<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q/A
<TABLE>
<CAPTION>
(Mark one)
<C> <S>
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Quarterly Period Ended October 2, 1999.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Transition Period From ______________ to _____________.
</TABLE>
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 1, 1999
Common Stock 1,993,000
Page 1
<PAGE>
EXPLANATORY NOTE TO FORM 10-Q/A-1
This amended quarterly report on Form 10-Q/A-1 amends Note 7 to the condensed
consolidated financial statements contained in Item 1 of the Company's quarterly
report on Form 10-Q for the quarter ended October 2, 1999, as filed with the
Securities and Exchange Commission on November 15, 1999. This amendment reflects
the adjusted and corrected division reporting due to the realignment of the
divisions that occurred in the third quarter of 1999. The commentary in Item 2
(Management's Discussion and Analysis of Financial Condition and Results of
Operations) regarding sales in both the three-month results and the nine-month
results have also been amended to reflect the adjusted and corrected division
reporting.
In accordance with rule 12b-15 under the Securities Exchange Act of 1934, the
complete text of Part I, Items 1 and 2, as amended, follows.
Page 2
<PAGE>
FORM 10-Q/A-1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I: Financial Information
Item 1: Condensed Consolidated Balance Sheets
at October 2, 1999 (unaudited) and December 31, 1998 4
Condensed Consolidated Statement of Operations
Three and nine months ended October 2, 1999
(unaudited) and October 3, 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
Nine months ended October 2, 1999 (unaudited)
and October 3, 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Signatures 20
</TABLE>
Page 3
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Prestolite Electric Holding, Inc. and Subsidiaries
(including Prestolite Electric Incorporated)
Condensed Consolidated Balance Sheet
(in thousands, except share amounts)
<TABLE>
<CAPTION>
October 2, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash $ 832 $ 896
Accounts receivable, net of allowances 51,605 51,352
Inventories, net 55,556 52,082
Defered tax asset 2,898 2,134
Prepaid and other current assets 2,203 2,286
---------------- ----------------
Total current assets 113,094 108,750
Property, plant and equipment, net 55,981 56,064
Deferred tax asset 1,002 1,002
Investments 4,770 4,996
Intangible assets 10,923 11,528
Long-term receivables, pension assets and assets
of discontinued operations 5,747 5,807
---------------- ----------------
Total assets $ 191,517 $ 188,147
================ ================
Liabilities
Current Liabilities:
Revolving credit $ 5,660 $ 4,935
Current portion of long-term debt 3,060 2,401
Accounts payable 25,223 26,088
Accrued liabilities 19,108 27,135
---------------- ----------------
Total current liabilities 53,051 60,559
Long-term debt 147,169 133,416
Other non-current liabilities 1,958 3,090
---------------- ----------------
Total liabilities 202,178 197,065
Stockholders' equity
Common stock, par value $.01, 5,000,000 shares 2 2
authorized, 1,993,000 shares issued and outstanding
at October 2, 1999 and December 31, 1998, respectivley
Paid-in capital 16,623 16,623
Retained earnings (accumulated deficit) (2,024) (404)
Notes receivable, employees' stock purchase, 7.74% due 2002 (513) (559)
Foreign currency translation adjustment (300) (131)
Treasury stock, 1,310,000 shares on October 2, 1999 and
December 31, 1998, respectively (24,449) (24,449)
---------------- ----------------
Total stockholders' equity (10,661) (8,918)
---------------- ----------------
Total liabilities and stockholders' equity $ 191,517 $ 188,147
================ ================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 4
<PAGE>
Prestolite Electric 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 2, October 3, October 2, October 3,
1999 1998 1999 1998
--- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 65,433 $ 70,450 $ 195,952 $ 217,823
Cost of goods sold 52,580 56,198 156,878 174,117
--------------- --------------- --------------- --------------
Gross profit 12,853 14,252 39,074 43,706
Selling, general and administrative 9,472 9,732 28,786 29,370
Costs associated with option repurchase - - - 2,101
Restructuring charge - - - 980
--------------- --------------- --------------- --------------
Operating income 3,381 4,520 10,288 11,255
Interest expense 4,029 3,425 11,915 9,951
Other expense (income) (201) 47 (1,249) (475)
--------------- --------------- --------------- --------------
Income (loss) from continuing operations
before extraordinary loss and income taxes (447) 1,048 (378) 1,779
Loss (benefit) from unconsolidated subsidiaries 44 - 160 -
Provision for income taxes 312 369 1,082 632
--------------- --------------- --------------- --------------
Income (loss) from continuing operations (803) 679 (1,620) 1,147
Extraordinary loss, net of taxes of $716 - - - 1,275
for the nine months ended October 3, 1998
--------------- --------------- --------------- --------------
Net income (loss) $ (803) $ 679 $ (1,620) $ (128)
=============== =============== =============== ==============
Other comprehensive income (expense):
Foreign currency translation adjustment $ 1,899 $ 865 $ (169) $ (62)
--------------- --------------- --------------- --------------
Comprehensive income (loss) $ 1,096 $ 1,544 $ (1,789) $ (190)
=============== =============== =============== ==============
Basic earnings per common share
Income (loss) from continuing operations $ (0.40) $ 0.34 $ (0.81) $ 0.54
Extraordinay item $ - $ - $ - $ (0.61)
--------------- --------------- --------------- --------------
Net income (loss) $ (0.40) $ 0.34 $ (0.81) $ (0.07)
=============== =============== =============== ==============
Diluted earnings per common share
Income (loss) from continuing operations $ (0.40) $ 0.32 $ (0.81) $ 0.54
Extraordinay item $ - $ - $ - $ (0.61)
--------------- --------------- --------------- --------------
Net income (loss) $ (0.40) $ 0.32 $ (0.81) $ (0.07)
=============== =============== =============== ==============
Basic shares outstanding 1,993,000 1,993,000 1,993,000 2,105,052
Dilutive shares outstanding 2,125,886 2,103,860 2,126,219 2,224,501
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 5
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
(including Prestolite Electric Incorporated)
Condensed Consolidated Unaudited Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (1,620) $ (128)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Loss on debt refinancing - 1,991
Option repurchase - 2,101
Cash provided by discontinued operations 170 1,603
Depreciation 8,117 8,215
Amortization 1,410 800
Gain on sale of property, plant, and equipment (128) (236)
Loss from unconsolidated subsidiaries 160 -
Deferred taxes (764) (1,431)
Changes in working capital items (13,576) (4,239)
---------------- ----------------
Net cash provided by (used in) operating activities (6,231) 8,676
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,782) (7,806)
Proceeds from disposal of fixed assets 239 18
Acquisition of:
Lucas businesses - (49,943)
Roberts Remanufacturing (2,958) -
Investment in affiliates 66 (2,640)
---------------- ----------------
Net cash used in investing activities (9,435) (60,371)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in revolving line of credit 14,471 2,990
Payments on long-term debt - (32,146)
Proceeds from borrowings 659 125,000
Costs related to new borrowings, including loss on refinancing - (5,785)
Purchase of treasury stock, options and warrants, employee stock receivable 46 (29,895)
Borrowings (payments) on capital leases 26 (173)
Other financing costs, net (19) (6,773)
---------------- ----------------
Net cash provided by financing activities 15,183 53,218
Effect of exchange rate changes on cash 419 141
---------------- ----------------
Net increase (decrease) in cash (64) 1,664
Cash - beginning of period 896 455
---------------- ----------------
Cash - end of period $ 832 $ 2,119
================ ================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 6
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
(including Prestolite Electric Incorporated)
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1: General Information
Prestolite Electric Holding, Inc. conducts all of its operations through its
wholly-owned principal subsidiary, Prestolite Electric Incorporated. There are
no material differences between the financial statements of Prestolite Electric
Holding, Inc. and Prestolite Electric Incorporated (collectively, "Prestolite,"
"us," "we" or the "Company").
These unaudited condensed consolidated financial statements have been prepared
by us in accordance with Rule 10-01 of Regulation S-X and have been prepared on
a basis consistent with our audited financial statements for the year ended
December 31, 1998. These statements reflect all adjustments, consisting only of
items of a normal recurring nature, which are, in the opinion of management,
necessary for the fair statement of the consolidated financial condition and
consolidated results of operations for the interim period presented.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial
statements and the related notes should be read in conjunction with our audited
financial statements, the notes to those statements and the other material
included in our Annual Report on Form 10-K for the year ended December 31, 1998.
The year-end 1998 condensed balance sheet data was derived from our audited
financial statements, but does not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. The results of operations for the three- and nine-month periods
ended October 2, 1999 are not necessarily indicative of the operating results
that may be expected for the full year or any other interim period.
Genstar Capital Corporation and Company management own all of the equity
securities of Prestolite Electric Holding, Inc.
Note 2: Acquisitions
On January 15, 1999, we acquired a remanufacturing business unit from Roberts
Generator for $2.9 million. This business unit operates as Roberts
Remanufacturing and rebuilds alternators and starter motors for specialty
applications. We financed this purchase with funds borrowed under our United
States revolving line of credit.
On January 22, 1998 Prestolite acquired the heavy duty products division of
Lucas Industries, plc. (a U. K. corporation), Lucas South Africa and Lucas
Indiel Argentina S. A., collectively referred to as "the Lucas Acquisition," for
approximately $44.3 million in cash, net of cash acquired and including the
assumption of approximately $3.2 million in debt, inventory purchases of
approximately $1.4 million during 1998, and up to $4.1 million for certain
accounts receivable as they are collected ($1,074,000 paid during 1998, and $0.1
million paid to date in 1999). In addition, Prestolite has agreed to pay Lucas
up to an additional $6.6 million if certain operating targets are achieved in
Argentina in 1999 and 2000 and up to $ 4.9 million if certain fully reserved
receivables are collected. No liability for this $11.5 million is accrued, as
management does not consider payment probable. Any future payments will be
recorded as an
Page 7
<PAGE>
adjustment to the purchase price. In addition, on January 22, 1998, Prestolite
Electric Incorporated completed the offering of $125 million of 9.625% Senior
Notes due 2008 (the "Notes"). The proceeds of the Notes funded the Lucas
Acquisition and repaid approximately $42 million of our outstanding
indebtedness. Approximately $29.7 million of the proceeds were also used for the
repurchase of common stock, warrants and options to purchase common stock. These
transactions are more fully described in our Annual Report on Form 10-K for the
year ended December 31, 1998.
In conjunction with these transactions, during the first quarter of 1998 the
Company charged operations for $2.1 million for the repurchase of options and
recorded an extraordinary charge of $1.275 million, net of tax benefit, related
to the debt refinancing. The Company also recorded a $0.98 million
restructuring charge in the first quarter of 1998 related to costs anticipated
to be incurred at the Company's existing facilities as a result of the Lucas
Acquisition.
Note 3: Inventories
Inventories are summarized as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
As of As of
October 2, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Raw Material $ 21,600 $ 15,014
Work in Progress 11,685 16,171
Finished Goods 22,271 20,897
------------ ------------
$ 55,556 $ 52,082
============ ============
</TABLE>
Note 4: Property, Plant and Equipment
Property, Plant and Equipment consists of the following (in thousands of U.S.
dollars):
<TABLE>
<CAPTION>
As of As of
October 2, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Land & Buildings $ 29,725 $ 29,433
Machinery & Equipment 60,515 54,863
Construction in Progress 3,927 2,699
----------- ------------
Total, at Cost 94,167 86,995
Accumulated Depreciation (38,186) (30,931)
----------- -----------
Net $ 55,981 $ 56,064
=========== ===========
</TABLE>
Page 8
<PAGE>
Note 5: Investments
Investments consist of the following (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
As of As of
October 2, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
DAX Industries, Inc. (35% interest) $ 1,671 $ 1,869
Ecoair Corp. (7% interest, at cost) 2,000 2,000
Prestolite Asia Ltd. (50% interest) 576 530
Auto Ignition, Ltd. (4% interest, at cost) 523 597
------------ -------------
$ 4,770 $ 4,996
============ =============
</TABLE>
Note 6: Debt
In 1998 we issued $125 million of 9.625% (interest payable semiannually)
unsecured senior notes. The senior notes mature on February 1, 2008 but may be
redeemed earlier at our option under conditions specified in the indenture
pursuant to which the senior notes were issued. The senior notes are senior
unsecured obligations of Prestolite Electric Incorporated and are fully and
unconditionally guaranteed on a senior unsecured basis by Prestolite Electric
Holding, Inc. The senior notes are subordinated to our secured credit
facilities, to the extent of the value of the assets securing such indebtedness,
including the secured facilities described below. The senior notes are also
subordinated to the indebtedness of any subsidiary of Prestolite Electric
Incorporated, including the indebtedness of its United Kingdom subsidiary. The
proceeds were used to refinance existing debt, fund the acquisition of the Lucas
businesses and to repurchase certain Prestolite Electric Holding, Inc.
securities. The senior notes are more fully described in our Prospectus dated
June 26, 1998.
In connection with the issuance of the Notes, we entered into new credit
agreements in the U. S. and the U. K. The U. S. agreement consists of a $23.0
million revolving credit facility ($23.0 million available at October 2, 1999)
which is advanced according to a formula based on eligible accounts receivable
and inventory levels. The borrowings are collateralized by all U. S. accounts
receivable and inventories and mature on July 31, 2000. Interest is payable at
the bank's prime rate (8.25 percent at October 2, 1999) or at the "London Late
Eurodollar" rate plus 2.75 percent at our option. In certain situations these
rates may be increased by 0.125 percent.
On November 2, 1999, the Company revised its United Kingdom borrowing
arrangements. The revised agreement makes available an overdraft facility of
(Pounds)4.0 million with interest at 1.25% above the bank's base rate (5.25% at
November 1, 1999), a (Pounds)2.0 million floating rate term loan with interest
at 1.35% above the bank's base rate and principal payable over 60 months, and a
(Pounds)2.0 million fixed rate term loan with an interest rate to be established
upon the drawing of the loan. The Company intends to draw the full amount of
the floating rate term loan and a portion of the overdraft facility in November,
1999. The receivables and facilities of the Company in the United Kingdom
secure these loans.
In Argentina and South Africa, we have arrangements with several banks which
allow our subsidiaries in these countries to discount or borrow against accounts
receivable, generally at the prime rates of the banks involved. Those rates
ranged from 16.9 percent to 18.0 percent at
Page 9
<PAGE>
October 2, 1999. Total available credit in Argentina and South Africa at October
2, 1999 was approximately $5.1 million.
Debt consists of the following (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
As of As of
October 2, December 31,
1999 1998
------------- -------------
<S> <C> <C>
U. S. Bank Debt $ 20,628 $ 3,366
U.S. Unpresented Checks 1,299 385
U. K. Bank Debt 4,327 8,132
Argentina Bank Debt 2,729 2,120
South Africa Bank Debt 571 269
Senior Notes 125,000 125,000
Capital Lease Obligations 1,222 1,196
Other Debt 113 284
------------- --------------
Total Debt 155,889 140,752
Current Maturities 8,720 7,336
Long Term Debt $ 147,169 $ 133,416
============= ==============
Cash 832 896
Total Debt net of Cash $ 155,057 $ 139,856
============= ==============
</TABLE>
The current maturities shown above represent $660,000 of required principal
payments on the United Kingdom term loan, all Argentina bank debt, and
management's estimate of the maximum amounts to be paid down in the next year on
revolver and overdraft facilities for which no principal repayment is specified.
The Company was in violation of the fixed charge covenant of its United States
bank agreement at October 2, 1999. On October 28, 1999, the bank waived the
violation and the covenant was amended to reduce the fixed charge coverage
requirements through December 30, 2000. The Company presently anticipates that
it will be able to comply with the amended covenant.
Note 7: Segment Reporting
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Prior quarter information is restated to
conform with the provisions of SFAS No. 131. Prestolite operates in four
principal geographic regions. Sales in South Africa and Argentina consist
largely of products for the automotive market while sales of products in the
United States and United Kingdom consist largely of products for non-automotive
applications. Sales between geographic segments and between operating segments
are priced at cost plus a standard markup.
Page 10
<PAGE>
Sales to external customers, based on country of origin, is as follows (in
thousands of U.S. dollars):
<TABLE>
<CAPTION>
North United South
America Kingdom Argentina Africa Total
----------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
For quarter ended October 2, 1999 $ 37,205 $ 15,380 $ 9,522 $ 3,326 $ 65,433
For quarter ended October 3, 1998 36,543 15,462 15,486 2,959 70,450
For nine months ended October 2, 1999 $ 108,193 $ 48,365 $ 29,642 $ 9,752 $ 195,952
For nine months ended October 3, 1998 106,822 54,365 46,782 9,854 217,823
</TABLE>
During 1998, the Company began to manage itself on the basis of three business
units (Heavy Duty Systems, Electric Vehicle Systems, and Automotive Systems) and
to evaluate the performance of its segments based on earnings before interest
expense, taxes, depreciation and amortization and excluding restructuring and
option repurchase charges ("EBITDA"). Corporate overhead and certain other
charges are not allocated to the divisions. During the third quarter of 1999,
division locations were realigned, moving two U.S. locations out of the
Automotive Systems Division and placing one each in Heavy Duty Systems and
Electric Vehicle Systems. Segment assets are not currently broken out in the
normal course of managing segment operations; accordingly, such information is
not available for disclosure. In accordance with SFAS No. 131, the operating
results for the quarters ended October 2, 1999 and October 3, 1998 are
summarized by operating segment (in thousands of U.S. dollars) below:
<TABLE>
<CAPTION>
Heavy Electric
Duty Vehicle Automotive
Systems Systems Systems Unallocated
Division Division Divison Costs Total
---------- -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Sales to external customers:
For quarter ended October 2, 1999 $ 33,607 $ 18,978 $ 12,848 $ - $ 65,433
For quarter ended October 3, 1998 32,659 19,346 18,445 - 70,450
EBITDA:
For quarter ended October 2, 1999 5,153 1,995 949 (1,131) 6,966
For quarter ended October 3, 1998 4,071 2,555 2,418 (1,433) 7,611
Sales to external customers:
For nine months ended October 2, 1999 100,593 55,965 39,394 - 195,952
For nine months ended October 3, 1998 100,778 60,409 56,636 - 217,823
EBITDA:
For nine months ended October 2, 1999 15,898 6,122 3,015 (3,971) 21,064
For nine months ended October 3, 1998 14,012 8,653 5,785 (4,624) 23,826
</TABLE>
Page 11
<PAGE>
A reconciliation of EBITDA to income from continuing operations before income
taxes follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
For the three months ended
October 2, October 3,
1999 1998
---------------- --------------
<S> <C> <C>
EBITDA for reporting segments $ 6,966 $ 7,611
Depreciation and amortization 3,384 3,138
Loss in unconsolidated subsidiaries 44 -
Interest expense 4,029 3,425
---------------- --------------
Income (loss) from continuing operations before income taxes $ (403) $ 1,048
================ ==============
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
October 2, October 3,
1999 1998
---------------- --------------
<S> <C> <C>
EBITDA for reporting segments $ 21,064 $ 23,826
Depreciation and amortization 9,527 9,015
Loss in unconsolidated subsidiaries 160 -
Option repurchase - 2,101
Restructuring - 980
Interest expense 11,915 9,951
---------------- --------------
Income (loss) from continuing operations before income taxes $ (218) $ 1,779
================ ==============
</TABLE>
Page 12
<PAGE>
ITEM 2: Management's Discussion and Analysis
of Financial Condition and Results of Operation.
Overview
We manufacture alternators, starter motors, direct current motors, battery
chargers, and switching devices. These are supplied under the "Prestolite,"
"Leece-Neville," "Hobart," "Lucas," and "Indiel" brand names for original
equipment and aftermarket application on a variety of vehicles and industrial
equipment. "Hobart" is used under license from a subsidiary of Illinois Tool
Works, Inc. "Lucas" is used under license from a subsidiary of LucasVarity plc.
Most of our products are component parts used on diesel engines, automobiles and
electric vehicles, sold to both aftermarket customers and original equipment
manufacturers. We sell our products to a variety of markets, in terms of both
end-use and geography.
In January 1998, we acquired three businesses from a subsidiary of LucasVarity
plc. These businesses operate in England, South Africa, and Argentina. We
purchased these businesses for approximately $44.3 million in cash, net of cash
acquired and including the assumption of $3.2 million in debt, plus certain
future obligations, as described in Note 2 to the financial statements.
The Lucas acquisition was financed from the sale of $125.0 million of 9.625%
senior notes due 2008 issued under Rule 144A of the Securities Act of 1933, as
amended. Proceeds from the offering of our senior notes were also used to repay
existing debt in the United States and United Kingdom, to repurchase all the
warrants issued to holders of the Company's subordinated debt, to repurchase 40%
of the common stock held by Genstar Capital Corporation, to repurchase 8.5% of
the common stock held by management and to repurchase 40% of the options held by
management. The total cost associated with the repurchase of these securities
was approximately $29.7 million.
In January 1999, we acquired a remanufacturing business that continues to
operate in Saddlebrook, NJ. We purchased this business for $2.9 million,
financed through our U.S. revolving line of credit.
During 1998, we organized our business into three divisions. While the three
divisions bear the names of their principal markets, no division sells
exclusively into its target market. Further, each division has some sales into
the target markets of the other divisions.
The Heavy Duty Systems Division produces alternators, starter motors, inline
pumps, control boxes and other products, primarily for installation on diesel
engines used in the heavy duty, defense, marine and industrial markets. The
division's major facilities are in Arcade, NY; Florence, KY; Acton, England; and
Leyland, England, with a smaller remanufacturing facility in Garfield, NJ
(previously located in Saddlebrook, NJ and reported with the Automotive Systems
Division).
The Electric Vehicle Systems Division produces motors (including starter motors,
material handling motors, and pump and winch motors), controls (including
contactors, solenoids, relays, distributors, and control boxes), battery
chargers and other products. The division's major facilities are in Decatur,
AL; Wagoner, OK; Florence, KY; Troy, OH; and Leyland, England, with a smaller
remanufacturing facility in Dearborn, MI (previously reported with the
Automotive Systems Division). We sell these products into many of the same
markets as the
Page 13
<PAGE>
products of our Heavy Duty Systems Division. In addition, the products of our
Electric Vehicles Systems Division are sold into the material handling market
for installation on or use with lift trucks and other electric vehicles; the
truck accessory market for use in winches, snow plow lifts and other
applications; and the telecommunications market where contactors are used in
battery backup systems.
The Automotive Systems Division manufactures automotive components, primarily
alternators and starter motors. The division's facilities are in South Africa
and Argentina. The Argentina operation also manufactures steering columns and
distributors. Some of the products of this division are sold into the heavy
duty and material handling markets. In both South Africa and Argentina more
than half of our sales are to the automotive aftermarket, and about half of
those aftermarket sales are products purchased for resale.
Results of Operations
Three Months Ended October 2, 1999 Compared to Three Months Ended October 3,
1998
Sales for the three months ended October 2, 1999 were $65.4 million, a decrease
of $5.0 million, or 7.1%, from $70.5 million in the third quarter of 1998. The
decrease in sales dollars is mainly attributable to the Automotive Systems
Division. Automotive Systems sales declined $7.9 million or 45.9%. An Argentina
sales decline of $7.8 million and a $0.1 million South Africa sales decline
comprise this total. Heavy Duty Systems sales increased $3.3 million or 10.0%.
Heavy Duty Systems sales in the United Kingdom declined $0.7 million but were
offset by a $4.0 million increase in Heavy Duty Systems sales in the United
States, including $1.1 million in Roberts Remanufacturing sales. While Heavy
Duty Systems defense sales in the United States declined $2,000, or 0.2%, other
U.S. sales, not including the Roberts Remanufacturing sales, increased by $2.8
million, or 15.0%. Electric Vehicle Systems sales declined $0.4 million or
1.9%. Contributing to this were declines in defense sales of $0.4 million, or
21.7%, material handling sales of $0.4 million, or 17.1%, and Beech
Remanufacturing sales of $74,000, or 13.2%. These declines were offset by
Electric Vehicle sales increases in the United Kingdom of $0.3 million, or
14.8%, and in other U.S. sales of $0.2 million, or 1.3%.
Gross profit was $12.9 million in the third quarter of 1999, or 19.6% of sales.
This compares to gross profit of $14.3 million, or 20.2% of sales, in the third
quarter of 1998. Lower sales volume, higher material costs, and a shift to
sales of lower margin products contributed to this decline.
Selling, general, and administrative expense was $9.5 million, or 14.5% of
sales, for the third quarter of 1999, a decrease of $0.3 million, or 2.9%, from
$9.7 million, or 13.8% of sales, in the third quarter of 1998. Reduction in
selling, general, and administrative expense in our international locations
continues to reflect the cost control benefits of the integration of the
businesses acquired in the Lucas acquisition. This reduction is offset in part
by the increased selling, general, and administrative expense in the U.S. Heavy
Duty Systems due to the Roberts acquisition.
Operating income in the third quarter of 1999 was $3.4 million, or 5.2% of
sales, a decrease of $1.1 million, or 25.2%, from the $4.5 million, or 6.4% of
sales, in the third quarter of 1998. This was due to the factors discussed
above.
Other income was $201,000 in the third quarter of 1999 versus other expenses of
$47,000 in the third quarter of 1998. This consists of the net effect of
interest income, pension expense for
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inactive defined benefit pension plans associated with United States facilities
that have been closed, foreign currency exchange losses, royalty expenses, South
Africa export rebate income and South Africa trademark expense.
Interest expense was $4.0 million in the third quarter of 1999, an increase of
$0.6 million, or 17.6%, compared to $3.4 million in the third quarter of 1998.
This increase is due to increases in bank debt in the United States and the
United Kingdom.
The provision for income taxes was $312,000, 69.8% of the loss from continuing
operations before taxes, for the third quarter of 1999 as compared to the
$369,000 provision for income taxes for the third quarter of 1998, 35.2% of
income from continuing operations before taxes and the extraordinary item. The
change in the tax rate is due to losses in Argentina for which no tax benefit
has been recorded.
Nine Months Ended October 2, 1999 Compared to Nine Months Ended October 3, 1998
Sales for the nine months ended October 2, 1999 were $196.0 million, a decrease
of $21.9 million, or 10.0%, from $217.8 million in the first nine months of
1998. The decrease in sales dollars is mainly attributable to the Automotive
Systems Division. Automotive Systems sales declined $17.2 million or 30.4%. An
Argentina sales decline of $17.1 million and a South Africa sales decline of
$0.1 million comprise this decline. Heavy Duty Systems sales declined $185,000
or 0.2%. Heavy Duty Systems sales in the United Kingdom declined $6.5 million
but were offset by a $6.4 million increase in Heavy Duty Systems sales in the
United States, including an increase of $3.7 million in Roberts Remanufacturing
sales for the period. While Heavy Duty Systems defense sales in the United
States declined $0.5 million, or 14.2%, other heavy Duty systems sales in the
United States increased by $3.2 million, or 6.2%, not including the $3.7 million
increase in Roberts Remanufacturing sales. Electric Vehicle Systems sales
declined $4.4 million or 7.4%. Contributing to this were declines in defense
sales of $3.2 million, or 44.7%, in material handling sales of $1.6 million, or
21.9%, Beech Remanufacturing sales of $208,000, or 11.5%, and other U.S. sales
of $0.1 million. Electric Vehicle Systems sales in the United Kingdom
increased $540,000, or 6.5%, partially offsetting the declines in other areas.
Gross profit was $39.1 million in the first nine months of 1999, or 19.9% of
sales. This compares to gross profit of $43.7 million, or 20.1% of sales, for
the first nine months of 1998. The decrease in gross profit as a percent of
sales results from several factors. Ongoing cost cutting measures in the United
Kingdom and Argentina have reduced overhead costs. The benefit of these
reductions is offset by declining volume, higher material costs, and a shift in
sales to lower margin products at some locations. The Roberts Remanufacturing
business, acquired in January 1999, has higher margins than the company average,
mitigating some of the decline.
Selling, general, and administrative expense was $28.8 million, or 14.7% of
sales, for the first nine months of 1999, a decrease of $0.6 million, or 2.0%,
from $29.4 million, or 13.5% of sales, in the first nine months of 1998.
Reduction in selling, general, and administrative expense in our international
locations continues to reflect the cost control benefits of the integration of
the businesses acquired in the Lucas acquisition. This reduction is offset in
part by the increased selling, general, and administrative expense in U.S. Heavy
Duty Systems due to the Roberts acquisition.
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We recorded a $2.1 million charge in January of 1998 to reflect our repurchase
from management of 40% of then-outstanding options to purchase our common stock.
We also recorded a first quarter charge in 1998 of $1.0 million to cover
severance payments related to restructuring activities at our facilities in
Leyland, England and Decatur, Alabama. Of this total, $0.5 million was spent in
1998 and $0.2 million was spent in the first nine months of 1999. The remainder
is expected to be spent during the fourth quarter of 1999.
Operating income in the first nine months of 1999 was $10.3 million, or 5.3% of
sales, a decrease of $967,000, or 8.6%, from the $11.3 million, or 5.2% of
sales, in the first nine months of 1998. This was due to the factors discussed
above.
Other income was $1.2 million in the first nine months of 1999 versus $475,000
in the first nine months of 1998. This consists of South Africa export rebate
income, the elimination of a lawsuit-related reserve in Argentina in 1999,
proceeds on the sales of fixed assets, interest income, and miscellaneous
income. These were partially offset by pension expense for inactive defined
benefit pension plans associated with United States facilities that have been
closed, foreign currency exchange losses, royalty expenses, and South Africa
trademark expense.
Interest expense was $11.9 million in the first nine months of 1999, an increase
of $2.0 million, or 19.7%, compared to $9.9 million in the first nine months of
1998. This increase is due to increases in bank debt in the United States,
United Kingdom and South Africa, as well as increases in capital leases, as
compared to levels of debt in the first nine months of 1998.
The provision for income taxes was $1.1 million on the $378,000 loss from
continuing operations before taxes for the first nine months of 1999. This
compares to a provision for income taxes of $632,000 for the first nine months
of 1998, 35.5% of income from continuing operations before taxes and the
extraordinary item. The higher 1999 tax rate is due to losses in Argentina for
which tax benefits have not been recorded.
In conjunction with the incurrence of additional debt, the refinancing of our
existing debt and repurchase of warrants, we recorded an extraordinary item of
$1.3 million net-of-tax in 1998. On a pretax basis this charge covered $728,000
in debt prepayment fees, $335,000 for the write-off of unamortized financing
costs, $733,000 to write off the unamortized discount on subordinated debt and
$195,000 related to the repurchase of warrants.
Liquidity and Capital Resources
Cash used by operating activities in the first nine months of 1999 was $6.2
million. Capital spending for the first nine months of 1999 was $6.8 million, a
$1.0 million reduction from the $7.8 million of capital spending in the first
nine months of 1998. Capital spending for the first nine months of 1999 in the
Unites States was $3.7 million as compared to capital spending in 1998 of $4.9
million. Capital spending for the first nine months of 1999 in the United
Kingdom of $1.4 million, in Argentina of $1.4 million, and in South Africa of
$0.3 million, compares to the first nine months of 1998 levels in the United
Kingdom of $1.6 million, in Argentina of $0.7 million, and in South Africa of
$0.6 million. Planned capital expenditures consist primarily of expenditures to
reduce costs through automation, replace existing equipment and enable us to
manufacture new products.
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We spent $4.9 million in 1998 and $1.4 million in the first nine months of 1999
on redundancy costs. We expect to spend approximately $1.4 million in the
fourth quarter of 1999 on redundancy costs. These amounts have been or will be
charged to the reserves established in connection with the Lucas acquisition in
1998 or as a result of the 1998 restructuring charge discussed above.
In connection with the acquisition of our Argentina operations from Lucas in
1998, we agreed to certain future obligations to Lucas. Remaining obligations
include post-closing payments to Lucas of up to $3.0 million upon the collection
of certain receivables expected to be collected in 1999, 2000, and 2001, up to
$4.9 million contingent upon the collection of certain fully-reserved
receivables and up to $6.6 million contingent upon the achievement by our
Argentina subsidiary of certain earnings targets in 1999 and 2000. Aggregate
payments for receivables collected totaled $1.1 million in 1998 and $0.1 million
in the first nine months of 1999. We expect to pay any of these contingencies
from the collection of receivables or from such earnings.
Debt, net of cash, increased from $139.9 million at December 31, 1998 to $155.1
million at October 2, 1999. The increase was due, in part, to the acquisition
of the Roberts Remanufacturing business in January 1999. We had revolving
credit facilities with banks in the United States and United Kingdom under which
additional borrowings of $1.9 million and $5.4 million were available based on
the October 2, 1999 levels of receivables (United States and United Kingdom) and
inventory (United States only) which are pledged to support that debt. In
addition, during July 1999, we modified our U.S. bank agreement to allow
borrowings above the amount supported by receivables and inventory. The
additional amount is $3.0 million effective July 30, 1999 declining in steps to
zero at December 1, 1999. In Argentina and South Africa, we have arrangements
with several banks permitting discounting or borrowing against receivables.
Total net additional credit available in Argentina and South Africa as of
October 2, 1999 was approximately $1.9 million. In November 1999, we increased
the amounts which can be borrowed in the United Kingdom, as described in Note 6
to the financial statements.
We expect our liquidity needs to consist primarily of working capital needs and
scheduled payments of principal and interest on our indebtedness. We expect our
short-term liquidity needs to be provided by operating cash flows and borrowings
under our revolving credit facilities. We expect to fund our long-term
liquidity needs from our operating cash flows, the issuance of debt and/or
equity securities and bank borrowings. We believe that cash flows from
operations, our existing cash balances and amounts available under these
revolving credit facilities will provide adequate funds for on going operation,
planned capital expenditures, investments, and debt service for at least the
next twelve months. Estimates as to working capital needs and other
expenditures may be materially affected if the foregoing sources are not
available or do not otherwise provide sufficient funds to meet our obligations.
Year 2000
Currently, many automated systems and software products are coded to accept only
two digit entries in the date code field. These date code fields will need to
accept four digit entries or otherwise be modified to distinguish 21st century
dates from 20th century dates. As a result, many companies' information systems
and software need to be upgraded or replaced in order to function correctly
after December 31, 1999.
We have completed our Year 2000 assessments of our information technology and
embedded systems, and are continuing efforts to prepare our systems and
applications for the Year 2000 as
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part of a larger, general program to enhance all of our computer systems. The
Year 2000 element of these efforts consists primarily of installing or upgrading
enterprise resource planning systems to be Year 2000 compliant at our United
States, United Kingdom and Argentina facilities, and ensuring compliance by an
outside service bureau utilized by our South African facility. All software
remediation efforts are complete as of October 2, 1999. Because the majority of
our operations outside of the United States were acquired in early 1998 and
these operations were not Year 2000 compliant, our efforts to deal with the Year
2000 issue outside the United States required a larger investment than our
domestic programs. In Argentina, a new Year 2000 compliant system has been
installed. In the United Kingdom, a system used in two locations was replaced
with Year 2000 compliant systems, while the system in use at a third location
was upgraded for Year 2000 compliance. In addition, we have reviewed our product
base and believe that our products will not be affected by Year 2000 issues.
In connection with the overall computer enhancement program, including Year 2000
compliance, we expect to incur aggregate internal and third party costs of
approximately $3.0 million, of which approximately $2.6 million had been
incurred by the third quarter of 1999. The $3.0 million total includes
approximately $0.5 million related to in-house efforts to enhance the
performance of our United States warehousing systems, approximately $1.0 million
for each of the United Kingdom and Argentina software conversions and
approximately $0.5 million related to ancillary Year 2000 efforts.
We rely on third party vendors and service providers for certain products and
services, including certain data processing capabilities. We are communicating
with our principal vendors and service providers to assess the Year 2000
readiness of their products and services. Responses indicate that our
significant providers currently have compliant versions available or are well
into renovation and testing phases with completion scheduled prior to December
31, 1999. However, we can give no guarantee that the systems of these vendors
and service providers in which we rely will be timely Year 2000 compliant. Our
contingency planning for Year 2000 issues related primarily to securing backup
vendors (which have been identified for key purchased products) and the
possibility of stockpiling raw materials. Contingency planning will continue
throughout 1999 and our plans will be modified based upon the progress of our
remediation efforts, system updates and installations and based upon our
communications with selected suppliers.
While we believe that the estimated cost of becoming Year 2000 compliant will
not be significant to our results of operations, failure to complete all the
work in a timely manner could have a material adverse effect on our results of
operations. While we expect all planned work to be completed, we cannot
guarantee that all systems will be in compliance by the Year 2000, that the
systems of suppliers and other companies and government agencies on which we
rely will be converted in a timely manner or that our contingency planning will
be able to fully address all potential interruptions. Therefore, date-related
issues could cause delays in our ability to produce or ship our products,
process transactions or otherwise conduct business in any of our markets.
Forward-Looking Statements
This form 10-Q contains, in addition to historical information, forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical fact included herein
may contain forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as
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"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.
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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.
Date: November 24, 1999 By: /s/ Kenneth C. Cornelius
------------------------
Kenneth C. Cornelius
Senior Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
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