10-K 1 k68478e10-k.txt FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 2001. [ ] 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. (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) 2311 GREEN RD., STE B, ANN ARBOR, MICHIGAN 48105 (Address of principal executive offices) (Zip Code)

(734) 913-6600 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, address, and former fiscal year, if changed since last report) Indicate whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No ____ As of March 28, 2002, there were 1,985,000 shares of the registrant's common stock outstanding. There is no public market for the registrant's common stock. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- This annual report on Form 10-K of Prestolite Electric 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 alternators and starter motors for heavy duty, automotive, defense and industrial markets. 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 consolidated a 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. Attractive Aftermarket/Original Equipment Balance. In 2001 approximately 42% of our net sales were to OEM customers and 58% to aftermarket 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." 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. 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. International Presence. We currently conduct business in the United States, the United Kingdom, South Africa, China and Argentina. Approximately 55% of our net sales in 2001 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 requirements. See "-- Risk Factors -- We have risks because of foreign operations." PRODUCTS We manufacture and distribute alternators and starter motors, primarily for use in heavy duty vehicles and automobiles. Our products 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. 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. 1 Other Products. Other products we manufacture include ignition distributors, 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 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. Markets Served We sell our products to a variety of markets, including: Heavy Duty. The heavy duty market includes heavy duty trucks, school and shuttle buses, emergency vehicles, off-road and special 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. Automotive. Products sold to automobile OEMs are primarily starter motors and alternators in Argentina and South Africa. Defense. Our products sold to the defense market include alternators and starter motors for use in military vehicles. Industrial, Marine and Other Applications. These sales include starter motors and alternators for marine and other applications. Independent Distribution. A portion of sales to each of our markets are through independent distributors. About half of our automotive sales through these distribution networks represents products manufactured by third parties and purchased by us for resale. CUSTOMERS AND COMPETITION Most of our products are component parts used on diesel or gasoline engines. 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 42% of our 2001 net sales, with the remaining sales derived from aftermarket customers. No single customer individually accounts for more than ten percent of our consolidated revenues. 2 We operate in highly competitive markets. While no single competitor competes with us in all of our 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." Delco Remy International Inc. is our principal competitor in the North American market for truck alternators and starter motors in both the OEM and aftermarket segments. Some national and many local remanufacturers also compete in the aftermarket segment. 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 and bus alternators and starters. Our principal competitors in the South African and Argentine OEM market include Bosch and other international corporations that import into those markets. C.E. Niehoff is our major competitor in the North American market for military alternators. Our principal competitors in the market for high-amperage (165 to 320 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. DISCONTINUED OPERATIONS In August of 2000 we sold our direct current motor business, switch business and battery charger business. As discussed in Note 3 of our audited financial statements, these businesses generated approximately $71.3 million of sales in 1999 and $44.0 million of sales during the seven months of our ownership in 2000. We treat these 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 consolidated sales shown in our financial statements. Products of our discontinued businesses included: - 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. - Switches, sold to a wide variety of markets, including material handling and automotive. We sold these businesses for a total contract price of $62.0 million, less certain receivables and subject to certain adjustments. The adjusted sale price was approximately $57.4 million. SEASONALITY, RAW MATERIALS AND BACKLOG Our sales to OEMs accounted for approximately 42% of our net sales for the year ended December 31, 2001. 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 which may have an effect on our sales. In addition, strikes, lock-outs, work stoppages or other production interruptions in the vehicle 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 vehicles could have a materially adverse effect on our results of operations. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." 3 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 and for the use of a conductive bearing to replace brushes in alternators and other rotating machines. We have the exclusive right to use the "Prestolite Electric" trade name for use with alternator and starter motors. "Prestolite Wire", "Prestolite Batteries", "Prestolite Motors", and "Prestolite Switches" are sold by unrelated companies. We formerly had the right to the "Prestolite Electric" name under a perpetual, royalty-free license from AlliedSignal Corporation (now Honeywell Incorporated). At the end of 1999, we formed a limited liability company which acquired the rights to the "Prestolite" name from AlliedSignal. 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 Y30.0 million (approximately $0.2 million as of that date) and royalty payments based on the net sales of such products. EMPLOYEES We had approximately 2,000 employees as of December 31, 2001. There are no collective bargaining agreements in effect with respect to any of our United States employees. All of the hourly employees at our United Kingdom, South African, Argentine, and Chinese facilities are members of unions. We have not experienced a strike or work stoppage at any of our facilities, except in South Africa. The actions in South Africa were part of nationwide, industry-wide actions that included our facility. We cannot assure you that a strike or work stoppage will not occur in the future at any of our facilities. 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 42% of our net sales for the year ended December 31, 2001. 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 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." 4 We have risks because of our foreign operations. We currently conduct business in the United States, the United Kingdom, South Africa, China and Argentina. Approximately 55% of our net sales in 2001 were to customers outside of North America. 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 payment 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 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. We cannot assure you that additional warranty claims or requests for payment would not materially adversely affect our 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. 5 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 contractual 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, 2001, we had $112.2 million of consolidated indebtedness outstanding and our stockholders' deficit was approximately $25.3 million. Our ability to make scheduled payments of principal or interest on, or to refinance, our debt will 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. 6 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 minimum fixed charge coverage ratios and funded debt ratios. These restrictive covenants may restrict our ability to expand or to pursue our business strategies. A breach of 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 repay borrowings, the lender could proceed against the collateral granted to it to secure that debt. 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. If we did not purchase our senior notes we would default under the Indenture. This would permit the trustee under the Indenture or the holders of at least 25% in principal amount of the outstanding senior notes to declare the principal and accrued but unpaid interest to be due and payable. We are controlled by Genstar Capital Corporation. As of December 31, 2001, Genstar Capital Corporation controlled 96.7% (83.8% 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." 7 ITEM 2. PROPERTIES Our corporate headquarters are located at 2311 Green Road, Ann Arbor, Michigan 48105, which we lease. The phone number at that location is (734) 913-6600. The following table sets forth certain information regarding the major facilities we operated as of December 31, 2001:

We continually evaluate our facility requirements and believe that suitable additional space, if needed, will be available on commercially reasonable terms. 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, is or will be material to our future financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 28, 2002, there were 1,985,000 shares of our common stock outstanding. Management shareholders owned 65,000 shares. The other 1,920,000 shares were in a trust controlled by Genstar Investment Corporation. As of March 28, 2002, there were employee-held options outstanding to purchase up to an additional 326,660 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. 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. 8 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, 2001 and the balance sheet data as of December 31, 2000 and 2001 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 3 to our audited financial statements. The statements of operations data for each of the fiscal years in the two year period ended December 31, 1998 and the balance sheet data as of December 31, 1997, 1998 and 1999 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.

9 ------------------------- a) Other expense (income) consists primarily of pension expense for inactive United States defined benefit pension plans, gains on the sale of fixed assets, interest income, royalty expenses, trademark expense. 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; - foreign exchange losses; - charges associated with the repurchase or extension of stock options; - and other items as shown in Note 19 of the accompanying financial statements. We consider EBITDA to be a widely used 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 2001 by $11.5 million, in 2000 by approximately $13.8 million, in 1999 by $7.4 million, in 1998 by $4.0 million, and in 1997 by $4.0 million. e) Special charges in 2001 are $1.5 million for Argentina bad debt expense and in 2000 are the costs associated with the write down of the investment in Ecoair Corp. and two specialty alternator projects. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We manufacture alternators, starter motors and other items for heavy duty, automotive, defense and industrial markets. These are supplied under the "Prestolite," "Leece-Neville," "Lucas," and "Indiel" brand names for original equipment and aftermarket application on a variety of vehicles and industrial equipment. ("Lucas" is used under license from a subsidiary of TRW, Inc.) Most of our products are component parts used on diesel engines and automobiles, sold to both aftermarket customers and original equipment manufacturers. We sell our products to a variety of markets, in terms of both end-use and geography. We operate in five principal geographic regions. Sales from Africa and South America consist largely of products for the automotive market while sales of products from North America and Europe consist largely of products for non-automotive applications. While each region primarily sells in its own area, no region sells exclusively into its target market. Further, each region has some sales into the target markets of the other regions. In order to increase our sales into China, in 2001 we began operation of a joint venture in China, Prestolite Electric Beijing, Ltd., selling products for both automotive and heavy duty vehicle applications. Our North American and European facilities produce alternators, starter motors, inline pumps, and other products, primarily for installation on diesel engines used in the heavy duty, defense, marine and industrial markets. These facilities are located in Arcade, NY; Florence, KY; Garfield, NJ; Acton, England; and Leyland, England. The African and South American facilities manufacture automotive components, primarily alternators and starter motors. These facilities are located in Johannesburg, South Africa; and in Buenos Aires, San Lorenzo, and San Luis, Argentina. The Argentina operation also manufactures distributors. In both South Africa and Argentina more than half of our sales are to the automotive aftermarket, and about half of those aftermarket sales are products purchased for resale. Prestolite Electric Beijing, Ltd. manufactures automotive products in China and generally relies on our U.S. and U.K. facilities for heavy duty products. RESULTS OF OPERATIONS Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Sales from continuing operations were $159.3 million in 2001, a decrease of $12.6 million, or 7.3%, from $171.9 million in 2000. The increase in sales attributable to the recently established joint venture in China, $8.9 million, was more than offset by the decreases in sales in our other locations. North American sales decreased $2.9 million, or 3.7%. European sales decreased $7.3 million, a 16.5% decline. South African sales decreased $3.5 million for a 33.6% decline, and Argentina sales decreased $6.8 million for an 18.1% decline. Worldwide economic factors resulted in lower volumes of sales in most locations. China, being a new market for us, has no comparison to determine an increase or decrease. Gross profit was $32.3 million in 2001, or 20.3% of sales. This compares to gross profit of $32.2 million in 2000, or 18.8% of sales. The increase of gross profit as a percent of sales is a result of cost savings, an increase in higher-margin sales in China and a decrease in lower margin sales in Argentina. Selling, general, and administrative expense was $22.3 million, or 14.0% of sales in 2001, a decrease of $2.4 million, or 10%, from $24.7 million, or 14.4% of sales in 2000. Reduction in selling, general, and administrative expense is attributable to cost savings recognized from continuing programs that offset the increases resulting from the startup of the China operation. In 2001, we recorded a charge of $1.5 million to cover anticipated bad debt charges in Argentina related to the Argentine economic and monetary crisis, as discussed in Note 2 of our financial statements. We also recorded a charge of $0.6 million in costs associated with the extension of expiration of options to purchase company stock issued to specific employees. In 2001, we recorded a charge for severance of $4.6 million. During 2001 the Company announced and implemented restructuring plans including employee cutbacks in 11 Argentina and the United Kingdom resulting in severance charges of $2.3 million and $1.7 million respectively. We also recorded $0.5 million in North America and $0.1 million in South Africa. In 2000 the Company recorded $2.2 million in severance charges primarily for employee cutbacks in Argentina and the United Kingdom. In 2000, we also recorded a charge of $3.5 million to write off the investment and costs of two specialty alternator projects and $0.2 million in costs associated with the repurchase of options from departed employees. Operating income in 2001 was $3.3 million, or 2.1% of sales, an increase of $1.6 million, or 93.9%, from the $1.7 million, or 1.0% of sales, in 2000. This was due to the factors discussed above. Other expense was $78,000 in 2001 compared to other income of $0.6 million in 2000. This consists primarily of gains on the sale of fixed assets, interest income, royalty expenses and trademark expense. Interest expense was $13.2 million in 2001, a decrease of $1.8 million, or 11.9%, compared to $15.0 million in 2000. This decrease is a result of decreases in debt in the second half of 2000 because of the proceeds of the sale of three businesses in August, 2000. The benefit from income taxes was $1.6 million on the $11.5 million loss from continuing operations before taxes and extraordinary items for 2001. This compares to a benefit from income taxes of $4.5 million for 2000 on a $13.8 million loss from continuing operations before taxes and an extraordinary item. Extraordinary income of $0.4 million, net of taxes, was recorded in 2001 related to the gain on the repurchase of senior notes. In 2000, we recorded extraordinary income of $4.1 million, net of taxes, related to gains on the repurchase of senior notes. Effective August 4, 2000, we sold our discontinued businesses, providing for expected costs related to that transaction. In 2001, we recorded a $1.6 million loss on disposal of discontinued operations, to cover costs related to the closing of a facility used by Ametek for a period of time after the sale, but retained by us, and currently categorized as held for sale. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Sales from continuing operations were $171.9 million in 2000, a decrease of $16.0 million, or 8.5%, from $187.9 million in 1999. These results exclude the sales of the discontinued businesses of $43.9 million in 2000 and $71.3 million in 1999 due to the sale of these businesses. The decrease in sales is attributable to overseas decreases, where European sales declined $7.5 million, or 14.6%, primarily due to reduced military sales, but also due to the reduced exchange rates in 2000, and a $1.7 million, or 13.9%, decline in South Africa mostly due to exchange rate fluctuations in 2000. In North America, sales declined $7.0 million, or 8.1%, primarily due to reduced aftermarket sales to our OEM customers. These sales declines were offset by an increase in Argentina sales of $0.2 million, or 0.6%. Gross profit was $32.2 million in 2000, or 18.8% of sales. This compares to gross profit of $36.3 million, or 19.3% of sales, in 1999. The decrease in gross profit as a percent of sales is a result of lower sales volume, a shift in mix toward products with lower profit margins and inventory reduction. Selling, general, and administrative expense was $24.7 million, or 14.4% of sales in 2000, a decrease of $3.7 million, or 13.2%, from $28.5 million, or 15.2% of sales, in 1999. Reduction in selling, general, and administrative expense is partially attributable to cost savings recognized from prior and continuing programs. In conjunction with those cost reductions, we recorded a $2.2 million charge in 2000 to reflect the cost of severance payments to terminated employees. The employees in question were terminated or given notice of termination of employment prior to September 30, 2000. 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 2000, we recorded a charge of $3.5 million to write off the investment and costs of two specialty alternator projects. We also recorded $0.2 million in costs associated with the repurchase of options to purchase our stock from departed employees. 12 Operating income in 2000 was $1.7 million, or 1.0% of sales, a decrease of $5.7 million, or 77.0%, from the $7.3 million, or 3.9% of sales in 1999. This was due to the factors discussed above. Other income was $0.6 million in 2000 versus $1.0 in 1999. This consists of 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, royalty expenses, and trademark expense. Interest expense was $15.0 million in 2000, a decrease of $0.8 million, or 5.0%, compared to $15.8 million in 1999. This decrease is a result of decreases in bank debt and senior notes beginning in the third quarter of 2000. Senior notes with a face value of $23.1 million were purchased and retired in the second half of 2000. The benefit from income taxes was $4.5 million on the $13.8 million loss from continuing operations before taxes and extraordinary items for 2000. This compares to a benefit from income taxes of $715,000 for 1999 on a $7.4 million loss from continuing operations before taxes and an extraordinary item. Extraordinary income of $4.1 million, net of taxes, was recorded in 2000 related to the gain on the repurchase of the senior notes. Discontinued Businesses -- 2000 compared to 1999 During 1999, we announced our intention to sell two business segments, the direct current electric motor business ("DC motors") and the battery charger business. In conjunction with that decision, we 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. Effective August 4, 2000, we sold those two businesses plus our switch business to Ametek, Inc. The $62 million contractual price of this asset sale will be adjusted for changes in net operating assets from a target amount and for the sales to a key customer during a three month period of 2001. We estimate that the adjusted sale price will be approximately $57.4 million, including $7.0 million in escrow at December 31, 2000. We also committed to provide Ametek with certain services at no charge for periods of six to twelve months following closing. After providing for the no-charge services and for other costs related to the transaction, we recorded a gain on disposition of $23.3 million pretax and $14.5 million after tax. In our financial statements we treat the DC motor, battery charger, and switch businesses as discontinued operations. Prior year financial statements, including 1999 and 1998 earnings per share, have been restated to reflect these businesses as discontinued operations. Sales from discontinued operations were $44.0 million in the seven months of operation in 2000, while sales of these operations were $71.3 million in 1999. Operating and other income (before income tax) in the seven months of 2000 was $3.6 million, while operating income for 1999 was $4.5 million. Provision for income taxes of $1.3 million for the seven months of 2000 and $1.6 million for 1999 resulted in after tax income from discontinued operations of $2.3 million in 2000 and $2.8 million in 1999. LIQUIDITY AND CAPITAL RESOURCES Cash used by continuing operating activities in 2001 was $1.3 million compared to cash usage of $4.9 million in 2000 and $7.3 million in 1999. Discontinued operations used $1.4 million of cash on 2001 as we provided transition services associated with the sale of those businesses. That compares of cash usage related to the discontinued operations of $2.9 million in 2000 (before sale proceeds of $51.6 million) and cash generations from those operations of $6.2 million in 1999. Capital spending of continuing activities was $4.6 million in 2001 compared to $6.4 million in 2000 and $6.7 million in 1999. In 2001 capital spending was $2.5 million in the United States, $1.0 million in the United Kingdom, $0.7 million in Argentina and $0.2 million in South Africa compared to $3.1, $1.0, $1.6, and $0.7 million respectively in 2000. In addition, we spent $0.2 million in china in 2001; we did not have that operation in 2000. Capital expenditures for 2002 are expected to be approximately $5 million. These expenditures are primarily for capacity increases, new product designs, and cost reduction. 13 Debt, net of cash, increased by $6.5 million in 2001. We had revolving credit facilities in the United States and United Kingdom under which additional borrowings of $10.7 million and $0.3 million, respectively, were available based on the December 31, 2001 levels of eligible receivables (United States and United Kingdom) and inventory (United States only) which are pledged to support that debt. At the end of 2001, banks in Argentina were generally not lending and in South Africa, no additional borrowings were available under our South African credit facility. Beginning in 1991 the Argentine government maintained the value of its currency such that one Argentine peso equaled one U.S. dollar. During the second half of 2001, Argentina suffered a severe economic and monetary crisis. During most of December 2001 and early January 2002 the banks in Argentina were closed. On January 14, 2002, the banks reopened and the Argentina peso traded at $0.606 per peso (1.65 pesos per dollar). We used that $0.606 rate to translate the December 31, 2001 balance sheet of our Argentine subsidiary. We translated the accompanying income statements for 1999, 2000, and 2001 and the balance sheet at December 31, 2000 at $1.00 per peso. As the result of using the $0.606 rate, we recorded a foreign exchange loss of $276,000 and a charge to other comprehensive income of $6.2 million representing the cumulative translation adjustment. On March 1, 2002 the peso traded at a value of $0.4706 (2.12 pesos per dollar). Also, because of the impact of the financial crisis we provided financial support to our Argentine subsidiary from North America, increasing the amount lent to that subsidiary by $5.3 million during the year. During 2001 our Argentine subsidiary reduced the non-debt discounted checks outstanding by $3.7 million and bank debt outstanding by $1.2 million. Management expects the liquidity needs to be primarily working capital and scheduled payments under certain contractual obligations. We expect these short term liquidity needs to be provided by operating cash flows and borrowings under the revolving credit facilities. The following table provides the contractual obligations as of December 31, 2001:

------------------------- (a) Certain conditions of default under the long-term agreement in the United Kingdom may allow our United Kingdom bank to cancel debt commitments or to require repayment of drawn amounts. (b) Lessors of capital leases have been granted a first priority security interest in all of the Company's right, title and interest in the equipment covered under the lease obligations. We have other commercial commitments that secure foreign purchases, VAT obligations, custom bonds and insurance coverage. The table below summarizes these commitments as of December 31, 2001:

------------------------- (a) Lines of credit represent the amount outstanding at December 31, 2001 on credit facilities in the United States, United Kingdom, South Africa and Argentina. Although the revolving credit agreements may 14 extend beyond one year, note outstanding amounts have been reported in current liabilities on the balance sheet. (b) Other commercial commitments include a $1.9 million contribution to the joint venture, Prestolite Electric Beijing, Ltd. We do not expect to fund foreign subsidiary operations in 2002, but there is a risk that economic conditions or country political policy changes may require transfers of funds to provide for working capital needs. We do not expect these amounts to be material or affect the availability of funds to impair the working capital or capital expenditure needs. In April 2001, we began operating a joint venture in China, Prestolite Electric Beijing, Ltd. We own 52% of the equity and have committed to provide $1.9 million in cash by 2004. This joint venture generated sales and operating income of $8.9 million and $2.0 million, respectively during 2001. However, we will not be able to repatriate funds until we have contributed the $1.9 million We expect our liquidity needs to consist primarily of working capital needs and scheduled payments of principal and interest on our indebtedness. We expect our short-term liquidity needs to be provided by operating cash flows and borrowings under our revolving credit facilities. We expect to fund our long term liquidity needs from our operating cash flows, the issuance of debt and/or equity securities, or from bank borrowings. 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 least the next twelve months. Estimates as to working capital needs and other expenditures may be materially affected if the foregoing sources are not available or do not otherwise provide sufficient funds to meet our obligations. 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. SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the consolidated financial statements. Estimating valuation allowances, including customer items and inventory. On a quarterly basis, the Company evaluates its significant reserves and valuation allowances and makes revisions in estimates as required. The ultimate cost or loss to the Company changes as additional information regarding the uncertainty becomes available. The Company considers the following in establishing these reserves: - Management analyzes accounts receivable balances on an on-going basis, including historical bad debt information, customer credit-worthiness and current economic trends when evaluating the adequacy of the allowances for accounts receivable. An analysis of the current ageing of accounts receivable is reviewed on a by customer basis. - Management analyzes inventory on an on-going basis, including the adequacy of the reserve for excess and slow moving inventory. Management utilizes computer modeling techniques to analyze inventory movements but historical trends involve risk and uncertainties regarding the anticipated mix of products sold. Estimating warranty reserves. The Company warrants to their customers that products are defect-free and meet certain specifications and these customers in turn often offer warranties to their customers. As a result, the company receives claims and requests for payments from their customers to remedy complaints. On an on-going basis management reviews historical trends of the warranty costs by product and customer and 15 estimates the anticipated liability. The adequacy of the warranty reserve may be affected by an unanticipated product failure and request for payments from the customer, but this would not materially adversely affect the results of operations. Foreign currency transactions and translations. The Company has significant operations overseas, located in the United Kingdom, South Africa, Argentina and China. Management evaluates the appropriate functional currency based on the volume of intercompany transactions and volume of exports. Each reporting period the results of operations of the Company's foreign subsidiaries are translated at the appropriate functional currency (currently the local currency for each location). Foreign currency translation gains or losses on intercompany loans that are of a long-term investment nature that are not included in net income for the period are reported separately as a component of equity. Foreign currency gains and losses on third party transactions and intercompany transactions that are not of a long-term investment nature are reported in the operating statement. NEW ACCOUNTING PRONOUNCEMENTS We adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective January 1, 2001. This statement did not have an impact on the financial results of the Company. In July 2001 the Financial Accounting Standards Board issued Statement of Accounting Standards No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 replaces APB No. 16 and eliminates the pooling-of-interests method for any business combinations after June 30, 2001. SFAS 142 supercedes APB No. 17 and eliminated the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and impairment testing and recognition for goodwill and intangible assets. SFAS No. 142 is effective for 2002. Accordingly, we will no longer amortize goodwill of $3.9 million at December 31, 2001. This goodwill will instead be assessed for impairment at least annually. In June and August of 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143") and No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS 144") which are effective January 1, 2003 and January 1, 2002, respectively, for the Company. SFAS 143 requires that an existing legal obligation associated with the retirement of a tangible long-lived asset be recognized as a liability when incurred and the amount of the liability be initially measured at fair value. Under SFAS 144, a single accounting method was established for long-lived assets to be disposed of. SFAS 144 requires the Company to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and the loss is the difference between carrying amount and fair value. The Company is currently reviewing the provisions of SFAS 143 and 144 and assessing the impact of adoption. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES CONTENTS

F-1 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Prestolite Electric Holding, Inc. In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity (deficit), and of cash flows present fairly, in all material respects, the financial position of Prestolite Electric Holding, Inc. and its subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index 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 did not audit the financial statements of Prestolite Indiel Argentina S.A., a wholly owned subsidiary, which statements reflect total assets of $20,497,000 and $37,120,000 as of December 31, 2001 and 2000, respectively, and total revenues of $33,884,000, $40,785,000 and $39,366,000 for each of the three years in the period ended December 31, 2001. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts for Prestolite Indiel Argentina S.A., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 and the report of other auditors provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP February 22, 2002 Detroit, Michigan F-2 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

The accompanying notes are an integral part of the consolidated financial statements. F-3 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The accompanying notes are an integral part of the consolidated financial statements. F-4 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial statements. F-5 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)

The accompanying notes are an integral part of the consolidated financial statements. F-6 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Prestolite Electric Holding, Inc. ("PEI" "We", "Us" or the "Company"), 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 includes the wholly-owned subsidiaries Prestolite Electric Incorporated and Prestolite Electric of Michigan, Inc. The wholly-owned subsidiaries of Prestolite Electric Incorporated include Prestolite Electric Limited, a U.K. corporation; Prestolite Electric (Pty) Ltd., a South Africa corporation; Prestolite Indiel Argentina S.A., an Argentina corporation; and Prestolite Electric Holding (China) LLC, a U.S. limited liability company. Prestolite Electric Holding (China) LLC in turn owns 52% of Prestolite Electric Beijing Ltd., a Chinese corporation. Operations are generally conducted as Prestolite Electric Incorporated. There are no material differences between the financial statements of PEI and Prestolite. On January 22, 2002, the shares of Prestolite Electric Holding, Inc. formerly held by Genstar Capital Corporation, the parent company were distributed to the 39 shareholders of Genstar Capital Corporation. Those shares were placed into a trust. Under the terms of the trust agreement, all voting power associated with the shares is exercised by Genstar Capital Corporation. We manufacture and distribute alternators, starter motors, and other electrical components for aftermarket and original equipment applications in the heavy duty vehicle, automotive, defense, material handling, marine, and other industries. Two manufacturing facilities and one distribution warehouse are located in the United States; two manufacturing facilities are located in the United Kingdom; one manufacturing facility is located in South Africa; and three manufacturing facilities are located in Argentina. 2. ARGENTINA Beginning in 1991 the Argentine government maintained the value of its currency such that one Argentine peso equaled one U.S. dollar. During the second half of 2001, Argentina suffered a severe economic and monetary crisis. During most of December 2001 and early January 2002 the banks in Argentina were closed. On January 14, 2002, the banks reopened and the Argentina peso traded at $0.606 per peso (1.65 pesos per dollar). We used that $0.606 rate to translate the December 31, 2001 balance sheet of our Argentine subsidiary. We translated the accompanying income statements for 1999, 2000, and 2001 and the balance sheet at December 31, 2000 at $1.00 per peso. As the result of using the $0.606 rate, we recorded a foreign exchange loss of $276,000 and a charge to other comprehensive income of $6.2 million representing the cumulative translation adjustment. On March 1, 2002 the peso traded at a value of $0.4706 (2.12 pesos per dollar). Also, because of the impact of the financial crisis on our customers, we recorded a $1.5 million charge to cover anticipated bad debts in Argentina. As discussed in Note 11, our practice in Argentina has been to borrow funds by discounting post-dated checks received from our customers. Because Argentine banks stopped lending during the second half of 2001, we provided financial support to our Argentine subsidiary from North America, increasing the amount lent to that subsidiary by $5.3 million during the year. During 2001 our Argentine subsidiary reduced the non-debt discounted checks outstanding by $3.7 million and bank debt outstanding by $1.2 million. 3. DISCONTINUED OPERATIONS During 1999, we announced our intention to sell two business segments, the direct current electric motor business ("DC motors") and the battery charger business. In conjunction with that decision, we recorded a charge of $2.3 million ($3.6 million less a tax benefit of $1.3 million) 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. Effective August 4, 2000, we sold those two businesses plus our switch businesses to Ametek, Inc. The $62.0 million contractual price of this asset sale was adjusted for changes in net operating assets from a target F-7 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. DISCONTINUED OPERATIONS -- (CONTINUED) amount and for the sales to a key customer during the second quarter of 2001. The adjusted sale price was approximately $57.4 million, including $3.8 million in escrow at December 31, 2001. We also committed to provide Ametek with certain services at no charge for periods of six to twelve months following closing. After providing for the no-charge services and for other costs related to the transaction, we recorded a gain on disposition of $23.3 million before tax and $14.5 million after tax in 2000. During 2001 we reduced the gain-on-sale by recording a charge of $1.6 million before tax. No tax benefit associated with this charge was recorded as management believes that realization of those benefits is not probable. A portion of this change adjusts the carrying value of a manufacturing facility previously used by some of the operations sold. The charge also includes $0.4 million to write-off receivables and to provide for certain benefits that may not be delivered to Ametek because of the October 2001 Chapter 11 filing of Thermadyne Holdings Corporation. Thermadyne, which purchased our welding equipment business in 1997, shares a facility with the battery charger business sold to Ametek in 2000. In addition, we guaranteed the lease on the Thermadyne portion of that facility through October 31, 2006. Annual lease payments are $447,000. Since its bankruptcy filing Thermadyne has operated and paid rent at the facility, but has provided no assurance that it will continue to do so. We have recorded no provision for the contingent lease-guarantee exposure at December 31, 2001. Net assets related to discontinued operations at December 31 are summarized below (in thousands):

Summary financial information related to the discontinued operations is presented below (in thousands). Amounts for 2000 are through August 4, 2000.

F-8 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of PEI and all subsidiaries in which we have financial and operating control. All intercompany accounts and transactions are eliminated in consolidation. FOREIGN CURRENCY TRANSLATION The assets and liabilities of foreign subsidiaries have been translated from their functional currencies 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. Transactions in foreign currencies not settled at the balance sheet date are translated at the exchange rates prevailing at that date with a resulting charge or credit to income. Foreign exchange gains and losses related to inter-company obligations are recorded to the extent they are not considered long term in nature. See also Note 2. 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 United States inventory and by the first-in, first-out ("FIFO") method for all inventory located outside the United States. Approximately $28,639,000 and $30,814,000 of net inventories at December 31, 2001 and 2000, respectively, have been valued based on FIFO cost. 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, betterment, 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). INTANGIBLE ASSETS AND DEFERRED FINANCING FEES Intangible assets are primarily comprised of 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 carrying value to anticipated undiscounted cash flows and operating income. Deferred financing fees associated with the issuance of the senior notes are being amortized over the terms of the related notes. Accumulated amortization is $2,076,912 and $1,608,342 at December 31, 2001 and 2000, respectively. Amortization expense for the years ended December 31, 2001, 2000 and 1999 is $468,570, $545,999 and $548,676 respectively, and is included in selling, general and administrative expense in the Statement of Operations. 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 products to which such costs relate. F-9 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) ENGINEERING EXPENSES Engineering costs are expensed as incurred and are included in selling, general, and administrative expenses. Total engineering expenses for the year ended December 31, 2001 and including expenses of the discontinued businesses for the years ended December 31, 2000 and 1999 were $3,475,000, $5,630,000 and $6,583,000, 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, 2001, 2000 and 1999 of $2,251,000, $3,677,000 and $4,986,000. 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. FINANCIAL INSTRUMENTS The carrying amount of our financial instruments, which includes cash, accounts receivable, accounts payable, and debt other than senior unsecured notes approximates their fair value at December 31, 2001 and 2000. The fair value of the senior unsecured notes was approximately $65 million at December 31, 2001. Fair values have been determined based on management estimates and information from market sources. REVENUE RECOGNITION We recognize revenues on the sale of our products, net of estimated costs of returns, allowances and sales incentives, when product title transfers to the customer, primarily upon shipment. We generally sell our products on open account under credit terms customary to the region of distribution. We perform ongoing credit evaluation of our customers and generally do not require collateral to secure our customers' receivables. 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. MINORITY INTEREST Minority interest included in the results of operations represents the minority shareholders' share of the income of Prestolite Electric Beijing, Ltd. (PEBL). The minority interest included in the Consolidated Balance Sheet reflects the original investment by PEBL along with the proportional share of the earnings of PEBL. ESTIMATES The preparation 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. F-10 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS We adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective January 1, 2001. Pursuant to this statement, all derivative instruments are recognized as assets or liabilities in the balance sheet and measured at fair value. This statement does not have a material impact on our results for the year ended December 31, 2001. In July 2001 the Financial Accounting Standards Board issued Statement of Accounting Standards No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 replaces APB No. 16 and eliminates the pooling-of-interests method for any business combinations after June 30, 2001. SFAS 142 supercedes APB No. 17 and eliminated the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and impairment testing and recognition for goodwill and intangible assets. SFAS No. 142 is effective for 2002. Accordingly, we will no longer amortize goodwill of $3.9 million at December 31, 2001. This goodwill will instead be assessed for impairment at least annually. In June and August 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS 143") and No. 144 "Accounting for the Impairment or Disposal of Long Lived Assets" ("SFAS 144") which are effective January 1, 2003 and January 1, 2002, respectively, for the Company. SFAS 143 requires that an existing legal obligation associated with the retirement of a tangible long-lived asset be recognized as a liability when incurred and the amount of the liability be initially measured at fair value. Under SFAS 144, a single accounting method was established for long-lived assets to be disposed of. SFAS 144 requires the Company to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and the loss is the difference between carrying amount and fair value. The Company is currently reviewing the provisions of SFAS 143 and 144 and assessing the impact of adoption. 5. ACQUISITIONS AND JOINT VENTURES Prestolite Electric Beijing, Ltd. (PEBL) began operations in The People's Republic of China on April 1, 2002. Prestolite owns 52% of PEBL, and we have included the results of PEBL in our consolidated financial statements after eliminating intercompany activity. Beijing JinHu Auto-Electric Company Limited owns the other 48% of PEBL. The managers of PEBL own JinHu. Prestolite contributed certain technology to PEBL and agreed to contribute an additional $1.9 million in cash to PEBL by the first quarter of 2004. JinHu contributed certain technology and agreed to contribute certain fixed assets to PEBL; the timing of the JinHu contributions occur as Prestolite makes its contributions in order to maintain the 52/48 ownership share. Until Prestolite and JinHu make these contributions, JinHu is leasing the fixed assets to PEBL. The fixed assets to be contributed by JinHu are included in our consolidated balance sheet at December 31, 2001 as additional machinery and equipment and as minority interest. On January 15, 1999, we acquired a remanufacturing business unit from Roberts Generator for $2.9 million. This business unit operates as Roberts Remanufacturing and rebuilds alternators and starter motors for specialty applications. This acquisition was accounted for under the purchase method. Goodwill recorded for this acquisition was $1.1 million. Investments at December 31, 2001 consist of a 4% interest, recorded at cost, in Auto Ignition, Ltd., an Indian corporation. F-11 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. CHARGES RELATED TO CERTAIN SPECIALTY ALTERNATORS We charged $3,450,000 to income in 2000 to write off all our assets related to Ecoair Corp. ($3.2 million) and to record the settlement of a lawsuit related to the development and manufacture of a special regulator used in certain alternators ($250,000). During 1998 and 1999 we committed to a $2.6 million investment for a 9% interest in the equity of Ecoair Corp. We also purchased a license for $0.6 million covering a specialty alternator patented by Ecoair, and we acquired approximately $0.1 million in equipment and inventory related to the production of the Ecoair alternator. Production of the Ecoair alternator proved to be far more difficult than originally anticipated. In addition, Ecoair Corp. must secure new investment if it is to continue as a going concern. During 2000 we decided not to invest further in Ecoair Corp. and accordingly wrote off all our assets related to Ecoair. 7. 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 (in thousands):

For all three years, 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. 8. INVENTORIES Inventories consist of the following at December 31 (in thousands):

During 2001 we adjusted our procedure of estimating inventory reserves in the United Kingdom. As the result of that change we charged $522,000 to cost of sales in 2001. F-12 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INTANGIBLE ASSETS Intangible assets consist of the following at December 31 (in thousands):

10. ACCRUED LIABILITIES Accrued liabilities consist of the following at December 31 (in thousands):

11. DEBT Debt consists of the following at December 31 (in thousands):

Our U.S. bank borrowing arrangements consist of a $10 million revolving credit facility and a $3.5 million letter of credit facility. Interest is payable on amounts borrowed under the revolving credit facility at the F-13 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. DEBT -- (CONTINUED) bank's prime rate plus up to another 0.75% depending upon amounts borrowed and upon our Funded Debt Ratio. We are currently paying interest at prime, 4.75% at December 31, 2001. The letter of credit fee is 2% of amounts drawn. Both U.S. facilities are collateralized by eligible accounts receivable and inventory. On December 31, 2000 letters of credit totaling $1.7 million were outstanding. Our U. K. agreement consists of a L2.0 million fixed rate term loan, a L2.0 million floating rate term loan, a L1.4 million floating rate term loan and a L2.8 million overdraft facility. Interest on the fixed rate term loan is 8.144% while interest on the floating-rate term loans and the overdraft facilities are at 1.375% above the bank's base rate (4.0% at December 31, 2001). The term loans are repayable in sixty monthly payments through January 2004 (fixed rate), November 2003 and January 2005. The U. K. loans are collateralized by eligible receivables and fixed assets in the United Kingdom. In Argentina we have had arrangements with several banks that allow us to borrow by discounting post-dated checks given to us by our customers. Depending on the details of the arrangement with each bank, the resulting borrowing may be recorded as debt or as the sale of the underlying receivable. At December 31, 2001 and 2000 we had, in addition to the debt shown in the table above, $263,000 and $3,957,000 of discounted checks which we recorded as the sale of a receivable. As discussed in Note 2, the banks in Argentina were effectively closed at the end of 2001; consequently, new borrowing was not possible. In South Africa we borrow from a bank on an unsecured basis at the bank's prime lending rate. At December 31, 2001 we could have borrowed an additional $10.7 million in the U.S. and $0.3 million (L0.2 million, translated at $1.4560 per pound sterling) in the U.K. The 9.625% senior unsecured notes are guaranteed by PEI. The notes mature on February 1, 2008. We have the option to redeem them beginning February 1, 2003 with the net proceeds of a public equity offering at our option, in whole or in part, at amounts from 104.8125% to 100% of the principle plus accrued interest. During 2000, we purchased and retired Senior Notes with a face value of $23.1 million for $15.9 million plus accrued interest. After writing off $0.7 of the unamortized financing cost associated with the Senior Notes, we recorded a $4.1 million extraordinary after-tax gain on these transactions. During 2001 we recorded a $0.4 million extraordinary after-tax gain on the purchase of Senior Notes with a face value of $1.8 million. The senior notes and bank arrangements mentioned above contain various covenants including the maintenance of certain financial ratios and limits on (a) issuance of additional debt or preferred stock; (b) the payment of dividends and purchases, redemptions or retirements of common stock; (c) investments; (d) sale of assets and capital stock of subsidiaries; and (e) certain consolidations, mergers, transfers of assets and certain other transactions with affiliates. Our U.S. bank covenants at December 31 require us to maintain a Funded Debt Ratio of not more than 7:1 and a Fixed Charge Coverage Ratio of not less than 1:1, as those terms are defined in our bank credit agreement. The foreign facilities contain covenants that pertain to the foreign operations. Maturities of debt obligations at December 31 are as follows (in thousands):

F-14 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. INCOME TAXES Income (loss) from continuing operations, before minority interests and income taxes, consists of the following (in thousands):

The components of income tax benefit related to continuing operations are as follows (in thousands):

A reconciliation of the U.S. statutory tax rate to the effective tax rate is as follows:

Our operation in China will enjoy a tax holiday through 2002 and is scheduled to pay taxes at 15% for the following three years. F-15 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. INCOME TAXES -- (CONTINUED) The major components of deferred taxes (stated on an after tax basis) on the balance sheet are as follows (in thousands):

Our Argentina subsidiary has NOL carryforwards at December 31, 2001 of approximately $25.5 million, which expire in 2002 through 2005. 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. 13. EMPLOYEE BENEFIT PLANS We have a retirement savings plan for substantially all of our United States employees. This plan has a deferred salary arrangement and matching contributions by the Company. Our matching contributions to this plan were $421,000, $475,000, and $635,000 for 2001, 2000 and 1999, respectively, including contributions for employees associated with the operations sold in 2000. We also have defined benefit plans that cover certain former United States employees. Benefits under these defined plans are based on years of service. Our funding policy is to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended. Our subsidiaries in the United Kingdom and South Africa provide retirement benefits based on the employee's earnings. Our funding policy is to meet the minimum funding requirements imposed by current statutes or tax regulations. F-16 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The following table provides a reconciliation of benefit obligations, plan assets and funded status of the United States defined benefit plans at December 31, 2001 and 2000, based upon most recent actuarial valuations (December, 31, 2000 and 1999), (in thousands):

F-17 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. EMPLOYEE BENEFIT PLANS -- (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, 2001 and 2000, based upon the most recent actuarial valuations (December 31, 2001 and 2000), (in thousands):

F-18 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)

In 2001, a portion of the plan assets were transferred to an insurance company to purchase annuities and related pension obligations were reduced. This resulted in a pension settlement gain. Our subsidiary, Prestolite Indiel (Argentina), has a noncontributory unfunded pension plan which provides retirement benefits for nine former employees. The plan was established in June, 1987 and terminated in June 1995. The following provides a reconciliation of benefit obligations and funded status, based upon the most recent actuarial valuations:

F-19 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. LEASES We lease certain office and manufacturing facilities, data processing equipment and automobiles under long-term operating lease agreements. In the current year, we entered into capital leases for certain manufacturing and engineering equipment and improvements related to real property. The leases expire on various dates through 2006. Future minimum lease payments for operating and capital leases (with terms in excess of one year) at December 31, 2001 were (in thousands):

Rent expense for the operating leases of continuing operations was $1,177,415, $1,168,815 and $1,330,750 for the years ended December 31, 2001, 2000 and 1999. Scheduled payments on capital leases as of December 31, 2001 were (in thousands):

The book value, as of December 31, 2001, of equipment under capital leases was $1,372,995, which is net of amortization of $640,852. 15. STOCK OPTIONS AND WARRANTS PEI has a stock option plan for certain employees. We have 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. F-20 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. STOCK OPTIONS AND WARRANTS -- (CONTINUED) The changes in stock options outstanding for the years ended December 31, 2001, 2000, and 1999 are as follows:

During 2001 we extended to January 30, 2004 the expiration date on options to purchase 58,760 shares at $5.00 per share. Those options would have expired in 2001, 2002 and 2003 had we not extended them. We recorded a charge of $647,000 to recognize the difference between the fair market value and the aggregate exercise price of the options extended. All other options expire ten years from the date of the grant Information with respect to stock options outstanding at December 31, 2001 follows:

We continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees" ("APB 25") in accounting for our stock option plan. Under APB 25, we do not recognize compensation expense on the issuance of our stock options because the option terms are fixed and the exercise price equals the fair value of the underlying stock on the grant date. As required by SFAS 123, we have 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. F-21 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. STOCK OPTIONS AND WARRANTS -- (CONTINUED) Principal assumptions used in calculating the pro forma information were as follows:

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. Pro forma information follows (in thousands except for earnings per share information):

16. RELATED PARTY TRANSACTIONS We have a management consulting agreement with Genstar Investment Corporation ("GIC") which controls 96.7% of our outstanding stock. Under the agreement, we pay GIC a management consulting fee. For the years ended December 31, 2001, 2000, and 1999, we charged $600,000, $825,000, and $900,000, respectively, to operations under this agreement. At both December 31, 2001 and 2000, $150,000 of these fees were accrued and unpaid. 17. LITIGATION AND CLAIMS Various legal actions and claims are pending or may be instituted or asserted in the future against us. The outcome of individual matters is not predictable at this time. The potential aggregate amount of liability at December 31, 2001 and 2000 with respect to these matters cannot be ascertained; however, we believe that any resulting unrecorded liability would not materially affect our future consolidated financial statements. We record 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. F-22 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 18. SEVERANCE We record severance expenses when plans are announced and employees notified. The following is a summary of the severance charges and outlays (in thousands):

The announcement and implementation of restructuring plans in 2001 included employee cutbacks in Argentina and the United Kingdom, resulting in severance charges of $2.3 million and $1.7 million respectively. We also recorded North American charges of $0.5 million and South African charges of $0.1 million. Employee cutbacks primarily in Argentina and the United Kingdom in 2000 resulted in $2.2 million of severance charges for that year. 19. SEGMENT REPORTING As the result of the sale of three businesses in 2000 we restructured our segment reporting in the year 2001. We operate in five geographic locations; each location's revenue and operating performance is managed and reported separately. We evaluate operating performance based on earnings before interest expense, taxes, depreciation, amortization and certain other charges (EBITDA). Corporate overhead and certain other charges are not allocated to the business/geographic units. Sales, assets and EBITDA for those units are summarized below. Sales are as follows (in thousands):

F-23 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. SEGMENT REPORTING -- (CONTINUED) A reconciliation of EBITDA to income from continuing operations before income taxes follows (in thousands):

F-24 PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES SCHEDULE II PRESTOLITE ELECTRIC HOLDING, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)

------------------------- (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. Included in the inventory deductions in 2001 is $375,000 that relates to the Argentina devaluation and other exchange rate changes at the balance sheet dates of December 31, 2000 to December 31, 2001. F-25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None. F-26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information as of December 31, 2001 with respect to our executive officers and directors:

------------------------- (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 was named Corporate Vice President in 2001. 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 AlliedSignal 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. Peter J. Corrigan joined Prestolite in 1992 as Director of Quality Assurance in the Corporate Office. Subsequently he was promoted to Vice President of Engineering, Vice President of Operations and Corporate Vice President of Sales and Marketing. Mr. Corrigan was named President of our subsidiary in Argentina, Prestolite Electric Indiel, in 2001. Mr. Corrigan holds a BA in Physics from Wake Forest University and an MBA from Case Western Reserve University. F-27 John Jenkins came to Prestolite as Finance Manager in South Africa, as a result of the Lucas acquisition in January of 1998. At that time, he was promoted to Managing Director of the South African operation. He was subsequently promoted to Managing Director of Heavy Duty Systems, Europe, and is located in Acton, England. 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. 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. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes all compensation paid for the years ended December 31, 2001, 2000, and 1999 to the Chief Executive Officer and the four other highest compensated executive officers who were serving executive officers at December 31, 2001:

------------------------- (a) Amounts in 2001 and 1999 reflect bonuses earned during 2000 and 1998 but paid during 2001 and 1999 respectively. No payments were made during 2000 for amounts earned in 1999. Amounts earned in 2001 have not yet been determined. F-28 (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 2001, 2000, or 1999. (d) Amounts in 2001, 2000, 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. Includes for Messrs, Packard, Cornelius and Chelminski in 2001, 2000, 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. Amounts in 2001 also include payment of deferred compensation for Mr. Cornelius of $25,000 and for Mr. Chelminski of $35,000. OPTION GRANTS IN LAST FISCAL YEAR There were no grants of stock options during the fiscal year to the Chief Executive Officer and the four other highest compensated executive officers who were serving executive officers at December 31, 2001. 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, 2001 and number and value of all unexercised options held by certain executive officers as of December 31, 2001.

------------------------- (a) Value is based upon the fair market value of our common stock as of December 31, 2001 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, Lea, Corrigan and Chelminski. The agreements 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 F-29 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 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, 2001, 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 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 although during 2001 we extended the termination date on certain options as described in Note 15 of the financial statements. 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, 2001, options to purchase an aggregate of 326,660 shares of Common Stock at prices from $5.00 to $22.00 were outstanding under the Management Stock Option Plan. F-30 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, 2002 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, 2002 , there were 1,985,000 shares of our common stock outstanding.

------------------------- * 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, 2002, 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) On January 22, 2002, the shares of Prestolite Electric Holding, Inc. formerly held by Genstar Capital Corporation were distributed to the 39 shareholders of Genstar Capital Corporation. Those shares were placed into a trust. Under the terms of the trust agreement, all voting power associated with the shares is exercised by Genstar Capital Corporation. Among the shares so distributed were 89,300 distributed to Genstar Investment Corporation. (c) Voting rights associated with these shares have been ceded to Genstar Capital Corporation via an agreement as of December 31, 2001. (d) Consists of 17,000 shares of common stock and 132,600 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of March 15, 2002. Does not include 35,300 shares issuable upon exercise of options which vest more than 60 days after March 15, 2002. (e) Consists of 8,000 shares of common stock and 31,020 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of March 15, 2002. Does not include 7,080 shares issuable upon exercise of options which vest more than 60 days after March 15, 2002. (f) 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 24,340 shares issuable upon exercise of options that F-31 are currently exercisable or exercisable within 60 days of March 15, 2002. Does not include 5,960 shares issuable upon exercise of options which vest more than 60 days after March 15, 2002. (g) Consists of 8,000 shares of common stock and 14,880 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of March 15, 2002. Does not include 3,120 shares issuable upon exercise of options which vest more than 60 days after March 15, 2002. (h) Consists of 8,000 shares of common stock and 13,880 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of March 15, 2002. Does not include 3,420 shares issuable upon exercise of options which vest more than 60 days after March 15, 2002. (i) Consists of 4,200 shares issuable upon exercise of options that are currently exercisable or exercisable within 60 days of March 15, 2002. Does not include 3,300 shares issuable upon exercise of options which vest more than 60 days after March 15, 2002. (j) Consists of 89,300 shares of common stock owned by Genstar Investment Corporation as to which Messrs. Paterson, Turner and West may be deemed to be beneficial owners. Excludes the remaining shares of Common Stock controlled by Genstar Capital Corporation as to which Messrs. Paterson, Turner and West disclaim beneficial ownership. See Item 13. "Certain Relationships and Related Transactions." Genstar Capital Corporation controls 83.8% of our common stock on a fully-diluted basis. (k) Amount shown includes an aggregate of 138,280 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 15, 2002. Does not include an aggregate of 58,180 shares issuable upon exercise of options which vest more than 60 days after March 15, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Three of our directors, Messrs. Paterson, Turner and West, are executive officers and shareholders of Genstar Investment Corporation. Genstar Investment Corporation manages Genstar Capital Corporation and owns 89,300 of our outstanding shares. Our principal operating subsidiary, Prestolite Electric Incorporated, 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. Effective October 1, 2000, this management agreement was revised with the annual management and financial advisory services fee being reduced to $600,000 per annum. Payments are made quarterly. In 1999 and 2000 Prestolite paid management and advisory fees of $900,000, in each case, plus out-of-pocket expenses, to Genstar Investment Corporation. In 2001, Prestolite paid management and advisory fees of $600,000, plus out-of-pocket expenses, to Genstar Investment Corporation. F-32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS OF FORM 8-K (a) Financial Statements

Reports on form 8-K. None. (b) Exhibits.

F-33 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 twenty-eighth day of March, 2002. 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.

F-34

PRESTOLITE ELECTRIC HOLDING INC 10-K