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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21803
---------------------------------
AFTERMARKET TECHNOLOGY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4486486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 OAKMONT LANE, SUITE 100
WESTMONT, IL 60559
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 455-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on the closing price of such stock, as reported by The
Nasdaq National Market, on February 27, 1998) was $205 million.
The number of shares outstanding of the Registrant's Common Stock, as of
February 27, 1998, was 19,868,296 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
AFTERMARKET TECHNOLOGY CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Page
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . 16
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . 44
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . 44
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 53
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . 56
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FORWARD LOOKING STATEMENT NOTICE
Certain statements contained in this Annual Report that are not related
to historical results are forward-looking statements. Actual results may
differ materially from those projected or implied in the forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed under Item 1.
"Business--Certain Factors Affecting the Company" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Further, certain forward-looking statements are based upon assumptions as to
future events that may not prove to be accurate.
PART I
ITEM 1. BUSINESS
BACKGROUND
Aftermarket Technology Corp. ("ATC") was incorporated under the laws of
Delaware in July 1994 at the direction of Aurora Capital Partners L.P.
("ACP") to acquire Aaron's Automotive Products, Inc. ("Aaron's"), H.T.P.,
Inc. ("HTP"), Mamco Converters, Inc. ("Mamco") and RPM Merit, Inc. ("RPM")
(collectively, the "Initial Acquisitions"). Aaron's, HTP, Mamco and RPM as
they existed prior to the Initial Acquisitions are hereinafter collectively
referred to as the "Predecessor Companies." Subsequent to the Initial
Acquisitions, the Company acquired Component Remanufacturing Specialists,
Inc. ("CRS") and Mascot Truck Parts Inc. ("Mascot") in June 1995, and
King-O-Matic Industries Limited ("King-O-Matic") in September 1995
(collectively, the "1995 Acquisitions"), Tranzparts, Inc. ("Tranzparts") in
April 1996 and Diverco, Inc. ("Diverco") in October 1996 (collectively, the
"1996 Acquisitions"), Replacement and Exchange Parts Co., Inc. ("REPCO") in
January 1997, ATS Remanufacturing ("ATS") in July 1997, Trans Mart, Inc.
("Trans Mart") in August 1997 and the Metran companies (Metran Automatic
Transmission Parts Corp., Metran Boston, Inc. and Metran Parts of
Pennsylvania, Inc.) ("Metran") in November 1997 (collectively, the "1997
Acquisitions"), and the OEM Division ("Autocraft") of Fred Jones Enterprises,
Inc. (formerly known as Autocraft Industries, Inc.) in March 1998 (the
"Autocraft Acquisition" and, together with the Initial Acquisitions, the 1995
Acquisitions, the 1996 Acquisitions and the 1997 Acquisitions, the
"Acquisitions"). ATC conducts all of its operations through its wholly-owned
subsidiaries and each of their respective subsidiaries. Throughout this
Annual Report, except where the context otherwise requires, the "Company"
refers collectively to ATC and its subsidiaries and the Predecessor
Companies.
On December 20, 1996, ATC consummated an initial public offering of its
Common Stock (the "IPO"). Simultaneous with the consummation of the IPO,
Aftermarket Technology Holdings Corp. ("Holdings"), the sole stockholder of
ATC prior to the IPO, was merged into ATC (the "Reorganization"). Upon the
effectiveness of the Reorganization, each outstanding share of Holdings
Common Stock was converted into one share of ATC Common Stock, and each
outstanding share of Holdings Redeemable Exchangeable Cumulative Preferred
Stock was converted into one share of ATC Redeemable Exchangeable Cumulative
Preferred Stock, which was immediately thereafter redeemed for an amount in
cash equal to $100.00 plus an amount in cash equal to accrued and unpaid
dividends on the Holdings Preferred Stock to the date of the Reorganization.
GENERAL
The Company is a leading remanufacturer and distributor of drive train
products used in the repair of vehicles in the automotive aftermarket. The
Company's principal products include remanufactured transmissions, torque
converters and engines, as well as remanufactured and new parts for the
repair of automotive drive train assemblies. The Company's two primary
customer groups are: original equipment manufacturers ("OEMs"), principally
Chrysler Corporation, which purchase remanufactured transmissions and other
remanufactured drive train components for use as replacement parts by their
dealers primarily during the warranty period following the sale of a vehicle;
and independent transmission rebuilders, general repair shops, distributors
and retail automotive parts stores (the "Independent Aftermarket"), which
purchase remanufactured torque converters and engines and other
remanufactured and new parts for repairs generally during the period
following the expiration of the vehicle warranty. As a result of recent
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acquisitions, the Company's OEM customers now also include Ford Motor
Company, General Motors Corporation and certain European OEMs and its
products now include electronic control modules, instrument display clusters,
cellular telephones and radios.
Since the Initial Acquisitions, the Company has grown both internally
and through ten additional acquisitions. The Company and the Predecessor
Companies have achieved compound annual growth in revenue of approximately
35.7% from 1992 through 1997 (including both internal growth and growth
through acquisitions). The Company believes the key elements of its success
are the quality and breadth of its product offerings and the Company's
emphasis on strong customer relationships, promoted by strong technical
support, rapid delivery time, innovative product development and competitive
pricing. In addition, the Company has benefited from the increasing use of
remanufactured products as the industry recognizes that remanufacturing
provides a higher quality, lower cost alternative to rebuilding the assembly
or replacing it with a new assembly manufactured by an OEM.
The Company's strategy is to achieve growth both internally and through
strategic acquisitions. The Company intends to expand its business by: (i)
increasing penetration of its current customer base; (ii) gaining new OEM and
Independent Aftermarket customers; and (iii) introducing new products to both
existing and new customers. The Company plans to continue to support these
growth strategies through strategic acquisitions in the future. In addition,
the Company believes that its core competency of remanufacturing, which has
been applied to the drive train products segment of the automotive
aftermarket, has the potential to be utilized in other aftermarket segments.
Therefore, the Company is conducting selective market studies to explore
possible additional markets for its remanufacturing capabilities.
See "Certain Factors Affecting the Company."
AUTOMOTIVE AFTERMARKET
The automotive aftermarket in the United States and Canada, which
consists of sales of parts and services for vehicles after their original
purchase, has been noncyclical and has generally experienced steady growth
over the past several years, unlike the market for new vehicle sales.
According to the Automotive Parts & Accessories Association, between 1988 and
1997 (the most recent period for which data is available), estimated
industry-wide revenue for the automobile aftermarket increased from
approximately $99.2 billion to $151.2 billion. This consistent growth is due
principally to the increase in the number of vehicles in operation, the
increase in the average age of vehicles, and the increase in the average
number of miles driven annually per vehicle. The Company competes primarily
in the aftermarket segment for automotive transmissions, engines and other
drive train related products, which represents more than $7 billion of the
entire automotive aftermarket. The Company believes that within this segment
the market for remanufactured drive train products has grown faster than the
overall automotive aftermarket.
REMANUFACTURING
Remanufacturing is a process through which used assemblies are returned
to a central facility where they are disassembled and their component parts
cleaned, refurbished and tested. The usable component parts are then
combined with new parts in a high volume, precision assembly line
manufacturing process to create remanufactured assemblies.
When an assembly such as a transmission or engine fails, there are
generally three alternatives available to return the vehicle to operating
condition. The dealer or independent repair shop may: (i) remove the
assembly, disassemble it into its component pieces, replace worn or broken
parts with remanufactured or new components, and reinstall the assembly in
the vehicle ("rebuild"); (ii) replace the assembly with an assembly from a
remanufacturer such as the Company; or (iii) in rare instances, replace the
assembly with a new assembly manufactured by the OEM.
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted by make and model and either placed into immediate
production or stored until needed. In the remanufacturing process, the cores
are evaluated and disassembled into their component parts and the components
that can be incorporated into the remanufactured product are cleaned,
refurbished
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and tested. All components determined not reusable or repairable
are replaced by other remanufactured or new components. The units are then
reassembled into finished assemblies. Inspection and testing are conducted
at various stages of the remanufacturing process, and each finished assembly
is tested on equipment designed to simulate performance under operating
conditions. After testing, completed products are then packaged for
immediate delivery or shipped to one of the Company's distribution centers.
The cores used in the Company's remanufacturing process for sale to its
OEM customers are provided by the OEMs. In the case of OEMs other than
Chrysler, the dealers return cores to the OEM, which then ships them to the
Company. Chrysler cores are sent to the Company through its central core
return center. See "Customers--OEM Customers."
The majority of the cores used in the Company's remanufacturing process
for sale to its Independent Aftermarket customers are obtained from customers
as trade-ins. The Company encourages its Independent Aftermarket customers
to return cores on a timely basis and charges customers a supplemental core
charge in connection with purchases of engines and critical hard parts. The
customer can satisfy this charge by returning a usable core or making a cash
payment equal to the amount of the supplemental core charge. If cores are
not returned in a timely manner, the Company then must procure cores through
its network of independent core brokers. While core prices are subject to
supply and demand price volatility, the Company believes its procurement
network for cores will continue to provide cores at reasonable prices.
There are three primary benefits of using remanufactured components
rather than rebuilt or new components in repair of vehicles:
- - First, costs to the OEM associated with remanufactured assemblies generally
are 50% less than new or rebuilt assemblies due to the remanufacturer's use
of high volume manufacturing techniques and salvage methods that enable the
remanufacturer to refurbish and reuse a high percentage of original
components.
- - Second, remanufactured assemblies are generally of consistent high quality
compared to rebuilt assemblies because of the precision manufacturing
techniques, technical upgrades and rigorous inspection and testing
procedures employed in remanufacturing. In contrast, the quality of a
rebuilt assembly is heavily dependent on the skill level of the particular
mechanic, who typically is less able to remain current with engineering
changes than remanufacturers, who work in close liaison with OEM engineers.
In addition, the proliferation of transmission and engine designs, the
increasing complexity of transmissions and engines that incorporate
electronic components and the shortage of highly trained mechanics
qualified to rebuild assemblies have tended to favor remanufacturing over
rebuilding assemblies for aftermarket repairs. For warranty repairs,
consistent quality is important to the OEM providing the applicable
warranty, because once installed, the remanufactured product is usually
covered by the OEM's warranty for the balance of the original warranty
period.
- - Third, replacement of a component with a remanufactured component generally
takes considerably less time than the time needed to rebuild the component,
thereby significantly reducing the time the vehicle is at the dealer or
repair shop.
The Company believes that because of this combination of high quality, low
cost and efficiency, the use of remanufactured assemblies for aftermarket
repairs is growing compared to the use of new or rebuilt assemblies. Although
the primary customers for the Company's remanufactured components have
historically been OEMs, the Company expects the Independent Aftermarket to
increase its use of remanufactured components in the future.
PRODUCTS
The principal product lines of the Company are remanufactured
transmissions, repair kits and hard parts used in drive train repairs, and
remanufactured engines. Following the Autocraft Acquisition, the Company also
remanufactures electronic control modules, instrument display clusters, cellular
telephones and radios.
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REMANUFACTURED TRANSMISSIONS
The Company remanufactures transmissions that are factory approved and
suitable for warranty and post-warranty replacement of transmissions for
Chrysler, Ford, General Motors and 12 foreign OEMs, including Hyundai Motor
America, Mitsubishi and American Isuzu, for their United States dealer networks.
The number of transmission models remanufactured by the Company has been
increasing to accommodate the greater number of models currently used in
vehicles manufactured by the Company's OEM customers.
In addition, the Company rebuilds heavy duty and medium duty truck
transmissions, differentials and air compressors for truck manufacturers such as
Navistar, Freightliner and Western Star. These assemblies are sold primarily to
truck dealers in Canada.
REPAIR KITS AND HARD PARTS
Repair kits sold by the Company consist of gaskets, friction plates,
seals, bands, filters, clutch components and other "soft" parts that are used
in rebuilding transmissions for substantially all domestic and most imported
passenger cars and light trucks. Kits are currently sold principally to the
Independent Aftermarket. Each kit is designed specifically to include
substantially all of the soft parts necessary for rebuilding a particular
transmission model. Due to its high volume of kit sales, the Company
maintains a variety of supply relationships that enable the Company to
purchase components for its kits at prices that the Company believes are more
favorable than those available to its lower volume competitors. The Company
also believes that its remanufacturing of some of the parts used in its kits
gives it an additional pricing advantage over some of its competitors who
purchase all their parts from suppliers.
The Company remanufactures torque converters (the coupler between the
transmission and engine), planetary gears (speed regulating devices inside
the transmission) and transmission fluid pumps. These "hard" parts are sold
principally to the Independent Aftermarket for use in drive train repairs.
Many of the Company's competitors do not distribute as broad a line of hard
parts or remanufacture the hard parts that they distribute. The Company
believes these factors provide it both an availability and cost advantage
over many of its competitors.
The Company's Independent Aftermarket customers typically require both
repair kits and hard parts in order to complete a vehicle repair. For this
reason, the Company believes that the breadth of its product line, which
enables a customer to obtain all the parts for a repair job from a single
source, gives the Company a competitive advantage.
REMANUFACTURED ENGINES
The Company remanufactures engines for use as replacement engines in
many domestic passenger cars and light trucks. Principal customers include
Western Auto, as well as general repair garages and distributors. Over the
past four years, the variety of engine models remanufactured by the Company
has increased from 50 to 77 as the Company has expanded the range of engines
offered to meet customer requirements. In addition, the Company obtains
remanufactured engines for many foreign passenger cars and light trucks from
independent suppliers.
The Company began remanufacturing selected engine models for Chrysler in
1997 and through the Autocraft Acquisition the Company now also operates a
facility in England that remanufactures engines that are factory approved and
suitable for warranty and post-warranty replacement of engines for seven
European OEMs, including Jaguar and the European divisions of Ford and
General Motors This facility also does assembly and modification of new
production engines for certain of its OEM customers.
ELECTRONIC COMPONENTS
Through the Autocraft Acquisition, the Company now also remanufactures
automotive electronic control modules (which manage various engine
functions), instrument display clusters, cellular telephones and radios for
Ford, General Motors, Audi, Jaguar and Volkswagen. In addition, Autocraft
provides warehouse and distribution services for AT&T Wireless, the cellular
telephone subsidiary of AT&T, and recently began remanufacturing cellular
telephones on a limited basis for AT&T Wireless.
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CUSTOMERS
The Company's customers are Chrysler, Ford, General Motors and 18
foreign OEMs, and the Independent Aftermarket, which includes independent
transmission rebuilders, general repair shops, distributors and retail
automotive parts stores.
OEM CUSTOMERS
The Company provides factory-approved remanufactured transmissions to
OEMs for use in warranty and, to a lesser extent, post-warranty repair work
by their dealers. The Company's largest OEM customer is Chrysler, to whom
the Company also supplies certain factory-approved remanufactured engines.
The Company sells remanufactured transmissions to 12 foreign OEMs, including
Hyundai Motor America, Mitsubishi and American Isuzu. The Company added
General Motors as a customer in July 1997 with the purchase of ATS and
expanded its General Motors business with the acquisition of Autocraft. As a
result of the Autocraft Acquisition, the Company has begun to provide
factory-approved remanufactured components to several new OEM customers
including transmissions to Ford, electronic components to Ford, General
Motors, Audi, Jaguar and Vokswagen, and engines to Jaguar, Land Rover, Aston
Martin and the European divisions of Ford and General Motors. Products are
sold to each OEM pursuant to supply arrangements for individual transmission
or engine models, which supply arrangements typically may be terminated by
the OEM at any time.
Sales to the Company's OEM customers accounted for 51.9% of the
Company's 1996 revenues and 46.9% of its 1997 revenues. Sales to Chrysler
accounted for 37.2% and 32.0% of the Company's revenues in 1996 and 1997,
respectively. On a pro forma basis as if the Autocraft Acquisition had
occurred on January 1, 1997, sales to OEM customers would have accounted for
approximately 55% of pro forma 1997 revenues with sales to Chrysler and Ford
accounting for approximately 20% and 15%, respectively, of the total pro
forma revenues.
Over the past 15 years, the Company has developed and maintained strong
relationships at many levels of both the corporate and the factory
organizations of Chrysler. In recognition of the Company's consistently high
level of service and product quality throughout its relationship with
Chrysler, in each of 1995, 1996 and 1997 the Company was awarded the Platinum
Pentastar award, the highest award Chrysler bestows on a supplier. The
Company is one of only seven of Chrysler's approximately 3,500 suppliers to
receive the Platinum Pentastar every year since the creation of the award,
and the Company remains the only exclusively MOPAR aftermarket supplier to
ever be awarded the Platinum Pentastar.
In August 1997, the Company's facilities that remanufacture
transmissions for Chrysler and General Motors received QS-9000 certification,
a complete quality management system developed for Chrysler, Ford, General
Motors and truck manufacturers who subscribe to the ISO 9002 quality
standards. The system is designed to help suppliers such as the Company
develop a quality system that emphasizes defect prevention and continuous
improvement in manufacturing processes. The Company's facility that
remanufactures heavy and medium duty truck transmission received ISO 9002
certification in November 1997. In addition, with the Company's recent
acquisition of Autocraft, several of these newly acquired facilities received
QS-9000 and ISO 9002 certifications in 1997. Certain of Autocraft's
facilities have also received Ford's Q1 quality certification.
Chrysler began implementing remanufacturing programs for its
transmission models in 1986 and selected the Company as its sole supplier of
remanufactured transmissions in 1989. Chrysler has advised the Company that,
by implementing a remanufacturing program, Chrysler has realized substantial
warranty cost savings, standardized the quality of its dealers' aftermarket
repairs and reduced its own inventory of replacement parts. Currently, the
Company provides all remanufactured front wheel drive transmissions purchased
by Chrysler. In late 1996, the Company, with the approval of Chrysler,
developed a new production line to remanufacture substantially all of
Chrysler's rear wheel drive transmission models and has built up a core
supply necessary to support the program, although Chrysler has not yet
released firm orders for these models.
Autocraft began remanufacturing transmissions for Ford in 1989 and for
General Motors in 1985. The Company believes that as a result of the
acquisition of Autocraft, the Company provides approximately 90% of the
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remanufactured transmissions purchased by Ford and approximately 50% of the
remanufactured transmissions purchased by General Motors.
As part of its relationship with Ford, Autocraft also provides material
recovery services to assist Ford with the management of its dealer parts
inventory. Under this program, Ford dealers send their excess parts
inventory to Autocraft. The parts are then sorted and disposed of in one of
three ways: useful parts that are needed by other dealers are redistributed;
useful parts that are not needed by other dealers are sold to
remanufacturers, distributors and other third parties; and useless parts are
scrapped. Revenue from sales to third parties are shared by Ford and
Autocraft. Prior to the introduction of the material recovery program, Ford
scrapped all excess dealer parts but under the program the number of parts
that are scrapped has declined to less than 2%.
As part of its expanding relationship with Chrysler and in response to
periodic shortages of cores in the past, the Company established and expanded
a central core return center for all of Chrysler's transmission models.
Chrysler dealers make arrangements to ship transmission and engine cores to a
regional depot, which then ships directly to the Company's central core
return center located near its main remanufacturing facility. The Company
thus assists Chrysler by improving the efficient and timely return of cores
at a cost savings to Chrysler. Furthermore, the Company performs value-added
services such as core audit and analysis in conjunction with Chrysler
engineers. The Company is continuing to work with Chrysler to improve the
tracking and management of cores, which will allow the Company to schedule
its production more efficiently. The Company believes that this central core
facility has reduced the risk of future Chrysler core shortages. In
addition, the increased number of cores has resulted in a greater number of
reusable parts, which, together with recently expanded production capacity at
Chrysler, has increased the Company's supply of parts required in the
remanufacturing process. In 1996, the Company also established a technical
support center to assist selected Chrysler dealers in evaluating transmission
warranty repair options.
INDEPENDENT AFTERMARKET
The Company, through its ATC Distribution Group, supplies transmission
repair kits and hard parts used in drive train repairs to over 25,000 of the
approximately 71,000 independent transmission rebuilders, distributors and
general repair shops in the United States and Canada. These products are
used in the Independent Aftermarket to rebuild transmissions and other
assemblies using remanufactured and new component parts purchased from a
variety of suppliers. In addition, the Company supplies remanufactured
engines and transmission filter kits to over 1,600 of the approximately
40,000 retail automotive parts stores throughout the United States, which
offer new and remanufactured parts and assemblies to a broad range of
customers, principally "do-it-yourself" customers and general repair shops.
As the number of vehicle models has proliferated and repairs have become
increasingly complex, independent transmission rebuilders and general repair
shops have grown more dependent on their suppliers for technical support and
for assistance in managing inventory by delivering product on a just-in-time
basis at competitive prices. To address these needs, the Company maintains
60 distribution centers located in metropolitan areas throughout the United
States and Canada from which the Company provides technical support and a
wide range of drive train related products that are delivered on a same day
basis by trucks to customers in and around metropolitan areas and on a next
day basis by overnight carrier to customers in more remote areas. The
Company believes that its distribution system is the most extensive in the
drive train segment of the automotive aftermarket and represents a
competitive advantage for the Company relative to its typically smaller,
local competitors. The Company believes there are opportunities for further
geographic penetration in this relatively fragmented market. See "Business
Strategy."
The retail automotive parts store market is highly fragmented with most
retail stores obtaining products similar to those provided by the Company
from a variety of regional suppliers. The Company provides high quality
products, competitive prices and high service levels as well as value added
promotional literature and advertising support. The Company's principal
retail customers are Western Auto and Advance Auto.
The Company significantly expanded its telemarketing capability with the
acquisition of Trans Mart in August 1997. Telemarketing from a central
location in Alabama, coupled with the Company's next day delivery strategy to
more remote areas, enables the Company to reach customers in areas that
cannot support the costs associated with establishing and maintaining a
distribution center. In addition to telemarketing, new customers are
developed by
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the Company's direct sales force operating from its distribution centers, and
by national and local trade publication advertising. In addition, the
Company participates in various trade shows. The Company believes its
DIVERCO, HTP, INTERCONT, KING-O-MATIC, MAMCO, METRAN, OLYMPIC, REPCO, RPM and
TRANZPARTS brand names are well recognized and respected in their regional
markets.
The Company has developed a common product identification and numbering
system which is currently being implemented on a company-wide basis in
conjunction with a computer network electronically linking its distribution
centers. The Company expects to complete this process by the end of 1998.
These changes are expected to improve customer service, increase product
availability, enhance inventory management and improve operational
efficiencies.
The Company believes it is well positioned within the highly fragmented
aftermarket for drive train products as a result of its extensive product
line, diverse customer base and broad geographic presence, with 60
distribution centers throughout the United States and Canada. Sales to
Independent Aftermarket customers accounted for 48.1% of the Company's
revenues in 1996 and 53.1% of its revenues in 1997.
BUSINESS STRATEGY
The Company's strategy is to achieve growth both internally and through
strategic acquisitions. The Company intends to expand its business by: (i)
increasing penetration of its current customer base; (ii) gaining new OEM and
Independent Aftermarket customers; and (iii) introducing new products to both
existing and new customers. Strategic acquisitions have been an important
element in the Company's historical growth, and the Company plans to continue
to support its growth strategy through strategic acquisitions in the future.
The Company's management is experienced in identifying acquisition
opportunities and completing and integrating acquisitions within the
automotive aftermarket. In addition, the Company believes that its core
competency of remanufacturing, which has been applied to the drive train
products segment of the automotive aftermarket, has the potential to be
utilized in other aftermarket segments.
INCREASING SALES TO EXISTING CUSTOMERS
OEM CUSTOMERS. The Company intends to increase its business with its
existing OEM customers by working with OEMs to increase dealer utilization of
remanufactured transmissions in both the warranty and post-warranty period.
The Company is working in tandem with OEMs to highlight to dealers the
quality and cost advantages of using remanufactured assemblies versus
rebuilding. In addition, the post-warranty repair market, which the Company
believes is approximately eight times as large as the OEM dealer warranty
repair market, presents a growth opportunity. Currently, the vast majority
of post-warranty repairs are performed in the Independent Aftermarket rather
than at OEM dealers. Given the relatively low cost and high quality of
remanufactured components, OEM dealers can enhance their cost competitiveness
compared to independent service centers through the increased use of
remanufactured components as well as providing end customers with a high
quality product. To the extent that OEM dealers increase their level of
post-warranty repairs, the Company is well positioned to capitalize on this
market growth. The Company has introduced a number of new transmission
models and related drive train products in the last several years for its OEM
customers. The Company, with the approval of Chrysler, developed a new
production line in late 1996 dedicated to remanufacturing substantially all
of Chrysler's rear wheel drive transmission models and has built up a core
supply necessary to support the program, although Chrysler has not yet
released firm orders for these transmission models.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that it
currently supplies less than one-third of the remanufactured or new drive
train component requirements of its independent transmission rebuilder and
general repair shop customers. The Company believes it is well positioned to
expand sales to these customers through a common product identification and
numbering system which is currently being implemented on a company-wide basis
in conjunction with a computer network that will electronically link its
distribution centers. The Company also intends to expand its business with
existing customers by cross-selling products among its subsidiaries'
customers. For example, after its acquisition in January 1997, REPCO
introduced Mamco and RPM torque converters to its customers. The Company
intends to increase its business with its existing retail automotive
customers by offering "niche" products at competitive prices throughout these
customers' networks.
7
INTRODUCING NEW PRODUCTS
OEM CUSTOMERS. The Company believes that OEMs recognize that the use of
remanufactured assemblies provide a high quality, lower cost alternative to
rebuilding damaged assemblies or replacing them with new assemblies. For this
reason, the Company believes that OEMs are interested in working with large,
high quality remanufacturers to reduce the OEMs' warranty expenditures and
increase their parts sales into the post-warranty aftermarket. The Company
continues to work with its OEM customers to identify additional remanufactured
products and services where the Company can provide value to the OEM. In this
way, the Company believes that it will be able to leverage its customer
relationships and remanufacturing competency. For example, in 1997 the Company
began remanufacturing 4.0 liter engines for Chrysler. In addition, the Company
also intends to leverage the electronic component capability of Autocraft by
introducing these products to some of its other OEM customers.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its
reputation for high quality products and customer service enables it to leverage
its relationships with existing customers to sell additional products. The
Company monitors sales trends and is in frequent communication with customers
regarding potential new products. For example, in 1997 the Company began to
offer clutch kits, transmission filter kits and torque converters to its retail
customers. The acquisition of Diverco in October 1996 has enabled the Company
to begin offering standard transmission components to its independent
transmission rebuilder and general repair shop customers.
ESTABLISHING NEW CUSTOMER RELATIONSHIPS
OEM CUSTOMERS. The Company believes that opportunities for growth exist
with several OEMs regarding United States based remanufacturing programs. The
Company believes that this represents an opportunity for growth and is currently
working to develop programs with certain foreign OEMs. During 1997, the Company
began remanufacturing standard transmissions for New Venture Gear, a joint
venture between Chrysler and General Motors. In July 1997, the Company became
one of four suppliers of remanufactured transmissions to General Motors when the
Company acquired ATS, which has been remanufacturing transmissions for General
Motors for 12 years. In March 1998, the Company expanded its business with
General Motors by purchasing Autocraft, one of General Motors' other three
transmission suppliers. The Autocraft Acquisition also marked the addition of
Ford as one of the Company's customers.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its product
mix and distribution network position it to expand its Independent Aftermarket
customer base in three ways. First, although the Company's distribution network
is currently the most extensive in the drive train segment of the automotive
aftermarket, there are further opportunities for the Company to expand to
additional geographic markets. Second, as a result of the acquisition of Trans
Mart in August 1997, which significantly expanded the Company's telemarketing
capability, the Company expects to reach new Independent Aftermarket customers
in non-metropolitan areas. Third, in the last few years, the Company has
expanded its customer base to include general repair shops and retail automotive
parts stores. The Company now serves over 1,600 of the 40,000 retail automotive
parts stores in the United States, primarily by selling products to two retail
chains, and 25,000 of the approximately 71,000 independent transmission
rebuilders, distributors and general repair shops in the United States and
Canada. The Company intends to leverage its breadth of products and
distribution network to supply "niche products" such as transmission filter kits
and remanufactured engines at improved availability rates and competitive
prices. The Company believes that its position as a leading national supplier
of remanufactured engines affords it the opportunity to service additional
national retail chains to the extent that these chains migrate away from their
existing fragmented base of suppliers. In addition, the Company's position
enables it to supply other chains that may expand their product lines in the
future to include remanufactured engines.
ADDITIONAL REMANUFACTURING OPPORTUNITIES
The Company has begun to look beyond the automotive aftermarket to identify
other aftermarket segments that utilize the Company's core competency of
remanufacturing. The Company believes that other markets may have similar
characteristics to those experienced by the Company in the automotive
aftermarket. If remanufacturing
8
opportunities are identified in these other markets, the Company will review
them and may pursue those that are expected to be consistent with its
capabilities and investment objectives.
The foregoing discussion of the Company's business strategy contains
forward looking statements. See "Forward Looking Statement Notice."
COMPETITION
The Company competes in the highly fragmented automobile aftermarket for
transmissions, engines and other drive train components, in which the
majority of industry supply comes from small local or regional participants.
Competition is based primarily on product quality, service, delivery,
technical support and price. Many of the Company's competitors operate only
in certain geographic regions with a limited product line. The Company is
one of the largest participants in the aftermarket for remanufactured drive
train components, offers a more complete line of products across a diverse
customer base and has a much broader geographic presence than many of its
competitors. As a result, the Company believes that it is well positioned to
enhance its competitive position by expanding its product line through the
development of new products or acquisition of new businesses as well as by
expanding its distribution network into new geographic markets.
Nevertheless, the aftermarket for remanufactured drive train components
remains highly competitive, and certain of the Company's competitors are
larger than the Company and have greater financial and other resources
available to them than does the Company.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 3,500
people. The Company believes its employee and labor relations are good. None
of the Company's subsidiaries has experienced a work stoppage in its history,
and the Company has not experienced any work stoppage since its formation in
1994. None of the Company's employees are members of any labor union. As a
result of the Autocraft Acquisition, in March 1998 the Company hired
approximately 1,500 new employees who had previously been employed by the
seller of Autocraft.
ENVIRONMENTAL
The Company is subject to various evolving Federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability
for the costs of cleaning up, and certain damages resulting from, past
spills, disposals or other releases of hazardous substances.
In connection with the Acquisitions, the Company conducted certain
investigations of the acquired companies' facilities and their compliance
with applicable environmental laws. The investigations, which included
"Phase I" assessments by independent consultants of all manufacturing and
certain distribution facilities, found that certain facilities have had or
may have had releases of hazardous materials that may require remediation and
also may be subject to potential liabilities for contamination from off-site
disposal of substances or wastes. These assessments also found that certain
reporting and other regulatory requirements, including certain waste
management procedures, were not or may not have been satisfied. Although
there can be no assurance, the Company believes that, based in part on the
investigations conducted, in part on certain remediation completed prior to
the acquisitions, and in part on the indemnification provisions of the
agreements entered into in connection with the Company's acquisitions, the
Company will not incur any material liabilities relating to these matters.
The company from which RPM acquired its assets (the "Prior RPM Company")
has been identified by the United States Environmental Protection Agency (the
"EPA") as one of many potentially responsible parties for environmental
liabilities associated with a "Superfund" site located in the area of RPM's
former manufacturing facilities and current distribution facility in Azusa,
California. The Federal Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), provides for
cleanup of sites from which there has been a release or threatened release of
hazardous substances, and authorizes recovery of related response costs and
certain other damages from potentially responsible parties ("PRPs"). PRPs
are broadly defined
9
under CERCLA, and generally include present owners and operators of a site
and certain past owners and operators. As a general rule, courts have
interpreted CERCLA to impose strict, joint and several liability upon all
persons liable for cleanup costs. As a practical matter, however, at sites
where there are multiple PRPs, the costs of cleanup typically are allocated
among the PRPs according to a volumetric or other standard. The EPA has
preliminarily estimated that it will cost approximately $47 million to
construct and approximately $4 million per year for an indefinite period to
operate an interim remedial groundwater pumping and treatment system for the
part of the Superfund site within which RPM's former manufacturing facilities
and current distribution facility, as well as those of many other potentially
responsible parties, are located. The actual cost of this remedial action
could vary substantially from this estimate, and additional costs associated
with the Superfund site are likely to be assessed. The Company has
significantly reduced its presence at the site and has moved all
manufacturing operations off-site. Since July 1995, the Company's only real
property interest in this site has been the lease of a 6,000 square foot
storage and distribution facility. The RPM acquisition agreement and the
leases pursuant to which the Company leased RPM's facilities after the
Company acquired the assets of RPM (the "RPM Acquisition") expressly provide
that the Company did not assume any liabilities for environmental conditions
existing on or before the RPM Acquisition, although the Company could become
responsible for these liabilities under various legal theories. The Company
is indemnified against any such liabilities by the seller of RPM as well as
the Prior RPM Company shareholders. There can be no assurance, however, that
the Company would be able to make any recovery under any indemnification
provisions. Since the RPM Acquisition, the Company has been engaged in
negotiations with the EPA to settle any liability that it may have for this
site. Although there can be no assurance, the Company believes that it will
not incur any material liability as a result of these environmental
conditions.
CERTAIN FACTORS AFFECTING THE COMPANY
Set forth below are certain factors that may affect the Company's
business:
DEPENDENCE ON SIGNIFICANT CUSTOMER
The Company's largest customer, Chrysler, accounted for approximately
37.2% and 32.0% of the Company's net sales for 1996 and 1997, respectively.
No other customer accounted for more than 10% of the Company's net sales
during either of these years, although the Company expects that Ford will
account for more than 10% of the Company's net sales in 1998.
Chrysler, like other North American OEMs, generally requires its dealers
using remanufactured products to use only those from approved suppliers.
Although the Company is currently the only factory-approved supplier of
remanufactured transmissions to Chrysler, Chrysler (like the Company's other
OEM customers) is not obligated to continue to purchase the Company's
products and there can be no assurance that the Company will be able to
maintain or increase the level of its sales to Chrysler or that Chrysler will
not approve other suppliers in the future. In addition, within the last
three years Chrysler reduced its standard new vehicle warranty from seven
years/70,000 miles to three years/36,000 miles and could implement a shorter
warranty in the future. Any such action could have the effect of reducing
the amount of warranty work performed by Chrysler dealers. An extended,
substantial decrease in orders from Chrysler would have a material adverse
effect on the Company. See "Customers--OEM Customers."
SHORTAGE OF TRANSMISSION CORES AND COMPONENT PARTS
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted and either placed into immediate production or
stored until needed. The majority of the cores remanufactured by the Company
are obtained from OEMs or from Independent Aftermarket customers as
trade-ins. The ability to obtain cores of the types and in the quantities
required by the Company is critical to the Company's ability to meet demand
and expand production. With the increased acceptance in the aftermarket of
remanufactured assemblies, the demand for cores has increased. The Company
periodically has experienced situations in which the inability to obtain
sufficient cores has limited its ability to accept all of the orders
available to it. As part of its expanding relationship with Chrysler and in
response to the periodic shortage of cores, in 1995 the Company established a
central core return center for all of Chrysler's transmission product lines.
The operation of this facility enables the Company to receive cores on a more
timely basis and better monitor the
10
availability of cores. There can be no assurance that the Company will not
experience core shortages in the future. If the Company were to experience
such a shortage, it could have a material adverse effect on the Company.
Certain component parts required in the remanufacturing process are
manufactured by Chrysler and the Company's other OEM customers. The Company
has experienced shortages of such component parts from time to time in the
past, and future shortages could have a material adverse effect on the
Company.
ABILITY TO ACHIEVE AND MANAGE GROWTH
An important element in the Company's growth strategy is the acquisition
and integration of complementary businesses in order to broaden product
offerings, capture market share and improve profitability. There can be no
assurance that the Company will be able to identify or reach mutually
agreeable terms with acquisition candidates, or that the Company will be able
to manage additional businesses profitably or successfully integrate such
additional businesses into the Company without substantial costs, delays or
other problems. Acquisitions may involve a number of special risks,
including: initial reductions in the Company's reported operating results;
diversion of management's attention; unanticipated problems or legal
liabilities; and a possible reduction in reported earnings due to
amortization of acquired intangible assets in the event that such
acquisitions are made at levels that exceed the fair market value of net
tangible assets. Some or all of these items could have a material adverse
effect on the Company. There can be no assurance that businesses acquired in
the future will achieve sales and profitability that justify the investment
therein. In addition, to the extent that consolidation becomes more
prevalent in the industry, the prices for attractive acquisition candidates
may increase to unacceptable levels. See "Business Strategy."
The Company also plans to expand its existing operations by broadening
its product lines and increasing the number of its distribution centers in
the United States. There can be no assurance that any new product lines
introduced by the Company will be successful, that the Company will manage
successfully the start-up and marketing of new products or that additional
distribution centers will be integrated into the Company's existing
operations or will be profitable. See "Business Strategy."
In addition, the Company is exploring possible additional markets for
its remanufacturing capabilities, but no assurance can be given that the
Company will pursue any such opportunity or be successful outside the
automotive aftermarket. See "Business Strategy--Additional Remanufacturing
Opportunities."
INDEBTEDNESS AND LIQUIDITY
The Company had outstanding long-term indebtedness of $273.1 million at
March 6, 1998. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." The level of the Company's consolidated indebtedness could have
important consequences, including the following: (i) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
principal of and interest on its indebtedness and will not be available for
other purposes; (ii) the ability of the Company to obtain financing in the
future for working capital needs, capital expenditures, acquisitions,
investments, general corporate purposes or other purposes may be materially
limited or impaired; (iii) the Company's level of indebtedness may reduce its
flexibility to respond to changing business and economic conditions or take
advantage of business opportunities that may arise; and (iv) the ability of
the Company to pay dividends is restricted. See Item 5. "Market for
Registrant's Common Equity and Related Stockholder Matters." Any default by
the Company with respect to its outstanding indebtedness, or any inability on
the part of the Company to obtain necessary liquidity, would have a material
adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its management
team, including Stephen J. Perkins, Chairman of the Board, President and
Chief Executive Officer. Although the Company believes it could replace key
employees in an orderly fashion should the need arise, the loss of such
personnel could have a material adverse effect on the Company.
11
ENVIRONMENTAL MATTERS
The Company is subject to various evolving federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability
for the costs of cleaning up, and certain damages resulting from, past
spills, disposals or other releases of hazardous substances. In connection
with the Acquisitions, the Company conducted certain investigations of the
acquired companies' facilities and their compliance with applicable
environmental laws. These investigations found various environmental matters
and conditions that could, under certain circumstances, expose the Company to
liability. Furthermore, the company from which RPM acquired its assets has
been identified by the United States Environmental Protection Agency as one
of the many potentially responsible parties for environmental liabilities
associated with a "Superfund" site located in the area of RPM's former
manufacturing facilities and one of its current distribution facilities.
Although no assurances can be given, the Company believes that it will not
incur any material liabilities relating to these matters. See "Environmental
Matters."
COMPETITION
The automotive aftermarket for transmissions, engines and other drive
train products is highly fragmented and highly competitive. There can be no
assurance that the Company will compete successfully with other companies in
its industry segment, some of which are larger than the Company and have
greater financial and other resources available to them than does the
Company. See "Competition."
CONTROL OF THE COMPANY; ANTI-TAKEOVER MATTERS
The Company is controlled by Aurora Equity Partners L.P. ("AEP") and
Aurora Overseas Equity Partners I, L.P. ("AOEP" and together with AEP, the
"Aurora Partnerships"), which hold approximately 52% of the voting power in
the Company (through direct ownership and certain voting arrangements).
Therefore, the Aurora Partnerships will be able to elect all of the directors
of the Company and approve or disapprove any matter submitted to a vote of
the Company's stockholders. As a result of the Aurora Partnerships'
substantial ownership interest in the Common Stock, it may be more difficult
for a third party to acquire the Company. A potential buyer would likely be
deterred from any effort to acquire the Company absent the consent of the
Aurora Partnerships or their participation in the transaction. The general
partner of each of the Aurora Partnerships is controlled by Richard R.
Crowell, Gerald L. Parsky and Richard K. Roeder, each of whom is a director
of the Company. The Indentures governing the Company's 12% Senior
Subordinated Notes due 2004 (the "Senior Notes") contain provisions that
would allow a holder to require the Company to repurchase such holder's
Senior Notes at a cash price equal to 101% of the principal amount thereof,
together with accrued interest, upon the occurrence of a "change of control"
of the Company (as defined therein), which could also have the effect of
discouraging a third party from acquiring the Company. See Item 12.
"Security Ownership of Certain Beneficial Owners and Management."
In addition, the Company's Board of Directors is authorized, subject to
certain limitations prescribed by law, to issue up to 5,000,000 shares of
preferred stock in one or more classes or series and to fix the designations,
powers, preferences, rights, qualifications, limitations or restrictions,
including voting rights, of those shares without any further vote or action
by stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions
and other corporate transactions, could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
preferred stock.
12
ITEM 2. PROPERTIES
The Company leased 76 facilities with total leased space of
approximately 2.5 million square feet as of December 31, 1997. The following
table sets forth certain information regarding the manufacturing facilities
and distribution centers of the Company as of December 31, 1997.
Lease
Approximate Expiration
Location Sq. Feet Date Type of Facility/Products Manufactured
- ---------------------------------------------------------------------------------------------------------------
Florence, Alabama 85,100 2002 Distribution Center (1)
Phoenix, Arizona 22,000 2000 Distribution Center (1)
Tucson, Arizona 6,400 1998 Distribution Center (1)
Azusa, California 5,600 2000 Distribution Center (1)
Fresno, California 14,000 2000 Distribution Center (1)
Los Angeles, California 4,700 2000 Distribution Center (1)
Rancho Cucamonga, California 153,000 2002 Distribution Center (1)
Sacramento, California 11,200 1998 Distribution Center (1)
San Diego, California 10,000 2002 Distribution Center (1)
San Jose, California 10,000 2000 Distribution Center (1)
San Leandro, California 13,000 2002 Distribution Center (1)
Van Nuys, California 6,800 2000 Distribution Center (1)
Colorado Springs, Colorado 5,000 * Distribution Center (1)
Denver, Colorado 9,000 2000 Distribution Center (1)
Jacksonville, Florida 12,000 1999 Distribution Center (2)
Orlando, Florida 11,900 2002 Distribution Center (1)
Orlando, Florida 4,000 1998 Distribution Center (2)
Atlanta, Georgia 14,900 1998 Distribution Center (1)(2)
Harvey, Illinois 46,000 2001 Distribution Center (1)
Hillside, Illinois 20,000 2000 Distribution Center (1)(2)
Westmont, Illinois 5,900 2002 Corporate Offices
Louisville, Kentucky 51,500 1999 Distribution Center (1)
Louisville, Kentucky 9,200 * Distribution Center (1)(2)
Harahan, Louisiana 2,500 1998 Distribution Center (2)
Baltimore, Maryland 4,000 1999 Distribution Center (2)
Malden, Massachusetts 6,200 2001 Distribution Center (1)
Grand Rapids, Michigan 9,000 1998 Distribution Center (1)(2)
Taylor, Michigan 12,200 2000 Distribution Center (1)(2)
Berkeley, Missouri 18,000 1998 Distribution Center (1)
Creve Coeur, Missouri 9,700 1998 Distribution Center (1)(2)
Joplin, Missouri 264,000 2008 Manufacturing Facility
Kansas City, Missouri 10,200 2000 Distribution Center (1)(2)
Springfield, Missouri 280,800 2004 Manufacturing Facility
Springfield, Missouri 30,000 1999 Manufacturing Facility
Springfield, Missouri 12,100 2001 Distribution Center (1)(2)
Springfield, Missouri 34,000 * Manufacturing Facility
Springfield, Missouri 60,400 2000 Manufacturing Facility
Springfield, Missouri 98,800 * Manufacturing Facility
Springfield, Missouri 10,000 * Manufacturing Facility
Springfield, Missouri 200,000 2006 Manufacturing Facility
Las Vegas, Nevada 7,500 1999 Distribution Center (1)
Las Vegas, Nevada 250 * Sales Office
East Rutherford, New Jersey 5,700 1999 Distribution Center (2)
13
Lease
Approximate Expiration
Location Sq. Feet Date Type of Facility/Products Manufactured
- ---------------------------------------------------------------------------------------------------------------
Mahwah, New Jersey 160,000 2003 Manufacturing Facility
Albuquerque, New Mexico 7,000 2000 Distribution Center (1)
Jericho, New York 13,800 1998 Distribution Center (1)
Charlotte, North Carolina 23,000 2001 Distribution Center (1)(2)
Gastonia, North Carolina 130,000 2000 Manufacturing Facility
Gastonia, North Carolina 60,000 * Manufacturing Facility
Dayton, Ohio 42,000 1999 Manufacturing Facility
Forest Park, Ohio 10,000 1998 Distribution Center (1)
Portland, Oregon 20,000 2000 Distribution Center (1)
Croydon, Pennsylvania 7,100 2000 Distribution Center (1)
Memphis, Tennessee 37,800 2003 Distribution Center (1)(2)
Nashville, Tennessee 6,500 2000 Distribution Center (1)
Austin, Texas 5,000 * Distribution Center (1)
Dallas, Texas 93,000 2012 Distribution Center (1)
Dallas, Texas 9,000 1998 Distribution Center (1)
Houston, Texas 13,500 2002 Distribution Center (1)(2)
San Antonio, Texas 13,000 2002 Distribution Center (1)
Salt Lake City, Utah 15,000 2000 Distribution Center (1)
Norfolk, Virginia 9,700 2000 Distribution Center (1)
Norfolk, Virginia 13,500 2002 Distribution Center (1)(2)
Seattle, Washington 22,000 2000 Distribution Center (1)
Spokane, Washington 9,500 2000 Distribution Center (1)
Janesville, Wisconsin 30,000 2001 Distribution Center (1)
Calgary, Alberta 9,200 2001 Distribution Center (1)
Edmonton, Alberta 14,800 2003 Distribution Center (3)
Delta, British Columbia (Vancouver) 13,000 2004 Distribution Center (1)
Moncton, New Brunswick 12,000 2000 Distribution Center (3)
Mississauga, Ontario 35,100 1998 Distribution Center (3)
Mississauga, Ontario 12,200 2001 Manufacturing Facility
Mississauga, Ontario 24,000 2000 Distribution Center (1)
Montreal, Quebec 11,200 2000 Distribution Center (1)
Regina, Saskatchewan 600 * Distribution Center (1)
Mexicali, Mexico 77,100 2002 Manufacturing Facility
______________
* Month-to-month lease.
(1) Transmission repair kits & drive train hard parts.
(2) Engines
(3) Heavy duty truck transmissions & differentials
In connection with the Autocraft Acquisition, the Company purchased the
207,000 square foot facility in Oklahoma City, Oklahoma at which its Ford
transmission remanufacturing operations are conducted, as well as an adjacent
98,000 square foot facility at which the Ford material recovery program is
conducted. In addition, the Company began leasing 12 additional facilities
with an aggregate of approximately 450,000 square feet at which the other
Autocraft operations are conducted. These leased facilities are located in
Oklahoma City, Oklahoma; Carrollton, Fort Worth and Houston, Texas; Sparks,
Nevada; and Charlotte, North Carolina. The Company's new United Kingdom
subsidiary (which was acquired as part of the Autocraft Acquisition) owns a
120,000 square foot facility in Grantham, England from which it conducts its
engine remanufacturing operations.
14
The Company believes that its current manufacturing facilities and
distribution centers are adequate for the current level of the Company's
activities. The Company's transmission and engine remanufacturing facility
in Springfield, Missouri is currently employing two work shifts. Other
manufacturing sites have the flexibility to add both additional shifts and
production workers needed to accommodate additional demand for products and
services. However, in the event the Company were to experience a material
increase in sales, the Company may require additional manufacturing
facilities. The Company believes such additional facilities are readily
available on a timely basis on commercially reasonable terms. Further, the
Company believes that the leased space housing its existing manufacturing and
distribution facilities is not unique and could be readily replaced, if
necessary, at the end of the terms of its existing leases on commercially
reasonable terms. Many of the Company's leases are renewable at the option
of the Company.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been and is involved in various legal
proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect, individually or in the aggregate, on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the quarter ended December 31, 1997.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "ATAC" since the IPO in December 1996. As of February 27,
1998, there were approximately 88 record holders of its Common Stock. The
following table sets forth for the periods indicated the range of high and
low sale prices of the Common Stock as reported by Nasdaq:
High Low
1996
Fourth quarter (beginning December 17) ............. $17 5/8 $14 1/4
1997
First quarter ...................................... 19 5/8 14 3/8
Second quarter ..................................... 23 14 3/4
Third quarter ...................................... 27 1/4 18 1/2
Fourth quarter ..................................... 24 3/4 15 1/2
On February 27, 1998, the last sale price of the Common Stock, as
reported by Nasdaq, was $23 15/16 per share.
The Company has not paid cash dividends on its Common Stock to date.
Because the Company currently intends to retain any earnings to provide funds
for the operation and expansion of its business and for the servicing and
repayment of indebtedness, the Company does not intend to pay cash dividends
on its Common Stock in the foreseeable future. Furthermore, as a holding
company with no independent operations, the ability of the Company to pay
cash dividends is dependent upon the receipt of dividends or other payments
from its subsidiaries. Under the terms of the Indentures governing the
Senior Notes, the Company is not permitted to pay any dividends on its Common
Stock unless certain financial ratio tests are satisfied. In addition, the
Company's $100.0 million Credit Facility contains certain covenants that,
among other things, prohibit the payment of dividends by the Company. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Any determination to
pay cash dividends on the Company's Common Stock in the future will be at the
sole discretion of the Company's Board of Directors.
During 1997, the Company did not issue any securities that were not
registered under the Securities Act of 1933, as amended.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the
statements of income data for the years ended December 31, 1995, 1996 and
1997 and the balance sheet data at December 31, 1996 and 1997 are derived
from the Consolidated Financial Statements of the Company that have been
audited by Ernst & Young LLP, independent auditors, and are included
elsewhere herein, and are qualified by reference to such financial statements
and notes related thereto. The selected financial data with respect to the
statement of income data for the year ended December 31, 1993, the seven
months ended July 31, 1994 and the five months ended December 31, 1994 and
the balance sheet data at December 31, 1993, 1994 and 1995, are derived from
the audited Combined Financial Statements of the Predecessor Companies and
the Consolidated Financial Statements of the Company that have been audited
by Ernst & Young LLP, independent auditors, but are not included herein. The
data provided should be read in conjunction with the Consolidated Financial
Statements, related notes and other financial information included in this
Annual Report.
COMBINED CONSOLIDATED
--------------------------------- ------------------------------------------------------
FOR THE YEAR FOR THE SEVEN FOR THE FIVE
ENDED MONTHS ENDED MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
DECEMBER 31, JULY 31, DECEMBER 31, -------------------------------
1993 1994(1) 1994 1995 1996 1997(2)
--------------- ------------- -------------- ------ ------ --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales .......................... $110,702 $90,056 $67,736 $190,659 $272,878 $346,110
Cost of sales....................... 66,687 52,245 40,112 115,499 166,810 212,416
------- ------ ------ ------- ------- -------
Gross profit........................ 44,015 37,811 27,624 75,160 106,068 133,694
Selling, general and
administrative expenses............ 25,682 20,475 14,206 38,971 55,510 73,768
Amortization of intangible assets .. 28 16 1,210 3,308 3,738 4,501
------- ------ ------ ------- ------- -------
Operating income ................... 18,305 17,320 12,208 32,881 46,820 55,425
Interest expense (income), net ..... (302) (158) 6,032 16,915 19,106 16,910
Income taxes (3).................... 471 (5) 2,565 6,467 11,415 15,512
------- ------ ------ ------- ------- -------
Income before extraordinary item ... $ 18,136 $17,483 3,611 9,499 16,299 23,003
======= ======
Preferred stock dividends........... 853 2,093 2,222 -
------ ------- ------- -------
Income before extraordinary item
available to common stockholders.. $ 2,758 $ 7,406 $ 14,077 $23,003
====== ======= ======= =======
Diluted earnings per share before
extraordinary item (4) ........... $ 0.65 $ 1.02 $ 1.19
Shares used in computation of
diluted earnings per share
before extraordinary item (4) .... 14,616 15,918 19,335
OTHER DATA:
Capital expenditures (5)............ $ 2,310 $ 1,850 $ 1,336 $ 5,187 $ 7,843 $ 8,682
17
Combined Consolidated
--------------- ---------------------------------
December 31,
---------------------------------------------------
1993 1994 1995 1996 1997
(in thousands)
BALANCE SHEET DATA:
Working capital.............................. $26,651 $40,499 $60,012 $103,371 $98,523
Property, plant and equipment, net........... 4,678 6,196 10,784 17,482 24,414
Total assets................................. 45,618 187,293 247,932 320,747 368,677
Long-term liabilities (6).................... 998 121,483 165,724 167,233 152,571
Preferred stock.............................. - 20,853 22,946 - -
Common stockholders' equity ................. 31,720 22,757 30,188 105,832 175,429
_______________
(1) The combined financial statements for the seven months ended July 31, 1994
include the operations of the Predecessor Companies up to their respective
acquisition dates. All material transactions between the Predecessor
Companies have been eliminated.
(2) Income before extraordinary item for the year ended December 31, 1997
excludes an extraordinary item in the amount of $3,749 ($6,269 less related
income tax benefit of $2,520). This amount is comprised of (i) a $5,700
charge resulting from the early redemption of $40,000 in principal amount
of the Senior Notes in February 1997, which included the payment of a 12.0%
early redemption premium and the write-off of related debt issuance costs
and (ii) a charge of approximately $600 for the write-off of previously
capitalized debt issuance costs in connection with the termination of the
Company's previous revolving credit facility.
(3) Two of the Predecessor Companies elected to be taxed as S Corporations for
all periods prior to the Initial Acquisitions; therefore, for federal and
state income tax purposes, any income or loss generally was not taxed to
these companies but was reported by their respective stockholders. A pro
forma provision for taxes based on income reflecting the estimated
provision for federal and state income taxes that would have been provided
had these companies been C Corporations and included in consolidated
returns with the Company is as follows: $7,334 for the year ended
December 31, 1993 and $7,004 for the seven months ended July 31, 1994.
(4) See Note 1 to Consolidated Financial Statements for a description of the
computation of net income per share.
(5) Excludes capital expenditures made by certain of the Company's subsidiaries
prior to such subsidiaries' respective acquisitions and any capital
expenditures made in connection with such acquisitions.
(6) Includes deferred tax liabilities of $1,438, $3,478, $5,252 and $8,044 at
December 31, 1994, 1995, 1996 and 1997, respectively.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Annual Report.
OVERVIEW
The Company's revenues are generated through the sale of drive train
products used in the repair of vehicles in the automotive aftermarket. Since
its formation, the Company has benefited from a combination of internal and
acquisition-related revenue growth. The Company achieved compound annual
growth in revenue of approximately 33.0% from 1993 through 1997 (including
both internal growth and growth through acquisitions).
The Company's revenues from sales to Independent Aftermarket customers
increased by 26.9% compounded annually from $70.9 million to $183.8 million
from 1993 through 1997. This growth was due to geographic expansion through
the addition of distribution centers, a broadened product line, enhanced
customer service, effective sales efforts, the addition of retail automotive
parts stores as customers and acquisitions. During the same period, revenues
from sales to OEM customers increased by 42.1% compounded annually from $39.8
million to $162.3 million due to increased sales to existing customers,
including Chrysler, and the addition of new customers.
The primary components of the Company's cost of goods sold are the cost
of cores and component parts, labor costs and overhead. While certain of
these costs have fluctuated as a percentage of sales over time, cost of goods
sold as a percentage of sales has remained relatively constant from 1993
through 1997. Selling, general and administrative ("SG&A") expenses consist
primarily of salaries, commissions, rent, marketing expenses and other
management infrastructure expenses. SG&A expenses as a percentage of sales
declined from 23.2% in 1993 to 21.3% in 1997 principally due to the effect of
spreading certain fixed costs over a larger sales base.
The Company regularly evaluates strategic acquisition opportunities in
the automotive aftermarket business and expects to continue to do so in the
future. On March 6, 1998, the Company completed the acquisition of
substantially all the assets of the OEM Division of Autocraft. See Item 1.
"Business."
RESULTS OF OPERATIONS
The following table sets forth certain financial statement data expressed
in millions of dollars and as a percentage of net sales.
Year Ended December 31,
-----------------------------------------------------
1995 1996 1997
-----------------------------------------------------
(in millions)
Net sales............................... $190.7 100.0% $272.9 100.0% $346.1 100.0%
Cost of sales........................... 115.5 60.6 166.8 61.1 212.4 61.4
------ ----- ------ ----- ----- -----
Gross profit............................ 75.2 39.4 106.1 38.9 133.7 38.6
SG&A expenses .......................... 39.0 20.5 55.5 20.3 73.8 21.3
Amortization of intangible assets ...... 3.3 1.7 3.8 1.4 4.5 1.3
------ ----- ------ ----- ----- -----
Operating income ....................... 32.9 17.2 46.8 17.2 55.4 16.0
Interest expense, net................... 16.9 8.8 19.1 7.0 16.9 4.9
Provision for income taxes.............. 6.5 3.4 11.4 4.2 15.5 4.5
------ ----- ------ ----- ----- -----
Income before extraordinary item ....... $ 9.5 5.0% $ 16.3 6.0% $ 23.0 6.6%
====== ===== ====== ===== ===== =====
19
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Income before extraordinary item increased 41.1% from $16.3 million in
1996 to $23.0 million in 1997. Net sales increased 26.8%, from $272.9
million in 1996 to $346.1 million in 1997, primarily due to sales generated
by the acquisitions of REPCO, ATS, Trans Mart and Metran as well as increased
sales volumes to OEM customers. In general, costs and expenses also
increased; however, overall the Company was able to spread its overhead
expenses over a larger revenue base, which contributed to the comparatively
higher income from before extraordinary item for the year.
On a per share basis, income before extraordinary item increased from
$1.02 per diluted share in 1996 to $1.19 per diluted share in 1997. The
number of shares used in the per share calculations were 15.9 million in 1996
and 19.3 million in 1997. The increase in shares resulted primarily from the
Company's public offering of Common Stock in October 1997.
NET SALES. Net sales increased $73.2 million, or 26.8%, from $272.9
million in 1996 to $346.1 million in 1997. Of this increase, $23.2 million
was due to the internal growth described above and $50.0 million was due to
the incremental net sales generated by the companies acquired in 1997 (REPCO,
ATS, Trans Mart and Metran). Net sales to Chrysler represented 37.2% of
total net sales in 1996, as compared to 32.0% in 1997.
Net sales on a proforma (unaudited) basis, to reflect the 1996
acquisitions of Tranzparts and Diverco and the 1997 acqusitions of REPCO,
ATS, Trans Mart and Metran as if all acquisitions had occurred on January 1,
1996, were $358.6 million for 1996 and $392.5 million for 1997.
GROSS PROFIT. Gross profit as a percentage of net sales remained
relatively constant at 38.9% in 1996 as compared to 38.6% in 1997.
SG&A EXPENSES. The Company's SG&A expenses increased $18.3 million,
from $55.5 million in 1996 to $73.8 million in 1997. As a percentage of net
sales, SG&A expenses increased from 20.3% to 21.3% between the two periods.
The increase in SG&A expenses is primarily due to the ongoing incremental
expenses of the Tranzparts, Diverco, REPCO, ATS, Trans Mart and Metran
acquisitions, certain enhancements to the Company's infrastructure (including
additional management and improved information systems) and additional
selling and other variable overhead costs associated with the higher sales
volume (including increased production capacity). The increase in SG&A
expenses as a percentage of net sales is primarily attributable to: (i) the
deferred compensation expense described below, (ii) certain enhancements to
the Company's infrastructure (including additional management and improved
information systems) and (iii) the additional ongoing expenses associated
with being a publicly held company.
Included in SG&A expenses are non-cash charges totaling $0.5 million in
1996 and $1.8 million in 1997, representing the pro rata portion for each
year of deferred compensation expense relating to the difference between the
exercise price and the intrinsic value for financial statement presentation
purposes of stock options granted to Mr. Stephen J. Perkins, the Company's
Chairman of the Board, President and Chief Executive Officer, and other
members of senior management. The Company expects to recognize additional
compensation expense aggregating $1.1 million over the balance of the
respective vesting periods of the options, which generally range from three
to five years from the date of grant.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased from $3.8 million in 1996 to $4.5 million in 1997. The increase
resulted from the additional intangible assets arising from the acquisitions
of Tranzparts, Diverco, REPCO, ATS, Trans Mart and Metran.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased 18.4%, from $46.8 million
in 1996 to $55.4 million in 1997.
INTEREST EXPENSE, NET. Interest expense decreased from $19.1 million in
1996 to $16.9 million in 1997. The lower interest resulted from the net
effect of the early redemption in February 1997 of $40.0 million of the
Senior Notes
20
offset to some extent by increased borrowings under the Company's $100.0
million revolving credit facility (the "Credit Facility"). The Credit
Facility carries a significantly lower effective interest rate than did the
Senior Notes.
EXTRAORDINARY ITEM. An extraordinary item in the amount of $3.8 million
($6.3 million, net of related income tax benefit of $2.5 million) was
recorded in 1997. This amount is comprised of (i) a $5.7 million charge
resulting from the early redemption of $40.0 million of the Senior Notes
in February 1997, which included the payment of a 12.0% early redemption
premium and the write-off of related debt issuance costs and (ii) a charge of
approximately $0.6 million for the write-off of previously capitalized debt
issuance costs in connection with the termination of the Company's previous
revolving credit facility.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Net income increased 71.6% from $9.5 million in 1995 to $16.3 million in
1996, as the Company experienced significant revenue growth from both of its
customer groups, OEMs and the Independent Aftermarket including retail
automotive parts stores. More than half of the revenue growth occurred from
OEM customers. Growth from the Independent Aftermarket was achieved largely
through two strategic acquisitions (Tranzparts and Diverco), and to a lesser
extent from internal growth. The higher net income was primarily achieved
from the Company's ability to spread its overhead expenses over a larger
revenue base.
Although the Company's IPO resulted in an increase in the number of
shares used in the earnings per share ("EPS") calculation, EPS increased
significantly from $0.65 in 1995 to $1.02 in 1996. The number of shares used
in the calculation of EPS were 14.6 million for 1995 and 15.9 million for
1996.
NET SALES. Net sales increased $82.2 million or 43.1%, from $190.7
million in 1995 to $272.9 million in 1996. Of this increase, $42.8 million
was due to internal growth and $39.4 million was due to the incremental net
sales generated by the companies acquired in 1995 and 1996: CRS, Mascot,
King-O-Matic, Tranzparts and Diverco, which were acquired on June 1, 1995,
June 9, 1995, September 12, 1995, April 2, 1996 and October 1, 1996,
respectively.
The internal growth was generated primarily from increased sales volumes
with existing OEM customers. To a lesser extent, internal growth was also
generated by the incremental sales associated with the opening of five new
distribution centers during the second half of 1995, increased sales volumes
through existing distribution centers and increased sales volumes with
existing retail customers.
Net sales to Chrysler of $101.5 million in 1996 represented 37.2% of the
Company's total net sales for the year, as compared to $67.6 million and
35.4% in 1995. The increase in net sales to Chrysler is partially reflective
of an effort by Chrysler during the third quarter of 1995 to reduce its
inventory of remanufactured transmissions. Management believes that the
Chrysler inventory reduction during the third quarter of 1995 was a one-time
effort to reverse an inventory build-up in 1994 and is not expected to recur.
GROSS PROFIT. Gross profit as a percentage of net sales decreased
slightly from 39.4% in 1995 to 38.9% in 1996. The decrease in gross profit
margin was largely attributable to certain non-recurring start-up costs
incurred during 1996 in connection with the Company's new plant in Joplin,
Missouri and the expansion of capacity at the Company's plant in Springfield,
Missouri needed to support sales growth to retail and OEM customers.
SG&A EXPENSES. SG&A expenses decreased slightly as a percentage of net
sales from 20.4% in 1995 to 20.3% in 1996. However, SG&A expenses increased
in absolute dollars from $39.0 million in 1995 to $55.5 million in 1996,
representing an increase of $16.5 million or 42.4%. The increase in SG&A
expenses was due largely to the ongoing incremental SG&A expenses of the
companies acquired in 1995 and 1996: CRS, Mascot, King-O-Matic, Tranzparts
and Diverco. Other significant factors contributing to the increase in SG&A
expenses include the ongoing incremental expenses associated with the five
new distribution centers opened during the second half of 1995, and certain
start-up and ongoing SG&A expenses incurred in connection with the Company's
new plant in Joplin, Missouri. In addition, SG&A expenses in 1996 included a
charge of approximately $0.7 million for certain planned reorganization costs
associated with the relocation of the Company's corporate headquarters to the
Chicago area and costs associated with a realignment of the Independent
Aftermarket division.
21
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased approximately $0.4 million in 1996 as compared to 1995, reflecting
the increase in intangible assets that occurred as a result of the
acquisitions of CRS, Mascot, King-O-Matic, Tranzparts and Diverco.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased 42.2%, from $32.9 million
in 1995 to $46.8 million in 1996. As a percentage of net sales, income from
operations in 1996 was 17.2%, equal to the same percentage of net sales in
1995.
INTEREST EXPENSE, NET. Interest expense increased $2.3 million from
$18.0 million in 1995 to $20.3 million in 1996. The increase was due to a
full year of interest expense on the Series D Senior Notes which were used to
finance the acquisitions of CRS, Mascot and King-O-Matic, and the related
amortization of debt issuance costs. The Series D Senior Notes were issued
on June 1, 1995 and therefore were only outstanding for the last seven months
of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had total cash and cash equivalents on hand of $78,000 at
December 31, 1997, representing a decrease in net cash of $46.4 million in
1997. Net cash provided by operating activities was $11.7 million for the
year. Net cash used in investing activities was $71.5 million for the
period, including $60.8 million for the acquisitions of REPCO, ATS, Trans
Mart and Metran, a scheduled payment of $2.0 million relating to the
acquisition of Diverco, and $8.7 million in capital expenditures, primarily
for purchases of equipment. Net cash provided by financing activities was
$13.3 million, including $47.9 million from the public offering of Common
Stock in October 1997 and net borrowings of $11.1 million under the Credit
Facility partially offset by payments totaling $44.8 million in connection
with the redemption of $40.0 million of Senior Notes.
The Company raised total net proceeds of $61.6 million in the IPO and
concurrent private placement of Common Stock in December 1996 and an
additional $47.9 million in the secondary offering in October 1997. From the
Company's inception in July 1994 to December 1996, the Company funded its
operations and investments in property and equipment, including acquisitions,
through the issuance of Senior Notes totaling $162.4 million, the private
sale of preferred stock of $20.0 million and Common Stock of $20.0 million,
and to a lesser extent through cash provided by operating activities and
revolving bank lines. In December 1996, the preferred stock was redeemed
and, in February 1997, $40.0 million in principal amount of the Senior Notes
was redeemed, with a combination of the proceeds from the IPO and borrowings
under the Credit Facility. The net proceeds from the secondary offering were
used to repay borrowings under the Credit Facility.
The Company's capital expenditures in 1997 were $8.7 million. These
capital expenditures consisted primarily of additional transmission, engine
and torque converter remanufacturing equipment and other improvements to
support planned increases in production capacity in the Joplin and
Springfield, Missouri and Mahwah, New Jersey plants.
The Company has budgeted $12.4 million for capital expenditures during
1998. These will include replacement and additional remanufacturing
equipment to support planned increases in production capacity in the
Company's Joplin and Springfield, Missouri and Mahwah, New Jersey facilities.
Overall, planned capital expenditures for 1998 are considered adequate for
normal replacement and consistent with projections for future sales and
earnings.
The ATS acquisition involves contingent payments aggregating up to $19.0
million (present value $13.6 million as of December 31, 1997) expected to be
made over eight years. The Autocraft Acquisition includes a deferred
purchase payment of up to $12.5 million payable in 1999.
In February 1997, the Company terminated its $30.0 million revolving
credit facility with The Chase Manhattan Bank (the "Bank") that had been
scheduled to mature in July 1999 and replaced it with the $100.0 million
Credit Facility, which is also with the Bank. The Credit Facility is
available to finance the Company's working capital requirements, future
acquisitions and other general corporate needs, and will expire in December
2001. Amounts advanced under the Credit Facility are secured by
substantially all assets of the Company. As of December 31, 1997, the
Company had approximately $86.2 million available under the Credit Facility.
22
In March 1998 the credit agreement for the Credit Facility was amended
and restated to provide a $120.0 million term loan facility in addition to
the existing revolving facility. The Company borrowed $120.0 million under
the term loan facility on March 6, 1998 to purchase Autocraft and pay related
transaction expenses. The term loan is payable in quarterly installments
through December 31, 2003 and bears interest at a rate of at either (i) the
Alternate Base Rate plus a specified margin or (ii) the Eurodollar Rate plus
a specified margin. The "Alternate Base Rate" is equal to the highest of (a)
the Bank's prime rate, (b) the secondary market rate for three-month
certificates of deposit plus 1.0% and (c) the federal funds rate plus 0.5%,
in each case as in effect from time to time. The "Eurodollar Rate" is the
rate offered by the Bank for eurodollar deposits for one, two, three, six or,
if available by all lenders, nine months (as selected by the Company) in the
interbank eurodollar market in the approximate amount of the Bank's share of
the advance under the Credit Facility. The applicable margins for both
Alternate Base Rate and Eurodollar Rate loans are subject to a quarterly
adjustment based on the Company's leverage ratio as of the end of the four
fiscal quarters then completed. The Alternate Base Rate margin is zero
currently and the Eurodollar margin is currently at 1.0%.
In September 1997, the Company entered into an agreement with Bank of
Montreal for a revolving credit facility to accommodate the working capital
needs of the Company's Canadian subsidiaries. Borrowings under the agreement
are limited to certain advance rates based upon the eligible accounts
receivable and inventory of the Canadian subsidiaries up to an aggregate
maximum of C$3.5 million.
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations
and its budgeted capital expenditures. In pursuing future acquisitions, the
Company will continue to consider the effect any such acquisition costs may
have on its liquidity. In order to consummate such acquisitions, the Company
may need to seek additional capital through additional borrowings or equity
financings.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which was adopted by the Company on December 31, 1997.
As a result, the Company changed the method previously used to compute
earnings per share and is restating all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options and warrants is excluded.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which was adopted by the Company on
December 31, 1997. This Statement requires additional disclosures relating to
liquidation preferences of preferred stock, information about the pertinent
rights and privileges of the outstanding equity securities, and the
redemption amounts for all issues of capital stock that are redeemable at
fixed or determinable prices on fixed or determinable dates. The Company
does not currently issue such securities; accordingly, this Statement has no
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." In addition to net income, comprehensive income includes items
recorded directly to stockholders' equity such as cumulative foreign currency
translation adjustments. This Statement establishes new standards for
reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997. Adoption of this standard
will only require additional financial statement disclosure detailing the
Company's comprehensive income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
new standards for reporting information about operating segments in interim
and annual financial statements. This Statement is also effective for fiscal
years beginning after December 15, 1997. The Company will evaluate the
impact, if any, this Statement will have on disclosures in the consolidated
financial statements.
23
YEAR 2000 COMPLIANCE
The Company has been informed by the vendors of all its material
computer software that such software will continue to function properly
during the transition from 1999 to 2000 without disruption of the Company's
operations or the Company incurring additional cost for software upgrades or
modifications. The Company intends to conduct tests to confirm compliance by
the end of 1998. The Company's software includes both operational software
and software that is being implemented as part of the Company's continuing
efforts to seek operating efficiencies by upgrading its information systems.
INFLATION; LACK OF SEASONALITY
Although the Company is subject to the effects of changing prices, the
impact of inflation has not been a significant factor in results of
operations for the periods presented. In some circumstances, market
conditions or customer expectations may prevent the Company from increasing
the prices of its products to offset the inflationary pressures that may
increase its costs in the future. Historically, there has been little
seasonal fluctuation in the Company's business.
ENVIRONMENTAL MATTERS
See Item 1. "Business--Environmental" for a discussion of certain
environmental matters relating to the Company.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
CONTENTS
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . 26
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Income. . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Changes in Stockholders' Equity . . . . . . 29
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . 30
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 31
25
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Aftermarket Technology Corp.
We have audited the accompanying consolidated balance sheets of
Aftermarket Technology Corp. (the Company) as of December 31, 1996 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Aftermarket Technology Corp. at December 31, 1996 and 1997, and the
consolidated results of the Company's operations and cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 23, 1998,
(Except for Note 17, as to which the date is March 6, 1998)
26
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
December 31, December 31,
1996 1997
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 46,498 $ 78
Accounts receivable, net 38,780 53,761
Inventories 60,586 76,166
Prepaid and other assets 2,917 4,706
Refundable income taxes - 1,011
Deferred income taxes 2,272 3,478
---------- ---------
Total current assets 151,053 139,200
Equipment and leasehold improvements:
Machinery and equipment 12,907 19,335
Autos and trucks 2,011 2,712
Furniture and fixtures 1,553 3,139
Leasehold improvements 4,585 6,058
---------- ---------
21,056 31,244
Less accumulated depreciation and amortization (3,574) (6,830)
---------- ---------
17,482 24,414
Debt issuance costs, net 6,320 4,260
Cost in excess of net assets acquired, net 145,430 200,393
Other assets 462 410
---------- ---------
Total assets $ 320,747 $ 368,677
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 25,226 $ 16,055
Accrued payroll and related costs 4,429 5,820
Accrued interest payable 7,996 6,253
Other accrued expenses 3,372 4,904
Bank lines of credit 4,335 4,596
Income taxes payable 321 -
Acquisition notes payable - 1,435
Due to former owners 2,003 1,614
---------- ---------
Total current liabilities 47,682 40,677
12% Series B and D Senior Subordinated Notes 161,981 121,288
Acquisition notes payable - 9,097
Amount drawn on revolving credit facility - 11,100
Deferred compensation - 3,042
Deferred income taxes 5,252 8,044
Commitments and contingencies (See Note 13)
Stockholders' equity:
Preferred stock, $.01 par value;
shares authorized - 5,000,000;
Issued and outstanding shares - none - -
Common stock, $.01 par value;
shares authorized - 30,000,000;
Issued and outstanding shares -
16,980,794 and 19,577,274
at December 31, 1996 and
December 31, 1997, respectively 169 195
Additional paid-in capital 81,380 131,604
Retained earnings 24,240 43,494
Cumulative translation adjustment 43 136
---------- ---------
Total stockholders' equity 105,832 175,429
---------- ---------
Total liabilities and stockholders' equity $ 320,747 $ 368,677
========== =========
SEE ACCOMPANYING NOTES.
27
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the years ended December 31,
1995 1996 1997
----------- --------- ---------
Net sales $ 190,659 $ 272,878 $ 346,110
Cost of sales 115,499 166,810 212,416
----------- --------- ---------
Gross profit 75,160 106,068 133,694
Selling, general and administrative expense 38,971 55,510 73,768
Amortization of intangible assets 3,308 3,738 4,501
----------- --------- ---------
Income from operations 32,881 46,820 55,425
Interest and other income 1,100 1,181 1,912
Interest expense 18,015 20,287 18,822
----------- --------- ---------
Income before income taxes and extraordinary item 15,966 27,714 38,515
Provision for income taxes 6,467 11,415 15,512
----------- --------- ---------
Income before extraordinary item 9,499 16,299 23,003
Extraordinary item - net of income tax
benefit of $2,520 - (See Note 16) - - 3,749
----------- --------- ---------
Net income 9,499 16,299 19,254
----------- --------- ---------
Dividends accrued on preferred stock 2,093 2,222 -
----------- --------- ---------
Net income available to common stockholders $ 7,406 $ 14,077 $ 19,254
=========== ========= =========
Basic earnings per common share:
Income before extraordinary item $ 0.69 $ 1.15 $ 1.31
Extraordinary item - - (0.21)
----------- --------- ---------
Net income $ 0.69 $ 1.15 $ 1.10
=========== ========= =========
Diluted earnings per common share:
Income before extraordinary item $ 0.65 $ 1.02 $ 1.19
Extraordinary item - - (0.20)
----------- --------- ---------
Net income $ 0.65 $ 1.02 $ 0.99
=========== ========= =========
SEE ACCOMPANYING NOTES
28
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Cumulative
Preferred Common Capital in Excess Retained Translation
Stock Stock of Par Value Earnings Adjustments Total
--------- ------- ------------ -------- ----------- --------
Balance as of December 31, 1994 $ 20,853 $ 120 $ 19,880 $ 2,757 $ - $ 43,610
Net income