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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1999.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file Number 333-49429-01
Prestolite Electric Holding, Inc.
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(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
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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 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 ______
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As of March 29, 2000, there were 1,993,000 shares of the registrant's
common stock outstanding. There is no public market for the registrant's common
stock.
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This annual report on Form 10-K of Prestolite Electric Holding, Inc.
(formerly known as PEI Holding, Inc.) includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact included in this report may
contain forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "believe" or "continue" or the
negative thereof or variations thereon or similar terminology. Such forward-
looking statements are based upon information currently available in which our
management shares its knowledge and judgment 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 Item 1. "Business-- Risk Factors" and Item 7. "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.
Readers are urged to carefully review and consider disclosures made in this
and other reports that we file with the Securities and Exchange Commission that
discuss factors germane to our business.
PART I
Item 1. Business
We are a global manufacturer and distributor of electro-mechanical power
conversion products and systems for niche markets, including vehicle, defense
and industrial applications. Our products are primarily used for diesel engines
and electric vehicles and include alternators, starter motors, and switches. We
sell our products primarily to the aftermarket and original equipment
manufacturers ("OEMs"). On January 22, 1998, we acquired three businesses from a
subsidiary of LucasVarity plc. As a result of the Lucas acquisition, we have
consolidated our leadership position in our primary markets, expanded our global
reach and improved our aftermarket distribution capabilities. We conduct our
business through our operating subsidiary Prestolite Electric Incorporated and
its subsidiaries.
We believe that our position in our primary markets can be attributed to
the following factors:
Product Quality and Brand Recognition. We believe our products are
generally recognized by our customers as superior based on their advanced
technology, reliability, durability and quality. We believe our primary brand
names, Leece-Neville in the heavy duty vehicle market and Prestolite in the
industrial markets, are generally recognized as being of the highest quality in
their respective markets.
Attractive Aftermarket/Original Equipment Balance. In 1999 approximately
half of our net sales were to OEM customers. The aftermarket is generally a more
stable source of sales and generates higher margins than sales to our OEM
customers. See "--Risk Factors--We depend on original equipment manufacturers,
whose businesses are cyclical." We believe that our aftermarket and original
equipment businesses are complementary and provide us with a competitive
advantage in meeting customer needs and in maintaining the high levels of
expertise necessary to compete successfully in both markets. The engineering and
manufacturing capabilities necessary to meet the requirements for original
equipment technology and quality are transferable to our aftermarket operations.
The use of our products as original components in OEM products is a major factor
in generating aftermarket demand. Further, the understanding of replacement
activity gained through the aftermarket enhances our understanding of the needs
of OEMs. See "--Market Dynamics."
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Applied Technological and Engineering Capabilities. We have built an
engineering team with in-depth design and application experience, which allows
us to introduce innovative new products and applications. Our engineers work
closely with partners at a number of major universities in the areas of
electronics, magnetics, alternative materials and product testing. Product
design, development and application are performed by dedicated engineering
teams, which work closely with customers to design products and systems that
meet each customer's specifications.
Manufacturing Excellence. We assembled our present management team
following Genstar Capital Corporation's acquisition of the company in 1991. This
team has instituted continuous improvement programs at all of our manufacturing
facilities. These programs have led to the adoption of techniques such as
synchronous manufacturing, cellular manufacturing and kanban-based just-in-time
inventory control. Changes in manufacturing methods have made floor space
available for expansion at most of our facilities. From 1992 to 1997, we
increased our sales per employee by approximately 65% and increased our sales
per square foot of manufacturing and warehouse space by approximately 160%.
Ongoing training programs for our experienced workforce are an integral part of
such continuous improvement efforts.
International Presence. We currently conduct business in the United States,
the United Kingdom, South Africa and Argentina, have partial interests in
companies in India and Korea, and have a licensee in China. (The partial
interest in the Korean company is considered part of our discontinued
operations.) Approximately 55% of our net sales in 1999 were to customers
outside of North America. As our original equipment customers expand their
manufacturing operations in foreign countries, we expect that these customers
will increasingly turn to suppliers who can support their locally-manufactured
OEM products and aftermarket presence. We believe our global manufacturing and
distribution network provides an advantage over our competitors in servicing our
North American and European customers' foreign manufacturing operations. See "--
Risk Factors--We have risks because of foreign operations."
Products
We manufacture and distribute electro-mechanical power conversion products and
systems for heavy duty vehicles and defense, industrial and automotive
applications. We have historically manufactured alternators, starter motors, and
switches. The 1998 Lucas acquisition added truck, bus and automotive products
that complement our historic product portfolio. Although our products are
primarily used for diesel engines, electric vehicles and automobiles, they are
also used in a broad range of industrial applications.
Alternators. We manufacture alternators and regulators primarily for heavy
duty applications, generally under the Leece-Neville or Prestolite brand names,
and for automotive applications. Alternators are electric generators that
produce rectified direct current. Regulators are electronic devices that control
alternator output. Alternator output is directly related to frame size, or
diameter. We manufacture alternators in sizes ranging from 5 inches to 8-9/16
inches for use in off-road vehicles, refrigerated trucks, trucks, generator
sets, military vehicles, buses and special purpose vehicles such as ambulances.
We produce smaller alternators for a wide variety of cars, light to medium
trucks and agricultural vehicles.
Starter Motors. We manufacture a full line of starter motors which includes
products designed for the lower-end and mid-size segments of the market. In the
United Kingdom, we manufacture a range of heavy duty starter motors which are
sold primarily for trucks, buses and generator sets. Through the Lucas
acquisition we added starter motors for automobiles and light commercial
vehicles.
Switches. We manufacture switches, which include solenoids, contactors and
control boxes. A solenoid is an electromagnet used to move a plunger in and out
to operate contacts that make and
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break electric circuits. Our solenoid switches are typically used to control a
vehicle starter motor or a hydraulic pump motor. Contactors are similar to
solenoids, but are built for heavier duty applications and are more expensive.
Our contactors are primarily designed for material handling, defense, industrial
and telecommunications applications. A control box (called "switchgear" in the
United Kingdom), which includes solenoids and electronic circuits in an enclosed
case, assists the starting circuit of a diesel-powered vehicle. Our control
boxes are sold primarily for military applications.
Other Products. Other products we manufacture include ignition distributors
primarily for marine applications, the TrekStar line of speedometers and
odometers, in-line diesel pumps, and Thermostart brand pre-heaters for diesel
engines. We also redistribute in Argentina and South Africa a wide range of
automotive products manufactured by third parties.
Markets
Market Dynamics
Aftermarket. The aftermarket consists of the production and sale of both
new and remanufactured parts used in the maintenance and repair of vehicles. Our
aftermarket distribution channels consist of:
. the aftermarket arms of original equipment suppliers;
. independent distributors, who supply repair shops, dealers and
retailers; and
. government agencies that directly purchase our aftermarket products.
Our newly-manufactured aftermarket products compete with remanufactured
products, which consist of used components that are reassembled into finished
products. Distribution through independent distributors is an additional
important element of the aftermarket. Although the distributors' share of the
North American and European aftermarket has declined in recent years,
independent distributors remain an important distribution channel for us.
Original Equipment. The original equipment market consists of the
production and sale of new component parts for use in the manufacture of new
vehicles or equipment. Original equipment sales are generally made to the
vehicle OEM, although some sales may be to another component manufacturer which
in turn supplies the OEM. In response to pressure to improve product quality,
shorten design cycles and reduce capital spending, production and inventory
costs, OEMs are increasingly outsourcing design and production of non-strategic
components. The original equipment market has been impacted by recent
fundamental changes in OEM sourcing strategies. OEMs are consolidating their
supplier base and are seeking suppliers which can, among other things, meet
their shorter product design cycles, bring products to market on an expedited
basis, lower product and system costs and pass cost savings on to the OEM. As a
result, we believe that OEMs generally prefer to purchase components from a
small group of preferred suppliers. OEMs are becoming increasingly global. OEMs
are in turn requiring their preferred suppliers to establish global production
capabilities to meet their original equipment needs as they expand
internationally, and establish global distribution networks to provide
aftermarket support.
Markets Served
We sell our products to a variety of markets, including:
Heavy Duty. The heavy duty market, which represented approximately 59% of
our net sales in 1999, includes heavy duty trucks, school and shuttle buses,
emergency vehicles, off-road and special
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purpose vehicles, refrigerated trucks and generator sets. Our heavy duty
products are designed primarily for use with diesel engines, generally 2.5
liters or larger. Our products (alternators, starter motors, starter solenoids,
in-line diesel pumps and the Thermostart brand pre-heater) usually fit multiple
applications with limited or no modification for a specific application.
Automotive. The automotive and light truck market represented
approximately 30% of our net sales in 1999. Products sold to automobile OEMs
include starter solenoids for light truck application in the United States, and
starter motors and alternators in Argentina and South Africa.
Defense. Our products sold to the defense market include alternators,
starter motors and control boxes for use in military vehicles including tanks,
trucks, personnel carriers and the HMMWV, and are generally designed for use
with a specific diesel engine. Although the defense market has declined in
recent years, it was still responsible for approximately 5% of our net sales in
1999.
Industrial, Marine and Other Applications. Approximately 6% of our 1999
net sales were to a wide range of other markets. These include starter motors,
alternators and ignition distributors for marine and other applications,
contactors sold to the telecommunications market for use with backup battery
systems.
Independent Distribution. A portion of sales to each of our markets are
through independent distributors. We have a network of automotive parts
distributors in Argentina and South Africa, many operating with a "Lucas"
franchise that includes distinctive signage and branded product. About half of
our sales through these automotive distribution networks represents products
manufactured by third parties and purchased by us for resale. Sales to
independent distributors represented approximately 24% of our 1999 net sales.
Customers and Competition
Most of our products are component parts used on diesel engines, electric
vehicles and automobiles. Vehicle components often do not last for the entire
life of the vehicle. As a result, sales are made to both aftermarket and
original equipment customers. Our sales to OEM customers represented
approximately half of our 1999 net sales, with the remaining net sales derived
from aftermarket customers.
No single customer individually accounts for more than ten percent of our
consolidated revenues.
We operate in highly competitive markets. While no single competitor
competes with us in all of its product lines, we face significant competition in
each of our product lines. In addition, we are under constant pressure from our
major OEM customers to reduce product costs. We believe that our experience in
engineering and implementing cost reduction programs and our ability to develop
new and improved products and to control manufacturing and development costs
should allow our products and prices to remain competitive. See "--Risk
Factors--We face substantial competition."
Alternators. Delco Remy International Inc. is our principal competitor in
the North American market for truck alternators in both the OEM and aftermarket
segments. Some national and many local remanufacturers also compete in the
aftermarket. Our principal competitor in the North American transportation
refrigeration and off-road portions of the market for heavy duty alternators is
Bosch. Bosch is also our principal competitor in the European market for truck
alternators. Our principal competitors in the South African and Argentine OEM
market include Bosch and other international corporations that import into such
markets. C.E. Niehoff is our major competitor in the market for military
alternators. Our principal competitors in the market for high-amperage (165 to
300 ampere) commercial alternators are Lestek and Powerline. At the lower end of
the heavy duty alternator market, automotive-based designs and foreign
competitors are a significant factor.
Motors. Our principal competitors in the North American and European
starter motor market are
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Delco and Bosch, respectively. Our principal competitors in the South African
and Argentine OEM market include Bosch and other international corporations that
import into such markets.
Relays and Controls. Principal competitors in the solenoid market are
Electromation and Automotive Controls (Echlin) in the light truck sector;
Stancor Electric (Emerson) in the heavy duty market; Stancor Electric and Clum
in the material handling market; and Stancor Electric in industrial markets. Our
principal competitors in the contactor market are Albright Engineers (primarily
in Europe), Contact Industries and, in the forklift aftermarket, Intrupa
Manufacturing.
Discontinued Operations
In the second half of 1999, we decided to sell our direct current motor
business and battery charger businesses. As discussed in Note 2 of our audited
financial statements, these businesses generated approximately $45 million of
sales in 1999. Because we have decided to sell these businesses, we treat them
as "discontinued operations" in the financial statements. Consequently, they are
not included in the discussion above and the sales of these businesses are not
included in the $214 million of consolidated sales shown in our financial
statements. The Company has retained an investment banker to assist in the
disposition of these businesses and expects to complete the sale transactions
during 2000. The agreement with the investment banker was filed as an exhibit to
this Form 10K with the SEC on March 30, 2000.
Products of our discontinued businesses include:
. Material handling motors, 5 to 13 inches in diameter, generally designed
for a specific forklift truck model.
. Pump and winch motors, 4.5 inches in diameter, generally used in
hydraulic pump operations.
. Motors, 3.3 inches in diameter, used for back-up braking systems on
school busses and other applications.
. Battery chargers, sold under the Hobart brand name, generally used in
the material handling market.
Markets for the products of our discontinued operations are mainly the
material handling market which includes motors and contactors for electric lift
trucks and other electrically-powered commercial vehicles such as golf carts.
The direct current electric motors sold to the material handling market are
generally designed for specific forklift truck models. Almost all of our battery
chargers are sold to distributors, which normally purchase lift trucks,
batteries and battery chargers from separate suppliers.
Our principal North American competitors in the material handling motor
market are General Electric and Advanced DC. Principal competitors in the
battery charger market include Hertner, Ferro Magnetic and Exide.
Seasonality, Raw Materials and Backlog
Our sales to OEMs accounted for approximately half of our net sales for
the year ended December 31, 1999. As a result, a significant portion of our
sales are related to the overall level of domestic and foreign new diesel and
electric vehicle production. New vehicle sales and production are cyclical and
can be affected by the strength of the economy generally or in specific regions,
by prevailing interest rates and other factors which may have an effect on our
sales. In addition, strikes, lock-outs, work stoppages or other production
interruptions in the vehicle or material handling industries may adversely
affect the demand for our products. The balance of our aftermarket and OEM
sales, as well as the diversity of our OEM markets served (both in terms of
end-use and geography), help stabilize our revenues. However, a decline in the
demand for or production of new diesel or electric vehicles, particularly in
North America, could have a materially adverse effect on our results of
operations. See Item 7. "Management's Discussion and Analysis of Financial
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Condition and Results of Operations."
Principal raw materials for our business include copper, aluminum, steel
and electronic components. All materials are readily available from a number of
suppliers, and we do not foresee any difficulty in obtaining adequate inventory
supplies.
The majority of our products are not on a backlog status. They are
produced from readily available materials and have a relatively short
manufacturing cycle.
Patents, Trademarks and Licenses
We hold various patents and trademarks related to our products. No single
patent or trademark is currently of material importance to our operations. We
have applied for U.S. patents for our self-diagnostic alternator, for our
latching contactor and for the use of a conductive bearing to replace brushes in
alternators and other rotating machines.
We have exclusive right to use the "Prestolite Electric" trade name for
use with motor and ignition parts. "Prestolite Wire" and "Prestolite Batteries"
are sold by unrelated companies. We formerly had the right to the "Prestolite
Electric" name under a perpetual, royalty-free license from Allied Signal
Corporation (now Honeywell Incorporated). At the end of 1999, we formed a
limited liability company which acquired the rights to the "Prestolite" name
from Allied Signal. We own half of that company and Prestolite Wire owns half.
We have the use of the "Hobart" brand name for battery chargers until February
28, 2001.
Lucas Industries plc retained all rights to the "Lucas" trade name and
logo and certain other trademarks following the Lucas acquisition. We are
permitted for a transition period to brand products sold by us in Argentina and
South Africa with certain Lucas trademarks.
On April 8, 1998, we entered into an agreement with Hitachi, Ltd., a
Japanese corporation, for a seven-year non-exclusive, non-transferable license
to manufacture and sell certain starter motors and alternators utilizing
Hitachi's proprietary technology in exchange for a one-time fee of (Yen)30.0
million (approximately $0.2 million as of that date) and royalty payments based
on the net sales of such products.
On June 24, 1998, we entered into an agreement with Ecoair Corp., a
Delaware corporation, for a 99-year non-exclusive, non-transferable license
relating to the manufacture, use and sale of alternators utilizing Ecoair's
proprietary technology in exchange for royalty payments on products produced by
us and incorporating technology derived from this information.
Employees
We had approximately 2,500 employees as of December 31, 1999, including
300 that were part of our discontinued operations. There are no collective
bargaining agreements in effect with respect to any of our United States
employees. All of the employees at our Leyland, England facility and all of the
hourly and some of the salaried employees at the five facilities acquired in the
Lucas acquisition are members of unions. We have not experienced a strike or
work stoppage at any of our facilities, except in 1998 in South Africa for
approximately three weeks as part of a nationwide, industry-wide strike that
included our facility. We can not assure you that a strike or work stoppage will
not occur in the future at any of our facilities. See "--Risk Factors--We may
have difficulty integrating acquired operations." We believe that relations with
our employees are excellent.
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Risk Factors
In addition to other information in this annual report on Form 10-K,
readers evaluating us and our business should carefully consider the following
risk factors for our company as a whole. These risks may impair our results of
operations and business prospects. The risks set forth below and elsewhere in
this annual report on Form 10-K could cause actual results to differ materially
from those that we project.
We depend on original equipment manufacturers, whose businesses are cyclical.
Our sales to OEMs accounted for approximately half of our net sales for
the year ended December 31, 1999. As a result, a significant portion of our
sales are related to the overall level of domestic and foreign vehicle
production. New vehicle sales and production are cyclical and can be affected by
the strength of the economy generally or in specific regions, by prevailing
interest rates and other factors. In addition, strikes, lock-outs, work
stoppages or other production interruptions in the vehicle or material handling
industries may adversely affect the demand for our products. A decline in the
demand for or production of new vehicles, particularly in North America could
materially adversely affect our results of operations. In addition, we are under
increasing pressure from our major OEM customers to reduce product costs. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
We have risks because of our foreign operations.
We currently conduct business in the United States, the United Kingdom,
South Africa and Argentina, have partial interests in companies in India and
Korea, and have a licensee in China. (The partial interest in the Korean company
is considered part of our discontinued operations.) Approximately 55% of our net
sales in 1999 were to customers outside of North America. We intend to expand
our international presence. Adverse results from our foreign operations could
adversely affect our results of operations. The success of our international
operations will depend on numerous factors, many of which are beyond our
control, including economic and political conditions in the countries in which
we operate. In particular, Argentina and South Africa have historically been
less economically and politically stable than the United States and the United
Kingdom. International operations may also increase our exposure to certain
risks inherent in doing business outside the United States, including slower
payments cycles, unexpected changes in regulatory requirements, potentially
adverse tax consequences, restrictions on the repatriation of profits and assets
and compliance with foreign laws and standards.
In addition, most of our employees outside of the United States are
represented by labor unions. We cannot assure you that a strike or work stoppage
will not occur or that actions taken by us will not adversely affect our
relations with our unionized employees.
We have risks related to currency fluctuations.
Due to our operations outside of the United States we experience foreign
currency exchange gains and losses. Fluctuations between the United States
dollar and other currencies may adversely affect our results of operations.
While we may engage in foreign currency hedging transactions which may moderate
the overall effect of such currency exchange rate fluctuations, we expect that
we will be affected by such fluctuations, and we cannot assure you that we will
be successful in any hedging activities. We also cannot assure you that such
exchange rate fluctuations will not cause significant fluctuations in quarterly
results of operations. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We face substantial competition.
We operate in highly competitive markets. While no single company competes
with us in all of
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our product lines, we face significant competition in each of our product lines.
Many of our competitors are significantly larger and have substantially greater
financial and other resources and we cannot assure you that our products will
continue to compete successfully.
We may have exposure under our warranties.
We warrant to our customers that our products are defect-free and meet
certain specifications. These customers in turn often offer warranties to their
customers on the products they sell, including products of our OEM customers
which include our products as component parts. As a result, we receive claims
and requests for payment from our customers to remedy complaints made by the
ultimate consumers. Beginning in the fourth quarter of 1995, we began to
experience increased warranty claims due to a combination of reasons, including
increased sales, plant relocation activities and unexpected product failures. We
believe that the major factors contributing to these warranty claims have been
addressed. However, we cannot assure you that additional warranty claims or
requests for payment would not materially adversely affect our results of
operations. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We depend on our key personnel.
Our performance depends in part upon the continued service of our executive
officers, including P. Kim Packard, our chief executive officer. The loss of the
services of any of our key employees could materially adversely affect our
results of operations. We do not maintain a "key man" life insurance policy on
any of our executives or employees. Our future success also depends on the
ability to identify, hire, train, and retain other highly qualified technical
and managerial personnel. Competition for qualified personnel is intense, and we
cannot assure you that we will be able to attract or retain necessary personnel
in the future. Failure to attract and retain the necessary technical and
managerial personnel could materially adversely affect our results of
operations.
We face environmental risks.
Our operations and properties are subject to various environmental laws.
The nature of our operations exposes us to the risk that we will be liable for
environmental matters, including off-site disposal matters. We cannot assure you
that we will not incur material costs in connection with environmental
liabilities or that the indemnities provided by the sellers of the acquired
businesses will be applicable or available.
We believe that we comply with all relevant environmental laws and that we
have properly recorded the costs related to any known environmental claims
related to our properties. Based upon our experience to date, we believe that
the future cost of compliance with existing environmental laws (or liability for
known environmental claims) will not materially adversely affect our results of
operations. However, future events may give rise to additional compliance costs
or liabilities that could have a materially adverse affect on our results of
operations. We may be required in the future to spend material amounts to comply
with more stringent laws, as well as more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws.
We are highly leveraged and have significant debts which we may be unable to
pay.
We have a significant amount of debt. As a result, we are highly leveraged
and have significant interest expense. In addition, subject to the restrictions
contained in the Indenture governing our senior notes and in our bank credit
facilities, we may incur additional debt from time to time to pay for
acquisitions or capital expenditures or for other purposes. As of December 31,
1999, we had $151.1 million of consolidated indebtedness outstanding and our
stockholders' deficit was approximately $16.3 million.
Our ability to make scheduled payments of principal or interest on, or to
refinance, our debt will
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depend on future operating performance and cash flow. Our operating performance
and cash flow are subject to prevailing economic conditions, prevailing interest
rate levels and financial, competitive, business and other factors which may be
beyond our control. The degree to which we are leveraged could have important
consequences to holders of our senior notes, including, but not limited to,
those discussed below under "-Our debt agreements have restrictive covenants and
limitations" and:
. our ability to obtain additional financing may be impaired;
. a substantial portion of our cash flow from operations must be dedicated
to paying interest on our debt which reduces funds available to us for
other purposes;
. we are substantially more leveraged than certain of our competitors which
may place us at a competitive disadvantage;
. we may be hindered in our ability to adjust rapidly to changing market
conditions;
. our substantial degree of leverage may affect certain suppliers'
willingness to give us favorable payment terms; and
. our substantial leverage could make us more vulnerable in the event of
an economic downturn.
We cannot assure you that our future cash flow will be sufficient to meet
our obligations and commitments. If we cannot generate sufficient cash flow from
operations to service our debt and to meet our other obligations and
commitments, we might be required to refinance our debt or to sell assets to
obtain the funds we need. We cannot assure you that refinancing or asset sales
could be completed on a timely basis or on satisfactory terms, if at all, or
would be permitted by the terms of our credit facilities or the Indenture. In
the event that we are unable to refinance our credit facilities or raise funds
through asset sales, sales of equity securities or otherwise, our ability to pay
principal of, and interest on, our senior notes would be adversely affected.
Our debt agreements have restrictive covenants and limitations.
Our credit facilities in the United States and United Kingdom include
certain negative covenants and restrictions on our actions including, without
limitation, restrictions on:
. making investments, loans and advances and paying of dividends and other
restricted payments;
. incurring additional debt;
. granting most liens;
. entering into mergers, consolidations and sales of all or a substantial
part of our business or property;
. selling receivables or repaying other debt; and
. guaranteeing certain obligations.
Our credit facilities also require us to meet certain financial covenants,
including maintaining capitalization levels, capitalization ratios, minimum
fixed charge coverage ratios and funded debt ratios. All of these restrictive
covenants may restrict our ability to expand or to pursue our business
strategies. Breaching any of these covenants could result in a default under our
credit facilities, in which case, debt under our credit facilities could be
declared due and payable. If we were unable to
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repay borrowings, the lender could proceed against the collateral granted to it
to secure that debt. This collateral includes liens on our inventory, accounts
receivable and general intangibles.
In addition, our United States credit facility contains certain events of
default which are substantially similar to the events of default under the
Indenture, except that:
. our failure to pay other debt or judgments entered against us will
trigger a default at lower dollar amounts than in the Indenture;
. the failure of any security interest in collateral securing our United
States credit facility will trigger a default;
. a change of control (as defined in the Indenture) that triggers our
repurchase obligations under the Indenture will trigger a default;
. our United States credit facility prohibits the optional redemption of
our senior notes in certain circumstances; and
. our United States credit facility generally has shorter grace periods
and lower default thresholds than the Indenture.
If the debt under our United States credit facility were to be accelerated,
we cannot assure you that we would have sufficient assets to repay all of our
debt, including our senior notes.
We may not be able to repurchase our senior notes upon a change of control.
Upon the occurrence of a change of control (as defined in the Indenture),
each holder of our senior notes may require us to purchase its senior notes at
101% of their principal amount, plus accrued and unpaid interest, if any, to the
date of repurchase. However, our United States credit facility prohibits us from
purchasing our senior notes in the event of a change of control, unless and
until all of the debt under our United States credit facility is repaid. If we
did not purchase our senior notes we would default under the Indenture and our
United States credit facility. This would permit the trustee under the
Indenture, the holders of at least 25% in principal amount of the outstanding
senior notes or the lender under our United States credit facility to declare
the principal and accrued but unpaid interest to be due and payable. Our
inability to repay the debt under our United States credit facility, if
accelerated, would also constitute an event of default under the Indenture,
which could cause an acceleration of the debt under the Indenture. In the event
of a change of control, we cannot assure you that we would have either the
ability to refinance our United States credit facility or sufficient assets to
repay our United States credit facility and our senior notes.
We are controlled by Genstar Capital Corporation.
As of December 31, 1999, Genstar Capital Corporation owned approximately
91.3% (83.2% on a fully-diluted basis) of our common stock. Consequently,
Genstar has the ability to control our business and affairs by virtue of its
ability to elect a majority of our board of directors and its voting power with
respect to actions requiring stockholder approval. See Item 12. "Security
Ownership of Certain Beneficial Owners and Management."
Item 2. Properties
Our corporate headquarters are located at 2100 Commonwealth Boulevard, Ann
Arbor, Michigan 48105, which we lease. The phone number at that location is
(734) 913-6600. The
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<PAGE>
following table sets forth certain information regarding the major facilities we
operated as of December 31, 1999:
<TABLE>
<CAPTION>
Square Owned/Leased (Lease
Location Use Feet expiriation date)
-------- --- ---- -----------------
<S> <C> <C> <C>
Ann Arbor, MI Headquarters 11,000 Leased (Dec. 2003)
Ann Arbor, MI Technology Center 4,500 Leased (Dec. 2003)
Arcade, NY Manufacturing 342,800 Owned
Decatur, AL Manufacturing 258,000 Owned
Wagoner, OK Manufacturing 50,000 Leased (Apr. 2004)
Troy, OH Manufacturing 160,000 Leased (Oct. 2006)
Florence, KY Warehouse 108,800 Leased (June 2000)
Garfield, NJ Manufacturing 42,000 Leased (month to month)
Leyland, U.K. Manufacturing 250,000 Owned
Cardiff, U.K. Manufacturing 15,000 Owned
Acton, U.K. Manufacturing 368,000 Owned
Johannesburg, South Africa Manufacturing 118,400 Owned
Buenos Aires, Argentina Manufacturing 159,000 Owned
San Lorenzo, Argentina Manufacturing 76,676 Owned
San Luis, Argentina Manufacturing 30,800 Owned
</TABLE>
The facility in Troy, Ohio produces battery chargers. The facility in
Wagoner, Oklahoma produces direct current motors. These two locations are part
of the businesses that we are treating as "discontinued operations." In Decatur,
Alabama and Leyland, England, we manufacture direct current motors and other
products. The operations at those two locations which manufacture direct current
motors are also treated as part of "discontinued operations."
We believe that we comply with all relevant environmental regulations
related to our properties.
Item 3. Legal Proceedings
From time to time we are involved in various litigation matters arising in
the ordinary course of our business. Management believes that none of the
matters in which we are currently involved, either individually or in the
aggregate, will be material to our future financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Market Information
There is no established public trading market for our common stock.
As of March 29, 2000, there were 1,993,000 shares of our common stock
outstanding, held by nine holders. As of March 29, 2000, there were employee
held options outstanding to purchase up to an additional 314,840 shares of our
common stock.
Dividends
From time to time we may pay dividends from funds that are legally
available to pay dividends. Our ability to declare and pay dividends on our
common stock is restricted by certain covenants in the Indenture. We intend to
retain all of our earnings to finance the development and growth of our
business. Accordingly, we do not anticipate that any dividends will be declared
on our common stock for the foreseeable future. Future payments of cash
dividends, if any, will depend on the financial condition, results of
operations, business conditions, capital requirements, restrictions contained in
agreements, future prospects and other factors deemed relevant by our board of
directors.
Item 6. Selected Financial Data
The following table sets forth our selected consolidated historical
financial data as of and for the periods indicated. The statements of operations
data for each of the fiscal years in the three-year period ended December 31,
1999 and the balance sheet data as of December 31, 1998 and 1999 have been
derived from our audited financial statements included elsewhere in this annual
report on Form 10-K, and are restated to account for the discontinuance of
businesses, as discussed above and in Note 2 to our audited financial
statements. The statements of operations data for each of the fiscal years in
the two year period ended December 31, 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 have been derived from our audited financial
statements not included in this annual report on Form 10-K, restated to account
for the discontinuance of businesses, as discussed above. The information in the
table should be read in conjunction with Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our Consolidated
Financial Statements, including the notes thereto, included elsewhere in this
annual report on Form 10-K.
12
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands, except ratios, share and per share amounts)
(restated)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 109,760 $ 114,204 $ 125,585 $ 237,090 $ 213,982
Cost of goods sold 87,900 92,806 100,831 188,659 172,064
Selling, general and administrative expenses 17,122 17,049 17,817 32,271 31,134
Costs associated with option repurchase - - - 2,101 2
Restructuring charge 3,100 56 - 711 450
---------- ----------- ---------- ---------- ----------
Operating income 1,638 4,293 6,937 13,348 10,332
Other expense (income) (a) 234 158 294 (82) (1,003)
Interest expense 4,282 5,313 5,384 13,494 15,816
---------- ----------- ---------- ---------- -----------
Income (loss) from continuing operations
before income taxes and extraordinary items $ (2,878) $ (1,178) $ 1,259 $ (64) $ (4,481)
Provision for income taxes 188 (3,299) 950 685 293
---------- ----------- ---------- ---------- ----------
Income (loss) from continuing operations
before extraordinary items $ (3,066) $ 2,121 $ 309 $ (749) $ (4,774)
========== =========== ========== ========== ==========
Net earnings per common share from continuing
operations before extraordinary items (b):
Basic $ (0.88) $ 0.61 $ 0.09 $ (0.36) $ (2.40)
Diluted $ (0.88) $ 0.60 $ 0.09 $ (0.36) $ (2.40)
Shares used in computing earnings per share (b):
Basic 3,466,740 3,454,740 3,446,740 2,111,812 1,993,000
Diluted 3,466,740 3,553,800 3,628,020 2,231,273 1,993,000
Balance Sheet Data (at end of period):
Working Capital (excluding debt) $ 16,240 $ 17,275 $ 19,694 $ 44,057 $ 54,160
Total assets 72,473 93,604 88,685 183,773 182,056
Total debt 40,451 46,514 42,930 140,752 151,126
Stockholders' equity (deficit) 13,273 18,018 18,943 (8,918) (16,292)
Other Data:
EBITDA (c): $ 8,612 $ 8,508 $ 10,607 $ 26,209 $ 22,276
Cash flow from operating activities: 1,447 2,560 5,477 (2,009) (317)
Cash flow from investing activities: (3,777) (8,392) 3,755 (55,274) (11,637)
Cash flow from financing activities: 3,789 8,032 (9,582) 57,557 10,418
Ratio of earnings to fixed charges (d): - 1.3x 1.8x 1.2x -
</TABLE>
13
<PAGE>
(a) Other expense (income) in 1999 consists primarily of pension expense for
inactive United States defined benefit pension plans, gains on the sale of fixed
assets, interest income, foreign currency exchange losses, royalty expenses, and
South Africa trademark expense. Other expense (income) in 1998 consists
primarily of pension expense for inactive United States defined benefit pension
plans, gains on the sale of fixed assets, interest income, and in all other
years consists primarily of operating costs of idle facilities.
(b) Earnings per common share and shares used in the computation reflect the
20-for-1 stock split effective March 25, 1998.
(c) EBITDA for any period is calculated as the sum of income (loss) from
continuing operations plus the following to the extent deducted in
calculating such net income:
. minority interest;
. interest expense;
. income tax expense;
. depreciation expense;
. amortization expense; and
. extraordinary items and restructuring charges and in 1998 charges
associated with the repurchase of stock options.
We consider EBITDA to be a widely accepted financial indicator of a
company's ability to service debt, fund capital expenditures and expand its
business; however, EBITDA is not calculated the same by all companies and is
not a measurement required by generally accepted accounting principles.
EBITDA should not be considered by an investor as an alternative to net
income, as an indicator of our operating performance or as an alternative to
cash flow (as defined in accordance with generally accepted accounting
principles) as a measure of liquidity.
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
include income before income taxes, discontinued operations and
extraordinary items plus fixed charges. Fixed charges consist of interest
expense and 33% of rental expense (deemed by management to be representative
of the interest factor of rental payments). Earnings were insufficient to
cover fixed charges in 1995 by approximately $1.6 million and in 1999 by
approximately $3.6 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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
14
<PAGE>
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 3 to the financial statements.
We financed the Lucas acquisition 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. We also used proceeds from the offering of our senior notes 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.
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. In January 1999, we acquired a remanufacturing business
that continues to operate in Garfield, NJ. We purchased this business for $2.9
million, financed through our U.S. revolving line of credit.
The Electric Vehicle Systems Division produces motors (including starter
motors, material handling motors, and pump and winch motors), switches
(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. We sell these products into
many of the same markets as the products of our Heavy Duty Systems Division. In
addition, the products of our Electric Vehicle 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. In the fourth quarter of 1999, we
decided to sell the battery charger and direct current motor lines of business
that are part of this division. The remaining portion of this business
manufactures and sells switches, and with the completion of the sale of the
discontinued businesses, this division will be renamed to the Switch Division.
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
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Sales from continuing operations were $214.0 million in 1999, a decrease
of $23.1 million, or 9.7%, from $237.1 million in 1998. These results exclude
the sales of the battery charger and direct current motor businesses of $45.2
million in 1999 and $45.7 million in 1998 due to the announced decision to sell
these lines of business. The decrease in sales is mostly attributable to the
Automotive Division, where Argentina sales declined $18.7 million, or 33.4%, and
South Africa sales declined $0.5 million, or 4.4%. Also contributing to the
sales decline was the Heavy Duty Systems decline of $2.1 million, or 1.5%. The
Heavy Duty Systems decline was due to a $9.5 million, or 15.5%, decline
15
<PAGE>
in the U.K. and a decline in U.S. defense sales of $0.5 million, or 11.1%. These
declines were partly offset by $5.1 million of sales at the Roberts
Remanufacturing facility and by the other U.S. Heavy Duty sales increase of $2.9
million or 4.1%. The remaining Electric Vehicle Systems business, which
manufactures and sells switches, reported a sales decline of $1.9 million, or
5.8%, with this decline attributable to the U.S. defense sales decline of $2.6
million, or 31.1%, offset by small increases in U.K. sales of $0.2 million, or
4.15%, and in other U.S. sales of $0.8 million, or 4.8%.
Gross profit was $41.9 million in 1999, or 19.6% of sales. This compares to
gross profit of $48.4 million, or 20.4% of sales, in 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 was offset by declining volume 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 $31.1 million, or 14.6% of
sales in 1999, a decrease of $1.1 million, or 3.5%, from $32.3 million, or 13.6%
of sales, in 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.
In 1999, we recorded a $2,000 charge to reflect the repurchase of options
to purchase our stock from management. 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 recorded a charge in
1999 of $0.5 million to cover severance payments related to restructuring in
Argentina and in the Corporate Tech Center in Ann Arbor, Michigan. In 1998, we
recorded a charge of $0.7 million to cover severance payments related to
restructuring activities at our facilities in Leyland, England and Decatur,
Alabama.
Operating income in 1999 was $10.3 million, or 4.8% of sales, a decrease of
$3.0 million, or 22.6%, from the $13.3 million, or 5.6% of sales in 1998. This
was due to the factors discussed above.
Other income was $1.0 million in 1999 versus $82,000 in 1998. This
consists of South Africa export rebate income, gain on the sale 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 $15.8 million in 1999, an increase of $2.3 million,
or 17.2%, compared to $13.5 million in 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 1998.
The provision for income taxes was $293,000 on the $4.5 million loss from
continuing operations before taxes and extraordinary items for 1999. This
compares to a provision for income taxes of $685,000 for 1998 on the $64,000
loss from continuing operations before taxes and the extraordinary item.
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.
16
<PAGE>
Discontinued Businesses - 1999 compared to 1998
In the second half of 1999, we decided to sell our direct current motor
business and battery charger businesses. Because we have decided to sell these
businesses, we treat them as "discontinued operations" in the financial
statements. Consequently, they are not included in the discussion above and the
sales of these businesses are not included in the $214 million of consolidated
sales shown in our financial statements.
Sales from discontinued operations were $45.2 million in 1999, a decrease
of $0.5 million, or 1.1%, from the 1998 sales of $45.7 million. Gross profit in
1999 was $8.2 million, a decrease of $1.6 million from the 1998 gross profit of
$9.8 million. Gross profit as a percent of sales declined from 21.5% in 1998 to
18.0% in 1999. Various factors, including decreased sales volume and lower
margin products, contributed to this decline.
Selling, general and administrative expense was $6.6 million, an increase
of $0.2 million, or 2.8%, from the 1998 selling, general and administrative
expense of $6.4 million. A major factor in the increase in selling, general and
administrative expense was the minimum royalty of $500,000 paid to DAX.
Operating income in 1999 was $1.6 million, a decrease of $1.8 million, or
52.9%, from the 1998 operating income of $3.4 million. This has resulted in
operating income as a percent of sales decreasing to 3.6% in 1999 as compared to
7.5% in 1998. The decline in operating income is due to the factors discussed
above.
Discontinued operations produced income before taxes of $1.3 million in 1999 and
$3.4 million in 1998. Income on an after-tax basis, and after recording the 1999
estimated loss on the disposal of these operations of $2.3 million ($3.5 million
on a pre-tax basis), is reported as income from discontinued operations in our
financial statements of $883,000 and $2,254,000 for 1999 and 1998, respectively.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales from continuing operations were $237.1 million in 1998, an increase
of $111.5 million, or 88.8%, from $125.6 million in 1997. The Lucas acquisition
was responsible for the increase in sales. These results exclude the sales of
the battery charger and direct current motor businesses of $45.7 million in 1998
and $46.1 million in 1997. Compared to pro forma results for 1997 to include the
Lucas acquisition, sales decreased $17.1 million, or 6.7%. From pro forma 1997
levels, 1998 sales in the Automotive Systems Division declined $13.3 million, or
16.2%. Both Argentina and South Africa declines in sales contributed to the
divisional decline. Also contributing to the pro forma decline in sales were
both the Heavy Duty Systems Division, with pro forma decline of $1.4 million, or
1.0%, and the Electric Vehicle Systems Division, with pro forma decline of $2.3
million, or 6.7%. United States defense sales were mostly responsible for the
Heavy Duty Systems and Electric Vehicle Systems Divisions declines.
Gross profit was $48.4 million in 1998, an increase of $23.7 million, or
95.6%, from $24.7 million in 1997. Compared to pro forma results to include the
Lucas acquisition, gross profit increased $4.0 million, or 8.1%, from $44.5
million. Cost cutting measures in the United Kingdom and Argentina were
primarily responsible for the pro forma improvement in gross profit. Lower
material cost, improved labor productivity in the United States, and favorable
product mix also contributed to the improvement in gross profit percentages.
Selling, general, and administrative expense was $32.3 million in 1998, an
increase of $14.5 million, or 81.1%, from $17.8 million in 1997. This increase
is due to the Lucas acquisition. Compared to pro forma results for 1997 to
include the Lucas acquisition, these expenses decreased $3.4 million, or 10.4%,
from $35.6 million. The reduction in selling, general and administrative
17
<PAGE>
expense as compared to the 1997 pro forma results reflects the benefit on
integrating the businesses acquired in the Lucas acquisition.
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 charge in 1998 of $0.7 million to cover
severance payments related to restructuring activities at our facilities in
Leyland, England and Decatur, Alabama.
Operating income in 1998 was $13.3 million, an increase of $6.4 million, or
92.4%, from $6.9 million in 1997 due to the factors discussed above. Operating
income as a percentage of sales was 5.6% in 1998, compared to 5.5% in 1997. On a
pro forma basis to include the Lucas acquisition, 1997 operating income was $7.2
million, or 2.8% of sales.
Other income was $82,000 in 1998, versus other expense in 1997 of $294,000,
and other income in 1997 of $354,000 on a pro forma basis. These items in 1998
primarily consisted of pension expense for inactive United States defined
benefit pension plans, gains on the sales of fixed assets, interest income, and
in 1997 primarily of operating costs of idle facilities.
Interest expense was $13.5 million in 1998, an increase of $8.1 million,
or 150.0%, from $5.4 million in 1997. This increase is due to the incurrence of
additional debt in connection with the Lucas acquisition and the repurchase of
shares, options and warrants in the first quarter of 1998.
The provision for income taxes was $685,000 in 1998 compared to $950,000
in 1997. The decrease in income taxes largely resulted from a decrease in income
from continuing operations, before income taxes, offset by an increase in
effective tax rates, due primarily to higher effective tax rates in the foreign
jurisdictions in which we operate.
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.
Discontinued Businesses - 1998 compared to 1997
Sales from discontinued operations were $45.7 million in 1998, a decrease
of $404,000, or 0.8%, from the 1997 sales of $46.1 million. Gross profit in 1998
was $9.8 million, an increase of $655,000 from the 1997 gross profit of $9.2
million. Gross profit as a percent of sales rose from 19.9% in 1997 to 21.5% in
1998. Various factors, including lower material costs, improved labor
productivity, and favorable product mix contributed to this improvement.
Selling, general and administrative expense was $6.4 million in 1998, an
increase of $1.0 million, or 18.7%, from the 1997 selling, general and
administrative expense of $5.4 million. A major factor in the increase in
selling, general and administrative expense was the minimum royalty paid to DAX.
Operating income in 1998 was $3.4 million, a decrease of $0.4 million, or
9.3%, from the 1997 operating income of $3.8 million. Operating income as a
percent of sales decreased to 7.5% in 1998 as compared to 8.2% in 1997. The
decline in operating income is due to the factors discussed above.
Discontinued operations produced income before taxes of $3.4 million in 1998 and
$3.9 million in 1997. Income on an after-tax basis is reported as income from
discontinued operations in our financial statements of $2,254,000 and $2,314,000
for 1998 and 1997, respectively.
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<PAGE>
Liquidity and Capital Resources
Cash used by operating activities in 1999 was $319,000. Capital spending,
net of discontinued businesses, was $7.5 million, a $1.9 million reduction from
1998 capital spending of $9.4 million. Capital spending in the U.S. was $3.6
million in 1999 compared to $4.1 million in 1998, a $0.5 million reduction.
Capital spending in the U.K. was $1.6 million in 1999 compared to $3.1 million
in 1998, a reduction of $1.5 million. Capital spending in Argentina and South
Africa was $1.9 million and $0.4 million, respectively, in 1999. These compare
to 1998 capital spending of $1.5 million in Argentina and $0.7 million in South
Africa. Argentina's increase of $0.4 million included approximately $1.0 million
to address Year 2000 issues. Capital expenditures for 2000 are expected to be
approximately $6.9 million. Planned expenditures include expenditures to enable
us to manufacture new product designs and replace existing equipment.
In connection with the acquisition of our Argentina operations from Lucas
in January 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 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 2000.
Aggregate payments in 1999 totaled $0.1 million and in 1998 $1.1 million for
receivables collected. These contingent payments are expected to be paid from
the collection of the receivables or from such earnings.
Debt, net of cash, increased from $139.9 million at December 31, 1998 to
$150.7 million at December 31, 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 $10.2 million and $3.9 million were
available based on the December 31, 1999 levels of receivables (United States
and United Kingdom) and inventory (United States only) which are pledged to
support that debt. In Argentina and South Africa, we have arrangements with
several banks permitting discounting or borrowing against receivables. Total net
additional credit available in Argentina and South Africa as of December 31,
1999 was $1.4 million. The Company was in violation of certain covenants to the
credit agreements during 1999 and at December 31, 1999, which were cured as a
result of amending the credit agreement.
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, bank borrowings, and the sale of our direct current motor and
battery charger businesses. We believe that cash flows from operations, our
existing cash balances and amounts available under the various revolving credit
facilities will provide adequate funds for on going operations, planned capital
expenditures, investments, and debt service for at lease 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
We completed our Year 2000 assessments of our information technology and
embedded systems. These efforts consisted 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 were complete as of October 2, 1999. In Argentina, a Year
2000 compliant system was 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
reviewed our product base, and our products were not affected by
19
<PAGE>
Year 2000 issues. We communicated with our principal vendors and service
providers to assess the Year 2000 readiness of their products and services. Our
contingency planning for Year 2000 issues related to these vendors consisted
primarily of securing backup vendors (which had been identified for key
purchased products) and the possibility of stockpiling raw materials
In connection with the overall computer enhancement program, including Year
2000 compliance, we incurred aggregate internal and third party costs of
approximately $3.0 million by December 31, 1999. This amount 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.
Our ability to produce or ship our products, process transactions or
otherwise conduct business in any of our markets were not affected by any date-
related issues. We believe that the estimated cost of becoming Year 2000
compliant was not significant to our results of operations.
Net Operating Losses
At December 31, 1999 we had net operating loss carryforwards for United
States tax reporting purposes of approximately $17.4 million, and approximately
$574,000 of alternative minimum tax benefit and $454,000 of foreign tax credit
carryforwards. These U. S. net operating losses expire beginning in 2006.
Inflation
We believe that the relatively moderate inflation over the last few years
has not has a significant impact on our revenues or profitability and that we
have been able to offset the effects of inflation by increasing prices or by
realizing improvements in operating efficiency.
Item 8. Financial Statements and Supplementary Data
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Prestolite Electric Holding, Inc.
In our opinion, the consolidated financial statements listed in the index,
appearing under Item 14(a) on page 58, present fairly, in all material respects,
the financial position of Prestolite Electric Holding, Inc. and its subsidiaries
at December 31, 1999 and 1998, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31,1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedule
listed in the index, appearing under item 14(a) on page 58, presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits. We conducted our audits of these consolidated financial statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 18, 2000
Detroit, Michigan
21
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Consolidated Balance Sheet
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 432 $ 896
Accounts receivable, net of allowance for doubtful accounts of
$2,369 and $2,933 as of December 31, 1999 and 1998, respectively 37,807 43,883
Inventories, net 49,642 43,861
Deferred tax asset 6,429 2,134
Prepaid and other current assets 3,088 2,132
---------- ----------
Total current assets 97,398 92,906
Property, plant and equipment:
Land, building and improvements 28,686 28,049
Machinery and equipment 49,206 44,792
Construction in progress 3,716 2,556
----------- ----------
81,608 75,397
Less accumulated depreciation (33,738) (25,934)
---------- ----------
47,870 49,463
Deferred tax asset - 1,002
Investments 3,152 2,589
Intangible assets 10,908 10,485
Long-term receivables and pension assets 4,706 5,220
Net assets of discontinued operations 18,022 22,108
---------- ----------
Total assets $182,056 $183,773
========== ==========
LIABILITIES
Current Liabilities:
Revolving credit $ 19,214 $ 6,907
Current portion of long-term debt 666 429
Accounts payable 24,162 22,908
Accrued liabilities 19,076 25,941
---------- ----------
Total current liabilities 63,118 56,185
Long-term debt 131,246 133,416
Other non-current liabilities 1,845 3,090
Deferred tax liabilities 2,139 -
---------- ----------
Total liabilities 198,348 192,691
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01, 5,000,000 shares
authorized, 1,993,000 shares issued and outstanding
at December 31, 1999 and December 31, 1998, respectively 2 2
Paid-in capital 16,623 16,623
Accumulated deficit (6,595) (404)
Notes receivable, employees' stock purchase, 7.74% due 2002 (513) (559)
Foreign currency translation adjustment
Treasury stock, 1,310,000 shares at December 31, 1999 and (1,360) (131)
December 31, 1998, respectively (24,449) (24,449)
---------- ----------
Total stockholders' equity (deficit) (16,292) (8,918)
---------- ----------
Total liabilities and stockholders' equity (deficit) $182,056 $183,773
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands except share amounts)
<TABLE>
<CAPTION>
For the year ended
--------------------------------------------------------
December 31, December 31, December 31,
1999 1998 1997
------------- ---------- -----------
<S> <C> <C> <C>
Net sales $ 213,982 $ 237,090 $ 125,585
Cost of goods sold 172,064 188,659 100,831
----------- ---------- ----------
Gross profit 41,918 48,431 24,754
Selling, general and administrative 31,134 32,271 17,817
Costs associated with option repurchase 2 2,101 -
Restructuring charge 450 711 -
----------- ---------- ----------
Operating income 10,332 13,348 6,937
Interest expense 15,816 13,494 5,384
Other expense (income) (1,003) (82) 294
----------- ---------- ----------
Income (loss) from continuing operations
before extraordinary item and income taxes (4,481) (64) 1,259
Provision for income taxes 293 685 950
----------- ---------- ----------
Income (loss) from continuing operations
before extraordinary item (4,774) (749) 309
Income from discontinued operations, net of taxes 883 2,254 2,341
Estimated loss on disposal of discontinued
operations, net of taxes (2,300) (1,500)
Extraordinary item - loss on debt refinancing, net of
taxes of $716 - (1,275) -
----------- ---------- ----------
Net income (loss) $ (6,191) $ 230 $ 1,150
=========== ========== ==========
Basic earnings per common share
Income (loss) from continuing operations $ (2.40) $ (0.36) $ 0.09
Income from discontinued operations, including
estimated loss on disposal (0.71) 1.08 0.24
Extraordinary item - (0.61) -
----------- ---------- ----------
Net income (loss) $ (3.11) $ 0.11 $ 0.33
=========== ========== ==========
Diluted earnings per common share
Income (loss) from continuing operations $ (2.40) $ (0.36) $ 0.09
Income from discontinued operations, including
estimated loss on disposal (0.71) 1.08 0.23
Extraordinay item - (0.61) -
----------- ---------- ----------
Net income (loss) $ (3.11) $ 0.11 $ 0.32
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Retained Notes Foreign
Shares Earnings/ receivable/ currency
------------------------
Common Treasury Common Paid-in Stock (Accumulated employee translation
stock stock stock capital warrants deficit) stock adjustment
------------ --------- ------- -------- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 3,303,000 24,000 $ 2 $ 16,623 $ 1,073 $ 382 $ (396) $ 550
Net income 1,150
Translation adjustment (171)
Comprehensive income
Transfer to stock warrants 2,166 (2,166)
Common stock repurchased and other - 8,000 50
------------ --------- ------- -------- ------- ------- ------ -------
Balance, December 31, 1997 3,303,000 32,000 2 16,623 3,239 (634) (346) 379
Net income 230
Translation adjustment (510)
Comprehensive loss
Purchase of stock warrants (3,239)
Common stock sold - (16,000) (251)
Common stock repurchased and other - 1,294,000 38
------------ --------- ------- -------- ------- ------- ------ -------
Balance, December 31, 1998 3,303,000 1,310,000 2 16,623 - (404) (559) 131)
Net loss (6,191)
Translation adjustment (1,229)
Comprehensive loss
Common stock repurchased and other
- - 46
------------ --------- ------- -------- ------- ------- ------ ------
Balance, December 31, 1999 3,303,000 1,310,000 $ 2 $ 16,623 $ - $(6,595) $ (513) $(1,360)
------------ --------- ------- -------- ------- ------- ------ -------
<CAPTION>
Treasury Comprehensive
stock Total Income
------------ -------- -------------
<S> <C> <C> <C>
Balance, January 1, 1997 $ (216) $ 18,018
Net income 1,150 $ 1,150
Translation adjustment (171) (171)
--------
Comprehensive income - $ 979
========
Transfer to stock warrants -
(104) (54)
Common stock repurchased and other --------- --------
Balance, December 31, 1997 (120) 18,943
Net income 230 $ 230
Translation adjustment (510) (510)
--------
Comprehensive loss - $ (280)
========
Purchase of stock warrants (3,239)
Common stock sold 251 -
Common stock repurchased and other (24,380) (24,342)
--------- --------
Balance, December 31, 1998 (24,449) (8,118)
Net loss (6,191) $ (6,191)
Translation adjustment (1,229) (1,229)
--------
Comprehensive loss - $ (7,420)
Common stock repurchased and other 46 ========
--------- --------
Balance, December 31, 1999 $ (24,449) $(16,292)
--------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (6,191) $ 230 $ 1,150
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Loss on debt refinancing - 1,991 -
Option repurchase 2 2,101 -
Estimated loss on sale of discontinued operations 3,561 - 2,500
Cash provided by discontinued operations 444 1,346 (1,240)
Write-down and loss on property, plant and equipment held for disposal - - 277
Deferred gain on sale and leaseback (233) (233) (233)
Depreciation 8,870 8,830 3,718
Amortization 1,619 1,137 246
Loss on sale of property, plant, and equipment 15 112 148
Deferred taxes (1,154) (1,464) 171
Changes in operating assets and liabilities:
Accounts receivable 5,109 (5,777) (2,117)
Inventories (5,158) (2,319) (960)
Prepaid and other current assets (594) 1,864 (224)
Accounts payable 1,420 (4,550) (411)
Accrued liabilities (8,027) (5,277) 2,452
-------- --------- --------
Net cash provided by (used in) operating activities (317) (2,009) 5,477
Cash Flows from Investing Activities:
Capital expenditures (7,451) (9,365) (3,866)
Proceeds from disposal of property, plant and equipment 122 21 1,140
Proceeds from sale of discontinued operations and assets held for disposal - - 7,500
Acquisition of:
Roberts Remanufacturing (2,924) - -
Lucas businesses, net of cash acquired of $2,858 - (41,086) -
Acquisition costs of Lucas businesses - (1,543) (1,019)
Other - (668) -
Investment in affiliates (1,384) (2,633) -
-------- --------- --------
Net cash (used in) provided by investing activities (11,637) (55,274) 3,755
Cash Flows from Financing Activities:
Net increase in revolving line of credit 3,840 (7,663) 3,691
Payments on long-term debt (52) (22,824) (6,799)
Proceeds from borrowings 6,461 125,000 -
Costs related to new borrowings, including loss on refinancing of $1,991 - (7,416) -
Purchase of treasury stock, options and warrants, employee stock receivable 44 (29,358) (54)
Borrowings (payments) on capital leases 153 (200) (194)
Payments on acquisition payable to Hobart - - (6,150)
Other financing costs, net (28) 18 (76)
-------- --------- --------
Net cash provided by (used in) financing activities 10,418 57,557 (9,582)
Effect of exchange rate changes on cash 1,072 167 10
-------- --------- --------
Net increase (decrease) in cash (464) 441 (340)
Cash - beginning of period 896 455 795
-------- --------- --------
Cash - end of period $ 432 $ 896 $ 455
======== ========= ========
Supplemental cash slow information:
Interest paid $ 13,358 $ 9,010 $ 5,017
======== ========= ========
Taxes paid $ 1,328 $ 494 $ 619
======== ========= ========
Non-cash financing transactions:
Debt assumed on acquisition of Lucas businesses $ 3,227
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1: General Information
Prestolite Electric Holding, Inc. ("PEI" or the "Company"), a subsidiary of
Genstar Capital Corporation ("Genstar" or the "Parent") was formed in 1991 to
acquire substantially all of the assets and assume certain liabilities of
Prestolite Electric Incorporated and its wholly owned subsidiaries
("Prestolite"). PEI changed its name from "PEI Holdings, Inc." to "Prestolite
Electric Holding, Inc." on December 31, 1998. PEI includes the wholly owned
subsidiaries Prestolite Electric Incorporated and Prestolite Electric of
Michigan, Inc. Prestolite Electric Incorporated's wholly-owned subsidiaries
include Prestolite Electric Limited, a U.K. corporation, Prestolite electric
(Pty) Ltd., a South Africa corporation, and Prestolite Indiel Argentina S.A., an
Argentina corporation. Operations are generally conducted as Prestolite Electric
Incorporated. There are no material differences between the financial statements
of PEI and Prestolite. Separate financial statements of Prestolite have not been
presented because management has determined that they would not be material to
investors. Summary financial information of Prestolite is presented in Note 19.
The Company manufactures and distributes heavy duty alternators and starter
motors, direct current electric motors, battery chargers, and other electrical
components for aftermarket and original equipment applications in the heavy duty
vehicle, defense, material handling, marine, and other industries. Six
manufacturing facilities and one distribution warehouse are located in the
United States, three manufacturing facilities are located in the United Kingdom,
one manufacturing facility is located in South Africa, and three manufacturing
facilities are located in Argentina.
Note 2: Discontinued Operations
During 1999, the Company announced its intention to sell two business
segments, the direct current electric motor business ("DC motors") and the
battery charger business. In conjunction with that decision, the Company
recorded a charge of $2.3 million ($3,561,000 less a tax benefit of $1,261,000)
to recognize the expected loss on the sale of the net assets (including
estimated losses through the disposal date) of one of these business segments.
The Company has retained an investment banker to assist in the disposition of
these businesses and expects to complete the sales during 2000.
During 1997, the Company sold its welding equipment business segment unit
for $7.5 million plus a commitment from the buyer to subsequently purchase
certain inventory. In 1997, the Company recorded a $1.5 million loss on that
sale ($2.5 million less a $1.0 million tax benefit).
The DC motor, battery charger, and welding equipment businesses have been
treated as discontinued operations. Prior year financial statements, including
1998 diluted earnings per share, have been restated to reflect these businesses
as discontinued operations.
26
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Summary financial information related to those businesses is presented
below (in thousands).
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales
DC Motors $ 27,442 $ 27,621 $ 29,398
Battery Chargers 17,778 18,090 16,717
Welding Equipment - - 15,199
-------------- -------------- --------------
Total $ 45,220 $ 45,711 $ 61,314
============== ============== ==============
Operating and other income (loss)
DC Motors $ (1,308) $ 399 $ 1,766
Battery Chargers 2,647 3,015 2,101
Welding Equipment - - (289)
-------------- -------------- --------------
Total $ 1,339 $ 3,414 $ 3,578
Provision for income taxes 456 1,160 1,237
-------------- -------------- --------------
Income from discontinued operations $ 883 $ 2,254 $ 2,341
============== ============== ==============
Depreciation and amortization (included in determining operating income
above)
DC Motors $ 1,106 $ 1,018 $ 904
Battery Chargers 842 801 633
Welding Equipment - - 597
-------------- -------------- --------------
Total $ 1,948 $ 1,819 $ 2,134
============== ============== ==============
Net assets
DC Motors $ 15,217 $ 14,575
Battery Chargers 6,092 6,946
Welding Equipment 274 587
Writedown-loss on property, plant
and equipment held for disposal (3,561)
-------------- --------------
Total $ 18,022 $ 22,108
============== ==============
</TABLE>
The net assets of the DC Motors and Battery Charger segments at December
31, 1999 consist primarily of accounts receivable, inventory, fixed assets,
investments in unconsolidated affiliates and intangible assets net of certain
accounts payable and accrued liabilities related to these segments. The 1998 net
assets of the Welding Equipment business primarily consist of unsold inventory
and amounts due from the buyer, part of which was liquidated during 1999.
27
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 3: Acquisitions
On January 15, 1999, the Company 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. This acquisition was accounted for under the purchase method and
goodwill recorded for this acquisition was $1.1 million.
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 Businesses"). The
Lucas Businesses primarily manufacture alternators and starter motors for the
truck, bus and automotive markets in the United Kingdom, continental Europe,
South America and South Africa. The purchase price was as follows (in
thousands):
Fair value of assets acquired $ 86,052
Fair value of liabilities acquired (44,852)
Goodwill (excluding acquisition costs) 2,744
--------
Purchase price, including repayment of $3,393 of debt 43,944
Cash acquired (2,858)
--------
Purchase price, net of cash acquired 41,086
Assumption of Lucas Argentina debt 3,227
--------
$ 44,313
========
In addition, the Company purchased $1.4 million of inventory from Lucas
during 1998 and agreed to pay up to $4.1 million for certain accounts receivable
as they are collected ($187,000 and $1,074,000 collected in 1999 and 1998,
respectively, and $2.8 million due Lucas as of December 31, 1999). Prestolite
also agreed to pay Lucas up to $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. The operating target was not achieved in
1999 and no amounts have been recorded for any future additional payments, as
management believes that further payments are not probable. Any future payments
will be recorded as an adjustment to the purchase price.
28
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The 1998 consolidated statement of operations includes a full year of
operating results of the Lucas Businesses. Unaudited pro forma 1997 information
as if the Lucas Businesses had been acquired on January 1, 1997 follows (in
thousands):
(Unaudited)
Net sales 300,287
Loss from continuing operations before income taxes (1,198)
Net loss (2,357)
Loss per common share (basic and fully diluted the same) (1.19)
Note 4: Summary of Significant Accounting Policies:
a. Principles of Consolidation: The consolidated financial statements
include the accounts of PEI and all subsidiaries in which the Company
has financial and operating control. All intercompany accounts and
transactions were eliminated in consolidation.
b. Foreign Currency Translation: The assets and liabilities of foreign
subsidiaries have been translated into U.S. dollars at the rates of
exchange existing as of the balance sheet date. Revenues and expenses
have been translated at the average monthly exchange rates.
Translation adjustments are recorded as a separate component of
stockholders' equity.
c. Inventories: Inventories are stated at the lower of cost or market
with cost being established by the last-in, first-out ("LIFO") method
for substantially all inventory owned by domestic companies and by the
first-in, first-out ("FIFO") method for all inventories owned by
foreign subsidiaries and divisions. Approximately $34,469 and $30,976
of net inventories at December 31, 1999 and 1998, respectively, have
been valued based on FIFO cost.
d. Property, Plant and Equipment: Property, plant and equipment are
stated at cost. Costs of maintenance and repairs are charged to
operations when incurred; costs of renewals, betterments, and
additions are capitalized. The cost and accumulated depreciation
applicable to assets retired or sold are removed from the accounts,
and the gain or loss on disposition is recognized as income.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the buildings and improvements (11 to 31) years and
the machinery and equipment (3 to 10 years).
29
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
e. Intangible Assets: Intangible assets are primarily comprised of
financing costs and goodwill. At each balance sheet date, management
assesses whether there has been impairment in the carrying value of
intangible assets. This assessment is based on comparing amortization
to anticipated undiscounted cash flows and operating income.
f. Product Warranty Costs and Service Returns: Anticipated costs related
to product warranty and service returns are provided for based upon
management's estimate of such costs, after consideration of historical
trends and sales of the products to which such costs relate.
g. Engineering Expenses: Engineering costs are expensed as incurred and
are included in selling, general, and administrative expenses. Total
engineering expenses, including expenses of the discontinued
businesses, for the years ended December 31, 1999, 1998, and 1997 were
$6,583,000, $6,793,000, and $5,988,000, respectively. Included in
these engineering expenses are research and development costs (as
defined by Statement of Financial Accounting Standards No. 2) for the
years ended December 31, 1999, 1998, and 1997 of $4,986,000,
$5,415,000 and $4,947,000, respectively.
h. Earnings per share: Basic earnings per share is calculated by dividing
net income by the weighted average number of common shares
outstanding. Diluted earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding and
potentially issuable common shares. Common stock equivalents are
excluded from the diluted earnings per share calculation if a net loss
is incurred for the period, as they would be anti-dilutive.
i. Financial Instruments: The carrying amount of the Company's financial
instruments, which includes cash, accounts receivable, accounts
payable, and debt other than senior unsecured notes approximates their
fair value at December 31, 1999 and 1998. The fair value of the senior
unsecured notes was approximately $100 million at December 31, 1999.
Fair values have been determined based on management estimates and
information from market sources.
j. Comprehensive Income: Comprehensive Income, a measure that reflect all
non-owner changes in equity in addition to net income, consists of net
income and foreign currency translation adjustments and is presented
in the statement of stockholders' equity.
k. Estimates: The preparations of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
30
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 5: Earnings per Share ("EPS"):
In computing income available to common stockholders, no adjustments
were required to the amounts reported in the statement of income. Shares of
common stock available and potentially issuable used in the computation are
comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Average number of shares of common stock used
in computing basic EPS 1,993,000 2,111,812 3,275,000
Warrants, issuable for a nominal exercise price - - 171,740
--------- --------- ---------
Used in computing basic EPS 1,993,000 2,111,812 3,446,740
Dilutive effect of stock options - - 181,280
--------- --------- ---------
Used in computing dilutive EPS 1,993,000 2,111,812 3,628,020
========= ========= =========
</TABLE>
For 1999 and 1998, stock options were not considered in calculating
dilutive earnings per share since the effect of inclusion would be
anti-dilutive to earnings per common share from continuing operations.
Note 6: Inventories
Inventories consist of the following at December 31 (in thousands of U.S.
dollars):
1999 1998
-------- --------
FIFO cost:
Raw Material $ 23,056 $ 22,008
Work in Progress 7,420 6,800
Finished Goods 23,351 18,205
-------- --------
Total FIFO cost 53,827 47,013
Adjustment to LIFO cost 990 1,106
Reserves for excess and obsolescence (5,175) (4,258)
-------- --------
$ 49,642 $ 43,861
======== ========
31
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 7: Investments
Investments consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Ecoair Corp. (9.98% interest, at cost) $ 2,570 $ 2,000
Auto Ignition, Ltd. (4% interest, at cost) 582 589
-------- --------
$ 3,152 $ 2,589
======== ========
</TABLE>
The determination of fair value for these investments is not practicable.
Note 8: Intangible Assets
Intangible assets consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill (five to ten year amortization) 7,099 6,187
Financing costs (ten year amortization) 5,473 5,473
License fees (five year amortization) 770 -
-------- --------
13,342 11,660
Less accumulated amortization 2,434 1,175
-------- --------
$ 10,908 $ 10,485
======== ========
</TABLE>
32
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 9: Accrued Liabilities:
Accrued liabilities consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued compensation $ 2,143 $ 3,113
Accrued warranty 3,846 4,791
Amount due related to investment - 1,000
Accrued restructuring 517 2,980
Accrued interest 5,160 5,044
Amount due Lucas 2,835 3,026
Other accrued liabilities 5,936 7,181
-------- --------
$ 20,437 $ 27,135
Less obligations of discontinued operations 1,361 1,194
-------- --------
$ 19,076 $ 25,941
======== ========
</TABLE>
Note 10: Debt
Debt consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
North America
Revolving credit $ 12,091 $ 3,751
Senior unsecured notes, 9.625% 125,000 125,000
-------- --------
Total 137,091 128,751
-------- --------
United Kingdom
Overdraft facility 2,593 8,132
Term loan 6,409 -
South Africa 269 269
Argentina 3,160 2,120
-------- --------
Total 12,431 10,521
-------- --------
Total term, revolving credit and subordinated debt 149,522 139,272
Capital lease obligations 1,348 1,196
Other 256 284
-------- --------
Consolidated total 151,126 140,752
Less current maturities 19,880 7,336
-------- --------
Consolidated long term debt $131,246 $133,416
======== ========
</TABLE>
33
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On January 22, 1998, Prestolite issued $125 million of 9.625% (interest
payable semiannually) unsecured senior notes. The senior notes are guaranteed on
a senior unsecured basis by PEI. The proceeds were used to refinance existing
debt, fund the acquisition of the Lucas businesses and to repurchase certain PEI
securities. The notes mature on February 1, 2008, and are redeemable at the
option of the Company, in whole or in part, beginning on February 1, 2003 at
amounts from 104.8125% to 100% of the principal plus accrued and unpaid interest
to the redemption date with the net proceeds of a public equity offering. In
addition, in the event of a public equity offering, up to 35% of the notes may
be redeemed prior to February 1, 2001 at 109.625% of the principal, plus accrued
and unpaid interest to the redemption date.
As a result of this refinancing, the company recorded an extraordinary
item of $1,275,000 (net of taxes of $716,000), consisting of prepayment
penalties, the write-off of unamortized financing costs related to the
refinanced debt and the write-off of the unamortized discount on the
subordinated debt.
In connection with the issuance of the notes, the Company entered into new
credit agreements in the U. S. and the U. K. The U. S. agreement consists of a
$23 million revolving credit facility ($10.2 million available at December 31,
1999), including a $2 million letter of credit subfacility, which is advanced
pursuant 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, 2001. Interest is payable at the bank's prime
rate (8.50 percent at December 31, 1999) or at the "London Late Eurodollar" rate
plus 2.75 percent at the Company's option. In certain situations these rates are
increased by 0.125 percent. The Company amended the credit agreement on February
28, 2000 to cure certain covenants effective December 31, 1999.
The U.K. agreement allowed the Company to borrow up to (pound)7 million
and was advanced based on eligible U.K. accounts receivable. In October 1999 the
U.K. agreement was revised. The revised U.K. borrowing arrangement consists of a
(pound)2 million fixed-rate term loan and a (pound)4.0 million overdraft
facility which reduces in steps until it reaches (pound)2 million on November
30, 2000. Interest on the fixed rate loan is at 8.144% while interest on the
floating-rate term loan and the overdraft facility is at the bank's base rate
(5.625% at December 31, 1999) plus 1.25%. The term loans are repayable in sixty
essentially equal monthly payments through January 2004 (fixed-rate) and
November 2003 (floating-rate). The loans are collateralized by the Company's
receivables and fixed assets in the United Kingdom. At December 31, 1999, both
the term loans and (pound)1.6 million of the (pound)4.0 million overdraft
facility had been drawn.
In Argentina and South Africa, the Company has arrangements with several
banks which allow its subsidiaries in these countries to discount or borrow
against accounts receivable, generally at the prime rates of the banks involved.
Those rates ranged from 15.5 percent to 16.0 percent at December 31, 1999. Total
available credit in Argentina and South Africa at December 31, 1999 was
approximately $5.1 million.
The senior notes and credit facilities mentioned above contain various
covenants including maintenance of certain financial ratios and limits on (a)
issuance of additional debt or preferred stock; (b) the payment of dividends and
purchases, redemptions or retirements of common
34
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
stock; (c) investments; (d) sale of assets and capital stock of subsidiaries;
and (e) certain consolidations, mergers, transfers of assets and certain other
transactions with affiliates. The Company was in violation of certain covenants
during 1999 and at December 31, 1999, which were cured as a result of amending
the credit agreement.
The Company anticipates paying a significant portion of the revolving debt
from the proceeds of the anticipated sale of the discontinued businesses. The
related debt, therefore, has been classified as current.
Maturities of debt obligations at December 31 are as follows (in
thousands):
2000 $ 19,880
2001 1,730
2002 1,306
2003 1,169
2004 1,972
Thereafter 125,069
----------
$ 151,126
==========
Note 11: Income Taxes:
Income (loss) from continuing operations, before income taxes, consists of
the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States $ (5,740) $ (6,916) $ -
Foreign 1,259 6,852 1,259
---------------- ---------------- ----------------
$ (4,481) $ (64) $ 1,259
================ ================ ================
</TABLE>
35
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The components of income tax related to continuing operations are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
United States
Current $ (359) $ 400 $ -
Deferred (1,590) (2,720) (107)
Increase (decrease) in valuation reserve - - (196)
Foreign
Current 1,292 1,783 247
Deferred 752 747 202
Increase (decrease) in valuation reserve - 138 489
State and local
198 337 315
---------------- ---------------- ----------------
$ 293 $ 685 $ 950
================ ================ ================
</TABLE>
A reconciliation of the U. S. statutory tax rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory Rate 34% 34.0% 34.0%
Change in valuation reserve 0.0 (214.6) 23.2
State and local, net of federal benefit (4.4) (350.2) 13.7
Difference in foreign tax rates 4.1 (183.2) 0.0
Permanent difference (4.4) (183.2) 0.0
NOLs not benefitted (33.6) 0.0 0.0
Other (2.2) (172.7) 4.6
--------------- --------------- ---------------
Effective tax rate 6.5% (1069.9%) 75.5%
=============== =============== ===============
</TABLE>
36
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The major components of deferred taxes (stated on an after tax basis) on
the balance sheet are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Accrued tax benefit carryforwards $ 17,087 $ 18,877
Assets of discontinued operations 1,214 -
Current liabilities 1,585 2,424
Accounts receivable 724 633
Inventories (688) (641)
Property, plant and equipment (1,984) (906)
Pension liability (561) (569)
Other 1,840 399
Valuation reserve (14,927) (17,081)
---------------- ----------------
$ 4,290 $ 3,136
================ ================
</TABLE>
PEI has net operating loss ("NOL") carryforwards at December 31, 1999 for
U.S. tax reporting purposes of approximately $17.4 million and approximately
$574,000 of alternative minimum tax benefit and $454,000 of foreign tax credit
carryforwards. The NOLs in the U.S. expire beginning in 2006. The Argentina
subsidiary has NOL carryforwards at December 31, 1999 of approximately $31.9
million, which expire in 2000 through 2004. The valuation reserve represents a
full reserve against the net deferred tax asset position of the Argentina
operation and a reserve against the U.S. foreign tax credit, as management
believes that realization of these benefits is not probable.
The Company has not provided deferred income taxes on undistributed
earnings of its foreign subsidiaries (approximately $6.7 million) since all
amounts are considered to be permanently invested.
Note 12: Employee Benefit Plans
The Company has retirement savings plans for substantially all of its
United States employees. These retirement savings plans have cash or deferred
salary arrangements and include an option for matching contributions by the
Company. The Company's matching contributions to these plans were $635,000,
$653,000 and $699,000 for 1999, 1998, and 1997, respectively.
The Company also has defined benefit plans that cover certain former
United States employees. Benefits under these defined plans are based on years
of service. The Company's funding policy is to meet the minimum funding
requirements of the Employee Retirement Income Security Act of 1974, as amended.
The Company's subsidiaries in the U.K. and South Africa provide benefits based
on the employee's earnings. The Company's funding policy is to meet the minimum
funding requirements imposed by current statutes or tax regulations.
37
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following provides a reconciliation of benefit obligations, plan assets
and funded status of the United States defined benefit plans at December 31,
1999 and 1998, based upon most recent actuarial valuations (December, 31, 1999
and 1998), (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year 3,079 2,927
Service cost 12 12
Interest cost 218 211
Actuarial (gain) loss (330) 118
Benefits paid (194) (189)
------ ------
Benefit obligation at end of year 2,785 3,079
------ ------
Change in plan assets
Fair value of plan assets at beginning of year 2,685 2,429
Actual return on plan assets 307 351
Employer contributions 260 94
Benefits paid (194) (189)
------ ------
Fair value of plan assets at end of year 3,058 2,685
------ ------
Funded status 273 (394)
Unrecognized net actuarial gain (484) (68)
------ ------
Accrued benefit cost $ (211) $ (462)
====== ======
Weighted-average assumptions as of December 31
Discount rate 8.40% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase - -
</TABLE>
<TABLE>
<CAPTION>
Pension benefits
----------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 12 $ 12 $ 13
Interest cost 218 211 209
Expected return on plan assets (222) (195) (176)
------ ------ ------
Net periodic benefit cost $ 8 $ 28 $ 46
====== ====== ======
</TABLE>
38
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the U.K. and South Africa defined benefit plans at December 31,
1999 and 1998, based upon the most recent actuarial valuations (December 31,
1999 and 1998), (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 15,618 $ 9,525
Service cost 2,254 1,992
Interest cost 1,824 998
Plan participants' contributions 1,081 1,071
Actuarial (gain) loss (308) 297
Acquisition 13,594 2,657
Benefits paid (901) (922)
-------- --------
Benefit obligation at end of year 33,162 15,618
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year 17,425 12,262
Actual return on plan assets 5,225 (514)
Acquisition 13,594 3,998
Employer contribution 1,677 1,530
Plan participants' contributions 1,084 1,071
Benefits paid (901) (922)
-------- --------
Fair value of plan assets at end of year 38,104 17,425
-------- --------
Funded status 4,942 1,807
Unrecognized transition asset (828) (957)
Unrecognized prior-service cost 391 444
Unrecognized actuarial (gain) / loss (3,085) 236
-------- --------
Prepaid benefit cost $ 1,420 $ 1,530
======== ========
Weighted-average assumptions as of December 31
Discount rate 5.5%-12% 7%-12%
Expected return on plan assets 6.5%-12% 8%-12%
Rate of compensation increase 3.5%-10.5% 5%-10.5%
</TABLE>
39
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Pension benefits
--------------------------------
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 2,254 $ 1,992 $ 480
Interest cost 1,824 998 693
Expected return on plan assets (2,154) (1,482) (876)
Amortization of transition (asset) obligation (129) (129) (129)
Amortization of prior-service cost 53 53 53
Recognized net actuarial loss (62) (89) (121)
-------- -------- ------
Net periodic benefit cost $ 1,786 $ 1,343 $ 100
======== ======== ======
</TABLE>
Note 13: Leases
The Company leases certain office and manufacturing facilities, data
processing equipment and automobiles under long-term operating lease agreements.
In the current year, the Company entered into capital leases for certain
manufacturing and engineering equipment and improvements related to real
property. The leases expire on various dates through 2006. The following are
schedules of future minimum lease payments for operating and capital leases
(with terms in excess of one year) at December 31, 1999 (in thousands):
Operating leases:
2000 $ 2,101
2001 1,735
2002 1,396
2003 1,307
2004 960
Thereafter 1,517
--------
$ 9,016
========
Rent expense for operating leases of continuing operations was $1,330,750,
$1,630,460 and $2,402,703 for the years ended December 31, 1999, 1998 and 1997,
respectively.
40
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Scheduled payments on capital leases as of December 31, 1999 were (in
thousands):
Capital Leases
2000 $ 546
2001 522
2002 387
2003 52
2004 29
Thereafter 81
----------
Total minimum lease payments $ 1,617
Less: Imputed interest 269
----------
Present value of net minimum lease payments $ 1,348
==========
The book value, as of December 31, 1999, of equipment under capital leases
was $1,339,000, which is net of amortization of $1,314,000.
Note 14: Stock Options and Warrants:
PEI has established a stock option plan for certain designated employees.
The Company has reserved 350,280 shares for the plan. Options issued have
exercise prices of $5.00 to $22.00 per share, and no options have been
exercised. Options generally vest 20 percent per year over five years but may
not be exercised until 90 days following the effective date of a registration
statement under the Securities Act of 1933 or upon receipt by PEI of a legal
opinion that registration is not required. The exercise date may be accelerated
upon a change of control of the Company. The options expire 10 years from the
date of grant.
41
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The changes in stock options outstanding for the years ended December 31,
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Weighted
average
exercise
Options price
-------------- --------------
<S> <C> <C>
Outstanding at January 1, 1997 361,400 $ 6.20
Forfeited (51,500) 5.90
-------------- --------------
Outstanding at December 31, 1997 309,900 $ 6.25
============== ==============
Granted 95,500 18.86
Forfeited (12,100) 7.80
Repurchased (123,960) 5.31
-------------- --------------
Outstanding at December 31, 1998 269,340 $ 11.10
============== ==============
Granted 51,000 22.00
Forfeited (4,900) 20.46
Repurchased (600) 18.86
============== ==============
Outstanding at December 31, 1999 314,840 $ 12.71
============== ==============
Exercisable at December 31, 1999 - -
============== ==============
Vested at December 31, 1999 205,680 $ 9.76
============== ==============
</TABLE>
Information with respect to stock options outstanding at December 31, 1999
follows:
<TABLE>
<CAPTION>
Average
Options remaining
Exercise Outstanding at contractual
Price December 31, 1999 life (years)
------------- ---------------------------- --------------
<S> <C> <C>
$ 5.00 59,840 2.0
6.25 20,400 4.0
8.25 94,600 5.6
18.86 90,500 8.3
22.00 49,500 9.4
-------------------
Total 314,840
===================
</TABLE>
42
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, " Accounting for Stock issued to Employees" ("APB 25") in
accounting for its stock option plans.
Under APB 25, the Company does not recognize compensation expense on the
issuance of its stock options because the option terms are fixed and the
exercise price equals the market price of the underlying stock on the grant
date.
As required by SFAS 123, the Company has determined the pro-forma
information as if the Company had accounted for stock options granted since
January 1, 1995, under the fair value method of SFAS 123.
Principal assumptions used in calculating the pro forma information were
as follows (no options were issued in 1997):
<TABLE>
<CAPTION> 1999 1998
---------------- ---------------
<S> <C> <C>
Risk-free interest rates 5.90% 4.73%
Expected life, in years 7.00 7.00
Expected volatility - -
Expected dividend yield - -
Weighted average fair value of options granted $22.00 $18.86
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss), as reported $ (6,191) $ 230 $1,150
Net income (loss), pro forma (6,415) 145 1,094
Earnings per common share, as reported
Basic $ (3.11) $ 0.11 $ 0.33
Diluted $ (3.11) $ 0.11 $ 0.32
Earnings per common share, pro forma
Basic $ (3.22) $ 0.07 $ 0.32
Diluted $ (3.22) $ 0.07 $ 0.30
</TABLE>
43
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
Note 15: Related Party Transactions:
The Company has a management consulting agreement with Genstar Investment
Corporation ("GIC"), an affiliate of Genstar. Under the agreement, the Company
pays GIC a management consulting fee. For the years ended December 31, 1999,
1998 and 1997, $900,000, $900,000 and $800,000, respectively, were charged to
operations under this agreement. At both December 31, 1999 and 1998, $225,000 of
these fees were accrued and unpaid.
Note 16: Litigation and Claims:
Various legal actions and claims are pending or may be instituted or
asserted in the future against the Company. The outcome of individual matters is
not predictable at this time. The potential aggregate amount of liability at
December 31, 1999 and 1998 with respect to these matters cannot be ascertained;
however, management believes that any resulting unrecorded liability would not
materially affect the future consolidated financial statements of the Company.
The Company records a liability for environmental remediation costs when a
clean-up program becomes probable and the costs can be reasonably estimated. The
extent and amounts of the liabilities can change substantially due to factors
such as the nature or extent of contamination, changes in remedial requirements
and technological improvements.
Note 17: Restructuring Charge:
During 1999, the company announced restructuring plans related primarily
to its operations in Argentina and the U.S. Technical Center in Ann Arbor,
Michigan. During 1998, the company had announced restructuring plans in the
United Kingdom and Argentina. All costs related to the plans are for employee
severance, and that portion of the cost related to the acquired Lucas Businesses
was recorded as a liability assumed as of the date of acquisition. The following
is a summary of the restructuring (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Beginning balance $ 2,980 $ -
Severance cost related to the acquired Lucas Business - 7,127
Severance cost charged to operations 450 711
Payments (2,913) (4,858)
--------- ----------
Ending balance $ 517 $ 2.980
========= ==========
</TABLE>
44
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 18: Segment Reporting
The operating segments reported below are the segments of the Company for
which separate financial information is available and for which operating income
amounts are evaluated regularly by executive management in deciding how to
allocate resources and in assessing performance. The accounting policies of the
business segments are the same as those describe in the summary of significant
accounting policies in Note 4.
The Company operates in four principal geographic areas. 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 application. Sales between geographic segments and
between operating segments are priced at cost plus a standard markup.
Sales to external customers, based on country of origin, is as follows (in
thousands):
<TABLE>
<CAPTION>
North United South
America Kingdom Argentina Africa Other Total
----------------- --------------- -------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sales to external customers, based
on country of domicile
1999 $ 107,889 $ 56,574 $ 37,299 $ 12,220 $ 213,982
1998 102,513 65,768 56,030 12,779 237,090
1997 104,053 21,532 - - 125,585
Sales to external customers, based
on location of customers
1999 $ 102,748 $ 57,266 $ 37,678 $ 9,974 $ 6,316 $ 213,982
1998 100,096 62,465 55,766 10,626 8,137 237,090
Long-lived assets:
1999 $ 17,701 $ 20,722 $ 7,333 $ 2,114 $ 47,870
1998 16,912 22,095 8,296 2,160 49,463
1997 16,501 3,222 - - 19,723
</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. Segment assets are not
currently broken out in the normal course of managing segment operations;
accordingly, such information is not available for disclosure.
45
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
In accordance with SFAS No. 131, the operating results for the years ended
December 31, 1999, 1998 and 1997 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 Division Costs Total
---------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales to external customers:
1999 $ 133,799 $ 30,664 $ 49,519 $ - $213,982
1998 135,626 32,655 68,809 - 237,090
1997 90,381 35,204 125,585
EBITDA:
1999 20,249 3,888 3,081 $ (4,942) 22,276
1998 21,180 5,095 6,437 (6,503) 26,209
1997 10,978 6,144 (6,515) 10,607
</TABLE>
A reconciliation of EBITDA to income from continuing operations before income
taxes follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- --------------
<S> <C> <C> <C>
EBITDA for reporting segments $ 22,276 $ 26,209 $ 10,607
Depreciation and amortization 10,489 9,967 3,964
Restructuring, redundancy and option repurchase costs 452 2,812
Interest expense 15,816 13,494 5,384
---------------- --------------- --------------
Income (loss) from continuing operations before income taxes $ (4,481) $ (64) $ 1,259
================ =============== ==============
</TABLE>
46
<PAGE>
Prestolite Electric Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Note 19: Summary of Prestolite Electric, Incorporated
Summary consolidated financial information of Prestolite Electric
Incorporated follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Statement of operations:
Net sales $ 213,982 $ 237,090 $ 125,585
Gross profit 41,918 48,431 24,754
Income from continuing operations
before extraordinary loss (4,524) (102) 1,248
Net income (6,234) 192 1,139
Balance sheet:
Current assets 97,398 92,906
Noncurrent assets 84,658 90,867
Current liabilities 63,223 56,247
Noncurrent liabilities 135,230 136,506
Stockholders' equity (16,397) (8,980)
</TABLE>
47
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
---------------------------------
Balance at Reserves Charge to Charged Balance at
Beginning Added w/ Costs and to Other End
of Period Acquisitions Expenses Accounts Deductions (1) of Period
---------- ------------ --------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31, 1999 $ 2,933 $ 1,356 $ 1,920 $ 2,369
Year ended December 31, 1998 $ 1,969 $ 1,042 $ 1,639 $ 1,717 $ 2,933
Year ended December 31, 1997 $ 1,657 $ 788 $ 476 $ 1,969
Year ended December 31, 1996 $ 1,281 $ 819 $ 443 $ 1,657
Year ended December 31, 1995 $ 1,111 $ 756 $ 586 $ 1,281
Reserve for Inventory Obsolescence:
Year ended December 31, 1999 $ 4,258 $ 2,230 $ 1,313 $ 5,175
Year ended December 31, 1998 $ 2,986 $ 2,204 $ 1,279 $ 2,211 $ 4,258
Year ended December 31, 1997 $ 3,309 $ 474 $ 797 $ 2,986
Year ended December 31, 1996 $ 3,028 $ 802 $ 521 $ 3,309
Year ended December 31, 1995 $ 2,937 $ 508 $ 417 $ 3,028
</TABLE>
- --------------------------------------------
(1) Deductions related to the allowance for doubtful accounts relate to
the write-off of uncollectable accounts and to changes to the
reserves for the return of used parts. Deductions related to
inventory obsolescence relate primarily to the disposal of obsolete
inventory.
Item 9. Changes in and Disagreements with Accountants
None.
48
<PAGE>
PART III
Item 10. Directors and Executive Officers
The following table sets forth certain information as of December 31, 1999,
with respect to our executive officers and directors:
Name Age Position
---
P. Kim Packard 61 President, Chief Executive Officer and
Director
Kenneth C. Cornelius 55 Senior Vice President, Chief Financial
Officer and Secretary
Dennis P. Chelminski 47 Controller, Treasurer and Assistant
Secretary
Michael Lea 56 Vice President and Division President, Heavy
Duty Products Division
I. Conrad Schwab 58 Vice President and Division President,
Electric Vehicles Systems Division
Richard D. Paterson (a)(b) 57 Chairman of the Board and Director
Ross J. Turner (b) 69 Director
John A. West (a) (b) 72 Director
_______________________
(a) Member of audit committee
(b) Member of compensation committee
Kim Packard began service as our President, Chief Executive Officer and a
director in December 1991. Previously, Mr. Packard was President and Chief
Operating Officer of Hobart Brothers Company of Troy, Ohio for six years and
prior to that President of Warner & Swasey and an officer or executive of
various divisions of Allied/Bendix. He also served in various marketing, sales
and executive capacities with GTE Sylvania. Mr. Packard holds a B.S. in
electrical engineering from Pennsylvania State University and an M.S. from the
Massachusetts Institute of Technology, where he was a Sloan Fellow. He is also a
director of Kurz-Kasch Corporation, Dayton, Ohio.
Kenneth C. Cornelius began service as our Vice President and Chief
Financial Officer in August 1992 and has been our Secretary since 1993.
Previously, he was Chief Financial Officer with M-C Industries for three years
after spending 17 years with Maremont Corporation in various financial
positions, including eight years as Vice President and Chief Financial Officer.
Mr. Cornelius holds a B.A. from Carleton College and an M.B.A. from the
University of Michigan.
Dennis P. Chelminski began service as our Controller, Treasurer and
Assistant Secretary in February 1992. He held the position of our Chief
Accounting Officer from October 1991 to February 1992 and was our Manager of
Financial Analysis under our prior ownership. Prior to 1986, he held various
financial positions with Eltra Corporation and Allied-Signal Corporation. Mr.
Chelminski holds a B.S. in accounting from the University of Toledo and is a
C.P.A.
Michael Lea began service as our Vice President and Managing Director of
our United Kingdom subsidiary in December 1993. He had previously been Sales and
Marketing Director of Polypenco Ltd. From 1977 to 1990 he served in various
positions with GKN, leading to Managing Director of GKN Composites Ltd. Mr. Lea
is a Chartered Engineer holding Bachelor of Technology in Metallurgy and Doctor
of Philosophy in Engineering degrees from Brunel University in West London,
England.
49
<PAGE>
I. Conrad Schwab began service as Vice President and Division President of
our Prestolite Power Division in conjunction with our acquisition of two product
lines from Hobart Brothers Company in February 1996. He joined Hobart in 1988 as
General Manager of the Ground Power Division. He was formerly General Manager,
Personal Aircraft, at Piper Aircraft, Director of Business Development for Fiat-
Allis and served in various positions for Firestone in Europe. He received a
B.A. in Biological Science from Johns Hopkins University, did graduate studies
at the University of Tubingen in Germany and received a Master of Foreign Trade
from the American Graduate School of International Management.
Richard D. Paterson has been a director and Chairman of the board of
directors since 1991. Mr. Paterson has been Executive Vice President and a
director of Genstar Investment Corporation, an affiliate of Genstar Capital
Corporation, since 1987 and was a director of Genstar Capital Corporation from
1988 through August 1995. In addition, he is currently a director of a number of
privately held corporations.
Ross J. Turner has been a director since 1991. Mr. Turner has been Chairman
of the board of directors of Genstar Investment Corporation since 1987 and was a
director of Genstar Capital Corporation from 1988 through August 1995. Mr.
Turner is a director of Rio Algom Limited in Canada and Blue Shield of
California in the United States. In addition, he is currently a director of a
number of privately held corporations.
John A. West has been a director since 1991. Mr. West has been Executive
Vice President and a director of Genstar Investment Corporation, an affiliate of
Genstar Capital Corporation, since 1987 and was a director of Genstar Capital
Corporation from 1988 through August 1995. In addition, he is currently a
director of a number of privately held corporations.
Directors are elected annually to serve until the next annual meeting of
shareholders or until their successors have been elected and qualified.
Executive officers are appointed by, and serve at the discretion of, our board
of directors. None of the executive officers or directors is related by blood,
marriage or adoption to any other executive officer or director.
50
<PAGE>
Item 11. Executive Compensation
The following table summarizes all compensation paid for the years ended
December 31, 1999 and 1998 to the Chief Executive Officer and the four other
highest compensated executive officers who were serving executive officers at
December 31, 1999:
<TABLE>
<CAPTION>
Other Annual Long-Term All Other
Name and Compensation Compensation Compensation
Principal Position Year Salary ($) Bonus ($)(a) ($) (b) Awards (c) ($) (d)
---- ----------- ------------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
P. Kim Packard 1999 405,000 - - - 16,192
President and 1998 377,192 185,000 - - 1,339,628
Chief Executive Officer
Kenneth C. Cornelius 1999 192,054 - - - 9,507
Senior Vice President 1998 184,354 65,300 - - 205,121
Chief Financial Officer
I. Conrad Schwab 1999 157,027 - - - 5,165
Vice President and 1998 155,388 51,600 - - 47,420
Division President
Electric Vehicles
Systems Division
Michael Lea 1999 150,577 - - - 14,785
Vice President and 1998 125,021 55,900 - - 161,941
Division President
Worldwide Heavy
Duty Products Division
Dennis P. Chelminski 1999 112,038 - - - 7,626
Treasurer/Controller 1998 105,585 22,400 - - 119,274
</TABLE>
- -----------------
(a) Amounts in 1998 reflect bonuses earned during 1998 but paid during 1999. No
payments are scheduled in 2000 for amounts earned in 1999.
(b) Other annual compensation in the form of perquisites and other personal
benefits has been omitted where aggregate amount of such perquisites and other
personal benefits constituted the lesser of $50,000 or 10% of the total annual
salary and bonus for the officer for the year.
(c) The company did not make any long-term incentive awards to any of these
officers in 1998 or 1999.
(d) Amounts in 1998 and 1999 reflect premiums paid for life insurance coverage
in excess of $50,000 and contributions by us pursuant to our 401(k) and one
other pension plan. In 1998 the amounts shown also reflect payments in
connection with a repurchase of shares and options to purchase shares. See Item
13. "Certain Relationships and Related Transactions - The Recapitalization."
Also includes for Messrs, Packard, Cornelius and Chelminski in 1998 and 1999
interest on deferred compensation (Mr. Packard - $7,500; Mr. Cornelius - $2,500;
Mr. Chelminski - $3,500) payable pursuant to a Deferred Compensation Agreement
between us and each of Messrs. Packard, Cornelius and Chelminski.
51
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning the grant of
stock options during the fiscal year.
<TABLE>
<CAPTION>
Number of % of Total Potential Realization
Securities Options Value at Assumed Rates of
Underlying Granted to Exercise Price Stock Price Appreciation for
Options Employees per Expiration Option Term (b)
------------------
Name Granted in 1999 Share (a) Date 5% 10%
---- ------- ------- --------- ---- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
P. Kim Packard 15,000 28.8% $22.00 5/20/2009 207,535 525,935
Kenneth C. Cornelius 5,000 9.6 22.00 5/20/2009 69,178 175,312
I. Conrad Schwab 4,000 7.7 22.00 5/20/2009 55,343 140,249
Michael Lea 5,000 9.6 22.00 5/20/2009 69,178 175,312
Dennis P. Chelminski 1,500 2.9 22.00 5/20/2009 20,754 52,594
</TABLE>
(a) The exercise price was equal to the fair market value of the common stock
on the date of the grant, as determined by our board of directors and based upon
our historical and projected financial performance.
(b) The 5% and 10% assumed rates are prescribed by the rules and regulations of
the Securities and Exchange Commission and do not represent our estimate or
projection of the future trading price of our common stock. We cannot assure
that any of the values reflected in this table will be achieved. Actual gains,
if any, on stock option exercises are dependent on numerous factors, including
our future performance, overall conditions and the option holder's continued
employment throughout the entire vesting period and option term, which factors
are not reflected in this table.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table summarizes the exercise of options during the year
ended December 31, 1999 and number and value of all unexercised options held by
certain executive officers as of December 31, 1999.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised In-The-Money Options
Exercise Realized Options at FY-End (#) at FY-End ($) (a)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- --- ---
<S> <C> <C> <C> <C> <C> <C>
P. Kim Packard - - 101,700 52,200 1,539,582 244,128
Kenneth C. Cornelius - - 15,080 18,020 191,681 90,750
I. Conrad Schwab - - 4,260 11,440 43,933 43,733
Michael Lea - - 10,560 15,740 128,648 81,469
Dennis P. Chelminski - - 8,820 6,180 125,436 33,793
</TABLE>
52
<PAGE>
(a) Value is based upon the fair market value of our common stock as of
December 31, 1999 as determined by our board of directors, minus the exercise
price. Fair market value was determined by our board of directors and was based
upon our historical and projected financial performance.
Compensation of Directors
Our directors do not receive any compensation for their services as
directors.
Compensation Committee Interlocks and Insider Participation
The current members of the compensation committee of our board of directors
are Messrs. Richard A. Paterson, chairman, Ross J. Turner and John A. West. Each
is an executive officer and currently a director of Genstar Investment
Corporation and was a director of Genstar Capital Corporation at various times
from 1988 through August 1995.
Employment Agreements
We have entered into agreements with each of Messrs. Packard, Cornelius,
Schwab, Lea and Chelminski. The agreements with Messrs. Packard, Cornelius,
Schwab and Lea provide that if the employee's employment is terminated for any
reason other than by the employee voluntarily except in the event of a
substantial diminution in responsibilities, for cause (as defined in the
respective employment agreements) or as a result of death or disability, the
terminated individual shall receive for a period of one year following the date
of termination the then-current salary and benefits that the employee would
otherwise have been entitled to receive (except for Mr. Packard who would
receive two years salary and benefits).
Each of the agreements provides that if the employee's employment is
terminated within twelve months following a change of control (as defined in the
respective employment agreements) for any reason other than for cause, the
respective individual would be entitled to receive an additional one year period
(six months for Mr. Chelminski) of salary and benefits following the expiration
of the salary and benefits the employee is entitled to receive in the event of
termination for any other reason.
Any benefits payable under the agreements, absent mutual agreement of the
parties, will be payable at such time and in such manner as if the employee
remained employed, and such benefits, if any, shall continue notwithstanding
re-employment and/or death of the employee following termination of employment.
1991 Option Plan
In 1991, the PEI Holding, Inc. Management Stock Option Plan was adopted.
The Management Stock Option Plan is designed to provide an incentive to those
designated employees to continue in their employment and to increase their
efforts for our success. The designated employees are selected in the sole
discretion of the compensation committee of our board of directors. As of
December 31, 1999, an aggregate of 350,280 shares of our common stock were
reserved for issuance under the Management Stock Option Plan.
The purchase price of each share of common stock subject to the options is
the fair market price of our common stock on the date of the grant as determined
by our board of directors. All
53
<PAGE>
options granted are subject to the terms of an agreement entered into by the
recipient of the options.
Each agreement entered into requires the recipient of the options to be
bound by the terms of any stockholders' agreement entered into between us and
certain of our stockholders. Options vest beginning on January 1 of the first
calendar year following granting of the option (or on the first anniversary of
the date of grant if granted in connection with hiring) and vest at a rate of
20% per year on each subsequent January 1. Options are not transferable by the
recipient other than by will or by the laws of descent and distribution and are
exercisable during the recipient's lifetime only by the recipient. All options
terminate on the tenth anniversary of the date of grant. Options are exercisable
within 90 days after a registration statement pertaining to our common stock has
been filed with (and declared effective by) the Securities and Exchange
Commission under the Securities Act of 1933, as amended, or when we otherwise
determine in our sole discretion.
If the recipient is terminated without cause (as defined in the agreement)
or for permanent disability or death then all unvested options are terminated
and canceled on the date of termination. Within 30 days of termination we may
make a cash payment to the recipient in the amount of the excess of the fair
market value of the common stock subject to such options over the exercise price
for such shares, or make such other decisions with respect to such options as in
our sole discretion. If the recipient is terminated for cause then all options,
both vested and unvested, are canceled.
In the event of a merger or consolidation (subsequent to which our present
stockholders own less than 50% of the voting stock of the surviving entity), a
sale of all or substantially all of our assets to an entity not affiliated with
Genstar Capital Corporation or our dissolution or liquidation, then the plan
administrator may provide for the vesting of up to all options outstanding
within 30 days of such event or authorize a cash payment to each option holder
equal to the excess of the fair market value of the shares of common stock
subject to such holder's option over the applicable exercise price. The options
are subject to anti-dilution provisions in the event of a change in our capital
structure.
As of December 31, 1999, options to purchase an aggregate of 314,840
shares of Common Stock at prices from $5.00 to $22.00 were outstanding under the
Management Stock Option Plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The table below sets forth certain information regarding beneficial
ownership of our common stock as of March 15, 2000 by each person or entity
known by us to own beneficially 5% of more of our common stock, each director
and certain of our executives officers and all executive officers and directors
as a group. As of March 15, 2000, there were 1,993,000 shares of our common
stock outstanding.
54
<PAGE>
<TABLE>
<CAPTION>
Shares
-------
Beneficially Owned
-------------------
Name Number (a) Percent (a)
- ---- ---------- -----------
<S> <C> <C>
Genstar Capital Corporation (b) 1,920,000 96.3
Scotia Plaza, Suite 4900
40 King Street West
Toronto, Ontario M54 4AA Canada
P. Kim Packard (c) 132,600 6.3
c/o Prestolite Electric Incorporated
2100 Commonwealth Blvd.
Ann Arbor, Michigan 48105
Kenneth C. Cornelius (d) 29,060 1.4
Dennis P. Chelminski (e) 18,940 *
I. Conrad Schwab (f) 15,400 *
Michael Lea (g) 23,820 1.2
Richard D. Paterson (h) 89,280 4.5
Ross J. Turner (h) 89,280 4.5
John A. West (h) 89,280 4.5
All executive officers and directors as a group (9 persons) (i) 309,100 14.3
</TABLE>
_________________
* Less than 1%
(a) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of March 15, 2000, are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned.
(b) Genstar Capital Corporation's shares are held of record by The Royal Trust
Company, a licensed trust company in Canada, that holds the shares for the
benefit of Genstar Capital Corporation, its preferred shareholders and Genstar
Investment Corporation.
(c) Consists of 17,000 shares of common stock and 115,600 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60 days
of March 15, 2000. Does not include 38,300 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2000.
(d) Consists of 8,000 shares of common stock and 21,060 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60 days
of March 15, 2000. Does not include 12,040 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2000.
(e) Consists of 8,000 shares of common stock and 10,940 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60 days
of March 15, 2000. Does not include 4,060 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2000.
(f) Consists of 8,000 shares of common stock and 7,400 shares issuable upon
exercise of options that are currently exercisable or exercisable within 60 days
of March 15, 2000. Does not include 8,300 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2000.
55
<PAGE>
(g) Consists of 8,000 shares of common stock owned by Mrs. Rhonda Lea, Mr.
Lea's wife, as to which Mr. Lea may be deemed to be beneficial owner and 15,820
shares issuable upon exercise of options that are currently exercisable or
exercisable within 60 days of March 15, 2000. Does not include 10,480 shares
issuable upon exercise of options which vest more than 60 days after March 15,
2000.
(h) Consists of 89,280 shares of common stock indirectly owned by Genstar
Investment Corporation by virtue of Genstar Investment Corporation's ownership
in Genstar Capital Corporation, as to which Messrs. Paterson, Turner and West
may be deemed to be beneficial owners. Excludes the remaining shares of Common
Stock owned by Genstar Capital Corporation as to which Messrs. Paterson, Turner
and West disclaim beneficial ownership. See Item 13. "Certain Relationships and
Related Transactions-GIC Management Agreement." Genstar Capital Corporation owns
approximately 83.1% of our common stock on a fully-diluted basis.
(i) Amount shown includes an aggregate of 172,020 shares of common stock
issuable upon the exercise of options exercisable within 60 days of March 15,
2000. Does not include an aggregate of 76,480 shares issuable upon exercise of
options which vest more than 60 days after March 15, 2000.
Item 13. Certain Relationships and Related Transactions
Set forth below is a summary of certain agreements and arrangements, as
well as other transactions with related parties which took place during the 1998
fiscal year.
The Recapitalization
In connection with the offering of our senior notes in January 1998, we
effected a series of transactions that resulted in our recapitalization,
including the purchase of our securities from our security holders for an
aggregate purchase price of approximately $29.7 million. Shares of common stock
were purchased by a limited liability company affiliated with us, and options to
purchase common stock were purchased by us. Purchase prices were equal to $18.86
per share of common stock and a price per option equal to $18.86 per share of
common stock issuable upon exercise of such option minus the applicable exercise
price. The exercise price of options ranged from $5.00 to $8.25 per share. Total
amounts received for such purchases were as follows: Genstar Capital Corporation
($24,145,408); P. Kim Packard ($1,325,188); Kenneth C. Cornelius ($196,996); I.
Conrad Schwab ($41,470); Dennis P. Chelminski ($111,722); Michael Lea
($139,831); and five additional employees ($345,266 as a group). Amounts paid to
management included payments to compensate for less favorable tax treatment with
respect to purchased options.
Three of our directors, Messrs. Paterson, Turner and West, are executive
officers of Genstar Investment Corporation. Messrs. Paterson, Turner and West
are also shareholders of Genstar Investment Corporation. Genstar Investment
Corporation holds approximately 4.65% of the outstanding preferred shares of
Genstar Capital Corporation, and, as a result, was entitled to approximately
4.65% of the proceeds distributed to Genstar Capital Corporation and/or its
preferred shareholders in connection with the recapitalization. Genstar
Investment Corporation acts as the advisor to Genstar Capital Corporation, and
is entitled to certain fees and reimbursement of expenses from Genstar Capital
Corporation for services rendered to Genstar Capital Corporation. To the extent
that Genstar Investment Corporation collects fees and expenses directly from
portfolio companies of Genstar Capital Corporation, such as us, Genstar Capital
Corporation's obligation to pay these fees and expenses to Genstar Investment
Corporation is reduced.
56
<PAGE>
GIC Management Agreement
Our principal operating subsidiary, Prestolite Electric Incorporated,
has entered into a management agreement with Genstar Investment Corporation
terminating on December 31, 2002, under which Genstar Investment Corporation has
agreed to provide Prestolite with ongoing management and financial advisory
services. Prestolite has agreed to pay Genstar Investment Corporation a fee of
$900,000 or .03% of Prestolite's annual sales as compensation for services
rendered by Genstar Investment Corporation under the agreement, plus all
out-of-pocket costs and expenses. Payments are made quarterly. During 1997,
Prestolite paid management and advisory fees of $800,000; in 1998 and 1999
Prestolite paid management and advisory fees of $900,000, in each case plus
out-of-pocket expenses, to Genstar Investment Corporation.
57
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports of Form 8-K
(a) Financial Statements
<TABLE>
<S> <C>
Consolidated Balance Sheet as of December 31, 1999 and 1998 Part II, Item 8
Consolidated Statement of Operations for each of the years in the
three year period ended December 31, 1999 Part II, Item 8
Consolidated Statement of Stockholders' (Deficit) Equity for each
of the years in the three year period ended December 31, 1999 Part II, Item 8
Consolidated Statement of Cash Flows for each of the years in the
three year period ended December 31, 1999 Part II, Item 8
Notes to Consolidated Financial Statements Part II, Item 8
Independent Accountants' Report Part II, Item 8
Schedule II - Valuation and Qualifying Accounts Part II, Item
</TABLE>
(b) Reports on form 8-K.
None.
(c) Exhibits.
Number Description
- ------------ -----------
10.1 Letter agreement, dated January 12, 2000, between Robert W.
Baird & Co., Incorporated and Prestolite Electric
Incorporated regarding the sale of or other disposition of
certain businesses.
10.2 Letter agreement, dated December 31, 2000, between Lincoln
Partners, L.L.C., as investment banking representative, and
Prestolite Electric Incorporated in connections with the
sale of or other disposition of certain businesses.
10.3 Exclusive listing agreement, dated February 29, 2000 between
Binswanger and Prestolite Electric to sell certain property
located in Decatur, Alabama.
10.4 Amendment No. 3, dated February 29, 2000, to Credit
Agreement, dated December 31, 1998 between Prestolite
Electric Incorporated and Comerica Bank to modify certain
portions of agreement and covenants.
27.1 Financial Data Schedule
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Prestolite Electric Holding, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Ann Arbor, State of Michigan on the 28th day of March, 2000.
PRESTOLITE ELECTRIC HOLDING, INC.
By: /s/ P. Kim Packard
---------------------------------------------
P. Kim Packard
Director, President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of Prestolite Electric
Holding, Inc. and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ P. Kim Packard President, Chief Executive Officer March 28, 2000
- -------------------------------- (principal executive officer)
P. Kim Packard Director
/s/ Richard D. Patterson Chairman of the Board, Director March 28, 2000
- --------------------------------
Richard D. Patterson
/s/ Kenneth C. Cornelius Senior Vice President, Chief March 28, 2000
- -------------------------------- Financial Officer (principal
Kenneth C. Cornelius accounting and financial officer
and Secretary
/s/ Ross J. Turner Director March 28, 2000
- -------------------------------
Ross J. Turner
/s/ John A. West Director March 28, 2000
- -------------------------------
John A. West
</TABLE>
59
<PAGE>
Exhibit 10.1
January 12, 2000
Prestolite Electric Incorporated
2100 Commonwealth Blvd, Suite 300
Ann Arbor, MI 48105
Attention: Ken Cornelius
Chief Financial Officer
Dear Ken:
On behalf of Robert W. Baird & Co. Incorporated ("Baird") we wish to thank you
for the opportunity to represent Prestolite Electric Incorporated ("Prestolite"
or the "Company") in connection with the possible sale or other disposition of
certain of the Company's businesses. This letter confirms the agreement between
Baird and the Company under which Baird is engaged as financial advisor to the
Company in connection with the proposed Disposition(s) (as defined below).
1. Baird accepts this engagement and agrees to:
(a) become familiar, to the extent we deem appropriate, with the
business, operations, properties, financial condition, and
prospects of the Company;
(b) assist the Company in analyzing and evaluating the operations and
financial position of certain businesses the Company is
considering divesting;
(c) assist the Company and its other financial advisor, Lincoln
Partners LLC, in the preparation and implementation of a
marketing plan with respect to the proposed Disposition(s) and in
the screening of interested prospective purchasers;
(d) assist the Company in evaluating proposals which are received
from potential purchasers; counsel the Company as to strategy and
tactics for negotiating with potential purchasers and, advise the
Company with respect to the form and structure of, and
consideration to be received in, the proposed Disposition(s).
If Baird is asked to provide other services not specifically
contemplated above, the Company and Baird shall enter into a separate
agreement covering such additional services to be rendered and the fee
payable by the Company.
2. Baird's engagement shall commence on the date of this letter and shall
expire on January 3, 2001 unless extended by mutual written agreement,
but may be terminated earlier by either the Company or Baird at any
time upon 30 days'
<PAGE>
written notice from one party to the other. Notwithstanding expiration
or termination of Baird's engagement, the provisions of this letter
concerning confidentiality, indemnification, contribution, legal
matters and the Company's obligations to pay Baird's fees and
reimburse Baird's expenses shall survive and remain in effect.
3. For the purposes of this letter:
(a) A "Disposition" means any transaction or a series of transactions
which results, directly or indirectly, in the transfer of control
of the Company's Battery Charger Business or DC Motor Business
(as defined in your December 16, 1999 Board of Directors
information package entitled, "Breakup and Sale of Prestolite")
or any material part of their assets or businesses (a
"Business"), including without limitation: (i) any merger,
consolidation, reorganization, recapitalization or other business
combination pursuant to which a Business is transferred to or
combined with that of another non-affiliated entity; (ii) the
acquisition by an acquirer (or a "group", as defined in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended) of
beneficial ownership of more than 50% of any class of capital
stock (or rights to acquire the same) of the Company or any of
its affiliates or of all or substantially all of the assets of
the DC Motor Business or the Battery Charger Business; or (iii) a
lease of a material part of the assets of the DC Motor Business
or the Battery Charger Business, with or without a purchase
option, or the formation of a joint venture or partnership, or
similar transaction with another party with respect to a
Business.
(b) "Transaction Date" means the date of the closing of any
Disposition.
(c) "Consideration" means the aggregate value, whether in cash,
securities, assumption of (or purchase subject to) debt or
liabilities (including, without limitation, indebtedness for
borrowed money, pension liabilities, guarantees and other
calculable liabilities but excluding trade liabilities and trade
payables), or other property, obligations or services, paid or
payable directly or indirectly (through an escrow or otherwise)
or otherwise assumed in connection with a Disposition (including
amounts paid to holders of any warrants, stock purchase rights or
convertible securities of the Company and to holders of any
options or stock appreciation rights issued by the Company,
whether or not vested). For the purpose of computing the value of
Consideration, the value of securities shall be determined as
follows:
(i) the value of securities (whether debt or equity) that are
traded on a national securities exchange, the NASDAQ system
or the over-the-counter market shall be the last reported
sales price prior to the Transaction Date; and
(ii) the value of other securities, indebtedness, obligations,
property and services (including assumed liabilities) shall
be their fair market value as of the Transaction Date, or
such other value as may be mutually agreed upon by the
Company and Baird.
<PAGE>
If any part of the Consideration consists of contingent payments
to be calculated by reference to uncertain future occurrences,
such as future financial or business performance, then any
portion of Baird's fees payable hereunder relating to such
portion of the Consideration shall be payable upon the receipt of
such portion of the Consideration.
If all or any portion of the Consideration is paid in any
currency other than United States Dollars, the value of such
Consideration shall be converted into United States Dollars at
the prevailing exchange rate on the Transaction Date.
(d) Notwithstanding (c) above, if a Disposition entails the sale or
transfer of only a portion of the assets of the DC Motor Business
or the Battery Charger Business and the retention (or sale to a
party other than the acquiring party or parties) of cash, cash
equivalents, securities, investments or receivables
(collectively, "Liquid Assets"), then such Liquid Assets shall be
deemed to be included in the Consideration and shall be valued in
accordance with (c) above; provided, however, that the value of
inventories and receivables shall be their book value.
4. Baird shall be entitled to the following compensation for its services
hereunder:
(a) a non-refundable retainer fee of $15,000 with $1,500 payable
promptly upon execution of this letter and with the balance
payable in nine monthly installments of $1,500 beginning February
1, 2000 through October 1, 2000 (the "Financial Advisory Fee").
(b) if a Disposition is consummated:
(i) during the term of Baird's engagement under this letter; or
(ii) during the 12 months following termination or expiration of
Baird's engagement with any person or entity (or any other
person or entity formed by or affiliated with such person
or entity) identified to the Company by Baird or involving
a person or entity or transaction as to which Baird has
performed services during the period of its engagement; or
(iii) which results from, or completes a Disposition contemplated
by, an agreement in principle or a definitive agreement to
effect a Disposition which is entered into during the term
of Baird's engagement or the 12 months following
termination or expiration of Baird's engagement;
then the Company shall pay to Baird in cash on the Transaction Date, a
transaction fee (the "Transaction Fee") equal to the percentages
specified below of the Consideration paid or payable in such
Disposition.
<PAGE>
Total Consideration Paid Percentage
------------------------ ----------
On the amount up to $35 million 0.10%
On the amount between $35 million and $40 million 0.30%
On the amount over $40 million 0.40%
It is intended that the Transaction Fee payable to Baird shall be 10%
of the success fee paid to Lincoln Partners LLC by the Company in
connection with the proposed Disposition(s).
5. In addition to the fees payable to Baird, the Company shall reimburse
Baird and its affiliates, upon request, for its and their reasonable
out-of-pocket expenses incurred in connection with Baird's engagement.
Out-of-pocket expenses may include, but are not limited to,
transportation, lodging, meals, document services, data base services,
facsimile charges, courier charges, word processing requirements and
fees and expenses of third parties such as legal counsel.
6. The Company shall furnish all information reasonably requested by
Baird for the purpose of rendering services hereunder (the
"Information"). The Company recognizes and confirms that Baird (i)
will use and rely on the Information and on other information
available from generally recognized public sources in performing the
services contemplated by this letter without any obligation to
independently verify the Information or such other information; (ii)
will not assume responsibility for the accuracy or completeness of the
Information or such other information; and (iii) will not make an
appraisal of any of the assets or liabilities of the Company or any
other entity. To the best of the Company's knowledge, the Information
will be true and correct in all material respects and will not contain
any material misstatement of a fact or omit to state any material fact
necessary to make the statements contained therein not misleading.
Baird agrees as provided in this letter to keep all non-public
Information provided to it by the Company confidential, except as
required by law. Notwithstanding anything to the contrary in this
letter, Baird may disclose non-public Information to its agents and
advisors, who shall also be bound by the terms of this paragraph,
whenever Baird determines that such disclosure is necessary or
appropriate to provide the services contemplated in this letter. The
Company acknowledges that all opinions and advice (written or oral)
given by Baird to the Company in connection with Baird's engagement
are intended solely for the benefit and use of the Company (including
its management, directors and attorneys) in considering the
transaction(s) to which they relate and the Company agrees that,
except as specifically permitted hereunder, no such opinion or advice
shall be used for any other purpose or reproduced, disseminated,
quoted or referred to at any time, in any manner or for any purpose,
nor shall any public references to Baird be made by the Company (or
such persons), without the prior written consent of Baird, which
consent shall not be unreasonably withheld.
7. The Company hereby agrees to indemnify, hold harmless and reimburse
Baird and each other Indemnified Party (as hereinafter defined) as
follows:
(a) The Company agrees to indemnify and hold Baird, its affiliates
and their respective directors, officers, partners, employees,
agents and controlling
<PAGE>
person (Baird and each such person being an "Indemnified Party")
harmless from and against any and all losses, claims, damages and
liabilities, joint or several, to which such Indemnified Party
may become subject, relating to or arising out of the engagement
of Baird, actions taken or omitted in connection therewith, or
the matters contemplated by this letter (including amounts paid
in settlement), and will reimburse each Indemnified Party for all
expenses (including without limitation fees and expenses of legal
counsel) as they are incurred in connection with investigating,
preparing or defending, or providing evidence in, any pending or
threatened claim or any action or proceeding arising therefrom,
whether or not such Indemnified Party is a party and whether or
not such claim, action or proceeding is brought by or on behalf
of the Company; provided, however, that the Company shall not be
liable pursuant to the foregoing indemnification provision in
respect of any loss, claim, damage or liability that a court of
competent jurisdiction shall have determined by final judgment
(not subject to further appeal) to be the sole result of the
willful misfeasance or gross negligence of such Indemnified
Party.
(b) If indemnification is to be sought hereunder by an Indemnified
Party, then such Indemnified Party shall notify the Company of
the commencement of any litigation, proceeding or other action in
respect thereof; provided, however, that the failure to notify
the Company shall not relieve the Company from any liability or
obligation that it may have under this paragraph or otherwise to
such Indemnified Party. Following such notification, the Company
may elect in writing to assume the defense of such litigation,
proceeding or other action (and the costs related thereto) and,
upon such election, the Company shall not be liable for any legal
costs subsequently incurred by such Indemnified Party (other than
costs of investigation or the production of documents or
witnesses) unless (i) the Company has failed to provide legal
counsel reasonably satisfactory to such Indemnified Party in a
timely manner or (ii) such Indemnified Party shall have concluded
that (A) the representation of such Indemnified Party by legal
counsel selected by the Company would be inappropriate due to
actual or potential conflicts of interest or (B) there may be
legal defenses available to such Indemnified Party that are
different from or additional to those available to the Company or
any other Indemnified Party represented by such legal counsel.
Nothing set forth herein shall preclude any Indemnified Party
from retaining its own counsel at its own expense. The Company
agrees that it will not, without the prior written consent of
Baird, settle, compromise or consent to the entry of judgment in
any pending or threatened claim, proceeding, or action in respect
of which indemnification could be sought hereunder (whether or
not any Indemnified Party is a party to such claim or proceeding)
unless such settlement includes a provision unconditionally
releasing Baird and all other Indemnified Parties from and
holding them harmless against all liability in respect of claims
by any releasing party related to or arising out of such matters
or any transaction or conduct in connection therewith.
(c) If the indemnification and reimbursement provisions set forth
above are unavailable or insufficient to hold an Indemnified
Party harmless, then the Company shall nonetheless contribute to
any such amounts paid or
<PAGE>
payable by such Indemnified Party in a proportion that
appropriately reflects the relative benefits received by the
Company, on the one hand, and Baird, on the other hand, in
connection with the matters to which such expenses or other
amounts relate. If the foregoing allocation according to relative
benefits is not permitted by applicable law, then amounts shall
be contributed by the Company to the Indemnified Party in such
proportion as appropriately reflects not only the relative
benefits referred to above, but also so reflects the relative
fault of the Company, on the one hand, and Baird, on the other
hand, as well as any other relevant equitable considerations.
(d) If multiple claims are asserted against an Indemnified Party in
any action or other proceeding, including an arbitration, and
indemnification as to at least one of such claims is permitted
under applicable law and provided for under this agreement, the
Company agrees that any judgment or award shall be conclusively
deemed to be based on claims as to which indemnification is
permitted and provided for, except to the extent the judgment or
award expressly states that the judgment or award, or any portion
thereof, is based solely on a claim or claims as to which
indemnification is not available.
(e) In connection with Baird's engagement hereunder, Baird may also
be engaged to act for the Company in one or more additional
capacities, and the terms of any such additional engagement may
or may not be embodied in one or more separate written
agreements. The provisions of this paragraph shall (i) apply to
the original engagement, any such additional engagement, and any
modification of the original engagement or such additional
engagement, (ii) remain in full force and effect whether or not
any of the transactions contemplated by this engagement or such
additional engagement are consummated, (iii) survive the
expiration or termination of the period of Baird's engagement,
and (iv) be in addition to any liability that the Company might
otherwise have to any Indemnified Party. The Company also agrees
that no Indemnified Party (including Baird) shall have any
liability (direct or indirect, in contract or tort or otherwise)
to the Company or its security holders, creditors or affiliates
in connection with any matter relating to the engagement of Baird
hereunder, except to the extent that a court having competent
jurisdiction shall have determined by final judgment (not subject
to further appeal) that such liability resulted solely from the
willful misfeasance or gross negligence of such Indemnified
Party. In no event shall the aggregate amount of liability of all
Indemnified Parties hereunder be in excess of the fees (exclusive
of expense reimbursement) actually paid to Baird under this
letter.
8. If a Disposition is effected and the Company is not the surviving
entity after such Disposition or in the event of a sale of all or
substantially all of the assets of the Company, the Company shall
cause the acquirer or acquirers to assume and honor the obligations
and liabilities of the Company in this letter, including without
limitation the Company's obligations and liabilities pursuant to
provisions concerning indemnification, contribution and the Company's
obligations to pay Baird's fees and to reimburse Baird's expenses.
<PAGE>
9. The Company acknowledges that Baird is a full service securities firm
and as such Baird and its affiliates may from time to time hold long
or short positions or effect transactions, for its own account or the
accounts of customers, in securities or options on securities of the
Company or other parties that might be involved in transactions with
the Company.
10. The Company and Baird agree and acknowledge that (i) this letter is
solely for the benefit of the parties to this letter, (ii) Baird shall
owe no duty to any person or entity other than the Company, and (iii)
no other person or entity, including without limitation the Company's
shareholders and the Company and its shareholders' respective
employees, officers, directors, trustees, affiliates and agents, shall
be deemed a third party beneficiary of this letter or have any rights
with respect to Baird's engagement.
11. This letter may not be amended or modified except in writing executed
by the Company and Baird. This letter may be executed in counterparts,
each of which shall be deemed an original and all of which shall
constitute one and the same instrument. Solely for purposes of
enforcing this agreement, the Company consents to personal
jurisdiction, service and venue in any court in which any claim,
action or proceeding which is subject to this agreement (including
without limitation the indemnification provisions) is brought against
Baird or any other Indemnified Party. Any right to trial by jury with
respect to any claim, action or proceeding related to or arising out
of Baird's engagement, any transaction or conduct in connection
therewith or this agreement is hereby waived. This letter shall be
governed by and construed in accordance with the internal laws of the
State of Illinois without reference to principles of conflicts of law.
Please confirm that the foregoing is in accordance with the Company's
understanding by signing and returning to Baird the enclosed duplicate of this
letter.
Very truly yours,
ROBERT W. BAIRD & CO. INCORPORATED
By: /s/ Steven G. Booth
--------------------------------
Its: Managing Director
-------------------------------
Accepted and agreed to as of
the date first written above
PRESTOLITE ELECTRIC INCORPORATED
By: /s/ Kenneth C. Cornelius
-----------------------------
Its: /s/ Vice President
-----------------------------
<PAGE>
Exhibit 10.2
December 31, 1999
Mr. Kenneth C. Cornelius
Senior Vice President & CFO
Prestolite Electric Incorporated
2100 Commonwealth Blvd.
Ann Arbor, Michigan 48105
Dear Mr. Cornelius:
This Letter Agreement confirms our mutual understanding regarding the retention
of Lincoln Partners L.L.C. ("Lincoln") by Prestolite Electric Incorporated
("Prestolite" or the "Company") to act as its exclusive investment banking
representative in connection with the proposed sale of the Wagoner DC motor
business, the Battery Charger business and the Material Handling motor business
(the "Businesses").
Lincoln Services and Role
1. Lincoln will assist Prestolite's management in:
(a) developing a list of corporations, partnerships, individuals or other
entities (each, together with its affiliates, a "Prospective
Purchaser") who might be interested in entering into a Transaction (as
defined in the next paragraph) with the Company;
(b) preparing a descriptive memorandum that describes the Businesses'
operations, management, results of operations and financial condition
and that incorporates current financial data and other information
deemed relevant by Prestolite (as amended and supplemented from time
to time) (the "Offering Memorandum");
(c) formulating and recommending a strategy for the sale of the
Businesses;
(d) contacting and eliciting interest from Prospective Purchasers;
(e) conveying information desired by serious Prospective Purchasers not
contained in the Offering Memorandum (the "Supplemental Information");
(f) investigating the financial capability of Prospective Purchasers;
(g) reviewing and analyzing proposals, both preliminary and firm, that are
received from Prospective Purchasers; and
(h) negotiating, to the extent requested by Prestolite, with Prospective
Purchasers. The initial list of Prospective Purchasers will be
submitted in writing by Lincoln to Prestolite as will any subsequent
list of Prospective Purchasers.
<PAGE>
2. As used in this Letter Agreement, the term "Transaction" shall mean:
(a) the acquisition, directly or indirectly, by a Prospective
Purchaser in a single transaction or a series of transactions, of (i)
all or substantially all of the assets or operations of the Businesses
or (ii) fifty percent (50%) or more of the outstanding stock of
another entity owned by Prestolite which owns the assets of the
Businesses; or (b) any merger, consolidation, reorganization,
recapitalization, business combination or other transaction pursuant
to which the Businesses are acquired by, or combined with, a
Prospective Purchaser.
3. In order that Prestolite and Lincoln best coordinate their efforts to
effect a Transaction during the period of Lincoln's engagement,
Prestolite and Lincoln agree that Lincoln will be the sole and
exclusive representative of Prestolite in the sale of the Businesses.
In the event Prestolite initiates discussions relating to the possible
sale of the Businesses other than through Lincoln, Prestolite agrees
to coordinate these discussions with Lincoln and each of those
entities so contacted will be deemed to be a Prospective Purchaser. In
the event Prestolite receives an unsolicited inquiry concerning
matters covered by this Letter Agreement, Prestolite will refer any
such inquiry to Lincoln and each of these unsolicited inquiries will
be deemed to be a Prospective Purchaser. Lincoln will not contact any
Prospective Purchaser without each being approved in advance by
Prestolite.
Information
- -----------
4. In connection with Lincoln's activities on Prestolite's behalf,
Prestolite will furnish Lincoln with information and data concerning
Prestolite and the Businesses (the "Information"). To the best of
Prestolite's knowledge all Information: (a) made available to Lincoln
by Prestolite; or (b) contained in any Offering Memorandum or
Supplemental Information will, at all times during the period of
engagement of Lincoln hereunder, be complete and correct in all
material respects and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein not misleading in the light of the
circumstances under which such statements are made. Further, any
projections provided by Prestolite to Lincoln contained in the
Offering Memorandum or Supplemental Information will be prepared in
good faith and will be based upon assumptions which, in the light of
the circumstances under which they are made, are reasonable.
Prestolite will promptly notify Lincoln if it learns of any material
inaccuracy or misstatement in, or omission from, any Information
previously delivered to Lincoln. The Offering Memorandum and every
item of Supplemental Information will be specifically approved in
advance by Prestolite. In rendering its services hereunder, including,
without limitation, assisting Prestolite's management in the
preparation of the Offering Memorandum, Lincoln will be using and
relying on the Information (and information available from public
sources and other sources deemed reliable by Lincoln) without
independent verification thereof or independent appraisal of any of
the Businesses' assets. Lincoln does not assume responsibility for the
accuracy or completeness of the Information or any other information
regarding Prestolite or the Businesses.
<PAGE>
5. In evaluating Prospective Purchasers, as requested by Prestolite,
Lincoln will be using publicly available information; information
contained in public reports provided by third party vendors (such as
Dun & Bradstreet, Inc.); and other information furnished to Lincoln by
such Prospective Purchasers. Lincoln does not assume responsibility
for the accuracy or completeness of any information regarding
Prospective Purchasers contained in public sources or provided by
Prospective Purchasers.
6. Prestolite will provide Lincoln with access to Prestolite's employees,
independent accountants and legal counsel and other third parties
having a relationship with Prestolite to the extent Lincoln shall deem
reasonably necessary in connection with the performance of its
services hereunder.
Compensation and Reimbursement of Expenses
- ------------------------------------------
7. In consideration of Lincoln's services pursuant to this Letter
Agreement, Lincoln shall be entitled to receive, and Prestolite agrees
to pay Lincoln, the following compensation:
(a) An initial cash retainer of $25,000 payable to Lincoln upon the
execution of this Letter Agreement for services rendered over the
next six months.
(b) For the first eight months of the Engagement only, a monthly cash
retainer of $7,500 paid quarterly in arrears.
(c) Provided a transaction or Transaction or Transactions are
completed, a Success Fee equal to the higher of (i) an amount
determined according to the following schedule:
1.0% of the Sale Price up to $35 million (the "First
Hurdle Price"); plus 3.0% of the amount above the
First Hurdle Price and below $40 million (the "Second
Hurdle Price"); plus 4.0% of the Sale Price in excess
of the Second Hurdle Price.
or (ii) $250,000
Lastly, Lincoln agrees to allow up to 10% of the Success Fee computed in section
7(c) to be paid to another investment bank of Prestolite's choice.
The Success Fee shall be earned, due and payable in cash at the time of the
closing of the Transaction, except in the case where any portion(s) of the
Success Fee are associated with contingent portion(s) of the Sale Price or notes
issued to Prestolite (as defined in the next paragraph). The Success Fee for
that portion of the Sale Price received at closing shall be computed consistent
with the next paragraph. Portion(s) of the Sale Price or notes shall be due and
payable in cash at the time of the collection of such future payment(s) or
collection of the notes. Notwithstanding the preceding sentence, Prestolite and
Lincoln may mutually agree on an amount to be paid in cash at the closing in
lieu of any future payments to Lincoln.
<PAGE>
8. For the foregoing purposes the "Sale Price" shall be calculated as the
sum of the following values identified in (a) through (g) less (h) at
closing:
(a) Cash and cash equivalents paid to Prestolite;
(b) Market value of any common stock issued to Prestolite;
(c) The par value of any preferred stock issued to Prestolite, unless
market value is easily determinable;
(d) The face value of any notes issued to Prestolite, unless the
market value is easily determinable;
(e) The face value of any debt owed by Prestolite which is assumed
and/or forgiven by the Purchaser, unless the market value is
easily determinable;
(f) Consideration paid or payable under covenants not to compete,
earn-outs, royalties, and management or consulting arrangements
(such terms not to encompass employment agreements) between
Prestolite and the Purchaser;
(g) Trade accounts receivable or lease receivables associated with
the Businesses' business (at fair market value) or other of the
Businesses assets listed on the Businesses' balance sheets,
prepared in a manner consistent with past practices, but retained
by Prestolite after closing; and less
(h) Accounts payable and accrued liabilities associated with the
Businesses' business or any third party (i.e. non-Prestolite)
liabilities on the Businesses' balance sheet, prepared in a
manner consistent with past practices, which are not assumed by
the Purchaser as of the closing date of the sale of the
Businesses.
9. Notwithstanding termination of this Letter Agreement or Lincoln's
engagement hereunder, in the event Prestolite enters into a
Transaction with the Prospective Purchaser or Prestolite enters into a
definitive sale agreement with the Prospective Purchaser (which
subsequently results in a Transaction) within twelve months of the
termination date of this Letter Agreement, Lincoln shall be entitled
to the Success Fee as set forth above.
10. In addition to the fees described above, Prestolite agrees to promptly
reimburse Lincoln, upon request from time to time, for all reasonable
out-of-pocket expenses incurred by Lincoln in connection with the
matters contemplated by this Letter Agreement commencing with expenses
incurred December 21, 1999.
<PAGE>
Indemnification
- ---------------
11. Prestolite agrees to separately indemnify Lincoln in accordance with
the indemnification provisions (the "Indemnification Provisions")
attached to this Letter Agreement in Exhibit I, which Indemnification
Provisions are incorporated herein and made part hereof.
Other Terms
- -----------
12. Either party hereto may terminate this Letter Agreement at any time
upon written notice, without liability or continuing obligation except
as set forth in this paragraph 12. Neither the termination of this
Letter Agreement nor Lincoln's engagement hereunder shall affect: (a)
any compensation earned by Lincoln up to the date of termination or
completion, or after termination, as the case may be, pursuant to
paragraph seven or paragraph nine; (b) the reimbursement of expenses
incurred by Lincoln up to the date of termination or completion, as
the case may be, pursuant to paragraph ten; (c) the attached
Indemnification Provisions; and (d) the provisions of paragraph 15 of
this Letter Agreement, all of which shall remain operative and in full
force and effect.
13. Lincoln makes no representations express or implied that its efforts
on behalf of Prestolite will result in a Transaction.
14. Lincoln agrees that there will be no obligation on the part of
Prestolite to negotiate with or accept any offer from a Prospective
Purchaser unless, in Prestolite's sole discretion, the terms and
conditions shall be acceptable to Prestolite's management and/or Board
of Directors.
15. Any advice rendered by Lincoln pursuant to this Letter Agreement shall
not be disclosed publicly without Lincoln's prior written consent.
16. Lincoln may publish, at its own expense, an advertisement announcing
the completion of the Transaction and Lincoln's role therein, subject
to receiving Prestolite's written approval which will not be
unreasonably withheld.
<PAGE>
If the foregoing correctly sets forth our understanding, please confirm this by
signing and returning to us the duplicate copy of this Letter Agreement. We look
forward to working with you towards the successful conclusion of this
assignment.
Very truly yours,
LINCOLN PARTNERS L.L.C.
By: /s/ L. James Lawson, III
-------------------------
L. James Lawson, III
Managing Director
The above is agreed to this
4/th/ day of January 2000
Prestolite Electric Incorporated
By: /s/ Kenneth C. Cornelius
---------------------------------
Kenneth C. Cornelius
Senior Vice President & CFO
<PAGE>
INDEMNIFICATION PROVISIONS
1. Indemnification. Prestolite (as such term is defined in the attached
---------------
Letter Agreement) on its own behalf as well as on the behalf of its successors
or assigns, agrees that since Lincoln (as such term is defined in the attached
Letter Agreement) will be acting on Prestolite's behalf, Prestolite (the
"Indemnifying Party") will indemnify and hold harmless Lincoln and each of its
officers, directors, agents, employees and affiliates and each person, if any,
who controls Lincoln within the meaning of the federal securities laws (Lincoln
and each such entity and person being referred to hereinafter as an "Indemnified
Party") from and against any and all losses, claims, damages, and liabilities,
as incurred, joint or several (including all legal or other expenses reasonably
incurred by any Indemnified Party in connection with the preparation for or
defense of any claim, action, or proceeding, whether or not instituted or
resulting in any liability), to which each Indemnified Party may become subject
under any applicable federal or state law or otherwise, caused by or arising out
of Lincoln's engagement (as such term is defined in the attached Letter
Agreement) or Lincoln's role in connection therewith (i) caused by or arising
out of any untrue statement or alleged untrue statement of a material fact
contained in the Information, Offering Memorandum or Supplemental Information
(as such terms are defined in the attached Letter Agreement) or the omission or
the alleged omission to state therein a material fact necessary in order to make
the statements therein not misleading in light of the circumstances under which
they were made or (ii) otherwise caused by or arising out of or in connection
with Lincoln acting pursuant to the Letter Agreement except to the extent that a
court of competent jurisdiction shall have determined by a final judgement that
such losses, claims, damages or liabilities resulted primarily from the gross
negligence, bad faith, or willful misconduct of Lincoln or any Indemnified Party
in which case this clause (ii) shall not be applicable.
2. Notification by Indemnifying Party. Promptly after the Indemnifying
----------------------------------
Party's knowledge of the commencement of any action, suit, proceeding or
investigation against an Indemnified Party relating to this Letter Agreement,
the Indemnifying Party agrees to notify Lincoln of the assertion against the
Indemnified Party.
3. Notification by Lincoln. If any action, suit, proceeding or
-----------------------
investigation is commenced, as to which Lincoln proposes to demand
indemnification, Lincoln shall in writing promptly notify the Indemnifying
Party; provided, however, that any failure by Lincoln to notify the Indemnifying
-------- -------
Party shall not relieve the Indemnifying Party from its obligations hereunder
except to the extent such failure prejudices the defense for which
indemnification is claimed.
<PAGE>
4. Selection of Counsel for Indemnified Party. In the event an action or
------------------------------------------
proceeding arising out of this Letter Agreement shall be commenced against an
Indemnified Party and the Indemnifying Party shall decline or fail to assume the
defense of such matter with counsel reasonably satisfactory to Lincoln or
Lincoln's legal counsel shall determine that defenses may be available to an
Indemnified Party that are different from those available to the Indemnifying
Party, then the Indemnified Party may employ separate counsel to represent or
defend it or any Indemnified Party in any such action or proceeding in which it
or such Indemnified Party may become involved or is named as defendant and the
Indemnifying Party shall pay currently the reasonable fees and disbursements of
such separate counsel; provided that the Indemnifying Party shall not be
obligated to pay the fees and disbursements of more than one such separate
counsel for any one such action or proceeding in any one jurisdiction.
5. Contribution. The Indemnifying Party and Lincoln agree that if any
------------
indemnification or reimbursement sought by an Indemnified Party pursuant to the
Letter Agreement is held by a court to be unavailable for any reason (other than
as a consequence of a court of competent jurisdiction having determined by a
final judgement that such losses, claims, damages or liabilities resulted
primarily from the gross negligence, bad faith or willful misconduct of Lincoln
or any Indemnified Party), then (whether or not Lincoln is the Indemnified
Party) the Indemnifying Party and Lincoln shall contribute to the losses,
claims, damages, liabilities and expenses for which such indemnification or
reimbursement is held unavailable in such proportion as is appropriate to
reflect the relative benefits and fault of the Indemnifying Party on the one
hand, and Lincoln on the other hand, in connection with the transaction
contemplated by the Letter Agreement, subject to the limitation that Lincoln's
aggregate contribution shall not exceed the amount of fees actually received by
Lincoln pursuant to the Letter Agreement.
6. Agreement to Testify. In the event of administrative proceedings or
--------------------
litigation in connection with the services provided under this Letter Agreement,
Lincoln agrees that its representatives will testify or otherwise assist the
Indemnifying Party in preparing for testimony at the reasonable request of the
Indemnifying Party. If Lincoln is not a co-defendant in such proceeding or
litigation, the Indemnifying Party will pay Lincoln reasonable and customary
additional compensation as agreed upon by Lincoln and the Indemnifying Party to
cover testifying in connection with such proceedings or litigation and the
preparation for such litigation, proceeding or testimony. In any circumstance in
which Lincoln or its representatives takes any of such actions, regardless of
whether it is a co-defendant, the Indemnifying Party will reimburse Lincoln for
all out-of-pocket expenses reasonably incurred by Lincoln and its
representatives in connection therewith, including the reasonable fees and
disbursements of its separate legal counsel.
<PAGE>
7. Survival. Neither the termination nor completion of the Letter
--------
Agreement or of the engagement of Lincoln referred to therein shall affect the
indemnification provided for hereunder, which shall remain operative and in full
force and effect.
Accepted and agreed to this
4/th/ day of January 2000
Prestolite Electric Incorporated
By: /s/ Kenneth C. Cornelius
---------------------------------
Kenneth C. Cornelius
Senior Vice President and CFO
<PAGE>
Exhibit 10.3
EXCLUSIVE LISTING AGREEMENT
THIS AGREEMENT, by and between BINSWANGER, having an address at Two
Logan Square, Fourth Floor, Philadelphia, Pennsylvania 19103 ("Agent") and
PRESTOLITE ELECTRIC INCORPORATED, having an address at Highway 20 West, Decatur,
Alabama 35609-2205 ("Owner").
Intending to be legally bound hereby, Agent and Owner agree as follows:
1. Exclusive Right to Sell. Subject to the terms of Section 4.1 below,
-----------------------
Agent is hereby given the sole and exclusive right to list and offer for sale
for the Owner's account the land and buildings owned by Owner situated in
DECATUR, ALABAMA, located on Highway 20 West, and consisting of approximately
258,000 square feet of space on approximately 69 acres of land, (all or any part
of which is hereinafter referred to as the "Property"), provided that Agent
agrees by listing and otherwise, to use its best efforts to sell the Property
until this Agreement is terminated as herein provided. Such sale may be subject
to a "leaseback" of the Property to Owner, on terms satisfactory to Owner.
2. Term. This Agreement shall be for a term of one (1) year, beginning
----
from the last date of execution of this Agreement by Agent or by Owner, and
shall terminate on such date unless extended in writing by Owner. For a period
of one (1) year following the termination of Agent's exclusive right, Agent's
authority shall continue as to those entities with whom there has been
substantial two way communication regarding the Property ("Protected
Prospects"), so that if subsequent to such termination an agreement of sale is
entered into on the Property by any such entity, or by any person, firm or
corporation in which or in whom there is an interest, relationship or connection
with such entity, whether by Agent or by Owner directly or by any other agent,
or person whomsoever, a full Commission as hereinafter defined shall be paid to
Agent. Such substantial communication must be evidenced by documented telephone
calls or written correspondence.
3. Listing Price. Agent is authorized to offer the Property for sale at
-------------
a gross purchase price of Four Million Nine Hundred Fifty Thousand and 00/100
Dollars ($4,950,000.00), in cash or upon other such prices, terms and conditions
as Owner may from time to time approve in writing.
4. Commission. IF THE PROPERTY IS SOLD EXCEPT AS PROVIDED IN SECTION
----------
4.1 BELOW, NO MATTER BY WHOMSOEVER THE PROPERTY MAY BE SOLD, TRANSFERRED,
CONVEYED, EXCHANGED OR LEASED OR SUCH PURCHASER OR TENANT PROCURED, WHETHER BY
AGENT OR BY OWNER DIRECTLY OR BY ANY OTHER ENTITY WHATSOEVER, THEN, IN ANY SUCH
EVENT, OWNER AGREES THAT AGENT SHALL HAVE EARNED A COMMISSION AND OWNER AGREES
TO PAY TO AGENT A SALE COMMISSION OF SIX PERCENT (6%) OF THE GROSS AGGREGATE
PURCHASE PRICE (the "Commission").
<PAGE>
4.1 Agent acknowledges that Owner (i) is attempting to sell Owner's
motor manufacturing business currently operated at the Property and (ii) may
attempt to sell the switch business currently operated at the Property. Agent
acknowledges and agrees that in the event Owner sells the Property in
conjunction with the sale of Owner's motor manufacturing business and/or Owner's
switch business, no Commission shall be due and payable by Owner to Agent
pursuant to Section 4; provided, however, that in such case Owner shall be
obligated to pay to Agent the cancellation fee specified in Section 5.
4.2 It is understood and agreed that the Property will not be offered
for lease to third parties; however, in the event Owner decides to offer the
Property for lease to third parties during the term of this Agreement, Agent
shall be granted the sole and exclusive right to list and offer the Property for
lease for the balance of the term of this Agreement. If, prior to the
termination of this Agreement (or after such termination as hereinafter set
forth), Owner leases or agrees to lease the Property, or any part thereof, to a
"Protected Prospect," Owner agrees to pay Agent a lease Commission based on the
Gross Aggregate Rental which shall be computed in accordance with Paragraph 4
hereof and paid by Owner to Agent, within fifteen (15) days of Owner's receipt
of rent payment. In the event that a lease is executed by Owner, any expansion
of space leased by such tenant or the grant thereafter of additional space, to
any such tenant, or any person, firm or corporation having an interest,
relationship or connection in or with the tenant of the lease, shall be deemed
an original letting and Commissions thereon shall be computed accordingly and
paid by Owner to Agent. It is further understood that if such tenant, or any
person, firm or corporation having an interest, relationship or connection in or
with the tenant or the lease, shall purchase the Property, or any substitute
land and/or building owned by Owner, at any time during the term of the lease,
or any extension or renewal thereof, Owner agrees to pay to Agent a sale
Commission as set forth in Paragraph 4 above; provided, however, that the
aggregate amount of leasing Commissions paid by Owner to Agent shall be credited
against such sale Commission.
5. Cancellation Fee. In the event Owner, during the term of this
----------------
Agreement (i) elects to remove the Property from the market, whether or not for
Owner's own use, (ii) makes a donation of the Property, (iii) sells Property
pursuant to Section 4.1, or (iv) abandons (a) the Property, or (b) Owner's
interest in the Property (whether in fee or leasehold), then in any such cases,
a one-time cancellation fee of $10,000.00 for each month this Agreement is in
effect prior to cancellation, up to a maximum of $100,000.00 shall be paid to
Agent, which fee shall be paid within ten (10) days of Owner's notification to
Agent of Owner's decision to so remove the Property from the market; provided,
however, that payment of such cancellation fee does not negate Owner's
obligation to pay a Commission to Agent should a prospect of Agent purchase or
lease the Property after the payment of such cancellation fee.
6. Sale or Transfer. The acquisition of the Property, or any part
----------------
thereof, by virtue of a purchase of a controlling capital stock interest,
controlling partnership interest or corporate assets, or by virtue of merger,
consolidation, or gift, or in any other manner whatsoever by operation of law or
otherwise, shall not be deemed and taken to be included within the term "sale"
for the purposes of this Agreement.
<PAGE>
7. Marketing. For certain promotional or advertising expenses, Owner
---------
agrees to pay Agent certain marketing expenses in accordance with the Marketing
Plan attached hereto as Exhibit "A" and made a part hereof which is expressly
approved by Owner's signature below. One-half (1/2) of said amount shall be
advanced to Agent for such expenses upon Owner's receipt of a fully executed
copy of this Agreement and the balance shall be paid to Agent monthly thereafter
upon receipt of bills for such expenses as they are incurred by Agent, or
Agent's representative. Agent and Owner may subsequently agree in writing to
additional promotional or advertising expenses. It is agreed that (i) upon a
sale of the Property, any unreimbursed advertising expenses to which Owner has
previously agreed in writing shall be due and payable to Agent at the closing of
the transaction and, (ii) in the event that this Agreement shall terminate
without the Property being sold or leased, any unreimbursed advertising expenses
shall be due and payable to Agent on such termination date.
7.1 Subject to compliance with applicable laws and regulations, Agent
is hereby authorized to place an available sign on the Property which Owner
agrees shall be the only such sign permitted on the Property during the term of
this Agreement.
8. Owner's Obligations. Any and all proposed sale agreements shall
-------------------
be made in Owner's name and upon the terms and conditions acceptable to Owner
both as to legal form and substance. Agent shall have the right to cause to be
inserted therein provisions setting forth the Commissions to be paid to Agent as
provided for in this Agreement, or as may hereafter be agreed upon by Agent and
Owner, and Owner shall furnish Agent with copies of all such agreements promptly
upon their execution. In the event that Agent engages counsel to collect any
sums due to Agent hereunder, or to enforce any of the provisions hereof, then
Owner agrees to reimburse Agent, upon demand, for all reasonable fees, costs and
other incidental expenses, including, but not limited to, reasonable attorneys'
fees and costs, whether or not a suit is instituted.
8.1 Owner represents and warrants to Agent that Owner has the legal
right to sell the Property. Owner agrees that any sale entered into will include
a provision stating that the purchaser has purchased the Property without
reliance upon any representation of Owner or Agent except as explicitly set
forth therein.
8.2 During the term of this Agreement all inquiries made to Owner
pertaining to the Property shall be referred to Agent, and Owner agrees not to
negotiate with any prospective purchaser except through Agent and except as
provided in Section 4.1.
9. Environmental Disclaimer. Owner acknowledges and agrees that (i)
------------------------
Agent is not an expert in environmental matters and that Agent has not made nor
has been asked to make and shall not make any representations and warranties
with respect to the environmental conditions or suitability of the Property;
(ii) any obligation which may exist with regard to compliance with statutes,
ordinances and regulations relating to the environmental conditions is Owner's
sole responsibility; (iii) if required by law, Owner will immediately (a) notify
Agent of any knowledge of any matters of environmental concern, (b) give such
information to a potential
<PAGE>
buyer or tenant, and (c) report such information to the appropriate governmental
authority; (iv) Owner will indemnify, defend and hold Agent harmless against any
claims, demands and liabilities, including reasonable attorney's fees and costs
----------
arising from or related to the environmental condition of the Property; and, (v)
the provisions of this Paragraph shall survive the termination of this
Agreement.
10. FIRPTA. Under Section 1445 of the Internal Revenue Code of 1986,
------
as amended, and the regulations issued thereunder, the purchaser of the Property
may be required to withhold up to ten percent (10%) of the Purchase Price of the
Property unless Owner provides the purchaser with a "nonforeign certificate"
indicating that Owner is not a foreign person for purposes of the Internal
Revenue Code. Agent may be subject to liability if Owner issues a false
"nonforeign certificate". Owner hereby agrees to indemnify and hold Agent
harmless from liability for any tax, penalty, interest or other charge imposed
upon Agent by, through or under Owner resulting from Owner's actions or Owner's
agents' actions.
11. Dual Agency. Owner acknowledges that the Agent may present the
-----------
Property for sale to a potential purchaser who is also represented by the Agent.
In such event, the Agent will disclose such arrangement to the Owner.
12. Representation. Owner and Agent will disclose to any prospective
--------------
buyer that Agent represents Owner except as provided in Section 4.1.
13. Non-Discrimination. OWNER AND AGENT AGREE THAT THE PROPERTY WILL
------------------
BE OFFERED FOR SALE AND WILL BE SOLD WITHOUT REGARD TO RACE, COLOR, RELIGIOUS
CREED, SEX, ANCESTRY, AGE, NATIONAL ORIGIN, DISABILITY OR FAMILIAL STATUS.
14. Definitions.
-----------
The term "Gross Aggregate Purchase Price" shall mean the full
cash consideration to be paid by the purchaser to Owner pursuant to the written
sales agreement between them (other than real property tax proration payments by
purchaser to Owner), plus any principal amount of any mortgages and other liens
on the Property (a) securing deferred purchase price payable by the purchaser in
Owner's favor or (b) subject to which the purchaser accepts title to the
Property. In the case of a trade of properties or other items other than cash or
cash credits, the fair market value of such property or other items traded for
the Property shall also be included in the term "gross aggregate purchase
price." The leaseback rentals, if any, to be paid by Owner to purchaser shall be
excluded from the term "gross aggregate purchase price."
The term "Gross Aggregate Rental" shall mean the base rent and
any and all calculations of such base rent during the term of the lease and any
renewal or extension thereof. The leaseback rentals, if any, to be paid by Owner
to purchaser shall be excluded from the term "gross aggregate rental." Base rent
excludes "triple net" reimbursement payments payable by the tenant to the
landlord.
<PAGE>
The terms "lease" and "renewal, extension or expansion" include
any arrangement by which the tenant or any person, firm, or corporation having
any interest, relationship, or connection in or with the tenant originally has
or, with respect to renewals, extensions, or expansions, continues to have the
right to use or remain in possession of all or any portion of the Property,
including, but not limited to, a lease, a license or as a holdover, but
specifically excludes a leaseback from the purchaser to Owner.
15. Miscellaneous. This Agreement and the representations and
-------------
warranties contained herein shall be binding upon Agent and Owner and their
respective successors and assigns. Owner acknowledges that Agent may assign
Agent's rights and obligations under this Agreement to one or more affiliates of
Agent and Owner hereby consents to such assignments.
15.1 This Agreement and the terms hereof constitute the entire
agreement between Owner and Agent and no modification or amendment shall be
effective unless and until made in writing and signed by both Owner and Agent.
15.2 Agent and Owner shall acknowledge their approval of this
Agreement, and Owner shall acknowledge presentation by Agent of the "Real Estate
Brokerage Services Disclosure" which is attached hereto and made a part hereof,
as required by Alabama Real Estate Commission Rule 790-X-3-.13 (1), by signing
in the space provided below and Owner returning to Agent at least one (1) fully
executed counterpart hereof.
OWNER:
PRESTOLITE ELECTRIC INCORPORATED
By: /s/ Kenneth C. Cornelius
-----------------------------
Title: Vice President
-------------------------
Date: February 29, 2000
----------------------------
AGENT:
BINSWANGER SOUTHERN (N.C.), INC.
BINSWANGER OF PENNSYLVANIA, INC.
By: /s/ Susan M. Sygenda
----------------------------------
Susan M. Sygenda, Vice President
----------------------------------
Date: February 28, 2000
--------------------------------
<PAGE>
Exhibit 10.4
AMENDMENT NO. 3 TO CREDIT AGREEMENT
-----------------------------------
THIS AMENDMENT, dated as of February 28, 2000, by and between Prestolite
Electric Incorporated, a Delaware corporation, of Ann Arbor, Michigan (herein
called "Company"), and Comerica Bank, a Michigan banking corporation, of
Detroit, Michigan (herein called "bank").
W I T N E S S E T H:
WHEREAS, said parties desire to amend that certain Second Amended and
Restated Credit Agreement dated as of December 31, 1998, entered into by and
between Company and Bank, as amended by Amendment No. 1 dated as of July 30,
1999 and Amendment No. 2 dated as of October 28, 1999 (herein called
"Agreement"), to modify the financial covenants;
NOW, THEREFORE, IT IS AGREED that the Agreement is amended as follows:
1. Section 10.11 is amended to read in its entirety as follows:
"10.11 Maintain Consolidated Capitalization of not less than
the following amounts as of the last day of each fiscal quarter during
the periods indicated below:
December 31, 1999 through December 30, 2000 ............ $90,000,00
December 31, 2000 and thereafter ....................... $92,000,00
2. Section 10.13 is amended by deleting the dates and ratios specified
therein and replacing them with the following:
December 31, 1999 through June 29, 2000 ................ 1.3 to 1
June 30, 2000 through December 30, 2000 ................ 1.5 to 1
December 31, 2000 and thereafter ....................... 1.7 to 1
3. Section 10.14 is amended to read in its entirety as follows:
"10.14 Maintain a Funded Debt Ratio of not more than the
following as of the last day of each fiscal quarter during the periods
specified below:
December 31, 1999 through December 30, 2000 ............ 6.6 to 1
December 31, 2000 and thereafter ....................... 5.5 to 1
<PAGE>
4. Company and Bank acknowledge and agree that Company is attempting to
sell certain of its assets out of the ordinary course of business, and that as a
condition to Bank's consent to any proposed sale, Bank may require that all of
some of the financial covenants in the Agreement be amended.
This Amendment shall be effective as of the date hereof and upon payment by
Company of a non-refundable amendment fee in the amount of $57,500. Except as
modified hereby, all of the terms and conditions of the Agreement and the
Revolving Credit Note shall remain in full force and effect. Company hereby
represents and warrants that, after giving effect to the amendments contained
herein, (a) the execution, delivery and performance of this Amendment and any
other documents and instruments required under this Amendment or the Agreement
are within Company's corporate powers, have been duly authorized, are not in
contravention of law or the terms of Company's certificate of incorporation or
bylaws and do not require the consent or approval of any governmental body,
agency or authority, and this Amendment, and any other documents and instruments
required under this Amendment or the Agreement, are valid and binding in
accordance with their terms; (b) the continuing representations and warranties
of Company set forth in Section 9.1 through 9.5 and 9.8 through 9.16 of the
Agreement are true and correct on and as of the date hereof, and the continuing
representations and warranties of Company set forth in Section 9.6 of the
Agreement are true and correct as of the date hereof with respect to the most
recent financial statements furnished to Bank by Company in accordance the
Agreement; and (c) no Default or Event of Default has occurred and is continuing
as of the date hereof.
WITNESS the execution hereof as of the date and year first above written.
COMERICA BANK PRESTOLITE ELECTRIC INCORPORATED
By: /s/ Peggy Cummins By: /s/ Dennis P. Chelminski
---------------------- --------------------------
Its: Vice President Its: /s/ Controller
-------------------- ---------------------------
<PAGE>
CONSENT OF GUARANTOR
--------------------
The undersigned guarantor hereby consents to the foregoing Amendment as of
the date thereof and reaffirms and ratifies all of its obligations to the Bank
under the guaranty of the obligations of Company previously executed and
delivered by it.
PRESTOLITE ELECTRIC HOLDING, INC.
By: /s/ Dennis P. Chelminski
--------------------------------
Its: Controller
-------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR PEI
HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001057053
<NAME> PRESTOLITE ELECTRIC HOLDING, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 432
<SECURITIES> 0
<RECEIVABLES> 40,176
<ALLOWANCES> 2,369
<INVENTORY> 49,642
<CURRENT-ASSETS> 97,398
<PP&E> 81,608
<DEPRECIATION> 33,738
<TOTAL-ASSETS> 182,056
<CURRENT-LIABILITIES> 63,118
<BONDS> 131,246
0
0
<COMMON> 2
<OTHER-SE> 16,623
<TOTAL-LIABILITY-AND-EQUITY> 182,056
<SALES> 213,982
<TOTAL-REVENUES> 213,982
<CGS> 172,064
<TOTAL-COSTS> 203,198
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,816
<INCOME-PRETAX> (4,481)
<INCOME-TAX> 293
<INCOME-CONTINUING> (4,774)
<DISCONTINUED> (1,417)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,191)
<EPS-BASIC> (3.11)
<EPS-DILUTED> (3.11)
</TABLE>
