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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21803
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AFTERMARKET TECHNOLOGY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4486486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE OAK HILL CENTER, SUITE 400
WESTMONT, IL 60559
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 455-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$.01 PAR VALUE
Indicate by check mark 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 such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by
non-affiliates of the Registrant (based on the closing price of such stock, as
reported by The Nasdaq National Market, on March 2, 2000) was $88.5 million.
The number of shares outstanding of the Registrant's Common
Stock, as of March 2, 2000, was 20,566,812 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
AFTERMARKET TECHNOLOGY CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PAGE
ITEM 1. BUSINESS.......................................................1
ITEM 2. PROPERTIES.....................................................12
ITEM 3. LEGAL PROCEEDINGS..............................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................13
ITEM 6. SELECTED FINANCIAL DATA........................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....28
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............53
ITEM 11. EXECUTIVE COMPENSATION.........................................56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................62
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................64
FORWARD-LOOKING STATEMENT NOTICE
Certain statements contained in this Annual Report that are not related
to historical results are forward-looking statements. Actual results may differ
materially from those projected or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under Item 1. "Business--Certain Factors Affecting
the Company" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Further, certain forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate.
PART I
ITEM 1. BUSINESS
BACKGROUND
Aftermarket Technology Corp. ("ATC") was incorporated under the laws
of Delaware in July 1994 at the direction of Aurora Capital Group to acquire
Aaron's Automotive Products, Inc. ("Aaron's"), H.T.P., Inc. ("HTP"), Mamco
Converters, Inc. ("Mamco") and RPM Merit, Inc. ("RPM"). Aaron's, HTP, Mamco
and RPM as they existed prior to their acquisition by ATC are hereinafter
collectively referred to as the "Predecessor Companies." Subsequent to these
initial acquisitions, the Company acquired Component Remanufacturing
Specialists, Inc., Mascot Truck Parts Inc. ("Mascot") and King-O-Matic
Industries Limited in 1995, Tranzparts, Inc. ("Tranzparts") and Diverco, Inc.
("Diverco") in 1996, Replacement and Exchange Parts Co., Inc. ("REPCO"), ATS
Remanufacturing ("ATS"), Trans Mart, Inc. ("Trans Mart") and the Metran
companies (Metran Automatic Transmission Parts Corp., Metran Boston, Inc. and
Metran Parts of Pennsylvania, Inc.) ("Metran") in 1997, and the OEM Division
("Autocraft") of The Fred Jones Companies, Inc. (formerly known as Autocraft
Industries, Inc.) in March 1998. At the end of 1997, Diverco, HTP, Mamco,
Metran, REPCO, Trans Mart and Tranzparts were merged together to form ATC
Distribution Group, Inc. RPM was merged into ATC Distribution Group, Inc. at
the end of 1998. In February 1999, ATC sold Mascot. During the fourth quarter
of 1999, ATC Distribution Group acquired substantially all the assets of All
Transmission Parts, Inc. and its affiliate, All Automatic Transmission Parts,
Inc. (collectively "All Trans"). ATC conducts all of its operations through
its wholly-owned subsidiaries and each of their respective subsidiaries.
Throughout this Annual Report, except where the context otherwise requires,
the "Company" refers collectively to ATC and its subsidiaries and the
Predecessor Companies.
On December 20, 1996, ATC consummated an initial public offering of its
Common Stock (the "IPO"). Simultaneous with the consummation of the IPO,
Aftermarket Technology Holdings Corp. ("Holdings"), the sole stockholder of ATC
prior to the IPO, was merged into ATC (the "Reorganization"). Upon the
effectiveness of the Reorganization, each outstanding share of Holdings Common
Stock was converted into one share of ATC Common Stock, and each outstanding
share of Holdings Redeemable Exchangeable Cumulative Preferred Stock was
converted into one share of ATC Redeemable Exchangeable Cumulative Preferred
Stock, which was immediately thereafter redeemed for an amount in cash equal to
$100.00 plus an amount in cash equal to accrued and unpaid dividends on the
Holdings Preferred Stock to the date of the Reorganization.
GENERAL
The Company is a leading remanufacturer and distributor of drivetrain
products used in the repair of vehicles in the automotive aftermarket. The
Company's principal products include remanufactured transmissions, torque
converters, engines, electronic control modules, instrument and display clusters
and radios, as well as remanufactured and new parts for the repair of automotive
drivetrain assemblies. The Company also provides logistics and material recovery
services. The Company has two reportable segments: the Original Equipment
Manufacturer ("OEM") segment and the Independent Aftermarket segment.
The first of these segments consists of four operating units (Aaron's,
Autocraft Industries, Autocraft UK and CRS/ATS) that principally sell
factory-approved remanufactured transmissions directly to OEMs primarily for use
as
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replacement parts by their domestic dealers during the warranty and
post-warranty periods following the sale of a vehicle. The principal customers
for these transmissions are DaimlerChrysler Corporation, Ford Motor Company,
General Motors Corporation and certain foreign OEMs. In addition, the OEM
segment sells select remanufactured engines to DaimlerChrysler and certain
European OEMs (including Ford's European operations), as well as remanufactured
foreign and domestic engines to general repair shops and retail automotive parts
stores.
The Company's Independent Aftermarket segment (the ATC Distribution
Group) primarily sells transmission repair kits, soft parts, remanufactured
torque converters and transmissions and both new and remanufactured hard parts
used in drivetrain repairs to independent transmission rebuilders for repairs
generally during the period following the expiration of the vehicle warranty. To
a lesser extent, the Distribution Group also sells its products to general
repair shops, wholesale distributors and retail automotive parts stores.
In addition to the OEM and Independent Aftermarket segments, the
Company has three "other" operating units. These operating units were acquired
in the Autocraft acquisition: Autocraft Electronics, an automotive electronic
parts remanufacturing and distribution business; Logistics Services, a
warehouse, distribution and turnkey order fulfillment and information services
business for AT&T Wireless Services (the cellular telephone subsidiary of AT&T);
and Material Recovery, a material recovery parts processing and Internet-based
auction business primarily for Ford. None of these operating units meet the
quantitative thresholds for determining reportable segments.
Since its formation, the Company has grown both internally and through
a series of acquisitions at a compound annual revenue growth rate of
approximately 29.1%. The Company believes the key elements of its success are
the quality and breadth of its product offerings and its strong technical
support, rapid delivery time, innovative product development and competitive
pricing. In addition, the Company has benefited from the increasing use of
remanufactured products as the industry recognizes that remanufacturing provides
a higher quality, lower cost alternative to rebuilding the assembly or replacing
it with a new assembly manufactured by an OEM.
The Company's strategy is to continue to grow both internally and
through strategic acquisitions. The Company intends to expand its business by:
(i) increasing penetration of its current customer base; (ii) gaining new OEM
and Independent Aftermarket customers; and (iii) introducing new products to
both existing and new customers. The Company plans to continue to support these
growth strategies through strategic acquisitions in the future.
See "Certain Factors Affecting the Company."
REMANUFACTURING
Remanufacturing is a process through which used assemblies are returned
to a central facility where they are disassembled and their component parts
cleaned, refurbished and tested. The usable component parts are then combined
with new parts in a high volume, precision assembly line or cellular
manufacturing process to create remanufactured assemblies.
When an assembly such as a transmission or engine fails, there are
generally three alternatives available to return the vehicle to operating
condition. The dealer or independent repair shop may: (i) remove the assembly,
disassemble it into its component pieces, replace worn or broken parts with
remanufactured or new components, and reinstall the assembly in the vehicle
("rebuild"); (ii) replace the assembly with an assembly from a remanufacturer
such as the Company; or (iii) in rare instances, replace the assembly with a new
assembly manufactured by the OEM.
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted by vehicle make and model and either placed into
immediate production or stored until needed. In the remanufacturing process, the
cores are evaluated and disassembled into their component parts and the
components that can be incorporated into the remanufactured product are cleaned,
refurbished and tested. All components determined not reusable or repairable are
replaced by other remanufactured or new components. Inspection and testing are
conducted at various stages of the remanufacturing process, and each finished
assembly is tested on equipment designed to simulate performance under operating
conditions. After testing, completed products are then packaged for immediate
delivery or shipped to one of the Company's distribution centers.
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The cores used in the Company's remanufacturing process for sale to its
OEM customers are provided primarily by the OEMs. In the case of OEMs other than
DaimlerChrysler, the dealers return cores to the OEM, which then ships them to
the Company. Chrysler cores are sent to the Company through its central core
return center. See "OEM Customers."
The majority of the cores used in the Company's remanufacturing process
for sale to its non-OEM customers are obtained from customers as trade-ins. The
Company encourages these customers to return cores on a timely basis and charges
customers a supplemental core charge in connection with purchases of engines and
critical hard parts. The customer can satisfy this charge by returning a usable
core or making a cash payment equal to the amount of the supplemental core
charge. If cores are not returned in a timely manner, the Company then must
procure cores through its network of independent core brokers. While core prices
are subject to supply and demand price volatility, the Company believes its
procurement network for cores will provide cores as needed at reasonable prices.
There are three primary benefits of using remanufactured components
rather than rebuilt or new components in repair of vehicles:
- First, costs to the OEM associated with remanufactured assemblies
generally are 50% less than new or dealer-rebuilt assemblies due to the
remanufacturer's use of high volume manufacturing techniques and
salvage methods that enable the remanufacturer to refurbish and reuse a
high percentage of original components.
- Second, remanufactured assemblies are generally of consistent high
quality due to the precision manufacturing techniques, technical
upgrades and rigorous inspection and testing procedures employed in
remanufacturing. The quality of a rebuilt assembly is heavily dependent
on the skill level of the particular mechanic. In addition, the
proliferation of transmission and engine designs, the increasing
complexity of transmissions and engines that incorporate electronic
components and the shortage of highly trained mechanics qualified to
rebuild assemblies are leading to what management believes is a trend
toward the use of remanufactured assemblies for aftermarket repairs.
For warranty repairs, consistent quality is important to the OEM
providing the applicable warranty, because once installed, the
remanufactured product is usually covered by the OEM's warranty for the
balance of the original warranty period.
- Third, replacement of a component with a remanufactured component
generally takes considerably less time than the time needed to rebuild
the component, thereby significantly reducing the time the vehicle is
at the dealer or repair shop and allows the dealer and repair shops to
increase their volume of business.
The Company believes that because of this combination of high quality,
low cost and efficiency, the use of remanufactured assemblies for aftermarket
repairs is growing compared to the use of new or rebuilt assemblies. Although
the primary customers for the Company's remanufactured components have
historically been OEMs, the Company expects the Independent Aftermarket to
increase its use of remanufactured components in the future.
ORIGINAL EQUIPMENT MANUFACTURER SEGMENT
The Company's OEM segment consists of four operating units that
remanufacture and sell transmissions directly to automobile manufacturers. In
addition, the OEM segment sells select remanufactured engines to DaimlerChrysler
and certain European OEMs, including Ford's European operations, as well as
remanufactured foreign and domestic engines to general repair shops and retail
automotive parts stores.
REMANUFACTURED TRANSMISSIONS
The Company remanufactures factory-approved transmissions for warranty
and post-warranty replacement of transmissions for DaimlerChrysler, Ford,
General Motors and several foreign OEMs, including Hyundai, Mitsubishi, Isuzu,
Subaru and Kia, primarily for their United States dealer networks. The number of
transmission models remanufactured by the Company has been increasing to
accommodate the greater number of models currently used in vehicles manufactured
by the Company's OEM customers.
3
REMANUFACTURED ENGINES
The Company remanufactures select factory-approved engine models for
Chrysler vehicles and through the Autocraft Acquisition also operates a facility
in England that remanufactures factory-approved engines for several European
OEMs, including Jaguar and the European divisions of Ford and General Motors.
These engines are used for warranty and post-warranty replacement. The facility
in England also does assembly and modification of new production engines for
certain of its OEM customers.
The Company also remanufactures engines for use as post-warranty
replacements in many domestic and foreign passenger cars and light trucks. In
addition, the Company sources remanufactured engines for other foreign passenger
cars and light trucks from independent suppliers. The Company distributes these
engines through a network of 16 local distribution centers located throughout
the eastern half of the United States. Principal customers include general
repair garages and wholesale distributors.
OEM CUSTOMERS
The Company's largest OEM segment customer is DaimlerChrysler, to whom
the Company supplies remanufactured transmissions and certain remanufactured
engines for use in Chrysler automobiles and light trucks. As a result of the
Autocraft Acquisition, the Company also provides remanufactured components to
several other OEMs including transmissions to Ford and engines to Jaguar, Land
Rover, Aston Martin and the European divisions of Ford and General Motors. The
Company added General Motors as a transmission customer in July 1997 with the
purchase of ATS and expanded its General Motors business with the Autocraft
Acquisition. Products are sold to each OEM pursuant to supply arrangements for
individual transmission or engine models, which supply arrangements typically
may be terminated by the OEM at any time.
OEM segment sales accounted for 52.1%, 52.0% and 54.0% of the Company's
1997, 1998 and 1999 revenues, respectively. Sales to DaimlerChrysler accounted
for 32.0%, 18.2% and 20.5% of the Company's revenues in 1997, 1998 and 1999,
respectively, and sales to Ford accounted for 17.1% and 19.2% of the Company's
revenues in 1998 and 1999, respectively. On a pro forma basis, as if the sale of
Mascot and the acquisitions of Autocraft and All Trans had occurred on January
1, 1998, OEM segment sales would have accounted for approximately 51.7% and
52.5% of pro forma 1998 and 1999 revenues, respectively. Sales to
DaimlerChrysler would have accounted for 16.8% and 19.9% of the total pro forma
revenues in 1998 and 1999, respectively, and sales to Ford would have accounted
for 19.0% and 18.6% of the total pro forma revenues in 1998 and 1999,
respectively.
Over the past 15 years, the Company has developed and maintained strong
relationships at many levels of both the corporate and the factory organizations
of Chrysler (which was merged with Daimler Benz in 1998 to form
DaimlerChrysler). In recognition of the Company's consistently high level of
service and product quality throughout its relationship with DaimlerChrysler, in
each of the seven years prior to and including 1999, the Company has received
the highest award bestowed by Chrysler to its suppliers for which the Company
was eligible. The Company is one of a select group of Chrysler's suppliers to
receive such awards for the seven-year period.
The Company's facilities that remanufacture transmissions for
DaimlerChrysler, Ford and General Motors, as well as certain of its other OEM
segment facilities, have QS-9000 certification, a complete quality management
system developed for DaimlerChrysler, Ford, General Motors and truck
manufacturers who subscribe to the ISO 9002 quality standards. The system is
designed to help suppliers, such as the Company, develop a quality system that
emphasizes defect prevention and continuous improvement in manufacturing
processes. Certain of the Autocraft facilities have also received Ford's Q1
quality certification.
DaimlerChrysler began implementing remanufacturing programs for its
Chrysler transmission models in 1986 and selected the Company as its sole
supplier of remanufactured transmissions in 1989. DaimlerChrysler has advised
the Company that, by implementing a remanufacturing program for Chrysler
vehicles, DaimlerChrysler has realized substantial warranty cost savings,
standardized the quality of its dealers' aftermarket repairs and reduced its own
inventory of replacement parts. Currently, the Company provides all
remanufactured front-wheel-drive transmissions purchased by DaimlerChrysler for
use in Chrysler vehicles. In late 1998, the Company commenced production of
4
remanufactured Chrysler rear-wheel-drive transmissions. The Company presently
does not provide remanufactured transmissions or other components to
DaimlerChrysler's Mercedes Benz division.
Autocraft began remanufacturing transmissions for Ford in 1989 and for
General Motors in 1985. The Company believes that as a result of the acquisition
of Autocraft, the Company provides approximately 85% of the remanufactured
transmissions purchased by Ford and approximately 30% of the remanufactured
transmissions purchased by General Motors.
INDEPENDENT AFTERMARKET SEGMENT
The Company's Independent Aftermarket segment primarily sells
transmission repair kits, soft parts, remanufactured torque converters and
transmissions and both new and remanufactured hard parts used in drivetrain
repairs to independent transmission rebuilders throughout the United States
and Canada. To a lesser extent, these products are also sold to general
repair shops, wholesale distributors and retail automotive parts stores.
The market for parts sales and services for vehicles after their
original purchase has been non-cyclical and has generally experienced steady
growth over the past several years, unlike the market for new vehicle sales.
According to the Automotive Parts & Accessories Association, between 1989 and
1998 (the most recent period for which data is available), estimated
industry-wide revenue for the automobile aftermarket increased from
approximately $104.8 billion to $152.2 billion. This consistent growth is due
principally to the increase in the number of vehicles in operation, the increase
in the average age of vehicles, and the increase in the average number of miles
driven annually per vehicle. The Company competes primarily in the aftermarket
segment for automotive transmissions, engines and other drivetrain related
products, which represents more than $8 billion of the entire automotive
aftermarket.
PRODUCTS
Repair kits sold by the Company consist of gaskets, friction plates,
seals, bands, filters, clutch components and other "soft" parts that are used in
rebuilding transmissions for substantially all domestic and most imported
passenger cars and light trucks. Each kit is designed to include substantially
all of the soft parts necessary for rebuilding a particular transmission model.
Due to its high volume of kit sales, the Company maintains a variety of
strategic supply relationships that enable the Company to purchase components
for its kits at prices that the Company believes are more favorable than those
available to its lower volume competitors. The Company also believes that its
remanufacturing capability provides a cost advantage over some of its
competitors who purchase all their parts from suppliers.
The Company remanufactures torque converters (the coupler between the
transmission and engine) and certain "hard" parts such as planetary gears (speed
regulating devices inside the transmission) and transmission fluid pumps. Many
of the Company's competitors do not distribute as broad a line of hard parts or
remanufacture the hard parts that they distribute. The Company believes these
factors provide it both an availability and cost advantage over many of its
competitors.
The Company's Independent Aftermarket customers typically require
repair kits, torque converters and hard parts in order to complete a vehicle
repair. For this reason, the Company believes that the breadth of its product
line, which enables a customer to obtain all the parts for a repair job from a
single source, gives the Company a competitive advantage. The Company is one of
the few full-line transmission parts suppliers in the industry.
INDEPENDENT AFTERMARKET CUSTOMERS
The Company, through its ATC Distribution Group, supplies transmission
repair kits, soft parts, torque converters and hard parts used in automatic and
manual drive train repairs to independent transmission rebuilders throughout the
United States and Canada. To a lesser extent, the Company also sells to general
repair shops and wholesale distributors. These products are used in the
Independent Aftermarket to rebuild transmissions and other assemblies using
remanufactured and new component parts purchased from a variety of suppliers. In
addition, the Company supplies transmission filter kits to less than 2,000 of
the approximately 40,000 retail automotive parts stores located in the United
States and Canada, which principally sell to "do-it-yourself" customers and
general repair shops.
5
As the number of vehicle models has proliferated and repairs have
become increasingly complex, independent transmission rebuilders and general
repair shops have grown more dependent on their suppliers for technical support
and assistance in managing inventory by delivering product on a just-in-time
basis at competitive prices. To address these needs, the Company maintains more
than 50 distribution centers located in metropolitan areas throughout the United
States and Canada from which the Company provides technical support and a wide
range of drivetrain related products that are delivered on a same-day basis by
trucks or delivery service to customers in and around metropolitan areas and on
a next-day basis by overnight carrier to customers in more remote areas. The
Company believes that its distribution system is the most extensive in the
drivetrain segment of the automotive aftermarket and represents a competitive
advantage for the Company relative to its typically smaller, local competitors.
The Company believes there are opportunities for further geographic penetration
in this relatively fragmented market. See "Business Strategy."
The Company conducts telemarketing that, when coupled with the
Company's next-day delivery strategy to more remote areas, enables the Company
to establish customer relationships in areas that cannot support the costs
associated with setting up and maintaining a distribution center. Additionally,
new customers are developed by the Company's direct sales force operating from
its distribution centers, by advertising in national and local trade
publications, and by participating in various trade shows.
The Company believes it is well positioned within the highly fragmented
aftermarket for drivetrain products as a result of its extensive product line,
diverse customer base and broad geographic presence, with over 50 local
distribution centers throughout the United States and Canada. The Independent
Aftermarket segment accounted for 45.8%, 38.4% and 35.4% of the Company's
revenues in 1997, 1998 and 1999, respectively.
OTHER OPERATING UNITS
The Company's other operating units, acquired as part of the Autocraft
acquisition, were determined not to be reportable segments. The other operating
units consist of an automotive electronic parts remanufacturing and distribution
business, a warehouse, distribution and turnkey order fulfillment and
information services business and a material recovery parts processing and
Internet-based auction business.
Prior to the Autocraft acquisition, the Company's "other" operating
units consisted solely of Mascot, which remanufactured heavy-duty and
medium-duty truck transmissions, differentials and air compressors primarily for
sales to truck dealers in Canada. However, during 1998 the Company decided to
concentrate on the remanufacturing of automobile and light truck drivetrain
components rather than on heavy-duty truck components. For that reason, in
February 1999 the Company sold Mascot to a third party buyer.
AUTOMOTIVE ELECTRONIC COMPONENTS
The automotive electronic components operating unit remanufactures
automotive electronic control modules (which manage various engine functions)
for General Motors, remanufactures and distributes radios and instrument and
display clusters for General Motors and Ford, and remanufactures and distributes
cellular telephones and other cellular products (E.G., navigation systems) for
Ford, General Motors, Audi, Jaguar and Volkswagen.
LOGISTICS SERVICES
The logistics services operating unit provides centralized warehouse,
distribution and turnkey order fulfillment and information services for AT&T
Wireless Services, the cellular telephone subsidiary of AT&T. As part of this
service, the Company handles all warranty-service exchanges and inventory
tracking for AT&T Wireless Services.
MATERIAL RECOVERY
As part of its relationship with Ford, the Company also provides
material recovery services to assist Ford with the management of its dealer
parts inventory. Under this program, Ford dealers send their excess parts
inventory to the Company. The parts are then sorted and disposed of in one of
three ways: useful parts that are needed by other dealers are redistributed;
useful parts that are not needed by other dealers are sold to remanufacturers,
wholesale distributors and
6
other third parties through an innovative on-line Internet auction process; and
useless parts are scrapped. As a result of the introduction of the materials
recovery program, the number of parts that are scrapped has been significantly
reduced to less than 2%.
BUSINESS STRATEGY
The Company's strategy is to achieve growth both internally and through
strategic acquisitions. The Company intends to expand its business by: (i)
increasing penetration of its current customer base; (ii) gaining new OEM and
Independent Aftermarket customers; and (iii) introducing new products to both
existing and new customers.
INCREASING SALES TO EXISTING CUSTOMERS
OEM CUSTOMERS. The Company intends to increase its business with its
existing OEM customers by working with OEMs to increase dealer utilization of
remanufactured transmissions in both the warranty and post-warranty periods. The
Company is working in tandem with OEMs to highlight to dealers the quality and
cost advantages of using remanufactured assemblies versus rebuilding. In
addition, the post-warranty repair market, which the Company believes is
significantly larger than the OEM dealer warranty repair market, presents a
growth opportunity. Currently, the vast majority of post-warranty repairs are
performed in the Independent Aftermarket rather than at OEM dealers. Given the
relatively low cost and high quality of remanufactured components, OEM dealers
can enhance their cost competitiveness compared to independent service centers
through the increased use of remanufactured components as well as providing end
customers with a high quality product. To the extent that OEM dealers increase
their level of post-warranty repairs, the Company is well positioned to
capitalize on this market growth. The Company has introduced a number of new
transmission models and related drivetrain products in the last several years
for its OEM customers.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that it
currently supplies approximately 15% of the remanufactured or new drivetrain
component requirements of its independent transmission rebuilder and general
repair shop customers. The Company believes it is well positioned to expand
sales to these customers through common product identification and numbering in
conjunction with a computer network that electronically links its distribution
centers, enabling the Company to offer its full line of products throughout the
entire Distribution Group.
INTRODUCING NEW PRODUCTS
OEM CUSTOMERS. The Company believes that OEMs recognize that the use of
remanufactured assemblies provide a high quality, lower cost alternative to
rebuilding damaged assemblies or replacing them with new assemblies. For this
reason, the Company believes that OEMs are interested in working with large,
high quality remanufacturers to reduce the OEMs' warranty costs and increase
their parts sales into the post-warranty aftermarket. The Company continues to
work with its OEM customers to identify additional remanufactured products and
services where the Company can provide value to the OEM. In this way, the
Company believes that it will be able to leverage its customer relationships and
remanufacturing competency. In early 2000, the Company was selected by Ford to
supply remanufactured transmissions for use in Ford's new Focus, which is a
global platform, and to supply a new line of Motorcraft-branded remanufactured
transmissions.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its
reputation for high quality products and customer service enables it to leverage
its relationships with existing customers to sell additional products. The
Company monitors sales trends and is in frequent communication with customers
regarding potential new products. The Company has begun to offer complete
remanufactured transmissions for sale to its independent transmission rebuilder
customers. In addition, the Company has begun offering new hard parts such as
planetary gears, sun gears and oversized pump gears. In introducing new
products, the Company focuses on components that are difficult to find and
typically require a high rate of replacement. The acquisition of All Trans in
the fourth quarter of 1999 substantially increased the Company's manual
transmission parts product offering, enabling it for the first time to offer
manual transmission parts throughout the Distribution Group.
OTHER. The Company also intends to leverage the capability of its
electronics remanufacturing and distribution business by introducing
remanufactured electronic components to some of its other OEM customers.
7
ESTABLISHING NEW CUSTOMER RELATIONSHIPS
OEM CUSTOMERS. The Company believes that opportunities for growth exist
with several foreign OEMs regarding their United States-based remanufacturing
programs. The Company believes that this represents an opportunity for growth
and is currently working to develop programs with certain of these OEMs.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its
product mix and distribution network position it to expand its Independent
Aftermarket customer base in two ways. First, through its telemarketing
capability, the Company expects to reach new Independent Aftermarket customers
in non-metropolitan areas. Second, the Company expects to attract additional
Independent Aftermarket customers with its extensive product offering and
technical support capability.
OTHER. The Company believes that its logistics services business should
be attractive to new customers who recognize that outsourcing this function will
enable them to both focus on their core competencies and have an efficient
product distribution system. The Company also believes that the ability to sell
product via Internet auctions, cost savings and environmental benefits provided
by its material recovery business, will be attractive to other OEMs.
The foregoing discussion of the Company's business strategy contains
forward-looking statements. See "Forward-Looking Statement Notice."
COMPETITION
The Company competes in the highly fragmented automobile aftermarket
for transmissions, engines and other drivetrain components, in which the
majority of industry supply comes from small local or regional participants.
Competition is based primarily on product quality, service, delivery, technical
support and price. Many of the Company's competitors operate only in certain
geographic regions with a limited product line. The Company is the largest
participant in the aftermarket for remanufactured drivetrain components, offers
a more complete line of products across a diverse customer base and has a much
broader geographic presence than many of its competitors. As a result, the
Company believes that it is well positioned to enhance its competitive position
by expanding its product line through the development of new products or
acquisition of new businesses as well as by expanding its distribution network
into new geographic markets. Nevertheless, the aftermarket for remanufactured
drivetrain components remains highly competitive.
EMPLOYEES
As of December 31, 1999, the Company had approximately 5,100 full-time
employees. The Company believes its employee and labor relations are good. The
Company has never experienced any work stoppage and none of its employees are
members of any labor union.
ENVIRONMENTAL
The Company is subject to various evolving Federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
nonhazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances.
In connection with its acquisitions, the Company conducted certain
investigations of the acquired companies' facilities and their compliance with
applicable environmental laws. The investigations, which included "Phase I"
assessments by independent consultants of all manufacturing and certain
distribution facilities, found that certain facilities have had or may have had
releases of hazardous materials that may require remediation and also may be
subject to potential liabilities for contamination from off-site disposal of
substances or wastes. These assessments also found that certain reporting and
other regulatory requirements, including certain waste management procedures,
were not or may not have been satisfied. Although there can be no assurance, the
Company believes that, based in part on the
8
investigations conducted, in part on certain remediation completed prior to the
acquisitions, and in part on the indemnification provisions of the agreements
entered into in connection with the Company's acquisitions, the Company will not
incur any material liabilities relating to these matters.
The company from which RPM acquired its assets (the "Prior RPM
Company") has been identified by the United States Environmental Protection
Agency (the "EPA") as one of many potentially responsible parties for
environmental liabilities associated with a "Superfund" site located in the area
of RPM's former manufacturing facilities and current distribution facility in
Azusa, California. The Federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
provides for cleanup of sites from which there has been a release or threatened
release of hazardous substances, and authorizes recovery of related response
costs and certain other damages from potentially responsible parties ("PRPs").
PRPs are broadly defined under CERCLA, and generally include present owners and
operators of a site and certain past owners and operators. As a general rule,
courts have interpreted CERCLA to impose strict, joint and several liability
upon all persons liable for cleanup costs. As a practical matter, however, at
sites where there are multiple PRPs, the costs of cleanup typically are
allocated among the PRPs according to a volumetric or other standard. The EPA
has preliminarily estimated that it will cost approximately $47 million to
construct and approximately $4 million per year for an indefinite period to
operate an interim remedial groundwater pumping and treatment system for the
part of the Superfund site within which RPM's former manufacturing facilities
and current distribution facility, as well as those of many other potentially
responsible parties, are located. The actual cost of this remedial action could
vary substantially from this estimate, and additional costs associated with the
Superfund site are likely to be assessed. The Company has significantly reduced
its presence at the site and has moved all manufacturing operations off-site.
Since July 1995, the Company's only real property interest in this site has been
the lease of a 6,000 square-foot storage and distribution facility. The RPM
acquisition agreement and the leases pursuant to which the Company leased RPM's
facilities after the Company acquired the assets of RPM (the "RPM Acquisition")
expressly provide that the Company did not assume any liabilities for
environmental conditions existing on or before the RPM Acquisition, although the
Company could become responsible for these liabilities under various legal
theories. The Company is indemnified against any such liabilities by the seller
of RPM as well as the Prior RPM Company shareholders. There can be no assurance,
however, that the Company would be able to make any recovery under any
indemnification provisions. Since the RPM Acquisition, the Company has been
engaged in negotiations with the EPA to settle any liability that it may have
for this site. Although there can be no assurance, the Company believes that it
will not incur any material liability as a result of these environmental
conditions.
CERTAIN FACTORS AFFECTING THE COMPANY
Set forth below are certain factors that may affect the Company's
business:
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company's largest customer, DaimlerChrysler, accounted for
approximately 32.0%, 18.2% and 20.5% of the Company's net sales for 1997, 1998
and 1999, respectively. Ford accounted for 17.1% and 19.2% of net sales in 1998
and 1999, respectively. No other customer accounted for more than 10% of the
Company's net sales during any of these years.
DaimlerChrysler and Ford, like other North American OEMs, generally
require their dealers using remanufactured products to use only those from
approved suppliers. Although the Company is currently the only factory-approved
supplier of remanufactured transmissions for Chrysler vehicles and one of two
suppliers to Ford, DaimlerChrysler and Ford (like the Company's other OEM
customers) are not obligated to continue to purchase the Company's products and
there can be no assurance that the Company will be able to maintain or increase
the level of its sales to them or that they will not approve other suppliers in
the future. In addition, within the last four years the standard new vehicle
warranty for Chrysler vehicles was reduced from seven years/70,000 miles to
three years/36,000 miles and a shorter warranty could be implemented in the
future. Any such action could have the effect of reducing the amount of warranty
work performed by Chrysler dealers. An extended, substantial decrease in orders
from DaimlerChrysler or Ford would have a material adverse effect on the
Company. See "Customers--OEM Customers."
9
SHORTAGE OF TRANSMISSION CORES AND COMPONENT PARTS
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted and either placed into immediate production or stored
until needed. The majority of the cores remanufactured by the Company are
obtained from OEMs or from Independent Aftermarket customers as trade-ins. The
ability to obtain cores of the types and in the quantities required by the
Company is critical to the Company's ability to meet demand and expand
production. With the increased acceptance in the aftermarket of remanufactured
assemblies, the demand for cores has increased. The Company periodically has
experienced situations in which the inability to obtain sufficient cores has
limited its ability to accept all of the orders available to it. There can be no
assurance that the Company will not experience core shortages in the future. If
the Company were to experience such a shortage for an extended period of time,
it could have a material adverse effect on the Company.
Certain component parts required in the Company's OEM transmission
remanufacturing process are manufactured by the Company's OEM customers. The
Company has experienced shortages of such component parts from time to time in
the past, and future shortages could have a material adverse effect on the
Company.
ABILITY TO ACHIEVE AND MANAGE GROWTH
An important element in the Company's growth strategy is the
acquisition and integration of complementary businesses in order to broaden
product offerings, capture market share and improve profitability. There can be
no assurance that the Company will be able to identify or reach mutually
agreeable terms with acquisition candidates, or that the Company will be able to
manage additional businesses profitably or successfully integrate such
additional businesses into the Company without substantial costs, delays or
other problems. Acquisitions may involve a number of special risks, including:
initial reductions in the Company's reported operating results; diversion of
management's attention; unanticipated problems or legal liabilities; and a
possible reduction in reported earnings due to amortization of acquired
intangible assets in the event that such acquisitions are made at levels that
exceed the fair market value of net tangible assets. Some or all of these items
could have a material adverse effect on the Company. There can be no assurance
that businesses acquired in the future will achieve sales and profitability that
justify the investment therein. In addition, to the extent that consolidation
becomes more prevalent in the industry, the prices for attractive acquisition
candidates may increase to unacceptable levels. See "Business Strategy."
The Company's Distribution Group, which serves the Independent
Aftermarket, is composed of what were ten separate businesses, each with its own
independent distribution, planning and accounting system that did not work with
the systems of the other Distribution Group businesses. In furtherance of the
Company's business strategy to integrate these ten businesses into the ATC
Distribution Group, the Company began replacing these systems with an
enterprise-wide information system. However, as a result of system complexities
and unanticipated issues relating to the conversion of data from the old systems
to the new system, the business disruption experienced by the Distribution Group
was greater than originally anticipated. As a result of these problems, the cost
and the timing of the system implementation exceeded the Company's plan. The
Company resolved the majority of these problems by the end of 1999.
INDEBTEDNESS AND LIQUIDITY
The Company had outstanding long-term indebtedness of $308.5 million at
December 31, 1999. The level of the Company's consolidated indebtedness could
have important consequences, including the following: (i) a substantial portion
of the Company's cash flow from operations must be dedicated to the payment of
principal of, and interest on, its indebtedness and will not be available for
other purposes; (ii) the ability of the Company to obtain financing in the
future for working capital needs, capital expenditures, acquisitions,
investments, general corporate purposes or other purposes may be materially
limited or impaired; (iii) the Company's level of indebtedness may reduce its
flexibility to respond to changing business and economic conditions or take
advantage of business opportunities that may arise; and (iv) the ability of the
Company to pay dividends is restricted. See Item 5. "Market for Registrant's
Common Equity and Related Stockholder Matters." In addition, the Company's bank
credit agreement contains covenants that (i) require the Company to meet certain
financial ratios and (ii) limit the Company's ability to, among other things,
incur indebtedness,
10
make capital expenditures, make investments, engage in mergers and dispose of
assets. The indenture that governs the Company's 12% Senior Subordinated Notes
due 2004 (the "Senior Notes") contains, among other things, a covenant that
limits the Company's ability to incur additional indebtedness. Any default by
the Company with respect to such covenants, or any inability on the part of the
Company to obtain necessary liquidity, could have a material adverse effect on
the Company. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
ENVIRONMENTAL MATTERS
The Company is subject to various evolving federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances. In connection with its
acquisitions, the Company conducted certain investigations of the acquired
companies' facilities and their compliance with applicable environmental laws.
These investigations found various environmental matters and conditions that
could, under certain circumstances, expose the Company to liability.
Furthermore, the company from which RPM acquired its assets has been identified
by the United States Environmental Protection Agency as one of the many
potentially responsible parties for environmental liabilities associated with a
"Superfund" site located in the area of RPM's former manufacturing facilities
and one of its current distribution facilities. Although no assurances can be
given, the Company believes that it will not incur any material liabilities
relating to these matters. See "Environmental Matters."
COMPETITION
The automotive aftermarket for transmissions, engines and other
drivetrain products is highly fragmented and highly competitive. There can be no
assurance that the Company will compete successfully with other companies in its
industry segment, some of which are larger than the Company and have greater
financial and other resources available to them than does the Company. See
"Competition."
CONTROL OF THE COMPANY; ANTI-TAKEOVER MATTERS
The Company is controlled by Aurora Equity Partners L.P. and Aurora
Overseas Equity Partners I, L.P. (collectively, the "Aurora Partnerships"),
which hold approximately 63% of the voting power in the Company (through direct
ownership and certain voting arrangements). Therefore, the Aurora Partnerships
will be able to elect all of the directors of the Company and approve or
disapprove any matter submitted to a vote of the Company's stockholders. As a
result of the Aurora Partnerships' substantial ownership interest in the Common
Stock, it may be more difficult for a third party to acquire the Company. A
potential buyer would likely be deterred from any effort to acquire the Company
absent the consent of the Aurora Partnerships or their participation in the
transaction. The general partner of each of the Aurora Partnerships is
controlled by Richard R. Crowell, Gerald L. Parsky and Richard K. Roeder, each
of whom is a director of the Company. The Indentures governing the Senior Notes
contain provisions that would allow a holder to require the Company to
repurchase such holder's Senior Notes at a cash price equal to 101% of the
principal amount thereof, together with accrued interest, upon the occurrence of
a "change of control" of the Company (as defined therein), which could also have
the effect of discouraging a third party from acquiring the Company. See Item
12. "Security Ownership of Certain Beneficial Owners and Management."
In addition, the Company's Board of Directors is authorized, subject to
certain limitations prescribed by law, to issue up to 2,000,000 shares of
preferred stock in one or more classes or series and to fix the designations,
powers, preferences, rights, qualifications, limitations or restrictions,
including voting rights, of those shares without any further vote or action by
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate transactions, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of preferred stock.
11
ITEM 2. PROPERTIES
The Company conducts its remanufacturing and other non-distribution
operations at the following facilities:
LEASE
APPROXIMATE EXPIRATION
LOCATION SQ. FEET DATE PRODUCTS PRODUCED/SERVICES PROVIDED
- ------------------------------ ------------ ---------- -----------------------------------------------------
Rancho Cucamonga, CA 153,000 2002 torque converters
Joplin, MO 264,000 2008 transmissions
Springfield, MO 280,800 2004 transmissions
Springfield, MO 200,000 2006 engines
Springfield, MO 30,900 2001 torque converters
Springfield, MO 34,000 2001 cleaning and testing equipment
Gastonia, NC 130,000 2000 transmissions and valve bodies
Mahwah, NJ 160,000 2003 transmissions, transfer cases and assorted components
Dayton, OH 42,000 2004 torque converters
Oklahoma City, OK 98,000 owned material recovery
Oklahoma City, OK 207,000 owned transmissions
Portland, OR 7,600 2004 manual transmission components
Carrollton, TX 39,000 2006 radios and instrument and display clusters
Houston, TX 50,000 2002 engine control modules and radios
Grantham, England 120,000 owned engines and related components
Mexicali, Mexico 43,800 2007 torque converters
The Company distributes transmission repair kits, soft parts, torque
converters and drive train hard parts and/or engines to non-OEM customers
through 61 local and six regional distribution centers in the United States and
Canada, all of which are leased. The local distribution centers generally range
in size from 5,000 to 20,000 square feet and are typically leased for five-year
terms with a portion of the leases expiring every year. The regional
distribution centers range in size from 14,000 to 168,000 square feet and have
lease expiration dates at various times through 2012. The Company also leases
two facilities for its All Trans operations, which leases expire in 2004 and
2005.
The Company leases a 220,000 square foot facility and a 108,000 square
foot facility in Fort Worth, Texas from which it distributes cellular telephones
and accessories for AT&T Wireless Services. These leases expire in 2008 and
2005, respectively.
The Company also leases assorted warehouses and space for its corporate
offices and computer services.
The Company believes that its current manufacturing facilities and
distribution centers are adequate for the current level of the Company's
activities. The Company's manufacturing sites have the flexibility to add both
additional shifts and production workers needed to accommodate additional demand
for products and services. However, in the event the Company were to experience
a material increase in sales, the Company may require additional manufacturing
facilities. The Company believes such additional facilities are readily
available on a timely basis on commercially reasonable terms. Further, the
Company believes that the leased space housing its existing manufacturing and
distribution facilities is not unique and could be readily replaced, if
necessary, at the end of the terms of its existing leases on commercially
reasonable terms. Historically, the Company has been able to renew leases or
find alternate space upon the expiration of its leases without material
interruption in the subject facilities' operations. Many of the Company's leases
are renewable at the option of the Company.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been and is involved in various
legal proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect, individually or in the aggregate, on the Company.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "ATAC" since the IPO in December 1996. As of February
29, 2000, there were approximately 94 record holders of its Common Stock. The
following table sets forth for the periods indicated the range of high and low
sale prices of the Common Stock as reported by Nasdaq:
HIGH LOW
------- -------
1998
First quarter.............................. 27 1/4 17
Second quarter............................. 23 7/16 16 1/4
Third quarter.............................. 18 1/2 9 1/8
Fourth quarter............................. 11 1/2 3 7/8
1999
First quarter.............................. 9 7/8 4 1/2
Second quarter............................. 12 3/8 6 7/8
Third quarter.............................. 11 7/8 8 1/32
Fourth quarter............................. 12 5/8 7 3/4
On February 29, 2000, the last sale price of the Common Stock, as
reported by Nasdaq, was 11 3/4 per share.
The Company has not paid cash dividends on its Common Stock to date.
Because the Company currently intends to retain any earnings to provide funds
for the operation and expansion of its business and for the servicing and
repayment of indebtedness, the Company does not intend to pay cash dividends
on its Common Stock in the foreseeable future. Furthermore, as a holding
company with no independent operations, the ability of the Company to pay
cash dividends is dependent upon the receipt of dividends or other payments
from its subsidiaries. Under the terms of the Indentures governing the Senior
Notes, the Company is not permitted to pay any dividends on its Common Stock
unless certain financial ratio tests are satisfied. In addition, the
agreement for the Company's bank credit facility contains certain covenants
that, among other things, prohibit the payment of dividends by the Company.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Any determination to
pay cash dividends on the Common Stock in the future will be at the sole
discretion of the Company's Board of Directors.
During 1999, the Company did not issue any securities that were not
registered under the Securities Act of 1933, as amended.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the
statements of operations data for the years ended December 31, 1997, 1998 and
1999 and the balance sheet data at December 31, 1998 and 1999 are derived from
the Consolidated Financial Statements of the Company that have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere herein, and
are qualified by reference to such financial statements and notes related
thereto. The selected financial data with respect to the statement of operations
data for the years ended December 31, 1995 and 1996 and the balance sheet data
at December 31, 1995, 1996 and 1997, are derived from the Consolidated Financial
Statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, but are not included herein. The data provided should be
read in conjunction with the Consolidated Financial Statements, related notes
and other financial information included in this Annual Report.
CONSOLIDATED
--------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................... $190,659 $272,878 $346,110 $486,773 $564,965
Cost of sales............................... 115,499 166,810 212,416 348,443 382,899
Special charges............................. -- -- -- 1,347 4,895
---------- ---------- ---------- ---------- ----------
Gross profit................................ 75,160 106,068 133,694 136,983 177,171
Selling, general and administrative
expenses.................................. 38,971 55,510 73,768 109,357 123,429
Amortization of intangible
assets.................................... 3,308 3,738 4,501 6,806 7,420
Special charges............................. -- -- -- 7,397 8,868
---------- ---------- ---------- --------- ---------
Income from operations...................... 32,881 46,820 55,425 13,423 37,454
Interest expense (income), net.............. 16,915 19,106 16,910 23,714 26,502
Income tax expense (benefit) ............... 6,467 11,415 15,512 (3,176) 4,145
---------- ---------- ---------- --------- ---------
Income (loss) before extraordinary 9,499 16,299 23,003 (7,115) 6,807
items (1)(2)................................
Preferred stock dividends................... 2,093 2,222 -- -- --
---------- ---------- ---------- --------- ---------
Income (loss) before extraordinary items
available to common stockholders.......... $ 7,406 $ 14,077 $ 23,003 $ (7,115) $ 6,807
========== ========== ========== ========= =========
Earnings (loss) per share before
extraordinary items (3)................... $ 0.65 $ 1.02 $ 1.19 $ (0.36) $ 0.32
Shares used in computation of earnings
per share before extraordinary items (3).. 14,616 15,918 19,335 19,986 21,164
OTHER DATA:
Capital expenditures (4)................. $ 5,187 $ 7,843 $ 8,682 $ 23,986 $ 23,162
14
CONSOLIDATED
---------------------------------------------
DECEMBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
---------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital............................. $ 60,012 $103,371 $ 98,523 $ 87,934 $101,938
Property, plant and equipment, net.......... 10,784 17,482 24,414 63,903 75,369
Total assets................................ 247,932 320,747 368,677 531,905 596,646
Long-term liabilities (5)................... 165,724 167,233 152,571 258,042 302,535
Preferred stock............................. 22,946 -- -- -- --
Common stockholders' equity................. 30,188 105,832 175,429 168,011 176,144
- ---------------
(1) Income before extraordinary item for the year ended December 31, 1997
excludes an extraordinary item in the amount of $3,749 ($6,269 less
related income tax benefit of $2,520). This amount consisted of (i) a
$3,425 charge resulting from the early redemption of $40,000 in
principal amount of the Senior Notes in February 1997, which included
the payment of a 12.0% early redemption premium and the write-off of
related debt issuance costs and (ii) a charge of $324 for the write-off
of previously capitalized debt issuance costs in connection with the
termination of the Company's previous revolving credit facility.
(2) Loss before extraordinary item for the year ended December 31, 1998
excludes an extraordinary item in the amount of $703 ($1,172 less
related income tax benefit of $469). This amount consisted of (i) a
$340 charge resulting from the early redemption of $9,615 in principal
amount of the Senior Notes in September and October of 1998, which
included the payment of a 4.0% early redemption premium and the
write-off of related debt issuance costs and (ii) a charge of $363 for
the write-off of previously capitalized debt issuance costs in
connection with the termination of the Company's previous revolving
credit facility.
(3) See Item 8. "Consolidated Financial Statements and Supplementary
Data-Note 14" for a description of the computation of earnings per
share.
(4) Excludes capital expenditures made by certain of the Company's
subsidiaries prior to such subsidiaries' respective acquisitions and
any capital expenditures made in connection with such acquisitions.
(5) Includes deferred tax liabilities of $3,478, $5,252, $8,044, $11,492
and $15,112 at December 31, 1995, 1996, 1997, 1998 and 1999,
respectively.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Annual Report. See Item 8. "Consolidated Financial Statements
and Supplementary Data."
Readers are cautioned that the following discussion contains certain
forward-looking statements and should be read in conjunction with the
"Forward-Looking Statement Notice" appearing at the beginning of this Annual
Report.
OVERVIEW
The Company's revenues are generated primarily through the sale of
drivetrain products used in the repair of vehicles in the automotive
aftermarket. Since its formation, the Company has benefited from a combination
of internal and acquisition-related revenue growth, achieving compounded annual
growth in revenue of approximately 31.2% from 1995 through 1999.
From 1995 through 1999, the Company's revenues in the OEM segment
increased by 29.8% compounded annually from $107.6 million to $305.1 million due
primarily to increased sales to existing customers, including DaimlerChrysler,
combined with new customers, including Ford and General Motors, added through
acquisitions. During the same period, revenues in the Independent Aftermarket
segment increased by 26.0% compounded annually from $79.5 million to $200.1
million. This growth was due to a combination of acquisitions, geographic
expansion, an expanded product offering, effective sales efforts and the
development of new customers.
The Company regularly evaluates strategic acquisition opportunities and
expects it will continue to do so in the future. During the first quarter of
1998, the Company acquired substantially all of the assets of Autocraft, the OEM
Division of The Fred Jones Companies, Inc. During the fourth quarter of 1999,
the Company acquired substantially all of the assets All Trans. See Item 1.
"Business."
During 1998 and 1999 the Company recorded special charges of $8.7
million and $13.8 million, respectively, primarily related to certain
initiatives designed to improve operating efficiencies and reduce costs. See
"Results of Operations" for a complete discussion of these charges. In addition,
in 1998 the Company recorded charges for non-recurring costs totaling $21.4
million. As previously disclosed, the Company believes that these charges were
one-time in nature due to the application of new information and estimation
methodologies.
Income from operations before special charges and nonrecurring expenses
was $42.4 million and $51.2 million for the years ended December 31, 1998 and
1999, respectively. Excluding special charges, nonrecurring expenses and
extraordinary items, net income was $11.0 million or $0.52 per diluted share in
1998 compared to $14.8 million or $0.70 per diluted share in 1999.
The primary components of the Company's cost of goods sold are the cost
of cores and component parts, labor costs and overhead. While certain of these
costs have fluctuated as a percentage of sales over time, cost of goods sold as
a percentage of sales remained relatively constant from 1995 through 1997, at
approximately 61.0%. In 1998, cost of goods sold as a percentage of net sales,
before $12.7 million of non-recurring costs and $1.3 million of special charges,
increased to 69.0% and in 1999 was 67.8% before $4.9 million of special charges.
The change in cost of goods sold as a percentage of net sales from 1995 to 1999
is due primarily to changes in mix within the OEM segment and costs related to
the Independent Aftermarket segment's enterprise-wide information system.
Selling, general and administrative ("SG&A") expenses consist primarily
of salaries, commissions, rent, marketing expenses and other management
infrastructure expenses. SG&A expenses as a percentage of net sales increased
from 20.4% in 1995 to 21.8% in 1999. This increase was principally
16
due to growth in the Logistics Services business unit and to growth in the OEM
segment's remanufactured engine program, primarily due to the expansion of its
branch sales channel, combined with enhancements to the Company's management and
systems infrastructure.
RESULTS OF OPERATIONS
The following table sets forth certain financial statement data
expressed in millions of dollars and as a percentage of net sales.
For the Years Ended December 31,
--------------------------------------------------------
1997 1998 1999
------------------ -------------------- ----------------
Net sales.............................. $346.1 100.0% $486.8 100.0% $565.0 100.0%
Cost of sales.......................... 212.4 61.4 348.5 71.6 382.9 67.8
Special charges........................ - - 1.3 0.3 4.9 0.9
------ ----- ------- ----- ------ -----
Gross profit........................... 133.7 38.6 137.0 28.1 177.2 31.3
SG&A expenses.......................... 73.8 21.3 109.4 22.5 123.4 21.8
Amortization of intangible assets...... 4.5 1.3 6.8 1.3 7.4 1.3
Special charges........................ - - 7.4 1.5 8.9 1.6
------ ----- ------- ----- ------ -----
Income from operations................. 55.4 16.0 13.4 2.8 37.5 6.6
Interest expense, net and other........ 16.9 4.9 23.7 4.9 26.5 4.7
------ ----- ------- ----- ------ -----
Income (loss) before income taxes
and extraordinary items.............. 38.5 11.1 (10.3) (2.1) 11.0 1.9
Income tax expense (benefit)........... 15.5 4.5 (3.2) (0.7) 4.2 0.7
------ ----- ------- ----- ------ -----
Income (loss) before extraordinary items $ 23.0 6.6% $( 7.1) (1.4)% $ 6.8 1.2%
====== ===== ======= ===== ====== =====
The Company has two reportable segments: the OEM segment and the
Independent Aftermarket segment. The OEM segment consists of four operating
units that sell remanufactured transmissions directly to automobile
manufacturers, principally DaimlerChrysler, Ford, General Motors and several
foreign OEMs, primarily for use as replacement parts by their domestic dealers
during the warranty and post-warranty periods following the sale of a vehicle.
In addition, the OEM segment sells select remanufactured engines to
DaimlerChrysler and certain European OEMs, including Ford's European operation,
as well as remanufactured domestic and foreign engines to general repair shops
and retail automotive parts stores. The Company's Independent Aftermarket
segment primarily sells transmission repair kits, soft parts, remanufactured
torque converters and new and remanufactured hard parts used in drivetrain
repairs to independent transmission rebuilders for repairs generally during the
period following the expiration of the vehicle warranty. To a lesser extent, the
Independent Aftermarket segment also sells its products to general repair shops,
wholesale distributors and retail automotive parts stores. In addition to the
OEM and Independent Aftermarket segments, the Company has three other operating
units reflected as "Other" due to their relative size, all of which were
acquired in the Autocraft acquisition: an automotive electronic parts
remanufacturing and distribution business; warehouse, distribution and turnkey
order fulfillment and information services for AT&T Wireless Services; and a
material recovery parts processing and Internet-based auction business primarily
for Ford. None of these operating units meet the quantitative thresholds for
determining reportable segments. See Item 8. "Consolidated Financial Statements
and Supplementary Data-Note 17."
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Income (loss) before extraordinary items increased $13.9 million, from
a loss of $7.1 million for the year ended December 31, 1998, to income of $6.8
million for the year ended December 31, 1999. During 1998 and 1999, the Company
recorded pre-tax special charges of $8.7 million and $13.8 million,
respectively, related to certain initiatives designed to improve operating
efficiencies and reduce costs (see "Special Charges" below). In addition, during
1998, the Company recorded pre-tax charges for non-recurring costs totaling
$21.4 million. Excluding these non-recurring costs and special charges, income
17
before extraordinary items would have increased $3.8 million, or 34.5%, from
$11.0 million for the year ended December 31, 1998, to $14.8 million for the
year ended December 31, 1999. This increase was primarily attributable to
increases in profitability in the Company's OEM segment and "Other" business
units, partially offset by a decline in profitability in the Company's
Independent Aftermarket segment during 1999 as compared to 1998. On a per share
basis, income (loss) before extraordinary items increased from a loss of $0.36
per share in 1998 to net income per diluted share of $0.32 in 1999. Excluding
special charges and non-recurring expense, income before extraordinary items per
diluted share increased from $0.52 for the year ended December 31, 1998 to $0.70
for the year ended December 31, 1999.
NET SALES. Net sales increased $78.2 million, or 16.1%, from $486.8
million in 1998 to $565.0 million in 1999. This increase is partially
attributable to the full-year benefit of sales from Autocraft, which was
acquired in March 1998, and to the acquisition of All Trans, completed during
the fourth quarter of 1999. On a pro forma basis, as if the February 1999 sale
of Mascot, and the acquisitions of Autocraft and All Trans had all taken place
on January 1, 1998, net sales would have increased $54.5 million, or 10.3%, from
$526.8 million in 1998 to $581.3 million in 1999. This increase in sales, on a
pro forma basis, was primarily attributable to increased sales in the Company's
OEM and Independent Aftermarket segments combined with increased sales in its
Logistics Services and Material Recovery business units.
GROSS PROFIT. Gross profit increased $40.2 million, or 29.3%, from
$137.0 million in 1998 to $177.2 million in 1999. Excluding non-recurring costs
of $12.7 million recorded in 1998 and special charges of $1.3 million and $4.9
million recorded in 1998 and 1999, respectively, gross profit increased $31.1
million during 1999 as compared to 1998. As a percentage of net sales, gross
profit before non-recurring costs and special charges increased from 31.0% to
32.2% between the two periods. The increase in gross profit was principally due
to the increased sales in the OEM segment and Logistics Services business unit,
partially offset by a decline in gross profit experienced in the Independent
Aftermarket segment.
SG&A EXPENSES. SG&A expenses increased $14.0 million, or 12.8%, from
$109.4 million in 1998 to $123.4 million in 1999. Excluding non-recurring costs
of $7.5 million recorded in 1998, SG&A expenses increased $21.5 million during
1999 as compared to 1998 and as a percentage of net sales increased from 20.9%
to 21.8% between the two periods. This increase was due primarily to (i) $7.7
million related to the OEM segment's remanufactured engine program primarily
associated with the expansion of its branch sales channel and increased warranty
costs, (ii) $6.2 million of additional infrastructure costs related to the
Independent Aftermarket segment's enterprise-wide information system, (iii) $4.2
million in the Logistics Services business unit primarily related to sales
volume growth and systems enhancements, (iv) $4.2 million primarily associated
with the Company's business improvement initiatives, including travel,
recruitment and professional service costs and (v) $2.9 million of additional
cost due to a full year of SG&A cost from Autocraft, partially offset by an SG&A
cost reduction of $1.9 million as a result of the sale of Mascot.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $0.6 million, or 8.8%, from $6.8 million in 1998 to $7.4 million in
1999. The increase is primarily attributable to a full year of amortization for
the Autocraft acquisition and the acquisition of All Trans during the fourth
quarter of 1999.
SPECIAL CHARGES. During 1999, the Company recorded $13.8 million of
special charges, of which $4.9 million was included as a component of cost of
sales. These charges consisted of (i) $6.1 million of costs primarily related to
distribution center, distribution branch and manufacturing plant consolidations
within the Independent Aftermarket segment, (ii) $3.3 million of costs
associated with the narrowing of the remanufactured engine product offering,
(iii) $2.8 million of severance and other costs related to the reorganization of
certain management functions and (iv) $1.6 million of severance, plant exit and
other costs.
18
During 1998, the Company recorded $8.7 million of special charges, of
which $1.3 million was included as a component of cost of sales. These charges
consisted of (i) $3.8 million of restructuring charges consisting principally of
employee severance costs and certain other exit costs, (ii) $2.5 million of
costs relating principally to idle facility costs and (iii) $2.4 million related
to a state's interpretation of its tax law that subjected a portion of the OEM
segment's operations over the past four years to a state tax for the first time.
The Company, as an ongoing part of its planning process, continues to
identify and evaluate areas where cost efficiencies can be achieved through
consolidation of redundant facilities, outsourcing functions or changing
processes or systems. Implementation of any of these could require the Company
to incur special charges, which would be offset over time by the projected cost
savings.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased $24.1 million, or 179.9%, from
$13.4 million in 1998 to $37.5 million in 1999. As a percentage of net sales,
income from operations increased from 2.8% to 6.6%, between the two periods.
Excluding non-recurring costs of $20.2 million recorded in 1998 and special
charges of $8.7 million and $13.8 million recorded in 1998 and 1999,
respectively, income from operations increased $9.0 million during 1999 as
compared to 1998. As a percentage of net sales, income from operations before
non-recurring costs and special charges increased from 8.7% to 9.1% between the
two periods.
INTEREST EXPENSE, NET AND OTHER. Interest expense, net and other
increased $2.8 million, or 11.8%, from $23.7 million in 1998 to $26.5 million in
1999. The increase primarily resulted from a full year of borrowing under the
Company's $120.0 million term loan credit facility in March 1998 to finance the
Autocraft acquisition and increased borrowings under the Company's $100.0
million revolving credit facility in the fourth quarter of 1999 to finance the
All Trans acquisition. These term loan and revolving facilities are referred to
as the "Credit Facility."
EXTRAORDINARY ITEMS. In 1998, an extraordinary item in the amount of
$0.7 million ($1.2 million before related income tax benefit of $0.5 million)
was recorded. This amount consisted of (i) a $0.4 million charge for the
write-off of previously capitalized debt issuance costs in connection with the
termination of the Company's previous revolving credit facility and (ii) a $0.3
million charge resulting from the repurchase of $9.6 million in principal amount
of the Senior Notes in open market transactions.
OEM SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1998 1999
--------------- ---------------
Net sales....................$253.0 100.0% $305.1 100.0%
Special charges..............$ 5.0 2.0% $ 4.3 1.4%
Segment profit...............$ 23.9 9.4% $ 50.4 16.5%
NET SALES. Net sales increased $52.1 million, or 20.6%, from $253.0
million in 1998 to $305.1 million in 1999. On a pro forma basis, as if the
Autocraft acquisition had taken place on January 1, 1998, net sales would have
increased $32.7 million, or 12.0%, from $272.4 million in 1998 to $305.1 million
in 1999. The increase was primarily due to increased sales of remanufactured
transmissions to DaimlerChrysler and Ford and increased sales of remanufactured
engines through the Company's branch sales channel, partially offset by a
decrease in sales volume of engines and related parts in the segment's European
operations. Sales to DaimlerChrysler accounted for 18.2% and 20.5% of the
Company's revenues (34.9% and
19
37.9% of segment revenues) in 1998 and 1999, respectively. Sales to Ford
accounted for 17.1% and 19.2% of the Company's revenues (30.5% and 32.5% of
segment revenues) in 1998 and 1999, respectively.
SPECIAL CHARGES. The OEM segment recorded $4.3 million of special
charges in 1999. These charges consisted of (i) $3.3 million in connection with
the narrowing of its remanufactured engine product offering and (ii) $1.0
million relating to severance and plant exit costs.
The OEM segment recorded $5.0 million of special charges in 1998. These
charges consisted of (i) $2.6 million in connection with the consolidation of
certain manufacturing plants and (ii) $2.4 million relating to a state's
interpretation of its tax law that subjected a portion of the segment's
operations over the past four years to a state tax for the first time.
SEGMENT PROFIT. Segment profit increased $26.5 million, or 110.9%, from
$23.9 million (9.4% of OEM net sales) in 1998 to $50.4 million (16.5% of OEM net
sales) in 1999. Excluding special charges of $5.0 million and $4.3 million in
1998 and 1999, respectively, and non-recurring costs of $10.0 million recorded
in 1998, segment profit would have increased $15.8 million, or 40.6%, from $38.9
million (15.4% of segment net sales) in 1998 to $54.7 million (17.9% of segment
net sales) in 1999. The increase was primarily the result of increased sales.
INDEPENDENT AFTERMARKET SEGMENT
The following table presents net sales, special charges and segment
loss expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1998 1999
--------------- ---------------
Net sales....................$186.7 100.0% $200.1 100.0%
Special charges..............$ 2.1 1.1% $ 6.5 3.2%
Segment loss.................$(11.6) (6.2)% $(15.0) (7.5)%
NET SALES. Net sales increased $13.4 million, or 7.2%, from $186.7
million in 1998 to $200.1 million in 1999. On a pro forma basis, as if the All
Trans acquisition had taken place on January 1, 1998, net sales would have
increased $10.6 million, or 5.1%, from $206.5 million in 1998 to $217.1 million
in 1999. This increase was largely attributable to sales from a new line of hard
parts that were introduced after the third quarter of 1998 and to an improvement
from the lower sales volumes experienced during the second half of 1998, which
were caused by customer service and fill rate shortfalls related to
implementation issues associated with the segment's enterprise-wide information
system.
SPECIAL CHARGES. The Independent Aftermarket segment recorded $6.5
million of special charges in 1999. These charges consisted of (i) $6.1 million
primarily related to distribution center, distribution branch and manufacturing
plant consolidations and (ii) $0.4 million of severance and other costs related
to the reorganization of certain management functions.
During 1998 the Independent Aftermarket segment recorded $2.1 million
of special charges. These charges consisted of (i) $1.6 million for
restructuring charges, which included severance and certain other exit costs and
(ii) $0.5 million relating to facility consolidation.
SEGMENT LOSS. Segment loss increased $3.4 million from $11.6 million in
1998 to $15.0 million in 1999. Excluding special charges of $2.1 million and
$6.5 million in 1998 and 1999, respectively, and non-recurring costs of $9.3
million recorded during 1998, segment loss would have increased $8.3 million
from $0.2 million in 1998 to $8.5 million in 1999. This increase in segment loss
was primarily attributable to $6.2 million of additional infrastructure costs
related to the segment's enterprise-wide information system, and $2.4 million of
costs related to the Company's aftermarket remanufactured transmission program.
20
OTHER OPERATING UNITS
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1998 1999
--------------- ---------------
Net sales....................$ 47.1 100.0% $ 59.8 100.0%
Special charges..............$ - - % $ 0.6 1.0%
Segment profit...............$ 4.7 10.0% $ 8.7 14.5%
NET SALES. Net sales increased $12.7 million, or 27.0%, from $47.1
million in 1998 to $59.8 million in 1999. On a pro forma basis, as if the
Autocraft acquisition and the sale of Mascot had taken place on January 1, 1998,
net sales would have increased $11.1 million, or 23.1%, from $48.0 million in
1998 to $59.1 million in 1999. This increase was primarily attributable to
increased sales in the Logistics Services business unit due to growth in AT&T's
wireless service business.
SPECIAL CHARGES. Special charges recorded during 1999 of $0.6 million
relate to exit and other costs in the Electronics business unit.
SEGMENT PROFIT. Segment profit increased $4.0 million, or 85.1%, from
$4.7 million in 1998 to $8.7 million in 1999. Excluding special charges of $0.6
million in 1999, segment profit in 1999 would have increased $4.6 million, or
97.9%, from $4.7 million in 1998 to $9.3 million in 1999. The increase was
primarily the result of the additional sales volume described above, partially
offset by an increase in costs in the Logistics Services business unit
associated with enhancements to its information systems to support future
growth.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Income (loss) before extraordinary items decreased $30.1 million from
$23.0 million in 1997 to a $7.1 million loss in 1998. Excluding the
non-recurring costs and other special charges, income before extraordinary items
would have been $11.0 million. This decrease was primarily attributable to (i) a
decline in demand for remanufactured Chrysler transmissions and related
reduction of inventory at DaimlerChrysler and (ii) problems related to the
Company's implementation of the enterprise-wide information system in the
Independent Aftermarket segment. On a per share basis, income (loss) before
extraordinary items decreased from $1.19 per diluted share in 1997 to a loss of
$0.36 per share in 1998.
NET SALES. Net sales increased $140.7 million, or 40.7%, from $346.1
million in 1997 to $486.8 million in 1998. Of this increase, $131.8 million
related to the March 1998 Autocraft acquisition and $32.3 million related to a
full year's net sales for the businesses acquired in 1997, partially offset by a
$23.4 million decline in sales by the Company's other businesses.
GROSS PROFIT. Gross profit increased $3.3 million, or 2.5%, from $133.7
in 1997 to $137.0 million in 1998. As a percentage of net sales, gross profit
decreased from 38.6% to 28.1% between the two periods. The decrease in gross
profit margins was primarily related to (1) changes in OEM segment sales mix and
(2) system complexities and problems with data conversion encountered during the
implementation of the Independent Aftermarket segment's enterprise-wide
information system, which resulted in an internalization of management's focus
and hampered inventory management functions, pricing initiatives and sales
growth efforts. In addition, the Company incurred $12.7 million of non-recurring
costs in 1998 primarily consisting of (i) $6.7 million for increased inventory
reserves and (ii) $5.2 million for a
21
liability related to the purchase of excess cores. Also during 1998, the Company
recorded $1.3 million of special charges relating to idle facility costs.
Excluding these costs, gross profit in 1998 would have been $151.0 million or
31.0% of net sales.
SG&A EXPENSES. SG&A expenses increased $35.6 million, or 48.2%, from
$73.8 million in 1997 to $109.4 million in 1998. As a percentage of net sales,
SG&A expenses increased from 21.3% to 22.5% between the two periods. During
1998, the Company recorded $7.5 million of non-recurring costs including (i)
$3.0 million related to changes in estimates and other reserves, (ii) $2.7
million related to start-up costs and internal use software and (iii) $1.8
million related to changes in employee benefits and warranty policies. Excluding
these costs, SG&A expenses in 1998 would have been $101.9 million or 20.9% of
net sales as compared to 21.3% in 1997. On an absolute dollar basis, the
increase was primarily attributable to additional SG&A expenses for the
Autocraft businesses acquired in March 1998 and a full year's expense for the
acquisitions made in 1997.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $2.3 million, or 51.1%, from $4.5 million in 1997 to $6.8 million in
1998. The increase was primarily attributable to the March 1998 Autocraft
acquisition.
SPECIAL CHARGES. During 1998, the Company recorded $8.7 million of
special charges, of which $1.3 million was included as a component of cost of
sales. These charges consisted of (i) $3.8 million of restructuring charges that
primarily included employee severance costs and certain other exit costs, (ii)
$2.5 million of costs that primarily included idle facility costs and (iii) $2.4
million that related to a state's interpretation of its tax law that subjected a
portion of the OEM segment's operations over the past four years to a state tax
for the first time.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations decreased $42.0 million, or 75.8%, from
$55.4 million in 1997 to $13.4 million in 1998.
INTEREST EXPENSE, NET AND OTHER. Interest expense, net and other
increased $6.8 million, or 40.2%, from $16.9 million in 1997 to $23.7 million in
1998. The increase primarily resulted from borrowing under the term loan portion
of the Credit Facility in March 1998 to finance the Autocraft acquisition and
increased borrowings under the revolving portion of the Credit Facility
partially offset by the early redemption in September and October 1998 of $9.6
million in principal amount of Senior Notes. In addition, the Company recorded a
$1.2 million net loss on the sale of Mascot during 1998.
EXTRAORDINARY ITEMS. In 1997, an extraordinary item in the amount of
$3.8 million ($6.3 million before related income tax benefit of $2.5 million)
was recorded. This amount consisted of (i) a $3.4 million charge resulting from
the early redemption of $40.0 million of the Senior Notes in February 1997,
which included the payment of a 12.0% early redemption premium and the write-off
of related debt issuance costs and (ii) a $0.4 million charge for the write-off
of previously capitalized debt issuance costs in connection with the termination
of the Company's previous revolving credit facility.
In 1998, an extraordinary item in the amount of $0.7 million ($1.2
million before related income tax benefit of $0.5 million) was recorded. This
amount consisted of (i) a $0.4 million charge for the write-off of previously
capitalized debt issuance costs in connection with the termination of the
Company's previous revolving credit facility and (ii) a $0.3 million charge
resulting from the repurchase of $9.6 million in principal amount of the Senior
Notes in open market transactions.
22
OEM SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1997 1998
--------------- ---------------
Net sales....................$180.3 100.0% $253.0 100.0%
Special charges..............$ - - $ 5.0 2.0%
Segment profit...............$ 47.0 26.1% $ 23.9 9.4%
NET SALES. Net sales increased $72.7 million, or 40.3%, from $180.3
million in 1997 to $253.0 million in 1998. This increase was due to the March
1998 Autocraft acquisition, which accounted for approximately $91.5 million in
incremental net sales, partially offset by an $18.8 million decline in sales to
existing customers, particularly DaimlerChrysler. As previously reported, the
demand for DaimlerChrysler transmissions declined in 1998 primarily due to (i)
moderate weather during the winter of 1997-1998 and (ii) improved quality of
late model original equipment front wheel drive transmissions. The decline in
demand led to reduced inventory requirements at DaimlerChrysler. In order to
assist DaimlerChrysler in meeting these inventory requirements by the end of
1998, the Company significantly reduced its shipments to DaimlerChrysler during
the second half of the year. The Company believes that reduced demand for front
wheel drive transmissions due to improved quality will be mostly offset by
demand for rear wheel drive transmissions, which the Company began
remanufacturing for DaimlerChrysler during the third quarter of 1998. Sales to
DaimlerChrysler accounted for 32.0% and 18.2% of the Company's revenues (61.4%
and 34.9% of segment revenues) in 1997 and 1998, respectively. Sales to Ford,
(which became a customer in March 1998) accounted for 17.1% of the Company's
revenues (30.5% of segment revenues) in 1998.
SPECIAL CHARGES. The OEM segment recorded $5.0 million of special
charges in 1998. These charges consisted of (i) $2.6 million in connection with
the consolidation of certain manufacturing plants and (ii) $2.4 million relating
to a state's interpretation of its tax law that subjected a portion of the
segment's operations over the past four years to a state tax for the first time.
SEGMENT PROFIT. Segment profit decreased $23.1 million, or 49.1%, from
$47.0 million (26.1% of OEM net sales) in 1997 to $23.9 million (9.4% of OEM net
sales) in 1998. Excluding the special charges of $5.0 million and non-recurring
costs of $10.0 million, segment profit in 1998 would have been $38.9 million
(15.4% of segment net sales). The decline was primarily the result of changes in
the sales mix in the OEM segment and to the lower fixed cost absorption as a
result of decreased DaimlerChrysler sales in 1998.
23
INDEPENDENT AFTERMARKET SEGMENT
The following table presents net sales, special charges and segment
profit (loss) expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1997 1998
--------------- ---------------
Net sales....................$158.4 100.0% $186.7 100.0%
Special charges..............$ - - % $ 2.1 1.1%
Segment profit (loss)........$ 10.7 6.8% $(11.6) (6.2)%
NET SALES. Net sales increased $28.3 million, or 17.9%, from $158.4
million in 1997 to $186.7 million in 1998. The increase related to a full year's
net sales of $32.3 million from the three Independent Aftermarket companies
acquired in 1997. Sales for the remainder of the segment were relatively flat
year over year.
SPECIAL CHARGES. The Independent Aftermarket segment recorded $2.1
million of special charges in 1998. These charges consisted of (i) $1.6 million
for restructuring charges, which included severance and certain other exit
costs, and (ii) $0.5 million related to facility consolidation.
SEGMENT PROFIT (LOSS). Segment profit decreased $22.3 million from
$10.7 million (6.8% of segment net sales) in 1997 to an $11.6 million loss in
1998. Excluding the special charges of $2.1 million and non-recurring costs of
$9.3 million, segment loss would have been $0.2 million in 1998. The decline was
primarily the result of problems relating to the enterprise-wide information
systems implementation and the continued operational consolidation from nine
separate entities into one during 1998.
OTHER OPERATING UNITS
The following table presents net sales and segment profit expressed in
millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
--------------------------------
1997 1998
--------------- ---------------
Net sales....................$ 7.4 100.0% $ 47.1 100.0%
Segment profit...............$ 0.1 1.4% $ 4.7 10.0%
NET SALES. Net sales increased $39.7 million, or 536.5%, from $7.4
million in 1997 to $47.1 million in 1998. The increase was attributable to sales
by the Electronics, Logistics Services and Material Recovery business units,
which were acquired in March 1998 as part of the Autocraft acquisition. Prior to
the Autocraft acquisition, revenue in this segment was entirely attributable to
Mascot, which was sold in February 1999.
SEGMENT PROFIT. Segment profit increased $4.6 million from $0.1 million
in 1997 to $4.7 million in 1998. The increase was primarily the result of sales
volume from the Autocraft acquisition.
24
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW & CAPITAL EXPENDITURES
The Company had total cash and cash equivalents on hand of $8.5 million
at December 31, 1999, representing a net increase in cash and cash equivalents
of $7.9 million in 1999. Net cash provided by operating activities was $29.9
million for 1999. Net cash used in investing activities was $60.1 million for
the year, including $41.2 million for the All Trans acquisition and $23.2
million in capital expenditures, primarily for equipment purchases, software and
related implementation costs and leasehold improvements. Net cash provided by
financing activities was $37.9 million, including net borrowings of $48.2
million under the Credit Facility partially offset by $8.1 million in payment of
amounts due to previously acquired companies.
The Company's capital expenditures in 1999 were $23.2 million,
consisting of (i) $15.5 million for additional transmission and engine
remanufacturing equipment and other improvements to support planned increases in
production capacity and efficiencies in certain of the Company's remanufacturing
plants, (ii) $5.2 million in connection with the ongoing implementation of the
Distribution Group's enterprise-wide information system and (iii) $2.5 million
primarily related to investments in the Company's other operating units. The
Company has $20.0 million budgeted for capital expenditures during 2000,
primarily for remanufacturing equipment replacements and additions to support
planned increases in production capacity and efficiencies in the Company's
various facilities.
Under the terms of the Company's 1997 acquisition of ATS
Remanufacturing (which remanufactures transmissions for General Motors), the
Company is required to make payments to the seller on each of the first eight
anniversaries of the closing date. As of December 31, 1999, the Company had made
$2.1 million of these payments. Substantially all of the remaining six payments,
which aggregate to approximately $16.8 million (present value of $13.6 million
as of December 31, 1999), are contingent upon the attainment of certain sales
levels by ATS, which the Company believes are more likely than not to be
attained.
FINANCING
The Company raised total net proceeds of $61.6 million in its initial
public offering and concurrent private placement of common stock in December
1996 and an additional $47.9 million in a secondary offering in October 1997.
From the Company's inception in July 1994 to December 1996, the Company funded
its operations and investments in property and equipment, including
acquisitions, through the issuance of Senior Notes totaling $162.4 million, the
private sale of preferred stock of $20.0 million and common stock of $20.0
million, and to a lesser extent through cash provided by operating activities
and revolving bank lines. In December 1996, the preferred stock and $40.0
million in principal amount of the Senior Notes were redeemed with proceeds from
the initial public offering. The net proceeds from the secondary offering were
used to repay borrowings under the Credit Facility. In September and October
1998, the Company redeemed $2.2 million and $7.4 million, respectively, in
principal amount of the Senior Notes, with borrowings under the Credit Facility.
In February 1997, the Company terminated its $30.0 million revolving
credit facility with a bank syndicate led by The Chase Manhattan Bank ("Chase")
that had been scheduled to mature in July 1999 and replaced it with the $100.0
million revolving portion of the Credit Facility, which is also with Chase. The
Credit Facility is available to finance the Company's working capital
requirements, future acquisitions and other general corporate needs, and will
expire in December 2003.
In March 1998, the Credit Facility was amended and restated to provide
the $120.0 million term loan facility in addition to the existing revolving
facility. The Company borrowed $120.0 million under this term loan facility on
March 6, 1998 to purchase Autocraft and pay related transaction expenses. The
term loan is payable in quarterly installments through December 31, 2003.
25
On December 20, 1999, the borrowing capacity under the term loan
portion of the Credit Facility was increased by $10.0 million. On December 24,
1999, the Company borrowed this $10.0 million and used the proceeds to reduce
the outstanding borrowings under the revolving portion of the Credit Facility.
These additional borrowings are payable in quarterly installments through
December 31, 2003.
The Credit Facility's rate of interest is determined at either (i) the
Alternate Base Rate plus a specified margin or (ii) the Eurodollar Rate plus a
specified margin. The "Alternate Base Rate" is equal to the highest of (a)
Chase's prime rate, (b) the secondary market rate for three-month certificates
of deposit plus 1.0% and (c) the federal funds rate plus 0.5%, in each case as
in effect from time to time. The "Eurodollar Rate" is the rate offered by Chase
for eurodollar deposits for one, two, three, six or, if available by all
lenders, nine months (as selected by the Company) in the interbank eurodollar
market. The applicable margins for both Alternate Base Rate and Eurodollar Rate
loans are subject to a quarterly adjustment based on the Company's leverage
ratio as of the end of the four fiscal quarters then completed. At December 31,
1999 the Alternate Base Rate margin was 1.25% and the Eurodollar margin was
2.25%.
Amounts advanced under the Credit Facility are secured by substantially
all the assets of the Company. The Credit Facility contains several covenants,
including ones that require the Company to maintain certain levels of net worth,
leverage and cash flow coverage and others that limit the Company's ability to
incur indebtedness, make capital expenditures, create liens, engage in mergers
and consolidations, make restricted payments (including dividends), sell assets,
make investments, issue stock and engage in transactions with affiliates of the
Company and its subsidiaries.
In addition to the Credit Facility, the Company has an agreement with
the Bank of Montreal for a revolving credit facility to accommodate the working
capital needs of the Company's Canadian subsidiary. Borrowings under the
agreement are limited to certain advance rates based upon the eligible accounts
receivable and inventory of the Canadian subsidiary up to an aggregate maximum
of C$3.0 million.
Based on its operating results during 1998, the Company was in
technical default of the leverage and cash flow covenants of the Credit Facility
and the Company's interest rate swap agreement as of December 31, 1998. This
resulted in a cross default under the line of credit for the Company's Canadian
subsidiaries. Due to the defaults, the Company was prohibited from further
borrowings under the Credit Facility and the Canadian line of credit. In March
1999, the Company obtained from its lenders waivers of the various defaults and
certain amendments to the Credit Facility and the interest rate swap agreement.
In December 1999, in conjunction with the $10.0 million increase in the Credit
Facility, the leverage ratio and interest coverage covenants in the credit
agreement were amended to be consistent with the Company's current financial
projections. As of December 31, 1999, the Company was in compliance with its
covenants and believes that it will be able to comply with these covenants in
the future.
Additionally, the Company has approximately $110.0 million of the
Senior Notes outstanding. The indentures under which the Senior Notes were
issued contain certain covenants that, among other things, limit the Company's
ability to incur additional indebtedness. As of December 31, 1999, the Company
was in compliance with such covenants and believes that it will be able to
comply with these covenants in the future.
As of December 31, 1999, the Company's borrowing capacity under the
Credit Facility and the Canadian line of credit were $14.9 million and C$2.2
million, respectively. In addition, the Company had cash and cash equivalents on
hand of $8.5 million at December 31, 1999.
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations
and its budgeted capital expenditures. In pursuing future acquisitions, the
Company will continue to consider the effect that any such acquisition costs may
have on its liquidity. In order to consummate such acquisitions, the Company may
need to seek additional capital through borrowings or equity financing.
26
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by
Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
- - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 issued June 1999),
effective for periods beginning after June 15, 2000. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated a part of a hedge and, if it is, the type of hedge transaction. The
Company anticipates that the adoption of SFAS No. 133 will not have a
significant effect on the Company's results of operations or its financial
position.
YEAR 2000 COMPLIANCE
During 1999 the Company assembled an internal project team that
addressed the issue of computer programs and embedded computer chips being
unable to distinguish between the Year 1900 and the Year 2000. The project team
developed and implemented a three-step plan intended to result in the Company's
operations continuing with no or minimal interruption through the Year 2000. The
plan was designed to comply with guidelines established by the Automotive
Industry Action Group (an industry association supported by several of the major
OEMs).
The project team inventoried all of the Company's computer hardware and
software and all of its devices having imbedded computer technology, focusing on
five areas: (i) business systems; (ii) production (E.G., desktop computers and
remanufacturing machinery); (iii) financial management (E.G., banking software,
postage equipment and time clocks); (iv) facilities (E.G., heating and air
conditioning systems, elevators, telephones, and fire and security systems); and
(v) significant vendors and customers. The project team then determined whether
each inventoried system, device, customer or vendor was Year 2000 compatible and
those systems and devices that were not compatible were upgraded or replaced.
As a result of these efforts, the Company did not experience any
significant disruption in the function of any of its computer hardware or
software or devices with embedded computer technology during the Year 2000 date
change. The Company also did not experience any significant problems due to Year
2000 compliance issues of any of the Company's significant customers or vendors.
The Company will continue to monitor the functions of its computer
hardware and software and devices with embedded computer technology, as well as
the Year 2000 compliance of its significant customers and vendors, to discover
and promptly correct any latent Year 2000 problems that may arise in the future.
INFLATION; LACK OF SEASONALITY
Although the Company is subject to the effects of changing prices, the
impact of inflation has not been a significant factor in results of operations
for the periods presented. In some circumstances, market conditions or customer
expectations may prevent the Company from increasing the prices of its products
to offset the inflationary pressures that may increase its costs in the future.
Historically, there has been little seasonal fluctuation in the Company's
business.
ENVIRONMENTAL MATTERS
See Item 1. "Business-Environmental" for a discussion of certain
environmental matters relating to the Company.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not hold or issue derivative financial instruments for
trading purposes. The Company uses derivative financial instruments to manage
its exposure to fluctuations in interest rates. Neither the aggregate value of
these derivative financial instruments nor the market risk posed by them is
material to the Company. The Company uses interest rate swaps to convert
variable rate debt to fixed rate debt to reduce volatility risk. For additional
discussion regarding the Company's use of such instruments, see Item 8.
"Consolidated Financial Statements and Supplementary Data-Note 2."
INTEREST RATE EXPOSURE
Based on the Company's overall interest rate exposure during the year
ended December 31, 1999, and assuming similar interest rate volatility in the
future, a near-term (12 months) change in interest rates would not materially
affect the Company's consolidated financial position, results of operation or
cash flows. Interest rate movements of 10% would not have a material effect on
the Company's financial position, results of operation or cash flows.
FOREIGN EXCHANGE EXPOSURE
The Company has three foreign operations that expose it to translation
risk when the local currency financial statements are translated to U.S.
dollars. Since changes in translation risk are reported as adjustments to
stockholders' equity, a 10% movement in foreign exchange would not have a
material effect on the Company's financial position, results of operation or
cash flows.
28
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Aftermarket Technology Corp.
Consolidated Financial Statements
For the years ended December 31, 1997, 1998 and 1999
CONTENTS
Report of Ernst & Young LLP, Independent Auditors.................30
Consolidated Balance Sheets.......................................31
Consolidated Statements of Operations.............................32
Consolidated Statements of Stockholders' Equity...................33
Consolidated Statements of Cash Flows.............................34
Notes to Consolidated Financial Statements........................35
29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Aftermarket Technology Corp.
We have audited the accompanying consolidated balance sheets of
Aftermarket Technology Corp. and subsidiaries (the Company) as of December 31,
1998 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index of Item 14 (a). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Aftermarket Technology Corp. and subsidiaries at December 31, 1998 and 1999, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 17, 2000
30
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31,
1998 1999
------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 580 $ 8,469
Accounts receivable, net 71,357 70,786
Inventories 98,696 120,502
Prepaid and other assets 3,959 6,112
Refundable income taxes 10,954 --
Deferred income taxes 8,240 14,036
------------- ------------
Total current assets 193,786 219,905
Property, plant and equipment, net 63,903 75,369
Debt issuance costs, net 5,044 5,268
Cost in excess of net assets acquired, net 267,947 295,039
Other assets 1,225 1,065
------------- ------------
Total assets $ 531,905 $ 596,646
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 35,945 $ 47,127
Accrued expenses 42,643 42,808
Income taxes payable -- 2,685
Bank line of credit 2,060 543
Credit facility 15,000 21,760
Amounts due to acquired companies 10,204 2,384
Deferred compensation -- 660
------------- ------------
Total current liabilities 105,852 117,967
12% Series B and D Senior Subordinated Notes 111,394 111,214
Amount drawn on credit facility, less current portion 123,350 164,799
Amounts due to acquired companies, less current portion 8,483 7,759
Deferred compensation, less current portion 3,323 2,944
Other long-term liabilities -- 707
Deferred income taxes 11,492 15,112
Stockholders' Equity:
Preferred stock, $.01 par value; shares authorized - 2,000,000;
none issued -- --
Common stock, $.01 par value; shares authorized - 30,000,000;
Issued - 20,411,768 and 20,612,764 (including shares held in
treasury) 204 206
Additional paid-in capital 135,104 135,894
Retained earnings 35,676 42,483
Accumulated other comprehensive loss (979) (445)
Common stock held in treasury, at cost (172,000 shares) (1,994) (1,994)
------------- ------------
Total stockholders' equity 168,011 176,144
------------- ------------
Total liabilities and stockholders' equity $ 531,905 $ 596,646
============= ============
SEE ACCOMPANYING NOTES.
31
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the years ended December 31,
1997 1998 1999
---------- ---------- ----------
Net sales $ 346,110 $ 486,773 $ 564,965
Cost of sales 212,416 348,443 382,899
Special charges -- 1,347 4,895
--------- --------- ---------
Gross profit 133,694 136,983 177,171
Selling, general and
administrative expense 73,768 109,357 123,429
Amortization of intangible assets 4,501 6,806 7,420
Special charges -- 7,397 8,868
--------- --------- ---------
Income from operations 55,425 13,423 37,454
Other income (expense), net 1,912 (41) 393
Interest expense 18,822 23,673 26,895
--------- --------- ---------
Income (loss) before income taxes
and extraordinary items 38,515 (10,291) 10,952
Income tax expense (benefit) 15,512 (3,176) 4,145
--------- --------- ---------
Income (loss) before extraordinary items 23,003 (7,115) 6,807
Extraordinary items, net of income taxes (3,749) (703) --
--------- --------- ---------
Net income (loss) $ 19,254 $ (7,818) $ 6,807
========= ========= =========
Per common share - basic:
Income (loss) before extraordinary items $ 1.31 $ (0.36) $ 0.33
Extraordinary items (0.21) (0.03) --
--------- --------- ---------
Net income (loss) $ 1.10 $ (0.39) $ 0.33
========= ========= =========
Per common share - diluted:
Income (loss) before extraordinary items $ 1.19 $ (0.36) $ 0.32
Extraordinary items (0.20) (0.03) --
--------- --------- ---------
Net income (loss) $ 0.99 $ (0.39) $ 0.32
========= ========= =========
SEE ACCOMPANYING NOTES.
32
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Accumulated
Additional Other
Preferred Common Paid-in Retained Comprehensive Treasury
Stock Stock Capital Earnings Income (Loss) Stock Total
----- ----- ------- -------- ------------- ----- -----
Balance at January 1, 1997 $ -- $ 169 $ 81,380 $ 24,240 $ 43 $ -- $ 105,832
Issuance of 2,200,000 shares of common
stock for cash at $22.03 per share,
net of offering costs of $530 -- 22 47,915 -- -- -- 47,937
Issuance of 396,480 shares of common
stock from exercise of stock options -- 4 2,309 -- -- -- 2,313
Net income -- -- -- 19,254 -- -- 19,254
Translation adjustment -- -- -- -- 93 -- 93
--------
Comprehensive income 19,347
-------------------------------------------------------------------------------------
Balance at December 31, 1997 -- 195 131,604 43,494 136 -- 175,429
Issuance of 834,494 shares of common
stock from exercise of stock options -- 9 3,500 -- -- -- 3,509
Purchase of 172,000 shares of common
stock for treasury -- -- -- -- -- (1,994) (1,994)
Net loss -- -- -- (7,818) -- -- (7,818)
Translation adjustment -- -- -- -- (1,115) -- (1,115)
---------
Comprehensive loss (8,933)
-------------------------------------------------------------------------------------
Balance at December 31, 1998 -- 204 135,104 35,676 (979) (1,994) 168,011
Issuance of 200,996 shares of common
stock from exercise of stock options -- 2 790 -- -- -- 792
Net income -- -- -- 6,807 -- -- 6,807
Translation adjustment -- -- -- -- 534 -- 534
---------
Comprehensive income 7,341
-------------------------------------------------------------------------------------
Balance at December 31, 1999 $ -- $ 206 $ 135,894 $ 42,483 $ (445) $ (1,994) $ 176,144
=====================================================================================
SEE ACCOMPANYING NOTES
33
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the years ended December 31,
1997 1998 1999
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income (loss) $ 19,254 $ (7,818) $ 6,807
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary items 6,269 1,172 --
Depreciation and amortization 7,890 15,351 19,675
Amortization of debt issuance costs 905 766 978
Provision for losses on accounts receivable 921 1,877 830
Loss on sale of equipment 8 101 19
Deferred income taxes 1,586 (1,314) (2,577)
Changes in operating assets and liabilities, net of businesses
acquired/sold:
Accounts receivable (10,258) 388 742
Inventories 544 (3,530) (19,951)
Prepaid and other assets (1,583) 1,780 9,037
Accounts payable and accrued expenses (13,792) 18,502 14,360
---------- --------- ---------
Net cash provided by operating activities 11,744 27,275 29,920
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (8,682) (23,986) (23,162)
Acquisition of companies, net of cash received (62,871) (114,995) (41,220)
Proceeds from sale of business -- -- 3,808
Proceeds from sale of equipment 77 762 443
---------- --------- ---------
Net cash used in investing activities (71,476) (138,219) (60,131)
FINANCING ACTIVITIES:
Borrowings on credit facility, net 11,100 127,250 48,209
Borrowings (payments) on bank line of credit, net 171 (2,261) (1,541)
Payment of debt issuance costs (786) (2,425) (1,274)
Redemption of senior subordinated notes (44,800) (10,000) --
Sale of common stock, net of offering costs 47,937 -- --
Proceeds from exercise of stock options 662 1,394 625
Purchase of common stock for treasury -- (1,994) --
Payments on amounts due to acquired companies (961) (650) (8,098)
---------- --------- ---------
Net cash provided by financing activities 13,323 111,314 37,921
Effect of exchange rate changes on cash and cash equivalents (11) 132 179
---------- --------- ---------
Increase (decrease) in cash and cash equivalents (46,420) 502 7,889
Cash and cash equivalents at beginning of year 46,498 78 580
---------- --------- ---------
Cash and cash equivalents at end of year $ 78 $ 580 $ 8,469
========== ========= ==========
Cash paid during the year for:
Interest $ 19,094 $ 21,335 $ 25,166
Income taxes, net 10,880 4,420 (6,426)
SEE ACCOMPANYING NOTES
34
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY
Aftermarket Technology Corp. and its subsidiaries ("ATC" or the
"Company") is primarily a remanufacturer and distributor of drivetrain products
used in the repair of vehicles in the automotive aftermarket. The Company's
principal products include remanufactured transmissions, torque converters,
engines, electronic control modules, instrument and display clusters, radios and
remanufactured and new parts for the repair of automotive drivetrain assemblies.
In addition, the Company provides value-added, third-party distribution and
material logistical services. The Company also provides reverse logistics and
material recovery services for the automotive industry. The Company's automotive
customers include original equipment manufacturers, independent transmission
rebuilders, general repair shops, wholesale distributors and retail automotive
parts stores. Established in 1994, the Company maintains manufacturing
facilities and/or distribution centers in the United States, Canada, Mexico and
the United Kingdom.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of new and used engine and transmission
parts, cores and finished goods. Consideration is given to deterioration,
obsolescence, and other factors in evaluating the estimated market value of
inventory based upon management's judgement and available information.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using straight-line methods over the
estimated useful lives of the assets for financial reporting purposes, as
follows: five to twelve years for machinery and equipment, three to six years
for autos and trucks, three to ten years for furniture and fixtures and up to 40
years for buildings and leasehold improvements. Depreciation and amortization
expense was $3,394, $8,545 and $12,255 for the years ended December 31, 1997,
1998 and 1999, respectively.
INTERNAL USE COMPUTER SOFTWARE
In 1998, the Company adopted the provisions of SOP 98-1, ACCOUNTING FOR
THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE.
Historically, the Company had capitalized all costs related to software and
implementation services in connection with its internal use software systems,
which were not material prior to 1998, and classified them as part of property,
plant and equipment. During 1998, in
35
accordance with SOP 98-1, the Company expensed software development costs
principally related to training and data conversion. The effects of the change
in accounting principle were immaterial to prior periods. As of December 31,
1998 and 1999, capitalized internal use software costs were $10,494 and $15,749,
respectively, including capitalized interest of $461 and $774 as of December 31,
1998 and 1999, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the
applicable local currency. Accordingly, all balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date and
income statement amounts have been translated using the average exchange rate
for the year. The translation adjustments resulting from the changes in exchange
rates have been reported separately as a component of stockholders' equity. The
effects of transaction gains and losses were not material for the periods
presented.
DEBT ISSUANCE COSTS
Debt issuance costs incurred in connection with the sale of the Senior
Notes (see Note 10) and the Credit Facility (see Note 9) are being amortized
over the life of the debt using a method which approximates the interest method.
Debt issuance costs are reflected net of accumulated amortization of $2,433 and
$3,370 at December 31, 1998 and 1999, respectively.
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of cost over the fair market value of the net assets of
businesses acquired (goodwill) is amortized on a straight-line basis over 40
years. Cost in excess of net assets acquired is reflected net of accumulated
amortization of $19,561 and $26,794 at December 31, 1998 and 1999, respectively.
LONG-LIVED ASSETS
The Company evaluates its long-lived assets (including related Cost in
excess of net assets acquired) on an ongoing basis. Identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the related asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future undiscounted cash flows expected to be
generated by the asset. If the asset is determined to be impaired, the
impairment recognized is measured by the amount by which the carrying value of
the asset exceeds its fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist of accounts receivable from its
customers, which are primarily in the automotive industry throughout the United
States, and to a lesser extent Canada and the United Kingdom. The credit risk
associated with the Company's accounts receivable is mitigated by its credit
evaluation process and the geographical dispersion of sales transactions. The
Company grants credit to certain customers, including its OEM customers
(including DaimlerChrysler, Ford and General Motors) who meet pre-established
credit requirements. Customers who do not meet those requirements are required
to pay for products upon delivery.
Accounts receivable is reflected net of an allowance for doubtful
accounts of $2,404 and $2,910 at December 31, 1998 and 1999, respectively.
OFF BALANCE SHEET DERIVATIVE INSTRUMENTS
During 1998 the Company entered into an interest rate swap agreement.
The interest rate swap agreement is used by the Company to manage interest rate
risk on a portion of its floating rate credit facility. The interest rate swap
is matched as a hedge against, and originally had the same maturity date as, the
Credit Facility. The interest rate swap agreement converts the floating interest
rate on a portion of the Credit Facility to a fixed rate. The cost of the
interest rate swap is recorded as part of interest expense and accrued expenses.
During 1999, the Company, in exchange for consideration received, shortened the
maturity dates on a portion
36
of its interest rate swap agreements to January 2001, and recorded a deferred
gain, which will be recognized over the life of the original agreements. Fair
value of these instruments is based on estimated current settlement cost.
REVENUE RECOGNITION
Revenues are recognized at the time of shipment to the customer or as
services are performed.
WARRANTY COST RECOGNITION
The Company estimates warranty costs as sales are made.
STOCK-BASED COMPENSATION
The Company has elected to follow APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for the
stock options awarded under the Company's 1996 and 1998 stock option plans.
Accordingly, compensation expense is recognized only for those options whose
price is less than fair market value at the measurement date. The Company has
adopted the disclosure only provisions of SFAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION.
SEGMENT REPORTING
In 1999, the Company revised its segment profit measure from profit or
loss before income taxes and extraordinary items ("EBT") to income from
operations (profit or loss before interest, other income (expense), income taxes
and extraordinary items) to conform with the profit measures used by the
Company's internal management during 1999. All prior-year segment information
has been restated to conform to the 1999 presentation. (See Note 17.)
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by
Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 issued June 1999),
effective for periods beginning after June 15, 2000. SFAS No. 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated a part of a hedge and, if it is, the type of hedge transaction. The
Company anticipates that the adoption of SFAS No. 133 will not have a
significant effect on the Company's results of operations or its financial
position. The Company is required to adopt SFAS No. 133 on January 1, 2001.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
1999 presentation.
NOTE 3. ACQUISITIONS AND SALE OF SUBSIDIARY
In January 1997, the Company acquired Replacement & Exchange Parts
Co., Inc. ("REPCO"), a Texas-based distributor of transmission repair parts,
for a purchase price of approximately $12.3 million, including transaction
fees and related expenses. Goodwill recorded approximated $6.8 million. The
operations of REPCO were not material to the Company's consolidated
operations.
In July 1997, the Company acquired substantially all of the assets of
ATS Remanufacturing ("ATS"), a remanufacturer of automatic transmissions and
related components located in Gastonia, North Carolina. To complete this
acquisition, the Company made cash payments totaling $12.9 million, including
transaction fees and related expenses. In addition, the ATS acquisition requires
subsequent payments due on each of the first eight anniversaries of the closing
date. As of December 31, 1999, the Company had made $2.1 million of additional
payments related to the ATS acquisition. Substantially all of the remaining six
payments to be made in the future, which will aggregate to approximately $16.8
million (present value $13.6 million as of December 31, 1999), are contingent
upon the attainment of certain sales levels by ATS,
37
which the Company believes are more likely than not to be attained. Goodwill
recorded for ATS approximated $26.1 million. The operations of ATS were not
material to the Company's consolidated operations.
In August 1997, the Company acquired Trans Mart, Inc. ("Trans Mart"), a
distributor of automatic and standard transmission parts and related drivetrain
components based in Florence, Alabama. To complete this acquisition, the Company
made cash payments of $27.9 million, including transaction fees and related
expenses. Goodwill recorded for Trans Mart approximated $20.9 million. The
operations of Trans Mart were not material to the Company's consolidated
operations.
In November 1997, the Company acquired Metran Automatic Transmission
Parts Corp. ("Metran"), a New York-based distributor of automatic and manual
transmission parts and related drivetrain components, for a purchase price of
approximately $8.1 million, including transaction fees and related expenses.
Goodwill recorded approximated $5.3 million. The operations of Metran were not
material to the Company's consolidated operations.
In January 1998, the Company acquired the inventory, accounts
receivable and related customer lists of Automatic Parts & Equipment, Inc., a
Minnesota-based distributor of automatic and manual transmission parts and
related drivetrain components, for a purchase price of approximately $0.2
million, including transaction fees and related expenses. Goodwill recorded
approximated $0.1 million. The operations of Automatic Parts & Equipment, Inc.
were not material to the Company's consolidated operations.
In March 1998, the Company acquired substantially all the assets of the
OEM Division of Autocraft Industries, Inc. ("Autocraft"), a remanufacturer and
distributor of drivetrain and electronic parts used in the warranty and
aftermarket repair of passenger cars and light trucks. The purchase price of
approximately $121.7 million, including transaction fees and related expenses,
includes $5.7 million paid during 1999 based on the performance of the OEM
Division's European operations during 1998. Goodwill recorded approximated $73.4
million.
In October and December 1999, the Company acquired substantially all
the assets of All Transmission Parts, Inc. and its affiliate, All Automatic
Transmission Parts, Inc., respectively, ("All Trans") a distributor of standard
and automatic transmission parts and related drivetrain components based in
Portland, Oregon for a combined purchase price of approximately $41.2 million,
including transaction fees and related expenses. Goodwill recorded for the All
Trans acquisition approximated $36.1 million. The financial statements reflect
the preliminary allocation of the purchase price. The purchase price allocation
will be finalized upon a final valuation of the acquired company's property,
plant and equipment and certain other information.
These acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the allocation of the cost of the acquired assets and
liabilities has been made on the basis of the estimated fair value. The
consolidated financial statements include the operating results of each business
from the date of acquisition.
In December 1998, the Company agreed to sell the assets of its Canadian
heavy-duty truck remanufacturing operation ("Mascot") for $3.8 million in cash
and the assumption of certain liabilities. As part of this transaction, the
Company recorded a $1.2 million loss in the fourth quarter of 1998. In February
1999, the Company collected the $3.8 million of cash proceeds.
38
On a pro forma basis, had the sale of Mascot and the Autocraft and All
Trans acquisitions occurred as of the beginning of 1998, the Company would have
reported:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999
---------------- ---------------
(UNAUDITED)
Net sales...................................$526,804 $581,250
Income (loss) before extraordinary items.... (6,659) 7,535
Net income (loss)........................... (7,362) 7,535
Earnings (loss) per share:
Basic..................................$ (0.37) $ 0.37
Diluted................................ (0.37) 0.36
The proforma information is not necessarily indicative of the results
of operations as they would have been had these transactions been effected on
the assumed date.
NOTE 4. RELATED-PARTY TRANSACTIONS
Amounts due to previously acquired companies consist primarily of
additional purchase price payable to former owners and certain officers of
companies acquired in 1997. Amounts are payable through 2005.
During 1998 and 1999, the Company received fees totaling $1,062 and
$1,229, respectively, from The Fred Jones Companies, Inc., the former owner of
Autocraft, for computer systems support services provided by the Company. In
addition, during 1998 and 1999 the Company sold $95 and $63, respectively, of
products to certain automobile dealerships owned by a limited liability company
in which The Fred Jones Companies has a significant equity interest. Fred Hall,
a former director of the Company, is Chairman, President, Chief Executive
Officer and a significant stockholder of The Fred Jones Companies.
The Company rents certain of its facilities from previous owners of
acquired companies. Rent expense includes amounts paid to certain of these
related parties of $1,574, $1,863 and $890 for the years ended December 31,
1997, 1998 and 1999, respectively.
The Company paid or owed at year end to Aurora Capital Partners
("ACP"), which controls the Company's largest stockholders, $1,395, $1,875 and
$800 in fees for investment banking services provided in connection with
companies acquired in 1997, 1998 and 1999, respectively. In addition, ACP was
paid management fees of $534, $541 and $596 in 1997, 1998 and 1999,
respectively. The Company reimburses ACP for out-of-pocket expenses incurred in
connection with providing management services. ACP is also entitled to various
additional fees depending on the Company's profitability or certain significant
corporate transactions. No such additional fees were paid in 1997, 1998 or 1999.
NOTE 5. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
----------------------
1998 1999
------- --------
Raw materials, including core inventories..$41,117 $ 43,915
Work-in-process............................ 3,051 2,993
Finished goods............................. 54,528 73,594
------- --------
$98,696 $120,502
------- --------
------- --------
Finished goods include purchased parts which are available for sale.
39
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
DECEMBER 31,
-------------------
1998 1999
-------- ---------
Land..............................$ 1,982 $ 2,029
Buildings......................... 10,031 10,074
Machinery and equipment........... 54,165 69,502
Autos and trucks.................. 4,045 4,991
Furniture and fixtures............ 3,997 5,295
Leasehold improvements............ 11,751 15,233
Construction in process........... -- 1,599
-------- ---------
85,971 108,723
Less: Accumulated depreciation
and amortization.......... (22,068) (33,354)
-------- ---------
$ 63,903 $75,369
======== =========
NOTE 7. ACCRUED EXPENSES
Accrued expenses are summarized as follows:
DECEMBER 31,
--------------------
1998 1999
--------- ---------
Payroll and related costs....... $11,478 $11,633
Interest payable................ 6,885 7,101
Core liability ................. 5,170 1,420
Warranty........................ 3,364 3,917
Non-income related taxes........ 3,220 3,801
Restructuring and other costs... 2,994 6,770
Other........................... 9,532 8,166
--------- ---------
$42,643 $42,808
========= =========
NOTE 8. BANK LINE OF CREDIT
The Company has a revolving credit agreement with the Bank of Montreal
(the "BOM Revolving Credit Agreement"), providing for a C$3.0 million revolving
credit facility to accommodate the working capital needs of its Canadian
subsidiary. The funds available to be advanced may not exceed the aggregate of
75% of the eligible accounts receivable and 50% of the eligible inventory of the
Canadian subsidiary. Amounts advanced are secured by substantially all assets of
the Canadian subsidiary and are guaranteed by the Company. Interest is payable
monthly at the Bank of Montreal's prime lending rate (6.50% at December 31,
1999) plus 0.50%. At December 31, 1999, $0.5 million was outstanding under this
line of credit.
The BOM Revolving Credit Agreement contains certain covenants,
including a tangible net worth covenant for the results of the Company's
Canadian subsidiary, and provides for cross-default in the event of a default
under the Company's Credit Facility (see Note 9.)
NOTE 9. CREDIT FACILITY
In March 1998, the credit agreement for the Company's $100.0 million
credit facility with The Chase Manhattan Bank, as agent (the "Bank"), was
amended and restated to provide for a new credit facility comprised of a $100.0
million line of credit (the "Revolver") and a $120.0 million term loan (the
"Term Loan") (collectively, the "Credit Facility") to finance the Company's
working capital requirements, future acquisitions and the acquisition of
Autocraft (see Note 3). In December 1999, the Company's credit agreement was
amended and restated to allow for an additional $10.0 million in borrowings
under the Term
40
Loan. Amounts advanced under the Credit Facility are secured by substantially
all the assets of the Company. Amounts outstanding under the Term Loan are
payable in quarterly installments through December 31, 2003. Amounts advanced
under the Revolver become due on December 31, 2003. The balance outstanding on
the Term Loan as of December 31, 1999 was $103.4 million. The Company may prepay
outstanding advances under the Revolver or the Term Loan in whole or in part
without incurring any premium or penalty. At December 31, 1999, $83.2 million
was outstanding under the Revolver. In addition, the Company had letters of
credit under the Credit Facility totaling $1.9 million at December 31, 1999.
At the Company's election, amounts advanced under the Credit Facility
will bear interest at either (i) the Alternate Base Rate plus a specified
margin, or (ii) the Eurodollar Rate plus a specified margin. The "Alternate Base
Rate" is equal to the highest of (a) the Bank's prime rate, (b) the secondary
market rate for three-month certificates of deposit plus 1.0% and (c) the
federal funds rate plus 0.5%, in each case as in effect from time to time. The
"Eurodollar Rate" is the rate offered by the Bank for eurodollar deposits for
one, two, three, six or, if available by all lenders, nine months (as selected
by the Company). The applicable margins for both Alternate Base Rate and
Eurodollar Rate loans are subject to a quarterly adjustment based on the
Company's leverage ratio as of the end of the four fiscal quarters then
completed. At December 31, 1999, the Alternate Base Rate and the Eurodollar Rate
margins are 1.25% and 2.25%, respectively. Interest payments on advances that
bear interest based upon the Alternate Base Rate are due quarterly in arrears
and on the termination date, and interest payments on advances that bear
interest based upon the Eurodollar Rate are due on the last day of each relevant
interest period (or, if such period exceeds three months, quarterly after the
first day of such period). The blended interest rate on the credit facility for
the year ended December 31, 1998 and 1999 was 6.72% and 7.70%, respectively.
The Company paid the Bank a facility and commitment fee upon the
effective date of the Credit Facility and subsequently in December 1999, related
to the increase in the Term Loan. In addition, the Company is required to pay
the Bank quarterly in arrears a commitment fee equal to a per annum percentage
of the average daily unused portion of the Credit Facility during such quarter.
The commitment is subject to a quarterly adjustment based on the Company's
leverage ratio as of the end of the four fiscal quarters then completed. At
December 31, 1999, the quarterly commitment fee percentage is 0.500%. The
Company must also reimburse the Bank for certain legal and other costs of the
Bank and pay a fee on outstanding letters of credit at a rate per annum equal to
the applicable margin then in effect for advances bearing interest at the
Eurodollar Rate.
During 1998, in order to convert $50.0 million of its Credit Facility
to a fixed rate, the Company entered into a series of interest rate swap
agreements scheduled to mature during July 2003. During 1999, the Company
revised the maturity dates on certain of the swap agreements to January 2001 in
exchange for proceeds of $0.6 million. The proceeds were recorded as a deferred
gain and are being amortized over the original life of the interest rate swap
agreements.
The Credit Facility contains several covenants, including ones that
require the Company to maintain certain levels of net worth, leverage and cash
flow coverage, and others that limit the Company's ability to incur
indebtedness, make capital expenditures, create liens, engage in mergers and
consolidations, make restricted payments (including dividends), sell assets,
make investments, issue stock and engage in transactions with affiliates of the
Company and its subsidiaries.
Annual maturities of the Company's Credit Facility are as follows as of
December 31, 1999:
2000........................... $ 21,760
2001........................... 27,200
2002........................... 27,200
2003........................... 110,399
------------
$186,559
============
NOTE 10. 12% SERIES B AND D SENIOR SUBORDINATED NOTES
On August 2, 1994, the Company completed a private placement issuance
of $120.0 million of 12% Series A Senior Subordinated Notes due in 2004.
Proceeds from the issuance were used to partially finance the acquisitions made
by the Company in 1994. The privately placed debt was subsequently exchanged for
public debt (Series B).
41
On June 1, 1995, the Company completed another private placement
issuance of $40.0 million of 12% Series C Senior Subordinated Notes due in 2004.
Proceeds of $42.4 million from the issuance were used to finance acquisitions
made by the Company during 1995. These notes have an effective interest rate of
10.95%. The privately placed debt was subsequently exchanged for public debt
(Series D).
Interest on the 12% Series B and Series D Senior Subordinated Notes
(the "Senior Notes") is payable semiannually on February 1 and August 1 of each
year. The Senior Notes will mature on August 1, 2004. Beginning on August 1,
1999, and each anniversary date thereafter, the Senior Notes may be redeemed at
the option of the Company, in whole or in part, at the redemption prices
specified below, plus accrued and unpaid interest:
AUGUST 1, REDEMPTION PRICE
--------- ----------------
1999.......................... 106%
2000.......................... 104
2001.......................... 102
2002 and thereafter........... 100
In addition, at any time on or prior to August 1, 1997, the Company
could have, subject to certain requirements, redeemed up to $30.0 million of the
Series B Senior Notes and $10.0 million of the Series D Senior Notes with the
net cash proceeds of one or more public equity offerings, at a price equal to
112% of the principal amount to be redeemed plus accrued and unpaid interest. On
February 16, 1997, the Company exercised its right and redeemed $30.0 million in
principal amount of the Series B Senior Notes and $10.0 million in principal
amount of the Series D Senior Notes. In connection with these redemptions, the
Company recorded an extraordinary loss of $3.8 million, net of tax.
During 1998, the Company purchased and retired a total of $2.2 million
in principal amount of the Series D Senior Notes and $7.4 million in principal
amount of the Series B Senior Notes in open market transactions. In connection
with these purchases, the Company recorded an extraordinary loss of $0.3
million, net of tax.
In the event of a change in control, the Company would be required to
offer to repurchase the Senior Notes at a price equal to 101% of the principal
amount plus accrued and unpaid interest.
The Senior Notes are general obligations of the Company, subordinated
in right of payment to all existing and future senior debt (including the
Company's Credit Facility). The Senior Notes are guaranteed by each of the
Company's existing and future subsidiaries other than any subsidiary designated
as an unrestricted subsidiary (as defined). As of December 31, 1999, the Company
had no unrestricted subsidiaries. The Company may incur additional indebtedness,
including borrowings under its Credit Facility (See Note 9), subject to certain
limitations.
The indentures under which the Senior Notes were issued contain certain
covenants that, among other things, limit the Company's ability to incur
additional indebtedness under certain conditions, issue disqualified capital
stock, engage in transactions with affiliates, incur liens, make certain
restricted payments (including dividends), make certain asset sales and permit
certain restrictions on the ability of its subsidiaries to make distributions.
42
NOTE 11. INCOME TAXES
The Company uses an asset and liability approach to financial
accounting and reporting for income taxes. Income tax expense (benefit) consist
of the following:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
Current:
Federal ................ $ 11,902 $ (1,938) $ 4,577
State .................. 1,919 (277) 1,576
Foreign ................ 105 353 510
-----------------------------------
Total current ............. 13,926 (1,862) 6,663
Deferred:
Federal ................ 1,366 (1,150) (900)
State .................. 220 (164) (975)
Foreign ................ -- -- (643)
-----------------------------------
Total deferred ............ 1,586 (1,314) (2,518)
Extraordinary items ....... (2,520) (469) --
-----------------------------------
$ 12,992 $ (3,645) $ 4,145
===================================
In addition, the Company has recognized tax benefits related to the
exercise of certain non-qualified stock options as an increase in stockholders'
equity of $1,696, $2,196 and $64 for the years ended December 31, 1997, 1998 and
1999, respectively.
The reconciliation of income tax expense (benefit) computed at the U.S.
federal statutory tax rates to income tax expense (benefit) is as follows:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1998 1999
-------------------- ---------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------ -------
Tax at U.S. statutory rates .....$11,286 35.0% $(4,012) (35.0)% $3,833 35.0%
State income taxes, net of
federal tax benefit ............ 1,167 3.6 (573) (5.0) 288 2.6
Foreign income taxes ............ -- -- 516 4.5 (182) (1.7)
Goodwill amortization ........... 311 1.0 311 2.7 336 3.1
Other ........................... 228 0.7 113 1.0 (130) (1.1)
--------------------------------------------------------
$12,992 40.3% $(3,645) (31.8)% $4,145 37.9%
========================================================
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31,
-----------------
1998 1999
------- -------
Deferred tax assets:
Inventory obsolescence reserve....... $ 3,774 $ 3,912
Product warranty accruals............ 1,117 1,088
Special charge accruals.............. -- 3,067
Other accruals and deferrals......... 3,059 4,674
Net operating losses................. 290 1,295
-----------------
Total deferred tax assets............... 8,240 14,036
-----------------
Deferred tax liabilities:
Amortization of intangible assets ... 10,123 12,270
Accelerated depreciation............. 1,217 2,151
Other accruals and deferrals......... 152 691
-----------------
Total deferred tax liabilities.......... 11,492 15,112
-----------------
Net deferred tax liability.............. $ 3,252 $ 1,076
=================
43
NOTE 12. STOCK OPTIONS AND WARRANTS
The Company provides stock options to employees, non-employee
directors, and independent contractors under its 1996 Stock Incentive Plan (the
"1996 Plan") and its 1998 Stock Incentive Plan (the "1998 Plan"). The Plans
provide for granting of non-qualified and incentive stock option awards. Options
under the Plans are generally granted at fair value and vest over a period of
time to be determined by the Board of Directors, generally from three to five
years. Options under the Plans expire 10 years from the date of grant. The
Company has reserved 2.4 million and 1.2 million shares of common stock under
the 1996 and 1998 Plans, respectively. Options available for grant under the
Plans were 525,106 and 249,355 as of December 31, 1998 and 1999, respectively.
A summary of the status of the Company's option plans are presented
below:
1997 1998 1999
--------------------------- --------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ------------ ----------- ------------- ----------- ------------
Outstanding at beginning of year 2,272,218 $ 2.65 1,993,914 $ 3.82 1,843,920 $ 7.46
Granted 130,176 $ 17.64 1,336,000 $ 9.54 544,500 $ 8.05
Exercised (396,480) $ 1.67 (834,494) $ 1.67 (200,996) $ 3.11
Canceled (12,000) $ 4.67 (651,500) $ 7.97 (268,749) $ 12.18
---------- --------- ---------
Outstanding at end of year 1,993,914 $ 3.82 1,843,920 $ 7.46 1,918,675 $ 7.43
========== ========= =========
Exercisable at end of year 1,163,944 $ 2.27 600,234 $ 4.71 874,083 $ 5.40
========== ========= =========
Weighted-average fair value of
options granted during the year $ 12.11 $ 5.98 $ 6.07
The following summarizes information about options outstanding as of
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICES SHARES PRICES
------- ----------- --------- ------------ -------------
$1.67 178,832 5.0 years $1.67 163,136 $ 1.67
$4.60-$6.90 921,088 6.6 years $5.01 639,059 $ 5.00
$6.91-$9.20 405,500 9.5 years $8.95 -- --
$9.21-$11.50 206,000 9.0 years $10.03 2,000 $10.94
$11.51-$18.50 207,255 8.2 years $17.55 69,888 $17.56
------------------- ------------------
1,918,675 7.5 years $7.43 874,083 $ 5.40
=================== ==================
In connection with the Company's initial acquisitions in July of 1994,
warrants to purchase 350,880 shares of Common Stock at $1.67 per share were
issued to two individuals. The warrants are exercisable through 2004. The
Company has also issued a warrant to one member of the Board of Directors to
purchase 70,176 shares of Common Stock at $1.67 per share, the fair value of the
Common Stock on the date of grant.
44
Had compensation cost for the Company's Plans been determined in
accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's reported net income (loss) and earnings (loss) per share would have
been adjusted to the proforma amounts indicated below:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------- -------- ---------
Income (loss) before extraordinary items:
As reported................................ $23,003 $(7,115) $6,807
Pro forma.................................. 22,127 (9,457) 3,880
Basic earnings (loss) per common share:
As reported................................ $ 1.31 $ (0.36) $ 0.33
Pro forma.................................. 1.26 (0.47) 0.19
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
--------- ---------- -----------
Expected volatility........................ 51.31% 71.16% 72.17%
Risk-free interest rates................... 6.00% 5.25% 5.75%
Expected lives............................. 8.2 years 6.3 years 7.9 years
The Company has not paid and does not anticipate paying dividends;
therefore, the expected dividend yield is assumed to be zero.
NOTE 13. COMMON AND PREFERRED STOCK
On October 28, 1997, the Company completed a secondary public offering
of 3.7 million shares of its common stock at $23.25 per share. Of the shares
sold in the offering, 2.2 million shares were sold by the Company and 1.5
million shares were sold by certain stockholders. The Company did not receive
any proceeds from the sale of shares by the selling stockholders.
On May 6, 1998, the stockholders of the Company approved the amendment
to the Company's Amended and Restated Certificate of Incorporation to reduce the
number of authorized shares of preferred stock from 5,000,000 to 2,000,000.
On August 26, 1998, the Company's Board of Directors authorized the
Company to repurchase 350,000 shares of the Company's Common Stock. During 1998,
the Company repurchased 172,000 shares at an average price of $11.59 per share.
NOTE 14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
-------- -------- ----------
Numerator:
Net income (loss)............................... $19,254 $(7,818) $6,807
===============================================
Denominator:
Weighted-average common shares outstanding...... 17,496,173 19,985,850 20,324,640
Effect of dilutive securities:
Employee stock options and warrants.......... 1,839,186 -- 838,961
----------------------------------------------
Denominator for diluted earnings per common
share .......................................... 19,335,359 19,985,850 21,163,601
===============================================
Basic earnings (loss) per common share............. $1.10 $(0.39) $0.33
Diluted earnings (loss) per common share........... 0.99 (0.39) 0.32
Due to the loss reported in 1998, the applicable share calculation
above excludes the antidilutive effect of stock options and warrants which would
have been 1,092,511 had the Company not reported a loss.
45
NOTE 15. EMPLOYEE RETIREMENT PLANS
The Company's defined contribution plans provide substantially all U.S.
salaried and hourly employees of the Company an opportunity to accumulate
personal funds for their retirement, subject to minimum duration of employment
requirements. Contributions are made on a before-tax basis to substantially all
of these plans.
As determined by the provisions of each plan, the Company matches a
portion of the employees' basic voluntary contributions. Company matching
contributions to the plans were approximately $359, $532 and $971 for the plan
years ending in 1997, 1998 and 1999, respectively.
NOTE 16. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under various
operating lease agreements, which expire on various dates through 2012. Facility
leases that expire generally are expected to be renewed or replaced by other
leases. Future minimum rental commitments under non-cancelable operating leases
with terms in excess of one year are as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000................................................................................... $ 11,935
2001................................................................................... 9,614
2002................................................................................... 8,114
2003................................................................................... 6,952
2004................................................................................... 5,018
2005 and thereafter.................................................................... 10,917
-----------
$ 52,550
===========
Rent expense for all operating leases approximated $7,228, $9,561 and
$11,469 for the years ended December 31, 1997, 1998 and 1999, respectively.
The Company is subject to various evolving Federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
nonhazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances.
In connection with the acquisition of certain subsidiaries, the Company
conducted certain investigations of these companies' facilities and their
compliance with applicable environmental laws. The investigations, which
included "Phase I" assessments by independent consultants of all manufacturing
and certain distribution facilities, found that certain facilities have had or
may have had releases of hazardous materials that may require remediation and
also may be subject to potential liabilities for contamination from off-site
disposal of substances or wastes. These assessments also found that certain
reporting and other regulatory requirements, including certain waste management
procedures, were not or may not have been satisfied. Although there can be no
assurance, the Company believes that, based in part on the investigations
conducted, in part on certain remediation completed prior to the acquisitions,
and in part on the indemnification provisions of the agreements entered into in
connection with the Company's acquisitions, the Company will not incur any
material liabilities relating to these matters.
The company from which RPM Merit ("RPM") acquired its assets (the
"Prior RPM Company") has been identified by the United States Environmental
Protection Agency (the "EPA") as one of many potentially responsible parties for
environmental liabilities associated with a "Superfund" site located in the area
of RPM's former manufacturing facilities and current distribution facility in
Azusa, California. The Federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund")
provides for cleanup of sites from which there has been a release or threatened
release of hazardous substances, and authorizes recovery of related response
costs and certain other damages from potentially responsible parties ("PRPs").
PRPs are broadly defined under CERCLA, and generally include
46
present owners and operators of a site and certain past owners and operators. As
a general rule, courts have interpreted CERCLA to impose strict, joint and
several liability upon all persons liable for cleanup costs. As a practical
matter, however, at sites where there are multiple PRPs, the costs of cleanup
typically are allocated among the PRPs according to a volumetric or other
standard. The EPA has preliminarily estimated that it will cost approximately
$47.0 million to construct and approximately $4.0 million per year for an
indefinite period to operate an interim remedial groundwater pumping and
treatment system for the part of the Superfund site within which RPM's former
manufacturing facilities and current distribution facility, as well as those of
many other potentially responsible parties, are located. The actual cost of this
remedial action could vary substantially from this estimate, and additional
costs associated with the Superfund site are likely to be assessed. The Company
has significantly reduced its presence at the site and has moved all
manufacturing operations off-site. Since July 1995, the Company's only real
property interest in this site has been the lease of a 6,000 square foot storage
and distribution facility. The RPM acquisition agreement and the leases pursuant
to which the Company leased RPM's facilities after the Company acquired the
assets of RPM (the "RPM Acquisition") expressly provide that the Company did not
assume any liabilities for environmental conditions existing on or before the
RPM Acquisition, although the Company could become responsible for these
liabilities under various legal theories. The Company is indemnified against any
such liabilities by the seller of RPM as well as the Prior RPM Company
shareholders. There can be no assurance, however, that the Company would be able
to make any recovery under any indemnification provisions. Since the RPM
Acquisition, the Company has been engaged in negotiations with the EPA to settle
any liability that it may have for this site. Although there can be no
assurance, the Company believes that it will not incur any material liability as
a result of these environmental conditions.
NOTE 17. REPORTABLE SEGMENTS
The Company has two reportable segments: Original Equipment
Manufacturer ("OEM") segment and Independent Aftermarket segment. The Company's
OEM segment consists of four operating units that primarily sell remanufactured
transmissions directly to the OEMs and engines to independent installers and
distributors. The Company's Independent Aftermarket segment consists of the
Company's Distribution Group, which primarily sells transmission repair kits,
soft parts, remanufactured torque converters and new and remanufactured hard
parts used in drivetrain repairs to independent transmission rebuilders and to a
lesser extent to general repair shops, wholesale distributors and retail
automotive parts stores. Other operating units, which are not reportable
segments, consist of an electronic parts remanufacturing and distribution
business, warehouse and distribution services for AT&T Wireless Services and a
material recovery processing business for Ford Motor Company.
The Company evaluates performance and allocates resources based upon
profit or loss before interest, other income (expense), income taxes and
extraordinary items ("Income from Operations"). The reportable segments'
accounting policies are the same as those described in the summary of
significant accounting policies (see Note 2). Intersegment sales and transfers
are recorded at the Company's standard cost and all intersegment profits, if
any, are eliminated.
47
The reportable segments are each managed and measured separately
primarily due to the differing customers, production processes, products sold
and distribution channels. The reportable segments are as follows:
INDEPENDENT
OEM AFTERMARKET OTHER TOTALS
----- ----------- ----- ------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997:
Revenues from external customers................ $ 180,280 $ 158,415 $ 7,415 $ 346,110
Intersegment revenues........................... 3,364 314 - 3,678
Depreciation and amortization expense........... 5,125 2,576 110 7,811
Segment profit.................................. 47,006 10,663 101 57,770
Segment assets.................................. 239,409 140,930 5,880 386,219
Expenditures for long-lived assets.............. 5,634 2,466 112 8,212
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998:
Revenues from external customers................ $ 252,962 $ 186,730 $ 47,081 $ 486,773
Intersegment revenues........................... 720 1,069 - 1,789
Depreciation and amortization expense........... 8,676 4,416 1,628 14,720
Special charges................................. 5,050 2,070 - 7,120
Segment profit (loss)........................... 23,862 (11,602) 4,738 16,998
Segment assets.................................. 351,560 158,914 44,535 555,009
Expenditures for long-lived assets.............. 7,936 13,222 2,560 23,718
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999:
Revenues from external customers................ $ 305,073 $ 200,058 $ 59,834 $ 564,965
Intersegment revenues........................... 656 347 - 1,003
Depreciation and amortization expense........... 10,252 6,374 2,151 18,777
Special charges................................. 4,308 6,453 570 11,331
Segment profit (loss)........................... 50,422 (15,017) 8,695 44,100
Segment assets.................................. 367,356 229,914 44,727 641,997
Expenditures for long-lived assets.............. 7,544 13,091 1,942 22,577
48
A reconciliation of the reportable segments to consolidated net sales,
operating income and consolidated assets are as follows:
As of and for the
Years Ended December 31,
-------------------------
1997 1998 1999
---- ---- ----
NET SALES:
External revenues from reportable segments..... $ 338,695 $ 439,692 $ 505,131
Intersegment revenues for reportable segments . 3,678 1,789 1,003
Other revenues................................. 7,415 47,081 59,834
Elimination of intersegment revenues........... (3,678) (1,789) (1,003)
--------- --------- ---------
Consolidated net sales.................. $ 346,110 $ 486,773 $ 564,965
========= ========= =========
PROFIT:
Total profit for reportable segments........... $ 57,669 $ 12,260 $ 35,405
Other profit................................... 101 4,738 8,695
Unallocated amounts:
Elimination of intersegment profits.......... (171) -- --
Special charges.............................. -- (1,624) (2,432)
Corporate expenses........................... (2,095) (1,320) (3,316)
Depreciation and amortization................ (79) (631) (898)
--------- --------- ---------
Income from operations.................. $ 55,425 $ 13,423 $ 37,454
========= ========= =========
ASSETS:
Total assets for reportable segments........... $ 380,339 $ 510,474 $ 597,270
Other assets................................... 5,880 44,535 44,727
Elimination of intercompany accounts........... (29,281) (26,556) (61,156)
Unallocated assets............................. 11,739 3,452 15,805
--------- --------- ---------
Consolidated assets..................... $ 368,677 $ 531,905 $ 596,646
========= ========= =========
Other significant items as disclosed within the reportable segments are
reconciled to the consolidated totals as follows:
Segment
Totals Adjustments Consolidated
------ ----------- ------------
OTHER SIGNIFICANT ITEMS:
FOR THE YEAR ENDED DECEMBER 31, 1997
Depreciation and amortization expense........ $ 7,811 $ 79 $ 7,890
Expenditures for long-lived assets........... 8,212 470 8,682
FOR THE YEAR ENDED DECEMBER 31, 1998
Depreciation and amortization expense........ $ 14,720 $ 631 $ 15,351
Special charges.............................. 7,120 1,624 8,744
Expenditures for long-lived assets........... 23,718 268 23,986
FOR THE YEAR ENDED DECEMBER 31, 1999
Depreciation and amortization expense........ $ 18,777 $ 898 $ 19,675
Special charges.............................. 11,331 2,432 13,763
Expenditures for long-lived assets........... 22,577 585 23,162
49
Revenues and long-lived assets by geographic area are determined by the
location of the Company's facilities as follows:
As of and for the
Years Ended December 31,
--------------------------
1997 1998 1999
---- ---- ----
NET SALES:
United States.................. $324,219 $442,759 $525,160
Canada and Europe.............. 21,891 44,014 39,805
-------- -------- --------
Consolidated net sales......... $346,110 $486,773 $564,965
======== ======== ========
LONG-LIVED ASSETS:
United States.................. $221,963 $318,184 $356,433
Canada and Europe.............. 7,514 19,935 20,308
-------- -------- --------
Consolidated long-lived assets. $229,477 $338,119 $376,741
======== ======== ========
For the years ended December 31, 1998 and 1999, the Company had two
significant external customers. Both customers were within the OEM segment and
represented $88,379 and $83,155 of consolidated net sales for 1998 and $115,537
and $108,257 of consolidated net sales for 1999.
For the year ended December 31, 1997, sales to one customer within the
OEM segment represented approximately $110,671 of consolidated net sales.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
With the exception of the Company's Senior Notes and interest rate swap
agreement, the carrying amounts of the Company's financial instruments
approximate their fair values due to the fact that they are either short-term in
nature or re-priced to fair value through floating interest rates.
The carrying amounts and fair values of these financial instruments are
as follows:
December 31,
----------------------------------------------------
1998 1999
---------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- ---------
Series B Senior Notes......... $ 82,570 $ 89,118 $ 82,570 $ 82,686
Series D Senior Notes......... 27,815 30,021 27,815 27,854
Interest rate swap agreement.. -- (1,854) -- 775
NOTE 19. SPECIAL CHARGES
The Company has implemented certain initiatives designed to improve
operating efficiencies and reduce costs. In the second quarter of 1998 the
Company recorded $3,580 in special charges related to these initiatives,
consisting of $1,085 of restructuring charges and $2,495 of other charges. The
restructuring charges included $822 of severance costs for 11 people and $263 of
exit costs. The severance costs were incurred in connection with the
reorganization of the ATC Distribution Group's management structure,
centralization of the ATC Distribution Group's Management Information Systems
("MIS") operations and certain other personnel matters. The exit costs were
incurred to consolidate the Company's Joplin and Springfield, Missouri engine
remanufacturing lines into the Springfield facility. The other charges consisted
of $2,044 of idle facility costs incurred at the Joplin facility due to the
consolidation of the remanufacturing lines and $451 of relocation costs related
to the centralization of the ATC Distribution Group's management team and to
centralize the ATC Distribution Group's MIS operations.
50
In the fourth quarter of 1998, the Company recorded an additional
$5,164 in special charges consisting of $2,764 in restructuring costs and $2,400
in non-income related taxes. The $2,764 restructuring cost includes $1,868 of
severance costs for seven people, $596 of exit costs and $300 of other costs.
The severance costs were incurred in connection with the replacement of the
Company's Chief Executive Officer and other members of management as well as
additional reorganization of the ATC Distribution Group's management structure.
The non-income related tax charge is due to a state's 1998 interpretation of tax
laws. This interpretation was applied retroactively to prior fiscal years. Due
to a change in distribution operations, the Company's exposure to the effect of
this tax interpretation will be significantly reduced in future tax periods.
In the first quarter of 1999, the Company recorded special charges of
$1,900, which consisted of $1,559 of severance costs for five people related to
its management reorganization and $341 of exit costs related to the
consolidation of certain of the Company's distribution centers.
In the second quarter of 1999, the Company recorded special charges of
$2,100, which consisted of $1,130 of exit costs related to the consolidation of
certain of the Company's distribution centers, $700 of other costs primarily
related to the Company's management reorganization and $270 of severance costs
for seven people. The severance costs were also related to the Company's
management reorganization.
In the fourth quarter of 1999, the Company recorded $9,763 of special
charges primarily related to the initiation of five actions. First, the Company
recorded $4,587 of costs primarily related to distribution center, distribution
branch and manufacturing plant consolidations within its Independent Aftermarket
segment, consisting of $1,930 of inventory write-downs classified as Cost of
Sales - Special Charges, $950 of severance costs for 198 people, $940 of costs
related to the write-down of fixed assets and $767 of exit costs. Second, the
Company recorded $3,333 of costs associated with the narrowing of its
remanufactured engine product offerings, consisting of $2,852 of inventory
write-downs classified as Cost of Sales - Special Charges, $173 of severance
costs for 31 people, $119 of exit costs and $189 of costs related to the
write-down of certain assets. Third, the Company recorded $850 of costs to exit
a plant within its OEM segment consisting of $500 of costs related to the
write-down of fixed assets and $350 of severance costs for 130 people. Fourth,
the Company recorded $490 of costs related to its electronics business unit
consisting of $168 related to the write-down of accounts receivable balances
from customers the business unit no longer services, $164 of severance costs for
nine people, $113 of inventory write-downs classified as Cost of Sales - Special
Charges and $45 of other costs. Fifth, the Company recorded $503 of severance
costs for 30 people, primarily related to the Company's management
reorganization.
The following table summarizes the provisions and reserves for
restructuring and special charges:
Loss on
Termination Exit/Other Write-Down of
Benefits Cost Assets Total
------------ ---------- ------------- ---------
Provision 1998................ $ 2,690 $ 6,054 $ -- $ 8,744
Payments 1998................. (822) (2,528) -- (3,350)
-------- -------- -------- ----------
Reserve at December 31, 1998.. 1,868 3,526 -- 5,394
Provision 1999................ 3,969 3,102 6,692 13,763
Payments 1999................. (2,425) (2,565) -- (4,990)
Asset write-offs 1999......... -- -- (975) (975)
-------- -------- -------- ---------
Reserve at December 31, 1999.. $ 3,412 $ 4,063 $ 5,717 $ 13,192
======== ======== ======== =========
As of December 31, 1998 and 1999, $5,394 and $9,138 was classified as
accrued expenses. At December 31, 1999, $4,054 was classified as inventory
valuation reserves.
NOTE 20. EXTRAORDINARY ITEMS
The extraordinary item in 1997 of $3,749, net of income tax benefit of
$2,520, consists largely of a pre-tax charge of $5,727 related to the early
redemption of $40,000 in principal amount of the Company's Senior Notes,
consisting of the early redemption premium charge of $4,316 plus unamortized
deferred financing fees of $1,411. The extraordinary item also includes a
pre-tax charge of $542 related to the
51
restructuring of the Company's original revolving credit facility. Both events
occurred in February 1997.
In March 1998, in connection with the restatement and amendment of the
credit agreement to provide for the Credit Facility, the Company recorded an
extraordinary item of $363, net of income tax benefit of $242, related to the
write-off of previously capitalized debt issuance costs.
In September and October 1998, the Company purchased and retired $9,615
in principal amount of the Company's Senior Notes in open market transactions.
In connection with these repurchases, the Company recorded an extraordinary item
of $340, net of income tax benefit of $227, related to the purchase price
premium and the write-off of unamortized deferred financing fees.
NOTE 21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
-----------------------------------------------
FIRST SECOND THIRD FOURTH (2)
--------- --------- --------- ----------
1998
- ----
Net sales................................................. $ 107,001 $ 130,468 $125,003 $124,301
Gross profit before special charges....................... 37,478 41,430 38,072 21,350
Income (loss) before extraordinary items.................. 6,303 3,998 2,553 (19,969)
Earnings (loss) per common share (1)...................... $ 0.32 $ 0.20 $ 0.13 $ (0.99)
Earnings (loss) per common share-assuming dilution (1).... 0.30 0.19 0.12 (0.99)
1999
- ----
Net sales................................................. $ 135,198 $ 141,203 $142,156 $146,408
Gross profit before special charges....................... 41,282 43,758 46,957 50,069
Net income (loss)......................................... 883 1,753 4,428 (257)
Earnings (loss) per common share.......................... $ 0.04 $ 0.09 $ 0.22 $ (0.01)
Earnings (loss) per common share-assuming dilution........ 0.04 0.08 0.21 (0.01)
(1) Earnings (loss) per share data is presented before extraordinary items.
(2) Due to the losses reported in the fourth quarter of 1998 and 1999, the
applicable per share calculation above excludes the antidilutive effect of stock
options and warrants in the fourth quarter of 1998 and 1999.
52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITIONS
- ---- --- ---------
Michael T. DuBose 46 Chairman of the Board, President and Chief Executive Officer
Barry C. Kohn 44 Vice President and Chief Financial Officer
John J. Machota 48 Vice President--Human Resources
Mary T. Ryan 46 Vice President, Communications and Investor Relations
Joseph Salamunovich 40 Vice President, General Counsel and Secretary
Jerry E. Kanis 56 President, Autocraft Group
Paul J. Komaromy 50 President, Aaron's Automotive Products, Inc.
Frank A. Papa 49 President, ATC Distribution Group
R. John Parry 53 President, Component Remanufacturing Specialists, Inc.
Robert Anderson 79 Director
Richard R. Crowell 45 Director
Dale F. Frey 67 Director
Mark C. Hardy 36 Director
Dr. Michael J. Hartnett 54 Director
Gerald L. Parsky 57 Director
Richard K. Roeder 51 Director
William A. Smith 54 Director
J. Richard Stonesifer 63 Director
MICHAEL T. DUBOSE joined the Company as Chairman of the Board of
Directors, President and Chief Executive Officer in 1998. Prior to that he
served as a consultant to Aurora Capital Group from 1997. From 1995 to 1997 Mr.
DuBose was Chairman and Chief Executive Officer of Grimes Aerospace Company, an
international engineering, manufacturing and distribution company. From 1993 to
1995 he served as Senior Vice President of SAI Corporation's computer equipment
manufacturing and systems sector. Prior to that Mr. DuBose held various
positions at General Instrument and General Electric Company. Mr. DuBose holds a
M.S. in Management from the Stanford University Graduate School of Business.
BARRY C. KOHN joined the Company as Vice President and Chief Financial
Officer in January 1999. During 1998 he served as a self-employed financial
consultant. From 1995 to 1997 Mr. Kohn was Senior Vice President and Chief
Financial Officer of Grimes Aerospace Company. Between 1987 and 1995 he held
increasingly senior positions at Grimes including Treasurer, Controller and
Manager of Business Planning. Mr. Kohn holds a Masters of Accounting from The
Ohio State University and is a Certified Public Accountant.
JOHN J. MACHOTA joined the Company as Vice President, Human Resources
in 1997. From 1996 to 1997, he was a self-employed human resources consultant.
From 1995 to 1996, Mr. Machota was Vice President, Compensation for Waste
Management, Inc. and from 1993 to 1995 served as Waste Management's Vice
President, Human Resource Services. From 1986 to 1993 Mr. Machota was Vice
President, Human Resources for a subsidiary of Waste Management and prior to
that held various other positions in the human resources area. Mr. Machota holds
a M.S. in Industrial Relations from Loyola University.
53
MARY T. RYAN joined the Company as Vice President, Communications and
Investor Relations in April 1999. From 1996 to 1998, Ms. Ryan served as Vice
President, Corporate Affairs for American Disposal Services, Inc. From 1995 to
1996 she was a self-employed public relations consultant. Prior to that Ms. Ryan
was employed for more than ten years with Waste Management, Inc. Ms. Ryan holds
a M.B.A. from DePaul University.
JOSEPH SALAMUNOVICH joined the Company as Vice President, General
Counsel and Secretary in 1997. From 1995 to 1997 Mr. Salamunovich was a partner
in the law firm of Gibson, Dunn & Crutcher LLP, where he specialized in
corporate and securities law matters. From 1986 to 1995 Mr. Salamunovich was an
associate of the same firm. Mr. Salamunovich holds a J.D. from Loyola Law
School.
JERRY E. KANIS joined the Company as President of the Company's
Autocraft Group (Autocraft Industries, Autocraft UK, Autocraft Electronics and
Material Recovery) in January 2000. Prior to joining the Company, Mr. Kanis was
employed with Ford Motor Company for over 25 years, most recently serving as
President of Ford Component Sales during 1999, as President of Visteon Component
Sales Group from 1998 to 1999, and as Director, Global Sales and Marketing for
the Power Products division of Ford's Geometric Results subsidiary from 1995 to
1996. The Autocraft Group remanufactures transmissions for Ford, remanufactures
engines for certain European OEMs (including Ford's European operations),
remanufacturers engine control modules, radios, instrument and display clusters
and certain other electronic components for General Motors, Ford and certain
other OEMs, and provides material recovery processing services primarily for
Ford.
PAUL J. KOMAROMY joined the Company in February 2000 as President of
the Company's Aaron's Automotive Products, Inc. subsidiary. From 1997 to 1999
Mr. Komaromy was Vice President and General Manager of the Engine Systems and
Accessories division of AlliedSignal, Inc. From 1987 to 1997 Mr. Komaromy was
employed with Grimes Aerospace, serving as Senior Vice President and General
Manager of the Vision Systems division from 1996 to 1997 and as Senior Vice
President, Operations and Engineering from 1991 to 1995. From 1978 to 1987 Mr.
Komaromy was employed with the Power Systems division of Cooper Industries. Mr.
Komaromy holds a M.S. in Industrial Administration from the Carnegie-Mellon
University Graduate School of Industrial Administration. Aaron's remanufactures
transmissions and engines for the Chrysler division of DaimlerChrysler
Corporation and engines for sale to independent aftermarket customers.
FRANK A. PAPA joined the Company as President of ATC Distribution
Group in March 2000. From 1998 to 2000 Mr. Papa was Vice President of Worldwide
Manufacturing & Distribution for the Stanley Mechanics Tools division of Stanley
Works and from 1997 to 1998 he was Senior Vice President, Operations and
Manufacturing for Sara Lee Corporation. From 1991 to 1997 he was employed with
Kayser Roth Corporation, a hosiery manufacturer, serving as Senior Vice
President, Operations from 1996 to 1997, Vice President, Manufacturing and
Distribution from 1993 to 1996 and Vice President, Manufacturing for the Sock
division from 1991 to 1993. Prior to that Mr. Papa held various positions with
Textron, Inc., an outdoor power equipment manufacturer, General Electric Company
and Byron Weston Company, a rag paper manufacturer. Mr. Papa holds a M.B.A.
from The University of Massachusetts. ATC Distribution Group sells transmission
parts and components used in drivetrain repairs to independent transmission
rebuilders and to a lesser extent to general repair shops, wholesale
distributors and retail automotive parts stores.
R. JOHN PARRY joined the Company as President of the Company's
Component Remanufacturing Specialists, Inc. subsidiary in October 1999. Prior to
that, Mr. Parry was employed for over 20 years with AlliedSignal, Inc., most
recently serving as Vice President and General Manager, Global OEM Business for
the Friction Materials division from 1998 to 1999, as Vice President, Business
Planning and Development for the Friction Materials division from 1997 to 1998,
as Vice President, Global Sales for the Friction Materials division from 1996 to
1997 and as Vice President, Business Planning and Development for the Braking
Systems division from 1993 to 1996. Prior to that Mr. Parry held various
positions with The Carborundum Company. Mr. Parry holds a M.B.A. from The
University of Rochester. CRS remanufactures transmissions for General Motors and
certain foreign OEMs.
ROBERT ANDERSON became a director of the Company in 1997. Mr. Anderson
has been associated with Rockwell International Corporation since 1968, where he
has been Chairman Emeritus since 1990 and served previously
54
as Chairman of the Executive Committee from 1988 to 1990 and as Chairman of the
Board and Chief Executive Officer from 1979 to 1988. Mr. Anderson is a director
of Motor Cargo Industries, Inc.
RICHARD R. CROWELL became a director of the Company in 1994. Mr.
Crowell is President and a founding partner of Aurora Capital Group. Prior to
forming Aurora Capital Group in 1991, Mr. Crowell was a Managing Director of
Rosecliff, Inc., the management company for Acadia Partners L.P. since its
inception in 1987.
DALE F. FREY became a director of the Company in 1997. Prior to his
retirement in 1997, Mr. Frey was Chairman of the Board, President and Chief
Executive Officer of General Electric Investment Corporation, a position he had
held since 1984, and was a Vice President of General Electric Company since
1980. Mr. Frey is a director of Praxair, Inc. and Roadway Express.
MARK C. HARDY became a director of the Company in 1994. Mr. Hardy is a
Managing Director and partner of Aurora Capital Group. Prior to joining Aurora
Capital Group in 1993, Mr. Hardy was an Associate at Bain & Company, a
consulting firm.
DR. MICHAEL J. HARTNETT became a director of the Company in 1994. Since
1992 Dr. Hartnett has been Chairman, President and Chief Executive Officer of
Roller Bearing Company of America, Inc., a manufacturer of ball and roller
bearings. Prior to joining Roller Bearing in 1990 as General Manager of its
Industrial Tectonics subsidiary, Dr. Hartnett spent 18 years with The Torrington
Company, a bearing manufacturer.
GERALD L. PARSKY became a director of the Company in 1997. Mr. Parsky
is the Chairman and a founding partner of Aurora Capital Group. Prior to forming
Aurora Capital Group in 1991, Mr. Parsky was a senior partner and a member of
the Executive and Management Committees of the law firm of Gibson, Dunn &
Crutcher LLP. Prior to that, he served as an official with the United States
Treasury Department and the Federal Energy Office, and as Assistant Secretary of
the Treasury for International Affairs.
RICHARD K. ROEDER became a director of the Company in 1994. Mr. Roeder
is a founding partner and Managing Director of Aurora Capital Group. Prior to
forming Aurora Capital Group in 1991, Mr. Roeder was a partner in the law firm
of Paul, Hastings, Janofsky & Walker, where he served as Chairman of the firm's
Corporate Law Department and a member of its National Management Committee.
WILLIAM A. SMITH has been a director of the Company since 1994. He
served as Chairman Emeritus of the Board of Directors from 1997 to 1998 and
prior to that served as Chairman of the Board since 1994. Mr. Smith was
President and Chief Executive Officer of the Company from 1994 until 1996. From
1993 to 1994 Mr. Smith served as a consultant to Aurora Capital Group in
connection with the formation of the Company and its initial acquisitions. Prior
to that Mr. Smith was President of the Rucker Fluid Power Division of Lucas
Industries, plc. and held various positions with Navistar International
Transportation Corporation, Labinal, Inc. (a French automotive and aerospace
equipment manufacturer) and Cummins Engine Company.
J. RICHARD STONESIFER became a director of the Company in 1997. Prior
to his retirement in 1996, Mr. Stonesifer was employed with the General Electric
Company for 37 years, serving most recently as President and Chief Executive
Officer of GE Appliances, and was an executive officer and Senior Vice President
of the General Electric Company, from January 1992 until his retirement.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who own more than 10% of
any equity security of the Company to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and to furnish copies of
these reports to the Company. Based solely on a review of the copies of the
forms that the Company received, the Company believes that all such forms
required during 1999 were filed on a timely basis except for the following: a
Form 4 for Mr. Crowell with respect to purchases
55
made by the Aurora Partnerships in December 1998, which was filed one month
late; Form 4s for the Aurora Partnerships and Messrs. Crowell, Parsky and Roeder
with respect to purchases made by the Aurora Partnerships in January 1999, which
were filed one day late; and Form 4s for the Aurora Partnerships and Messrs.
Crowell, Parsky and Roeder with respect to purchases made by the Aurora
Partnerships in September 1999, which were filed two days late.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the three most recently completed
fiscal years, the cash compensation for services in all capacities to the
Company of (i) the Company's Chief Executive Officer, (ii) the four persons who
as of December 31, 1999 were the other most highly compensated executive
officers of the Company and its subsidiaries and (iii) one person who would have
been among the four other most highly compensated executive officers of the
Company and its subsidiaries during 1999 if he had continued to serve as an
executive officer through the end of the year (collectively, the "Named
Executive Officers"):
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------------- --------------------
NUMBER OF SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS (2) OPTIONS(#)(3) COMPENSATION
- --------------------------- ---- ---------- --------- ------------- ------------
Michael T. DuBose (4) 1999 $400,000 $319,500 -- $203,940(5)
Chairman, President and 1998 17,534 -- 500,000 --
Chief Executive Officer 1997 -- -- -- --
Thomas R. Kawsky (6) 1999 187,633 202,260 15,000 11,663
President, Autocraft Industries 1998 156,667 73,135 15,000 8,399
1997 -- -- -- --
Barry C. Kohn (7) 1999 226,154 110,000 90,000 36,963(8)
Chief Financial Officer 1998 -- -- -- --
1997 -- -- -- --
Kenneth A. Bear (9) 1999 194,616 118,814 -- 2,240
President, Aaron's 1998 176,538 18,000 20,000 --
1997 120,368 52,662 -- --
Joseph Salamunovich 1999 186,077 90,000 20,000 1,321
Vice President, General Counsel 1998 173,000 17,300 10,000 937
and Secretary 1997 126,500 68,751 35,088 50,000(10)
Ronald E. Bradshaw (11) 1999 275,000 -- -- 8,462
Former Executive Vice President 1998 227,417 157,552 45,000 --
1997 -- -- -- --
- ---------------
(1) For information regarding the current annual salary of certain executive
officers see "Executive Compensation--Employment Agreements."
(2) Bonuses for a particular year are paid during the first quarter of the
following year, except in the cases of Mr. DuBose, whose bonus is paid
at the end of the year in which it is earned, and Mr. Bear, whose 1999
bonus will be paid over time as part of his severance.
(3) Consists of options to purchase securities of the Company, which options
were issued pursuant to the Company's 1996 Stock Incentive Plan (the
"1996 Plan") or its 1998 Stock Incentive Plan (the "1998 Plan").
Pursuant to the 1996 and 1998 Plans, the Compensation and Human
Resources Committee of the Board of Directors makes recommendations to
the Board of Directors regarding the terms and conditions of each option
to be granted.
(4) Mr. DuBose joined the Company as Chairman, President and Chief Executive
Officer in December 1998.
(5) Includes (i) $176,770 of relocation benefits (including $76,770 of
income tax "gross up") and (ii) $14,954 of car allowance.
56
(6) The position of President, Autocraft Industries ceased to be an
executive officer position in the Company as of January 1, 2000.
(7) Mr. Kohn joined the Company as Vice President and Chief Financial
Officer in January 1999.
(8) Includes $31,750 of relocation benefits (including $11,750 of income tax
"gross up").
(9) Mr. Bear became President of Aaron's in February 1998 and ceased to hold
such position in February 2000.
(10) Consists of relocation benefits.
(11) Mr. Bradshaw joined the Company as Executive Vice President in March
1998 and ceased to hold such position in July 1999. Base salary for 1999
includes severance payments made after July.
OPTION GRANTS TABLE
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1999:
INDIVIDUAL POTENTIAL REALIZABLE
GRANTS VALUE AT ASSUMED
------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION --------------------
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ----------------------- --------------- ------------ --------- ---------- -------- --------
Michael T. DuBose...... -- -- -- -- -- --
Thomas R. Kawsky....... 15,000(2) 3.0 $9.00 5/5/09 $ 84,901 $215,155
Barry C. Kohn.......... 90,000(3) 17.9 $5.0312 2/25/09 284,739 721,613
Kenneth A. Bear........ -- -- -- -- -- --
Joseph Salamunovich.... 20,000(2) 4.0 $9.00 5/5/09 113,201 286,874
Ronald E. Bradshaw..... -- -- -- -- -- --
- ----------------
(1) The potential gains shown are net of the option exercise price and do
not include the effect of any taxes associated with exercise. The
amounts shown are for the assumed rates of appreciation only, do not
constitute projections of future stock price performance, and may not
necessarily be realized. Actual gains, if any, on stock option exercises
depend on the future performance of the Common Stock, continued
employment of the optionee through the term of the options, and other
factors.
(2) These options were granted under the 1998 Plan. One third of the options
vest and become exercisable on each of May 5, 2000, 2002 and 2004.
(3) These options were granted under the 1996 Plan. One third of the options
vest and become exercisable on each of February 25, 2000, 2001 and 2002.
57
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
Shown below is information relating to the exercise of stock options
during 1999 by the Named Executive Officers and the value of unexercised options
for each of the Named Executive Officers as of December 31, 1999:
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
ACQUIRED ON VALUE ---------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- -------- ----------- ------------- ----------- -------------
Michael T. DuBose...... -- -- 166,667 333,333 $1,156,336 $1,312,664
Thomas R. Kawsky....... -- -- 5,000 25,000 -- 44,070
Barry C. Kohn.......... -- -- -- 90,000 -- 621,612
Kenneth A. Bear........ -- -- 76,843(2) 13,333(3) 720,567 --
Joseph Salamunovich.... -- -- 15,030 50,058 -- 58,760
Ronald E. Bradshaw..... -- -- -- -- -- --
- ---------------
(1) Calculated using the closing price of the Common Stock on the Nasdaq
National Market System on December 31, 1999, which was $11.938 per
share.
(2) 70,167 of these options were exercised in January 2000 and the balance
have terminated.
(3) These options have terminated.
EMPLOYMENT AGREEMENTS
The Company typically enters into an employment agreement with each of
its executive officers (including the Named Executive Officers) that provides
for a three-year term and is automatically renewable thereafter on a
year-to-year basis. The agreement includes a noncompetition provision for a
period of 18 months from the termination of the executive officer's employment
with the Company and a nondisclosure provision which is effective for the term
of the employment agreement and indefinitely thereafter. The executive officer
is entitled to severance equal to his base salary for a period of 12 months
after termination if he is terminated without cause (as defined in the
employment agreement), except in the cases of Mr. DuBose, whose severance period
is the longer of 24 months or the balance of the initial contract term, and Mr.
Kohn, whose severance period is 18 months. Set forth below is the current annual
base salary for the Company's Chief Executive Officer and each of its other four
most highly compensated executive officers as of March 27, 2000:
ANNUAL END OF INITIAL
NAME BASE SALARY CONTRACT TERM
- -------------------------------------------- ----------- --------------
Michael T. DuBose.................................... $400,000(1) 12/14/01
Paul J. Komaromy..................................... 270,000 2/1/03
Frank A. Papa........................................ 260,000 3/27/03
Jerry E. Kanis....................................... 250,000 2/14/03
Barry C. Kohn........................................ 240,000(2) 1/25/02
- ---------------
(1) Will be increased to $470,000 in April 2000.
(2) Will be increased to $270,000 in April 2000.
1996 AND 1998 STOCK INCENTIVE PLANS
Pursuant to the 1996 and 1998 Plans, officers, directors, employees and
consultants of the Company and its affiliates are eligible to receive options to
purchase Common Stock and other awards. Awards under the 1996 Plan are not
restricted to any specified form or structure and may include, without
limitation, sales or bonuses of stock, restricted stock, stock options, reload
stock options, stock purchase warrants, other rights to acquire stock,
securities convertible into or redeemable for stock, stock appreciation rights,
phantom stock, dividend equivalents, performance units or performance shares.
Awards under the 1998 Plan may take the form of stock options, annual incentive
bonuses and incentive stock.
58
The Plans are administered by the Compensation and Human Resources
Committee of the Board of Directors (the "Committee"), although the Board of
Directors may exercise any authority of the Committee under the Plans in lieu of
the Committee's exercise thereof. While the Plans permit the Committee to grant
awards, such grants are typically made by the Board of Directors based on the
Committee's recommendations regarding the recipients and type and amount of
awards. Subject to the express provisions of the Plans, the Committee has broad
authority in administering and interpreting the Plans. Options granted to
employees may be options intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, or options not
intended to so qualify. Awards to employees may include a provision terminating
the award upon termination of employment under certain circumstances or
accelerating the receipt of benefits upon the occurrence of specified events,
including, at the discretion of the Committee, any change of control of the
Company.
The aggregate number of shares of Common Stock that can be issued under
the Plans may not exceed 3,600,000. As of January 31, 2000, there were
outstanding options to purchase an aggregate of 1,786,325 shares of Common Stock
granted to directors, officers and employees of the Company and its subsidiaries
and certain independent contractors pursuant to the Plans, and the number of
shares available for issuance pursuant to options yet to be granted under the
Plans was 267,353. In February 2000 the Company granted options to employees to
purchase an additional 190,000 shares of Common Stock.
In most cases, outstanding options are subject to certain vesting
provisions and expire on the tenth anniversary of the date of grant. The
exercise prices of options outstanding under the Plans as of January 31, 2000
are as follows:
NUMBER OF OPTION
SHARES EXERCISE PRICE
----------------- --------------
62,480 $1.67
83,088 4.67
632,000 5.00
95,000 5.0312
108,000 5.3125
3,000 5.5625
41,500 8.50
63,500 8.9375
268,000 9.00
23,000 9.125
200,000 10.00
6,000 10.938
35,088 14.75
1,500 18.00
164,169 18.125
For information regarding options granted to directors and officers of
the Company, see Item 12. "Security Ownership of Certain Beneficial Owners and
Management."
COMPENSATION AND HUMAN RESOURCES COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
The members of the Compensation and Human Resources Committee are
Messrs. Crowell, Parsky and Stonesifer. Messrs. Crowell and Parsky are (i) two
of the three stockholders and directors of Aurora Advisors, Inc., the general
partner of Aurora Capital Partners, which is the general partner of Aurora
Equity Partners, L.P. ("AEP"), the largest stockholder of the Company, and (ii)
two of the three stockholders and directors of Aurora Overseas Advisors, Ltd.,
the general partner of Aurora Overseas Capital Partners L.P., the general
partner of Aurora Overseas Equity Partners I, L.P. ("AOEP"), a significant
stockholder of the Company. See Item 12. "Security Ownership of Certain
Beneficial Owners and Management." In addition, Messrs. Crowell and Parsky are
the senior members of Aurora Capital Group (of which the Aurora Partnerships are
a part), which provides investment banking and
59
management services to the Company pursuant to a management services agreement.
See Item 13. "Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common
Stock (the only class of issued and outstanding voting securities of the
Company), as of March 2, 2000 by each director of the Company, each of the Named
Executive Officers, the directors and executive officers of the Company as a
group and each person who at such time was known by the Company to beneficially
own more than 5% of the outstanding shares of any class of voting securities of
the Company.
NUMBER OF VOTING
SHARES (1) PERCENTAGE
----------- ----------
Aurora Equity Partners L.P. (other beneficial owners: Richard R.
Crowell, Gerald L. Parsky and Richard K. Roeder) (2)(3)................. 11,655,204 56.7
Aurora Overseas Equity Partners I, L.P. (other beneficial owners:
Richard R. Crowell, Gerald L. Parsky and Richard K. Roeder) (3)(4)...... 4,581,418 22.2
General Electric Pension Trust (5)......................................... 2,038,152 9.9
Investment Advisors, Inc. (6).............................................. 1,212,300 5.9
Michael T. DuBose (7)(8)................................................... 181,767 *
Thomas R. Kawsky (9)....................................................... 7,000 *
Barry C. Kohn (8)(10)...................................................... 47,500 *
Kenneth A. Bear (11)....................................................... 32,476 *
Joseph Salamunovich (8)(12)................................................ 26,726 *
Ronald E. Bradshaw (13).................................................... 1,000 *
Robert Anderson (14)(15)................................................... 47,918 *
Richard R. Crowell (2)(3)(4)(15)........................................... 12,999,050 63.2
Dale F. Frey (16).......................................................... 44,000 *
Mark C. Hardy (3)(15)(17).................................................. 20,460 *
Dr. Michael J. Hartnett (18)............................................... 80,176 *
Gerald L. Parsky (2)(3)(4)(15)(19)......................................... 12,999,050 63.2
Richard K. Roeder (2)(3)(4)(15)............................................ 12,999,050 63.2
J. Richard Stonesifer (20)................................................. 29,000 *
William A. Smith (21)...................................................... 545,984 2.7
All directors and officers as a group (16 persons) (22).................... 14,011,203 66.8
- ---------------
* Less than 1%.
(1) The shares of Common Stock underlying warrants or options granted under
the 1996 or 1998 Plans that are exercisable as of March 2, 2000 or that
will become exercisable within 60 days thereafter (such warrants or
options being referred to as "Exercisable") are deemed to be outstanding
for the purpose of calculating the beneficial ownership of the holder of
such warrants or options, but are not deemed to be outstanding for the
purpose of computing the beneficial ownership of any other person.
(2) Consists of (i) 8,417,632 shares owned by AEP (one of the Aurora
Partnerships), (ii) 2,038,152 shares owned by the General Electric
Pension Trust ("GEPT") (see Note 5 below) and (iii) 1,199,420 shares that
are subject to an irrevocable proxy granted to the Aurora Partnerships by
certain holders of Common Stock, including Messrs. Anderson, Crowell,
Hardy, Parsky and Roeder, certain other limited partners of AEP and
certain affiliates of a limited partner of AOEP (the other Aurora
Partnership). The proxy terminates upon the earlier of the transfer of
such shares or July 31, 2004. AEP is a Delaware limited partnership the
general partner of which is Aurora Capital Partners, a Delaware limited
partnership whose general partner is Aurora Advisors, Inc. Messrs.
Crowell, Parsky and Roeder are the sole stockholders and directors of
Aurora Advisors, are
60
limited partners of Aurora Capital Partners and may be deemed to
beneficially share ownership of the Common Stock beneficially owned by
AEP and may be deemed to be the organizers of the Company under
regulations promulgated under the Securities Act.
(3) The address of this stockholder is 10877 Wilshire Boulevard, Suite 2100,
Los Angeles, CA 90024.
(4) Consists of (i) 1,343,846 shares owned by AOEP, (ii) 2,038,152 shares
owned by GEPT (see Note 5 below) and (iii) 1,199,420 shares that are
subject to an irrevocable proxy granted to the Aurora Partnerships by
certain holders of Common Stock, including Messrs. Anderson, Crowell,
Hardy, Parsky and Roeder, certain other limited partners of AEP and
certain affiliates of a limited partner of AOEP. The proxy terminates
upon the earlier of the transfer of such shares or July 31, 2004. AOEP is
a Cayman Islands limited partnership the general partner of which is
Aurora Overseas Capital Partners, L.P., a Cayman Islands limited
partnership, whose general partner is Aurora Overseas Advisors, Ltd.
Messrs. Crowell, Parsky and Roeder are the sole stockholders and
directors of Aurora Overseas Advisor, are limited partners of Aurora
Overseas Capital Partners and may be deemed to beneficially own the
shares of the Company's Common Stock beneficially owned by AOEP. AOEP's
address is West Wind Building, P.O. Box 1111, Georgetown, Grand Cayman,
Cayman Islands, B.W.I.
(5) With limited exceptions, GEPT has agreed to vote these shares in the same
manner as the Aurora Partnerships vote their respective shares of Common
Stock. This provision terminates upon the earlier of the transfer of such
shares or July 31, 2004. GEPT's address is 3003 Summer Street, Stamford,
CT 06905.
(6) Based on a Schedule 13G/A filed with the Securities and Exchange
Commission on February 2, 2000. The address of Investment Advisors, Inc.,
is 3700 First Bank Place, Box 357, Minneapolis, MN 55440.
(7) Includes 166,667 shares subject to options that are Exercisable.
Excludes 333,333 shares subject to options that are not Exercisable.
(8) The address of this stockholder is One Oak Hill Center, Suite 400,
Westmont, IL 60559.
(9) Includes 5,000 shares subject to options that are Exercisable.
Excludes 25,000 shares subject to options that are not Exercisable.
Mr. Kawsky's address is 9901 West Reno Road, Oklahoma City, OK 73127.
(10) Includes 30,000 shares subject to options that are Exercisable. Excludes
60,000 shares subject to options that are not Exercisable.
(11) Mr. Bear's address is 1637 South Cobblestone Court, Springfield, MO
65809.
(12) Consists of shares subject to options that are Exercisable. Excludes
38,362 shares subject to options that are not Exercisable.
(13) Mr. Bradshaw's address is 1607 Elmhurst Avenue, Oklahoma City, OK 73120.
(14) Includes (i) 4,290 shares held by Mr. Anderson's wife (including 2,790
shares held by her as trustee for her relatives), as to which Mr.
Anderson disclaims beneficial ownership, and (ii) 24,000 shares subject
to options that are Exercisable. Excludes 26,000 shares subject to
options that are not Exercisable. Mr. Anderson's address is 10877
Wilshire Boulevard, Suite 1405, Los Angeles, CA 90024-4341.
(15) The shares actually owned by this person (as distinguished from the
shares that this person is deemed to beneficially own) are subject to an
irrevocable proxy granted to the Aurora Partnerships.
(16) Includes (i) 10,000 shares owned by a limited partnership of which Mr.
Frey is general partner, (ii) 4,000 shares held by him as trustee for his
grandchildren and (iii) 24,000 shares subject to options that are
Exercisable. Excludes 26,000 shares subject to options that are not
Exercisable. Mr. Frey disclaims beneficial ownership of 96% of the shares
owned by the limited partnership. Mr. Frey's address is One Gorham
Island, Westport, CT 06880.
(17) Includes 12,000 shares subject to options that are Exercisable.
(18) Includes 70,176 shares subject to warrants that are Exercisable. Mr.
Hartnett's address is 60 Round Hill Road, Fairfield, CT 06430.
61
(19) Includes 2,000 shares held by Mr. Parsky's wife, as to which Mr. Parsky
disclaims beneficial ownership.
(20) Includes 24,000 shares subject to options that are Exercisable. Excludes
26,000 shares subject to options that are not Exercisable. Mr.
Stonesifer's address is 8473 Bay Colony Drive, Naples, FL 34108.
(21) Mr. Smith's address is 1717 East LaRua, Pensacola, FL 32501.
(22) Excludes shares held by Named Executive Officers who are no longer
officers of the Company. Includes 387,569 shares subject to warrants and
options that are Exercisable. Excludes 619,695 shares subject to options
that are not Exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company believes the transactions described below were beneficial
to the Company and were on terms at least as favorable to the Company as could
have been obtained from unaffiliated third parties pursuant to arms-length
negotiations.
RELATIONSHIP WITH AURORA CAPITAL GROUP
The Company was formed in 1994 at the direction of Aurora Capital
Group, of which the Aurora Partnerships are a part. Aurora Capital Group is
controlled by Messrs. Crowell, Hardy, Parsky and Roeder, who are directors of
the Company. See Item 12. "Security Ownership of Certain Beneficial Owners and
Management."
The Company pays to Aurora Management Partners ("AMP"), which is a part
of Aurora Capital Group, a base annual management fee of $550,000 for advisory
and consulting services pursuant to a written management services agreement (the
"Management Services Agreement"). AMP is also entitled to reimbursements from
the Company for all of its reasonable out-of-pocket costs and expenses incurred
in connection with the performance of its obligations under the Management
Services Agreement. The base annual management fee is subject to increase, at
the discretion of the disinterested members of the Company's Board of Directors,
by up to an aggregate of $250,000 in the event the Company consummates one or
more significant corporate transactions. The base annual management fee has not
been increased as a result of any of the Company's acquisitions. The base annual
management fee is also subject to increase for specified cost of living
increases pursuant to which the base annual management fee was most recently
increased in January 1999 from $540,000. If the Company's EBITDA in any year
exceeds management's budgeted EBITDA by 15.0% or more for that year, AMP will be
entitled to receive an additional management fee equal to one half of its base
annual management fee for such year. Because the Company's EBITDA did not exceed
management's budgeted EBITDA by 15.0% in 1999, AMP did not receive this
additional management fee in 1999.
The base annual management fee payable to AMP will be reduced as the
collective beneficial ownership of Common Stock by the Aurora Partnerships
declines below 50% as follows: for any period during which the collective
beneficial ownership of the Aurora Partnerships is less than 50% but at least
40%, the base annual management fee payable for the period will be 80% of the
original base annual management fee (as such original base annual management fee
may previously have been adjusted due to discretionary increases by the Board of
Directors or cost of living increases as described above, the "Original Fee");
for any period during which the Aurora Partnerships' collective beneficial
ownership is less than 40% but at least 30%, the base annual management fee
payable for the period will be 60% of the Original Fee; and for any period
during which the collective beneficial ownership of the Aurora Partnerships is
less than 30% but at least 20%, the base annual management fee payable for the
period will be 40% of the Original Fee. If the Aurora Partnerships' collective
beneficial ownership declines below 20%, the Management Services Agreement will
terminate. As of March 2, 2000, the collective beneficial ownership of the
Aurora Partnerships for purposes of the Management Services Agreement was
approximately 63%. See Item 12. "Security Ownership of Certain Beneficial Owners
and Management."
If the Company consummates any significant acquisitions or
dispositions, AMP will be entitled to receive a fee from the Company for
investment banking services in connection with the transaction. The fee is equal
to 2.0% of the first $75.0 million of the acquisition consideration (including
debt assumed and current assets retained) and 1.0% of acquisition consideration
(including debt assumed and current assets retained) in excess of $75.0 million.
Since the
62
Company's formation, it has paid approximately $5.2 million of fees to AMP
for investment banking services in connection with the Company's
acquisitions, including $800,000 for the All Trans acquisition in 1999, which
was paid January 2000.
Notwithstanding the foregoing, no payment will be made to AMP pursuant
to the Management Services Agreement at any time that certain events of default
shall have occurred and be then continuing under any of the Indentures governing
the Senior Notes or the Credit Facility. The Management Services Agreement also
provides that the Company shall provide Aurora Capital Group and its directors,
employees, partners and affiliates with customary indemnification against all
actions not involving gross negligence or willful misconduct.
In October 1996, the Company granted options for an aggregate of 48,000
shares of Common Stock to Mark C. Hardy (a director of the Company), Kurt Larsen
(a former director of the Company) and two consultants of the Company, all four
of whom were then employees of Aurora Capital Group. These options, which have
an exercise price of $4.67 per share, become exercisable in one-third increments
on each of the first three anniversaries of the date of grant and expire in
2006. In 1997, 12,000 of these options terminated when Mr. Larsen resigned from
Aurora Capital Group.
INDEMNIFICATION AGREEMENTS
The Company has entered into separate but identical indemnification
agreements (the "Indemnification Agreements") with each director and executive
officer of the Company. The Indemnification Agreements provide for, among other
things, the following: (i) indemnification to the fullest extent permitted by
law against any and all expenses (including attorneys' fees and all other costs
and obligations of any nature whatever), judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection therewith) of any claim, unless the Company determines
that such indemnification is not permitted under applicable law; (ii) the prompt
advancement of expenses to the director or officer, including attorneys' fees
and all other costs, fees, expenses and obligations paid or incurred in
connection with investigating or defending any threatened, pending or completed
action, suit or proceeding related to the fact that such director or officer is
or was a director or officer of the Company or is or was serving at the request
of the Company as a director, officer, employee, trustee, agent or fiduciary of
another corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise, and for repayment to the Company if it is found that such
director or officer is not entitled to such indemnification under applicable
law; (iii) a mechanism through which the director or officer may seek court
relief in the event the Company determines that the director or officer is not
permitted to be indemnified under applicable law (and therefore is not entitled
to indemnification under the Indemnification Agreement); and (iv)
indemnification against expenses (including attorneys' fees) incurred in seeking
to collect from the Company an indemnity claim or advancement of expenses to the
extent successful.
REGISTRATION RIGHTS
The holders of the Common Stock outstanding before the IPO in December
1996 have certain "demand" and "piggyback" registration rights pursuant to a
stockholders agreement. In addition, GEPT has certain "demand" and "piggyback"
registration rights with respect to a portion of the shares of Common Stock
owned by it.
63
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules and Exhibits:
1. Financial Statements Index
See Index to Financial Statements and Supplemental Data on page 29.
2. Financial Statement Schedules Index
II - Valuation and Qualifying Accounts........................... S-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
3. Exhibit Index
The following exhibits are filed as part of this Annual Report on
Form 10-K, or are incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Amended and Restated Certificate of Incorporation of Aftermarket
Technology Corp. (previously filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference)
3.2 Certificate of Designations, Preferences, and Relative,
Participating, Option and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions Thereof of
Redeemable Exchangeable Cumulative Preferred Stock of Aftermarket
Technology Corp. (previously filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference)
3.3 Amended and Restated Bylaws of Aftermarket Technology Corp.
(previously filed as Exhibit 3.3 to the Company's Registration
Statement on Form S-1 (File No. 333-35543) filed on September 12,
1997 and incorporated herein by this reference)
3.4 Certificate of Amendment of Restated Certificate of Incorporation
of Aftermarket Technology Corp. filed with the Delaware Secretary
of State on August 7, 1998 (previously filed as Exhibit 3.4 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998 and incorporated herein by this reference)
4.1 Indenture, dated August 2, 1994, among Aftermarket Technology
Corp., the Guarantors named therein and Firstar Bank of Minnesota,
N.A. (formerly known as American Bank N.A.), as Trustee for the
Series B Notes (previously filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-4 filed on November 30, 1994,
Commission File No. 33-86838, and incorporated herein by this
reference)
4.2 Indenture, dated June 1, 1995, among Aftermarket Technology Corp.,
the Guarantors named therein and Firstar Bank of Minnesota, N.A.
(formerly known as American Bank N.A.), as Trustee for the Series D
Notes (previously filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-4 filed on June 21, 1995,
Commission File No. 33-93776, and incorporated herein by this
reference)
4.3 First Supplemental Indenture, dated as of February 23, 1995, among
Aftermarket Technology Corp., the Guarantors named therein and
Firstar Bank of Minnesota, N.A. (formerly known as American Bank
N.A.), as Trustee for the Series B Notes (previously filed as
Exhibit 4.3 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-6697, and incorporated herein by this reference)
64
4.4 Second Supplemental Indenture, dated as of June 1, 1995, among
Aftermarket Technology Corp., the Guarantors named therein and
Firstar Bank of Minnesota, N.A. (formerly known as American Bank
N.A.), as Trustee for the Series B Notes (previously filed as
Exhibit 4.4 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
4.5 Third Supplemental Indenture to the Series B Indenture and First
Supplemental Indenture to the Series D Indenture, dated as of July
25, 1996, among Aftermarket Technology Corp., the Guarantors named
therein and Firstar Bank of Minnesota, N.A. (formerly known as
American Bank N.A.), as Trustee for the Notes (previously filed as
Exhibit 4.5 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
4.6 Fourth Supplemental Indenture to the Series B Indenture and Second
Supplemental Indenture to the Series D Indenture, dated as of June
1, 1998, among Aftermarket Technology Corp., the Guarantors named
therein and Firstar Bank of Minnesota, N.A. (formerly known as
American Bank N.A.), as Trustee for the Notes (previously filed as
Exhibit 4.6 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by this
reference)
10.1 Stockholders Agreement, dated as of August 2, 1994, among Holdings,
and certain of its stockholders, optionholders and warrant holders
(the Stockholders Agreement) (previously filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-4 filed on November
30, 1994, Commission File No. 33-86838, and incorporated herein by
this reference)
10.2 Amendment No. 1 to the Stockholders Agreement, dated as of June 24,
1996 (previously filed as Exhibit 10.38 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 filed on November 6,
1996, Commission File No. 333-5597, and incorporated herein by this
reference)
10.3 Amendment No. 2 to the Stockholders Agreement, dated as of October
24, 1996 (previously filed as Exhibit 10.39 to Amendment No. 2 to
the Company's Registration Statement on Form S-1 filed on November
6, 1996, Commission File No. 333-5597, and incorporated herein by
this reference)
10.4 Amendment No. 3 to Stockholders Agreement, dated as of December 4,
1996 (previously filed as Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference)
10.5 Amendment No. 4 to Stockholders Agreement, dated as of December 16,
1996 (previously filed as Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference)
10.6 Amended and Restated Credit Agreement, dated as of March 6, 1998,
among Aftermarket Technology Corp., the Lenders from time to time
parties thereto and The Chase Manhattan Bank (the Credit Agreement)
(previously filed as Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 and incorporated
herein by this reference)
10.7 Guarantee and Collateral Agreement, dated as of March 6, 1998, by
Aftermarket Technology Corp. and each of the signatories thereto in
favor of The Chase Manhattan Bank as Agent for the banks and other
financial institutions from time to time parties to the Amended and
Restated Credit Agreement (see Exhibit 10.6) (previously filed as
Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by this
reference)
10.8 Amended and Restated Tax Sharing Agreement, dated as of December
20, 1996, among Aftermarket Technology Holdings Corp., Aaron's
Automotive Products, Inc., ATC Components, Inc., CRS Holdings
Corp., Diverco Acquisition Corp., H.T.P., Inc., Mamco Converters,
Inc., R.P.M. Merit, Inc. and Tranzparts Acquisition Corp.
(previously filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 and incorporated
herein by this reference)
10.9 Amended and Restated Management Services Agreement, dated as of
November 18, 1996, by and among Aftermarket Technology Corp., the
subsidiaries of Aftermarket Technology Corp., and Aurora Capital
Partners L.P. (previously filed as Exhibit 10.4 to Amendment No. 4
to the Company's Registration Statement on Form S-1 filed on
October 25, 1996, Commission File No. 333-5597, and incorporated
herein by this reference)
10.10 Aftermarket Technology Corp. 1996 Stock Incentive Plan (previously
filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein
65
by this reference)
10.11 Form of Incentive Stock Option Agreement (previously filed as
Exhibit 10.36 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
10.12 Form of Non-Qualified Stock Option Agreement (previously filed as
Exhibit 10.37 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
10.13 Employment Agreement dated as of August 1, 1997 between William A.
Smith and Aftermarket Technology Corp. (previously filed as Exhibit
10.13 to the Company's Registration Statement on Form S-1 (File No.
333-35543) filed on September 12, 1997 and incorporated herein by
this reference)
10.14 Employment Agreement, dated as of October 7, 1996, between Stephen
J. Perkins and Aftermarket Technology Corp. (previously filed as
Exhibit 10.35 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
10.15 Employment Agreement, dated as of October 1, 1996, between John C.
Kent and Aftermarket Technology Corp. (previously filed as Exhibit
10.7 to Amendment No. 2 to the Company's Registration Statement on
Form S-1 filed on November 6, 1996, Commission File No. 333-5597,
and incorporated herein by this reference)
10.16 Employment Agreement, dated August 2, 1994, between James R. Wehr
and Aaron's Automotive Products, Inc. (previously filed as Exhibit
10.9 to the Company's Registration Statement on Form S-4 filed on
November 30, 1994, Commission File No. 33-86838, and incorporated
herein by this reference)
10.17 Employment Agreement, dated as of June 1, 1995, between Michael L.
LePore and Component Remanufacturing Specialists, Inc. (previously
filed as Exhibit 10.11 to the Company's Registration Statement on
Form S-4 filed on June 21, 1995, Commission File No. 33-93776, and
incorporated herein by this reference)
10.18 Amended and Restated Warrant Certificate, dated as of August 2,
1994, for 280,704 warrants issued to William E. Myers, Jr.
(previously filed as Exhibit 10.18 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 and incorporated
herein by this reference)
10.19 Amended and Restated Warrant Certificate, dated as of August 2,
1994, for 70,176 warrants issued to Brian E. Sanderson (previously
filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated herein by
this reference)
10.20 Amended and Restated Warrant Certificate, dated June 24, 1996, for
70,176 warrants issued to Michael J. Hartnett (previously filed as
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by this
reference)
10.21 Stock Purchase Agreement, dated May 16, 1994, by and among C.R.
Wehr, Jr., Rev. Liv. Trust, James R. Wehr, Aaron's Automotive
Products, Inc. and AAP Acquisition Corp. (previously filed as
Exhibit 10.14 to the Company's Registration Statement on Form S-4
filed on November 30, 1994, Commission File No. 33-86838, and
incorporated herein by this reference)
10.22 Stock Purchase Agreement, dated July 21, 1994, by and among John B.
Maynard, Kenneth T. Hester, H.T.P., Inc. and HTP Acquisition Corp.
(previously filed as Exhibit 10.15 to the Company's Registration
Statement on Form S-4 filed on November 30, 1994, Commission File
No. 33-86838, and incorporated herein by this reference)
10.23 Stock Purchase Agreement, dated July 21, 1994, by and among John B.
Maynard, Mamco Converters, Inc. and Mamco Acquisition Corp.
(previously filed as Exhibit 10.16 to the Company's Registration
Statement on Form S-4 filed on November 30, 1994, Commission File
No. 33-86838, and incorporated herein by this reference)
10.24 Asset Purchase Agreement, dated June 24, 1994, by and among RPM
Merit, Donald W. White, John A. White, The White Family Trust and
RPM Acquisition Corp. (previously filed as Exhibit 10.17 to the
Company's Registration Statement on Form S-4 filed on November 30,
1994, Commission File No. 33-86838, and incorporated herein by this
reference)
10.25 Agreement and Plan of Merger and Reorganization, dated May 10,
1995, by and among Component Remanufacturing Specialists, Inc.,
James R. Crane, Michael L. LePore, Aftermarket Technology Corp.,
66
CRS Holdings Corp. and CRS Acquisition Corp. (previously filed as
Exhibit 2 to the Company's Current Report on Form 8-K filed on June
15, 1995, Commission File No. 33-80838-01, and incorporated herein
by this reference)
10.26 Stock Purchase Agreement, dated June 9, 1995, by and among Dianne
Hanthorn, Jobian Limited, Randall Robinson, Barry E. Schwartz,
Bradley Schwartz, Angela White, John White, Incorporated
Investments Limited, Glenn M. Hanthorn, Guido Sala and Tony
Macharacek, Mascot Truck Parts Inc. and Mascot Acquisition Corp.
(previously filed as Exhibit 10.22 to the Company's Registration
Statement on Form S-4 filed on June 21, 1995, Commission File No.
33-93776, and incorporated herein by this reference)
10.27 Stock Purchase Agreement, dated September 12, 1995, by and among
Gordon King, 433644 Ontario Limited, 3179338 Canada Inc.,
King-O-Matic Industries Limited, KOM Acquisition Corp. and
Aftermarket Technology Corp. (previously filed as Exhibit 10.23 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by this reference)
10.28 Stock Purchase Agreement, dated as of April 2, 1996, by and among
the Charles T. and Jean F. Gorham Charitable Remainder Trust dated
March 27, 1996, Charles T. Gorham, J. Peter Donoghue, Tranzparts,
Inc. and Tranzparts Acquisition Corp. (previously filed as Exhibit
10.23 to Amendment No. 1 to the Company's Registration Statement on
Form S-1 filed on October 25, 1996, Commission File No. 333-5597,
and incorporated herein by this reference)
10.29 Stock Purchase Agreement, dated as of October 1, 1996, by and among
Robert T. Carren Qualified Annuity Trust, Robert T. Carren,
Diverco, Inc., and Diverco Acquisition Corp. (previously filed as
Exhibit 10.34 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
10.30 Stock Purchase Agreement, dated as of January 31, 1997, by and
among S. Jay Wilemon, Ricki J. Wilemon, Bradley J. Wilemon, Corby
L. Wilemon, Replacement & Exchange Parts Co., Inc., Aftermarket
Technology Corp. and Repco Acquisition Corp. (previously filed as
Exhibit 10.30 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by this
reference)
10.31 Lease, dated February 24, 1995, between 29 Santa Anita Partnership
L.P. and Replacement Parts Manufacturing with respect to property
located at 12250 E. 4th Street, Rancho Cucamonga, California
(previously filed as Exhibit 10.24 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 filed on November 6,
1996, Commission File No. 333-5597, and incorporated herein by this
reference)
10.32 Lease, dated January 1, 1994, between CRW, Incorporated and Aaron's
Automotive Products, Inc. with respect to property located at 2600
North Westgate, Springfield, Missouri (previously filed as Exhibit
10.4 to the Company's Registration Statement on Form S-4 filed on
November 30, 1994, Commission File No. 33-86838, and incorporated
herein by this reference)
10.33 Amended and Restated Lease, dated as of June 1, 1997, by and among
Confar Investors II, L.L.C. and Aaron's Automotive Products, Inc.
(previously filed as Exhibit 10.33 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 and incorporated
herein by this reference)
10.34 Sublease, dated April 20, 1994, between Troll Associates, Inc. and
Component Remanufacturing Specialists, Inc. with respect to
property located at 400 Corporate Drive, Mahwah, New Jersey
(previously filed as Exhibit 10.40 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 filed on November 6,
1996, Commission File No. 333-5597, and incorporated herein by this
reference)
10.35 Sublease Modification and Extension Agreement, dated as of February
28, 1996, between Olde Holding Company and Component
Remanufacturing Specialists, Inc. with respect to property located
at 400 Corporate Drive, Mahwah, New Jersey (previously filed as
Exhibit 10.41 to Amendment No. 2 to the Company's Registration
Statement on Form S-1 filed on November 6, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
10.36 Exchange and Registration Rights Agreement, dated August 2, 1994,
by and among Aftermarket Technology Corp., the subsidiaries of
Aftermarket Technology Corp., Chemical Securities Inc., and
Donaldson, Lufkin & Jenrette Securities Corporation (previously
filed as Exhibit 10.13 to the Company's Registration Statement on
Form S-4 filed on November 30, 1994, Commission File No. 33-83868,
and incorporated herein by this reference)
10.37 Exchange and Registration Rights Agreement, dated June 1, 1995, by
and among Aftermarket Technology Corp., the subsidiaries of
Aftermarket Technology Corp., Chemical Securities Inc., and
Donaldson,
67
Lufkin & Jenrette Securities Corporation (previously filed as
Exhibit 10.16 to the Company's Registration Statement on Form S-4
filed on June 21, 1995, Commission File No. 33-93776, and
incorporated herein by this reference)
10.38 Firstbank Lending Agreement, dated as of June 28, 1996, between
Mascot Trust Parts Inc. and/or King-O-Matic Industries Ltd. and
Bank of Montreal (previously filed as Exhibit 10.33 to Amendment
No. 1 to the Company's Registration Statement on Form S-1 filed on
October 25, 1996, Commission File No. 333-5597, and incorporated
herein by this reference)
10.39 Stock Subscription Agreement, dated as of November 18, 1996,
between Aftermarket Technology Corp. and the Trustees of the
General Electric Pension Trust (previously filed as Exhibit 10.44
to Amendment No. 4 to the Company's Registration Statement on Form
S-1 filed on October 25, 1996, Commission File No. 333-5597, and
incorporated herein by this reference)
10.40 Amendment and Consent dated as of July 25, 1997 to the Credit
Agreement dated as of February 14, 1997 among Aftermarket
Technology Corp., the several banks and other financial
institutions from time to time parties thereto and The Chase
Manhattan Bank, as agent (previously filed as Exhibit 10.40 to the
Company's Registration Statement on Form S-1 (File No. 333-35543)
filed on September 12, 1997 and incorporated herein by this
reference)
10.41 Asset Purchase Agreement dated as of July 31, 1997 among Automatic
Transmission Shops Inc., C.W. Smith, ATS Remanufacturing, Inc. and
Aftermarket Technology Corp. (previously filed as Exhibit 10.41 to
the Company's Registration Statement on Form S-1 (File No.
333-35543) filed on September 12, 1997 and incorporated herein by
this reference)
10.42 Lease Agreement dated as July 31, 1997 between C.W. Smith and ATS
Remanufacturing, Inc. (previously filed as Exhibit 10.42 to the
Company's Registration Statement on Form S-1 (File No. 333-35543)
filed on September 12, 1997 and incorporated herein by this
reference)
10.43 Stock Purchase Agreement dated as of July 21, 1997 among Gary A.
Gamble, James E. Henderson, Trans Mart, Inc., TM-AL Acquisition
Corp. and Aftermarket Technology Corp. (previously filed as Exhibit
10.43 to the Company's Registration Statement on Form S-1 (File No.
333-35543) filed on September 12, 1997 and incorporated herein by
this reference)
10.44 Amendment No. 1 to Stock Purchase Agreement dated as of August 15,
1997 among Gary A. Gamble, James E. Henderson, Trans Mart, Inc.,
TM-AL Acquisition Corp. and Aftermarket Technology Corp.
(previously filed as Exhibit 10.44 to the Company's Registration
Statement on Form S-1 (File No. 333-35543) filed on September 12,
1997 and incorporated herein by this reference)
10.45 Amendment No. 2 to Stock Purchase Agreement dated as of August 15,
1997 among Gary A. Gamble, James E. Henderson, Trans Mart, Inc.,
TM-AL Acquisition Corp. and Aftermarket Technology Corp.
(previously filed as Exhibit 10.45 to the Company's Registration
Statement on Form S-1 (File No. 333-35543) filed on September 12,
1997 and incorporated herein by this reference)
10.46 Form of Indemnification Agreement between Aftermarket Technology
Corp. and directors and certain officers (previously filed as
Exhibit 10.46 to Amendment No. 1 the Company's Registration
Statement on Form S-1 (File No. 333-35543) filed on October 1, 1997
and incorporated herein by this reference)
10.47 Amendment Agreements dated August 25, 1997 to Firstbank Lending
Agreement between Bank of Montreal, Mascot Truck Parts, Inc. and
King-O-Matic Industries Limited (previously filed as Exhibit 10.47
to Amendment No. 1 the Company's Registration Statement on Form S-1
(File No. 333-35543) filed on October 1, 1997 and incorporated
herein by this reference)
10.48 Stock Purchase Agreement, dated as of November 14, 1997, by and
among Matthew Obeid, Metran Automatic Transmission Parts Corp.,
Metran of Boston, Inc., Metran Parts of Pennsylvania, Inc., TM-AL
Acquisition Corp. and Aftermarket Technology Corp. (previously
filed as Exhibit 10.48 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 and incorporated herein by
this reference)
10.49 Asset Purchase Agreement, dated as of February 10, 1998, by and
among Autocraft Industries, Inc., Fred Jones Industries A Limited
Partnership, and Aftermarket Technology Corp. (previously filed as
Exhibit 10.49 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by this
reference)
10.50 Amendment No. 1 to Asset Purchase Agreement, dated as of February
10, 1998, by and among Autocraft
68
Industries, Inc., Fred Jones Industries A Limited Partnership, and
Aftermarket Technology Corp. (previously filed as Exhibit 10.50 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by this reference)
10.51 Employment Agreement, dated as of July 28, 1994, between Kenneth A.
Bear and Aaron's Automotive Products, Inc. (previously filed as
Exhibit 10.51 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by this
reference)
10.52 Employment Agreement, dated as of February 21, 1997, between Joseph
Salamunovich and Aftermarket Technology Corp. (previously filed as
Exhibit 10.52 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by this
reference)
10.53 Employment Agreement, dated as of March 6, 1998, between Ronald E.
Bradshaw and Aftermarket Technology Corp. (previously filed as
Exhibit 10.53 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by this
reference)
10.54 Employment Agreement, dated as of December 15, 1998, between
Michael T. DuBose and Aftermarket Technology Corp. (previously
filed as Exhibit 10.54 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by
this reference)
10.55 Aftermarket Technology Corp. 1998 Stock Incentive Plan (previously
filed as Exhibit 10.55 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated herein by
this reference)
10.56 Waiver and Amendment dated as of March 26, 1999 to the Amended and
Restated Credit Agreement, dates as of March 26, 1998, among
Aftermarket Technology Corp., the several banks and other financial
institutions from time to time parties thereto and The Chase
Manhatten Bank, as agent (previously filed as Exhibit 10.56 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1998 and incorporated herein by this reference)
*10.57 Consent and Amendment dated as of August 25, 1999 to the Amended
and Restated Credit Agreement, dates as of March 26, 1998, among
Aftermarket Technology Corp., the several banks and other financial
institutions from time to time parties thereto and The Chase
Manhatten Bank, as agent
*10.58 Third Amendment dated as of December 20, 1999 to the Amended and
Restated Credit Agreement, dates as of March 26, 1998, among
Aftermarket Technology Corp., the several banks and other financial
institutions from time to time parties thereto and The Chase
Manhatten Bank, as agent
10.59 Asset Purchase Agreement, dated as of October 1, 1999, by and among
All Transmission Parts, Inc., All Automatic Transmission Parts,
Inc., David E. Helm, Barry C. Helm, Aftermarket Technology Corp.
and ATC Distribution Group, Inc. (previously filed as Exhibit 10.1
to the Company's Current Report on Form 8-K dated October 1, 1999
and incorporated herein by this reference)
*10.60 Form of Employment Agreement between Aftermarket Technology Corp.
and its officers
21 List of Subsidiaries (previously filed as Exhibit 21 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by this reference)
*23 Consent of Ernst & Young LLP, independent auditors
*27 Financial Data Schedules
- -----------
* Filed herewith
69
(b) Reports on Form 8-K
During the quarter ended December 31, 1999 the Company filed the
following reports on Form 8-K:
(1) Report dated October 1, 1999, reporting under Item 2 that on
October 1, 1999, the Company completed the acquisition of
substantially all the assets of All Transmission Parts, Inc. and
the expected acquisition of substantially all the assets of its
affiliate, All Automatic Transmission Parts, Inc., on or before
December 1, 1999 (collectively, "All Trans").
(2) Report dated December 9, 1999, reporting under Items 5 and 7 the
following: (i) management's expectations of earnings per share for
the first quarter of 2000 and years ending 2000 and 2001, (ii)
management's expectations of earnings per share for the year ending
1999 and (iii) a press release dated December 9, 1999 containing
related financial projections for 1999, 2000 and 2001.
(3) On December 17, 1999, an Amendment to the Periodic Report on Form
8-K dated October 1, 1999, reporting under Item 7, certain
historical financial information of All Trans and financial
information of the Company adjusted for the proforma effects of the
acquisition of All Trans.
(c) Refer to (a) 3 above.
(d) Refer to (a) 2 above.
70
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 20, 2000.
AFTERMARKET TECHNOLOGY CORP.
By: /s/ Michael T. DuBose
-------------------------------
Michael T. DuBose
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons in the
capacities indicated on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael T. DuBose Chairman of the Board, President and Chief
- ---------------------------------------------Executive Officer (Principal Executive Officer) March 20, 2000
Michael T. DuBose
/s/ Barry C. Kohn Chief Financial Officer (Principal Financial and
- ---------------------------------------------Accounting Officer) March 20, 2000
Barry C. Kohn
/s/ Robert Anderson Director March 20, 2000
- ---------------------------------------------
Robert Anderson
/s/ Richard R. Crowell Director March 20, 2000
- ---------------------------------------------
Richard R. Crowell
/s/ Dale F. Frey Director March 20, 2000
- ---------------------------------------------
Dale F. Frey
/s/ Mark C. Hardy Director March 20, 2000
- ---------------------------------------------
Mark C. Hardy
/s/ Michael J. Hartnett Director March 20, 2000
- ---------------------------------------------
Michael J. Hartnett
/s/ Gerald L. Parsky Director March 20, 2000
- ---------------------------------------------
Gerald L. Parsky
71
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard K. Roeder Director March 20, 2000
- ---------------------------------------------
Richard K. Roeder
/s/ William A. Smith Director March 20, 2000
- ---------------------------------------------
William A. Smith
/s/ J. Richard Stonesifer Director March 20, 2000
- ---------------------------------------------
J. Richard Stonesifer
72
AFTERMARKET TECHNOLOGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGE TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------ ---------- -------- ---------- --------------
Year ended December 31, 1997:
Reserve and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 1,326 $ 921 $ 183(2) $ 1,284(1) $ 1,146
Reserve for inventory obsolescence 2,741 930 - 1,575 2,096
Year ended December 31, 1998:
Reserve and allowances deducted from asset accounts:
Allowance for uncollectible accounts 1,146 1,877 214(2) 833(1) 2,404
Reserve for inventory obsolescence 2,096 7,788 1,456(2) 380 10,960
Year ended December 31, 1999:
Reserve and allowances deducted from asset accounts:
Allowance for uncollectible accounts 2,404 830 282(2) 606(1) 2,910
Reserve for inventory obsolescence 10,960 6,065 348(2) 5,557 11,816
(1) Accounts written off, net of recoveries
(2) Balances added or removed through acquisitions or sales of companies
S-1