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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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.)
33309 FIRST WAY SOUTH, SUITE A-206
FEDERAL WAY, WASHINGTON 98003
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 838-0346
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, 1997) was $92,848,490.
The number of shares outstanding of the Registrant's Common Stock, as
of February 28, 1997, was 16,980,794 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
AFTERMARKET TECHNOLOGY CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Page
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ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
ITEM 3. LEGAL PROCEEDINGS.. . . . . . . . . . . . . . . . . . . . . . . . .8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. . . . . . . .9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.. . . . . . . . . . . . . . . . . . . . . . . .9
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . .9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.. . . . . . . . . . . . . . . 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.. . . . . . . . . . . 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.. . . . . . . . . . . . . . . 35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . 35
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . 43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
i
PART I
ITEM 1. BUSINESS.
BACKGROUND
Aftermarket Technology Corp. ("ATC") was incorporated under the laws
of Delaware in July 1994 at the direction of Aurora Capital Partners L.P.
("ACP") to acquire Aaron's Automotive Products, Inc. ("Aaron's"), H.T.P., Inc.
("HTP"), Mamco Converters, Inc. ("Mamco") and RPM Merit, Inc. ("RPM")
(collectively, the "Initial Acquisitions"). Aaron's, HTP, Mamco and RPM as they
existed prior to the Initial Acquisitions are hereinafter collectively referred
to as the "Predecessor Companies." Subsequent to the Initial Acquisitions, the
Company acquired Component Remanufacturing Specialists, Inc. ("CRS") and Mascot
Truck Parts Inc. ("Mascot") in June 1995, and King-O-Matic Industries Limited
("King-O-Matic") in September 1995 (collectively, the "1995 Acquisitions"),
Tranzparts, Inc. ("Tranzparts") in April 1996 and Diverco, Inc. ("Diverco") in
October 1996 (collectively, the "1996 Acquisitions") and Replacement and
Exchange Parts Co., Inc. ("Repco") in January 1997. ATC conducts all of its
operations through its wholly-owned subsidiaries and each of their respective
subsidiaries. Throughout this Annual Report, except where the context otherwise
requires, the "Company" refers collectively to ATC and its subsidiaries and the
Predecessor Companies.
On December 20, 1996, ATC consummated an initial public offering of
its Common Stock (the "IPO"). Simultaneous with the consummation of the IPO,
Aftermarket Technology Holdings Corp., the sole stockholder of ATC prior to the
IPO ("Holdings") was merged into ATC (the "Reorganization"). Upon the
effectiveness of such merger, 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 (the "Holdings
Preferred Stock") was converted into one share of ATC Redeemable Exchangeable
Cumulative Preferred Stock (the "Preferred Stock"), which was immediately
thereafter redeemed for an amount in cash equal to $100.00 plus an amount in
cash equal to accrued and unpaid dividends on the Holdings Preferred Stock to
the date of the Reorganization.
GENERAL
The Company is a leading remanufacturer and distributor of drive train
products used in the aftermarket repair of passenger cars and light trucks. The
Company's principal products include remanufactured transmissions, torque
converters and engines, as well as remanufactured and new parts for the repair
of automotive drive train and engine assemblies. The Company's principal
customers include: (i) independent transmission rebuilders, general repair shops
and distributors (the "Independent Aftermarket"); (ii) original equipment
manufacturers ("OEMs"), principally Chrysler, for use as replacement parts by
their dealers; and (iii) retail automotive parts stores.
The Company believes the key elements of its success are the quality
and breadth of its product offerings and the Company's emphasis on strong
customer relationships, promoted by strong technical support, rapid delivery
time, innovative product development and competitive pricing. In addition, the
Company has benefited from the increasing use of remanufactured transmissions,
engines and other parts for aftermarket repairs as the industry recognizes that
remanufacturing provides a higher quality, lower cost alternative to rebuilding
the assembly or replacing it with a new assembly manufactured by an OEM.
The automotive aftermarket in the United States and Canada consists of
sales of parts and services for vehicles after their original purchase. The
Company competes specifically in the aftermarket segment for automotive
transmissions, engines and other drive train related products.
1
PRODUCTS
The Company's product lines include remanufactured transmissions,
remanufactured engines and hard parts used in drive train repairs. In addition,
the Company distributes repair kits used in drive train repairs and certain
other products.
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted by make and model and either placed into immediate
production or stored until needed. In the remanufacturing process, the cores
are evaluated and disassembled into their component parts. The components that
can be incorporated into the remanufactured product are cleaned, tested and
refurbished. All components determined not reusable or repairable are replaced
by other remanufactured or new components. The units are then reassembled using
high-volume precision manufacturing techniques into finished assemblies.
Inspection and testing are conducted at various stages of the remanufacturing
process, and each finished assembly is tested on equipment designed to simulate
performance under operating conditions. Primarily as a result of its rigorous
quality control procedures, the Company has experienced an insignificant number
of warranty claims on its products. After testing, completed products are then
packaged for immediate delivery or shipped to one of the Company's distribution
centers.
Generally, the cores used in the Company's remanufacturing process for
sale to its OEM customers are provided to the Company by the OEM or its dealer
network. The majority of the cores used in the Company's remanufacturing
process for sale to its Independent Aftermarket and retail customers are
obtained from customers as trade-ins. The Company encourages its Independent
Aftermarket and retail customers to return cores on a timely basis and charges
customers a supplemental core charge in connection with purchases of engines and
critical hard parts. The customer can satisfy this charge by returning a usable
core or making a cash payment equal to the amount of the supplemental core
charge. If cores are not returned in a timely manner, the Company then must
procure cores through its network of independent core brokers. While core
prices are subject to supply and demand price volatility, the Company believes
its procurement network for cores will continue to provide cores at reasonable
prices. The preceding sentence contains a forward-looking statement, and there
can be no assurance that actual results will not differ materially from the
information contained in the preceding sentence.
TRANSMISSIONS
The Company remanufactures transmissions which are factory approved
and suitable for warranty and post-warranty replacement of transmissions for
Chrysler and 12 foreign OEMs, including Hyundai Motor America, Subaru of America
and American Isuzu, for their United States dealer networks. The number of
transmission models remanufactured by the Company has been increasing to
accommodate the greater number of models currently used in vehicles manufactured
by the Company's OEM customers. The majority of the Company's transmissions are
sold to Chrysler under Chrysler's MOPAR brand name. In addition, the Company
rebuilds heavy duty and light duty truck transmissions and air compressors.
HARD PARTS
The Company remanufactures torque converters (the coupler between the
transmission and engine), planetary gears (speed regulating devices inside the
transmission) and transmission fluid pumps. These "hard" parts are sold
principally to the Independent Aftermarket for use in drive train repairs. Hard
parts are sold under the RPM, HTP, MAMCO, TRANZPARTS and DIVERCO brand names.
ENGINES
The Company remanufactures engines designed as replacement engines for
use in many domestic passenger cars and light trucks. Principal customers are
Western Auto and O'Reilly Auto Parts, as well as the Independent Aftermarket.
Over the past three years, the variety of engine models remanufactured by the
Company has increased as the Company has expanded the range of engines offered
to meet customer requirements.
2
REPAIR KITS AND OTHER PRODUCTS
Repair kits sold by the Company consist of gaskets, friction plates,
seals, bands, filters and other "soft" parts that are used in rebuilding
transmissions for substantially all domestic and most imported passenger cars
and light trucks. Kits are currently sold principally to the Independent
Aftermarket. Each kit is designed specifically to include substantially all of
the soft parts necessary for rebuilding a particular model of transmission. In
addition to manufacturing or remanufacturing certain of the components that are
used in its kits, the Company maintains a variety of supply relationships that
allow it to purchase components for its kits at competitive prices. The
components manufactured or remanufactured by the Company include various
friction plates, gaskets and bands. The repair kits are sold under the RPM,
HTP, KING-O-MATIC, TRANZPARTS and DIVERCO brand names.
Other products consist principally of remanufactured rack and pinion
assemblies and CV axles for passenger cars and light trucks for the Independent
Aftermarket, and cleaning and testing equipment for the Independent Aftermarket
and other industrial businesses. These products are sold under the RPM, HTP,
KING-O-MATIC, TRANZPARTS and INTERCONT brand names.
MARKETING AND DISTRIBUTION
The Company distributes its products to: (i) the Independent
Aftermarket; (ii) its OEM customers for use as replacement parts by their
dealers; and (iii) retail automotive parts stores.
INDEPENDENT AFTERMARKET
The Company supplies transmission repair kits and hard parts used in
drive train repairs to independent transmission rebuilders and distributors in
the United States and Canada, such as AAMCO Transmissions Inc., MOTRA Corp. and
Lee Myles Associates Corp. These products are used in the Independent
Aftermarket to rebuild transmissions and other assemblies using remanufactured
and new component parts purchased from a variety of suppliers. In addition, the
Company supplies transmission and engine repair kits, hard parts used in drive
train repairs, remanufactured engines and certain remanufactured components such
as CV axles to general repair shops in the United States. Transmission and
engine repairs performed in the Independent Aftermarket are generally for
vehicles no longer covered by warranty or for OEM dealers who do not have access
to remanufactured assemblies. The Company believes that it currently supplies
less than one-third of the remanufactured or new drive train component
requirements of its Independent Aftermarket customers.
There are two characteristics of the Independent Aftermarket that
influence the Company's business strategy. First, as the number of vehicle
models has proliferated and repairs have become increasingly complex, the
Independent Aftermarket has grown more dependent on its suppliers for technical
support and for assistance in managing inventory by delivering product on a
just-in-time basis at competitive prices. Second, Independent Aftermarket
customers (including those affiliated with larger organizations such as AAMCO,
MOTRA and Lee Myles) generally purchase parts at the individual repair shop
level. Independent Aftermarket customers tend to make purchasing decisions
based on availability and rapid delivery of products, competitive pricing,
breadth of product offering and technical assistance. To respond to these
requirements, the Company has developed a strategy of geographic expansion of
its distribution system to provide its Independent Aftermarket customers with
short-notice rapid delivery, high service levels and technical support for a
broad product offering in each local market. This is accomplished through
47 distribution centers located throughout the United States and Canada from
which the Company provides local technical support and a wide range of products
delivered by Company-operated trucks to its customers.
The Company has developed a common product identification and
numbering system which is currently being implemented on a Company-wide basis.
In addition, the Company is in the process of electronically linking its
distribution centers through a computer network that will enable each center to
determine more quickly if and where a particular part is located within the
distribution system, thereby further enhancing customer service. The Company
expects to implement this process in stages during 1997 and 1998, and it
believes that the process will be completed by the third quarter of 1998. These
changes are expected to improve customer service, increase
3
product availability, enhance inventory management and improve operational
efficiencies. The preceding sentence contains a forward-looking statement, and
there can be no assurance that actual results will not differ materially from
the information contained in the preceding sentence.
New customers are developed by a direct sales force operating from the
Company's local distribution centers, by national and local trade publication
advertising and by telemarketing. The Company also participates in trade shows.
The Company believes its RPM, HTP, KING-O-MATIC, MAMCO, TRANZPARTS, INTERCONT
and DIVERCO brand names are well recognized and respected in their regional
markets. Net sales to Independent Aftermarket customers accounted for 47.8% of
the Company's revenues in 1995 and 41.1% in 1996.
OEM CUSTOMERS
The Company provides factory-approved remanufactured transmissions to
OEMs for use in warranty and, to a lesser extent, post-warranty repair work by
their dealers. The Company's largest OEM customer is Chrysler, to whom the
Company also supplies certain factory-approved remanufactured engines. The
Company sells to 12 foreign OEMs, including Hyundai Motor America, Subaru of
America and American Isuzu. Products are sold to each OEM pursuant to supply
arrangements for individual transmission models. Net sales to the Company's OEM
customers accounted for 44.7% of the Company's 1995 revenues and 51.9% of
revenues in 1996. Net sales to Chrysler accounted for 35.4% and 37.2% of the
Company's revenues in 1995 and 1996, respectively. Net sales to Chrysler grew
from $67.6 million in 1995 to $101.5 million in 1996.
Over the past 12 years, the Company has developed and maintained
strong relationships at many levels of both the corporate and the factory
organizations of Chrysler. In recognition of the Company's consistently high
level of service and product quality throughout its relationship with Chrysler,
in 1995 and 1996 the Company was awarded the Platinum Pentastar award, the
highest award Chrysler bestows on a supplier. Chrysler awarded only 14 Platinum
Pentastar awards in 1995 and only 13 in 1996. The 1995 award marked the first
time that the Platinum Pentastar had been awarded to a remanufacturer or to a
supplier that serves exclusively as a MOPAR aftermarket parts supplier. In
addition to its Platinum Pentastar, the Company received Gold Pentastar awards
in 1993, 1994, 1995 and 1996. Only seven suppliers received the Gold Pentastar
award in each of these years.
Chrysler began implementing remanufacturing programs for its
transmission models in 1986 and selected the Company as its sole supplier of
remanufactured transmissions in 1989. Chrysler has advised the Company that, by
implementing a remanufacturing program, Chrysler has realized substantial
warranty cost savings, standardized the quality of its dealers' aftermarket
repairs and reduced its own inventory of replacement parts. Currently, Chrysler
has remanufacturing programs for transmission models that are used in less than
70% of its vehicles, and the Company is the only factory-approved supplier of
remanufactured transmissions for these models.
As part of its expanding relationship with Chrysler and in response to
a periodic shortage of cores, in 1996 the Company established a central core
return center for all of Chrysler's transmission models. Chrysler dealers make
arrangements to ship transmission and engine cores to a regional depot, which
then ships directly to the Company's central core return center located near its
main remanufacturing facility. The Company thus assists Chrysler by improving
the efficient and timely return of cores at a cost savings to Chrysler.
Furthermore, the Company performs value-added services such as core audit and
analysis in conjunction with Chrysler engineers. The Company is currently
working with Chrysler to improve the tracking and management of cores, which
will allow the Company to schedule its production more efficiently. The Company
believes that this central core facility has reduced the risk of future Chrysler
core shortages.
Although the Company is currently the only factory-approved supplier
of remanufactured transmissions to Chrysler, Chrysler is not obligated to
continue to purchase the Company's products and there can be no assurance that
the Company will be able to maintain or increase the level of its sales to
Chrysler or that Chrysler will not approve other suppliers in the future. In
addition, Chrysler reduced its standard new vehicle warranty from seven
years/70,000 miles to three years/36,000 miles and could implement a shorter
warranty in the
4
future. Any such action could have the effect of reducing the amount of warranty
work performed by Chrysler dealers.
RETAIL AUTOMOTIVE PARTS STORES
The Company supplies remanufactured engines, transmission filter kits,
engine components and engine repair kits to automotive aftermarket retail stores
throughout the United States, which offer new and remanufactured parts and
assemblies to a broad range of customers, principally "do-it-yourself" customers
and general repair shops. The retail automotive parts store market is highly
fragmented with most retail stores obtaining products similar to those provided
by the Company from a variety of regional suppliers. These customers tend to
make purchasing decisions based on price, rapid delivery of products and breadth
of product offering. As a supplier with a national scope and a broader product
line than many of its competitors, the Company provides high quality products,
competitive prices and high service levels as well as promotional literature and
advertisements. The Company's principal retail customers are Western Auto,
O'Reilly Auto Parts and Advance Auto. Net sales to retail automotive parts
stores accounted for 7.6% of the Company's revenues in 1995 and 7.1% in 1996.
ACQUISITIONS
Strategic acquisitions have been an important element in the Company's
historical growth. By integrating an acquired company's products into the
Company's distribution system, the Company is able to offer these products to a
substantially greater number of markets than was the case prior to the
acquisition. In addition, the Company expects to realize economies of scale in
areas including purchasing, administration and inventory management. The
Company's management is experienced in identifying acquisition opportunities and
completing and integrating acquisitions within the automotive aftermarket.
Since its formation and acquisition of Aaron's, HTP, Mamco and RPM in 1994, ATC
has acquired CRS, Mascot and King-O-Matic in 1995, Tranzparts and Diverco in
1996 and Repco in 1997.
COMPETITION
The Company competes in the highly fragmented yet highly competitive
automobile aftermarket for transmissions, engines and other drive train
components, in which the majority of industry supply comes from small
local/regional participants. However, certain of the Company's competitors are
larger than the Company and have greater financial and other resources available
to them than does the Company. Competition is based primarily on product
quality, service, delivery, technical support and price.
EMPLOYEES
As of January 31, 1997, the Company employed approximately 3,250
people. The Company believes its employee and labor relations are good. None
of the Company's subsidiaries has experienced a work stoppage in its history,
and the Company has not experienced any work stoppage since its formation in
1994. None of the Company's employees are members of any labor union.
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. The operation of
automotive parts remanufacturing plants involves environmental risks.
Prior to the RPM Acquisition, the company from which RPM acquired its
assets (the "Prior RPM Company") leased nine properties in the City of Azusa,
California (the "Azusa Properties") from a general partnership consisting of the
Prior RPM Company shareholders. The Azusa Properties are within an area which,
as a result of regional groundwater contamination, has been designated by the
Environmental Protective Agency (the
5
"EPA") as the Baldwin Park Operable Unit ("BPOU") of the San Gabriel Valley
Superfund Sites. The federal Superfund law (the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA")) both
provides for the appropriate cleanup of contaminated sites and assigns liability
for the cost of such cleanups. The parties held responsible for cleanup costs
are broadly defined under CERCLA, and generally include present owners and
operators of a site and certain past owners and operators. Liability for
cleanup costs imposed against such "responsible parties" is strict, joint and
several. However, such costs are typically allocable among responsible parties
through settlement or litigation based on factors including each particular
party's relative contribution of contaminants to the site and ability to pay.
The EPA has proposed a groundwater treatment system as an interim
remedial measure for the BPOU. The EPA has estimated that it will cost
approximately $47 million to construct this system and approximately $4 million
per year for an indefinite period to operate it. The Company has not
independently evaluated this estimate, and the actual cost may vary
substantially from this estimate. In addition, the EPA has incurred substantial
costs to date and will likely continue to incur such costs in overseeing the
implementation of remedial measures. The EPA has informally estimated that
these costs may be in excess of $1 million. Further, if the EPA determines that
the interim remedial measures are not adequate, additional costs could be
incurred. As discussed above, the "responsible parties" for this site could be
held liable for these EPA costs. In addition to cleanup costs, the responsible
parties may be required to pay for damages for injuries to natural resources
such as soil, groundwater or wildlife caused by the contamination at the BPOU.
To date, the government agencies authorized to claim natural resource damages
for this site have not made any assessment of the value, if any, of such
damages. In 1993, the EPA notified the Prior RPM Company, the general
partnership consisting of the Prior RPM Company shareholders which owns the
Azusa Properties and approximately 100 other entities that they may be
potentially responsible parties ("PRPs") for the San Gabriel Valley Superfund
Sites as present or former owners or operators of properties located within that
Site. In January 1995, the EPA sent letters to 16 of these parties with respect
to 15 properties in the BPOU, describing 4 of those properties as apparently the
"largest contributors to the groundwater contamination" and the remaining 11
properties as apparently in a range of moderate to lesser contributors. The
letters identify the recipients as PRPs for the proposed interim remediation and
request that they enter into negotiations to design, construct and operate the
cleanup remedy. The recipients of the letters included a general partnership
comprised of the Prior RPM Company shareholders, which was informed that the EPA
considers it responsible for two of the sites described as lesser to moderate
contributors to the contamination.
In conjunction with the federal and state environmental investigation
of this area, the Prior RPM Company has been required by the California Regional
Water Quality Control Board (the "Water Board") to conduct an investigation on
the Azusa Properties. This investigation has detected soil contamination on
certain of the Azusa Properties formerly leased by RPM and as a result, the
Prior RPM Company is being required by the Water Board to undertake further
investigations and may be required to undertake remedial action on those
properties.
For one year after the RPM Acquisition, the Company leased the Azusa
Properties pursuant to leases which provide that the Company has not assumed any
liabilities with respect to environmental conditions existing on or about these
properties prior to the commencement of the lease period, although the Company
could be held responsible for such liabilities under various legal theories.
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. The RPM acquisition
agreement provides that the Company did not assume any environmental liabilities
associated with hazardous substances existing on or about the Azusa Properties
occupied by the Prior RPM Company prior to the RPM Acquisition and that the
Prior RPM Company and the Prior RPM Company shareholders will jointly and
severally indemnify the Company for all liabilities or damages (other than
consequential damages) that the Company may reasonably incur as a result of any
claim asserted against the Company relating to unassumed environmental
liabilities. There can be no assurance, however, that the Company would be able
to make any recovery under any indemnification provisions. The Company also
could become responsible if the conduct of its business contributed to any
environmental contamination on these properties. The Company took steps to
ensure that its business at these properties was conducted in compliance with
applicable environmental laws and in a manner that does not contribute to any
environmental contamination. Moreover, the Company has significantly reduced
its presence at the site and has moved all manufacturing operations off-site.
Since July 18, 1995, the Company's only real property
6
interest in the Azusa Properties has been the lease of a 6,000 square foot
storage and distribution facility. The Company believes, although there can be
no assurance, that it will not incur any material liability as a result of the
pre-existing environmental conditions.
In connection with the CRS, Mascot, King-O-Matic, Aaron's, RPM, HTP,
Mamco, Tranzparts, Diverco and Repco acquisitions, 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 remedial, reporting and other
regulatory requirements, including certain waste management procedures, were not
or may not have been satisfied. Based in part on the investigations conducted,
and the indemnification provisions of the agreements entered into in connection
with these acquisitions, the Company believes, although there can be no
assurance, that its liabilities relating to these environmental matters will not
have a material adverse effect, individually or in the aggregate, on the
Company.
ITEM 2. PROPERTIES.
The Company currently leases 60 facilities with total leased space of
approximately 2.1 million square feet. The following table sets forth certain
information regarding the manufacturing facilities and distribution centers of
the Company.
LEASE
APPROXIMATE EXPIRATION TYPE OF FACILITY/PRODUCTS
LOCATION SQ. FEET DATE MANUFACTURED
- -------- ----------- ---------- --------------------------
Phoenix, Arizona 22,000 1997 Distribution Center
Tucson, Arizona 6,400 1998 Distribution Center
Azusa, California 6,000 1998 Distribution Center
Fresno, California 14,000 1997 Distribution Center
Los Angeles, California 4,700 1998 Distribution Center
Oakland, California 10,000 1997 Distribution Center
Rancho Cucamonga, California 153,000 2002 Distribution Center, Torque
Converters, Repair Kits, Hard
Parts
Sacramento, California 11,200 1998 Distribution Center
San Diego, California 10,000 1997 Distribution Center
San Jose, California 10,000 2000 Distribution Center
Van Nuys, California 6,800 2000 Distribution Center
Colorado Springs, Colorado 5,000 1997 Distribution Center
Denver, Colorado 9,000 1997 Distribution Center
Orlando, Florida 11,900 2001 Distribution Center
Atlanta, Georgia 14,900 1998 Distribution Center
Hillside, Illinois 20,000 2000 Distribution Center
Harvey, Illinois 46,000 2001 Distribution Center,
Transmissions, Hard Parts,
Engine Repair Kits
Louisville, Kentucky 51,500 1999 Distribution Center, Repair
Kits, Hard Parts
Louisville, Kentucky 9,200 (1) CV Axles
Grand Rapids, Michigan 9,000 1998 Distribution Center
Taylor, Michigan 12,200 2000 Distribution Center
Joplin, Missouri 264,000 1998 Transmissions, Engines
Creve Coeur, Missouri 9,700 1998 Distribution Center
Kansas City, Missouri 10,200 2000 Distribution Center
Springfield, Missouri 280,800 2004 Transmissions, Engines
Springfield, Missouri 30,000 1998 Torque Converters
Springfield, Missouri 12,100 2001 Distribution Center
Springfield, Missouri 34,000 1998 Cleaning and Testing Equipment
Springfield, Missouri 60,400 2000 Core Storage
Springfield, Missouri 98,800 (1) Core Storage
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Springfield, Missouri 10,000 (1) Core Storage
Springfield, Missouri 200,000 2006 Core Storage
Las Vegas, Nevada 7,500 1999 Distribution Center
Mahwah, New Jersey 92,900 2002 Distribution Center,
Transmissions
Albuquerque, New Mexico 7,000 1997 Distribution Center
Charlotte, North Carolina 23,000 2001 Distribution Center
Dayton, Ohio 42,000 1999 Torque Converters
Portland, Oregon 20,000 1997 Distribution Center
Memphis, Tennessee 37,800 2003 Distribution Center, Repair
Kits
Austin, Texas 5,000 1997 Distribution Center
Dallas, Texas 93,000 2011 Distribution Center, Repair
Kits, Hard Parts
Houston, Texas 13,500 2011 Distribution Center
San Antonio, Texas 13,000 2001 Distribution Center
Salt Lake City, Utah 15,000 1997 Distribution Center
Norfolk, Virginia 9,700 2000 Distribution Center
Federal Way, Washington 1,600 1998 Corporate Offices
Seattle, Washington 22,000 1997 Distribution Center
Spokane, Washington 9,500 2000 Distribution Center
Janesville, Wisconsin 30,000 2001 Distribution Center, Repair
Kits, Hard Parts
Calgary, Alberta 9,200 2001 Distribution Center
Edmonton, Alberta 14,800 1998 Distribution Center, Heavy
Duty Truck Transmissions
Vancouver, British Columbia 7,800 1997 Distribution Center
Vancouver, British Columbia 7,300 1997 Distribution Center
Moncton, New Brunswick 12,000 2000 Distribution Center
Mississauga, Ontario 35,100 1998 Distribution Center, Heavy
Duty Truck Transmissions and
Air Compressors
Mississauga, Ontario 12,200 2001 Repair Kits
Mississauga, Ontario 24,000 2000 Distribution Center
Montreal, Quebec 11,200 2000 Distribution Center
Regina, Saskatchewan 600 (1) Distribution Center
Mexicali, Mexico 77,100 1998 Torque Converters, Cleaning
and Testing Equipment
- -------------
(1) Month-to-month lease.
The Company believes that its current manufacturing facilities and
distribution centers are adequate for the current level of the Company's
activities. The Company's transmission and engine remanufacturing facility in
Springfield, Missouri is currently employing two work shifts, seven days a week.
Other manufacturing sites have the flexibility to add both additional shifts and
production workers needed to accommodate additional demand for products and
services. However, in the event the Company were to experience a material
increase in sales, the Company may require additional manufacturing facilities.
The Company believes such additional facilities are readily available on a
timely basis on commercially reasonable terms. Further, the Company believes
that the leased space housing its existing manufacturing and distribution
facilities is not unique and could be readily replaced, if necessary, at the end
of the terms of its existing leases on commercially reasonable terms. Many of
the Company's leases are renewable at the option of the Company.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company has been and is involved in various
legal proceedings. Management believes that all of such litigation is routine
in nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect, individually or in the aggregate, on the Company.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
One matter was submitted to a vote of the sole stockholder of the
Company during the quarter ended December 31, 1996. On December 13, 1996, a
special meeting of the sole stockholder was held to approve the amendment and
restatement of the Company's Certificate of Incorporation to increase the
authorized number of shares of Common Stock to 30,000,000 and Preferred Stock to
5,000,000. All 1,000 votes held by the sole stockholder were cast in favor of
the proposal.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock presently is traded on the Nasdaq National
Market under the symbol "ATAC." As of February 28, 1997, there were
approximately 1,680 record holders of its Common Stock. The Common Stock was
not listed on the Nasdaq National Market for a full quarterly period during the
fiscal year ended December 31, 1996.
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
the Common Stock in the foreseeable future. Furthermore, as a holding company
with no independent operations, the ability of the Company to pay cash dividends
will be dependent upon the receipt of dividends or other payments from its
subsidiaries. Under the terms of the indentures governing the Company's senior
subordinated notes due 2004, the Company is not permitted to pay any dividends
on the Common Stock unless certain financial ratio tests are satisfied. In
addition, the Company's revolving credit facility contains certain covenants
that, among other things, prohibit the payment of dividends by the Company. See
"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.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below with respect to the
statements of income data for the seven months ended July 31, 1994, five months
ended December 31, 1994, and the years ended December 31, 1995 and 1996 and the
balance sheet data at December 31, 1995 and 1996 are derived from the Combined
Financial Statements of the Predecessor Companies and Consolidated Financial
Statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere herein, and are qualified by
reference to such financial statements and notes related thereto. The selected
financial data with respect to the statement of income data for the year ended
December 31, 1992 and 1993 and the balance sheet data at December 31, 1992, 1993
and 1994, are derived from the audited Combined Financial Statements of the
Predecessor Companies 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.
9
COMBINED CONSOLIDATED
--------------------------------- ---------------------------------
FOR THE FOR THE FOR THE YEAR
YEAR ENDED SEVEN MONTHS FOR THE FIVE ENDED
DECEMBER 31, ENDED MONTHS ENDED DECEMBER 31,
-------------------- JULY 31, DECEMBER 31, --------------------
1992 1993 1994(1) 1994 1995 1996
-------- --------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales. . . . . . . . . . $75,264 $110,702 $90,056 $67,736 $190,659 $272,879
Cost of sales. . . . . . . . 45,588 66,687 52,245 40,112 115,499 166,811
-------- --------- --------- -------- --------- --------
Gross profit . . . . . . . . 29,676 44,015 37,811 27,624 75,160 106,068
Selling, general and
administrative expenses . . 22,103 25,682 20,475 14,206 38,971 55,510
Amortization of intangible
assets. . . . . . . . . . . 28 28 16 1,210 3,308 3,738
Operating income . . . . . . 7,545 18,305 17,320 12,208 32,881 46,820
Interest expense (income),
net . . . . . . . . . . . . (258) (302) (158) 6,032 16,915 19,106
Income taxes (2) . . . . . . 150 471 (5) 2,565 6,467 11,415
-------- --------- --------- -------- --------- --------
Net income . . . . . . . . . $ 7,653 $ 18,136 $ 17,483 $ 3,611 $ 9,499 $ 16,299
-------- --------- ---------
-------- --------- ---------
Preferred stock dividends. . 853 2,093 2,222
-------- --------- --------
Net income available to
common stockholders . . . . $ 2,758 $ 7,406 $ 14,077
-------- --------- --------
-------- --------- --------
Pro forma (unaudited) (3)
Net income per share. . . . $ 0.65 $ 1.02
Shares used in computation
of net income per share . . 14,616 15,918
OTHER DATA:
Capital expenditures (4) . . $ 1,141 $ 2,310 $ 1,850 $ 1,336 $ 5,187 $ 7,843
COMBINED CONSOLIDATED
------------------- ---------------------------------
DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . $18,639 $26,651 $40,499 $60,012 $103,371
Property, plant and
equipment (net) . . . . . . . . . . . 3,274 4,678 6,196 10,784 17,482
Total assets . . . . . . . . . . . . . 32,654 45,618 187,293 247,932 320,747
Long-term debt (5) . . . . . . . . . . 1,497 998 121,483 165,724 167,233
Preferred stock. . . . . . . . . . . . -- -- 20,853 22,946 --
Common stockholders' equity. . . . . . 22,107 31,720 22,757 30,188 105,832
- -----------------
(1) The combined financial statements for the seven months ended July 31, 1994
include the operations of the Predecessor Companies up to their respective
acquisition dates; operations for RPM between July 20, 1994 and July 31,
1994 and for the other three Predecessor Companies for August 1st and 2nd,
1994 are not significant. All material transactions between the
Predecessor Companies have been eliminated.
(2) Two of the Predecessor Companies elected to be taxed as S Corporations for
all periods through consummation of the Initial Acquisitions; therefore,
for federal and state income tax purposes, any income or loss generally was
not taxed to these companies but was reported by their respective
stockholders. A pro forma provision for taxes based on income reflecting
the estimated provision for federal and state income taxes which would have
been provided had these companies been C Corporations and included in
consolidated returns with the Company is as follows: $3,036 and $7,334 for
the years ended December 31, 1992 and 1993, respectively, and $7,004 for
the seven months ended July 31, 1994.
(3) See Note 1 to consolidated financial statements.
10
(4) Excludes capital expenditures made by each of CRS, Mascot, King-O-Matic,
Tranzparts and Diverco prior to such subsidiaries' respective acquisitions
and any capital expenditures made in connection with such acquisitions.
(5) Includes deferred tax liabilities of $1,438, $3,478 and $5,252 at
December 31, 1994, 1995 and 1996, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the
Combined Financial Statements of the Predecessor Companies and the Consolidated
Financial Statements of the Company and notes thereto included elsewhere in this
Annual Report. The Combined Financial Statements of the Predecessor Companies
represent the combination of the historical financial statements of the four
separate businesses of the Predecessor Companies.
The Company's revenues are generated through the sale of drive train
products used in the automotive aftermarket repair of passenger cars and light
trucks. Since its formation, the Company has benefited from a combination of
internal and acquisition-related revenue growth. The Company achieved compound
annual growth in revenue of 38.0% from 1992 through 1996 (29.2% if the 1995 and
1996 Acquisitions are excluded).
The Company's revenues from sales to Independent Aftermarket customers
increased by 17.7% compounded annually from $58.5 million to $112.1 million
between 1992 and 1996. This growth was due to geographic expansion through the
addition of distribution centers, a broadened product line, enhanced customer
service, effective sales efforts and acquisitions. During the same period,
revenues from sales to OEM customers increased by 70.4% compounded annually from
$16.8 million to $141.5 million due to increased sales to existing customers,
including Chrysler, and the addition of new customers. Revenues from sales to
retail automotive parts stores increased from virtually zero in 1992 to $19.3
million in 1996.
The primary components of the Company's cost of goods sold are the
cost of cores and component parts, labor costs and overhead. While certain of
these costs have fluctuated as a percentage of sales over time, cost of goods
sold as a percentage of sales has remained relatively constant from 1992 through
1996. Selling, general and administrative ("SG&A") expenses consist primarily
of salaries, commissions, rent, marketing expenses and other management
infrastructure expenses. SG&A expenses as a percentage of sales declined from
29.4% in 1992 to 20.3% in 1996 principally due to the effect of spreading
certain fixed costs over a larger sales base.
In the fourth quarter of 1996, the Company recorded a non-cash charge
of approximately $485,000 for deferred compensation expense relating to the
difference between the exercise price and the intrinsic value for financial
statement presentation purposes of the Company's Common Stock for 628,176
options granted in October 1996. Substantially all of such options were granted
to Mr. Stephen J. Perkins, the Company's Chief Executive Officer, and other
members of senior management at $4.67 per share. This compensation expense will
aggregate $3.3 million, and will be recognized over the respective vesting
periods of the options, which generally range from three to five years.
RESULTS OF OPERATIONS
The following table sets forth certain financial statement data
expressed in millions of dollars and as a percentage of net sales. The pro
forma statement of income for the year ended December 31, 1994 reflects the
combined financial statements for the seven months ended July 31, 1994 for
Aaron's, HTP, Mamco and RPM, and the consolidated operations of these companies
for the five months ended December 31, 1994. Pro forma expense adjustments were
made to reflect the Initial Acquisitions as if they had occurred on January 1,
1994.
11
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
PRO FORMA CONSOLIDATED CONSOLIDATED
1994 1995 1996
---- ---- ----
(IN MILLIONS)
Net sales. . . . . . . . . . . . . . . . . . $157.8 100.0% $190.7 100.0% $ 272.9 100.0%
Cost of sales. . . . . . . . . . . . . . . . 92.9 58.9 115.5 60.6 166.8 61.1
------- ------- ------- ------- ------- -------
Gross profit . . . . . . . . . . . . . . . . 64.9 41.1 75.2 39.4 106.1 38.9
Selling, general and administrative. . . . . 30.4 19.2 39.0 20.5 55.5 20.3
Amortization of intangible assets. . . . . . 3.0 1.9 3.3 1.7 3.8 1.4
------- ------- ------- ------- ------- -------
Operating income . . . . . . . . . . . . . . 31.5 20.0 32.9 17.2 46.8 17.2
Interest expense (income), net . . . . . . . 14.5 9.2 16.9 8.8 19.1 7.0
Provision for income taxes . . . . . . . . . 6.9 4.4 6.5 3.4 11.4 4.2
------- ------- ------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . $ 10.1 6.4% $ 9.5 5.0% $16.3 6.0%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net income increased 71.6% from $9.5 million in 1995 to $16.3 million
in 1996, as the Company experienced significant revenue growth from all three of
its customer groups, OEMs, retail automotive parts stores and the Independent
Aftermarket. More than half of the revenue growth occurred from OEM customers.
Growth from the Independent Aftermarket was achieved largely through two
strategic acquisitions (Tranzparts and Diverco), and to a lesser extent from
internal growth. The higher net income was primarily achieved from the
Company's ability to spread its overhead expenses over a larger revenue base.
Although the Company's IPO resulted in an increase in the number of
shares used in the earnings per share ("EPS") calculation, EPS increased
significantly from $0.65 in 1995 to $1.02 in 1996. The numbers of shares used
in the calculation of EPS were 14.6 million for 1995 and 15.9 million for 1996 .
NET SALES. Net sales increased $82.2 million or 43.1%, from $190.7
million in 1995 to $272.9 million in 1996. Of this increase, $42.8 million was
due to internal growth and $39.4 million was due to the incremental net sales
generated by the companies acquired in 1995 and 1996: CRS, Mascot, King-O-Matic,
Tranzparts and Diverco, which were acquired on June 1, 1995, June 9, 1995,
September 12, 1995, April 2, 1996 and October 1, 1996, respectively.
The internal growth was generated primarily from increased sales
volumes with existing OEM customers. To a lesser extent, internal growth was
also generated by the incremental sales from five new distribution centers
opened during the second half of 1995, increased sales volumes through existing
distribution centers and increased sales volumes with existing retail customers.
Net sales to Chrysler of $101.5 million in 1996 represented 37.2% of
the Company's total net sales for the year, as compared to $67.6 million and
35.4% in 1995. The increase in net sales to Chrysler is partially reflective of
an effort by Chrysler during the third quarter of 1995 to reduce its inventory
of remanufactured transmissions. Management believes that the Chrysler
inventory reduction during the third quarter of 1995 was a one-time effort to
reverse an inventory build-up in 1994 and is not expected to recur. The
preceding sentence contains a forward-looking statement, and there can be no
assurance that actual results will not differ materially from the information
contained in the preceding sentence.
GROSS PROFIT. Gross profit as a percentage of net sales decreased
slightly from 39.4% in 1995 to 38.9% in 1996. The decrease in gross profit
margin was largely attributable to certain non-recurring start-up costs incurred
during 1996 in connection with the Company's new plant in Joplin, Missouri and
the expansion of capacity at the Company's plant in Springfield, Missouri needed
to support sales growth to retail and OEM customers.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased
slightly as a percentage of net sales from 20.4% in 1995 to 20.3% in 1996.
However, SG&A expenses increased in absolute dollars from $39.0 million in 1995
to $55.5 million in 1996, representing an increase of $16.5 million or 42.4%.
The increase in SG&A expenses was due largely to the ongoing incremental SG&A
expenses of the companies acquired in 1995 and 1996: CRS, Mascot, King-O-Matic,
Tranzparts and Diverco. Other significant factors contributing to the increase
in SG&A expenses include the ongoing incremental expenses associated with the
five new distribution centers opened during the second half of 1995, and certain
start-up and ongoing SG&A expenses incurred in connection with the Company's new
plant in Joplin, Missouri. In addition, SG&A expenses in 1996 included a charge
of $0.7 million for certain planned reorganization costs associated with the
relocation of the Company's corporate headquarters to the Chicago area and the
integration of the Independent Aftermarket division.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $0.4 million in 1996 as compared to 1995, reflecting the increase in
intangible assets that occurred as a result of the acquisitions of CRS, Mascot,
King-O-Matic, Tranzparts and Diverco.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased 42.2%, from $32.9 million in
1995 to $46.8 million in 1996. As a percentage of net sales, income from
operations in 1996 was 17.2%, equal to the same percentage of net sales in 1995.
INTEREST EXPENSE (INCOME), NET. Interest expense increased $2.3
million from $18.0 million in 1995 to $20.3 million in 1996. The increase was
due to a full year of interest expense on the Series D senior subordinated notes
which were used to finance the acquisitions of CRS, Mascot and King-O-Matic, and
the related amortization of debt issuance costs. The Series D notes were issued
on June 1, 1995 and therefore were only outstanding for the last seven months of
1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31,
1994
The Company experienced revenue growth of 20.8% in 1995, its first
full year of operation since its formation. However, net income decreased from
$10.1 million in 1994 (on a pro forma basis) to $9.5 million in 1995. The
decrease in net income resulted from the combined effect on 1995 results of
higher interest expense and a lower percentage of income from operations. On
June 1, 1995, the Company issued its Series D senior subordinated notes, which
added $2.7 million of interest expense for the year. Income from operations
decreased from 20.0% of net sales in 1994 to 17.2% in 1995, principally as a
result of a lower gross profit margin and higher SG&A expenses as discussed
below.
NET SALES. Net sales increased by $32.9 million or 20.8% from $157.8
million in 1994 to $190.7 in 1995 primarily as a result of the acquisitions of
CRS, Mascot, and King-O-Matic. The three new acquisitions provided
$24.7 million in additional revenues. Net sales of remanufactured transmissions
increased from $68.4 million in 1994 to $85.9 million in 1995. The volume
increase of remanufactured transmissions resulted principally from the
acquisitions of CRS and Mascot, partially offset by a reduction in net sales of
remanufactured transmissions to Chrysler from $66.8 million in 1994 to $64.8
million in 1995. Net sales to Chrysler reflected a decrease from $19.8 million
during the third quarter of 1994 to $13.2 million for the third quarter of 1995
as Chrysler reduced its inventory of remanufactured transmissions, partially
offset by an increase from $16.4 million during the fourth quarter of 1994 to
$18.9 million for the fourth quarter of 1995. Net sales of repair kits, hard
parts and other drive train products increased $6.0 million from $69.0 million
in 1994 to $75.0 million in 1995 primarily as a result of the Company's
acquisition of King-O-Matic. Net sales of remanufactured engines increased $4.6
million from $15.2 million in 1994 to $19.8 million in 1995. The volume
increase of remanufactured engines resulted from increased demand from Western
Auto at its retail outlets, and the addition of new retail customers.
GROSS PROFIT. Gross profit as a percentage of net sales decreased
from 41.1% in 1994 to 39.4% in 1995. The gross profit decrease of 1.7% of net
sales was due in large part to increased labor costs relating to remanufactured
engines and transmissions. The Company was not able to recover all of the
additional costs through increased selling prices.
13
In addition, the aggregate gross profit was affected by the
acquisitions that occurred in 1995. Total net sales in 1995 includes $24.7
million for CRS, Mascot and King-O-Matic at a combined gross profit, which was
somewhat lower than that of the Company as a whole for 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased
from $30.4 million in 1994 to $39.0 in 1995 or, as a percentage of net sales,
from 19.2% in 1994 to 20.5% in 1995. The increase was partly due to the
Company's acquisitions of CRS, Mascot and King-O-Matic, which comprised $3.3
million of the Company's SG&A expenses in 1995. Other significant factors that
contributed to the increase in SG&A expenses were the relocation of RPM's main
facilities from Azusa, California to Rancho Cucamonga, California and the
addition of a new manufacturing plant in Joplin, Missouri, both of which
resulted in an increase in ongoing SG&A expenses and a significant amount of
non-recurring SG&A expenses being incurred during 1995. Legal, audit, tax and
other professional fees were also higher in 1995 principally due to a full year
of ATC operations as compared with only five months of operations in 1994.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $0.3 million in 1995, reflecting the increase in intangible assets
that occurred as a result of the acquisitions of CRS, Mascot and King-O-Matic.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased 4.4% from $31.5 million in
1994 to $32.9 million in 1995. As a percentage of net sales, income from
operations decreased from 20.0% in 1994 to 17.2% in 1995.
INTEREST EXPENSE (INCOME), NET. Interest expense increased $2.4
million from $14.5 million in 1994 to $16.9 million in 1995. The increase in
interest expense reflects additional interest on the Series D notes that were
issued principally to finance the acquisitions of CRS, Mascot and King-O-Matic
and the related amortization of debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company raised total net proceeds of $61.6 million in its IPO and
concurrent private placement of Common Stock in December 1996. From the
Company's inception in July 1994 to December 1996, the Company had funded its
operations and investments in property and equipment, including acquisitions,
through the issuance of senior subordinated notes totaling $162.4 million, the
private sale of Preferred Stock of $20 million and Common Stock of $20.0
million, and to a lesser extent through cash provided by operating activities
and revolving bank lines. In December 1996, the Preferred Stock was redeemed
and, in February 1997, $40 million of the Senior Subordinated notes were
redeemed, with a combination of the proceeds from the IPO and borrowings under
the Company's revolving credit facility.
The Company had total cash and cash equivalents on hand of $46.5
million at December 31, 1996, representing an increase in net cash of $37.7
million for the year then ended. Net cash provided by operating activities was
$17.8 million in 1996. Net cash used in investing activities was $20.0 million
in 1996, including a total of $12.2 million for the acquisition of Tranzparts
and Diverco, and $7.8 million in capital expenditures largely for transmission
and engine remanufacturing equipment and other improvements related to the
Company's new plant in Joplin, Missouri. Net cash provided by financing
activities was $39.9 million, including net proceeds of $61.6 million from the
IPO and concurrent private placement of Common Stock, payments totaling $25.2
million in connection with the redemption of Preferred Stock, and net borrowings
of $3.5 million on bank lines of credit.
The Company has budgeted a total of $9.6 million for capital
expenditures in 1997, including approximately $2.0 million carried over from the
1996 budget. The 1997 budget consists primarily of additional transmission,
engine and torque converter remanufacturing equipment and other improvements to
support planned increases in production capacity in the Joplin, Missouri,
Springfield, Missouri and Mahwah, New Jersey plants. Overall, planned capital
expenditures for 1997 are considered adequate for normal replacement and
consistent with projections for future sales and earnings.
14
As of December 31, 1996, the Company had approximately $27.0 million
available on its then existing $30 million revolving credit facility with The
Chase Manhattan Bank ("Chase") that had been scheduled to mature in July 1999.
In February 1997, the Company terminated that facility and replaced it with a
new $100 million revolving credit facility with Chase. The new revolving credit
facility is available to finance the Company's working capital requirements,
future acquisitions and other general corporate needs, and will expire in
December 2001. Amounts advanced under the agreement are secured by
substantially all assets of the Company.
In July 1996, the Company entered into an agreement with Bank of
Montreal for a revolving credit facility to accommodate the working capital
needs of the Company's Canadian subsidiaries. Borrowings under the agreement
are limited to certain advance rates based upon the eligible accounts receivable
and inventory of King-O-Matic and Mascot up to an aggregate maximum of C$3.0
million.
In January 1997, the Company acquired Repco, a drive train parts
distributor based in Dallas, Texas with three additional distribution centers in
Texas and one in Florida, for a purchase price of approximately $12.0 million.
With the acquisition of Repco, the Company has entered geographic markets of
distribution in several cities where it previously had little or no presence.
The Company evaluates potential acquisitions on an ongoing basis and expects to
continue to do so in the future.
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations.
In pursuing future acquisitions, the Company expects to have to consider the
effect any such acquisition costs may have on its liquidity. In order to
consummate such acquisitions, the Company may need to raise additional capital
through additional debt or equity financings.
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 "Business -- Environmental" for a discussion of certain
environmental matters relating to the Company.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Aftermarket Technology Corp.
Consolidated Financial Statements
Years Ended December 31, 1994, 1995 and 1996
CONTENTS
Report of Ernst & Young LLP, Independent Auditors.....................17
Audited Consolidated Financial Statements
Consolidated Balance Sheets...........................................18
Consolidated Statements of Income.....................................19
Consolidated Statements of Stockholders' Equity.......................20
Consolidated Statements of Cash Flows.................................21
Notes to Consolidated Financial Statements............................22
16
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Aftermarket Technology Corp.
We have audited the accompanying consolidated balance sheets of
Aftermarket Technology Corp. (the Company) as of December 31, 1995 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the five months ended December 31, 1994 and for the years ended
December 31, 1995 and 1996. We have also audited the accompanying combined
statements of income, stockholders' equity, and cash flows of the Predecessor
Companies to Aftermarket Technology Corp. (the Predecessor Companies) for the
seven months ended July 31, 1994. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements are the responsibility of the Company's and Predecessor Companies'
managements. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Aftermarket Technology Corp. at December 31, 1995 and 1996, and the
consolidated results of the Company's operations and cash flows for the five
months ended December 31, 1994, and for the years ended December 31, 1995 and
1996 and the combined results of the operations of the Predecessor Companies to
Aftermarket Technology Corp. and their cash flows for the seven months ended
July 31, 1994, in conformity with generally accepted accounting principles.
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 herein.
ERNST & YOUNG LLP
Seattle, Washington
February 14, 1997
17
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
December 31,
------------- -------------
1995 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . $ 8,755,691 $ 46,498,249
Accounts receivable, net. . . . . . . . . . . 32,965,874 38,779,538
Inventories . . . . . . . . . . . . . . . . . 43,064,712 60,586,056
Prepaid and other assets. . . . . . . . . . . 2,032,671 2,916,197
Deferred tax assets . . . . . . . . . . . . . 2,267,000 2,272,000
------------- -------------
Total current assets . . . . . . . . . . . . . 89,085,948 151,052,040
Equipment and leasehold improvements:
Machinery and equipment . . . . . . . . . . . 7,187,840 12,907,232
Autos and trucks. . . . . . . . . . . . . . . 1,503,760 2,012,450
Furniture and fixtures. . . . . . . . . . . . 858,070 1,552,660
Leasehold improvements. . . . . . . . . . . . 2,860,711 4,584,329
------------- -------------
12,410,381 21,056,671
Less accumulated depreciation
and amortization. . . . . . . . . . . . . . (1,625,917) (3,574,276)
------------- -------------
10,784,464 17,482,395
Debt issuance costs, net . . . . . . . . . . . 7,162,690 6,320,179
Cost in excess of net assets acquired, net . . 140,652,620 145,430,296
Other assets . . . . . . . . . . . . . . . . . 245,897 461,714
------------- -------------
Total assets . . . . . . . . . . . . . . . . . $ 247,931,619 $ 320,746,624
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . $ 12,951,575 $ 25,225,797
Accrued payroll and related costs . . . . . . 2,094,237 4,429,339
Accrued interest payable. . . . . . . . . . . 8,097,647 7,995,405
Other accrued expenses. . . . . . . . . . . . 3,170,162 3,371,562
Bank lines of credit. . . . . . . . . . . . . 811,067 4,334,686
Income taxes payable. . . . . . . . . . . . . 1,912,116 321,299
Due to former stockholders. . . . . . . . . . 36,734 2,002,824
------------- -------------
Total current liabilities. . . . . . . . . . . 29,073,538 47,680,912
12% Series B and D Senior Subordinated Notes . 162,245,762 161,981,356
Deferred tax liabilities . . . . . . . . . . . 3,478,000 5,252,000
Commitments and contingencies. . . . . . . . .
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - 200,000
and 0 at December 31, 1995 and 1996,
respectively . . . . . . . . . . . . . . . 22,946,300 --
Common stock, $.01 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 12,000,000
and 16,980,794 at December 31, 1995 and
1996, respectively . . . . . . . . . . . . 20,000,000 81,549,668
Retained earnings . . . . . . . . . . . . . . 10,163,019 24,239,467
Cumulative translation adjustment . . . . . . 25,000 43,221
------------- -------------
Total stockholders' equity . . . . . . . . . . 53,134,319 105,832,356
------------- -------------
Total liabilities and stockholders' equity . . $ 247,931,619 $ 320,746,624
------------- -------------
------------- -------------
18
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
Combined Consolidated
------------- ------------------------------------------
Seven Months Five Months
Ended Ended
July 31, December 31, Year Ended December 31,
1994 1994 1995 1996
------------- ------------ ------------ ------------
Net sales. . . . . . . . . . . . . . . $ 90,055,996 $ 67,735,869 $190,659,143 $272,878,458
Cost of sales. . . . . . . . . . . . . 52,245,178 40,111,819 115,499,023 166,810,941
------------- ------------ ------------ ------------
Gross profit . . . . . . . . . . . . . 37,810,818 27,624,050 75,160,120 106,067,517
Selling, general, and
administrative expense. . . . . . . . 20,475,113 14,205,750 38,971,230 55,509,529
Amortization of intangible assets. . . 15,534 1,209,971 3,307,563 3,738,382
------------- ------------ ------------ ------------
Income from operations . . . . . . . . 17,320,171 12,208,329 32,881,327 46,819,606
Interest and other income. . . . . . . 288,059 341,342 1,099,588 1,181,473
Interest expense . . . . . . . . . . . 130,036 6,373,921 18,015,346 20,287,419
------------- ------------ ------------ ------------
Income before income taxes . . . . . . 17,478,194 6,175,750 15,965,569 27,713,660
Provision (benefit) for income
taxes . . . . . . . . . . . . . . . . (5,000) 2,565,000 6,467,000 11,415,000
------------- ------------ ------------ ------------
Net income . . . . . . . . . . . . . . $ 17,483,194 3,610,750 9,498,569 16,298,660
------------- ------------ ------------ ------------
-------------
Dividends accrued on preferred
stock . . . . . . . . . . . . . . . . 853,288 2,093,012 2,222,212
------------ ------------ ------------
Net income available to common
stockholders. . . . . . . . . . . . . $ 2,757,462 $ 7,405,557 $ 14,076,448
------------ ------------ ------------
------------ ------------ ------------
Pro forma (unaudited):
Income before income taxes per
above . . . . . . . . . . . . . . . $ 17,478,194
Provision for income taxes. . . . . . 7,004,000
-------------
Pro forma net income. . . . . . . . . $ 10,474,194
-------------
-------------
Net income per share. . . . . . . . . $0.65 $1.02
------------ ------------
------------ ------------
Shares used in calculation of pro
forma net income per share. . . . . 14,616,160 15,918,384
------------ ------------
------------ ------------
19
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Combined
Seven Months
Ended
July 31,
1994
------------
Stockholders' equity at beginning of period............ $31,719,717
Distributions to stockholders........................ (5,503,000)
Net income........................................... 17,483,194
------------
Stockholders' equity at end of period.................. $43,699,911
------------
------------
Consolidated
------------------------------------------------------------------------
Cumulative
Preferred Common Retained Translation
Stock Stock Earnings Adjustment Total
------------ ------------ ------------ ------------ ------------
Issuance of 200,000 shares of
preferred stock for cash at $100
per share, August 2, 1994. . . . . . $ 20,000,000 $ -- $ -- $ -- $20,000,000
Issuance of 12,000,000 shares of
common stock for cash at $1.67
per share, August 2, 1994. . . . . . -- 20,000,000 -- -- 20,000,000
Net income for the five months
ended December 31, 1994. . . . . . . -- -- 3,610,750 -- 3,610,750
Accrued dividends on preferred
stock. . . . . . . . . . . . . . . . 853,288 -- (853,288) -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 . . . . . 20,853,288 20,000,000 2,757,462 -- 43,610,750
Translation adjustment . . . . . . . . -- -- -- 25,000 25,000
Net income for the year ended
December 31, 1995. . . . . . . . . . -- -- 9,498,569 -- 9,498,569
Accrued dividends on preferred
stock. . . . . . . . . . . . . . . . 2,093,012 -- (2,093,012) -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 . . . . . 22,946,300 20,000,000 10,163,019 25,000 53,134,319
Issuance of 4,980,794 shares of
common stock for cash at
$13.50 per share, December 17,
1996 net of offering costs of
$4,787,832 . . . . . . . . . . . . . -- 61,549,668 -- -- 61,549,668
Accrued dividends on preferred
stock. . . . . . . . . . . . . . . . 2,222,212 -- (2,222,212) -- --
Redeem preferred stock,
December 20, 1996. . . . . . . . . . (25,168,512) -- -- -- (25,168,512)
Translation adjustment . . . . . . . . -- -- -- 18,221 18,221
Net income for the year ended
December 31, 1996. . . . . . . . . . -- -- 16,298,660 -- 16,298,660
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 . . . . . $ -- $81,549,668 $24,239,467 $ 43,221 $105,832,356
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
20
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Combined Consolidated
------------ ------------------------------------------
Seven Months Five Months
Ended Ended
July 31, December 31, Year Ended December 31,
1994 1994 1995 1996
------------ ------------ ------------ ------------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . $17,483,194 $ 3,610,750 $ 9,498,569 $ 16,298,660
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization. . . . . 726,761 1,598,491 4,680,388 5,773,238
Amortization of debt issuance costs. . -- 268,650 710,281 842,511
Increase (decrease) in allowance for
losses on accounts receivable. . . . 249,176 192,208 496,591 (1,149,916)
Loss (gain) on sale of equipment . . . 24,276 4,804 (5,955) 21,912
Increase in net deferred tax
liabilities . . . . . . . . . . . . . -- 50,000 1,274,000 1,769,000
Changes in operating assets and
liabilities:
Accounts receivable . . . . . . . . (6,218,650) (1,799,626) (3,172,303) (2,719,859)
Inventories . . . . . . . . . . . . (2,716,807) (576,145) (8,118,364) (12,574,161)
Prepaid and other assets. . . . . . (519,553) 299,101 (1,137,901) (987,949)
Accounts payable and accrued
expenses . . . . . . . . . . . . . 2,102,961 4,249,395 6,555,947 10,520,582
------------ ------------ ------------ ------------
Net cash provided by operating
activities. . . . . . . . . . . . . . . 11,131,358 7,897,628 10,781,253 17,794,018
INVESTING ACTIVITIES:
Purchases of equipment . . . . . . . . . (1,850,224) (1,335,551) (5,187,400) (7,843,401)
Acquisition of companies, net of cash
received. . . . . . . . . . . . . . . . -- (146,954,457) (40,264,452) (12,199,106)
Proceeds from sale of fixed assets . . . 78,657 55,603 7,685 86,271
------------ ------------ ------------ ------------
Net cash used in investing activities. . (1,771,567) (148,234,405) (45,444,167) (19,956,236)
FINANCING ACTIVITIES:
Issuance of senior subordinated notes. . -- 120,000,000 42,400,000 --
Borrowings on revolving credit facility. -- 18,160,000 3,500,000 --
Payments on revolving credit facility. . -- (17,000,000) (4,742,458) --
Borrowings (payments) on bank lines
of credit . . . . . . . . . . . . . . . (1,000,000) -- -- 3,523,619
Payment of debt issuance costs . . . . . -- (5,697,413) (2,179,167) --
Payment of offering costs. . . . . . . . -- (5,339,855) -- --
Payment of initial public
offering costs. . . . . . . . . . . . . -- -- -- (4,787,832)
Net payments on other long-term debt . . (100,584) (358,637) -- --
Sale of common stock . . . . . . . . . . -- 20,000,000 -- 66,337,500
Sale of preferred stock. . . . . . . . . -- 20,000,000 -- --
Preferred stock redemption . . . . . . . -- -- -- (25,168,511)
Net payments to related parties. . . . . (88,737) -- -- --
Distributions to stockholders. . . . . . (5,503,000) -- -- --
Payments on amounts due to former
stockholders. . . . . . . . . . . . . . -- -- (4,987,088) --
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities. . . . . . . . . . (6,692,321) 149,764,095 33,991,287 39,904,776
Increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . 2,667,470 9,427,318 (671,627) 37,742,558
Cash and cash equivalents at
beginning of period . . . . . . . . . . 581,680 -- 9,427,318 8,755,691
------------ ------------ ------------ ------------
Cash and cash equivalents at end
of period . . . . . . . . . . . . . . . $ 3,249,150 $ 9,427,318 $ 8,755,691 $ 46,498,249
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . $ 128,259 $ 185,817 $ 15,376,365 $ 19,411,691
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income taxes. . . . . . . . . . . . . . $ 209,671 $ 2,571,000 $ 3,221,356 $ 10,970,402
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
21
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Aftermarket Technology Corp.
(ATC or the Company) include the results of the following remanufactured
automotive products businesses which sell to customers throughout the United
States and Canada: (i) Aaron's Automotive Products, Inc. (Aaron's), a
Springfield, Missouri-based remanufacturer of transmissions, engines, torque
converters, and other drive train parts for automotive original equipment
manufacturers, independent rebuilders and distributors, and retail chain store
customers; (ii) Component Remanufacturing Specialists (CRS), a Mahwah, New
Jersey-based remanufacturer and distributor of automotive drive train and
transmission components; (iii) H.T.P., Inc. (HTP), a Louisville, Kentucky-based
remanufacturer and warehouse distributor of new and remanufactured parts for
independent transmission rebuilders; (iv) Mamco Converters, Inc. (Mamco), a
Dayton, Ohio-based remanufacturer of torque converters for independent
transmission rebuilders and distributors; (v) King-O-Matic (King) and Mascot
Truck Parts Inc. (Mascot), Canadian-based remanufacturers and distributors of
automotive components and a rebuilder of heavy duty truck transmissions,
respectively, are located in Mississauga, Canada; (vi) RPM Merit (RPM), a Rancho
Cucamonga, California (formerly Azusa, California)-based remanufacturer of
torque converters, constant velocity axles, and transmission fluid pumps, and a
warehouse distributor of remanufactured parts and new part kits to independent
transmission rebuilders; (vii) Tranzparts, Inc. (Tranzparts), a Janesville,
Wisconsin-based remanufacturer and warehouse distributor of new and
remanufactured parts for independent transmission rebuilders; (viii) ATC
Components, Inc. (ATAC), a Memphis, Tennessee-based warehouse distributor of
transmission parts, engines, engine kits, and parts to independent transmission
and engine rebuilders; and (ix) Diverco, Inc. (Diverco) a Harvey, Illinois-based
distributor of standard drive train parts, engine parts, gaskets, and other soft
parts for transmission and engine repair and complete transmissions for light
trucks and automobiles.
The combined financial statements of the Predecessor Companies to
Aftermarket Technology Corp. (the Predecessor Companies) represent the
combination of the historical financial statements of Aaron's, RPM, HTP, and
Mamco. The Company was formed for the purpose of effecting the acquisitions of
the Predecessor Companies. The Predecessor Companies were acquired pursuant to
four separate purchase agreements for a total purchase price of approximately
$160.4 million (the Initial Acquisitions). The combined financial statements for
the seven months ended July 31, 1994 include the operations of the Predecessor
Companies up to their respective closing dates, which approximated July 31,
1994.
PRINCIPLES OF CONSOLIDATION
The Company's acquisitions have been accounted for as purchases, and
the consolidated financial statements for the years ended December 31, 1995 and
1996 and the five months ended December 31, 1994 include operations of the
Company and its wholly owned operating subsidiaries from the dates of
acquisition. Significant intercompany accounts and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
22
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of new and used engine and transmission
parts, and cores and finished goods. Appropriate consideration is given to
deterioration, obsolescence, and other factors in evaluating estimated market
value.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation
is computed using accelerated and straight-line methods over the estimated
useful lives of the assets, which range from three to fifteen years.
Depreciation expense was $711,227, $388,520, $1,372,825 and $2,034,856 for the
seven months ended July 31, 1994, the five months ended December 31, 1994, and
the years ended December 31, 1995 and 1996, respectively.
FOREIGN CURRENCY TRANSLATION
The financial statements of Canadian subsidiaries have been translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
(SFAS) No. 52, "Foreign Currency Translation." All balance sheet accounts have
been translated using the exchange rates in effect at the balance sheet date.
Income statement amounts have been translated using the average exchange rate
for the year. The translation gain resulting from the changes in exchange rates
has been reported separately as a component of stockholders' equity.
The effect on the statements of income of transaction gains or losses
is insignificant for the periods presented.
DEBT ISSUANCE COSTS
Debt issuance costs incurred in connection with the sale of the 12%
Series B and Series D Senior Subordinated Notes (Note 6) and Revolving Credit
Facility (Note 5) are being amortized over the life of the debt of ten, nine,
and seven years, respectively.
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of the purchase price over the fair value of the assets
purchased is being amortized over 40 years on a straight-line basis. Cost in
excess of net assets acquired is reflected net of accumulated amortization of
$4,466,669 and $8,261,622 at December 31, 1995 and 1996, respectively.
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
assesses the recoverability of cost in excess of net assets acquired by
determining whether the amortization of the asset balance over its remaining
life can be recovered through the undiscounted future operating cash flows of
the acquired operation. The amount of the impairment, if any, is measured based
on projected discounted future operating cash flows. The Company believes that
no impairment has occurred and that no reduction in the estimated useful life is
warranted.
23
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist of accounts receivable from its
customers, which are primarily in the automotive aftermarket industry throughout
the United States and Canada. The credit risk associated with the Company's
accounts receivable is mitigated by its credit evaluation process, reasonably
short collection terms and, except for one significant customer, the
geographical dispersion of sales transactions.
The Company grants credit to certain customers who meet
pre-established credit requirements. Customers who do not meet those
requirements are required to pay for products upon delivery. Credit losses are
provided for in the financial statements and consistently have been within
management's expectations.
Accounts receivable is reflected net of an allowance for doubtful
accounts of $2,469,000 and $1,326,000 December 31, 1995 and 1996, respectively.
WARRANTY POLICY
For certain products on which the Company provides a warranty, the
warranty period is generally up to twelve months or 12,000 miles.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted under SFAS No. 123, the
Company has continued its current accounting for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25. The
effect of applying SFAS No. 123 to the Company's stock-based awards on net
income and earnings per share is immaterial.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
1996 presentation.
PRO FORMA DATA (UNAUDITED)
INCOME TAXES
Two of the Predecessor Companies elected to be taxed as S Corporations
for all periods through the respective closing dates of the Acquisitions;
therefore, for federal and state income tax purposes, any income or loss accrued
prior to that date generally was not taxed to these companies but was reported
by their respective stockholders. The pro forma provision for taxes reflects the
estimated provision for federal and state income taxes which could have been
provided had these companies been C Corporations and filed consolidated returns.
Because these pro forma income taxes do not represent obligations of, and will
not be paid by, the Predecessor Companies, they have not been reflected in the
combined balance sheets or in the combined statements of cash flows.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is based on the weighted average number
of shares of common stock and common equivalent shares outstanding using the
treasury stock method and the estimated number of shares of common stock issued
in the Company's initial public offering whose net proceeds were used to redeem
the outstanding preferred stock including accrued dividends. Pursuant to the
Securities and Exchange Commission requirements, common and common equivalent
shares issued during the 12-month period prior to the filing of the
24
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's initial public offering have been included in the calculation as if
they were outstanding for all periods presented using the treasury stock method,
based on the initial public offering price.
Historical earnings per share is not considered meaningful due to the
significant changes in the Company's capital structure that occurred upon the
closing of the Company's initial public offering; accordingly, such per share
information is not presented.
2. ACQUISITIONS
During the year ended December 31, 1995, the Company acquired three
companies for a total purchase price of approximately $42.8 million. The CRS and
Mascot acquisitions closed on June 1, 1995, and June 9, 1995 respectively, and
the King acquisition closed on September 12, 1995 (collectively, the 1995
Acquisitions). The Company issued $40 million in principal amount of 12% Senior
Subordinated Notes due in 2004 concurrently with the acquisition of CRS, the
proceeds of which financed the 1995 Acquisitions (Note 6). In addition, on
April 2, 1996, the Company acquired Tranzparts, Inc. for $4.0 million and on
October 1, 1996 the Company acquired Diverco, Inc. for $10.5 million
(collectively the 1996 Acquisitions). All such acquisitions have been accounted
for as purchases. Accordingly, the allocation of the cost of the acquired assets
and liabilities has been made on the basis of the estimated fair value.
The consolidated financial statements include the operating results of
each business from the date of acquisition. The following unaudited pro forma
information for the year ended December 31, 1995 gives effect to the 1995
acquisitions as if such acquisitions had occurred on January 1, 1995. Pro forma
information to reflect the 1996 acquisitions has not been presented because the
effect of such acquisitions was not material to prior periods. The pro forma
information includes adjustments for interest expense that would have been
incurred to finance the acquisitions, additional depreciation based on the fair
market values of the property, plant, and equipment acquired, and amortization
of intangibles arising from the transactions. The pro forma financial
information is not necessarily indicative of the results of operations as they
would have been had the transactions been effected on the assumed dates.
YEAR ENDED
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
Net sales.......................... $ 210,958
Net income......................... 10,043
3. RELATED-PARTY TRANSACTIONS
The Company had liabilities to former stockholders totaling $36,734 at
December 31, 1995 and $2,002,824 at December 31, 1996. The 1996 amounts are
composed primarily of an additional purchase price payable to Diverco's former
stockholder. The remaining amount will be paid in the first quarter of 1997.
The Company paid Aurora Capital Partners (ACP), a significant
stockholder, approximately $1.1 million in fees for investment banking services
provided in connection with the 1995 and 1996 acquisitions. In addition, ACP was
paid management fees of $500,000 and $513,015 in 1995 and 1996, respectively.
ACP is also entitled to various additional fees depending on the Company's
profitability or future acquisitions. No such additional fees were paid in 1995
and 1996.
25
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
------------------------
1995 1996
----------- -----------
Raw materials, including core inventories........ $19,015,530 $30,412,730
Work-in-process.................................. 1,394,479 1,166,275
Finished goods................................... 22,654,703 29,007,051
----------- -----------
$43,064,712 $60,586,056
----------- -----------
----------- -----------
Finished goods include purchased parts which are available for sale.
5. BANK LINES OF CREDIT
CURRENT LIABILITIES
In July 1996, the Company entered into a Revolving Credit Agreement
with Bank of Montreal (BOM Revolving Credit Agreement) providing for a revolving
credit facility to accommodate the working capital needs of King and Mascot (the
Canadian subsidiaries). Advances under the BOM Revolving Credit Agreement may
be made, due upon demand, up to an aggregate of 75% of the eligible accounts
receivable and 50% of the eligible inventory of the Canadian subsidiaries, in
each case as defined in the BOM Revolving Credit Agreement, up to a maximum of
C$3.0 million. Amounts advanced are secured by substantially all assets of the
Canadian subsidiaries and are guaranteed by the Company. The agreement will
expire initially in June 1997 and may be renewed subject to an annual review.
Interest is payable monthly at the Bank of Montreal prime lending rate plus
0.25%. At December 31, 1996, $1.4 million was outstanding under this line of
credit and the interest rate in effect was 5.0%. At December 31, 1995, $0.8
million was outstanding under a former credit line used by the Canadian
subsidiaries.
In January 1996, the Company entered into an agreement with Commerce
Bank, N.A. providing financing for equipment purchases by Aaron's up to a
maximum of $2.9 million, secured by the underlying equipment purchased.
Interest is payable monthly at a fixed rate equal to 70% of the bank's prime
lending rate at the date of the advance plus 1%. As of December 31, 1996, $2.9
million was outstanding under this loan agreement. The agreement contains
several covenants including levels of net worth, leverage, interest coverage and
earnings before interest, taxes, depreciation, and amortization (EBITDA).
REVOLVING CREDIT FACILITY
On July 19, 1994, the Company entered into an agreement with The Chase
Manhattan Bank, as agent, providing for a $30 million revolving credit facility
(Revolving Credit Facility) to finance the Initial Acquisitions and for working
capital purposes. The funds available to be advanced may not exceed 85% of the
Company's eligible accounts receivable and 60% of the Company's eligible
inventories, as defined in the agreement. The available borrowing base at
December 31, 1996 was approximately $27 million. All amounts advanced are
secured by all accounts receivable and inventories and become due on July 31,
1999. The Company may prepay outstanding advances in whole or in part without
incurring any premium or penalty.
At the Company's election, amounts advanced under the Revolving Credit
Facility will bear interest at either (i) the Alternate Base Rate plus 1.25% or
(ii) the Eurodollar Rate plus 2.25%. The Alternate Base Rate is equal to the
highest of (a) the Bank's prime rate, (b) the secondary market rate for
three-month certificates of deposit plus 1.0%, or (c) the federal funds rate
plus 0.5%. Interest payments on advances which bear interest based upon the
Alternate Base Rate are due quarterly in arrears, and interest payments on
advances which bear interest
26
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BANK LINES OF CREDIT(CONTINUED)
based upon the Eurodollar Rate are due on the last day of each relevant interest
period (or, if such period exceeds three months, quarterly after the first day
of such period).
The Company paid the Bank a one-time facility and commitment fee upon
establishing the Revolving Credit Facility and is required to pay the Bank
quarterly in arrears a commitment fee of 0.5% per annum of the average daily
unused portion of the Revolving Credit Facility.
The Revolving Credit Facility contains several covenants, including
levels of net worth, leverage, EBITDA and cash flow coverage, and certain limits
on the Company to incur indebtedness, make capital expenditures, create liens,
engage in mergers and consolidations, make restricted payments (including
dividends), make asset sales, make investments, issue stock, and engage in
transactions with affiliates of the Company and its subsidiaries. At
December 31, 1996, no amounts were outstanding under this line of credit.
6. 12% SERIES B AND SERIES D SENIOR SUBORDINATED NOTES
On August 2, 1994, the Company completed a private placement issuance
of $120 million in principal amount of 12% Series A Senior Subordinated Notes
due in 2004. Proceeds from the issuance were used to partially finance the
Initial Acquisitions. The privately placed debt was exchanged for public debt
(designated Series B) on February 22, 1995.
On June 1, 1995, the Company completed another private placement
issuance of $40 million in principal amount of 12% Series C Senior Subordinated
Notes due in 2004. Proceeds of $42.4 million from the issuance were used to
finance the 1995 Acquisitions. These notes have an effective interest rate of
10.95%. The privately placed debt was exchanged for public debt (designated
Series D) on September 10, 1995.
Interest on the Notes is payable semiannually on February 1 and
August 1 of each year, commencing on February 1, 1995 for the Series B Notes and
August 1, 1995 for the Series D Notes. The Notes will mature on August 1, 2004.
On or after August 1, 1999, the Notes may be redeemed at the option of the
Company, in whole or in part, at specified redemption prices plus accrued and
unpaid interest:
Year Redemption Price
---- ----------------
1999..................................... 106%
2000..................................... 104
2001..................................... 102
2002 and thereafter...................... 100
In addition, at any time on or prior to August 1, 1997, the Company
may, subject to certain requirements, redeem up to $30 million of the Series B
Notes and $10 million of the Series D Notes aggregate principal amounts with the
net cash proceeds of one or more public equity offerings, at a price equal to
112% of the principal amount to be redeemed plus accrued and unpaid interest. On
February 16, 1997 the Company exercised its right and redeemed $30 million in
principal amount of the Series B Notes and $10 million in principal amount of
the Series D Notes resulting in a loss on early extinguishment of debt of $4.8
million.
In the event of a change in control, the Company would be required to
offer to repurchase the Notes at a price equal to 101% of the principal amount
plus accrued and unpaid interest.
The Notes are general obligations of the Company, subordinated in
right of payment to all existing and future senior debt (including the Revolving
Credit Facility). The Notes are guaranteed by each of the Company's existing and
future subsidiaries other than any subsidiary designated as an unrestricted
subsidiary (as defined). The Company may incur additional indebtedness,
including borrowings under its $30 million Revolving Credit Facility (Note 5),
subject to certain limitations.
27
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. 12% SERIES B AND SERIES D SENIOR SUBORDINATED NOTES (CONTINUED)
The indenture under which the Notes were issued contains certain
covenants that, among other things, limit the Company from incurring other
indebtedness, issuing disqualified capital stock, engaging in transactions with
affiliates, incurring liens, making certain restricted payments (including
dividends), making certain asset sales, and permitting certain restrictions on
the ability of its subsidiaries to make distributions. As of December 31, 1996,
the Company was in compliance with such covenants.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets are
as follows:
DECEMBER 31
---------- ----------
1995 1996
---------- ----------
Deferred tax liabilities:
Book basis of intangible assets
in excess of tax amounts.................. $3,208,000 $4,630,000
Other...................................... 270,000 622,000
---------- ----------
Total deferred tax liabilities.................. 3,478,000 5,252,000
Deferred tax assets:
Inventory obsolescence reserve............. 898,000 1,182,000
Bad debt reserves.......................... 545,000 778,000
Product warranty accruals.................. 438,000 312,000
Other...................................... 386,000 --
---------- ----------
Total deferred tax assets....................... 2,267,000 2,272,000
---------- ----------
Net deferred tax liability...................... $1,211,000 $2,980,000
---------- ----------
---------- ----------
Significant components of the provision for income taxes attributable
to operations are as follows:
YEAR ENDED
FIVE MONTHS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1994 1995 1996
---------- ---------- -----------
Current:
Federal.................... $2,136,000 $4,429,000 $8,499,000
State...................... 379,000 764,000 1,147,000
---------- ---------- -----------
Total current................... 2,515,000 5,193,000 9,646,000
Deferred:
Federal.................... 53,000 1,137,000 1,621,000
State...................... (3,000) 1