Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21803
---------------------------------
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.)
900 OAKMONT LANE, SUITE 100
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 February 27, 1998) was $205 million.
The number of shares outstanding of the Registrant's Common Stock, as of
February 27, 1998, was 19,868,296 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
AFTERMARKET TECHNOLOGY CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Page
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . 44
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . 44
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 53
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . 56
i
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 Partners L.P.
("ACP") to acquire Aaron's Automotive Products, Inc. ("Aaron's"), H.T.P.,
Inc. ("HTP"), Mamco Converters, Inc. ("Mamco") and RPM Merit, Inc. ("RPM")
(collectively, the "Initial Acquisitions"). Aaron's, HTP, Mamco and RPM as
they existed prior to the Initial Acquisitions are hereinafter collectively
referred to as the "Predecessor Companies." Subsequent to the Initial
Acquisitions, the Company acquired Component Remanufacturing Specialists,
Inc. ("CRS") and Mascot Truck Parts Inc. ("Mascot") in June 1995, and
King-O-Matic Industries Limited ("King-O-Matic") in September 1995
(collectively, the "1995 Acquisitions"), Tranzparts, Inc. ("Tranzparts") in
April 1996 and Diverco, Inc. ("Diverco") in October 1996 (collectively, the
"1996 Acquisitions"), Replacement and Exchange Parts Co., Inc. ("REPCO") in
January 1997, ATS Remanufacturing ("ATS") in July 1997, Trans Mart, Inc.
("Trans Mart") in August 1997 and the Metran companies (Metran Automatic
Transmission Parts Corp., Metran Boston, Inc. and Metran Parts of
Pennsylvania, Inc.) ("Metran") in November 1997 (collectively, the "1997
Acquisitions"), and the OEM Division ("Autocraft") of Fred Jones Enterprises,
Inc. (formerly known as Autocraft Industries, Inc.) in March 1998 (the
"Autocraft Acquisition" and, together with the Initial Acquisitions, the 1995
Acquisitions, the 1996 Acquisitions and the 1997 Acquisitions, the
"Acquisitions"). 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 drive train
products used in the repair of vehicles in the automotive aftermarket. The
Company's principal products include remanufactured transmissions, torque
converters and engines, as well as remanufactured and new parts for the
repair of automotive drive train assemblies. The Company's two primary
customer groups are: original equipment manufacturers ("OEMs"), principally
Chrysler Corporation, which purchase remanufactured transmissions and other
remanufactured drive train components for use as replacement parts by their
dealers primarily during the warranty period following the sale of a vehicle;
and independent transmission rebuilders, general repair shops, distributors
and retail automotive parts stores (the "Independent Aftermarket"), which
purchase remanufactured torque converters and engines and other
remanufactured and new parts for repairs generally during the period
following the expiration of the vehicle warranty. As a result of recent
1
acquisitions, the Company's OEM customers now also include Ford Motor
Company, General Motors Corporation and certain European OEMs and its
products now include electronic control modules, instrument display clusters,
cellular telephones and radios.
Since the Initial Acquisitions, the Company has grown both internally
and through ten additional acquisitions. The Company and the Predecessor
Companies have achieved compound annual growth in revenue of approximately
35.7% from 1992 through 1997 (including both internal growth and growth
through acquisitions). The Company believes the key elements of its success
are the quality and breadth of its product offerings and the Company's
emphasis on strong customer relationships, promoted by 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 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. The Company plans to continue to support these
growth strategies through strategic acquisitions in the future. In addition,
the Company believes that its core competency of remanufacturing, which has
been applied to the drive train products segment of the automotive
aftermarket, has the potential to be utilized in other aftermarket segments.
Therefore, the Company is conducting selective market studies to explore
possible additional markets for its remanufacturing capabilities.
See "Certain Factors Affecting the Company."
AUTOMOTIVE AFTERMARKET
The automotive aftermarket in the United States and Canada, which
consists of sales of parts and services for vehicles after their original
purchase, has been noncyclical 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 1988 and
1997 (the most recent period for which data is available), estimated
industry-wide revenue for the automobile aftermarket increased from
approximately $99.2 billion to $151.2 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
drive train related products, which represents more than $7 billion of the
entire automotive aftermarket. The Company believes that within this segment
the market for remanufactured drive train products has grown faster than the
overall automotive aftermarket.
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
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 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
2
and tested. All components determined not reusable or repairable
are replaced by other remanufactured or new components. The units are then
reassembled into finished assemblies. 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.
The cores used in the Company's remanufacturing process for sale to its
OEM customers are provided by the OEMs. In the case of OEMs other than
Chrysler, 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 "Customers--OEM Customers."
The majority of the cores used in the Company's remanufacturing process
for sale to its Independent Aftermarket customers are obtained from customers
as trade-ins. The Company encourages its Independent Aftermarket 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 continue to provide cores 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 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
compared to rebuilt assemblies because of the precision manufacturing
techniques, technical upgrades and rigorous inspection and testing
procedures employed in remanufacturing. In contrast, the quality of a
rebuilt assembly is heavily dependent on the skill level of the particular
mechanic, who typically is less able to remain current with engineering
changes than remanufacturers, who work in close liaison with OEM engineers.
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 have tended to favor remanufacturing over
rebuilding 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.
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.
PRODUCTS
The principal product lines of the Company are remanufactured
transmissions, repair kits and hard parts used in drive train repairs, and
remanufactured engines. Following the Autocraft Acquisition, the Company also
remanufactures electronic control modules, instrument display clusters, cellular
telephones and radios.
3
REMANUFACTURED TRANSMISSIONS
The Company remanufactures transmissions that are factory approved and
suitable for warranty and post-warranty replacement of transmissions for
Chrysler, Ford, General Motors and 12 foreign OEMs, including Hyundai Motor
America, Mitsubishi and American Isuzu, 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.
In addition, the Company rebuilds heavy duty and medium duty truck
transmissions, differentials and air compressors for truck manufacturers such as
Navistar, Freightliner and Western Star. These assemblies are sold primarily to
truck dealers in Canada.
REPAIR KITS AND HARD PARTS
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. Kits are currently sold principally to the
Independent Aftermarket. Each kit is designed specifically 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 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 of some of the parts used in its kits
gives it an additional pricing 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), planetary gears (speed regulating devices inside
the transmission) and transmission fluid pumps. These "hard" parts are sold
principally to the Independent Aftermarket for use in drive train repairs.
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 both
repair kits 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.
REMANUFACTURED ENGINES
The Company remanufactures engines for use as replacement engines in
many domestic passenger cars and light trucks. Principal customers include
Western Auto, as well as general repair garages and distributors. Over the
past four years, the variety of engine models remanufactured by the Company
has increased from 50 to 77 as the Company has expanded the range of engines
offered to meet customer requirements. In addition, the Company obtains
remanufactured engines for many foreign passenger cars and light trucks from
independent suppliers.
The Company began remanufacturing selected engine models for Chrysler in
1997 and through the Autocraft Acquisition the Company now also operates a
facility in England that remanufactures engines that are factory approved and
suitable for warranty and post-warranty replacement of engines for seven
European OEMs, including Jaguar and the European divisions of Ford and
General Motors This facility also does assembly and modification of new
production engines for certain of its OEM customers.
ELECTRONIC COMPONENTS
Through the Autocraft Acquisition, the Company now also remanufactures
automotive electronic control modules (which manage various engine
functions), instrument display clusters, cellular telephones and radios for
Ford, General Motors, Audi, Jaguar and Volkswagen. In addition, Autocraft
provides warehouse and distribution services for AT&T Wireless, the cellular
telephone subsidiary of AT&T, and recently began remanufacturing cellular
telephones on a limited basis for AT&T Wireless.
4
CUSTOMERS
The Company's customers are Chrysler, Ford, General Motors and 18
foreign OEMs, and the Independent Aftermarket, which includes independent
transmission rebuilders, general repair shops, distributors and retail
automotive parts stores.
OEM CUSTOMERS
The Company provides factory-approved remanufactured transmissions to
OEMs for use in warranty and, to a lesser extent, post-warranty repair work
by their dealers. The Company's largest OEM customer is Chrysler, to whom
the Company also supplies certain factory-approved remanufactured engines.
The Company sells remanufactured transmissions to 12 foreign OEMs, including
Hyundai Motor America, Mitsubishi and American Isuzu. The Company added
General Motors as a customer in July 1997 with the purchase of ATS and
expanded its General Motors business with the acquisition of Autocraft. As a
result of the Autocraft Acquisition, the Company has begun to provide
factory-approved remanufactured components to several new OEM customers
including transmissions to Ford, electronic components to Ford, General
Motors, Audi, Jaguar and Vokswagen, and engines to Jaguar, Land Rover, Aston
Martin and the European divisions of Ford and General Motors. 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.
Sales to the Company's OEM customers accounted for 51.9% of the
Company's 1996 revenues and 46.9% of its 1997 revenues. Sales to Chrysler
accounted for 37.2% and 32.0% of the Company's revenues in 1996 and 1997,
respectively. On a pro forma basis as if the Autocraft Acquisition had
occurred on January 1, 1997, sales to OEM customers would have accounted for
approximately 55% of pro forma 1997 revenues with sales to Chrysler and Ford
accounting for approximately 20% and 15%, respectively, of the total pro
forma revenues.
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. In recognition of the Company's consistently high
level of service and product quality throughout its relationship with
Chrysler, in each of 1995, 1996 and 1997 the Company was awarded the Platinum
Pentastar award, the highest award Chrysler bestows on a supplier. The
Company is one of only seven of Chrysler's approximately 3,500 suppliers to
receive the Platinum Pentastar every year since the creation of the award,
and the Company remains the only exclusively MOPAR aftermarket supplier to
ever be awarded the Platinum Pentastar.
In August 1997, the Company's facilities that remanufacture
transmissions for Chrysler and General Motors received QS-9000 certification,
a complete quality management system developed for Chrysler, 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. The Company's facility that
remanufactures heavy and medium duty truck transmission received ISO 9002
certification in November 1997. In addition, with the Company's recent
acquisition of Autocraft, several of these newly acquired facilities received
QS-9000 and ISO 9002 certifications in 1997. Certain of Autocraft's
facilities have also received Ford's Q1 quality certification.
Chrysler began implementing remanufacturing programs for its
transmission models in 1986 and selected the Company as its sole supplier of
remanufactured transmissions in 1989. Chrysler has advised the Company that,
by implementing a remanufacturing program, Chrysler 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 Chrysler. In late 1996, the Company, with the approval of Chrysler,
developed a new production line to remanufacture substantially all of
Chrysler's rear wheel drive transmission models and has built up a core
supply necessary to support the program, although Chrysler has not yet
released firm orders for these models.
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 90% of the
5
remanufactured transmissions purchased by Ford and approximately 50% of the
remanufactured transmissions purchased by General Motors.
As part of its relationship with Ford, Autocraft 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 Autocraft. 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, distributors and other third parties; and useless parts are
scrapped. Revenue from sales to third parties are shared by Ford and
Autocraft. Prior to the introduction of the material recovery program, Ford
scrapped all excess dealer parts but under the program the number of parts
that are scrapped has declined to less than 2%.
As part of its expanding relationship with Chrysler and in response to
periodic shortages of cores in the past, the Company established and expanded
a central core return center for all of Chrysler's transmission models.
Chrysler dealers make arrangements to ship transmission and engine cores to a
regional depot, which then ships directly to the Company's central core
return center located near its main remanufacturing facility. The Company
thus assists Chrysler by improving the efficient and timely return of cores
at a cost savings to Chrysler. Furthermore, the Company performs value-added
services such as core audit and analysis in conjunction with Chrysler
engineers. The Company is continuing to work with Chrysler to improve the
tracking and management of cores, which will allow the Company to schedule
its production more efficiently. The Company believes that this central core
facility has reduced the risk of future Chrysler core shortages. In
addition, the increased number of cores has resulted in a greater number of
reusable parts, which, together with recently expanded production capacity at
Chrysler, has increased the Company's supply of parts required in the
remanufacturing process. In 1996, the Company also established a technical
support center to assist selected Chrysler dealers in evaluating transmission
warranty repair options.
INDEPENDENT AFTERMARKET
The Company, through its ATC Distribution Group, supplies transmission
repair kits and hard parts used in drive train repairs to over 25,000 of the
approximately 71,000 independent transmission rebuilders, distributors and
general repair shops in the United States and Canada. 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 remanufactured
engines and transmission filter kits to over 1,600 of the approximately
40,000 retail automotive parts stores throughout the United States, which
offer new and remanufactured parts and assemblies to a broad range of
customers, principally "do-it-yourself" customers and general repair shops.
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
for assistance in managing inventory by delivering product on a just-in-time
basis at competitive prices. To address these needs, the Company maintains
60 distribution centers located in metropolitan areas throughout the United
States and Canada from which the Company provides technical support and a
wide range of drive train related products that are delivered on a same day
basis by trucks 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
drive train 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 retail automotive parts store market is highly fragmented with most
retail stores obtaining products similar to those provided by the Company
from a variety of regional suppliers. The Company provides high quality
products, competitive prices and high service levels as well as value added
promotional literature and advertising support. The Company's principal
retail customers are Western Auto and Advance Auto.
The Company significantly expanded its telemarketing capability with the
acquisition of Trans Mart in August 1997. Telemarketing from a central
location in Alabama, coupled with the Company's next day delivery strategy to
more remote areas, enables the Company to reach customers in areas that
cannot support the costs associated with establishing and maintaining a
distribution center. In addition to telemarketing, new customers are
developed by
6
the Company's direct sales force operating from its distribution centers, and
by national and local trade publication advertising. In addition, the
Company participates in various trade shows. The Company believes its
DIVERCO, HTP, INTERCONT, KING-O-MATIC, MAMCO, METRAN, OLYMPIC, REPCO, RPM and
TRANZPARTS brand names are well recognized and respected in their regional
markets.
The Company has developed a common product identification and numbering
system which is currently being implemented on a company-wide basis in
conjunction with a computer network electronically linking its distribution
centers. The Company expects to complete this process by the end of 1998.
These changes are expected to improve customer service, increase product
availability, enhance inventory management and improve operational
efficiencies.
The Company believes it is well positioned within the highly fragmented
aftermarket for drive train products as a result of its extensive product
line, diverse customer base and broad geographic presence, with 60
distribution centers throughout the United States and Canada. Sales to
Independent Aftermarket customers accounted for 48.1% of the Company's
revenues in 1996 and 53.1% of its revenues in 1997.
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. Strategic acquisitions have been an important
element in the Company's historical growth, and the Company plans to continue
to support its growth strategy through strategic acquisitions in the future.
The Company's management is experienced in identifying acquisition
opportunities and completing and integrating acquisitions within the
automotive aftermarket. In addition, the Company believes that its core
competency of remanufacturing, which has been applied to the drive train
products segment of the automotive aftermarket, has the potential to be
utilized in other aftermarket segments.
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 period.
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 approximately eight times as large as 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 drive train products in the last several years for its OEM
customers. The Company, with the approval of Chrysler, developed a new
production line in late 1996 dedicated to remanufacturing substantially all
of Chrysler's rear wheel drive transmission models and has built up a core
supply necessary to support the program, although Chrysler has not yet
released firm orders for these transmission models.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that it
currently supplies less than one-third of the remanufactured or new drive
train 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 a common product identification and
numbering system which is currently being implemented on a company-wide basis
in conjunction with a computer network that will electronically link its
distribution centers. The Company also intends to expand its business with
existing customers by cross-selling products among its subsidiaries'
customers. For example, after its acquisition in January 1997, REPCO
introduced Mamco and RPM torque converters to its customers. The Company
intends to increase its business with its existing retail automotive
customers by offering "niche" products at competitive prices throughout these
customers' networks.
7
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 expenditures 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. For example, in 1997 the Company
began remanufacturing 4.0 liter engines for Chrysler. In addition, the Company
also intends to leverage the electronic component capability of Autocraft by
introducing these products to some of its other OEM customers.
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. For example, in 1997 the Company began to
offer clutch kits, transmission filter kits and torque converters to its retail
customers. The acquisition of Diverco in October 1996 has enabled the Company
to begin offering standard transmission components to its independent
transmission rebuilder and general repair shop customers.
ESTABLISHING NEW CUSTOMER RELATIONSHIPS
OEM CUSTOMERS. The Company believes that opportunities for growth exist
with several OEMs regarding United States based remanufacturing programs. The
Company believes that this represents an opportunity for growth and is currently
working to develop programs with certain foreign OEMs. During 1997, the Company
began remanufacturing standard transmissions for New Venture Gear, a joint
venture between Chrysler and General Motors. In July 1997, the Company became
one of four suppliers of remanufactured transmissions to General Motors when the
Company acquired ATS, which has been remanufacturing transmissions for General
Motors for 12 years. In March 1998, the Company expanded its business with
General Motors by purchasing Autocraft, one of General Motors' other three
transmission suppliers. The Autocraft Acquisition also marked the addition of
Ford as one of the Company's customers.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its product
mix and distribution network position it to expand its Independent Aftermarket
customer base in three ways. First, although the Company's distribution network
is currently the most extensive in the drive train segment of the automotive
aftermarket, there are further opportunities for the Company to expand to
additional geographic markets. Second, as a result of the acquisition of Trans
Mart in August 1997, which significantly expanded the Company's telemarketing
capability, the Company expects to reach new Independent Aftermarket customers
in non-metropolitan areas. Third, in the last few years, the Company has
expanded its customer base to include general repair shops and retail automotive
parts stores. The Company now serves over 1,600 of the 40,000 retail automotive
parts stores in the United States, primarily by selling products to two retail
chains, and 25,000 of the approximately 71,000 independent transmission
rebuilders, distributors and general repair shops in the United States and
Canada. The Company intends to leverage its breadth of products and
distribution network to supply "niche products" such as transmission filter kits
and remanufactured engines at improved availability rates and competitive
prices. The Company believes that its position as a leading national supplier
of remanufactured engines affords it the opportunity to service additional
national retail chains to the extent that these chains migrate away from their
existing fragmented base of suppliers. In addition, the Company's position
enables it to supply other chains that may expand their product lines in the
future to include remanufactured engines.
ADDITIONAL REMANUFACTURING OPPORTUNITIES
The Company has begun to look beyond the automotive aftermarket to identify
other aftermarket segments that utilize the Company's core competency of
remanufacturing. The Company believes that other markets may have similar
characteristics to those experienced by the Company in the automotive
aftermarket. If remanufacturing
8
opportunities are identified in these other markets, the Company will review
them and may pursue those that are expected to be consistent with its
capabilities and investment objectives.
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 drive train 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
one of the largest participants in the aftermarket for remanufactured drive
train 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 drive train components
remains highly competitive, and certain of the Company's competitors are
larger than the Company and have greater financial and other resources
available to them than does the Company.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 3,500
people. The Company believes its employee and labor relations are good. None
of the Company's subsidiaries has experienced a work stoppage in its history,
and the Company has not experienced any work stoppage since its formation in
1994. None of the Company's employees are members of any labor union. As a
result of the Autocraft Acquisition, in March 1998 the Company hired
approximately 1,500 new employees who had previously been employed by the
seller of Autocraft.
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
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 the 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
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
9
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 CUSTOMER
The Company's largest customer, Chrysler, accounted for approximately
37.2% and 32.0% of the Company's net sales for 1996 and 1997, respectively.
No other customer accounted for more than 10% of the Company's net sales
during either of these years, although the Company expects that Ford will
account for more than 10% of the Company's net sales in 1998.
Chrysler, like other North American OEMs, generally requires its dealers
using remanufactured products to use only those from approved suppliers.
Although the Company is currently the only factory-approved supplier of
remanufactured transmissions to Chrysler, Chrysler (like the Company's other
OEM customers) is 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 Chrysler or that Chrysler will
not approve other suppliers in the future. In addition, within the last
three years Chrysler reduced its standard new vehicle warranty from seven
years/70,000 miles to three years/36,000 miles and could implement a shorter
warranty 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 Chrysler would have a material adverse
effect on the Company. See "Customers--OEM Customers."
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. As part of its expanding relationship with Chrysler and in
response to the periodic shortage of cores, in 1995 the Company established a
central core return center for all of Chrysler's transmission product lines.
The operation of this facility enables the Company to receive cores on a more
timely basis and better monitor the
10
availability of cores. 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, it could have a material adverse effect on the Company.
Certain component parts required in the remanufacturing process are
manufactured by Chrysler and the Company's other 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 also plans to expand its existing operations by broadening
its product lines and increasing the number of its distribution centers in
the United States. There can be no assurance that any new product lines
introduced by the Company will be successful, that the Company will manage
successfully the start-up and marketing of new products or that additional
distribution centers will be integrated into the Company's existing
operations or will be profitable. See "Business Strategy."
In addition, the Company is exploring possible additional markets for
its remanufacturing capabilities, but no assurance can be given that the
Company will pursue any such opportunity or be successful outside the
automotive aftermarket. See "Business Strategy--Additional Remanufacturing
Opportunities."
INDEBTEDNESS AND LIQUIDITY
The Company had outstanding long-term indebtedness of $273.1 million at
March 6, 1998. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." 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." Any default by
the Company with respect to its outstanding indebtedness, or any inability on
the part of the Company to obtain necessary liquidity, would have a material
adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its management
team, including Stephen J. Perkins, Chairman of the Board, President and
Chief Executive Officer. Although the Company believes it could replace key
employees in an orderly fashion should the need arise, the loss of such
personnel could have a material adverse effect on the Company.
11
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 the 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 drive
train 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. ("AEP") and
Aurora Overseas Equity Partners I, L.P. ("AOEP" and together with AEP, the
"Aurora Partnerships"), which hold approximately 52% 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 Company's 12% Senior
Subordinated Notes due 2004 (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 5,000,000 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.
12
ITEM 2. PROPERTIES
The Company leased 76 facilities with total leased space of
approximately 2.5 million square feet as of December 31, 1997. The following
table sets forth certain information regarding the manufacturing facilities
and distribution centers of the Company as of December 31, 1997.
Lease
Approximate Expiration
Location Sq. Feet Date Type of Facility/Products Manufactured
- ---------------------------------------------------------------------------------------------------------------
Florence, Alabama 85,100 2002 Distribution Center (1)
Phoenix, Arizona 22,000 2000 Distribution Center (1)
Tucson, Arizona 6,400 1998 Distribution Center (1)
Azusa, California 5,600 2000 Distribution Center (1)
Fresno, California 14,000 2000 Distribution Center (1)
Los Angeles, California 4,700 2000 Distribution Center (1)
Rancho Cucamonga, California 153,000 2002 Distribution Center (1)
Sacramento, California 11,200 1998 Distribution Center (1)
San Diego, California 10,000 2002 Distribution Center (1)
San Jose, California 10,000 2000 Distribution Center (1)
San Leandro, California 13,000 2002 Distribution Center (1)
Van Nuys, California 6,800 2000 Distribution Center (1)
Colorado Springs, Colorado 5,000 * Distribution Center (1)
Denver, Colorado 9,000 2000 Distribution Center (1)
Jacksonville, Florida 12,000 1999 Distribution Center (2)
Orlando, Florida 11,900 2002 Distribution Center (1)
Orlando, Florida 4,000 1998 Distribution Center (2)
Atlanta, Georgia 14,900 1998 Distribution Center (1)(2)
Harvey, Illinois 46,000 2001 Distribution Center (1)
Hillside, Illinois 20,000 2000 Distribution Center (1)(2)
Westmont, Illinois 5,900 2002 Corporate Offices
Louisville, Kentucky 51,500 1999 Distribution Center (1)
Louisville, Kentucky 9,200 * Distribution Center (1)(2)
Harahan, Louisiana 2,500 1998 Distribution Center (2)
Baltimore, Maryland 4,000 1999 Distribution Center (2)
Malden, Massachusetts 6,200 2001 Distribution Center (1)
Grand Rapids, Michigan 9,000 1998 Distribution Center (1)(2)
Taylor, Michigan 12,200 2000 Distribution Center (1)(2)
Berkeley, Missouri 18,000 1998 Distribution Center (1)
Creve Coeur, Missouri 9,700 1998 Distribution Center (1)(2)
Joplin, Missouri 264,000 2008 Manufacturing Facility
Kansas City, Missouri 10,200 2000 Distribution Center (1)(2)
Springfield, Missouri 280,800 2004 Manufacturing Facility
Springfield, Missouri 30,000 1999 Manufacturing Facility
Springfield, Missouri 12,100 2001 Distribution Center (1)(2)
Springfield, Missouri 34,000 * Manufacturing Facility
Springfield, Missouri 60,400 2000 Manufacturing Facility
Springfield, Missouri 98,800 * Manufacturing Facility
Springfield, Missouri 10,000 * Manufacturing Facility
Springfield, Missouri 200,000 2006 Manufacturing Facility
Las Vegas, Nevada 7,500 1999 Distribution Center (1)
Las Vegas, Nevada 250 * Sales Office
East Rutherford, New Jersey 5,700 1999 Distribution Center (2)
13
Lease
Approximate Expiration
Location Sq. Feet Date Type of Facility/Products Manufactured
- ---------------------------------------------------------------------------------------------------------------
Mahwah, New Jersey 160,000 2003 Manufacturing Facility
Albuquerque, New Mexico 7,000 2000 Distribution Center (1)
Jericho, New York 13,800 1998 Distribution Center (1)
Charlotte, North Carolina 23,000 2001 Distribution Center (1)(2)
Gastonia, North Carolina 130,000 2000 Manufacturing Facility
Gastonia, North Carolina 60,000 * Manufacturing Facility
Dayton, Ohio 42,000 1999 Manufacturing Facility
Forest Park, Ohio 10,000 1998 Distribution Center (1)
Portland, Oregon 20,000 2000 Distribution Center (1)
Croydon, Pennsylvania 7,100 2000 Distribution Center (1)
Memphis, Tennessee 37,800 2003 Distribution Center (1)(2)
Nashville, Tennessee 6,500 2000 Distribution Center (1)
Austin, Texas 5,000 * Distribution Center (1)
Dallas, Texas 93,000 2012 Distribution Center (1)
Dallas, Texas 9,000 1998 Distribution Center (1)
Houston, Texas 13,500 2002 Distribution Center (1)(2)
San Antonio, Texas 13,000 2002 Distribution Center (1)
Salt Lake City, Utah 15,000 2000 Distribution Center (1)
Norfolk, Virginia 9,700 2000 Distribution Center (1)
Norfolk, Virginia 13,500 2002 Distribution Center (1)(2)
Seattle, Washington 22,000 2000 Distribution Center (1)
Spokane, Washington 9,500 2000 Distribution Center (1)
Janesville, Wisconsin 30,000 2001 Distribution Center (1)
Calgary, Alberta 9,200 2001 Distribution Center (1)
Edmonton, Alberta 14,800 2003 Distribution Center (3)
Delta, British Columbia (Vancouver) 13,000 2004 Distribution Center (1)
Moncton, New Brunswick 12,000 2000 Distribution Center (3)
Mississauga, Ontario 35,100 1998 Distribution Center (3)
Mississauga, Ontario 12,200 2001 Manufacturing Facility
Mississauga, Ontario 24,000 2000 Distribution Center (1)
Montreal, Quebec 11,200 2000 Distribution Center (1)
Regina, Saskatchewan 600 * Distribution Center (1)
Mexicali, Mexico 77,100 2002 Manufacturing Facility
______________
* Month-to-month lease.
(1) Transmission repair kits & drive train hard parts.
(2) Engines
(3) Heavy duty truck transmissions & differentials
In connection with the Autocraft Acquisition, the Company purchased the
207,000 square foot facility in Oklahoma City, Oklahoma at which its Ford
transmission remanufacturing operations are conducted, as well as an adjacent
98,000 square foot facility at which the Ford material recovery program is
conducted. In addition, the Company began leasing 12 additional facilities
with an aggregate of approximately 450,000 square feet at which the other
Autocraft operations are conducted. These leased facilities are located in
Oklahoma City, Oklahoma; Carrollton, Fort Worth and Houston, Texas; Sparks,
Nevada; and Charlotte, North Carolina. The Company's new United Kingdom
subsidiary (which was acquired as part of the Autocraft Acquisition) owns a
120,000 square foot facility in Grantham, England from which it conducts its
engine remanufacturing operations.
14
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 transmission and engine remanufacturing facility
in Springfield, Missouri is currently employing two work shifts. Other
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. 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.
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, 1997.
15
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 27,
1998, there were approximately 88 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
1996
Fourth quarter (beginning December 17) ............. $17 5/8 $14 1/4
1997
First quarter ...................................... 19 5/8 14 3/8
Second quarter ..................................... 23 14 3/4
Third quarter ...................................... 27 1/4 18 1/2
Fourth quarter ..................................... 24 3/4 15 1/2
On February 27, 1998, the last sale price of the Common Stock, as
reported by Nasdaq, was $23 15/16 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
Company's $100.0 million 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 Company's Common Stock in the future will be at the
sole discretion of the Company's Board of Directors.
During 1997, the Company did not issue any securities that were not
registered under the Securities Act of 1933, as amended.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the
statements of income data for the years ended December 31, 1995, 1996 and
1997 and the balance sheet data at December 31, 1996 and 1997 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 income data for the year ended December 31, 1993, the seven
months ended July 31, 1994 and the five months ended December 31, 1994 and
the balance sheet data at December 31, 1993, 1994 and 1995, are derived from
the audited Combined Financial Statements of the Predecessor Companies and
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.
COMBINED CONSOLIDATED
--------------------------------- ------------------------------------------------------
FOR THE YEAR FOR THE SEVEN FOR THE FIVE
ENDED MONTHS ENDED MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
DECEMBER 31, JULY 31, DECEMBER 31, -------------------------------
1993 1994(1) 1994 1995 1996 1997(2)
--------------- ------------- -------------- ------ ------ --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales .......................... $110,702 $90,056 $67,736 $190,659 $272,878 $346,110
Cost of sales....................... 66,687 52,245 40,112 115,499 166,810 212,416
------- ------ ------ ------- ------- -------
Gross profit........................ 44,015 37,811 27,624 75,160 106,068 133,694
Selling, general and
administrative expenses............ 25,682 20,475 14,206 38,971 55,510 73,768
Amortization of intangible assets .. 28 16 1,210 3,308 3,738 4,501
------- ------ ------ ------- ------- -------
Operating income ................... 18,305 17,320 12,208 32,881 46,820 55,425
Interest expense (income), net ..... (302) (158) 6,032 16,915 19,106 16,910
Income taxes (3).................... 471 (5) 2,565 6,467 11,415 15,512
------- ------ ------ ------- ------- -------
Income before extraordinary item ... $ 18,136 $17,483 3,611 9,499 16,299 23,003
======= ======
Preferred stock dividends........... 853 2,093 2,222 -
------ ------- ------- -------
Income before extraordinary item
available to common stockholders.. $ 2,758 $ 7,406 $ 14,077 $23,003
====== ======= ======= =======
Diluted earnings per share before
extraordinary item (4) ........... $ 0.65 $ 1.02 $ 1.19
Shares used in computation of
diluted earnings per share
before extraordinary item (4) .... 14,616 15,918 19,335
OTHER DATA:
Capital expenditures (5)............ $ 2,310 $ 1,850 $ 1,336 $ 5,187 $ 7,843 $ 8,682
17
Combined Consolidated
--------------- ---------------------------------
December 31,
---------------------------------------------------
1993 1994 1995 1996 1997
(in thousands)
BALANCE SHEET DATA:
Working capital.............................. $26,651 $40,499 $60,012 $103,371 $98,523
Property, plant and equipment, net........... 4,678 6,196 10,784 17,482 24,414
Total assets................................. 45,618 187,293 247,932 320,747 368,677
Long-term liabilities (6).................... 998 121,483 165,724 167,233 152,571
Preferred stock.............................. - 20,853 22,946 - -
Common stockholders' equity ................. 31,720 22,757 30,188 105,832 175,429
_______________
(1) The combined financial statements for the seven months ended July 31, 1994
include the operations of the Predecessor Companies up to their respective
acquisition dates. All material transactions between the Predecessor
Companies have been eliminated.
(2) 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 is comprised of (i) a $5,700
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 approximately $600 for the write-off of previously
capitalized debt issuance costs in connection with the termination of the
Company's previous revolving credit facility.
(3) Two of the Predecessor Companies elected to be taxed as S Corporations for
all periods prior to the Initial Acquisitions; therefore, for federal and
state income tax purposes, any income or loss generally was not taxed to
these companies but was reported by their respective stockholders. A pro
forma provision for taxes based on income reflecting the estimated
provision for federal and state income taxes that would have been provided
had these companies been C Corporations and included in consolidated
returns with the Company is as follows: $7,334 for the year ended
December 31, 1993 and $7,004 for the seven months ended July 31, 1994.
(4) See Note 1 to Consolidated Financial Statements for a description of the
computation of net income per share.
(5) 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.
(6) Includes deferred tax liabilities of $1,438, $3,478, $5,252 and $8,044 at
December 31, 1994, 1995, 1996 and 1997, respectively.
18
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.
OVERVIEW
The Company's revenues are generated through the sale of drive train
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. The Company achieved compound annual
growth in revenue of approximately 33.0% from 1993 through 1997 (including
both internal growth and growth through acquisitions).
The Company's revenues from sales to Independent Aftermarket customers
increased by 26.9% compounded annually from $70.9 million to $183.8 million
from 1993 through 1997. This growth was due to geographic expansion through
the addition of distribution centers, a broadened product line, enhanced
customer service, effective sales efforts, the addition of retail automotive
parts stores as customers and acquisitions. During the same period, revenues
from sales to OEM customers increased by 42.1% compounded annually from $39.8
million to $162.3 million due to increased sales to existing customers,
including Chrysler, and the addition of new customers.
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 has remained relatively constant from 1993
through 1997. 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 sales
declined from 23.2% in 1993 to 21.3% in 1997 principally due to the effect of
spreading certain fixed costs over a larger sales base.
The Company regularly evaluates strategic acquisition opportunities in
the automotive aftermarket business and expects to continue to do so in the
future. On March 6, 1998, the Company completed the acquisition of
substantially all the assets of the OEM Division of Autocraft. See Item 1.
"Business."
RESULTS OF OPERATIONS
The following table sets forth certain financial statement data expressed
in millions of dollars and as a percentage of net sales.
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
-----------------------------------------------------
(in millions)
Net sales............................... $190.7 100.0% $272.9 100.0% $346.1 100.0%
Cost of sales........................... 115.5 60.6 166.8 61.1 212.4 61.4
------ ----- ------ ----- ----- -----
Gross profit............................ 75.2 39.4 106.1 38.9 133.7 38.6
SG&A expenses .......................... 39.0 20.5 55.5 20.3 73.8 21.3
Amortization of intangible assets ...... 3.3 1.7 3.8 1.4 4.5 1.3
------ ----- ------ ----- ----- -----
Operating income ....................... 32.9 17.2 46.8 17.2 55.4 16.0
Interest expense, net................... 16.9 8.8 19.1 7.0 16.9 4.9
Provision for income taxes.............. 6.5 3.4 11.4 4.2 15.5 4.5
------ ----- ------ ----- ----- -----
Income before extraordinary item ....... $ 9.5 5.0% $ 16.3 6.0% $ 23.0 6.6%
====== ===== ====== ===== ===== =====
19
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Income before extraordinary item increased 41.1% from $16.3 million in
1996 to $23.0 million in 1997. Net sales increased 26.8%, from $272.9
million in 1996 to $346.1 million in 1997, primarily due to sales generated
by the acquisitions of REPCO, ATS, Trans Mart and Metran as well as increased
sales volumes to OEM customers. In general, costs and expenses also
increased; however, overall the Company was able to spread its overhead
expenses over a larger revenue base, which contributed to the comparatively
higher income from before extraordinary item for the year.
On a per share basis, income before extraordinary item increased from
$1.02 per diluted share in 1996 to $1.19 per diluted share in 1997. The
number of shares used in the per share calculations were 15.9 million in 1996
and 19.3 million in 1997. The increase in shares resulted primarily from the
Company's public offering of Common Stock in October 1997.
NET SALES. Net sales increased $73.2 million, or 26.8%, from $272.9
million in 1996 to $346.1 million in 1997. Of this increase, $23.2 million
was due to the internal growth described above and $50.0 million was due to
the incremental net sales generated by the companies acquired in 1997 (REPCO,
ATS, Trans Mart and Metran). Net sales to Chrysler represented 37.2% of
total net sales in 1996, as compared to 32.0% in 1997.
Net sales on a proforma (unaudited) basis, to reflect the 1996
acquisitions of Tranzparts and Diverco and the 1997 acqusitions of REPCO,
ATS, Trans Mart and Metran as if all acquisitions had occurred on January 1,
1996, were $358.6 million for 1996 and $392.5 million for 1997.
GROSS PROFIT. Gross profit as a percentage of net sales remained
relatively constant at 38.9% in 1996 as compared to 38.6% in 1997.
SG&A EXPENSES. The Company's SG&A expenses increased $18.3 million,
from $55.5 million in 1996 to $73.8 million in 1997. As a percentage of net
sales, SG&A expenses increased from 20.3% to 21.3% between the two periods.
The increase in SG&A expenses is primarily due to the ongoing incremental
expenses of the Tranzparts, Diverco, REPCO, ATS, Trans Mart and Metran
acquisitions, certain enhancements to the Company's infrastructure (including
additional management and improved information systems) and additional
selling and other variable overhead costs associated with the higher sales
volume (including increased production capacity). The increase in SG&A
expenses as a percentage of net sales is primarily attributable to: (i) the
deferred compensation expense described below, (ii) certain enhancements to
the Company's infrastructure (including additional management and improved
information systems) and (iii) the additional ongoing expenses associated
with being a publicly held company.
Included in SG&A expenses are non-cash charges totaling $0.5 million in
1996 and $1.8 million in 1997, representing the pro rata portion for each
year of deferred compensation expense relating to the difference between the
exercise price and the intrinsic value for financial statement presentation
purposes of stock options granted to Mr. Stephen J. Perkins, the Company's
Chairman of the Board, President and Chief Executive Officer, and other
members of senior management. The Company expects to recognize additional
compensation expense aggregating $1.1 million over the balance of the
respective vesting periods of the options, which generally range from three
to five years from the date of grant.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased from $3.8 million in 1996 to $4.5 million in 1997. The increase
resulted from the additional intangible assets arising from the acquisitions
of Tranzparts, Diverco, REPCO, ATS, Trans Mart and Metran.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased 18.4%, from $46.8 million
in 1996 to $55.4 million in 1997.
INTEREST EXPENSE, NET. Interest expense decreased from $19.1 million in
1996 to $16.9 million in 1997. The lower interest resulted from the net
effect of the early redemption in February 1997 of $40.0 million of the
Senior Notes
20
offset to some extent by increased borrowings under the Company's $100.0
million revolving credit facility (the "Credit Facility"). The Credit
Facility carries a significantly lower effective interest rate than did the
Senior Notes.
EXTRAORDINARY ITEM. An extraordinary item in the amount of $3.8 million
($6.3 million, net of related income tax benefit of $2.5 million) was
recorded in 1997. This amount is comprised of (i) a $5.7 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 charge of
approximately $0.6 million for the write-off of previously capitalized debt
issuance costs in connection with the termination of the Company's previous
revolving credit facility.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Net income increased 71.6% from $9.5 million in 1995 to $16.3 million in
1996, as the Company experienced significant revenue growth from both of its
customer groups, OEMs and the Independent Aftermarket including retail
automotive parts stores. More than half of the revenue growth occurred from
OEM customers. Growth from the Independent Aftermarket was achieved largely
through two strategic acquisitions (Tranzparts and Diverco), and to a lesser
extent from internal growth. The higher net income was primarily achieved
from the Company's ability to spread its overhead expenses over a larger
revenue base.
Although the Company's IPO resulted in an increase in the number of
shares used in the earnings per share ("EPS") calculation, EPS increased
significantly from $0.65 in 1995 to $1.02 in 1996. The number of shares used
in the calculation of EPS were 14.6 million for 1995 and 15.9 million for
1996.
NET SALES. Net sales increased $82.2 million or 43.1%, from $190.7
million in 1995 to $272.9 million in 1996. Of this increase, $42.8 million
was due to internal growth and $39.4 million was due to the incremental net
sales generated by the companies acquired in 1995 and 1996: CRS, Mascot,
King-O-Matic, Tranzparts and Diverco, which were acquired on June 1, 1995,
June 9, 1995, September 12, 1995, April 2, 1996 and October 1, 1996,
respectively.
The internal growth was generated primarily from increased sales volumes
with existing OEM customers. To a lesser extent, internal growth was also
generated by the incremental sales associated with the opening of five new
distribution centers during the second half of 1995, increased sales volumes
through existing distribution centers and increased sales volumes with
existing retail customers.
Net sales to Chrysler of $101.5 million in 1996 represented 37.2% of the
Company's total net sales for the year, as compared to $67.6 million and
35.4% in 1995. The increase in net sales to Chrysler is partially reflective
of an effort by Chrysler during the third quarter of 1995 to reduce its
inventory of remanufactured transmissions. Management believes that the
Chrysler inventory reduction during the third quarter of 1995 was a one-time
effort to reverse an inventory build-up in 1994 and is not expected to recur.
GROSS PROFIT. Gross profit as a percentage of net sales decreased
slightly from 39.4% in 1995 to 38.9% in 1996. The decrease in gross profit
margin was largely attributable to certain non-recurring start-up costs
incurred during 1996 in connection with the Company's new plant in Joplin,
Missouri and the expansion of capacity at the Company's plant in Springfield,
Missouri needed to support sales growth to retail and OEM customers.
SG&A EXPENSES. SG&A expenses decreased slightly as a percentage of net
sales from 20.4% in 1995 to 20.3% in 1996. However, SG&A expenses increased
in absolute dollars from $39.0 million in 1995 to $55.5 million in 1996,
representing an increase of $16.5 million or 42.4%. The increase in SG&A
expenses was due largely to the ongoing incremental SG&A expenses of the
companies acquired in 1995 and 1996: CRS, Mascot, King-O-Matic, Tranzparts
and Diverco. Other significant factors contributing to the increase in SG&A
expenses include the ongoing incremental expenses associated with the five
new distribution centers opened during the second half of 1995, and certain
start-up and ongoing SG&A expenses incurred in connection with the Company's
new plant in Joplin, Missouri. In addition, SG&A expenses in 1996 included a
charge of approximately $0.7 million for certain planned reorganization costs
associated with the relocation of the Company's corporate headquarters to the
Chicago area and costs associated with a realignment of the Independent
Aftermarket division.
21
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased approximately $0.4 million in 1996 as compared to 1995, reflecting
the increase in intangible assets that occurred as a result of the
acquisitions of CRS, Mascot, King-O-Matic, Tranzparts and Diverco.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased 42.2%, from $32.9 million
in 1995 to $46.8 million in 1996. As a percentage of net sales, income from
operations in 1996 was 17.2%, equal to the same percentage of net sales in
1995.
INTEREST EXPENSE, NET. Interest expense increased $2.3 million from
$18.0 million in 1995 to $20.3 million in 1996. The increase was due to a
full year of interest expense on the Series D Senior Notes which were used to
finance the acquisitions of CRS, Mascot and King-O-Matic, and the related
amortization of debt issuance costs. The Series D Senior Notes were issued
on June 1, 1995 and therefore were only outstanding for the last seven months
of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had total cash and cash equivalents on hand of $78,000 at
December 31, 1997, representing a decrease in net cash of $46.4 million in
1997. Net cash provided by operating activities was $11.7 million for the
year. Net cash used in investing activities was $71.5 million for the
period, including $60.8 million for the acquisitions of REPCO, ATS, Trans
Mart and Metran, a scheduled payment of $2.0 million relating to the
acquisition of Diverco, and $8.7 million in capital expenditures, primarily
for purchases of equipment. Net cash provided by financing activities was
$13.3 million, including $47.9 million from the public offering of Common
Stock in October 1997 and net borrowings of $11.1 million under the Credit
Facility partially offset by payments totaling $44.8 million in connection
with the redemption of $40.0 million of Senior Notes.
The Company raised total net proceeds of $61.6 million in the IPO and
concurrent private placement of Common Stock in December 1996 and an
additional $47.9 million in the 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 was redeemed
and, in February 1997, $40.0 million in principal amount of the Senior Notes
was redeemed, with a combination of the proceeds from the IPO and borrowings
under the Credit Facility. The net proceeds from the secondary offering were
used to repay borrowings under the Credit Facility.
The Company's capital expenditures in 1997 were $8.7 million. These
capital expenditures consisted primarily of additional transmission, engine
and torque converter remanufacturing equipment and other improvements to
support planned increases in production capacity in the Joplin and
Springfield, Missouri and Mahwah, New Jersey plants.
The Company has budgeted $12.4 million for capital expenditures during
1998. These will include replacement and additional remanufacturing
equipment to support planned increases in production capacity in the
Company's Joplin and Springfield, Missouri and Mahwah, New Jersey facilities.
Overall, planned capital expenditures for 1998 are considered adequate for
normal replacement and consistent with projections for future sales and
earnings.
The ATS acquisition involves contingent payments aggregating up to $19.0
million (present value $13.6 million as of December 31, 1997) expected to be
made over eight years. The Autocraft Acquisition includes a deferred
purchase payment of up to $12.5 million payable in 1999.
In February 1997, the Company terminated its $30.0 million revolving
credit facility with The Chase Manhattan Bank (the "Bank") that had been
scheduled to mature in July 1999 and replaced it with the $100.0 million
Credit Facility, which is also with the Bank. 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
2001. Amounts advanced under the Credit Facility are secured by
substantially all assets of the Company. As of December 31, 1997, the
Company had approximately $86.2 million available under the Credit Facility.
22
In March 1998 the credit agreement for the Credit Facility was amended
and restated to provide a $120.0 million term loan facility in addition to
the existing revolving facility. The Company borrowed $120.0 million under
the 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 and bears interest at a rate of 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) in the
interbank eurodollar market in the approximate amount of the Bank's share of
the advance under the Credit Facility. 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. The Alternate Base Rate margin is zero
currently and the Eurodollar margin is currently at 1.0%.
In September 1997, the Company entered into an agreement with Bank of
Montreal for a revolving credit facility to accommodate the working capital
needs of the Company's Canadian subsidiaries. Borrowings under the agreement
are limited to certain advance rates based upon the eligible accounts
receivable and inventory of the Canadian subsidiaries up to an aggregate
maximum of C$3.5 million.
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 any such acquisition costs may
have on its liquidity. In order to consummate such acquisitions, the Company
may need to seek additional capital through additional borrowings or equity
financings.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which was adopted by the Company on December 31, 1997.
As a result, the Company changed the method previously used to compute
earnings per share and is restating all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options and warrants is excluded.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which was adopted by the Company on
December 31, 1997. This Statement requires additional disclosures relating to
liquidation preferences of preferred stock, information about the pertinent
rights and privileges of the outstanding equity securities, and the
redemption amounts for all issues of capital stock that are redeemable at
fixed or determinable prices on fixed or determinable dates. The Company
does not currently issue such securities; accordingly, this Statement has no
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." In addition to net income, comprehensive income includes items
recorded directly to stockholders' equity such as cumulative foreign currency
translation adjustments. This Statement establishes new standards for
reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997. Adoption of this standard
will only require additional financial statement disclosure detailing the
Company's comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
new standards for reporting information about operating segments in interim
and annual financial statements. This Statement is also effective for fiscal
years beginning after December 15, 1997. The Company will evaluate the
impact, if any, this Statement will have on disclosures in the consolidated
financial statements.
23
YEAR 2000 COMPLIANCE
The Company has been informed by the vendors of all its material
computer software that such software will continue to function properly
during the transition from 1999 to 2000 without disruption of the Company's
operations or the Company incurring additional cost for software upgrades or
modifications. The Company intends to conduct tests to confirm compliance by
the end of 1998. The Company's software includes both operational software
and software that is being implemented as part of the Company's continuing
efforts to seek operating efficiencies by upgrading its information systems.
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.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
CONTENTS
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . 26
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Changes in Stockholders' Equity . . . . . . 29
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . 30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 31
25
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Aftermarket Technology Corp.
We have audited the accompanying consolidated balance sheets of
Aftermarket Technology Corp. (the Company) as of December 31, 1996 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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 generally accepted auditing
standards. 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. at December 31, 1996 and 1997, and the
consolidated results of the Company's operations and cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 23, 1998,
(Except for Note 17, as to which the date is March 6, 1998)
26
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, December 31,
1996 1997
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 46,498 $ 78
Accounts receivable, net 38,780 53,761
Inventories 60,586 76,166
Prepaid and other assets 2,917 4,706
Refundable income taxes - 1,011
Deferred income taxes 2,272 3,478
---------- ---------
Total current assets 151,053 139,200
Equipment and leasehold improvements:
Machinery and equipment 12,907 19,335
Autos and trucks 2,011 2,712
Furniture and fixtures 1,553 3,139
Leasehold improvements 4,585 6,058
---------- ---------
21,056 31,244
Less accumulated depreciation and amortization (3,574) (6,830)
---------- ---------
17,482 24,414
Debt issuance costs, net 6,320 4,260
Cost in excess of net assets acquired, net 145,430 200,393
Other assets 462 410
---------- ---------
Total assets $ 320,747 $ 368,677
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 25,226 $ 16,055
Accrued payroll and related costs 4,429 5,820
Accrued interest payable 7,996 6,253
Other accrued expenses 3,372 4,904
Bank lines of credit 4,335 4,596
Income taxes payable 321 -
Acquisition notes payable - 1,435
Due to former owners 2,003 1,614
---------- ---------
Total current liabilities 47,682 40,677
12% Series B and D Senior Subordinated Notes 161,981 121,288
Acquisition notes payable - 9,097
Amount drawn on revolving credit facility - 11,100
Deferred compensation - 3,042
Deferred income taxes 5,252 8,044
Commitments and contingencies (See Note 13)
Stockholders' equity:
Preferred stock, $.01 par value;
shares authorized - 5,000,000;
Issued and outstanding shares - none - -
Common stock, $.01 par value;
shares authorized - 30,000,000;
Issued and outstanding shares -
16,980,794 and 19,577,274
at December 31, 1996 and
December 31, 1997, respectively 169 195
Additional paid-in capital 81,380 131,604
Retained earnings 24,240 43,494
Cumulative translation adjustment 43 136
---------- ---------
Total stockholders' equity 105,832 175,429
---------- ---------
Total liabilities and stockholders' equity $ 320,747 $ 368,677
========== =========
SEE ACCOMPANYING NOTES.
27
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the years ended December 31,
1995 1996 1997
----------- --------- ---------
Net sales $ 190,659 $ 272,878 $ 346,110
Cost of sales 115,499 166,810 212,416
----------- --------- ---------
Gross profit 75,160 106,068 133,694
Selling, general and administrative expense 38,971 55,510 73,768
Amortization of intangible assets 3,308 3,738 4,501
----------- --------- ---------
Income from operations 32,881 46,820 55,425
Interest and other income 1,100 1,181 1,912
Interest expense 18,015 20,287 18,822
----------- --------- ---------
Income before income taxes and extraordinary item 15,966 27,714 38,515
Provision for income taxes 6,467 11,415 15,512
----------- --------- ---------
Income before extraordinary item 9,499 16,299 23,003
Extraordinary item - net of income tax
benefit of $2,520 - (See Note 16) - - 3,749
----------- --------- ---------
Net income 9,499 16,299 19,254
----------- --------- ---------
Dividends accrued on preferred stock 2,093 2,222 -
----------- --------- ---------
Net income available to common stockholders $ 7,406 $ 14,077 $ 19,254
=========== ========= =========
Basic earnings per common share:
Income before extraordinary item $ 0.69 $ 1.15 $ 1.31
Extraordinary item - - (0.21)
----------- --------- ---------
Net income $ 0.69 $ 1.15 $ 1.10
=========== ========= =========
Diluted earnings per common share:
Income before extraordinary item $ 0.65 $ 1.02 $ 1.19
Extraordinary item - - (0.20)
----------- --------- ---------
Net income $ 0.65 $ 1.02 $ 0.99
=========== ========= =========
SEE ACCOMPANYING NOTES
28
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Cumulative
Preferred Common Capital in Excess Retained Translation
Stock Stock of Par Value Earnings Adjustments Total
--------- ------- ------------ -------- ----------- --------
Balance as of December 31, 1994 $ 20,853 $ 120 $ 19,880 $ 2,757 $ - $ 43,610
Net income - - - 9,499 - 9,499
Accrued dividends on preferred stock 2,093 - - (2,093) - -
Translation adjustment - - - - 25 25
----------------------------------------------------------------------------------------
Balance as of December 31, 1995 22,946 120 19,880 10,163 25 53,134
----------------------------------------------------------------------------------------
Issuance of 4,980,794 shares of common
stock for cash at $13.50 per share,
net of offering costs of $4,788 - 49 61,500 - 61,549
Redemption of preferred stock (25,168) - - - - (25,168)
Net income - - - 16,299 - 16,299
Accrued dividends on preferred stock 2,222 - - (2,222) - -
Translation adjustment - - - - 18 18
----------------------------------------------------------------------------------------
Balance as of December 31, 1996 - 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
----------------------------------------------------------------------------------------
Balance as of December 31, 1997 $ - $ 195 $ 131,604 $ 43,494 $ 136 $ 175,429
========================================================================================
SEE ACCOMPANYING NOTES
29
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the years ended December 31,
1995 1996 1997
-------- -------- --------
OPERATING ACTIVITIES:
Net income $ 9,499 $ 16,299 $ 19,254
Adjustments to reconcile net income to
net cash provided by operating activities:
Extraordinary item - - 6,269
Depreciation and amortization 4,680 5,773 7,890
Amortization of debt issuance costs 710 842 905
Provision for losses on accounts receivable 1,239 668 921
Loss (gain) on sale of equipment (6) 22 8
Deferred income taxes 1,274 1,769 1,586
Changes in operating assets and liabilities
(net of acquired businesses):
Accounts receivable (3,914) (4,537) (10,258)
Inventories (8,119) (12,574) 544
Prepaid and other assets (1,138) (988) (1,583)
Accounts payable and accrued expenses 6,556 10,521 (13,803)
-------- -------- --------
Net cash provided by operating activities 10,781 17,795 11,733
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (5,187) (7,843) (8,682)
Acquisition of companies, net of cash received (40,265) (12,199) (62,871)
Proceeds from sale of equipment 8 85 77
-------- -------- --------
Net cash used in investing activities (45,444) (19,957) (71,476)
-------- -------- --------
FINANCING ACTIVITIES:
Issuance of senior subordinated notes 42,400 - -
Borrowings (payments) on revolving credit facility, net (1,242) - 11,100
Borrowings on bank lines of credit, net - 3,523 171
Payment of debt issuance costs (2,179) - (786)
Redemption of senior subordinated notes - - (44,800)
Sale of Common Stock, net of offering costs - 61,549 47,937
Redemption of preferred stock - (25,168) -
Proceeds from exercise of stock options - - 662
Payments on amounts due to former owners (4,987) - (961)
-------- -------- --------
Net cash provided by financing activities 33,992 39,904 13,323
-------- -------- --------
Increase (decrease) in cash and cash equivalents (671) 37,742 (46,420)
Cash and cash equivalents at beginning of period 9,427 8,756 46,498
-------- -------- --------
Cash and cash equivalents at end of period $ 8,756 $ 46,498 $ 78
======== ======== ========
Cash paid during the period for:
Interest $ 15,376 $ 19,412 $ 19,094
Income taxes $ 3,221 $ 10,970 $ 10,880
SEE ACCOMPANYING NOTES
30
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 a remanufacturer and distributor of drive train products used
in the repair of vehicles in the automotive aftermarket. The Company's
principal products include remanufactured transmissions, engines, torque
converters and remanufactured and new parts for the repair of automotive
drive train assemblies. The Company's customers include original equipment
manufacturers, independent transmission rebuilders, general repair shops,
distributors and retail automotive parts stores. Established in 1994, the
Company maintains manufacturing facilities and distribution centers in the
United States and Canada.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries from the respective dates of
acquisition. 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. Appropriate consideration is given to
deterioration, obsolescence, and other factors in evaluating estimated market
value.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation
is computed using accelerated and straight-line methods over the estimated
useful lives of the assets, which range from three to fifteen years.
Depreciation expense was $1,373, $2,035 and $3,394 for the years ended
December 31, 1995, 1996 and 1997, respectively.
FOREIGN CURRENCY TRANSLATION
The Company's Canadian subsidiaries use the Canadian dollar as their
functional 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 effect on the statements of income of transaction gains or losses
is insignificant for the periods presented.
31
DEBT ISSUANCE COSTS
Debt issuance costs incurred in connection with the sale of the 12%
Series B and Series D Senior Notes (See Note 7) and revolving credit facility
(See Note 6) are being amortized over the life of the debt of ten, nine, and
five years, respectively, using a method which approximates the interest
method.
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 $8,262 and $12,758 at December 31, 1996 and 1997,
respectively.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," the Company assesses the recoverability
of cost in excess of net assets acquired by determining whether the
amortization of the asset balance over its remaining life can be recovered
through the undiscounted future operating cash flows of the acquired
operation. The amount of the impairment, if any, is measured based on
projected discounted future operating cash flows.
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 aftermarket industry
throughout the United States and Canada. The credit risk associated with the
Company's accounts receivable is mitigated by its credit evaluation process,
reasonably short collection terms and, except for one significant customer,
the geographical dispersion of sales transactions.
The Company grants credit to certain customers who meet pre-established
credit requirements. Customers who do not meet those requirements are
required to pay for products upon delivery. Credit losses are provided for in
the financial statements and consistently have been within management's
expectations.
Accounts receivable is reflected net of an allowance for doubtful
accounts of $1,326 and $1,146 at December 31, 1996 and 1997, respectively.
WARRANTY POLICY
For certain products on which the Company provides a warranty, the
warranty period is generally up to twelve months or 12,000 miles.
STOCK-BASED COMPENSATION
As allowed under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company continues to apply 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 plan.
Accordingly, a compensation cost is recognized only for those options whose
price is less than market at the measurement date.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 128,
"Earnings Per Share," in February 1997. This statement, which establishes
new standards for computing and presenting earnings per share, includes the
presentation of basic and diluted earnings per share. As of December 31,
1997, the Company has adopted this statement and prior periods have been
restated. See Note 11 for further discussion and related disclosures.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," in June
1997. In addition to net income, comprehensive income includes items
recorded directly to stockholders' equity such as cumulative foreign currency
translation adjustments. This statement establishes new standards for
reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. This statement is effective for
fiscal years beginning after December 15, 1997. Adoption of this standard
will only require additional financial statement disclosure detailing the
Company's comprehensive income.
32
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
new standards for reporting information about operating segments in interim
and annual financial statements. This statement is also effective for fiscal
years beginning after December 15, 1997. The Company will evaluate the
impact, if any, this statement will have on disclosures in the consolidated
financial statements.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the 1997
presentation.
NOTE 3. ACQUISITIONS
During the year ended December 31, 1995, the Company acquired Component
Remanufacturing Specialists ("CRS"), Mascot Truck Parts Inc. ("Mascot") and
King-O-Matic ("King"), for a purchase price of approximately $30.5 million,
$3.0 million and $9.3 million, respectively, including transaction fees and
related expenses. The CRS and Mascot acquisitions closed on June 1, 1995 and
June 9, 1995, respectively, and the King acquisition closed on September 12,
1995 (collectively, the "1995 Acquisitions"). Goodwill recorded for CRS,
Mascot and King approximated $24.6 million, $2.0 million and $4.9 million,
respectively. The Company issued $40 million in principal amount of 12%
Senior Notes due in 2004 concurrently with the acquisition of CRS, the
proceeds of which financed the 1995 Acquisitions (See Note 7).
The Company acquired Tranzparts, Inc. ("Tranzparts") for $4.2 million
and Diverco, Inc. ("Diverco") for $10.9 million in April 1996 and October
1996, respectively, including transaction fees and related expenses.
Goodwill recorded for Tranzparts and Diverco approximated $2.4 million and
$6.6 million, respectively. The operations of Tranzparts and Diverco were
not material to the Company's consolidated operations.
In January 1997, the Company acquired REPCO Industries, 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. In August 1997, the
Company acquired all of the outstanding capital stock of Trans Mart, Inc.
("Trans Mart"), a distributor of automatic and standard transmission parts
and related drive train components based in Florence, Alabama. To complete
these acquisitions, the Company made cash payments totaling $12.9 million and
$27.9 million for ATS and Trans Mart, respectively, including transaction
fees and related expenses. In addition, the ATS acquisition calls for
subsequent payments due on each of the first eight anniversaries of the
closing date. Substantially all of these additional payments, which will
aggregate up to approximately $19.0 million (present value $13.6 million as
of December 31, 1997), are contingent upon the attainment of certain sales
levels by ATS, which the Company believes are more likely than not to be
attained. Goodwill recorded for ATS and Trans Mart approximated $26.1
million and $20.9 million, respectively. The operations of ATS and 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 drive train components, for a purchase price
of approximately $8.1 million, including transaction fees and related
expenses. Goodwill recorded approximated $5.2 million. The operations of
Metran were not material to the Company's consolidated operations.
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.
Goodwill for all acquisitions is amortized over 40 years on a straight-line
basis. The consolidated financial statements include the operating results
of each business from the date of acquisition.
33
The consolidated financial statements include the operating results of
each business from the date of acquisition. Unaudited pro forma net sales
of $210,958 and net income of $10,043 for the year ended December 31, 1995
gives effect to the 1995 acquisitions as if such acquisitions had occurred on
January 1, 1995. The pro forma information includes adjustments for interest
expense that would have been incurred to finance the acquisitions, additional
depreciation based on the fair market values of the property, plant and
equipment acquired, and amortization of intangibles arising from the
transactions. The pro forma financial information is not necessarily
indicative of the results of operations as they would have been had the
transactions been effected on the assumed dates. Pro forma information to
reflect the 1996 and 1997 acquisitions has not been presented because the
effect of such acquisitions was not material to prior periods.
NOTE 4. RELATED-PARTY TRANSACTIONS
The Company had liabilities to former owners totaling $2,003 at December
31, 1996 and $1,614 at December 31, 1997. These amounts are composed
primarily of additional purchase price payable to the former owners of those
companies acquired in 1996 and 1997. The remaining amounts are payable during
1998 and 1999.
The Company paid Aurora Capital Partners (ACP), which controls a
significant stockholder, approximately $0.3 million and $1.4 million in fees
for investment banking services provided in connection with companies
acquired in 1996 and 1997, respectively. In addition, ACP was paid management
fees of $513 and $534 in 1996 and 1997, respectively. 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 1996 and 1997.
NOTE 5. INVENTORIES
Inventories consist of the following:
December 31,
------------------------------
1996 1997
------------------------------
Raw materials, including core inventories . . . $30,413 $24,788
Work-in-process . . . . . . . . . . . . . . . . 1,166 3,125
Finished goods. . . . . . . . . . . . . . . . . 29,007 48,253
------------------------------
$60,586 $76,166
==============================
Finished goods include purchased parts which are available for sale.
NOTE 6. BANK LINES OF CREDIT
CURRENT LIABILITIES
In September 1997, the Canadian subsidiaries entered into a revolving
credit agreement with Bank of Montreal (the "BOM Revolving Credit Agreement")
for a C$3.5 million revolving credit facility to accommodate the working capital
needs of the Canadian subsidiaries. Subject to the satisfaction of customary
conditions, advances under the BOM Revolving Credit Agreement may be made, and
letters of credit may be issued, up to an aggregate of C$3.5 million, due upon
demand, subject to annual review. 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 subsidiaries in each case as defined in the
BOM Revolving Credit Agreement. Amounts advanced are secured by substantially
all assets of the Canadian subsidiaries and are guaranteed by the Company.
Interest is payable monthly at the Bank of Montreal's prime lending rate plus
0.25%. The agreement contains certain covenants including a tangible net worth
covenant for the combined results of Canadian subsidiaries. At December 31,
1997, $1.9 million was outstanding under this line of credit.
34
In January 1996, the Company entered into an agreement with Commerce
Bank, N.A. providing financing for equipment purchases up to a maximum of
$2.9 million, secured by the underlying equipment purchased. Interest is
payable monthly at a fixed rate equal to 70% of Commerce Bank's prime lending
rate at the date of the advance plus 1%. As of December 31, 1997, $2.6
million was outstanding under this loan agreement. The agreement contains
several covenants including levels of net worth, leverage, interest coverage
and earnings before interest, taxes, depreciation, and amortization (EBITDA).
REVOLVING CREDIT FACILITY
In February 1997, the Company entered into an agreement with The Chase
Manhattan Bank (the "Bank"), as agent, providing for a $100 million revolving
credit facility (the "Revolving Credit Facility") available to the Company
for acquisitions and working capital purposes. Amounts advanced under
Revolving Credit Facility are secured by substantially all assets of the
Company and will become due on December 31, 2001, although the Company may
prepay outstanding advances in whole or in part without incurring any premium
or penalty.
At the Company's election, amounts advanced under the Revolving 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 or six months (as selected by the
Company) in the interbank eurodollar market in the approximate amount of the
Bank's share of the advance under the Credit Facility. 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, 1997, the Alternate
Base Rate and the Eurodollar Rate margins are 0.5% and 1.5%, 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 Company paid the Bank a one-time facility and commitment fee upon
the effective date of the Credit Facility and 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. The
quarterly commitment fee percentage is 0.375%. 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.
The Revolving Credit Facility contains several covenants, including
levels of net worth, leverage, EBITDA and cash flow coverage, and certain
limits on the Company to incur indebtedness, make capital expenditures,
create liens, engage in mergers and consolidations, make restricted payments
(including dividends), make asset sales, make investments, issue stock and
engage in transactions with affiliates of the Company and its subsidiaries.
At December 31, 1997, $11,100 was outstanding under this line of credit.
Subsequent to December 31, 1997, the credit agreement for the Revolving
Credit Facility was amended and restated (See Note 17).
NOTE 7. 12% SERIES B AND SERIES D SENIOR SUBORDINATED NOTES
On August 2, 1994, the Company completed a private placement issuance of
$120 million in principal amount of 12% Series A Senior Subordinated Notes
due in 2004. Proceeds from the issuance were used to partially finance the
initial acquisitions of the Company. The privately placed debt was exchanged
for public debt (designated Series B) on February 22, 1995.
On June 1, 1995, the Company completed another private placement
issuance of $40 million in principal amount of 12% Series C Senior
Subordinated Notes due in 2004. Proceeds of $42.4 million from the issuance
were used to finance the 1995 Acquisitions. These notes have an effective
interest rate of 10.95%. The privately placed debt was exchanged for public
debt (designated Series D) on September 10, 1995.
35
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. On or after August 1,
1999, the Senior Notes may be redeemed at the option of the Company, in whole
or in part, at specified redemption prices plus accrued and unpaid interest:
YEAR 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 million of
the Series B Senior Notes and $10 million of the Series D Senior Notes
aggregate principal amounts 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 million in principal amount of the
Series B Senior Notes and $10 million in principal amount of the Series D
Senior Notes resulting in a loss on early extinguishment of debt (See Note
16).
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 revolving 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,
1997, the Company had no unrestricted subsidiaries. The Company may incur
additional indebtedness, including borrowings under its revolving credit
facility (See Note 6), subject to certain limitations.
The indentures under which the Senior Notes were issued contain certain
covenants that, among other things, limit the Company from incurring other
indebtedness, issuing disqualified capital stock, engaging in transactions
with affiliates, incurring liens, making certain restricted payments
(including dividends), making certain asset sales and permitting certain
restrictions on the ability of its subsidiaries to make distributions. As of
December 31, 1997, the Company was in compliance with such covenants.
36
NOTE 8. INCOME TAXES
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,
------------------------
1996 1997
----------- ---------
Deferred tax liabilities:
Tax amortization basis of intangible assets in
excess of book amortization . . . . . . . . . . $4,630 $6,987
Tax depreciation of equipment & leasehold
improvements in excess of book depreciation . . 622 1,057
------------------------
Total deferred tax liabilities . . . . . . . . . . . 5,252 8,044
------------------------
Deferred tax assets:
Inventory obsolescence reserve. . . . . . . . . . 1,182 854
Bad debt reserves . . . . . . . . . . . . . . . . 778 378
Product warranty accruals . . . . . . . . . . . . 312 506
Other accruals & deferrals. . . . . . . . . . . . -- 1,740
------------------------
Total deferred tax assets. . . . . . . . . . . . . . 2,272 3,478
------------------------
Net deferred tax liability . . . . . . . . . . . . . $2,980 $4,566
========================
Significant components of the provision for income taxes attributable to
operations are as follows:
Years ended December 31,
-----------------------------------
1995 1996 1997
----------- ---------- -------
Current:
Federal . . . . . . . . . . . . . . . . . . . . . $4,422 $8,350 $11,902
State . . . . . . . . . . . . . . . . . . . . . . 764 1,147 1,919
Foreign. . . . . . . . . . . . . . . . . . . . . 7 149 105
-----------------------------------
Total current. . . . . . . . . . . . . . . . . . . . 5,193 9,646 13,926
-----------------------------------
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . 1,137 1,621 1,366
State . . . . . . . . . . . . . . . . . . . . . . 137 148 220
-----------------------------------
Total deferred . . . . . . . . . . . . . . . . . . . 1,274 1,769 1,586
Extraordinary item . . . . . . . . . . . . . . . . . -- -- ( 2,520)
-----------------------------------
$6,467 $11,415 $12,992
===================================
The components of the provision for deferred income taxes are as follows:
Years ended December 31,
---------------------------------------
1995 1996 1997
---------- ----------- -----------
Amortization of intangible assets. . . . . . . . . . $1,759 $1,422 $2,357
Inventory obsolescence reserve . . . . . . . . . . . (333) (284) 328
Bad debt reserves. . . . . . . . . . . . . . . . . . (223) (233) 400
Product warranty accruals. . . . . . . . . . . . . . (20) 126 (194)
Depreciation . . . . . . . . . . . . . . . . . . . . 339 427 435
Other accruals & deferrals . . . . . . . . . . . . . (248) 311 (1,740)
---------------------------------------
Provision for deferred income taxes. . . . . . . . . $1,274 $1,769 $1,586
=======================================
37
The reconciliation of income tax expense computed at the U.S. federal
statutory tax rates to income tax expense is as follows:
Years ended December 31,
---------------------------------------------------------------------
1995 1996 1997
---------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
---------------------------------------------------------------------
Tax at U.S. statutory rates. . . . . . . . . . . . . $5,588 35.0% $9,700 35.0% $11,286 35.0%
State income taxes, net of federal tax benefit . . . 529 3.3 842 3.0 1,167 3.6
Other. . . . . . . . . . . . . . . . . . . . . . . . 350 2.2 873 3.2 539 1.7
---------------------------------------------------------------------
$6,467 40.5% $11,415 41.2% $12,992 40.3%
=====================================================================
NOTE 9. STOCK OPTIONS
The Company adopted its 1994 Stock Incentive Plan, which was
subsequently renamed the 1996 Stock Incentive Plan (the "Plan"), in July 1994
in order to provide incentives to employees and directors of the Company.
The Company has reserved 2,400,000 shares of Common Stock for issuance under
the Plan. Options are generally granted at the fair value on the date of
grant and vest over a period of time to be determined by the Board of
Directors, generally from three to five years. The options expire 10 years
from the date of grant. Options available for grant are 127,782 and 9,606 as
of December 31, 1996 and 1997, respectively.
A summary of the status of the Company's option plan is presented below:
1995 1996 1997
Weighted- Weighted- Weighted-
Average Average Average
1995 Exercise 1996 Exercise 1997 Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- ---------- --------- ----------
Outstanding at beginning of year . . . . . . . . . . 1,403,514 $1.67 1,526,778 $1.67 2,272,218 $ 2.65
Granted. . . . . . . . . . . . . . . . . . . . . . . 123,264 $1.67 745,440 $4.67 130,176 $ 17.64
Exercised. . . . . . . . . . . . . . . . . . . . . . -- -- -- -- (396,480) $ 1.67
Forfeited. . . . . . . . . . . . . . . . . . . . . . -- -- -- -- (12,000) $ 4.67
--------- --------- ---------
Outstanding at end of year . . . . . . . . . . . . . 1,526,778 $1.67 2,272,218 $2.65 1,993,914 $ 3.82
========= ========= =========
Exercisable at end of year . . . . . . . . . . . . . 760,235 $1.67 1,117,113 $1.67 1,163,944 $ 2.27
========= ========= =========
Weighted-average fair value of
options granted during the year . . . . . . . . . $1.08 $7.10 $ 12.11
38
The following summarizes information about options outstanding as of
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Prices Shares Prices
------------------------------------------ ------------------------
$1.67 1,130,298 6.7 years $ 1.67 931,161 $1.67
$4.67 733,440 8.7 years $ 4.67 232,783 $4.67
$13.80-$16.10 47,088 9.3 years $14.88 -- --
$16.11-$18.40 59,088 9.5 years $17.66 -- --
$18.41-$23.00 24,000 9.6 years $23.00 -- --
----------- --------
1,993,914 7.6 years $ 3.82 1,163,944 $2.27
=========== ========
In connection with the prior acquisitions, 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.
As allowed under the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company will continue to apply APB Opinion No.
25 and related interpretations in accounting for the stock options awarded
under the Company's 1996 plan. Accordingly, no compensation cost has been
recognized for these stock options except the expense relating to options
granted with an exercise price below the market value at the date of grant.
Had compensation cost for the Company's 1996 Plan been determined in
accordance with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the proforma amounts indicated below:
Years ended December 31,
-----------------------------------------
1995 1996 1997
------------ ------------ -----------
Income before extraordinary item:
As reported . . . . . . . . . . . . . . . . . . $9,499 $16,299 $23,003
Pro forma . . . . . . . . . . . . . . . . . . . $9,142 $15,982 $22,127
Basic earnings per common share:
As reported . . . . . . . . . . . . . . . . . . $ 0.69 $ 1.15 $ 1.31
Pro forma . . . . . . . . . . . . . . . . . . . $ 0.66 $ 1.13 $ 1.26
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with weighted-average
assumptions for expected volatility of 51.31%, risk-free interest rates of
6.00% and expected option lives of 8.2 years for 1995, 1996 and 1997. The
Company has not paid and does not anticipate paying dividends; therefore, the
expected dividend yield is assumed to be zero.
The Black-Scholes option model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
39
NOTE 10. COMMON AND PREFERRED STOCK
On December 13, 1996, the Company amended and restated its charter to
increase its authorized Common Stock to 30,000,000 shares and consummated a
six-for-one stock split, and to increase its authorized Preferred Stock to
5,000,000 shares. The accompanying financial statements have been
retroactively adjusted to reflect the stock split.
On December 17, 1996 the Company sold 4,025,000 shares of Common Stock
through an initial public offering (Initial Public Offering). The price per
share for such Common Stock was $13.50 (Initial Public Offering Price). At
approximately the same time, the Company sold to General Electric Pension
Trust (GEPT) $12.0 million of Common Stock (955,794 shares) in a private
placement. The price per share for such privately placed Common Stock was the
price per share paid by the Underwriters in the Public Offering of $12.555
(the Initial Public Offering Price less Underwriters' discounts and
commissions).
On October 28, 1997, the Company completed a public offering of
3,650,000 shares of its common stock. The price per share for such Common
Stock was $23.25 (Public Offering Price). Of the shares sold in the offering,
2,200,000 shares were sold by the Company and 1,450,000 shares were sold by
certain stockholders. The Company did not receive any proceeds from the sale
of shares by the selling stockholders. The net proceeds to the Company of
approximately $47.9 million were used to repay a portion of the outstanding
indebtedness under the Company's revolving credit facility.
NOTE 11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
For the years ended December 31,
----------------------------------------
1995 1996 1997
------ ------ -------
Numerator:
Net income. . . . . . . . . . . . . . . . . . . . $9,499 $16,299 $19,254
=========================================
Denominator:
Weighted-average common shares outstanding. . . . 12,000,000 12,203,021 17,496,173
Common shares issued from preferred stock . . . 1,774,597 1,948,767 --
-----------------------------------------
Denominator for basic earnings per common share. . 13,774,597 14,151,788 17,496,173
Effect of dilutive securities:
Employee stock options and warrants. . . . . . . 841,563 1,766,596 1,839,186
-----------------------------------------
Denominator for diluted earnings per
common share . . . . . . . . . . . . . . . . . . 14,616,160 15,918,384 19,335,359
=========================================
Basic earnings per common share. . . . . . . . . . . $0.69 $1.15 $1.10
=========================================
Diluted earnings per common share. . . . . . . . . . $0.65 $1.02 $0.99
=========================================
The share calculations for 1995 and 1996 are based upon the Pro forma effects
from the estimated number of shares of Common Stock issued in the Company's
initial public offering whose net proceeds were used to redeem the
outstanding preferred stock including accrued dividends.
NOTE 12. EMPLOYEE RETIREMENT PLAN
The Company sponsors several defined contribution plans to 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 $108, $206 and $359 for the plan years ending in
1995, 1996 and 1997, respectively.
40
NOTE 13. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under various operating lease
agreements, which expire on various dates through 2004. 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:
YEAR ENDING DECEMBER 31,
- ------------------------
1998. . . . . . . . . . . . . . . . . . . . . . . $ 7,917
1999. . . . . . . . . . . . . . . . . . . . . . . 7,300
2000. . . . . . . . . . . . . . . . . . . . . . . 6,036
2001. . . . . . . . . . . . . . . . . . . . . . . 4,123
2002. . . . . . . . . . . . . . . . . . . . . . . 4,596
Thereafter. . . . . . . . . . . . . . . . . . . . 7,303
-----------
$ 37,275
===========
Rent expense for all operating leases approximated $3,115, $4,582 and
$7,228 for the years ended December 31, 1995, 1996 and 1997, respectively.
Rent expense includes amounts paid to related parties of $611, $940 and
$1,574 for the years ended December 31, 1995, 1996 and 1997, 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 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 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 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
41
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 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of all financial instruments approximate their fair
values at December 31, 1996 and 1997, except for the Series B and Series D
Senior Notes.
The fair values of the Company's Series B and Series D Senior Notes are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of these financial instruments at
December 31 are as follows:
1996 1997
------------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- -------
Series B Senior Notes.............. $120,000 $126,900 $90,000 $98,811
Series D Senior Notes.............. 40,000 42,300 30,000 32,937
NOTE 15. SIGNIFICANT CUSTOMER
For the years ended December 31, 1995, 1996 and 1997 sales to one customer
accounted for 35%, 37% and 32% of net sales, respectively. Additionally, at
December 31, 1995, 1996 and 1997 this customer accounted for approximately 46%,
51% and 45% of accounts receivable, respectively. No other customer accounted
for more than 10% of net sales in any period.
NOTE 16. EXTRAORDINARY ITEM
The extraordinary item of $3.8 million, net of income tax benefit of $2.5
million, consists largely of a pre-tax charge of $5.7 million related to the
early redemption of $40 million in principal amount of the Company's Senior
Notes, consisting of the early redemption premium charge of $4.3 million plus
unamortized deferred financing fees of $1.4 million. The extraordinary item
also includes a pre-tax charge of $0.6 million related to the restructuring of
the Company's revolving credit facility. Both events occurred in February 1997.
42
NOTE 17. SUBSEQUENT EVENTS
On March 6, 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 cash purchase price
for the acquisition consists of $112.5 million paid at closing, plus up to an
additional $12.5 million to be paid in 1999 based on the performance of the OEM
Division's European operations during 1998. The transaction is being accounted
for using the purchase method of accounting and goodwill recorded (estimated to
be approximately $60-70 million, which would increase by up to an additional
$12.5 million dependent on the potential 1999 payment described above) will be
amortized over 40 years on a straight-line method beginning on the date of
acquisition.
In March 1998, the credit agreement for the Credit Facility was amended and
restated as a new credit facility comprised of a $100 million revolving portion
and a $120 million term loan portion with The Chase Manhattan Bank, as agent,
(the "New Credit Facility") to finance the Company's working capital
requirements, future acquisitions and the acquisition of Autocraft. Amounts
advanced under the revolving portion of the New Credit Facility are secured by
substantially all assets of the Company and will become due on December 31,
2003, although the Company may prepay outstanding advances in whole or in part
without incurring any premium or penalty. The term loan portion of the New
Facility is due and payable in quarterly installments beginning in September
1998 and ending on December 31, 2003 as outlined in the agreement. The New
Credit Facility contains several covenants, including levels of net worth,
leverage, EBITDA and cash flow coverage, and certain limitations on the
Company's ability to incur indebtedness, make capital expenditures, create
liens, engage in mergers and consolidations, make restricted payments (including
dividends), make asset sales, make investments, issue stock and engage in
transactions with affiliates of the Company and its subsidiaries.
NOTE 18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter
------------------------------------
First Second Third Fourth
------- ------- ------- -------
1995
- ----
Net sales............................... $40,638 $45,094 $46,740 $58,187
Gross profit............................ 15,668 18,066 16,686 24,740
Net income.............................. 1,953 2,924 1,344 3,278
Pro forma earnings per share............ $0.14 $0.20 $0.09 $0.22
1996
- ----
Net sales............................... $64,146 $66,873 $68,287 $73,572
Gross profit............................ 25,788 25,063 25,998 29,219
Net income.............................. 4,399 3,891 4,051 3,958
Pro forma earnings per share............ $0.28 $0.25 $0.26 $0.23
1997
- ----
Net sales............................... $82,688 $85,410 $88,392 $89,620
Gross profit............................ 31,575 33,363 33,873 34,883
Income before extraordinary item........ 5,567 5,912 5,652 5,872
Diluted earnings per share.............. $0.29 $0.31 $0.30 $0.29
43
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
- ---- --- ---------
Stephen J. Perkins 50 Chairman of the Board, President and
Chief Executive Officer
Ronald E. Bradshaw 53 Executive Vice President
John C. Kent 46 Chief Financial Officer
John J. Machota 46 Vice President--Human Resources
Joseph Salamunovich 38 Vice President, General Counsel and
Secretary
Kenneth A. Bear 44 President, Aaron's Automotive
Products, Inc.
James D. Carey 58 President, Autocraft Electronics
Wesley N. Dearbaugh 46 President, ATC Distribution Group
Thomas R. Kawsky 49 President, Autocraft Industries
Michael L. LePore 44 President, Component Remanufacturing
Specialists, Inc.
Robert Anderson 77 Director
Richard R. Crowell 43 Director
Dale F. Frey 65 Director
Mark C. Hardy 34 Director
Dr. Michael J. Hartnett 52 Director
Gerald L. Parsky 55 Director
Richard K. Roeder 49 Director
William A. Smith 52 Director and Chairman Emeritus of the
Board of Directors
J. Richard Stonesifer 61 Director
STEPHEN J. PERKINS joined the Company as President and Chief Executive
Officer in October 1996 and became Chairman of the Board of Directors in
August 1997. From February 1992 to October 1996, Mr. Perkins was President
and Chief Executive Officer of Senior Flexonics, an international division of
Senior Engineering, plc. Senior Flexonics included 20 operations in 13
countries which manufactured and distributed engineered flexible tubular
products for the automotive, aerospace and industrial markets. From
September 1983 to February 1992, Mr. Perkins was President and Chief
Executive Officer of Flexonics, Inc., the privately held predecessor of
Senior Flexonics. Prior to that, Mr. Perkins held various positions with the
Flexonics Division of what is now Allied Signal Inc. and several management
positions in manufacturing at multiple facilities for the Steel Tubing Group
of Copperweld Corporation.
RONALD E. BRADSHAW became Executive Vice President of the Company in
March 1998 following the completion of the Company's acquisition of Autocraft
from Fred Jones Enterprises, Inc. (which was formerly known as Autocraft
Industries, Inc.) ("Fred Jones Enterprises"). Prior to that, Mr. Bradshaw
served as President and Chief Operating Officer of Fred Jones Enterprises
since October 1997 and as Senior Vice President and Chief Financial Officer
from 1994 to 1997 and as Treasurer from 1990 to 1994.
JOHN C. KENT became Chief Financial Officer of the Company in July 1994.
From March 1990 to July 1994, Mr. Kent was Vice President, Finance and Chief
Financial Officer of Aerotest, Inc., an aircraft maintenance and modification
company. In March 1995, Aerotest filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. The Aerotest bankruptcy
proceedings are still pending. From 1987 to March 1990, Mr. Kent was an
Assistant Treasurer at Security Pacific Auto Finance. From 1978 to 1987 Mr.
Kent served in several capacities at Western Airlines, Inc., including
Director of Cash and Risk Management.
44
JOHN J. MACHOTA joined the Company as Vice President--Human Resources in
June 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.
JOSEPH SALAMUNOVICH joined the Company as Vice President, General
Counsel and Secretary in March 1997. From January 1995 to March 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.
KENNETH A. BEAR became President of Aaron's in February 1998. Prior to
that he held various other positions with Aaron's, including Executive Vice
President since 1989. Mr. Bear joined Aaron's in 1983.
JAMES D. CAREY became President of Autocraft Electronics in March 1998
following the Autocraft Acquisition. Prior to that he served as Senior Vice
President of Fred Jones Enterprises since March 1997. Before joining Fred
Jones, Mr. Carey was employed for 32 years by Ford Motor Company, where he
served most recently as Manager of North American Parts Supply and Logistics
for the Ford Customer Service Division.
WESLEY N. DEARBAUGH joined ATC as President of the ATC Distribution
Group in June 1996. From 1993 to June 1996, Mr. Dearbaugh was a Partner and
Vice President of Marketing for Cummins, S.W., a multi-branch distributor of
heavy duty parts and service. From 1992 to 1993, he was Vice President of
Marketing for SEI, a large pension consulting firm. From 1983 to 1992, Mr.
Dearbaugh held senior management and partner positions in value investment
funds and limited partnerships. From 1979 to 1983, Mr. Dearbaugh held
positions at Cummins Diesel ReCon, Cummins Engine Company's Aftermarket
Remanufacturing Division including General Manager of Fuel Systems,
Director-Product Management, and Manager of Sales & Marketing. From 1974 to
1979, Mr. Dearbaugh held several positions in industrial engineering and
technical sales at Atlas Crankshaft, a manufacturing division of Cummins
Engine Company.
THOMAS R. KAWSKY became President of Autocraft Industries in March 1998
following the Autocraft Acquisition. Prior to that he served as Vice
President and General Manager of the OEM Division of Fred Jones Enterprises
since October 1997 and before joining Fred Jones he served as Vice
President--Manufacturing for the G&O Division of TransPro, Inc. since March
1997. Prior to that, Mr. Kawsky was employed by Cummins Engine Company for
26 years, where he served most recently as General Manager--Engines for the
Cummins Diesel ReCon Division.
MICHAEL L. LEPORE has been President of CRS since 1984. From 1976 to
1984 Mr. LePore was manager of U.S. Operations for Borg Warner Parts and
Service Division, a subsidiary of Borg Warner LTD U.K.
ROBERT ANDERSON became a director of the Company in March 1997. Mr.
Anderson has been associated with Rockwell International Corporation since
1968, where he has been Chairman Emeritus since 1990 and served previously 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 Gulfstream Aerospace Corporation, Motor Cargo Industries, Inc.,
Optical Data Systems Company and The Timken Company.
RICHARD R. CROWELL became a director of the Company in July 1994. Mr.
Crowell is President and a founding partner of ACP. Prior to forming ACP 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 August 1997. Prior to
his retirement in early 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 a Vice President of General Electric
Company since 1980. Mr. Frey is a director of USF&G Corporation, Praxair,
Inc., First American Financial Corporation, Roadway Express and Promus Hotel
Corp.
45
MARK C. HARDY became a director of the Company in July 1994. Mr. Hardy
is a Principal of ACP and joined ACP in June 1993. Prior to joining ACP, Mr.
Hardy was an Associate at Bain & Company, a consulting firm.
DR. MICHAEL J. HARTNETT became a director of the Company in July 1994.
Since March 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 March 1997. Mr.
Parsky is the Chairman and a founding partner of ACP. Prior to forming ACP
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 July 1994. Mr.
Roeder is a founding partner and Managing Director of ACP. Prior to forming
ACP 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 and Chairman Emeritus of the Board
of Directors since August 1997 and prior to that served as Chairman of the
Board since July 1994. Mr. Smith was the President and Chief Executive
Officer of the Company from July 1994 until October 1996. From March 1993 to
July 1994, Mr. Smith served as a consultant to ACP in connection with the
Initial Acquisitions. From March 1992 to March 1993, Mr. Smith was President
of the Rucker Fluid Power Division of Lucas Industries, plc. Prior to that,
Mr. Smith 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 August 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 an executive officer and Senior Vice
President of the General Electric Company, from January 1992 until his
retirement. Mr. Stonesifer is also a director of Grand Union Co.
DIRECTOR NOMINEE
Fred J. Hall has been nominated to fill a newly created directorship
resulting from the directors' expansion of the Board of Directors from 10 to
11 members effective May 6, 1998. Mr. Hall is Chairman of the Board,
President and Chief Executive Officer of Fred Jones Enterprises, which in
March 1998 completed the sale of Autocraft to the Company. In addition to
being employed in various capacities by Fred Jones Enterprises and its
affiliates since 1977, Mr. Hall served as Deputy Assistant Secretary of State
for European and Canadian Affairs from 1986 to 1988. Mr. Hall is 46 years
old.
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
Forms 4 were not timely filed on July 10, 1997 by Mr. LePore and on November
10, 1997 by Mr. Smith, in each case to report the exercise of stock options.
These oversights were subsequently corrected when Mr. LePore reported his
transaction in a Form 4 filed in December 1997 and Mr. Smith reported his
transaction in a Form 5 filed in February 1998.
46
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 those persons who were, as of December 31, 1997, (i) the Company's
Chief Executive Officer, (ii) the four other most highly compensated
executive officers of the Company and its subsidiaries during the last fiscal
year, and (iii) the Chairman Emeritus of the Company's Board of Directors
(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
- --------------------------- ---- --------- -------- -------------- ------------
Stephen J. Perkins 1997 $300,000 $225,000 -- --
Chairman of the Board, President 1996 70,385 125,000 498,000 --
and Chief Executive Officer(4) 1995 -- -- -- --
James R. Wehr 1997 282,728 154,086 35,088 --
President, Aaron's(5) 1996 282,297 300,000 -- --
1995 258,000 -- -- --
Michael L. LePore 1997 232,425 71,377 -- --
President, CRS 1996 226,520 181,745 -- --
1995 160,838(6) 179,038(7) 70,176 --
Wesley N. Dearbaugh 1997 200,000 47,400 -- --
President, ATC Distribution 1996 116,457 50,000 140,352 --
Group 1995 -- -- -- --
John C. Kent 1997 150,000 75,000 -- 25,000(8)
Chief Financial Officer 1996 127,918 100,000 35,088 --
1995 124,615 12,000 -- --
William A. Smith 1997 242,081 -- -- --
Chairman Emeritus of the 1996 319,196 315,803 -- --
Board of Directors(9) 1995 300,000 -- -- --
_______________
(1) For information regarding the salary of certain Named Executive Officers in
1998, see "Executive Compensation--Employment Agreements."
(2) Bonuses for a particular year are paid during the first quarter of the
following year.
(3) Consists of options to purchase securities of the Company, which options
were issued pursuant to the Company's 1996 Stock Incentive Plan. Pursuant
to the 1996 Stock Incentive Plan, the Compensation and Human Resources
Committee makes recommendations to the Board of Directors regarding the
terms and conditions of each option granted.
(4) Mr. Perkins joined the Company as President and Chief Executive Officer in
October 1996 and was appointed Chairman of the Board in August 1997.
(5) Mr. Wehr ceased to be President of Aaron's in February 1998.
(6) Includes five months' salary of $56,777 prior to the acquisition of CRS by
the Company in April 1995.
(7) Includes $86,759 of bonus earned prior to the acquisition of CRS by the
Company in April 1995.
(8) Consists of a one-time bonus paid in connection with Mr. Kent's relocation
from Washington to Illinois.
(9) Mr. Smith served as the Company's President and Chief Executive Officer
until October 1996 and as the Chairman of the Board until August 1997. In
August 1997 his annual salary was adjusted from $326,224 to $126,224.
47
OPTION GRANTS TABLE
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1997:
Individual Grants Potential
------------------------------- Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise For Option Term(1)
Options Granted Employees in Price Expiration -------------------------
Name (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ------------------------------ --------------- ------------- --------- ---------- -------- ---------
Stephen J. Perkins . . . . . . -- -- -- -- -- --
James R. Wehr. . . . . . . . . 35,088(2) 27.0% $17.25 1/1/07 $380,650 $964,641
Michael L. LePore. . . . . . . -- -- -- -- -- --
Wesley N. Dearbaugh. . . . . . -- -- -- -- -- --
John C. Kent . . . . . . . . . -- -- -- -- -- --
William A. Smith . . . . . . . -- -- -- -- -- --
_____________
(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 Company's 1996 Stock Incentive Plan.
One third of the options vest and become exercisable on each of January 1,
1998, 1999 and 2000 and expire on January 1, 2007.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
Shown below is information relating to the exercise of stock options during
1997 by the Named Executive Officers and the value of unexercised options for
each of the Named Executive Officers as of December 31, 1997:
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
- ------------------------------ ---------- ---------- ----------- ------------- ----------- -------------
Stephen J. Perkins . . . . . . -- -- 166,000 332,000 $2,233,530 $4,467,060
James R. Wehr. . . . . . . . . 70,000 $1,370,600 70,352(2) 35,088 1,157,642 30,702
Michael L. LePore. . . . . . . 35,088 581,759 -- 35,088 -- 577,373
Wesley N. Dearbaugh. . . . . . -- -- 35,087 105,265 472,096 1,416,341
John C. Kent . . . . . . . . . -- -- 58,480 46,784 927,200 699,655
William A. Smith . . . . . . . 230,000 4,826,272 612,106(3) -- 10,072,204 --
__________________
(1) Calculated using the closing price on December 31, 1997 of
$18.125 per share.
(2) These options were exercised in January 1998.
(3) 147,500 of these options were exercised during the first two months
of 1998.
EMPLOYMENT AGREEMENTS
Stephen J. Perkins entered into a three year employment agreement with
the Company effective as of October 7, 1996, pursuant to which he serves as
Chairman of the Board, President and Chief Executive Officer of the Company
at a current annual salary of $335,000. The employment agreement with Mr.
Perkins contains a noncompete provision for a period of 18 months from the
cessation of his employment with the Company and a nondisclosure provision
which is effective for the term of the employment agreement and indefinitely
thereafter.
48
Mr. Perkins is also entitled to participate in any bonus, incentive or other
benefit plans provided by the Company to its employees.
James R. Wehr entered into an employment agreement with Aaron's
effective as of August 2, 1994, pursuant to which he served as President of
Aaron's until February 1998 when he stepped down as an officer. Mr. Wehr
will continue as an employee of Aaron's until the end of 1998 at an annual
salary of $287,534. The employment agreement and related agreements with Mr.
Wehr contain a noncompete provision for a period ending August 1, 1999 and a
nondisclosure provision which is effective for the term of his employment
with Aaron's and indefinitely thereafter. Mr. Wehr is also entitled to
participate in any bonus, incentive or other benefit plans provided by
Aaron's to its employees.
Michael L. LePore entered into a three year employment agreement with
CRS effective as of June 1, 1995, pursuant to which he serves as President of
CRS at a current annual salary of 236,376. The employment agreement and
related agreements with Mr. LePore contain a noncompete provision for a
period ending June 1, 2002 and a nondisclosure provision which is effective
for the term of his employment with CRS and indefinitely thereafter. Mr.
LePore is also entitled to participate in any bonus, incentive or other
benefit plans provided by CRS to its employees.
John C. Kent entered into a three year employment agreement with the
Company effective as of October 1, 1996, pursuant to which he serves as Chief
Financial Officer of the Company at a current annual salary of $165,000. The
employment agreement with Mr. Kent contains a noncompete provision for a
period of 18 months from the cessation of his employment with the Company and
a nondisclosure provision which is effective for the term of the employment
agreement and indefinitely thereafter. Mr. Kent is also entitled to
participate in any bonus, incentive or other benefit plans provided by the
Company to its employees.
William A. Smith entered into an employment agreement with the Company
effective as of August 1, 1997 pursuant to which he serves as Chairman
Emeritus of the Board of Directors of the Company until December 31, 1998 at
a current annual salary of $126,224. The employment agreement with Mr. Smith
contains a noncompete provision for a period of 18 months from the cessation
of his employment with the Company and a nondisclosure provision which is
effective for the term of the employment agreement and indefinitely
thereafter. This agreement replaced an earlier employment agreement with the
Company pursuant to which Mr. Smith served as Chairman of the Board,
President and Chief Executive Officer of the Company at an annual salary of
$316,000 (subject to cost of living adjustments).
Ronald E. Bradshaw entered into a three year employment agreement with
the Company effective as of March 6, 1998, pursuant to which he serves as
Executive Vice President of the Company at a current annual salary of
$275,000. The employment agreement with Mr. Bradshaw contains a noncompete
provision for a period of 18 months from the cessation of his employment with
the Company and a nondisclosure provision which is effective for the term of
the employment agreement and indefinitely thereafter. Mr. Bradshaw is also
entitled to participate in any bonus, incentive or other benefit plans
provided by the Company to its employees.
Joseph Salamunovich entered into a three year employment agreement with
the Company effective as of March 17, 1997, pursuant to which he serves as
Vice President, General Counsel and Secretary of the Company at a current
annual salary of $173,000. The employment agreement with Mr. Salamunovich
contains a noncompete provision for a period of 18 months from the cessation
of his employment with the Company and a nondisclosure provision which is
effective for the term of the employment agreement and indefinitely
thereafter. Mr. Salamunovich is also entitled to participate in any bonus,
incentive or other benefit plans provided by the Company to its employees.
Kenneth A. Bear entered into an employment agreement with Aaron's
effective as of July 28, 1994, pursuant to which he serves as President of
Aaron's at a current annual salary of $180,000. The employment agreement
with Mr. Bear contains a nondisclosure provision which is effective for the
term of his employment with Aaron's and indefinitely thereafter. Mr. Bear is
also entitled to participate in any bonus, incentive or other benefit plans
provided by Aaron's to its employees.
49
1996 STOCK INCENTIVE PLAN
Upon completion of the Reorganization, the Company assumed the Amended
and Restated 1994 Stock Incentive Plan of Holdings and renamed it the 1996
Stock Incentive Plan (the "Stock Plan"). Pursuant to the Stock Plan,
officers, directors, employees and consultants of the Company and its
subsidiaries are eligible to receive options to purchase Common Stock and
other awards. The Stock Plan is administered by the Compensation and Human
Resources Committee, which has broad authority in administering and
interpreting the Stock Plan. Awards 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. Options granted to
employees under the Stock Plan 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. An award granted
under the Stock Plan to an employee or independent contractor 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 Compensation and Human
Resources Committee, any change of control of the Company.
As of February 27, 1998, there were outstanding options to purchase an
aggregate of 1,678,892 shares of Common Stock granted to officers and
employees of the Company and its subsidiaries and certain independent
contractors pursuant to the Existing Stock Plan. The exercise price of these
options are as follows:
NUMBER OF OPTION SHARES Exercise Price
----------------------- --------------
839,276 $ 1.67
733,440 4.67
35,088 14.75
12,000 15.25
35,088 17.25
24,000 18.25
Each option is subject to certain vesting provisions and expires on the
tenth anniversary of the date of grant. As of February 27, 1998, the number
of shares available for issuance pursuant to options yet to be granted under
the Existing Stock Plan was 33,606. For certain information regarding
options granted to 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 ACP, which is the general partner of Aurora Equity
Partners, a significant 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., also a significant stockholder of
the Company. See Item 12. "Security Ownership of Certain Beneficial Owners
and Management." In addition, Messrs. Crowell and Parsky are two of the
three managing directors of ACP, which provides management services to the
Company pursuant to a management services agreement. See Item 13. "Certain
Relationships and Related Transactions."
50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of each class of
issued and outstanding voting securities of the Company, as of February 27,
1998, by each director and director nominee 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). . . . . . . . . 9,273,598 46.7
Aurora Overseas Equity Partners I, L.P. (other beneficial owners:
Richard R. Crowell, Gerald L. Parsky and Richard K. Roeder)(3)(4) . . . 3,683,660 18.5
General Electric Pension Trust(5). . . . . . . . . . . . . . . . . . . . . 1,825,652 9.2
Stephen J. Perkins(6)(7) . . . . . . . . . . . . . . . . . . . . . . . . . 167,000 *
John C. Kent(7)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,480 *
Wesley N. Dearbaugh(7)(9). . . . . . . . . . . . . . . . . . . . . . . . . 36,088 *
Michael L. LePore(10). . . . . . . . . . . . . . . . . . . . . . . . . . . 36,688 *
James R. Wehr(11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718,548 3.6
Robert Anderson(12). . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,628 *
Richard R. Crowell(2)(4)(13)(14) . . . . . . . . . . . . . . . . . . . . . 10,335,468 52.0
Dale F. Frey(15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Mark C. Hardy(13)(14)(16). . . . . . . . . . . . . . . . . . . . . . . . . 12,460 *
Dr. Michael J. Hartnett(17). . . . . . . . . . . . . . . . . . . . . . . . 70,176 *
Gerald L. Parsky(2)(4)(13)(14)(18) . . . . . . . . . . . . . . . . . . . . 10,335,468 52.0
Richard K. Roeder(2)(4)(13)(14). . . . . . . . . . . . . . . . . . . . . . 10,335,468 52.0
J. Richard Stonesifer(19). . . . . . . . . . . . . . . . . . . . . . . . . -- --
William A. Smith(20) . . . . . . . . . . . . . . . . . . . . . . . . . . . 698,484 3.7
Fred J. Hall(21) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,600 *
All directors and officers as a group (20 persons)(22) . . . . . . . . . . 12,186,712 58.8
_______________
* Less than 1%.
(1) The shares of Common Stock underlying options or warrants that are
exercisable as of February 27, 1998 or that will become exercisable within
60 days thereafter are deemed to be outstanding for the purpose of
calculating the beneficial ownership of the holder of such options or
warrants, but are not deemed to be outstanding for the purpose of computing
the beneficial ownership of any other person.
(2) Consists of (i) 6,651,808 shares owned by AEP (one of the Aurora
Partnerships), (ii) 1,825,652 shares owned by the General Electric Pension
Trust ("GEPT") (See Note (5) below) and (iii) 796,138 shares that are
subject to an irrevocable proxy granted to the Aurora Partnerships by
certain holders of Common Stock, including Messrs. 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 transfer of such shares. AEP is a Delaware limited
partnership the general partner of which is ACP, a Delaware limited
partnership whose general partner is Aurora Advisors, Inc. ("AAI").
Messrs. Crowell, Parsky and Roeder are the sole stockholders and directors
of AAI, are limited partners of ACP and may be deemed to beneficially share
ownership of the Company's Common Stock beneficially owned by AEP and may
be deemed to be the organizers of the Company under regulations promulgated
under the Securities Act of 1933.
(3) The address for this beneficial holder is West Wind Building, P.O. Box
1111, Georgetown, Grand Cayman, Cayman Islands, B.W.I.
51
(4) Consists of (i) 1,061,870 shares owned by AOEP, (ii) 1,825,652 shares owned
by GEPT (See Note (5) below) and (iii) 796,138 shares that are subject to
an irrevocable proxy granted to AEP and AOEP by certain holders of Common
Stock, including Messrs. 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 transfer of such shares. AOEP is a
Cayman Islands limited partnership the general partner of which is Aurora
Overseas Capital Partners, L.P. ("AOCP"), a Cayman Islands limited
partnership whose general partner is Aurora Overseas Advisors, Ltd.
("AOAL"). Messrs. Crowell, Parsky and Roeder are the sole stockholders and
directors of AOAL, are limited partners of AOCP and may be deemed to
beneficially own the shares of the Company's Common Stock beneficially
owned by AOEP.
(5) With limited exceptions, GEPT has agreed to vote these shares in the same
manner as the Aurora Partnerships vote their respective shares of the
Company's Common Stock. This provision terminates upon the transfer of
such shares. The address of GEPT is 3003 Summer Street, Stamford, CT
06905.
(6) Includes 166,000 shares of Common Stock subject to options granted under
the Stock Plan that are exercisable as of February 27, 1998 or that will
become exercisable within 60 days thereafter. Excludes 332,000 shares of
Common Stock subject to options granted under the Stock Plan that are not
exercisable within 60 days of February 27, 1998.
(7) The address for this beneficial holder is 900 Oakmont Lane, Suite 100,
Westmont, IL 60559.
(8) Includes 58,480 shares of Common Stock subject to options granted under the
Stock Plan that are exercisable as of February 27, 1998 or that will become
exercisable within 60 days thereafter. Excludes 46,784 shares of Common
Stock subject to options granted under the Stock Plan that are not
exercisable within 60 days of February 27, 1998.
(9) Includes 35,088 shares of Common Stock subject to options granted under the
Stock Plan that are exercisable as of February 27, 1998 or that will become
exercisable within 60 days thereafter. Excludes 105,264 shares of Common
Stock subject to options granted under the Stock Plan that are not
exercisable within 60 days of February 27, 1998.
(10) Excludes 35,088 shares of Common Stock subject to options granted under the
Stock Plan that are not exercisable within 60 days of February 27, 1998.
Mr. LePore's address is 400 Corporate Drive, Mahwah, NJ 07430.
(11) Includes 11,696 shares of Common Stock subject to options granted under the
Stock Plan that are exercisable as of February 27, 1998 or that will become
exercisable within 60 days thereafter. Excludes 23,392 shares of Common
Stock subject to options granted under the Stock Plan that are not
exercisable within 60 days of February 27, 1998. Mr. Wehr's address is
2699 North Westgate, Springfield, MO 65803.
(12) Includes 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. Excludes 12,000 shares of Common Stock
subject to options granted under the Stock Plan that are not exercisable
within 60 days of February 27, 1998. Mr. Anderson's address is
10877 Wilshire Boulevard, Suite 1405, Los Angeles, CA 90024-4341.
(13) The address for this beneficial holder is 1800 Century Park East,
Suite 1000, Los Angeles, CA 90067.
(14) The shares actually held 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.
(15) Excludes 12,000 shares of Common Stock subject to options granted under the
Stock Plan that are not exercisable within 60 days of February 27, 1998.
Mr. Frey's address is One Gorham Island, Westport, CT 06880.
(16) Includes 4,000 shares of Common Stock subject to options granted under the
Stock Plan that are exercisable as of February 27, 1998 or that will become
exercisable within 60 days thereafter. Excludes 8,000 shares of Common
Stock subject to options granted under the Stock Plan that are not
exercisable within 60 days of February 27, 1998.
52
(17) Consists of shares of Common Stock subject to exercisable warrants. Mr.
Hartnett's address is 60 Round Hill Road, Fairfield, CT 06430.
(18) Includes 2,000 shares held by Mr. Parsky's wife, as to which Mr. Parsky
disclaims beneficial ownership.
(19) Excludes 12,000 shares of Common Stock subject to options granted under the
Stock Plan that are not exercisable within 60 days of February 27, 1998.
Mr. Stonesifer's address is 8473 Bay Colony Drive, Naples, FL 34108.
(20) Includes 464,606 shares of Common Stock subject to options that are
exercisable as of February 27, 1998 or that will become exercisable within
60 days thereafter. Mr. Smith's address is 629 SW 293rd Street, Federal
Way, WA 98023.
(21) Consists of shares owned by Fred Jones Industries A Limited Partnership, a
Texas limited partnership ("Fred Jones Industries"), which is a significant
stockholder of Fred Jones Enterprises. The general partner of Fred Jones
Industries is a corporation of which Mr. Hall is a director, officer and
significant stockholder. Mr. Hall is also a limited partner of Fred Jones
Industries.
(22) Includes 868,526 shares of Common Stock subject to warrants and options
that are exercisable as of February 27, 1998 or that will become
exercisable within 60 days thereafter. Excludes 621,312 shares of Common
Stock subject to options granted under the Stock Plan that are not
exercisable within 60 days of February 27, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company believes the transactions described below, which were
entered into by the Company and its subsidiaries, were beneficial to the
respective companies, and were on terms at least as favorable to the
respective companies as could have been obtained from unaffiliated third
parties pursuant to arms-length negotiations.
RELATIONSHIP WITH ACP
The Company was formed in 1994 at the direction of ACP, which is
affiliated with the Aurora Partnerships. ACP is controlled by Messrs.
Crowell, Parsky and Roeder, who are directors of the Company. As of March 9,
1998, the Company had paid ACP aggregate fees of approximately $4.2 million
for investment banking services provided by ACP in connection with the
Company's acquisitions in 1995-1998.
The Company also pays to ACP a base annual management fee of
approximately $540,000 for advisory and consulting services pursuant to a
written management services agreement (the "Management Services Agreement").
ACP 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 July 1997 from $530,000. If the Company's EBITDA in
any year exceeds management's budgeted EBITDA by 15.0% or more for that year,
ACP 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 1997, ACP did
not receive this additional management fee in 1997. In the event the Company
consummates any significant acquisitions or dispositions, ACP will be
entitled to receive a closing fee from the Company 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.
Notwithstanding the foregoing, no payment will be made to ACP 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 Company's 12% Senior Subordinated Notes due 2004 or the
Company's bank credit facility. The Management Services Agreement also
provides that the Company
53
shall provide ACP and its directors, employees, partners and affiliates with
customary indemnification against all actions not involving gross negligence
or willful misconduct.
The base annual management fee payable to ACP 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 February 13, 1998,
the collective beneficial ownership of the Aurora Partnerships for purposes
of the Management Services Agreement was approximately 52%. See Item 12.
"Security Ownership of Certain Beneficial Owners and Management."
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 ACP. 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 ACP.
AUTOCRAFT ACQUISITION
In March 1998 the Company purchased Autocraft from Fred Jones
Enterprises (then known as Autocraft Industries, Inc.) for $112.5 million in
cash plus up to an additional $12.5 million to be paid in 1999 based on the
performance of Autocraft's European operations during 1998. Of the $112.5
million, $1.25 million was paid to Fred Jones Industries in exchange for an
agreement from Fred Jones Industries to cooperate with the Company and not
compete against it for a specified period of time following the Autocraft
Acquisition. In connection with the Autocraft Acquisition, the Company
entered into a lease with Fred Jones Enterprises pursuant to which the
Company leases a manufacturing facility on a month to month basis at a rate
of $21,000 per month.
Fred J. Hall, who is nominated to serve as a director of the Company, is
(i) the Chairman of the Board, President and Chief Executive Officer and a
significant stockholder of Fred Jones Enterprises, and (ii) a director,
officer and significant stockholder of the corporation that is the general
partner of Fred Jones Industries, which is also a significant stockholder of
Fred Jones Enterprises. Mr. Hall is also a limited partner of Fred Jones
Industries.
FACILITY LEASES
In connection with its acquisition of Aaron's, the Company entered into
a lease with CRW, Inc., an affiliate of C.R. Wehr and James R. Wehr (whose
individual family trusts owned all of the outstanding capital stock of
Aaron's prior to its acquisition by the Company), for Aaron's headquarters
and primary remanufacturing facility located in Springfield, Missouri with an
initial term beginning as of January 1, 1994 and expiring as of December 31,
2004, subject to the Company's option to extend the term for a period of five
years. The monthly base rent is $33,105 and the Company is responsible for
paying property taxes, insurance and maintenance expenses for the leased
premises. The Company also entered into three leases with C.R. Wehr, Westway
Partnership, JRW, Inc. and C.J. Cates Real Estate Co. (each, an affiliate of
C.R. Wehr and James R. Wehr) for three manufacturing facilities comprising
approximately 84,000 square feet for an aggregate rent of $12,000 per month
with an initial term beginning as of January 1, 1994 and expiring as of
December 31, 1996 and December 31, 1998 (depending upon the facility),
subject to the Company's option to extend the term of the lease for a 30,000
square foot facility for one successive period of five years through December
31, 2003. In November 1994, the Company entered into another lease with the
same parties for a 98,800 square foot storage facility for monthly rent of
$7,300 per month. The initial term of the lease expired during 1995 and
pursuant to its terms, continues as a month-to-month lease until terminated.
The Company is responsible for paying
54
property taxes, insurance and maintenance expenses for each of these leased
premises. James R. Wehr is an executive officer of the Company.
In addition, the Company is a party to a lease with Patricia L.
Bridgeforth, Mr. Wehr's sister, for Aaron's 200,000 square foot core storage
facility. The lease has an initial term of ten years, expiring October 31,
2006, with an option to renew for five years. The base monthly rent is
$35,833 for the initial term, with specified increases for each renewal term.
The Company is also required to pay taxes, maintenance and operating
expenses.
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.
PAYMENT OF PREFERRED STOCK REORGANIZATION CONSIDERATION
In connection with the formation of the Company, in July and August 1994
Holdings issued shares of its preferred stock to each purchaser of Holdings
common stock, including the Aurora Partnerships and Messrs. Anderson,
Crowell, Hardy, Parsky, Roeder, Smith and Wehr (each of whom is a director of
the Company, except Mr. Wehr, who is a former executive officer), for
consideration of $100 per share. These shares were converted into shares of
the Company's preferred stock in the Reorganization in December 1996,
immediately after which the Company redeemed the preferred stock for an
amount per share equal to $100 plus an amount equal to the accrued and unpaid
dividends on the Holdings preferred stock through the date of the
Reorganization. Upon the redemption of their shares of preferred stock
Messrs. Anderson, Crowell, Hardy, Parsky, Roeder, Smith and Wehr received
$23,630, $159,195, $13,701, $176,403, $30,596, $70,765 and $1,414,051,
respectively. The Aurora Partnerships distributed their shares of preferred
stock to their respective general and limited partners prior to the
redemption.
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 1,825,652
shares of Common Stock owned by it.
55
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 25.
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)
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)
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
56
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)
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)
*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)
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 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
57
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., 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)
58
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.
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, 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
59
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.
*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.
*10.50 Amendment No. 1 to 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.
*10.51 Employment Agreement, dated as of July 28, 1994, between Kenneth A.
Bear and Aaron's Automotive Products, Inc.
*10.52 Employment Agreement, dated as of February 21, 1997, between Joseph
Salamunovich and Aftermarket Technology Corp.
*10.53 Employment Agreement, dated as of March 6, 1998, between Ronald E.
Bradshaw and Aftermarket Technology Corp.
*11 Statement Re Computation of Net Income Per Share
*21 List of Subsidiaries
60
*23 Consent of Ernst & Young LLP, independent auditors
*27 Financial Data Schedules
___________
* Filed herewith
(b) Reports on Form 8-K
During the last quarter of 1997, the Company filed a Report on Form 8-K
dated July 31, 1997 disclosing the acquisition of ATS Remanufacturing
pursuant to Item 2 of Form 8-K. No financial statements were required to be
filed pursuant to Item 7 of Form 8-K.
(c) Refer to (a) 3 above.
(d) Refer to (a) 2 above.
61
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 24, 1998.
AFTERMARKET TECHNOLOGY CORP.
By: /s/ Stephen J. Perkins
------------------------------
Stephen J. Perkins
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/ Stephen J. Perkins Chairman of the Board, President March 24, 1998
---------------------------- and Chief Executive Officer
Stephen J. Perkins (Principal Executive Officer)
/s/ John C. Kent Chief Financial Officer March 24, 1998
---------------------------- (Principal Financial and
John C. Kent Accounting Officer)
/s/ Robert Anderson Director March 24, 1998
----------------------------
Robert Anderson
/s/ Richard R. Crowell Director March 24, 1998
----------------------------
Richard R. Crowell
/s/ Dale F. Frey. Director March 24, 1998
----------------------------
Dale F. Frey.
/s/ Mark C. Hardy Director March 24, 1998
----------------------------
Mark C. Hardy
/s/ Michael J. Hartnett Director March 24, 1998
----------------------------
Michael J. Hartnett
/s/ Gerald L. Parsky Director March 24, 1998
----------------------------
Gerald L. Parsky
62
Signature Title Date
- ---------------------------- ------------------------------- --------------
/s/ Richard K. Roeder Director March 24, 1998
----------------------------
Richard K. Roeder
/s/ William A. Smith Chairman Emeritus of the March 24, 1998
---------------------------- Board of Directors
William A. Smith
/s/ J. Richard Stonesifer Director March 24, 1998
----------------------------
J. Richard Stonesifer
63
AFTERMARKET TECHNOLOGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
-------------------------
Balance at Charged to Charge to Balance
Beginning Costs and Other at End
of Period Expenses Accounts Deductions of Period
----------- ----------- ---------- ------------ ---------
Year ended December 31, 1995:
Reserve and allowances deducted
from asset accounts:
Allowance for uncollectible accounts $ 766 $ 1,239 $ 1,217(2) $ 753(1) $ 2,469
Reserve for inventory obsolescence 786 1,034 294(2) -- 2,114
Year ended December 31, 1996:
Reserve and allowances deducted from
asset accounts:
Allowance for uncollectible accounts 2,469 668 14(2) 1,825(1) 1,326
Reserve for inventory obsolescence 2,114 1,411 -- 784 2,741
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
(1) Accounts written off, net of recoveries
(2) Balances added through new acquisitions
S-1