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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21803
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AFTERMARKET TECHNOLOGY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4486486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE OAK HILL CENTER, SUITE 400
WESTMONT, IL 60559
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 455-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
of the Registrant (based on the closing price of such stock, as reported by The
Nasdaq National Market, on February 28, 2001) was $33.2 million.
The number of shares outstanding of the Registrant's Common Stock, as
of February 28, 2001, was 20,559,371 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
AFTERMARKET TECHNOLOGY CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
Page
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ITEM 1. BUSINESS............................................................................................ 1
ITEM 2. PROPERTIES..........................................................................................11
ITEM 3. LEGAL PROCEEDINGS...................................................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................................................12
ITEM 6. SELECTED FINANCIAL DATA.............................................................................13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................25
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................................................50
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................................50
ITEM 11. EXECUTIVE COMPENSATION..............................................................................53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................................................................57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................59
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....................................61
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 Group to acquire
Aaron's Automotive Products, Inc. ("Aaron's"), H.T.P., Inc. ("HTP"), Mamco
Converters, Inc. ("Mamco") and RPM Merit, Inc. ("RPM"). Aaron's, HTP, Mamco and
RPM as they existed prior to their acquisition by ATC are hereinafter
collectively referred to as the "Predecessor Companies." Subsequent to these
initial acquisitions, the Company acquired Component Remanufacturing
Specialists, Inc. ("CRS"), Mascot Truck Parts Inc. ("Mascot") and King-O-Matic
Industries Limited ("King-O-Matic") in 1995, Tranzparts, Inc. ("Tranzparts") and
Diverco, Inc. ("Diverco") in 1996, Replacement and Exchange Parts Co., Inc.
("REPCO"), ATS Remanufacturing ("ATS"), Trans Mart, Inc. ("Trans Mart") and the
Metran companies (Metran Automatic Transmission Parts Corp., Metran Boston, Inc.
and Metran Parts of Pennsylvania, Inc.) ("Metran") in 1997, and the OEM Division
("Autocraft") of The Fred Jones Companies, Inc. (formerly known as Autocraft
Industries, Inc.) in March 1998. At the end of 1997, Diverco, HTP, Mamco,
Metran, REPCO, Trans Mart and Tranzparts were merged together to form ATC
Distribution Group, Inc. ("ATCDG") and King-O-Matic and RPM became wholly owned
subsidiaries of ATCDG (ATCDG, King-O-Matic and RPM are collectively referred to
as the "Distribution Group"). RPM was merged into ATCDG at the end of 1998. In
February 1999, ATC sold Mascot. During the fourth quarter of 1999, the
Distribution Group acquired substantially all the assets of All Transmission
Parts, Inc. and its affiliate, All Automatic Transmission Parts, Inc.
(collectively "All Trans"). In October 2000, ATC sold the Distribution Group.
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 predecessors to such subsidiaries.
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.
In August 2000, the Company adopted a plan to discontinue a segment of
its business, known as the Independent Aftermarket, which consisted of the
Distribution Group and the U.S business that remanufactures domestic and foreign
engines primarily for sale through a branch distribution network into the
automotive aftermarket. As a result of this decision, the Independent
Aftermarket segment of its business has been reflected in the accompanying
consolidated financial statements and discussion and analysis as discontinued
operations. See "Discontinued Operations."
1
GENERAL
The Company is a leading remanufacturer and distributor of drivetrain
and electronic products used in the repair of vehicles in the automotive
aftermarket and a world-class provider of value added warehouse and distribution
services, returned material reclamation and disposition services. The Company's
principal products include remanufactured transmissions, torque converters,
engines, electronic control modules, instrument and display clusters and radios.
The Company also provides value added warehouse and distribution services,
turnkey order fulfillment and information services and returned material
reclamation and disposition services. The Company has two reportable segments:
the Drivetrain Remanufacturing ("Drivetrain") segment and the Logistics segment.
The Drivetrain segment consists of five operating units (Aaron's,
Autocraft Industries, Autocraft UK, CRS and ATS) that principally sell
factory-approved remanufactured transmissions directly to original equipment
manufacturers ("OEMs") primarily for use as replacement parts by their domestic
dealers during the warranty and post-warranty periods following the sale of a
vehicle. The principal customers for these transmissions are DaimlerChrysler
Corporation, Ford Motor Company, General Motors Corporation and certain foreign
OEMs. In addition, the Drivetrain segment sells select remanufactured engines to
certain European OEMs (including Ford's and GM's European operations and
Jaguar).
The Logistics segment consists of three operating units acquired in
the Autocraft acquisition: Logistics Services, a provider of value added
warehouse and distribution services, turnkey order fulfillment and information
services for AT&T Wireless Services; Autocraft Material Recovery, a provider of
returned material reclamation and disposition services (known as reverse
logistics), primarily for Ford and, to a lesser extent, General Motors; and
Autocraft Electronics, an automotive electronic components remanufacturing and
distribution business.
Since its formation, the continuing operations of the Company have
grown, both internally and through acquisitions at a compound annual revenue
growth rate of approximately 24%. The Company believes its core competencies and
the foundation of its success include (i) its remanufacturing technology, (ii)
world class fulfillment and customer service capabilities, (iii) excellent
information technology management and response skills, (iv) high quality
products with a sound ISO quality foundation and (v) excellent customer
relationships. In addition, the Company has benefited from industry trends
towards (i) 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 and (ii) the rapidly increasing use of third party
logistics providers as a cost effective logistics solution.
The Company's strategy is to continue growth both organically and
through strategic acquisitions. The Company intends to expand its business by:
(i) increased penetration of its existing customer base; (ii) the capture of new
Drivetrain and Logistics customers; and (iii) the introduction of new products
and services to both existing and new customers. The Company plans to supplement
these growth strategies with strategic and other opportunistic acquisitions in
the future.
See "Certain Factors Affecting the Company."
REMANUFACTURING
Remanufacturing is a process through which used assemblies are
returned to a central facility where they are disassembled and their component
parts cleaned, refurbished and tested. The usable component parts are then
combined with new parts in a high volume, precision assembly line or cellular
manufacturing process to create remanufactured assemblies.
When an assembly such as a transmission or engine fails, there are
generally three alternatives available to return the vehicle to operating
condition. The dealer or independent repair shop may: (i) remove the assembly,
disassemble it into its component pieces, replace worn or broken parts with
remanufactured or new components, and reinstall the assembly in the vehicle
("rebuild"); (ii) replace the assembly with an assembly from a remanufacturer
such as the Company; or (iii) in rare instances, replace the assembly with a new
assembly manufactured by the OEM.
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In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted by vehicle make and model and either placed into
immediate production or stored until needed. In the remanufacturing process, the
cores are evaluated and disassembled into their component parts and the
components that can be incorporated into the remanufactured product are cleaned,
refurbished and tested. All components determined not reusable or repairable are
replaced by other remanufactured or new components. Inspection and testing are
conducted at various stages of the remanufacturing process, and each finished
assembly is tested on equipment designed to simulate performance under operating
conditions. After testing, completed products are generally packaged for
immediate delivery.
The cores used in the Company's remanufacturing process for sale to
its OEM customers are provided primarily by the OEMs. In the case of OEMs other
than DaimlerChrysler, the dealers return cores to the OEM, which then ships them
to the Company. Chrysler cores are sent to the Company through its central core
return center. See "Drivetrain Customers."
There are three primary benefits of using remanufactured components
rather than rebuilt or new components in repair of vehicles:
- First, costs to the OEM associated with remanufactured assemblies
generally are 50% less than new or dealer-rebuilt assemblies due to
the remanufacturer's use of high volume manufacturing techniques and
salvage methods that enable the remanufacturer to refurbish and reuse
a high percentage of original components.
- Second, remanufactured assemblies are generally of consistent high
quality due to the precision manufacturing techniques, technical
upgrades and rigorous inspection and testing procedures employed in
remanufacturing. The quality of a rebuilt assembly is heavily
dependent on the skill level of the particular mechanic. In addition,
the proliferation of transmission and engine designs, the increasing
complexity of transmissions and engines that incorporate electronic
components and the shortage of highly trained mechanics qualified to
rebuild assemblies are leading to what management believes is a trend
toward the use of remanufactured assemblies for aftermarket repairs.
For warranty repairs, consistent quality is important to the OEM
providing the applicable warranty, because once installed, the
remanufactured product is usually covered by the OEM's warranty for
the balance of the original warranty period.
- Third, replacement of a component with a remanufactured component
generally takes considerably less time than the time needed to rebuild
the component, thereby significantly reducing the time the vehicle is
at the dealer or repair shop and allows the dealer and repair shops to
increase their volume of business.
The Company believes that because of this combination of high quality,
low cost and efficiency, the use of remanufactured assemblies for repairs is
growing compared to the use of new or rebuilt assemblies.
DRIVETRAIN REMANUFACTURING SEGMENT
The Company's Drivetrain segment consists of five operating units that
primarily remanufacture and sell transmissions directly to automobile
manufacturers. In addition, the Drivetrain segment sells select remanufactured
engines to certain European OEMs, including Ford's and General Motor's European
operations and Jaguar.
REMANUFACTURED TRANSMISSIONS
The Company remanufactures factory-approved transmissions for warranty
and post-warranty replacement of transmissions for DaimlerChrysler, Ford,
General Motors and several foreign OEMs, including Hyundai, Mitsubishi, Isuzu,
Subaru and Kia, primarily for their United States dealer networks. The number of
transmission models remanufactured by the Company has been increasing to
accommodate the greater number of models currently used in vehicles manufactured
by the Company's OEM customers.
3
REMANUFACTURED ENGINES
The Company operates a facility in England that remanufactures
factory-approved engines for several European OEMs, including Jaguar and the
European divisions of Ford and General Motors. These engines are used for
warranty and post-warranty replacement. The facility in England also does
assembly and modification of new production engines for certain of its OEM
customers.
DRIVETRAIN CUSTOMERS
The Company's largest Drivetrain segment customers are DaimlerChrysler
and Ford, to whom the Company primarily supplies remanufactured transmissions
for use in Chrysler and Ford automobiles and light trucks. Additionally, the
Company provides remanufactured components to several other OEMs including
transmissions to General Motors, Mitsubishi, Kia, Hyundai and Isuzu and engines
to Jaguar, Land Rover, Aston Martin and the European divisions of Ford and
General Motors. Products are generally 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.
Drivetrain segment sales accounted for 74.1%, 82.0% and 85.2% of the
Company's 2000, 1999 and 1998 revenues, respectively. Sales to DaimlerChrysler
accounted for 31.5%, 34.4% and 32.1% of the Company's revenues in 2000, 1999 and
1998, respectively, and sales to Ford accounted for 32.6%, 33.0% and 30.5% of
the Company's revenues in 2000, 1999 and 1998, respectively.
Historically, the Company has developed and maintained strong
relationships at many levels in both the corporate and factory organizations of
the Chrysler division of DaimlerChrysler. In recognition of the Company's
consistently high level of service and product quality throughout its
relationship with DaimlerChrysler, in each of the eight years prior to and
including 2000, the Company has received the highest award bestowed by Chrysler
to its suppliers for which the Company was eligible. The Company is one of a
select group of Chrysler's suppliers to receive such awards for the eight-year
period. Additionally, over the past two years, the Company has strengthened its
relationships with many of its other Drivetrain customers, as evidenced by the
award of new business with Ford, Jaguar, Isuzu and General Motors. The Company
has also recently received an award from Ford for "Dedication to Customer
Satisfaction" for its role in a production rework program.
All of the Company's facilities that remanufacture transmissions have
QS-9000 certification, a complete quality management system developed for
DaimlerChrysler, Ford, General Motors and truck manufacturers who subscribe to
the ISO 9002 quality standards. The system is designed to help suppliers, such
as the Company, develop a quality system that emphasizes defect prevention and
continuous improvement in manufacturing processes. Certain of the facilities
have also received Ford's Q1 quality certification.
DaimlerChrysler began implementing remanufacturing programs for its
Chrysler transmission models in 1986 and selected the Company as its sole
supplier of remanufactured transmissions in 1989. DaimlerChrysler has advised
the Company that, by implementing a remanufacturing program for Chrysler
vehicles, DaimlerChrysler has realized substantial warranty cost savings,
standardized the quality of its dealers' aftermarket repairs and reduced its own
inventory of replacement parts. Currently, the Company provides all
remanufactured front-wheel-drive transmissions purchased by DaimlerChrysler for
use in Chrysler vehicles. In late 1998, the Company commenced production of
remanufactured Chrysler rear-wheel-drive transmissions. The Company presently
does not provide remanufactured transmissions or other components to
DaimlerChrysler's Mercedes Benz division.
The Company began remanufacturing transmissions for Ford in 1989 and
for General Motors in 1985. The Company believes that it provides approximately
85% of the remanufactured transmissions purchased by Ford and approximately 30%
of the remanufactured transmissions purchased by General Motors.
LOGISTICS SEGMENT
The Company's Logistics segment is comprised of a warehouse,
distribution and turnkey order fulfillment and information services business, an
automotive electronic parts remanufacturing and distribution business and a
material
4
recovery parts processing and Internet-based auction business, all of which were
acquired as part of the Autocraft acquisition.
LOGISTICS SERVICES
The logistics services operating unit provides value added warehouse
and distribution services, turnkey order fulfillment and information services
for AT&T Wireless Services ("ATTWS"). As part of its product offering, the
Company provides bulk and direct fulfillment of cellular telephones and
accessories to ATTWS subscribers and partners and point-of-sale and other
marketing materials to ATTWS partners. The Company also provides accessory
packaging services, inventory tracking and management and processes all
warranty-service exchanges.
AUTOMOTIVE ELECTRONIC COMPONENTS
The automotive electronic components operating unit remanufactures
automotive electronic control modules (which manage various engine functions)
primarily for Delphi, remanufactures and distributes radios and instrument and
display clusters for General Motors, Delphi and Ford, and remanufactures and
distributes cellular telephones and other cellular products (E.G., navigation
systems) for Ford, General Motors, Audi, Jaguar and Volkswagen.
MATERIAL RECOVERY
As part of its relationship with Ford, the Company also provides
returned material reclamation and disposition services to assist Ford with the
management of its dealer parts inventory. Under this program, Ford dealers send
their excess parts inventory to the Company. The parts are then sorted and
disposed of in one of three ways: useful parts that are needed by other dealers
are redistributed; useful parts that are not needed by other dealers are sold to
remanufacturers, wholesale distributors and other third parties through an
innovative on-line Internet auction process; and useless parts are scrapped and
recycled. As a result of the introduction of the materials recovery program, the
number of parts that are sent to landfills has been significantly reduced to
less than 2%. The Company has recently expanded the scope of this business by
providing similar services, currently on a more limited scale, to General
Motors.
BUSINESS STRATEGY
The Company's strategy is to position itself as a world-class provider
of logistics and remanufacturing products and services. The Company expects to
achieve growth both organically and through strategic and opportunistic
acquisitions. The strategy for organic growth includes: (i) increasing
penetration of its current customer base; (ii) introducing new products and
services to both existing and new customers; and (iii) gaining new customers.
INCREASING SALES TO EXISTING CUSTOMERS
DRIVETRAIN CUSTOMERS. The Company intends to increase its business
with its existing Drivetrain customers by working with OEMs to increase dealer
utilization of remanufactured transmissions in both the warranty and
post-warranty periods. The Company is working in tandem with OEMs to highlight
to dealers the quality and cost advantages of using remanufactured assemblies
versus rebuilding. The Company is also working with OEMs to reduce the lag time
prior to the introduction of a remanufacturing program for new transmission
models and model years. In addition, the post-warranty repair market, which the
Company believes is significantly larger than the OEM dealer warranty repair
market, presents a growth opportunity. Currently, the vast majority of
post-warranty repairs are performed by aftermarket repair specialists rather
than by OEM dealers. Given the relatively low cost and high quality of
remanufactured components, OEM dealers can enhance their cost competitiveness
compared to independent service centers through the increased use of
remanufactured components as well as providing end customers with a high quality
product. To the extent that OEM dealers increase their level of post-warranty
repairs, the Company is well positioned to capitalize on this market growth. The
Company has introduced a number of new transmission models and related
drivetrain products in the last several years for its OEM customers.
LOGISTICS CUSTOMERS. The Company intends to increase penetration of
its existing Logistics customer base, broadening its offering of products and
services by focusing on its core competencies and how it can add value in
satisfaction of the customer's needs. Examples of this include the Company being
awarded by ATTWS, during 2000,
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programs covering the packaging and distribution of cellular telephone
accessories and the distribution of point-of-sale and other marketing materials.
INTRODUCING NEW PRODUCTS
DRIVETRAIN SEGMENT. The Company believes that OEMs recognize that the
use of remanufactured assemblies provide a high quality, lower cost alternative
to rebuilding damaged assemblies or replacing them with new assemblies. For this
reason, the Company believes that OEMs are interested in working with large,
high quality remanufacturers to reduce the OEMs' warranty costs and increase
their parts sales into the post-warranty aftermarket. The Company continues to
work with its OEM customers to identify additional remanufactured products and
services where the Company can provide value to the OEM. In this way, the
Company believes that it will be able to leverage its customer relationships and
remanufacturing competency. In 2000, the Company was selected by Ford to supply
remanufactured transmissions for use in Ford's new Focus, which is a global
platform, and to supply a new line of Motorcraft-branded remanufactured
transmissions.
LOGISTICS SEGMENT. The Company also intends to leverage its core
competencies in logistics and electronics remanufacturing by working with its
existing and new customers to identify products and services where the Company
can add value in satisfaction of the customers' needs. Examples of this strategy
include the Company being awarded a small but strategic contract by a new
customer for vehicle disassembly and salvage and the awarding by General Motors
of a pilot for a national material recovery program.
ESTABLISHING NEW CUSTOMER RELATIONSHIPS
DRIVETRAIN CUSTOMERS. The Company believes that opportunities for
growth exist with several foreign OEMs regarding their United States-based
remanufacturing programs. The Company believes that this represents an
opportunity for growth and is currently working to develop programs with certain
of these OEMs.
LOGISTICS CUSTOMERS. The Company believes that its logistics services
business should be attractive to new customers who recognize that outsourcing
this function will enable them to both focus on their core competencies and have
an efficient product distribution system. The Company also believes that the
ability to sell product via Internet auctions, cost savings and environmental
benefits provided by its material recovery business, will be attractive to other
OEMs.
The foregoing discussion of the Company's business strategy contains
forward-looking statements. See "Forward-Looking Statement Notice."
DISCONTINUED OPERATIONS
In August 2000, the Company adopted a plan to discontinue a segment of
its business, known as the Independent Aftermarket, which contained the
Distribution Group (a distributor of remanufactured transmissions and related
drivetrain components to independent aftermarket customers) and the U.S.
business that remanufactures domestic and foreign engines primarily for sale
through a branch distribution network into the automotive aftermarket (as
distinguished from the Drivetrain segment business that remanufactures engines
in England for OEMs). As a result of this decision, the Independent Aftermarket
segment of its business has been reflected in the accompanying consolidated
financial statements and discussion and analysis as discontinued operations.
In October 2000, the Company completed the sale of the Distribution
Group to ATCDG Acquisition Corp., Inc. ("Buyer"), an indirect wholly owned
subsidiary of Aceomatic-Recon Holdings Corporation, which is an affiliate of The
Riverside Company, for $60.1 million in cash, Series B Preferred Stock of Buyer
valued by the Company at $1.9 million (stated value of $8.7 million net of a
valuation allowance of $6.8 million) and an 18% senior subordinated promissory
note of Buyer in a principal amount of $10.1 million and a discounted value of
$8.4 million, which note is due in October 2005.
6
COMPETITION
In its Drivetrain segment, the Company primarily competes in the
market for remanufactured transmissions sold to the automotive aftermarket
directly through the OEM dealer networks. This market, narrowly defined, is one
in which the majority of industry supply comes from a limited number of
participants. Competition is based primarily on product quality, service,
delivery, technical support and price and tends to be split along customer
lines. The Company believes that it has established excellent relationships with
its customers and believes 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.
In its Logistics segment, the Company primarily competes in a
fragmented, high growth market as a niche participant offering a specialized
value-added service requiring severe service level requirements. Based on its
world-class performance levels, the Company believes it is well positioned to
compete in this rapid growth market. Some of the Company's competitors in this
segment are larger and have greater financial and other resources than the
Company.
EMPLOYEES
As of December 31, 2000, the Company had approximately 3,500 full-time
employees. The Company believes its employee and labor relations are good. The
Company has never experienced any work stoppage and none of its employees are
members of any labor union.
ENVIRONMENTAL
The Company is subject to various evolving federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and 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, some of
which have been subsequently divested, 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 or since the acquisitions, and in part on
the indemnification provisions of the agreements entered into in connection with
the Company's acquisitions, the Company will not incur any material liabilities
relating to these matters.
The company from which RPM acquired its assets (the "Prior RPM
Company") has been identified by the United States Environmental Protection
Agency (the "EPA") as one of many potentially responsible parties for
environmental liabilities associated with a "Superfund" site located in the area
of RPM's former manufacturing facilities and current distribution facility in
Azusa, California. The Federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund")
provides for cleanup of sites from which there has been a release or threatened
release of hazardous substances, and authorizes recovery of related response
costs and certain other damages from potentially responsible parties ("PRPs").
PRPs are broadly defined under CERCLA, and generally include present owners and
operators of a site and certain past owners and operators. As a general rule,
courts have interpreted CERCLA to impose strict, joint and several liability
upon all persons liable for cleanup costs. As a practical matter, however, at
sites where there are multiple PRPs, the costs of cleanup typically are
allocated among the PRPs according to a volumetric or other standard. The EPA
has preliminarily estimated that it will cost approximately $47.0 million to
construct and approximately $4.0 million per year for an indefinite period to
operate an interim remedial groundwater pumping and treatment system for the
part of the Superfund site within which RPM's
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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.
In connection with the October 2000 sale of the Distribution Group,
the Company has agreed to indemnify the buyer against (i) environmental
liability at former Distribution Group facilities that had been closed prior to
the Distribution Group sale, including the former manufacturing facility in
Azusa, California mentioned above and the former manufacturing facilities in
Mexicali, Mexico and Dayton, Ohio (ii) any other environmental liability of the
Distribution Group relating to periods prior to the Distribution Group sale, in
most cases subject to a $750,000 deductible and a $12.0 million cap.
CERTAIN FACTORS AFFECTING THE COMPANY
Set forth below are certain factors that may affect the Company's
business:
DEPENDENCE ON SIGNIFICANT CUSTOMERS
In 2000, the Company had three customers that individually accounted
for more than 10% of revenues. Ford accounted for approximately 32.6%, 33.0% and
30.5% of the Company's net sales for 2000, 1999 and 1998, respectively.
DaimlerChrysler accounted for 31.5%, 34.4% and 32.1% of net sales in 2000, 1999
and 1998, respectively, and ATTWS accounted for 15.3%, 7.0% and 4.1% of the
Company's net sales during 2000, 1999 and 1998, respectively.
DaimlerChrysler and Ford, like other North American OEMs, generally
require their dealers using remanufactured products to use only those from
approved suppliers. Although the Company is currently the only factory-approved
supplier of remanufactured transmissions for Chrysler vehicles and one of two
suppliers to Ford, DaimlerChrysler and Ford (like the Company's other OEM
customers) are not obligated to continue to purchase the Company's products and
there can be no assurance that the Company will be able to maintain or increase
the level of its sales to them or that they will not approve other suppliers in
the future. In addition, within the last five years the standard new vehicle
warranty for Chrysler vehicles was reduced from seven years/70,000 miles to
three years/36,000 miles and a shorter warranty could be implemented in the
future. Any such action could have the effect of reducing the amount of warranty
work performed by Chrysler dealers. An extended, substantial decrease in orders
from DaimlerChrysler or Ford would have a material adverse effect on the
Company. See "Drivetrain Remanufacturing Segment--Drivetrain 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. The ability to obtain cores of the types and in the
quantities required by the Company is critical to the Company's ability to meet
demand and expand production. With the increased acceptance in the aftermarket
of remanufactured assemblies, the demand for cores has increased. The Company
periodically has experienced situations in which the inability to obtain
sufficient cores has limited its ability to accept all of the orders available
to it. There can be no assurance that the Company will
8
not experience core shortages in the future. If the Company were to experience
such a shortage for an extended period of time, it could have a material adverse
effect on the Company.
Certain component parts required in the Company's transmission
remanufacturing process are manufactured by the Company's OEM customers. The
Company has experienced shortages of such component parts from time to time in
the past, and future shortages could have a material adverse effect on the
Company.
ABILITY TO ACHIEVE AND MANAGE GROWTH
An important element in the Company's growth strategy is the
acquisition and integration of complementary businesses in order to broaden
product offerings, capture market share and improve profitability. There can be
no assurance that the Company will be able to identify or reach mutually
agreeable terms with acquisition candidates, or that the Company will be able to
manage additional businesses profitably or successfully integrate such
additional businesses into the Company without substantial costs, delays or
other problems. Acquisitions may involve a number of special risks, including:
initial reductions in the Company's reported operating results; diversion of
management's attention; unanticipated problems or legal liabilities; and a
possible reduction in reported earnings due to amortization of acquired
intangible assets in the event that such acquisitions are made at levels that
exceed the fair market value of net tangible assets. Some or all of these items
could have a material adverse effect on the Company. There can be no assurance
that businesses acquired in the future will achieve sales and profitability that
justify the investment therein. In addition, to the extent that consolidation
becomes more prevalent in the industry, the prices for attractive acquisition
candidates may increase to unacceptable levels. See "Business Strategy."
INDEBTEDNESS AND LIQUIDITY
The Company had outstanding indebtedness of $227.5 million at December
31, 2000. The level of the Company's consolidated indebtedness could have
important consequences, including the following: (i) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
principal of, and interest on, its indebtedness and will not be available for
other purposes; (ii) the ability of the Company to obtain financing in the
future for working capital needs, capital expenditures, acquisitions,
investments, general corporate purposes or other purposes may be materially
limited or impaired; (iii) the Company's level of indebtedness may reduce its
flexibility to respond to changing business and economic conditions or take
advantage of business opportunities that may arise; and (iv) the ability of the
Company to pay dividends is restricted. See Item 5. "Market for Registrant's
Common Equity and Related Stockholder Matters." In addition, the Company's bank
credit agreement contains covenants that (i) require the Company to meet certain
financial ratios and (ii) limit the Company's ability to, among other things,
incur indebtedness, make acquisitions, make capital expenditures, make
investments, engage in mergers and dispose of assets. The indentures that govern
the Company's 12% Senior Subordinated Notes due 2004 (the "Senior Notes")
contain, among other things, a covenant that limits the Company's ability to
incur additional indebtedness. Any default by the Company with respect to such
covenants, or any inability on the part of the Company to obtain necessary
liquidity, could have a material adverse effect on the Company. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ENVIRONMENTAL MATTERS
The Company is subject to various evolving federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances. In connection with its
acquisitions, the Company conducted certain investigations of the acquired
companies' facilities and their compliance with applicable environmental laws.
These investigations found various environmental matters and conditions that
could, under certain circumstances, expose the Company to liability.
Furthermore, the company from which RPM acquired its assets has been identified
by the United States Environmental Protection Agency as one of the many
potentially responsible parties for environmental liabilities associated with a
"Superfund" site located in the area of
9
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."
COMPETITION
While the Company believes it is well positioned to compete in its two
market segments, there can be no assurance that the Company will be successful
competing against other companies in its industry segments, some of which are
larger than the Company and have greater financial and other resources available
to them than does the Company. See "Competition."
CONTROL OF THE COMPANY; ANTI-TAKEOVER MATTERS
The Company is controlled by Aurora Equity Partners L.P. and Aurora
Overseas Equity Partners I, L.P. (collectively, the "Aurora Partnerships"),
which as of February 28, 2001 hold approximately 67% of the voting power in the
Company (through direct ownership and certain voting arrangements). Therefore,
the Aurora Partnerships will be able to elect all of the directors of the
Company and approve or disapprove any matter submitted to a vote of the
Company's stockholders. As a result of the Aurora Partnerships' substantial
ownership interest in the Common Stock, it may be more difficult for a third
party to acquire the Company. A potential buyer would likely be deterred from
any effort to acquire the Company absent the consent of the Aurora Partnerships
or their participation in the transaction. The general partner of each of the
Aurora Partnerships is controlled by Richard R. Crowell, Gerald L. Parsky and
Richard K. Roeder, each of whom is a director of the Company. The indentures
governing the Senior Notes contain provisions that would allow a holder to
require the Company to repurchase such holder's Senior Notes at a cash price
equal to 101% of the principal amount thereof, together with accrued interest,
upon the occurrence of a "change of control" of the Company (as defined
therein), which could also have the effect of discouraging a third party from
acquiring the Company. See Item 12. "Security Ownership of Certain Beneficial
Owners and Management."
In addition, the Company's Board of Directors is authorized, subject
to certain limitations prescribed by law, to issue up to 2,000,000 shares of
preferred stock in one or more classes or series and to fix the designations,
powers, preferences, rights, qualifications, limitations or restrictions,
including voting rights, of those shares without any further vote or action by
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate transactions, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of preferred stock.
10
ITEM 2. PROPERTIES
The Company conducts its business from the following facilities:
APPROXIMATE LEASE EXPIRA-
LOCATION SQ. FEET TION DATE PRODUCTS PRODUCED/SERVICES PROVIDED
- ------------------------- ------------ ------------- -------------------------------------------------------------
Joplin, MO 264,000 2008 transmissions and transfer cases (1)
Springfield, MO 280,800 2004 transmissions (1)
Springfield, MO 200,000 2006 engines (2)
Springfield, MO 30,900 2001 torque converters (1) (3)
Springfield, MO 34,000 2001 cleaning and testing equipment (1) (3)
Gastonia, NC 130,000 2002 transmissions and valve bodies (1)
Mahwah, NJ 160,000 2003 transmissions, transfer cases and assorted components (1)
Oklahoma City, OK 98,000 owned returned material reclamation and disposition (4)
Oklahoma City, OK 207,000 owned transmissions (1)
Carrollton (Dallas), TX 39,000 2006 radios and instrument and display clusters (4)
Ft. Worth, TX 220,000 2008 cellular phone and accessory distribution (4)
Ft. Worth, TX 108,000 2005 cellular phone accessory packaging and returns processing (4)
Houston, TX 50,000 2002 engine control modules and radios (4)
Grantham, England 120,000 owned engines and related components (1)
- ----------------
(1) This facility is used by the Drivetrain segment.
(2) This facility is used by the discontinued operations.
(3) These facilities are being consolidated into other existing facilities.
(4) This facility is used by the Logistics segment.
The Company also leases assorted warehouses and space for its
corporate offices and computer services.
The Company believes that its current facilities are adequate for the
current level of the Company's activities. The Company's manufacturing sites
have the flexibility to add both additional shifts and production workers needed
to accommodate additional demand for products and services. However, in the
event the Company were to experience a material increase in sales, the Company
may require additional manufacturing facilities. The Company believes such
additional facilities are readily available on a timely basis on commercially
reasonable terms. Further, the Company believes that the leased space housing
its existing facilities is not unique and could be readily replaced, if
necessary, at the end of the terms of its existing leases on commercially
reasonable terms. Historically, the Company has been able to renew leases or
find alternate space upon the expiration of its leases without material
interruption in the subject facilities' operations.
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, 2000.
11
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
28, 2001, there were approximately 79 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
---- ---
2000
First quarter................................................................ 13 7/8 9 7/16
Second quarter............................................................... 12 7/8 5
Third quarter................................................................ 8 7/8 5
Fourth quarter............................................................... 6 3/8 1 5/8
1999
First quarter................................................................ 9 7/8 4 1/2
Second quarter............................................................... 12 3/8 6 7/8
Third quarter................................................................ 11 7/8 8 1/32
Fourth quarter............................................................... 12 5/8 7 3/4
On February 28, 2001, the last sale price of the Common Stock, as
reported by Nasdaq, was $5 5/8 per share.
The Company has not paid cash dividends on its Common Stock to date.
Because the Company currently intends to retain any earnings to provide funds
for the operation and expansion of its business and for the servicing and
repayment of indebtedness, the Company does not intend to pay cash dividends on
its Common Stock in the foreseeable future. Furthermore, as a holding company
with no independent operations, the ability of the Company to pay cash dividends
is dependent upon the receipt of dividends or other payments from its
subsidiaries. Under the terms of the Indentures governing the Senior Notes, the
Company is not permitted to pay any dividends on its Common Stock unless certain
financial ratio tests are satisfied. In addition, the agreement for the
Company's bank credit facility contains certain covenants that, among other
things, prohibit the payment of dividends by the Company. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Any determination to pay cash
dividends on the Common Stock in the future will be at the sole discretion of
the Company's Board of Directors.
During 2000, the Company did not issue any securities that were not
registered under the Securities Act of 1933, as amended.
12
ITEM 6. SELECTED FINANCIAL DATA
The results of the Company's Independent Aftermarket segment (which
consists of (i) ATC Distribution Group, Inc. ("Distribution Group"), a
distributor of remanufactured transmissions and related drivetrain components
to independent aftermarket customers and (ii) the remanufactured engines
business, which remanufactures and distributes engines primarily to independent
aftermarket customers) are classified as discontinued operations in the
financial data presented below. The selected financial data presented below with
respect to the statements of operations data for the years ended December 31,
2000, 1999 and 1998 and the balance sheet data at December 31, 2000 and 1999 are
derived from the Consolidated Financial Statements of the Company that have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
herein, and are qualified by reference to such financial statements and notes
related thereto. The selected financial data with respect to the statement of
operations data for the years ended December 31, 1997 and 1996 and the balance
sheet data at December 31, 1998, 1997 and 1996, are derived from the
Consolidated Financial Statements of the Company that have been audited by Ernst
& Young LLP, independent auditors, but are not included herein. The data
provided should be read in conjunction with the Consolidated Financial
Statements, related notes and other financial information included in this
Annual Report.
CONSOLIDATED
-------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 343,357 $ 328,024 $ 272,643 $167,776 $146,096
Cost of sales............................ 222,939 216,217 195,109 92,668 82,496
Special charges.......................... -- 113 -- -- --
---------- ---------- --------- -------- --------
Gross profit............................. 120,418 111,694 77,534 75,108 63,600
Selling, general and administrative
expenses............................... 48,971 47,026 42,720 25,374 18,218
Amortization of intangible
assets................................. 5,025 5,065 4,572 2,807 2,532
Special charges.......................... -- 3,864 4,024 -- --
---------- ---------- --------- -------- --------
Income from operations................... 66,422 55,739 26,218 46,927 42,850
Interest expense, net and other.......... 23,727 22,451 21,245 14,313 15,978
Income tax expense ...................... 16,249 12,224 2,841 13,078 10,937
---------- ---------- --------- -------- --------
Income from continuing operations (1)(2). 26,446 21,064 2,132 19,536 15,935
Preferred stock dividends................ -- -- -- -- 2,222
---------- ---------- --------- -------- --------
Income from continuing operations
available to common stockholders....... $ 26,446 $ 21,064 $ 2,132 $ 19,536 $ 13,713
========== ========== ======== ========= ========
Income from continuing operations per
share (3).............................. $ 1.25 $ 1.00 $ 0.10 $ 1.01 $ 1.00
Shares used in computation of income from
continuing operations per share (3).... 21,163 21,164 21,078 19,335 15,918
OTHER DATA:
Capital expenditures (4)................. $ 11,376 $ 6,948 $ 7,523 $ 3,942 $ 3,756
13
CONSOLIDATED
------------------------------------------------------------------
DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital, continuing operations...... $ 45,663 $ 13,972 $ 21,772 $ 27,405 $ 50,554
Property, plant and equipment, net.......... 44,070 39,397 38,157 11,517 8,574
Total assets................................ 400,020 572,359 513,472 357,882 310,922
Long-term liabilities (5)................... 213,537 302,491 258,042 152,571 167,233
Common stockholders' equity................. 80,239 176,144 168,011 175,429 105,832
- ---------------
(1) Income from continuing operations for the years ended December 31, 2000,
1999, 1998, 1997 and 1996 exclude loss (income) from discontinued
operations, net of income taxes, of $123,329, $14,257, $9,247, $(3,467) and
$(364), respectively.
(2) Income from continuing operations for the year ended December 31, 1998
excludes an extraordinary item in the amount of $703 ($1,172 less related
income tax benefit of $469). This amount consisted of (i) a $340 charge
resulting from the early redemption of $9,615 in principal amount of the
Senior Notes, which included the payment of a 4.0% early redemption premium
and the write-off of related debt issuance costs and (ii) a charge of $363
for the write-off of previously capitalized debt issuance costs in
connection with the termination of the Company's previous revolving credit
facility. In addition, income from continuing operations for the year ended
December 31, 1997 excludes an extraordinary item in the amount of $3,749
($6,269 less related income tax benefit of $2,520). This amount consisted
of (i) a $3,425 charge resulting from the early redemption of $40,000 in
principal amount of the Senior Notes, which included the payment of a 12.0%
early redemption premium and the write-off of related debt issuance costs
and (ii) a charge of $324 for the write-off of previously capitalized debt
issuance costs in connection with the termination of the Company's previous
revolving credit facility.
(3) See Item 8. "Consolidated Financial Statements and Supplementary Data-Note
14" for a description of the computation of earnings per share.
(4) Excludes capital expenditures made by certain of the Company's subsidiaries
prior to such subsidiaries' respective acquisitions and any capital
expenditures made in connection with such acquisitions.
(5) Includes long-term deferred tax liabilities of $15,068, $11,492, $8,044 and
$5,252 at December 31, 1999, 1998, 1997 and 1996, respectively.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Annual Report. See Item 8. "Consolidated Financial Statements
and Supplementary Data."
Readers are cautioned that the following discussion contains certain
forward-looking statements and should be read in conjunction with the
"Forward-Looking Statement Notice" appearing at the beginning of this Annual
Report.
CHANGES IN SEGMENT REPORTING
In 2000, the Company made certain changes in its segment reporting.
The Company (i) reclassified its remanufactured engines operating unit from the
Original Equipment Manufacturer ("OEM") segment to the Independent Aftermarket
segment due to similar economic characteristics and other factors, including
type of customer and method of distribution, (ii) revised its methodology for
allocation of corporate overhead and changed from a partial to a full allocation
of expenses relating to the Company's corporate offices to more accurately
reflect segment financial performance and (iii) as a result of a strategy to
strengthen its position in the logistics marketplace, the Company realigned
certain of its business units under a common management team to form the
Logistics segment. As a result, the Company has two reportable segments,
Drivetrain Remanufacturing (formerly OEM) and Logistics. All prior-year segment
information has been restated to conform to the 2000 presentation. The
Independent Aftermarket segment was discontinued, as explained below.
DISCONTINUED OPERATIONS
In August 2000, the Company adopted a plan to discontinue the
Independent Aftermarket segment of its business, comprised of the Distribution
Group, a distributor of remanufactured transmissions and related drivetrain
components to independent aftermarket customers and its domestic remanufactured
engines business, which remanufactures and distributes domestic and foreign
engines primarily through a branch distribution network to independent
aftermarket customers. As a result of this decision, the Independent Aftermarket
segment has been reflected in the accompanying consolidated financial statements
and management's discussion and analysis as discontinued operations.
In October 2000, the Company completed the sale of the Distribution
Group to ATCDG Acquisition Corp., Inc. ("Buyer"), an indirect wholly owned
subsidiary of Aceomatic-Recon Holdings Corporation, which is an affiliate of The
Riverside Company, for $60.1 million in cash, Series B preferred stock of Buyer
valued by the Company at $1.9 million (stated value of $8.7 million net of a
valuation allowance of $6.8 million) and an 18% senior subordinated promissory
note of the Buyer in a principal amount of $10.1 million and a discounted value
of $8.4 million.
OVERVIEW
The Company has two reportable segments in continuing operations:
the Drivetrain Remanufacturing segment and the Logistics segment. The
Drivetrain Remanufacturing segment consists of five operating units that
primarily sell remanufactured transmissions directly to DaimlerChrysler,
Ford, General Motors and several foreign OEMs, primarily for use as
replacement parts by their domestic dealers during the warranty and
post-warranty periods following the sale of a vehicle. In addition, the
Drivetrain Remanufacturing segment sells select remanufactured and newly
assembled engines to certain European OEMs, including Ford's and General
Motors's European operations and Jaguar. The Company's Logistics segment is
comprised of three business units, all of which were acquired in the
Autocraft acquisition: a provider of value added warehouse and distribution
services, turnkey order fulfillment and information services for AT&T
Wireless Services; a provider of returned material reclamation and
disposition services
15
for Ford and General Motors; and an automotive electronic components
remanufacturing and distribution business, primarily for Delphi and Visteon. See
Item 8. "Consolidated Financial Statements and Supplementary Data-Note 17."
Since its formation, the Company has benefited from a combination of
organic and acquisition-related revenue growth, achieving compound annual growth
in continuing operations revenue of approximately 24% from 1996 through 2000.
The Company's revenues in the Drivetrain Remanufacturing segment have increased
at a compound annual growth rate of 15% since 1996, to $254.3 million in 2000,
due largely to the addition of Ford as a customer through the acquisition of
Autocraft in March 1998. The Autocraft acquisition also included the three
business units that now comprise the Company's Logistics segment, where on a pro
forma basis, as if the Autocraft acquisition had taken place on January 1, 1998,
revenue has grown at a compound annual growth rate of 36% since 1998, to $89.1
million. This growth is entirely organic and is driven primarily by increases in
value added warehouse and distribution services fueled by the demand for
cellular phones and services.
The Company regularly evaluates strategic acquisition opportunities
and, consistent with its strategy to strengthen its position in the logistics
marketplace, expects it will continue to do so in the future. During the first
quarter of 1998, the Company acquired substantially all of the assets of
Autocraft, the OEM Division of The Fred Jones Companies, Inc. and will continue
to consider opportunistic acquisitions in its Drivetrain Remanufacturing
segment.
During 1999 and 1998, the Company recorded special charges of $4.0
million in each year, primarily related to certain initiatives designed to
improve operating efficiencies and reduce costs. See "Results of Operations" for
a complete discussion of these charges. In addition, in 1998 the Company
recorded charges for non-recurring costs totaling $10.2 million. As previously
disclosed, the Company believes that these charges were one-time in nature due
to the application of new information and estimation methodologies.
During 2000, the Company reduced its debt by $81.2 million from $308.7
million to $227.5 million, through a combination of cash flow from continuing
operations and the proceeds from the sale of the Distribution Group.
Additionally, the loss on the sale of the Distribution Group generated
approximately $44.0 million of income tax benefits for the Company.
RESULTS OF OPERATIONS
The following table sets forth certain financial statement data
expressed in millions of dollars and as a percentage of net sales.
For the Years Ended December 31,
------------------------------------------------------------
2000 1999 1998
---------------------- ------------------ ---------------
Net sales................................. $343.4 100.0% $328.0 100.0% $272.6 100.0%
Cost of sales............................. 223.0 64.9 216.2 65.9 195.1 71.6
Special charges........................... - - 0.1 0.0 - -
------ ----- ------ ----- ------ -----
Gross profit.............................. 120.4 35.1 111.7 34.1 77.5 28.4
SG&A expenses............................. 49.0 14.3 47.0 14.3 42.7 15.7
Amortization of intangible assets......... 5.0 1.5 5.1 1.6 4.6 1.7
Special charges........................... - - 3.9 1.2 4.0 1.4
------ ----- ------ ----- ------ -----
Income from operations.................... 66.4 19.3 55.7 17.0 26.2 9.6
Interest expense, net and other........... 23.7 6.9 22.4 6.8 21.2 7.8
------ ----- ------ ----- ------ -----
Income from continuing operations, before
income taxes........................... 42.7 12.4 33.3 10.2 5.0 1.8
Income tax expense........................ 16.3 4.7 12.2 3.8 2.9 1.0
------ ----- ------ ----- ------ -----
Income from continuing operations......... $ 26.4 7.7% $ 21.1 6.4% $ 2.1 0.8%
======= ===== ====== ===== ====== =====
16
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Income from continuing operations increased $5.3 million, or 25.1%, to
$26.4 million in 2000 from $21.1 million in 1999. During 1999, the Company
recorded pre-tax special charges of $4.0 million, primarily related to certain
initiatives designed to improve operating efficiencies and reduce costs (see
"Special Charges" below). Excluding special charges, income from continuing
operations increased $2.8 million, or 11.9%, from $23.6 million for the year
ended December 31, 1999. This increase was primarily attributable to a
significant increase in revenues in the Logistics segment, partially offset by a
decline in revenues in the Drivetrain Remanufacturing segment. Income from
continuing operations per diluted share increased to $1.25 in 2000 from $1.00 in
1999. Excluding special charges, income from continuing operations per diluted
share was $1.11 for the year ended December 31, 1999.
NET SALES. Net sales increased $15.4 million, or 4.7%, to $343.4
million in 2000 from $328.0 million in 1999. This increase is attributable to
increased sales in the Company's Logistics segment partially offset by a
decrease in revenues in the Drivetrain Remanufacturing segment. See "Drivetrain
Remanufacturing Segment" and "Logistics Segment" for a discussion of net sales.
GROSS PROFIT. Gross profit increased $8.7 million, or 7.8%, to $120.4
million in 2000 from $111.7 million in 1999. This increase is principally due to
increased revenues in the Logistics segment, improved yield and favorable mix of
remanufactured transmissions, favorable material variances and the benefit of
cost reduction initiatives implemented during 1999 and 2000. As a result, gross
profit as a percentage of net sales increased to 35.1% from 34.1% between the
two periods.
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses
increased $2.0 million, or 4.3%, to $49.0 million in 2000 from $47.0 million in
1999. The increase is due primarily to an increase in expense supporting
increased sales volume and growth initiatives in the Logistics segment,
partially offset by a decrease in expense in the Drivetrain Remanufacturing
segment. As a percentage of net sales, SG&A remained constant at 14.3%.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
decreased slightly to $5.0 million in 2000 from $5.1 million in 1999.
SPECIAL CHARGES. During 1999, the Company recorded $4.0 million of
special charges, of which $0.1 million was included as a component of cost of
sales. These charges consisted of $2.6 million of severance and other costs
related to the reorganization of certain management functions and $1.4 million
of severance, plant exit and other costs.
The Company, as an ongoing part of its planning process, continues to
identify and evaluate areas where cost efficiencies can be achieved through
consolidation of redundant facilities, outsourcing functions or changing
processes or systems. Implementation of any of these could require the Company
to incur special charges, which would be offset over time by the projected cost
savings.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased $10.7 million, or 19.2%, to
$66.4 million in 2000 from $55.7 million in 1999. As a percentage of net sales,
income from operations increased to 19.3% from 17.0%, between the two periods.
Excluding special charges of $4.0 million recorded in 1999, income from
operations was $59.7 million or 18.2% of net sales, for the year ended December
31, 1999.
INTEREST EXPENSE, NET AND OTHER. Interest expense, net and other
increased $1.3 million, or 5.8%, to $23.7 million in 2000 from $22.4 million in
1999. The increase primarily resulted from an overall increase in interest rates
in 2000 as compared to 1999. Interest expense of $6.1 million for the year ended
December 31, 2000 has been allocated to discontinued operations based on the
total consideration received from the sale of the Distribution Group and an
estimate of the proceeds expected from the sale or disposal of the
remanufactured engines business. Interest expense of $4.1 million for the year
ended December 31, 1999
17
has been allocated to the discontinued operations based on the total
consideration received from the sale of the Distribution Group and an estimate
of the proceeds expected from the sale or disposal of the remanufactured engines
business, less the amount of debt attributable to the acquisition of All Trans
(part of the Distribution Group) in the fourth quarter of 1999.
DISCONTINUED OPERATIONS. In August 2000, the Company adopted a plan to
discontinue the Independent Aftermarket segment of its business, comprised of
the Distribution Group and the remanufactured aftermarket engines business. In
October 2000, the Company completed the sale of the Distribution Group.
Management believes that the exit from this segment, which reduces debt and
generates significant tax benefits, offers a strategic opportunity to focus
resources on the businesses of the Company that are profitable and have greater
growth potential. As a result of the decision to exit the Independent
Aftermarket segment and the associated sale of the Distribution Group, the
Company recorded a charge of $114.8 million for the estimated loss on disposal
of discontinued operations, net of tax benefits of $59.2 million, during the
year ended December 31, 2000. The pre-tax charge of $174.0 million includes the
write-off of previously allocated goodwill, valuation allowances for certain
assets, provisions for anticipated operating losses until disposal of $12.9
million and anticipated costs of disposal, including lease terminations,
severance, retention and other employee benefits and professional fees. In
addition, the loss from discontinued operations includes a loss of $8.5 million
and $14.3 million, net of income tax benefits of $4.4 million and $8.1 million,
from the operations of the Independent Aftermarket segment during the period
from January 1, 2000 to August 3, 2000 (the measurement date for discontinued
operations) and during the year ended December 31, 1999, respectively.
DRIVETRAIN REMANUFACTURING SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
-----------------------------------------
2000 1999
------------------- -----------------
Net sales.................................. $ 254.3 100.0% $ 268.9 100.0%
======= ===== ======= =====
Special charges........................... $ - -% $ 1.0 0.4%
======= ===== ======= =====
Segment profit............................. $ 49.0 19.3% $ 50.5 18.8%
======= ===== ======= =====
NET SALES. Net sales decreased $14.6 million, or 5.4%, to $254.3
million in 2000 from $268.9 million in 1999. The decrease was primarily the
result of (i) a decline in shipments of Asian car model remanufactured
transmissions due to the termination of an unprofitable contract, delays in the
introduction of new model years into the remanufacturing program by certain OEMs
and production disruptions associated with an unsuccessful union organization
campaign and certain management changes, (ii) a decline in sales of
remanufactured transmissions to General Motors due to a reduction of its
inventory levels and the termination of an unprofitable contract, (iii) a
general decline in sales of remanufactured transmissions due to an overall
softness in demand resulting from a relatively mild winter in 1999, partially
offset by improved yield and one-time rework projects and (iv) decreased sales
of engines and related parts in the segment's European operations. Sales to
DaimlerChrysler accounted for 31.5% and 34.4% of the Company's revenues (42.5%
and 42.0% of segment revenues) in 2000 and 1999, respectively. Sales to Ford
accounted for 32.6% and 33.0% of the Company's revenues (40.8% and 36.8% of
segment revenues) in 2000 and 1999, respectively.
SPECIAL CHARGES. The Drivetrain Remanufacturing segment recorded $1.0
million of special charges in 1999 relating to severance and plant exit costs.
SEGMENT PROFIT. Segment profit decreased $1.5 million, or 3.0%, to
$49.0 million (19.3% of segment net sales) in 2000 from $50.5 million (18.8% of
segment net sales) in 1999. Excluding special charges of $1.0 million in 1999,
segment profit would have decreased $2.5 million, or 4.9%, from $51.5 million
(19.2%
18
of segment net sales) in 1999. The decrease was primarily the result of the
factors impacting sales as described above, partially offset by a reduction in
allocated corporate overhead in 2000 as compared to 1999.
LOGISTICS SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
----------------------------------------
2000 1999
----------------- ---------------
Net sales.................................. $ 89.1 100.0% $ 59.1 100.0%
======= ===== ====== =====
Special charges........................... $ - -% $ 0.6 1.0%
======= ===== ====== =====
Segment profit............................ $ 17.4 19.5% $ 7.7 13.0%
======= ===== ===== =====
NET SALES. Net sales increased $30.0 million, or 50.8%, to $89.1
million in 2000 from $59.1 million in 1999. This increase was primarily
attributable to an increase in sales for value added warehouse and distribution
services, driven by the strong growth in the market for cellular phones and
services, coupled with the benefit of two new programs the Company was awarded
by AT&T Wireless Services. These programs cover the packaging and distribution
of cell phone accessories and the distribution of point-of-sale and other
marketing materials. Sales to AT&T Wireless Services accounted for 15.3% and
7.0% of the Company's revenues (59.1% and 38.9% of segment revenues) in 2000 and
1999, respectively.
SPECIAL CHARGES. Special charges recorded during 1999 of $0.6 million
relate to facility exit costs and other costs related to the Electronics
business unit.
SEGMENT PROFIT. Segment profit increased $9.7 million, or 126.0%, to
$17.4 million (19.5% of segment net sales) in 2000 from $7.7 million (13.0% of
segment net sales) in 1999. Excluding special charges of $0.6 million in 1999,
segment profit would have increased $9.1 million, or 109.6%, from $8.3 million
(14.0% of segment net sales) in 1999. This increase was primarily the result of
the increased sales volume, combined with the benefit of restructuring
initiatives implemented in the Electronics business unit in late 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Income from continuing operations increased $19.0 million, or 904.8%,
to $21.1 million in 1999 from $2.1 million in 1998. During each of 1999 and
1998, the Company recorded pre-tax special charges of $4.0 million, related to
certain initiatives designed to improve operating efficiencies and reduce costs
(see "Special Charges" below). In addition, during 1998, the Company recorded
pre-tax charges for non-recurring costs totaling $10.2 million. Excluding these
non-recurring costs and special charges, income from continuing operations would
have increased $12.7 million, or 116.5%, to $23.6 million for the year ended
December 31, 1999, from $10.9 million for the year ended December 31, 1998. This
increase was primarily attributable to increased volume in both the Drivetrain
Remanufacturing and Logistics segments'. Income from continuing operations per
diluted share increased to $1.00 in 1999 from $0.10 in 1998. Excluding special
charges and non-recurring expense, income from continuing operations per diluted
share increased to $1.11 for the year ended December 31, 1999 from $0.52 for the
year ended December 31, 1998.
NET SALES. Net sales increased $55.4 million, or 20.3%, to $328.0
million in 1999 from $272.6 million in 1998. This increase is partially
attributable to the full-year benefit of sales from Autocraft, which was
acquired in March 1998. On a pro forma basis, as if the February 1999 sale of
Mascot and the acquisition of Autocraft had both taken place on January 1, 1998,
net sales would have increased $34.3 million, or 11.7%, to $327.3 million in
1999 from $293.0 million in 1998. This increase in sales, on a pro forma basis,
was primarily attributable to increased sales in the Company's Drivetrain
Remanufacturing and
19
Logistics segments'. See "Drivetrain Remanufacturing Segment" and " Logistics
Segment" for a discussion of net sales.
GROSS PROFIT. Gross profit increased $34.2 million, or 44.1%, to
$111.7 million in 1999 from $77.5 million in 1998. Excluding special charges of
$0.1 million recorded in 1999 and non-recurring costs of $8.9 million recorded
in 1998, gross profit increased $25.4 million, or 29.4%, during 1999 as compared
to 1998. As a percentage of net sales, gross profit before non-recurring costs
and special charges increased to 34.1% in 1999 from 31.7% in 1998. The increase
in gross profit was principally due to the increased volume of sales in the
Drivetrain Remanufacturing and Logistics segments' and associated operating
leverage.
SG&A EXPENSES. SG&A expenses increased $4.3 million, or 10.1%, to
$47.0 million in 1999 from $42.7 million in 1998. Excluding non-recurring costs
of $1.3 million recorded in 1998, SG&A expenses increased $5.6 million during
1999 as compared to 1998 and as a percentage of net sales decreased to 14.3% in
1999 from 15.2% in 1998. This increase was due primarily to an increase in
expense supporting increased sales volume and growth initiatives in the
Logistics segment and a full year of expense related to the Autocraft
acquisition.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $0.5 million, or 10.9%, to $5.1 million in 1999 from $4.6 million in
1998. The increase is primarily attributable to a full year of amortization for
the Autocraft acquisition.
SPECIAL CHARGES. During 1999, the Company recorded $4.0 million of
special charges, of which $0.1 million was included as a component of cost of
sales. These charges consisted of $2.6 million of severance and other costs
related to the reorganization of certain management functions and $1.4 million
of severance, plant exit and other costs.
During 1998, the Company recorded $4.0 million of special charges.
These charges consisted of $2.4 million related to a state's interpretation of
its tax law that subjected a portion of the Drivetrain Remanufacturing segment's
operations over the past four years to a state tax for the first time and $1.6
million of restructuring charges consisting principally of employee severance
costs and certain other exit costs.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased $29.5 million, or 112.6%, to
$55.7 million in 1999 from $26.2 million in 1998. As a percentage of net sales,
income from operations increased to 17.0% from 9.6%, between the two periods.
Excluding non-recurring costs of $10.2 million recorded in 1998 and special
charges of $4.0 million recorded in each of 1999 and 1998, income from
operations increased $19.3 million during 1999 as compared to 1998. As a
percentage of net sales, income from operations before non-recurring costs and
special charges increased to 18.2% from 14.8% between the two periods.
INTEREST EXPENSE, NET AND OTHER. Interest expense, net and other
increased $1.2 million, or 5.7%, to $22.4 million in 1999 from $21.2 million in
1998. The increase primarily resulted from a full year of borrowing under the
Company's $120.0 million term loan credit facility in March 1998 to finance the
Autocraft acquisition.
EXTRAORDINARY ITEMS. In 1998, an extraordinary item in the amount of
$0.7 million ($1.2 million before related income tax benefit of $0.5 million)
was recorded. This amount consisted of (i) a $0.4 million charge for the
write-off of previously capitalized debt issuance costs in connection with the
termination of the Company's previous revolving credit facility and (ii) a $0.3
million charge resulting from the repurchase of $9.6 million in principal amount
of the Senior Notes in open market transactions.
20
DRIVETRAIN REMANUFACTURING SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
-----------------------------------------
1999 1998
------------------ -----------------
Net sales.................................. $ 268.9 100.0% $ 232.3 100.0%
======= ===== ======= =====
Special charges........................... $ 1.0 0.4% $ 2.4 1.0%
======= ===== ======= =====
Segment profit............................. $ 50.5 18.8% $ 24.5 10.5%
======= ===== ======= =====
NET SALES. Net sales increased $36.6 million, or 15.8%, to $268.9
million in 1999 from $232.3 million in 1998. On a pro forma basis, as if the
Autocraft acquisition and the sale of Mascot had taken place on January 1,
1998, net sales would have increased $23.2 million, or 9.5%, to $268.2
million in 1999 from $245.0 million in 1998. The increase was primarily due
to increased sales of remanufactured transmissions to DaimlerChrysler and
Ford, partially offset by a decrease in sales volume of engines and related
parts in the segment's European operations. Sales to DaimlerChrysler
accounted for 34.4% and 32.1% of the Company's revenues (42.0% and 37.6% of
segment revenues) in 1999 and 1998, respectively. Sales to Ford accounted for
33.0% and 30.5% of the Company's revenues (36.8% and 33.2% of segment
revenues) in 1999 and 1998, respectively.
SPECIAL CHARGES. The Drivetrain Remanufacturing segment recorded $1.0
million of special charges in 1999. These charges consisted of severance and
plant exit costs.
The Drivetrain Remanufacturing segment recorded $2.4 million of
special charges in 1998 relating to a state's interpretation of its tax law that
subjected a portion of the segment's operations over the past four years to a
state tax for the first time.
SEGMENT PROFIT. Segment profit increased $26.0 million, or 106.1%, to
$50.5 million (18.8% of segment net sales) in 1999 from $24.5 million (10.5% of
segment net sales) in 1998. Excluding special charges of $1.0 million and $2.4
million in 1999 and 1998, respectively, and non-recurring costs of $10.2 million
recorded in 1998, segment profit would have increased $14.4 million, or 38.8%,
to $51.5 million (19.2% of segment net sales) in 1999 from $37.1 million (16.0%
of segment net sales) in 1998. The increase was primarily the result of
increased sales volume, associated operating leverage and yield on
remanufactured transmissions.
LOGISTICS SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
For the Years Ended December 31,
-----------------------------------------
1999 1998
------------------- ---------------
Net sales........................ $ 59.1 100.0% $ 40.3 100.0%
======= ===== ====== =====
Special charges.................. $ 0.6 1.0% $ - -%
======= ===== ====== =====
Segment profit................... $ 7.7 13.0% $ 3.4 8.4%
======= ===== ===== =====
NET SALES. Net sales increased $18.8 million, or 46.7%, to $59.1
million in 1999 from $40.3 million in 1998. On a pro forma basis, as if the
Autocraft acquisition had taken place on January 1, 1998, net sales
21
would have increased $11.1 million, or 23.1%, from $48.0 million in 1998. This
increase was primarily attributable to an increase in sales for value added
warehouse and distribution services, driven by the strong growth in the market
for cellular phones and services.
SPECIAL CHARGES. Special charges recorded during 1999 of $0.6 million
relate to facility exit and other costs in the Electronics business unit.
SEGMENT PROFIT. Segment profit increased $4.3 million, or 126.5%, to
$7.7 million in 1999 from $3.4 million in 1998. Excluding special charges of
$0.6 million in 1999, segment profit in 1999 would have increased $4.9 million,
or 144.1%, to $8.3 million in 1999 from $3.4 million in 1998. The increase was
primarily the result of the additional sales volume described above, partially
offset by an increase in costs in the Logistics Services business unit
associated with enhancements to its information systems to support future
growth.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW & CAPITAL EXPENDITURES
The Company had total cash and cash equivalents on hand of $2.0
million at December 31, 2000, representing a net decrease in cash and cash
equivalents of $6.4 million in 2000. Net cash provided by operating activities
from continuing operations was $42.2 million in 2000. During 2000, the Company
entered into an agreement with one of its Drivetrain Remanufacturing customers
to rework a specified number of transmission units. The terms of this agreement
were intended to match cash inflows and outflows associated with the transfer of
inventories; however, timing differences existed at December 31, 2000. As a
result, the Company's balance sheet reflects (i) accounts receivable of $4.7
million, (ii) inventories of $6.8 million and (iii) accounts payable of $19.5
million associated with this program. This program's completion is expected by
the end of the first quarter of 2001. Net cash provided by investing activities
from continuing operations was $48.8 million for the year, including $60.1
million from the sale of the Distribution Group partially offset by $11.4
million in capital expenditures, primarily for equipment purchases and leasehold
improvements. Net cash used in financing activities of $82.0 million includes
net payments of $79.9 million made on the Credit Facility, $1.2 million in
payment of amounts due to former owners of acquired companies and $0.5 million
of net payments made on the Canadian bank line of credit, partially offset by
$0.4 million of proceeds from the exercise of stock options. In conjunction with
the sale of Distribution Group, the Company's Canadian bank line of credit was
paid off in full in October 2000.
The Company's capital expenditures from continuing operations in 2000
were $11.4 million, consisting of (i) $5.5 million primarily related to computer
systems and machinery and equipment to support growth initiatives in the
Logistics segment, (ii) $5.2 million for additional transmission remanufacturing
equipment and other improvements to support planned increases in production
capacity and efficiencies in certain of the Company's remanufacturing plants
within its Drivetrain Remanufacturing segment and (iii) $0.7 million primarily
related to equipment to support growth in the Company's overall infrastructure.
During 2001, the Company has budgeted $15.0 million for capital expenditures for
remanufacturing equipment to support cost reduction initiatives and capacity
expansion as well as to support growth initiatives in the Company's Logistics
segment.
Under the terms of the Company's 1997 acquisition of ATS
Remanufacturing (which remanufactures transmissions for General Motors), the
Company is required to make payments to the seller and to certain other key
individuals on each of the first 14 anniversaries of the closing date. Through
December 31, 2000, the Company had made $3.9 million of these payments.
Substantially all of the remaining 11 payments, which aggregate to approximately
$15.0 million (present value of $12.7 million as of December 31, 2000), are
contingent upon the attainment of certain sales levels by ATS, which the Company
believes are more likely than not to be attained.
22
FINANCING
The Company raised total net proceeds of $61.6 million in its initial
public offering and concurrent private placement of common stock in December
1996 and an additional $47.9 million in a secondary offering in October 1997.
From the Company's inception in July 1994 to December 1996, the Company funded
its operations and investments in property and equipment, including
acquisitions, through the issuance of Senior Notes totaling $162.4 million, the
private sale of preferred stock of $20.0 million and common stock of $20.0
million, and to a lesser extent through cash provided by operating activities
and revolving bank lines. In December 1996, the preferred stock and $40.0
million in principal amount of the Senior Notes were redeemed with proceeds from
the initial public offering. The net proceeds from the secondary offering were
used to repay borrowings under the Credit Facility. In September and October
1998, the Company redeemed $2.2 million and $7.4 million, respectively, in
principal amount of the Senior Notes, with borrowings under the Credit Facility.
In February 1997, the Company terminated its $30.0 million revolving
credit facility with a bank syndicate led by The Chase Manhattan Bank ("Chase")
that had been scheduled to mature in July 1999 and replaced it with the $100.0
million revolving portion of the Credit Facility, which is also with Chase. The
Credit Facility is available to finance the Company's working capital
requirements, future acquisitions and other general corporate needs, and will
expire in December 2003.
In March 1998, the Credit Facility was amended and restated to provide
the $120.0 million term loan facility in addition to the existing revolving
facility. The Company borrowed $120.0 million under this term loan facility on
March 6, 1998 to purchase Autocraft and pay related transaction expenses. The
term loan is payable in quarterly installments through December 31, 2003.
On December 20, 1999, the borrowing capacity under the term loan
portion of the Credit Facility was increased by $10.0 million. On December 24,
1999, the Company borrowed this $10.0 million and used the proceeds to reduce
the outstanding borrowings under the revolving portion of the Credit Facility.
These additional borrowings are payable in quarterly installments through
December 31, 2003.
The Credit Facility's rate of interest is determined at either (i) the
Alternate Base Rate plus a specified margin or (ii) the Eurodollar Rate plus a
specified margin. The "Alternate Base Rate" is equal to the highest of (a)
Chase's prime rate, (b) the secondary market rate for three-month certificates
of deposit plus 1.0% and (c) the federal funds rate plus 0.5%, in each case as
in effect from time to time. The "Eurodollar Rate" is the rate offered by Chase
for Eurodollar deposits for one, two, three, six or, if available by all
lenders, nine months (as selected by the Company) in the interbank Eurodollar
market. The applicable margins for both Alternate Base Rate and Eurodollar Rate
loans are subject to a quarterly adjustment based on the Company's leverage
ratio as of the end of the four fiscal quarters then completed. At December 31,
2000, the Alternate Base Rate margin was 1.00% and the Eurodollar margin was
2.00%.
Amounts advanced under the Credit Facility are secured by
substantially all the assets of the Company. The Credit Facility contains
several covenants, including ones that require the Company to maintain certain
levels of net worth, leverage and cash flow coverage and others that limit the
Company's ability to incur indebtedness, make capital expenditures, create
liens, engage in mergers and consolidations, make restricted payments (including
dividends), sell assets, make investments, issue stock and engage in
transactions with affiliates of the Company and its subsidiaries.
Based on its operating results during 1998, the Company was in
technical default of the leverage and cash flow covenants of the Credit Facility
and the Company's interest rate swap agreement as of December 31, 1998. This
resulted in a cross default under the line of credit for the Company's Canadian
subsidiaries. Due to the defaults, the Company was prohibited from further
borrowings under the Credit Facility and the Canadian line of credit. In March
1999, the Company obtained from its lenders waivers of the various defaults and
certain amendments to the Credit Facility and the interest rate swap agreement.
In December 1999, in conjunction with the $10.0 million increase in the Credit
Facility, the leverage ratio and interest coverage covenants in the credit
agreement were amended to be consistent with the Company's then current
financial projections.
23
Based on its operating results during the first six months of 2000 and
in conjunction with the decision to discontinue the Independent Aftermarket
segment, the Company was in technical default of the net worth, leverage and
interest coverage covenants of the Credit Facility and the Company's interest
rate swap agreement as of June 30, 2000. This resulted in a cross default under
the line of credit for the Company's Canadian subsidiary. Due to the defaults,
the Company was prohibited from further borrowings under the Credit Facility and
its Canadian line of credit. The Company obtained from its lenders waivers of
the various defaults, and additionally, certain amendments to the Credit
Facility and the interest rate swap agreement were made consistent with the
Company's then-current financial projections.
On October 26, 2000, the Company obtained (i) the required consent of
the parties to the Credit Facility to complete the sale of the Distribution
Group and (ii) certain amendments to the leverage and interest coverage ratios
contained in the Credit Facility consistent with the terms of such sale. The
terms of this consent required that the Company utilize a portion of the net
cash proceeds from the sale of the Distribution Group to make a prepayment on
the term loan portion of the Credit Facility. The remainder of the cash proceeds
were applied against the revolving portion of the Credit Facility and will be
reinvested in the continuing businesses over the 330 days following the date of
the sale. Remaining balances outstanding on the term loan will be amortized
ratably in quarterly installments through December 31, 2003. Concurrent with
this consent and amendment, the loan pricing grid contained in the Credit
Facility was modified to more closely reflect current conditions in the credit
market. However, as of December 31, 2000, the Alternate Base Rate and Eurodollar
margins remained unchanged at 1.00% and 2.00%, respectively. As of December 31,
2000, the Company was in compliance with its covenants and believes that it will
be able to comply with these covenants in the future.
Additionally, the Company has approximately $111.0 million of the
Senior Notes outstanding. The indentures under which the Senior Notes were
issued contain certain covenants that, among other things, limit the Company's
ability to incur additional indebtedness. As of December 31, 2000, the Company
was in compliance with such covenants and believes that it will be able to
comply with these covenants in the future.
As of December 31, 2000, the Company's additional borrowing capacity
under the Credit Facility was $33.2 million. In addition, the Company had cash
and cash equivalents on hand of $2.0 million at December 31, 2000.
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations
and its budgeted capital expenditures. In pursuing future acquisitions, the
Company will continue to consider the effect that any such acquisition costs may
have on its liquidity. In order to consummate such acquisitions, the Company may
need to seek additional capital through borrowings or equity financing.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (as amended by
SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 issued June 1999 and
amended by SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
CERTAIN HEDGING ACTIVITIES - AN AMENDMENT TO FASB STATEMENT 133 issued June
2000), effective for periods beginning after June 15, 2000. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated a part of a hedge and, if it is, the type of hedge
transaction. Adoption of SFAS No. 133 will not have a significant effect on the
Company's results of operations or its financial position. The Company was
required to adopt SFAS No. 133 on January 1, 2001.
24
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not hold or issue derivative financial instruments
for trading purposes. The Company uses derivative financial instruments to
manage its exposure to fluctuations in interest rates. Neither the aggregate
value of these derivative financial instruments nor the market risk posed by
them is material to the Company. The Company uses interest rate swaps to convert
variable rate debt to fixed rate debt to reduce volatility risk. For additional
discussion regarding the Company's use of such instruments, see Item 8.
"Consolidated Financial Statements and Supplementary Data-Note 2."
INTEREST RATE EXPOSURE
Based on the Company's overall interest rate exposure during the year
ended December 31, 2000, and assuming similar interest rate volatility in the
future, a near-term (12 months) change in interest rates would not materially
affect the Company's consolidated financial position, results of operation or
cash flows. Interest rate movements of 10% would not have a material effect on
the Company's financial position, results of operation or cash flows.
FOREIGN EXCHANGE EXPOSURE
The Company has one foreign operation that exposes it to translation
risk when the local currency financial statements are translated to U.S.
dollars. Since changes in translation risk are reported as adjustments to
stockholders' equity, a 10% change in the foreign exchange rate would not have a
material effect on the Company's financial position, results of operation or
cash flows.
25
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Aftermarket Technology Corp.
Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
CONTENTS
Report of Ernst & Young LLP, Independent Auditors......................................................27
Consolidated Balance Sheets............................................................................28
Consolidated Statements of Operations..................................................................29
Consolidated Statements of Stockholders' Equity........................................................30
Consolidated Statements of Cash Flows..................................................................31
Notes to Consolidated Financial Statements.............................................................32
26
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Aftermarket Technology Corp.
We have audited the accompanying consolidated balance sheets of
Aftermarket Technology Corp. and subsidiaries (the Company) as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. Our audits also included the financial statement
schedule listed in the Index of Item 14 (a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Aftermarket Technology Corp. and subsidiaries at December 31, 2000
and 1999, and the consolidated results of their operations and their
consolidated cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 22, 2001
(Except for Note 22, as to which the date is March 2, 2001)
27
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31,
2000 1999
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,035 $ 8,469
Accounts receivable, net 58,624 46,266
Inventories 43,513 36,289
Prepaid and other assets 4,976 2,636
Refundable income taxes 2,730 -
Deferred income taxes 31,904 14,036
Assets of discontinued operations held for sale, net 6,002 87,966
--------- ---------
Total current assets 149,784 195,662
Property, plant and equipment, net 44,070 39,397
Debt issuance costs, net 4,175 5,268
Cost in excess of net assets acquired, net 174,833 179,974
Deferred income taxes 12,852 -
Other assets 10,308 180
Assets of discontinued operations held for sale, net 3,998 151,878
--------- ---------
Total assets $ 400,020 $ 572,359
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 54,163 $ 35,976
Accrued expenses 26,584 29,716
Income taxes payable - 2,685
Bank line of credit - 543
Credit facility 14,700 21,760
Amounts due to sellers of acquired companies 2,672 2,384
Deferred compensation - 660
Liabilities of discontinued operations 8,125 -
--------- ---------
Total current liabilities 106,244 93,724
12% Series B and D Senior Subordinated Notes 111,033 111,214
Amount drawn on credit facility, less current portion 92,000 164,799
Amounts due to sellers of acquired companies, less current portion 6,931 7,759
Deferred compensation, less current portion 3,125 2,944
Other long-term liabilities 448 707
Deferred income taxes - 15,068
Stockholders' Equity:
Preferred stock, $.01 par value; shares authorized - 2,000,000; none issued - -
Common stock, $.01 par value; sh