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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 October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from
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to .
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Commission File Number 333-49429-01
PEI Holding, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 943142033
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(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 changes 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
preceeding 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 No X
----- -----
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
Class: outstanding as of November 11, 1998
Common Stock 1,993,000
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FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Part I: Financial Information
Item 1: Condensed Consolidated Balance Sheets
at October 3, 1998 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Operations 4
Three months and nine months ended October 3, 1998 (unaudited)
and October 4, 1997 (unaudited)
Condensed Consolidated Statements of Cash Flows 5
Nine months ended October 3, 1998 (unaudited) and
October 4, 1997 (unaudited)
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion & Analysis of
Financial Condition and Results of Operations 11
Part II: Other Information 16
Signatures 17
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PEI HOLDING, INC. AND SUBSIDIARIES
(INCLUDING PRESTOLITE ELECTRIC INCORPORATED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
(unaudited)
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<S> <C> <C>
Assets
Current assets
Cash $ 2,119 $ 455
Accounts receivable, net of allowances 49,311 26,326
Inventories, net 47,954 24,687
Deferred tax asset, net 4,588 3,226
Prepaid and other current assets 2,905 965
-------- -------
Total current assets 106,877 55,659
Property, plant and equipment, net 61,049 26,179
Investments 5,137 2,597
Other long term assets 7,048 1,416
Intangible assets 2,406 2,834
======== =======
Total assets $182,517 $88,685
======== =======
Liabilities
Current liabilities
Revolving credit $ 5,978 $ 3,052
Current portion of long-term debt and
capital lease obligations 694 1,144
Accounts payable 25,795 12,042
Accrued liabilities 27,058 12,029
-------- -------
Total current liabilities 59,525 28,267
Senior notes 125,000 -
Other long term debt, net of current maturities 1,162 29,467
Subordinated debt, net - 9,267
Other non-current liabilities 3,913 1,034
Deferred tax liability, net 1,707 1,707
-------- -------
Total liabilities 191,307 69,742
Minority interest in Argentina subsidiary 38 -
Stockholders' equity
Common stock, par value $.01, 5,000,000 shares authorized,
3,303,000 shares issued and outstanding at July 4, 1998
and December 31, 1997, respectively 2 2
Paid-in capital 16,623 16,623
Stock warrants - 3,239
Retained earnings (accumulated deficit) (762) (634)
Notes receivable, employees' stock purchase (559) (346)
Foreign currency translation adjustment 317 379
Treasury stock, 1,310,000 and 32,000 shares on July 4, 1998
and December 31, 1997, respectively (24,449) (320)
-------- -------
Total stockholders' equity (8,828) 18,943
-------- -------
Total liabilities and stockholders' equity $182,517 $88,685
======== =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
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PEI HOLDING, INC. AND SUBSIDIARIES
(INCLUDING PRESTOLITE ELECTRIC INCORPORATED)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
--------------------------- ---------------------------
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $70,450 $41,516 $217,823 $129,034
Cost of goods sold 56,198 33,802 174,117 107,092
------------ ------------ ------------ -----------
Gross profit 14,252 7,714 43,706 24,942
Selling, general and administrative 9,732 6,112 29,370 17,573
Costs associated with option repurchase -- -- 2,101 --
Restructuring charge -- -- 980 --
------------ ------------ ------------ -----------
Operating income 4,520 1,602 11,255 7,369
Other expense (income) 47 338 (475) 317
Interest expense 3,425 1,378 9,951 4,214
------------ ------------ ------------ -----------
Income from continuing operations before
extraordinary loss and income taxes 1,048 (114) 1,779 2,838
Provision for income taxes 369 (240) 632 981
------------ ------------ ------------ -----------
Income from continuing operations 679 126 1,147 1,857
Income from discontinued operation, net -- (1,771) -- (1,672)
Extraordinary loss, net of taxes of $716 -- -- 1,275 --
------------ ------------ ------------ -----------
Net income (loss) 679 (1.645) (128) 185
Other comprehensive income (expense):
Foreign currency translation adjustment 865 (251) (62) (287)
------------ ------------ ------------ -----------
Comprehensive income (expense) $ 1,544 $(1,896) $ (190) $ (102)
============ ============ ============ ===========
Basic earnings per common share
Income from continuing operations $ 0.34 $ 0.04 $ 0.54 $ 0.54
Discontinued operations -- (0.51) -- (0.48)
Extraordinary item -- -- (0.59) --
------------ ------------ ------------ -----------
Net income (loss) $ 0.34 $(0.47) $ (0.07) $ 0.06
============ ============ ============ ===========
Diluted earnings per common share
Income from continuing operations $ 0.34 $ 0.03 $ 0.54 $ 0.51
Discontinued operations -- (0.48) -- (0.46)
Extraordinary item -- -- (0.61) --
------------ ------------ ------------ -----------
Net income (loss) $ 0.34 $(0.45) $ (0.07) $ 0.05
============ ============ ============ ===========
Basic shares outstanding 1,993,000 3,450,740 2,105,052 3,450,740
Dilutive shares outstanding 2,103,860 3,655,180 2,224,501 3,655,180
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
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PEI HOLDING, INC. AND SUBSIDIARIES
(INCLUDING PRESTOLITE ELECTRIC INCORPORATED)
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the nine months ended
--------------------------------
October 3, October 4,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (128) $ 185
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cash provided by (used in) discontinued operations 1,603 (1,331)
Loss (gain) on sale of property, plant, and equipment (236) 1,879
Compensation expense related to options 2,101 -
Depreciation and amortization 9,015 4,115
Deferred taxes (1,431) (100)
Loss on debt extinguishment 1,991 -
Changes in working capital items: (4,239) (5,516)
-------- --------
Net cash provided by operating activities 8,676 (768)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,806) (4,321)
Proceeds from disposal of fixed assets 18 1,144
Net proceeds from disposal of discontinued operations - 7,224
Investment in affiliates (2,640) -
Acquisition of Lucas businesses (49,943) -
-------- --------
Net cash provided by investing activities (60,371) 4,047
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior notes 125,000 -
Debt repaid in acquisition of Lucas businesses 3,227 -
Net increase (decrease) in revolving credit 2,990 7,275
Redemption of subordinated notes (10,000) -
Payments on acquisition payable to Hobart - (4,175)
Payments on long term debt (32,146) (5,920)
Purchase of stock and warrants (27,692) -
Payments on deferred compensation - (155)
Payments of capital lease obligations and other obligations (173) (63)
Purchase of treasury stock and options (2,203) (54)
Debt refinancing costs (5,785) -
-------- --------
Net cash from financing activities 53,218 (3,092)
Effect of exchange rate changes on cash 141 23
-------- --------
Net increase (decrease) in cash 1,664 210
Cash - beginning of period 455 794
======== ========
Cash - end of period $ 2,119 $ 1,004
======== ========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
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PEI HOLDING, INC. AND SUBSIDIARIES
(Including PRESTOLITE ELECTRIC INCORPORATED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL INFORMATION
PEI 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 PEI Holding, Inc. and Prestolite
Electric Incorporated (collectively, "the Company" or "Prestolite").
The unaudited condensed consolidated financial statements included herein have
been prepared by the Company in accordance with Rule 10-01 of Regulation S-X and
have been prepared on a consistent basis with the Company's audited financial
statements for the year ended December 31, 1997. 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. Prior period amounts have been reclassified where
necessary to conform to current presentation.
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 the Company's audited
financial statements and notes thereto and other material included in the
Prospectus dated June 26, 1998 (the "Prospectus"). The year-end 1997 condensed
balance sheet data was derived from the Company's 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 nine- and three-month periods ended October 3, 1998 are not
necessarily indicative of the operating results that may be expected for the
full year or any other interim period.
The equity securities of PEI Holding, Inc. are held by Genstar Capital
Corporation and Company management.
NOTE 2: ACQUISITION, SHARE REPURCHASE, AND REFINANCING
On January 22, 1998 Prestolite acquired three business units from a subsidiary
of LucasVarity plc ("the Lucas Acquisition") for approximately $40.0 million
in cash, the assumption of approximately $7.1 million in debt, deferred payments
of approximately $1.4 million, and future contingent payments of up to $19
million based upon the performance of Lucas Argentina. No liability has been
recorded for the contingent liability payment as payment is not considered
probable. Any future payments will be charged to goodwill. On the same day,
Prestolite Electric Incorporated completed the offering of $125 million of
9.625% Senior Notes due 2008 (the "Notes"). The proceeds of the Notes were used
to fund the Lucas Acquisition, to repay approximately $42 million of outstanding
indebtedness, and to pay approximately $29.7 million for the repurchase of PEI
Holding, Inc. common stock plus warrants and options to purchase common stock.
These transactions are more fully described in the Prospectus.
6
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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. As described in Note 6, the Company also recorded a
$0.98 million restructuring charge in the first quarter related to costs
anticipated to be incurred at the Company's existing facilities as a result of
the Lucas Acquisition.
Results for the first nine months of 1998 are recorded as though the Lucas
Acquisition was completed on January 1, 1998. An imputed interest cost of
$213,000 was charged to interest expense for the period from January 1 to
January 22. The Lucas Acquisition has been accounted for as a purchase and a
preliminary allocation of the purchase price has been made in accordance with
Accounting Principals Board Opinion 16. The purchase price allocation will be
completed by the end of the year and will likely change from that included in
the accompanying statements.
Pro forma unaudited consolidated operating results for the Company for the third
quarter and first nine months of 1997 as though the Lucas Acquisition had been
consummated on January 1, 1997 are summarized below. Pro forma adjustments
include only the addition of the results of the acquired business units and do
not reflect anticipated efficiencies in operations. These results are not
necessarily indicative of future results of operations nor are they indicative
of the results of historical operations had the acquisitions been consummated as
of the assumed dates. These results also reflect the 20-for-one stock split
effective March 26, 1998.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
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<S> <C> <C>
Net Sales, in thousands $75,284 $228,539
Net Income, in thousands $(2,979) $ (2,871)
Earnings (Loss) per Share
Basic $ (0.86) $ (0.83)
Diluted $ (0.82) $ (0.79)
</TABLE>
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NOTE 3: INVENTORIES
Inventories are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
As of As of
October 3, December 31,
1998 1997
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<S> <C> <C>
Raw Material $15,228 $ 9,027
Work in Process 15,233 6,096
Finished Goods 17,493 9,564
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Total $47,954 $24,687
======= =======
</TABLE>
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment consists of the following (in thousands of
dollars):
<TABLE>
<CAPTION>
As of As of
October 3, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Land & Buildings $ 25,500 $ 13,611
Machinery & Equipment 60,854 31,461
Construction in Progress 3,183 1,276
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Total, at Cost 89,537 46,348
Accumulated Depreciation (28,488) (20,169)
---------- ------------
Net $ 61,049 $ 26,179
========== ============
</TABLE>
NOTE 5: DEBT
In connection with the Lucas Acquisition, share repurchase, and refinancing
discussed in Note 2, Prestolite Electric Incorporated issued $125 million of
9.625% Senior Notes due 2008 (the "Notes"). The Notes pay interest semi-
annually and mature on February 1, 2008 but may be redeemed earlier at the
Company's option under conditions specified in the indenture pursuant to which
the Notes were issued. The notes are senior unsecured obligations of Prestolite
Electric Incorporated, are fully and unconditionally guaranteed on a senior
basis by PEI Holding, Inc., and are subordinated to secured credit facilities
(to the extent of the value of the assets securing such indebtedness) of
Prestolite Electric Incorporated, including its existing credit facility
referred to below, and are structurally subordinated to indebtedness of any
subsidiary of Prestolite Electric Incorporated, including indebtedness of its
United Kingdom subsidiary. The Notes are more fully described in the
Prospectus.
On January 22, 1998 Prestolite Electric Incorporated entered into a new
financing agreement with the U.S. bank that had previously been Prestolite
Electric Incorporated's U.S. senior debt provider for up to $23 million of
borrowings at the bank's prime rate, secured by the U.S. receivables and
inventory of Prestolite Electric Incorporated. On January 28, the Company's
United Kingdom subsidiary entered into an interim borrowing agreement with an
affiliate of the U.K. bank that had previously been the Company's U.K. debt
provider. On April 21 that interim agreement was replaced with an agreement
providing for up to (Pounds)7 million (approximately $11.6 million based on
exchange rates of 1.657 $/Pound as of such date) of borrowings at the U.K.
bank's base rate plus 1.75%,
8
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secured by the receivables of the United Kingdom subsidiary. In addition, the
Company's Argentina subsidiary has borrowing arrangements with several banks
secured by certain assets of the Company's Argentina subsidiary.
Debt is summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
As of As of
October 3, December 31,
1998 1997
---------- ------------
<S> <C> <C>
U.S. Bank Debt $ 4,772 $28,588
U.K. Bank Debt 1,206 3,785
Argentine Bank Debt 400 -
Senior Notes 125,000 -
Subordinated Debt - 10,000
Unamortized Discount on Subordinated Debt - (733)
Capital Lease Obligations 1,315 942
Other Debt 293 348
---------- ------------
Total 132,834 42,930
Current Maturities 6,672 4,196
---------- ------------
Long Term Debt $126,314 $38,734
========== ============
</TABLE>
NOTE 6: RESTRUCTURING
During 1997, the Company's board of directors approved a restructuring plan for
the Company's facility in Leyland, England, contingent upon completion of the
Lucas Acquisition. This plan was announced during the first quarter of 1998 and
includes moving production of certain products from the Leyland facility to a
facility in the United Kingdom acquired as part of the Lucas Acquisition. A
restructuring charge of $980,000 for employee severance costs was accrued and
charged to operations during the first quarter of 1998. During the first nine
months of 1998, the Company charged $568,000 against this accrual. The entire
amount is expected to be spent by the end of 1998.
As of the date of the Lucas Acquisition, management had begun to assess and
formulate restructuring plans related to operations acquired in the Lucas
Acquisition. These plans will include employee reductions and may include a
plant closure. Not all portions of the plan have been completed and approved as
of October 3, 1998. An accrual of $8,220,000 was established as a purchase
accounting adjustment related to these restructuring actions. Severance
payments of $3.9 million were made to employees and charged to this accrual
during the first nine months of 1998. Completion and approval of the
restructuring plans for these operations are expected by the end of 1998. The
accrual will be adjusted accordingly as a purchase price adjustment.
NOTE 7: INVESTMENTS
On June 24, 1998, the Company agreed to license certain alternator technology
from Ecoair Corp. ("Ecoair"). In addition, the Company purchased 66,667 shares
of Ecoair common stock for $1 million, and agreed to purchase an additional
33,333 shares for $500,000 on each of December 24, 1998 and June 24, 1999. Prior
to the Prestolite purchase, Ecoair had 1,347,646 shares and
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options to purchase 500,758 shares outstanding. The Company also received an
option to increase its ownership of Ecoair to 20% at varying prices through
June, 2000.
On July 2, 1998, the Company agreed to form a joint venture with Daewoo Heavy
Industries Ltd. ("Daewoo"). The joint venture, owned 50% by Prestolite and 50%
by Daewoo, began operations producing material handling motors at a plant in
Inchon, South Korea on August 31, 1998. Daewoo's contribution to the joint
venture consisted of $540,000 of cash plus certain equipment previously used by
Daewoo to produce material handling motors. Prestolite contributed $540,000 of
cash and is providing certain technology to the joint venture. In addition,
Prestolite and Daewoo have each agreed to provide loans of up to $700,000 to the
joint venture or to guarantee loans of that amount made by the joint venture if
such borrowings are deemed necessary by the joint venture. Daewoo has agreed to
purchase substantially all of the material handling motors required by its
Industrial Vehicle division, located in South Korea, from the joint venture.
10
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PEI Holding, Inc., through its operating subsidiary Prestolite Electric
Incorporated, manufactures alternators, starter motors, direct current motors,
battery chargers, and switching devices. These are supplied under the
Prestolite, Leece-Neville, Hobart, Lucas, and Butec 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 the Company's products are component parts used on diesel engines,
automobiles and electric vehicles. These components are sold to both aftermarket
and original equipment ("OEM") customers. The Company sells its products to a
variety of markets, in terms of both end-use and geography.
In January 1998, Prestolite acquired three businesses from a subsidiary of
LucasVarity plc. These businesses operate in England, South Africa, and
Argentina (collectively, the "Lucas Acquisition"). As summarized in Note 2 to
the financial statements and described more fully in the Prospectus, these
businesses were purchased for approximately $40.0 million in cash, the
assumption of $7.1 million in debt, and certain future obligations. Those
future obligations include a payment of $766,000 made in August, 1998; payments
of approximately $2 million during 1998 for inventory and transition assistance
in the United Kingdom; and up to $19 million contingent on certain events in
Argentina. Including the sales of the acquired businesses, more than half of
the Company's sales are outside the United States.
The acquisition was financed from the sale of $125 million of 9.625% senior
notes due 2008, issued under Rule 144A of the Securities Act of 1933, as
amended. Proceeds from the 144A offering were also used to repay existing debt
in the United States and United Kingdom, to repurchase all of the warrants
issued to holders of the Company's subordinated debt, to repurchase 40% of the
common stock held by Genstar Capital Corporation, and to repurchase 8.5% of
the common stock and 40% of the options held by management. The total cost
associated with the repurchase of these securities was approximately $29.7
million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 4,
1997.
Net sales for the three months ended October 3, 1998 were $70.5 million, an
increase of $28.9 million or 69.7% from the $41.5 million recorded in the third
quarter of 1997. The Lucas Acquisition was responsible for an increase in net
sales of $27.4 million. Compared to pro forma results including the Lucas
Acquisition for the third quarter of 1997, net sales declined by $4.8 million,
approximately 6.4%. Defense sales in North America declined by $2.6 million and
total sales in the U.K. declined by $2.1 million, while Argentina sales declined
by $2.8 million and South Africa sales declined by $1.0 million. These declines
were offset by increases in non-defense original equipment and original
equipment service sales in North America of approximately $4.0 million. Sales in
most other product and geographical markets were about equal to or slightly
above 1997 third quarter levels.
11
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Gross profit was $14.3 million in the third quarter of 1998 or 20.2% of net
sales. This compares to $7.7 million or 18.6% of net sales recorded for the
third quarter of 1997. On a pro forma basis to include the Lucas Acquisition,
gross profit in the third quarter of 1997 was $13.1 million or 17.5% of net
sales. Lower material costs, improved labor productivity, and a shift in sales
toward higher margin products all contributed to the improvement from the third
quarter 1997 gross profit percentage, both as reported and as pro forma to
include the Lucas Acquisition.
Selling, general, and administrative expense was $9.7 million or 13.8% of net
sales for the third quarter of 1998, an increase of 59.2% from the $6.1 million
or 14.7% of net sales recorded in the third quarter of 1997, but a decrease of
$1.3 million from $11.0 million or 14.6% of net sales in the third quarter of
1997 on a pro forma basis to include the Lucas Acquisition. Reductions in
selling, general, and administrative expenses in the third quarter of 1998 as
compared with the pro forma results continue to reflect the benefits of the
integration of the Lucas Acquisition.
As the result of the factors discussed above, operating income in the third
quarter of 1998 was $4.5 million, or 6.4% of net sales, versus $1.6 million, or
3.9% of net sales, recorded in the third quarter of 1997 and $1.6 million, or
2.1% of net sales, in the third quarter of 1997 on a pro forma basis to include
the Lucas Acquisition. Other expense was $47,000 in the third quarter of 1998
versus $338,000 recorded in the third quarter of 1997. For the third quarter of
1998 other expense consisted primarily of trademark expense, pension expense for
inactive defined benefit pension plans and other miscellaneous expenses offset
by interest income and export rebates. For the pro forma third quarter of 1997,
other expense consisted primarily of miscellaneous expenses offset by interest
income.
Interest expense was $3.4 million in the third quarter of 1998 compared to $1.4
million recorded in the third quarter of 1997. The increase in interest expense
resulted from the increase in debt caused by the offering of $125.0 million of
senior notes in January 1998, the proceeds of which were used to finance the
Lucas Acquisition and the repurchase of shares, options, and warrants in the
first quarter of 1998. Interest expense for the third quarter of 1997, pro
forma as though the issuance of the senior notes and the use of proceeds as
described above had occurred at the beginning of 1997, was $3.3 million.
The provision for income taxes was $369,000 for the third quarter of 1998, 35.2%
of income from continuing operations before taxes and the extraordinary item.
This compares to $240,000 of income tax benefit recorded in the third quarter of
1997, 210.5% of loss from continuing operations before the extraordinary item.
The recorded 1997 tax rate was higher because of the fixed component of taxes
and certain U.S. state taxes. On a pro forma basis, the provision for income
taxes was a $691,000 benefit or 36.4% of loss from continuing operations before
taxes and the extraordinary item. The pro forma provision for income taxes does
not include any tax benefit related to the Argentina loss of that period.
NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED OCTOBER 4, 1997
Net sales for the nine months ended October 3, 1998 were $217.8 million, an
increase of $88.8 million or 68.8% from the $129.0 million recorded in the first
nine months of 1997. The Lucas Acquisition was responsible for an increase in
net sales of approximately $88.9 million, slightly more than the total net sales
increase. Compared to pro forma results including the Lucas Acquisition for the
first nine months of 1997, net sales declined by $10.7 million, approximately
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4.7%. Sales of military alternators in North America declined by $5.2 million;
sales in the United Kingdom declined by $1.8 million; sales in South Africa
declined by $0.9 million; and sales in Argentina declined by $4.7 million from
the first nine months of 1997. These declines were partly offset by a $2.4
million increase in original equipment commercial alternator sales and a $1.6
million increase in battery charger sales, both in North America.
Gross profit was $43.7 million in the first nine months of 1998 or 20.1% of net
sales. This compares to $24.9 million or 19.3% of net sales recorded for the
first nine months of 1997. On a pro forma basis to include the Lucas
Acquisition, gross profit in the first nine months of 1997 was $41.8 million or
18.3% of net sales. Lower material costs, improved labor productivity, and a
shift in sales toward higher margin products all contributed to the improvement
from the first nine months of 1997 gross profit percentage both as reported and
as pro forma to include the Lucas Acquisition.
Selling, general, and administrative expense was $29.4 million or 13.5% of net
sales for the first nine months of 1998, an increase of 67.1% from the $17.6
million or 13.6% of net sales recorded in the first nine months of 1997, but a
decrease of $2.8 million from $32.2 million or 14.1% of net sales in the first
nine months of 1997 on a pro forma basis to include the Lucas Acquisition.
Reductions in selling, general, and administrative expenses in the first nine
months of 1998 as compared with the pro forma results continue to reflect the
benefits of the integration of the Lucas Acquisition.
As discussed in notes 2 and 6 to the condensed consolidated financial
statements, the Company recorded a $2.1 million charge in the first quarter of
1998 to record the repurchase of 40% of the stock options outstanding. The
Company also recorded a charge of $980,000 to cover restructuring activities at
the existing Prestolite facility in Leyland, England. This charge relates to
severance costs to be paid in conjunction with the transfer of certain
activities from the existing Prestolite facility in Leyland, England, to a
facility acquired as part of the Lucas Acquisition. The Leyland facility will
remain in operation with employment levels lower than those that previously
existed; the severance costs are expected to be paid by the end of 1998. Pro
forma results for 1997 include redundancy costs of $455,000 incurred by the
former Lucas operations in England and Argentina.
As the result of the factors discussed above, operating income in the first nine
months of 1998 was $11.3 million, or 5.2% of net sales, versus $7.4 million, or
5.7% of net sales, recorded in the first nine months of 1997 and $8.6 million,
or 3.8% of net sales, in the first nine months of 1997 on a pro forma basis to
include the Lucas Acquisition. Other income was $475,000 in the first nine
months of 1998 versus an expense of $317,000 recorded in the first nine months
of 1997. For the first nine months of 1998 other income consisted primarily of
interest income, a workers compensation refund, and the proceeds from the sale
of certain emissions credits, partly offset by loss on the sale of fixed assets
and pension expense for inactive defined benefit pension plans. For the pro
forma first nine months of 1997, other income consisted primarily of interest
income.
Interest expense was $9.9 million in the first nine months of 1998 compared to
$4.2 million recorded in the first nine months of 1997. The increase in
interest expense resulted from the increase in debt caused by the offering of
$125.0 million of senior notes in January 1998, the proceeds of which were used
to finance the Lucas Acquisition and the repurchase of shares, options, and
warrants in the first quarter of 1998. Interest expense for the first nine
months of 1997, pro forma as though the issuance of the senior notes and the use
of proceeds as described above had occurred at the beginning of 1997, was $9.6
million.
13
<PAGE>
The net provision for income taxes was $632,000 for the first nine months of
1998, 35.5% of income from continuing operations before taxes and the
extraordinary item. This compares to $981,000 of income taxes recorded in the
first nine months of 1997, 34.6% of income from continuing operations before
taxes and the extraordinary item. On a pro forma basis, the provision for income
taxes was $189,000 or 18.7% of loss from continuing operations before taxes and
the extraordinary item. The pro forma provision for income taxes does not
include any tax benefit related to the $1.6 million Argentina loss of that
period.
In conjunction with the refinancing and repurchase of shares, options, and
warrants, Prestolite recorded an extraordinary item of $1.3 million net-of-tax
in the first quarter of 1998. On a pre-tax 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 the warrants.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operating activities during the first nine months of 1998
was $8.7 million (including $4.5 million spent on redundancy costs during the
period and charged to the reserve established in connection with the Lucas
Acquisition). For the third quarter of 1998, capital spending totaled $1.9
million, as compared with total capital spending of $1.1 million in the third
quarter of 1997. Capital spending at the Company's North American locations was
$1.2 million in the third quarter of 1998 as compared to $1.0 million in the
third quarter of 1997, an increase of $0.2 million. Capital spending at the
ongoing Prestolite United Kingdom facilities was $0.6 million in the third
quarter of 1998, an increase of $0.5 million from the $0.1 million spent at
those locations in 1997. Capital spending at the locations acquired during the
Lucas Acquisition was $0.8 million for the third quarter of 1998, compared to
$2.2 million for the third quarter 1997. Capital spending in the first nine
months of 1998 was $7.8 million, as compared with total capital spending of $8.5
million in the first nine months of 1997 on a pro forma basis to include the
Lucas Acquisition. Capital spending at the ongoing Prestolite facilities was
$6.1 million, an increase of $2.2 million from the $3.9 million spent in the
first nine months of 1997. Capital spending at the facilities acquired in the
Lucas Acquisition was $1.7 million in the first nine months of 1998, compared to
$4.5 million for the first nine months of 1997. Capital expenditures for the
remainder of 1998 are expected to be approximately $3.2 million. Planned capital
expenditures consist primarily of expenditures to reduce costs through
automation, replace existing equipment and enable the Company to manufacture new
products, and expenditures related to improving the Company's manufacturing
infrastructure in connection with realignment of certain manufacturing
operations of the business acquired in the Lucas Acquisition.
Debt, net of cash, increased from $42.4 million at December 31, 1997 to $130.7
million at October 3, 1998, an increase of $9.2 million from the July 4, 1998
level of $121.5 million. That increase, partially offset by the positive cash
flow from operations of $8.7 million (net of $4.5 million spent for redundancy
costs during the first nine months of 1998 and charged to the reserve
established in connection with the Lucas Acquisition), was due to the issuance
of 125.0 million of senior notes on January 22, 1998 and the use of part of the
proceeds of such offering to effect the Lucas Acquisition, refinance existing
indebtedness, and repurchase securities from holders and management. As of
October 3, 1998 additional debt outstanding in Argentina and the United Kingdom
was offset by cash balances in South Africa and the United States. The Company
had revolving credit facilities with banks in the United States and United
14
<PAGE>
Kingdom under which additional borrowings of $13.3 million and $8.5 million
((Pounds)5.0 million) were available based on the October 3, 1998 levels of
receivables (U.S. and U.K.) and inventory (U.S. only) which are pledged to
support that debt.
The Company's liquidity needs are expected to consist primarily of working
capital needs and scheduled payments of principal and interest on its
indebtedness, including the senior notes and any indebtedness that may be
outstanding from time to time under its U.S. and U.K. revolving credit
facilities. The Company's short-term liquidity needs, including a portion of the
one-time costs associated with the Lucas Acquisition and joint venture
agreements, are expected to be provided by: (i) existing cash balances; (ii)
operating cash flows; and (iii) borrowings under the Company's U.S. and U.K.
revolving credit facilities. The Company expects to fund its long term liquidity
needs from its operating cash flows, the issuance of debt and/or equity
securities and bank borrowings. The Company believes that cash flows from
operations, its existing cash balances and amounts available under its U.S. and
U.K. revolving credit facilities will be adequate to meet the Company's
anticipated requirements for working capital, planned capital expenditures,
investments, and principal and interest payments on debt 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 the Company's obligations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains, in addition to historical information, forward-looking
statements that involve certain risks and uncertainties. These risks include,
but are not limited to, risks associated with the uncertainty of future
financial results, acquisitions, additional financing requirements, development
of new products and services, the effect of competitive products or pricing, the
effect of economic conditions and other uncertainties detailed in the Company's
other filings with the Securities and Exchange Commission. The Company
undertakes no obligation to publicly release any revisions to any forward-
looking statements contained herein to reflect events or circumstances occurring
after the date of this Form 10-Q. The Company's actual results may differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company.
15
<PAGE>
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.
The Company has not filed any reports on Form 8-K during
the quarterly period ended October 3, 1998.
16
<PAGE>
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.
PEI HOLDING, INC.
Date: November 13, 1998 By: /s/ KENNETH C. CORNELIUS
----------------------- -----------------------------
Kenneth C. Cornelius
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
17
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR PEI
HOLDING, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> PEI HOLDINGS, INC.
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