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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-2
(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
PRESTOLITE ELECTRIC 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)
PEI HOLDING, INC.
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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
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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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EXPLANATORY NOTE TO FORM 10-Q/A-2
This amended quarterly report on Form 10-Q/A-2 amends the Management's
Discussion and Analysis and Results of Operations contained in Item 2 of the
Company's quarterly report on Form 10-Q for the quarter ended October 3, 1998,
as filed with the Securities and Exchange Commission on November 13, 1998, and
as amended on Form 10-Q/A-1 as filed on December 9, 1998, by including
additional disclosure related to Year 2000 issues.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Prestolite Electric Holding, Inc. (formerly known as 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.
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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.
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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
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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.
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.
The Company has competed its Year 2000 assessments of its information technology
and embedded systems, and is continuing its efforts to prepare its systems and
applications for the Year 2000 as part of a larger, general program to enhance
all of its 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 the Company's United States, United Kingdom and Argentina
facilities, and ensuring compliance by an outside service bureau utilized by the
Company's South African facility. Remediation efforts in the United States are
more than 80% complete as of October 3, 1998 and all actions are expected to be
completed and all systems are expected to be updated by early 1999. Because the
majority of the Company's operations outside of the United States were acquired
in early 1998 and these operations were not Year 2000 compliant, the Company's
efforts to deal with the Year 2000 issue outside the United states are further
from completion than the Company's domestic programs. In Argentina a new system
has been selected and installation begun. In the United Kingdom a system used in
two locations is being replaced, while the system in use at a third location is
being upgraded for Year 2000 compliance. All of the Company's efforts outside
the United States are expected to be completed and tested by July 31, 1999. It
is expected that the material aspects of system upgrades and remediation efforts
at all of the Company's facilities will be completed and accordingly will be
Year 2000 compliant prior to December 31, 1999. In addition, the Company has
reviewed its product base and believes that the Company's products will not be
affected by the Year 2000 issues.
In connection with the overall computer enhancement program, including Year 2000
compliance, the Company expects to incur aggregate internal and third-party
costs of approximately $3.0 million, of which approximately $1.7 million had
been incurred as of October 3, 1998. These costs include approximately $0.5
million related to in-house efforts to enhance the performance of the Company's
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 remediation efforts.
The Company relies on third party vendors and service providers for certain
products and services, including certain data processing capabilities. The
Company is communicating with its principal vendors and service providers to
assess the Year 2000 readiness of their products and services. Responses
indicate that the significant providers currently have compliant versions
available or are well into the renovation and testing phases with completion
scheduled prior to December 31, 1999. However, the Company can give no guarantee
that the systems of these vendors and service providers on which the Company
relies will be timely Year 2000 compliant.
The Company's contingency planning for Year 2000 issues relates primarily to
securing backup vendors (which have been identified for most purchased products)
and the possibility of stockpiling raw materials. Contingency planning will
continue throughout 1999 and the Company's plans will be modified based upon the
progress of its remediation efforts, system updates and installations and based
upon its communications with selected suppliers.
While management believes that the estimated cost of becoming Year 2000
compliant will not be significant to the Company's results of operations,
financial position or cash flows, failure to complete all the work in a timely
manner could result in a material adverse effect on the Company's results of
operations, financial position or cash flows. While management expects all
planned work to be completed, there can be no guarantee that all systems will be
in compliance by the Year 2000, the systems of suppliers and other companies and
government agencies on which the Company relies will be converted in a timely
manner, or that the Company's contingency planning will be able to fully address
all potential interruptions. Therefore, date-related issues could cause delays
in the Company's ability to produce or ship its products, process transactions
or otherwise conduct business in any of its markets.
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.
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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.
PRESTOLITE ELECTRIC HOLDING, INC.
Date: January 26, 1999 By: /s/ KENNETH C. CORNELIUS
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Kenneth C. Cornelius
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
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