. Reported are our operating segments for which separate financial information is available and for which operating income amounts are evaluated regularly by management. In accordance with SFAS No. 131, the unaudited operating results for the periods ended September 29, 2001 and September 30, 2000 are summarized below. Sales and assets based on geographic regions are as follows (in thousands):
North South America Europe America Africa China Other Total ------------ ------------- ------------- ------------ ---------- ---------- ----------- Sales to external customers, based on point of shipment For quarter ended: September 29, 2001 * $ 19,323 $ 8,976 $ 6,931 $ 1,511 $ 2,403 $ - $ 39,144 September 30, 2000 * 19,873 10,225 9,754 2,857 - - 42,709 For nine months ended: September 29, 2001 * $ 59,008 $ 29,030 $ 27,121 $ 5,764 $ 2,403 $ - $123,326 September 30, 2000 * 60,864 33,000 28,515 8,794 - - 131,173 Long-lived assets as of: September 29, 2001 * $ 12,580 $ 14,983 $ 5,747 $ 1,472 $ 1,599 $ - $ 36,381 December 31, 2000 12,648 16,312 6,741 1,816 - - 37,517 Sales to external customers, based on location of customers For quarter ended: September 29, 2001 * $ 17,985 $ 7,463 $ 6,893 $ 1,502 $ 2,403 $ 2,898 $ 39,144 September 30, 2000 * 18,767 8,514 9,703 2,866 - 2,859 42,709 For nine months ended: September 29, 2001 * $ 54,167 $ 25,145 $ 26,967 $ 5,830 $ 2,403 $ 8,814 $123,326 September 30, 2000 * 57,595 28,554 28,228 9,016 - 7,780 131,173 * Unaudited
Page 10 As a result of the sale of our direct current electric motor business, our battery charger business and our switch business in August 2000 we have restructured our segment reporting. We manufacture and distribute alternators and starter motors in five geographic locations for use in heavy duty vehicles and automobiles. Each geographic location's revenue and operating performance is managed and reported separately. Our previous reporting of Heavy Duty Systems division included our North American and European operations and the Automotive Systems division consisted of South American and African operations. This change this quarter expands the reporting from divisions to each of the reporting locations. EBITDA by geographical region and a reconciliation of unaudited EBITDA to income (loss) from continuing operations before income taxes follows (in thousands):
North South Other / America Europe America Africa China Unallocated Total ------------ ----------- ------------ ------------ ----------- -------------- --------------- EBITDA for quarter ended: September 29, 2001* $ 3,578 $ 1,439 $ (83) $ (19) $ 662 $ (896) $ 4,681 September 30, 2000* $ 3,483 $ 1,312 $ 1,097 $ 382 $ - $ (1,082) $ 5,192 EBITDA for nine months ended: September 29, 2001* $10,059 $ 4,580 $ 1,884 $ 317 $ 662 $ (2,740) $ 14,762 September 30, 2000* $ 8,504 $ 4,180 $ 1,266 $ 908 $ - $ (3,257) $ 11,601
For the quarter ended For the nine months ended Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2001 2000 2001 2000 -------------- -------------- ---------------- ------------------ EBITDA $ 4,681 $ 5,192 $ 14,762 $ 11,601 less: Depreciation and amortization 2,194 2,307 6,346 6,967 Severance charges 2,127 419 3,237 2,119 Costs associated with option repurchase - 168 - 168 Special charges** 1,500 3,450 1,500 3,450 Exchange loss (13) 106 19 720 Interest expense 3,501 3,656 9,844 11,958 Minority interest 398 -- 398 -- Income (loss) from continuing -------------- -------------- ---------------- ------------------ operations before income taxes $ (5,026) $ (4,914) $ (6,582) $ (13,781) ============== ============== ================ ==================
* Unaudited ** Special charges in 2001 reflect Argentina bad debt adjustments, in 2000 reflect specialty alternator write-off. Page 11 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operation. OVERVIEW We manufacture alternators, starter motors and other items for heavy duty, automotive, defense and industrial markets. These are supplied under the "Prestolite," "Leece-Neville," and "Indiel" brand names for original equipment and aftermarket application on a variety of vehicles and industrial equipment. Most of our products are component parts used on diesel or gasoline engines, 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. We operate in five principal geographic regions. Sales from Africa and South America consist largely of products for the automotive market while sales of products from North America and Europe consist largely of products for non-automotive applications. While each region primarily sells in its own area, no region sells exclusively into its target market. Further, each region has some sales into the target markets of the other regions. In order to increase our sales into China, we have begun operation of a joint venture in China, Prestolite Electric Beijing, Ltd., selling products for both automotive and heavy duty vehicle applications. Our North American and European facilities produce alternators, starter motors, inline pumps, and other products, primarily for installation on diesel engines used in the heavy duty, defense, marine and industrial markets. These facilities are located in Arcade, NY; Florence, KY; Garfield, NJ; Acton, England; and Leyland, England. The African and South American facilities manufacture automotive components, primarily alternators and starter motors. These facilities are located in Johannesburg, South Africa; and in Buenos Aires, San Lorenzo and San Luis, Argentina. The Argentina operation also manufactures distributors. 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. Prestolite Electric Beijing, Ltd. manufactures automotive products in China and generally relies on our U.S. and U.K. Facilities for heavy duty products. RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 29, 2001 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2000 Sales for the quarter ended September 29, 2001 were $39.1 million, a decrease of $3.6 million, or 8.4%, from $42.7 million in the third quarter of 2000. The decrease in sales dollars is mainly attributable to Argentina and South Africa, where sales decreased a combined $4.1 million, or 33.1%. European sales declined $1.2 million or 12.2% and North American sales declined $0.6 million, or 2.8%. These decreases were offset by the $2.4 million of sales of our joint venture, Prestolite Electric Beijing, Ltd., in China. Page 12 Gross profit was $8.1 million in the third quarter of 2001, or 20.6% of sales. This compares to gross profit of $8.4 million, or 19.6% of sales, in the third quarter of 2000. Lower sales volume, partly offset by our cost-cutting measures, resulted in the decreased gross profit. Selling, general, and administrative expense was $5.6 million, or 14.4% of sales for the third quarter of 2001, comparable to the $5.6 million, or 13.0% of sales, in the third quarter of 2000. Increased selling, general and administrative expense as a result of the China joint venture in the third quarter of 2001 was offset by cost reductions. We recorded $2.1 million in severance charges during the quarter $1.7 million of which were related to our Argentina facilities. We also recorded a $1.5 million special charge for anticipated bad debt expenses. Following the end of the quarter a large Argentine customer owing us $1.3 million entered receivership. Operating loss in the third quarter of 2001 was $1.2 million, comparative to the operating loss of $1.2 million in the third quarter of 2000. This was due to the factors discussed above. Other income was $46,000 in the third quarter of 2001 compared to other income of $73,000 in the third quarter of 2000. This consists of the net effect of export rebate income and miscellaneous income, offset by pension expense for inactive defined benefit plans associated with United States facilities that have been closed, royalty expense, and trademark expense. Interest expense was $3.5 million in the third quarter of 2001, a decrease of $0.2 million compared to $3.7 million in the third quarter of 2000. This decrease is due primarily to reductions in debt resulting from the sale of three businesses in August 2000, and our subsequent repurchase of senior notes. The benefit from income taxes was $0.4 million, 7.9% of the loss from continuing operations before taxes, for the third quarter of 2001 as compared to the $2.3 million benefit from income taxes for the third quarter of 2000, 47.1% of the loss 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 was recorded. NINE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Sales for the first nine months ended September 29, 2001 were $123.3 million, a decrease of $7.8 million, or 6.0%, from $131.2 million in the first nine months of 2000. The decrease in sales dollars is mainly attributable to Argentina and South Africa, where sales decreased a combined $4.4 million, or 11.9%. European sales declined $4.0 million or 12.0% and North American sales declined $1.9 million, or 3.1%. These decreases were partially offset by the $2.4 million of sales of our joint venture, Prestolite Electric Beijing, Ltd., in China. Gross profit was $24.6 million in the first nine months of 2001, or 20.0% of sales. This compares to gross profit of $23.9 million, or 18.2% of sales, in the first nine months of 2000. A Page 13 shift in mix toward higher margin products and markets offset somewhat by lower sales volume provided this increase. Selling, general, and administrative expense was $16.2 million, or 13.1% of sales for the first nine months of 2001, a decrease of $3.5 million, or 17.6%, from $19.7 million, or 15.0% of sales, in the first nine months of 2000. The reduction in selling, general, and administrative expense is largely attributable to cost reductions implemented in mid-2000. We recorded $3.2 million in severance charges during the nine months, of which $1.8 million was related to our Argentina facilities. We also recorded a $1.5 million special charge for anticipated bad debt expenses. Following the end of the quarter a large Argentine customer owing us $1.3 million entered receivership. Operating income in the first nine months of 2001 was $3.7 million, or 3.0% of sales, an increase of $5.2 million, from the $1.5 million loss in the first nine months of 2000. This was due to the factors discussed above. Other income was $11,000 in the first nine months of 2001 compared to other income of $419,000 in the first nine months of 2000. This consists of the net effect of export rebate income and miscellaneous income, offset by pension expense for inactive defined benefit plans associated with United States facilities that have been closed, royalty expense, and trademark expense. Interest expense was $9.8 million in the first nine months of 2001, a decrease of $2.1 million compared to $12.0 million in the first nine of 2000. This decrease is due primarily to reductions in debt resulting from the sale of three businesses in August 2000, and our subsequent repurchase of senior notes. The benefit from income taxes was $491,000, 7.5% of the loss from continuing operations before taxes, for the first nine months of 2001 as compared to the $4.2 million benefit from income taxes for the first nine months of 2000, 30.8% of the loss 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 was recorded. LIQUIDITY AND CAPITAL RESOURCES Cash used by continuing operating activities in the first nine months of 2001 was $8.6 million. In addition, $2.2 million of cash was used for transition services required by the agreement under which we sold our discontinued businesses in 2000, and we paid $0.6 million to adjust the sale price of that transaction. We received $2.8 million in cash from the escrow for the sale of the discontinued businesses part of which was to offset some transition costs. Capital spending for the first nine months of 2001 was $3.2 million, a decrease of $1.3 million from the first nine months of 2000. Of the $3.2 million, $2.0 million was spent in North America and $1.2 million outside North America. Planned capital expenditures consist primarily of expenditures to reduce costs through automation, replace existing equipment and enable us to manufacture new products. Page 14 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 and up to $4.9 million contingent upon the collection of certain fully-reserved receivables. Aggregate payments were zero in the first nine months of 2001 and $0.2 million in 2000. We expect to pay any of these contingencies from the collection of the receivables. Debt, net of cash, increased from $102.9 million at December 31, 2000 to $114.7 million at September 29, 2001, an increase of $11.8 million. Factors contributing to this increase included the $5.7 million net loss, $3.2 million of capital spending, a $1.3 million increase in accounts receivable, $2.2 million of outlays for transition services required by the agreement under which we sold our discontinued businesses in 2000, a $0.6 million payment to adjust the sale price of the businesses sold in 2000, and a $2.5 million decrease in accrued liabilities. The decrease in accrued liabilities was primarily due to $1.0 million in tax payments. We had a cash balance of $0.8 million and revolving credit facilities with banks in the United States and United Kingdom under which additional borrowings of $5.6 million and $0.7 million, respectively, were available based on the September 29, 2001 levels of assets 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 South Africa as of September 29, 2001 was approximately $0.1 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 ongoing 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. OTHER MATTERS In June 2001 Argentina (the country) experienced a severe monetary crisis that continues to this date. The government has been unable to reach a political agreement to do what's needed for economic recovery. In the third quarter Prestolite Electric North America sent $2.0 million to its Argentine subsidiary and instructed a number of vendors to draw $2.1 million on letters of credit issued by its U.S. bank. During the third quarter the Argentina operation's sales dropped 37.2% from the second quarter and 28.2% from the third quarter of 2000. Argentina accounted for 17.7% of the third quarter consolidated sales, down from 22.8% recorded last year. In the third quarter an operating loss of $3.9 million and a net loss of $4.5 million were recorded in Argentina. Page 15 NEW ACCOUNTING PRONOUNCEMENTS We adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective January 1, 2001. Pursuant to this statement, all derivative instruments are recognized as assets or liabilities on the balance sheet and measured at fair value. This statement does not have a material impact on the financial results of the Company for the nine months ended September 29, 2001. In July 2001 the Financial Accounting Standards Board issued Statement of Accounting Standards No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 replaces APB No. 16 and eliminates the pooling-of-interests method for any business combinations after June 30, 2001. SFAS 142 supersedes APB No. 17 and eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and impairment testing and recognition for goodwill and intangible assets. SFAS No. 142 is effective for 2001 and the Company is currently assessing this Statement and the impact it may have on our operating results. In June and August, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143") and No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS 144") which are effective January 1, 2003 and January 1, 2002, respectively for the Company. SFAS 143 requires that an existing legal obligation associated with the retirement of a tangible long-lived asset be recognized as a liability when incurred and the amount of the liability be initially measured at fair value. Under SFAS 144, a single accounting method was established for long-lived assets to be disposed of. SFAS 144 requires the Company to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and the loss is the difference between carrying amount and fair value. The Company is currently reviewing the provisions of SFAS 143 and 144 and assessing the impact of adoption. FORWARD-LOOKING STATEMENTS This form 10-Q contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included herein may contain forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", or "continue" or the negative thereof or variations thereon or similar terminology. Such forward-looking statements are based upon information currently available in which our management shares its knowledge and 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 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Changes in Securities. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Reports on Form 8-K We have not filed any reports on Form 8-K during the quarterly period ended September 29, 2001. (b) Exhibits: 10.1 Credit Agreement by and between Prestolite Electric Incorporated and Comerica Bank, dated October 31, 2001. Page 17 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: November 14, 2001 By: /s/ Kenneth C. Cornelius ------------------------- Kenneth C. Cornelius Senior Vice President and Chief Financial Officer (principal financial and accounting officer) Page 18 Exhibit Index Exhibit No. Description 10.1 Credit Agreement by and between Prestolite Electric Incorporated and Comerica Bank, dated October 31, 2001.