UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _________
COMMISSION FILE NUMBER: 1-14181
TRANSPORTATION COMPONENTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0562800
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
THREE RIVERWAY, SUITE 200
HOUSTON, TEXAS 77056
(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 332-2500
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
--------------------------- --------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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. [X]
As of March 22, 1999, there were outstanding 17,727,815 shares of common
stock of the Registrant. The aggregate market value on such date of the voting
stock of the Registrant held by non-affiliates was an estimated $17.25 million.
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TRANSPORTATION COMPONENTS, INC.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business................................................... 1
Item 2. Properties................................................. 11
Item 3. Legal Proceedings.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........ 13
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters...................................... 14
Item 6. Selected Financial Data.................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 16
Item 7a. Quantitative and Qualitative Disclosures About Market Risk. 23
Item 8. Financial Statements and Supplementary Data................ 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant......... 46
Item 11. Executive Compensation..................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 46
Item 13. Certain Relationships and Related Transactions............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................. 47
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS SOME "FORWARD-LOOKING STATEMENTS"
WHICH GIVE THE COMPANY'S CURRENT EXPECTATIONS OR FORECASTS OF FUTURE EVENTS.
THESE STATEMENTS APPEAR IN A NUMBER OF PLACES, INCLUDING ITEM 1. "BUSINESS,"
ITEM 3. "LEGAL PROCEEDINGS" AND ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS". SUCH STATEMENTS CAN BE
IDENTIFIED BY THE USE OF TERMS SUCH AS "BELIEVES," "EXPECTS," "MAY,"
"ESTIMATES," "WILL," "SHOULD," "PLANS," OR "ANTICIPATES" AND OTHER SIMILAR WORDS
IN ANY DISCUSSION OF FUTURE OPERATING OR FINANCIAL PERFORMANCE. FROM TIME TO
TIME, THE COMPANY ALSO MAY PROVIDE ORAL OR WRITTEN FORWARD-LOOKING STATEMENTS IN
OTHER MATERIALS IT RELEASES TO THE PUBLIC.
SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE
AND INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS. IN PARTICULAR, THE COMPANY HAS IDENTIFIED SPECIFIC RISKS AND
UNCERTAINTIES RELEVANT TO THE COMPANY'S BUSINESS UNDER "ITEM 1. BUSINESS - RISK
FACTORS" ON PAGE 9 OF THIS REPORT. NO ASSURANCE CAN BE GIVEN THAT THESE ARE ALL
OF THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS. THIS DISCUSSION IS PROVIDED AS PERMITTED BY THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's definitive proxy statement, to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A not later
than 120 days after the close of the Registrant's fiscal year, are incorporated
by reference under Part III.
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PART I
ITEM 1. BUSINESS
Transportation Components, Inc., also known as TransCom USA (the "Company"
or "TransCom"), is a distributor throughout North America of replacement parts
and supplies for commercial trucks, trailers and other heavy duty vehicles and
equipment. To complement its parts distribution business, the Company also
provides customers with value-added services, such as parts installation and
repair, fleet maintenance management, machine shop services and remanufacturing
of brake shoes, fuel injectors and turbo chargers. The Company distributes a
broad selection of parts for braking systems and suspension and steering
systems, as well as axles, wheels and rims, trailer parts, drive train
components, hydraulic components and engine parts. These parts are used for
regular preventative maintenance, such as replacement of worn brake shoes,
belts, hoses and filters, and for "as-needed" repairs of damaged or
out-of-warranty vehicle parts.
The Company purchases heavy duty parts from component manufacturers,
inventories these parts in 95 facilities across the United States, Mexico and
Canada and distributes them to over 18,000 customers. The Company also exports
heavy duty parts to customers located in countries in South and Central America,
Southeast Asia and the Pacific Rim. The Company's customers include private
vehicle fleets operated by businesses which perform their own maintenance and
repairs, independent repair shops, resellers, municipal and other government
entities, specialty original equipment manufacturers ("OEMs") and other end
users.
On June 24, 1998, TransCom completed its initial public offering and
simultaneously acquired nine separate companies (the "Founding Partner
Companies") engaged in the heavy duty parts distribution and repair industry.
The Founding Partner Companies had 68 operating facilities located across the
United States and Mexico, and pro forma combined revenues in 1997 of
approximately $208 million. The Company subsequently acquired nine more
companies (the "Purchased Companies") in the third and fourth quarters of 1998
that added 27 additional locations in the United States and Canada. The
Purchased Companies added combined annualized revenues of approximately $87
million.
INDUSTRY OVERVIEW
The heavy duty parts and repair industry consists of: (i) component
manufacturers, (ii) OEMs and OEM-authorized dealerships, (iii) independent
distributors and (iv) repair shops and other end users. The Company believes
that this industry includes approximately 14,100 participants in the United
States, consisting of 11,500 independent parts distributors and repair shops and
2,600 OEM-authorized dealerships. Based on the number of independent
distributors and repair shops and the acquisition activity in the industry, the
Company believes that the heavy duty parts and repair industry is highly
fragmented and in the early stages of consolidation.
To service their customers, independent distributors such as TransCom
typically carry a large volume of inventory, including parts from many different
component manufacturers, to service a wide variety of vehicles and equipment.
With the size and depth of the inventory maintained, independent distributors
strive to deliver parts to customers on the same day on a more cost-effective
basis then OEM-authorized dealerships. In contrast, OEM-authorized dealerships
typically inventory parts for use primarily in vehicles assembled by their
respective OEMs.
The heavy duty parts and repair industry currently is experiencing the
same trends that have influenced other distribution industries such as
integrated single-source suppliers, strategic alliances, supply chain management
and enhanced management information systems. These trends have led to shorter
delivery cycles, increased use of electronic data interchange ("EDI"),
"partnering" relationships with customers, expansion of product offerings,
vendor-managed inventory, the growth of regional and national accounts and other
types of value-added services to meet customer demand for more services from
their suppliers.
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COMPETITIVE STRENGTHS
The Company believes that the following factors give it a competitive
advantage in the heavy duty parts and repair business:
o SIZE AND CRITICAL MASS - which provide the Company with purchasing and
other economies of scale, and greater leverage with component parts
manufacturers.
o GEOGRAPHICALLY DIVERSE OPERATIONS - which enable the Company to
effectively service large customers across regional and national
markets.
o STRONG CUSTOMER RELATIONSHIPS - which provide the Company with repeat
business and the opportunity to cross-sell the Company's services and
products.
o EXPERIENCED MANAGEMENT - which, together with their affiliates, hold in
excess of 50% of the Company's outstanding common stock and includes
executive management with extensive parts distribution experience, as
well as local management which have many years of experience in the
heavy duty parts and repair industry and established reputations in
their local markets.
o EXPERIENCED SALES STAFF - which enables the Company to provide superior
service to customers, since salespeople in the heavy duty industry must
possess significant knowledge of the various vehicle and parts
manufacturers and the specifications of a broad range of vehicle parts.
Unlike automobiles that are manufactured to standard models, virtually
all trucks are manufactured to individual specifications that greatly
complicate a sales person's job. Accordingly, a sales person must be
familiar with the various brands and specifications for truck parts to
determine properly a customer's parts needs. This knowledge and
expertise is generally gained through on-the-job training.
o RESOURCES TO IMPLEMENT ADVANCED INFORMATION SYSTEMS COMPANY-WIDE -
which, when implemented, will enable the Company to greatly improve its
distribution efficiencies and its ability to purchase and manage its
inventory on a real-time basis throughout the Company's locations.
STRATEGY
SELECTIVE ACQUISITION STRATEGY. The Company's initial strategy was to
aggressively pursue acquisitions to consolidate the heavy duty parts and repair
industry. The Company believes that the heavy duty parts and repair industry is
highly fragmented and provides an excellent opportunity to consolidate through
acquisitions. In pursuit of this strategy, the Company acquired the Purchased
Companies in the third and fourth quarters of 1998. This strategy was based on
issuing the Company's common stock for all or a substantial portion of the
consideration for new acquisitions. However, at the depressed market prices of
the Company's common stock during the first quarter of 1999, the Company is not
willing to use its common stock for acquisitions since it would be dilutive to
the Company's existing stockholders. Accordingly, the Company does not plan to
grow through acquisitions in the near term unless the market price of the
Company's common stock rises to levels that will make acquisitions accretive to
the Company's earnings, or the Company can generate excess cash flow. The
Company also may pursue additional debt or equity financing to finance future
acquisitions, although there can be no assurances that additional financing
would be available on terms attractive to the Company.
OPERATING STRATEGY. The Company has shifted its focus in the near term
from aggressive acquisition growth to integrating its existing 18 companies. The
key elements of the Company's operating strategy include:
o INCREASING PURCHASING SYNERGIES. The Company expects to realize
significant cost savings through purchasing economies of scale. The
Company is in the process of implementing product line commonality
among its 18 companies that will increase volume to selected vendors.
The increased volume generated from TransCom's size and common vendors
will provide greater purchasing discounts for the Company. The
purchasing synergies began to be material in the fourth quarter of
1998, and are expected to increase in significance throughout 1999.
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o ACHIEVING GEOGRAPHIC AND COMPANY-WIDE OPERATING EFFICIENCIES. The
Company believes that its geographic concentrations in California and
Florida will enable the Company to achieve operating efficiencies
within these geographic areas. The Company now has eleven locations in
California and nineteen locations in Florida. These efficiencies
include:
o The ability to provide greater product availability and
decrease duplicative inventory within a region. The Company
also believes it will be able to develop distribution
efficiencies within a geographical region, including more
cost-effective delivery of products from component
manufacturers to company locations.
o The opportunity to cross-sell products and services to the
customers of its companies within each region. The Company
believes it will be able to cross-sell the products and
services it offers to its customers by leveraging the
specialized and diverse product, service and marketing
expertise of the individual companies.
o The opportunity to be a single-source, preferred provider for
replacement parts and installation and repair services for
national and regional fleet services. Based on the national
vehicle fleet service provided by one of the Founding
Companies, the Company believes that demand exists from larger
vehicle fleets to utilize the services of independent
distributors capable of providing comprehensive services on a
regional or national basis. Many of the TransCom companies
already provide local or regional services to companies with
nationwide locations.
o The opportunity to identify those "best practices" that can be
successfully implemented throughout TransCom's operations.
o INSTALLING COMPANY-WIDE INFORMATION TECHNOLOGY SYSTEMS. The Company is
planning to install common operating and financial systems among the
companies over the next eighteen months. As described in more detail
below under "Information Technology Systems," these systems will
include:
o an operating system for inventory management from Karmak, Inc.
which is specially designed for the heavy duty parts industry
and is already in use at 33 of the Company's locations;
o a financial system from ROSS Systems, Inc. which will provide
a common financial reporting system throughout the companies;
and
o an Oracle data warehouse which will analyze sales and customer
information from all of the companies.
These systems are expected to provide timely, accurate and uniform
information to the Company's management which will enable the Company
to provide better service to its customers and operate more efficiently
with a lower cost structure. While management estimates that will take
approximately eighteen months to fully implement these systems
throughout the Company, the Company expects to begin realizing some
benefits from these systems in the second half of 1999.
o CENTRALIZING APPROPRIATE ADMINISTRATIVE FUNCTIONS. The Company is
working to realize cost savings by consolidating administrative
functions such as purchasing, financing, insurance, risk management,
employee benefits, marketing, accounts receivable and accounts payable.
While the consolidation of financing and insurance has already been
substantially implemented, the consolidation of the other areas is in
various stages of being implemented.
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o OPERATING ON A DECENTRALIZED BASIS. The Company presently manages its
18 companies on a decentralized basis, with local management retaining
primary responsibility for day-to-day operations, profitability and
growth of the business. The Company believes that, while maintaining
strong operating and financial controls, a decentralized structure
helps to retain the entrepreneurial spirit in the companies and allows
the Company to capitalize on the considerable local market knowledge,
goodwill, name recognition and customer relationships possessed by each
of the companies.
OPERATIONS AND SERVICES
PARTS DISTRIBUTION BUSINESS. The Company engages in the distribution of
replacement parts for commercial trucks and trailers and other types of
specialized heavy duty vehicles and equipment. The Company purchases heavy duty
parts from component manufacturers, inventories these parts in 95 facilities
across the United States, Mexico and Canada and distributes them to over 18,000
customers. The Company also exports parts and supplies to customers located in
Australia and New Zealand and countries in South and Central America and
Southeast Asia.
The Company maintains a large volume and wide selection of inventory,
which increases customers' access to the parts they need on a timely basis. As a
result of its broad product selection, the Company believes that it has
established a reputation with its customers as being more likely than its
competitors to have in stock the parts requested by the customer. To complement
its parts distribution business, the Company also provides customers with
value-added services, such as parts installation and repair, fleet maintenance
management, training, machine shop services and remanufacturing. The Company's
services allow customers to reduce expenses by reducing parts and labor costs
for repairs, decreasing the capital required for parts inventory and minimizing
the lost productivity caused by vehicle breakdowns.
COMPREHENSIVE PARTS PRODUCT LINE. The Company's broad product line
includes parts for braking systems and suspension and steering systems, as well
as axles, wheels and rims, trailer parts, drive train components, hydraulic
components and engine parts. The parts range from frequently replaced "wear
items" such as brake shoes, brake pads and filters, to transmissions that have
relatively lengthy useful lives. The parts are installed in vehicles such as
tractor-trailers, construction vehicles, waste disposal trucks, buses, light
duty trucks and other types of specialized vehicles and equipment. The Company
also provides parts for various types of off-road vehicles and equipment that
support the oil field service, construction, mining, timber and agriculture
industries as well as the U.S. military and commercial airlines. In addition,
the Company sells parts for use in various industrial applications that use
brakes, clutches, cables and other components similar to those utilized in
vehicles. The Company provides customers with replacement parts not covered by
the OEM warranty, either because the warranty period has expired or the part was
a common wear item never covered by a warranty. The warranties provided for new
equipment sold by an OEM generally are "pass through" warranties from the
original component manufacturer for each major component. The length of the
warranty on covered components varies based on the reasonable expected useful
life of the component.
CUSTOMERS. The Company's customers include regional and national private
fleets operated by businesses such as Browning-Ferris Industries, Inc. and Waste
Management, Inc., and common carrier and rental fleets, including United Parcel
Service of America, Inc., Roadway Package System, Inc. and U-Haul International,
Inc. The Company also distributes parts to independent repair shops, resellers,
municipal and other government entities, specialty OEMs and other end users. The
Company's typical customer is a regional fleet operator that operates from 10 to
100 trucks. The vehicles of a typical customer will experience frequent
stop-and-go travel that subjects vehicle parts to heavier wear and leads to more
frequent repair and replacement. The Company has a diverse customer base of more
than 18,000 customers, with no single customer accounting for more than 5% of
the Company's pro forma revenues in 1998.
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DELIVERY OF PARTS TO CUSTOMERS. Most of TransCom's companies have a fleet
of vehicles to deliver parts directly to customers. For typical customers, the
Company will make one or more daily scheduled stops for delivery of ordered
parts and pick-up of worn parts for repair. If a customer makes infrequent
purchases, a requested stop will be added to the regular routes of the Company's
vehicles. If a customer requests expedited service, the Company will provide
special delivery services.
VALUE-ADDED SERVICES. To complement their parts distribution business,
several of TransCom's companies provide commercial vehicle parts installation
and repair services. These companies employ mechanics and technicians who can
diagnose and make needed repairs using parts inventoried by the Company. As part
of its value-added services, the Company offers machine shop services to repair
and rebuild parts for customers. In some cases, the Company can advise the
customer when particular vehicles need scheduled maintenance.
Several of TransCom's companies have the capability to remanufacture
damaged or worn parts for sale to customers. When finished, the remanufactured
part meets either the original specifications or specifications acceptable to
the customer and is resold at a discount to new parts with a warranty specified
by the Company. The Company remanufactures brake shoes, turbochargers, drive
axles, transmissions and steering gears.
The Company provides the following value-added distribution services:
o The Company acts as a distributor for component manufacturers
interested in outsourcing the distribution of a low-volume or
discontinued item. In exchange for purchasing the annual
production (in the case of low-volume components) or last-call
production (in the case of discontinued components), the
Company obtains a significant purchase discount;
o The Company offers fleet maintenance management services in
which it develops a customized database to record all the
component parts used on the individual vehicles in a
customer's fleet to enable the Company to provide a
replacement part on a timely basis;
o The Company supplies specialty OEMs with assemblies of
component parts on a just-in-time basis; and
o The Company acts as a just-in-time inventory supplier for one
of its national fleet customers by warehousing frequently
needed parts, such as brake repair kits and shipping these
parts upon request to the fleet's various maintenance centers.
COMPLEMENTARY SERVICES AND PRODUCTS. In addition to their distribution
businesses, some of TransCom's companies are involved in niche businesses,
including the ones described below:
o Perfection Equipment Company, Inc., located in Oklahoma City,
Oklahoma, contracts with customers to assemble specialty truck
beds and trailers for vehicles such as oil field service
trucks. Perfection begins with a truck cab and chassis or a
trailer chassis built by an OEM. Pursuant to the customer's
specifications, Perfection obtains specialized equipment from
various manufacturers and assembles it onto the truck bed or
trailer. After assembly and delivery of the new specialty
trucks and trailers, Perfection continues to provide
replacement parts and service to these customers.
o Cook Brothers, headquartered in Binghamton, New York, has Mack
truck dealerships through which Cook Brothers offers new and
used Mack trucks for sale and provides service and parts.
o Hoosier Trailer & Truck Equipment located in Fort Wayne,
Indiana, sells new and used truck trailers and bodies,
performs truck body fabrication work, and installs truck beds.
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o DSS/Pro Diesel, headquartered in Nashville, Tennessee,
remanufactures diesel engine fuel injectors and other related
parts and distributes them across the United States and Canada
as well as overseas. This company complements the Company's
existing parts distribution business and broadens the
Company's product offerings.
o Charles W. Carter distributes auto parts as part of its Hawaii
operations.
INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000 STRATEGY
IMPLEMENTATION OF NEW INFORMATION TECHNOLOGY SYSTEMS. Each of the TransCom
companies currently has separate information technology systems which use a
variety of software and computer systems for operations and accounting. Over the
next 18 months, however, TransCom plans to install common information technology
systems among all of its companies to track and manage inventory and provide
financial reporting. The information systems to be installed will include the
following:
o An advanced management information system from Karmak, Inc.
which has been specifically designed for the heavy duty parts
industry. This operating system is presently used at 33 of the
Company's branch locations and will be used to purchase,
monitor and allocate inventory on a real-time basis throughout
the Company's branch locations.
o A financial reporting system from ROSS Systems, Inc. which
will centralize the financial reporting of all of the TransCom
Companies, and provide more timely and more detailed financial
information to management.
o An interface to be developed between the Karmak management
information system and the ROSS financial system which will
greatly enhance the utility of both systems and provide an
integrated system for management's use.
o A common wide area network that will connect all of the
Company's branch locations.
o An Oracle data warehouse which will collect valuable
sales/margin and customer information from all of the
Company's operations.
These systems will be implemented as quickly as possible, but are not
expected to be fully operational at all of the Company's locations until the
second half of 2000. Management expects to start realizing some of the benefits
from these systems in the second half of 1999. The total expenditures for the
new information systems are estimated at $4.0 million. Funding for these
expenditures will come from operating cash flows and borrowings under the
Company's credit facility as necessary.
EXPECTED BENEFITS OF NEW INFORMATION TECHNOLOGY SYSTEMS. Once implemented,
the new information technology systems are expected to provide the following
benefits to the Company:
o An integrated system which will automate the sales,
purchasing, inventory management, accounts receivable and
payable, and financial reporting processes of the Company.
o The capability for Electronic Data Interchange with vendors
and customers which will further reduce costs for both the
vendors and TransCom.
o Help the Company increase service capabilities to customers,
manage inventory more efficiently and reduce administrative
costs.
o Provide the Company with the necessary technology
infrastructure to fully integrate its operations and position
the Company for future growth.
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YEAR 2000 STRATEGY. Both the Karmak management information system and the
ROSS financial system have been certified by the Vendors as being Year 2000
compliant. The Company has evaluated its existing operating and financial
systems for Year 2000 compliance and has found that most of its branch locations
will need to take some actions to be Year 2000 compliant. For a number of the
locations, the Company will need to implement the new systems to make such
locations Year 2000 compliant. Accordingly, the implementation schedule for the
new systems will be partially based on the need to bring certain locations into
Year 2000 compliance. The Company believes that all of its locations will be
Year 2000 compliant by the end of 1999.
The Company is in the preliminary stages of assessing the Year 2000
compliance of its non-information technology systems, such as telephone systems,
and the extent to which the Company's suppliers are Year 2000 compliant. The
Company does not believe that the Year 2000 compliance of its customers will
have any material effect on the Company. The Company expects to complete this
assessment by the end of the second quarter of 1999 and then develop and
implement any necessary plans to address deficiencies. Finally, the Company is
in the preliminary stages of developing a contingency plan for disruptions
caused by Year 2000 issues, and plans to finish such plan by the end of the
third quarter of 1999.
Since the Company is substantially replacing its information technology
systems, the Company does not believe that it can segregate the portion of its
overall $4.0 million technology systems budget that is directly attributable to
Year 2000 compliance measures. This assessment of costs, however, may change as
the Company continues its assessment of the Year 2000 issues facing the Company.
The Company faces significant risks in implementing its company-wide
information systems as well as developing and implementing a Year 2000 strategy.
There can be no assurance that the Company will be able to coordinate and
integrate the information systems economically or that the Company will not
experience delays, disruptions and unanticipated expenses in doing so. There can
also be no assurances that the Company will successfully develop and implement a
Year 2000 plan. Furthermore, any future acquisitions will further complicate the
Company's ability to implement its company-wide information systems and its Year
2000 strategy. Any failure with respect to such implementation could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SUPPLIERS
The Company purchases heavy duty parts directly from over 300 component
manufacturers, but is not materially dependent on any one of its suppliers.
Prior to the creation of TransCom, most of the TransCom companies were members
of one of the major industry marketing groups which obtained volume discounts
from component manufacturers. At the end of 1998, the Company withdrew from
these marketing groups. Instead, the Company is working directly with the
various component manufacturers to obtain discounts and rebates that reflect the
greatly increased purchasing power of TransCom. In virtually all cases, the
Company has obtained volume discounts from the component manufacturers at least
equal to those available to marketing groups.
The Company is working to install line commonality for specific parts
among all of its companies. Historically, the various TransCom companies have
carried different and competing brands for most parts which has diffused the
Company's purchasing power. The Company is presently negotiating with specific
manufacturers to obtain better pricing in exchange for the Company's commitment
to purchase all or most of its needs for specific parts from a specific
manufacturer. This change to line commonality will increase the Company's
purchasing power and is expected to be a significant step in the Company's
efforts to decrease its purchasing costs.
Once the new information technology systems have been installed, the
Company will be able to centralize its purchasing and vendor payments which is
expected to bring further cost efficiencies. In addition, the Karmak system will
allow the Company to better manage its inventory levels among its branch
locations.
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COMPETITION
The heavy duty parts and repair industry is highly-fragmented and
competitive. The principal competitive factors are availability and quality of
parts, services and price. The Company competes with other independent
distributors on a regional and local basis, OEMs and OEM-authorized dealerships
(such as Navistar, Freightliner, Mack, Peterbilt, Kenworth and Volvo),
independent repair shops and component manufacturers who sell to large fleet
owners.
The Company believes that the heavy duty parts and repair industry is in
the early stages of consolidation. The Company has faced stiff competition for
acquisition candidates from other companies that are pursuing a similar
consolidation strategy. During 1998, venture capital groups formed two new
companies which have also acquired companies in the industry. These two
competitors have primarily offered cash as consideration and have acquired a
number of acquisition candidates that the Company had been pursuing. In addition
to these two new competitors, in the second quarter of 1998, Autozone, Inc.
acquired TruckPro, an independent distributor of heavy duty parts based in
Arkansas, and may continue to enter other markets through acquisitions or
opening new branch locations. Finally, in the fourth quarter of 1998, Genuine
Parts Company, which operates the National Auto Parts Association ("NAPA"),
acquired UAP, Inc. a Canadian company whose businesses include a significant
heavy duty parts operation. Genuine Parts Company may continue to enter other
markets through acquisitions or opening new branch locations.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company's operations are subject to a number of federal, state and
local regulations relating to the protection of the environment and to workplace
health and safety. In particular, the Company's operations are subject to
extensive federal, state and local laws and regulations governing waste
disposal, air emissions, water discharges, the handling of hazardous substances,
environmental protection, remediation, workplace exposure and other matters.
Hazardous materials the Company uses in its operations include various fuels,
solvents, cleaners, lubricants, and comparable materials commonly used in the
operation and servicing of vehicles and/or the remanufacturing of vehicle parts.
Improper disposal, spills or releases of such materials could result in
substantial liabilities to the Company including the cost of environmental
remediation. The Company's management believes that the Company is in
substantial compliance with all such laws and does not currently anticipate that
the Company will be required to expend any substantial amounts in the
foreseeable future in order to meet current environmental or workplace health
and safety requirements.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,700 persons.
Of these persons, approximately 290 were in administration, 485 were in sales
and 925 were in service and warehousing. The Company believes the expertise of
its sales force is a competitive advantage. Unlike automobiles that are
manufactured to standard models, heavy duty trucks are manufactured to
individual specifications. A salesperson must be familiar with the various
brands and specifications for truck parts to determine properly a customer's
parts needs. This knowledge and expertise is generally gained through on-the-job
training.
In the United States., approximately 69 associates at two sites are
members of labor unions. In Mexico, approximately 62 associates at seven sites
are members of a labor union. The Company's relationship with these unions
generally has been satisfactory.
8
<PAGE>
RISK FACTORS
LIMITED COMBINED OPERATING HISTORY; ABILITY TO INTEGRATE Operations.
TransCom's individual companies formerly operated as separate entities and have
continued to operate in that manner with a large degree of operating autonomy.
To manage the combined enterprise on a profitable basis, the Company must
institute certain necessary common systems and procedures. The Company intends
to integrate the computer, accounting and financial reporting systems, and
certain of the operational, administrative, banking and insurance procedures of
our companies. However, the Company cannot be certain that it will successfully
institute these common systems and procedures. In addition, the Company cannot
be certain that its management group will be able to successfully manage the
companies as a combined entity and effectively implement the Company's operating
or growth strategies.
RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGIES. A key element
of the Company's strategy is to increase the profitability and revenues of the
Company's existing companies and any future acquired businesses. Another key
component of the Company's strategy is to operate the companies on a
decentralized basis, with local management retaining responsibility for
day-to-day operations, profitability and the internal growth of the individual
business. If the Company does not implement proper overall business controls,
this decentralized operating strategy could result in inconsistent operating and
financial practices at the companies, and the Company's overall profitability
could be adversely affected. The Company's ability to generate internal growth
will be affected by, among other factors, the Company's ability to:
o increase sales to existing customers;
o attract new customers;
o hire and retain associates;
o open additional facilities;
o reduce operating and overhead expenses; and
o respond to competition from other distributors.
Many of these factors may be beyond the Company's control, and the Company
cannot be certain that its strategies will be successful or that the Company
will be able to generate cash flow sufficient to fund its operations and to
support internal growth.
RISKS FOR IMPLEMENTATION OF INFORMATION TECHNOLOGY SYSTEMS. The Company is
in the process of implementing common operating and financial systems in all of
the companies. This process will take approximately eighteen months to complete.
The Company may not be able to implement these systems economically, and the
Company may experience delays, disruptions and unanticipated expenses during the
implementation process. Until these information technology systems have been
fully implemented, the Company will not be able to achieve the full anticipated
operating efficiencies and competitive advantages that these systems are
expected to provide. Until these systems have been installed at the Company's
various locations, the Company will have to rely on the existing separate
systems currently being used at such locations.
RISKS OF YEAR 2000 COMPLIANCE. The Company has implemented a Year 2000
compliance program to ensure that its computer software programs and operating
systems are Year 2000 compliant. For a substantial number of its locations, the
Company will need to install the new operating and financial systems discussed
above to make such locations Year 2000 compliant. While the implementation
schedule is partially based on the need to make those locations Year 2000
compliant, there can be no assurances that the Company will be able to bring all
of its locations into Year 2000 compliance prior to the end of 1999. If the
Company cannot timely remedy its Year 2000 problems or if third parties with
whom the Company does business do not do so, such failures could cause business
interruptions or shutdown, financial loss, reputational loss and/or legal
liability. The Company cannot provide any assurances that its Year 2000
compliance program will be effective or that its estimates about the timing and
cost of completing its program will be accurate. The Company also cannot provide
any assurances that unexpected Year 2000 compliance problems of vendors,
customers and service providers will not adversely affect its business.
9
<PAGE>
RISKS RELATED TO ACQUISITION STRATEGY. One of the Company's original
growth strategies was to increase its revenues and the markets it serves through
the acquisition of additional parts distribution companies. The Company has
faced strong competition for acquisition candidates, which has limited the
number of acquisition opportunities and resulted in higher acquisition prices
for its recent acquisitions. The Company expects to face continuing competition
for acquisition candidates, and our competitors may have greater financial
resources and might be willing to pay higher prices than the Company is willing
to pay for the same acquisition opportunities. In addition, as discussed below
under Acquisition Financing Risks, the Company's ability to grow through
acquisitions will be limited by its ability to finance future acquisitions.
The Company also cannot be sure that the Company can integrate
successfully any acquired businesses with its other operations without
substantial costs, delays or other operational or financial problems. Further,
acquisitions involve a number of special risks which could materially and
adversely affect TransCom's business, financial condition and results of
operations. These special risks include:
o failure of the acquired businesses to achieve the results expected by
the Company and therefore to justify the Company's investment;
o diversion of TransCom's management's attention from operational
matters;
o the Company's inability to retain key personnel of the acquired
businesses; and
o risks associated with unanticipated events or liabilities.
ACQUISITION FINANCING RISKS. The Company had intended to use its common
stock for a substantial portion of the consideration for future acquisitions.
The Company's common stock, however, has not maintained a sufficient market
value so that the Company is willing to use it for acquisitions since issuances
at current levels would be dilutive to the Company's existing stockholders.
Accordingly, the Company was required to utilize more of its cash resources and
subordinated debt for the nine acquisitions it completed in the third and fourth
quarters of 1998. The Company's ability to use cash and additional debt to
finance acquisitions, however, is limited by certain financial covenants in its
credit facility that prohibit the Company from increasing its total debt in
excess of specified levels of historical cash flow. In addition, using cash and
subordinated debt for acquisitions limits the Company's financial flexibility
and will require the Company to seek additional capital through future debt or
equity financings. When the Company seeks additional debt or equity financing,
the Company cannot be certain that additional debt or equity will be available
to the Company at all or on terms acceptable to the Company. Accordingly, the
Company's ability to grow through acquisitions will be limited unless (i) the
market price of its common stock rises to levels that will make acquisitions
accretive to its earnings, (ii) the Company can generate excess cash flow, or
(iii) the Company can secure additional debt or equity financing on acceptable
terms.
RISKS OF IMPROVED PARTS QUALITY IN THE COMPONENT MANUFACTURING INDUSTRY.
The quality and useful lives of parts manufactured for heavy duty vehicles and
equipment is improving. Over time, this trend results in less frequent parts
replacement which reduces the demand for the Company's products and services.
Moreover, the improved quality of original parts is expected to allow component
manufacturers, OEMs and OEM-authorized dealerships to provide customers with
extended vehicle and parts warranties. If warranty coverage of parts is
extended, vehicle owners would likely return to the OEM-authorized dealership
from which they purchased the vehicle for longer periods of time to have
warranty repair service performed or parts replaced. In addition, improved
quality of replacement parts may extend the replacement cycles of heavy duty
parts. If parts replacement cycles increase, the Company could experience a
decrease in the frequency with which customers require replacement parts and
repair service.
COMPETITION RISKS. The parts and heavy duty repair industry is
highly-fragmented and very competitive. The principal competitive factors are
availability and quality of parts, services and price. The Company competes with
a large number of independent distributors on a regional and local basis, some
of which may have greater financial resources than the Company, and several of
which are public companies. The Company also faces increased competition from
OEMs and OEM-authorized dealerships who offer many of the same parts to owners
of vehicles and fleets, particularly during the warranty period. The Company's
existing and new competitors may have lower overhead cost structures and may be
able to provide their parts and services at lower rates than the Company.
Consequently, the Company may encounter significant competition in its efforts
to achieve both the Company's internal growth objectives as well as the
Company's operating strategy to increase its profitability.
10
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company's operations depend on the
continued efforts of its executive officers and on the senior and key management
personnel at the companies. The Company cannot guarantee that any key member of
management at the general office or subsidiary level will continue in such
capacity for any particular period of time. The loss of key personnel or the
inability to hire and retain qualified associates could have an adverse effect
on the Company's business, financial condition and results of operations. The
Company does not maintain key man life insurance.
ECONOMIC FACTORS. Many of the Company's products are sold to customers in
industries that experience fluctuations in demand based on economic conditions,
energy prices, consumer demand and other factors. For example, one of the
Founding Companies, Perfection Equipment Company, Inc. assembles specialty truck
equipment for companies in the oil field service industry, and is expected to
face a significant reduction of business in 1999 because of the recent business
slowdown in that industry. Also, the trucking industry has historically been
highly cyclical as a result of various economic factors such as economic
recession and downturns in customers' business cycles and shipping requirements.
The Company has no control over these economic factors. No assurance can be
given that the Company will be able to increase or maintain its level of sales
in periods of economic stagnation or downturn.
POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES. The Company's operations
are subject to various environmental laws and regulations, including those
dealing with the handling and disposing of waste products, hazardous substances,
fuel storage and air quality. As a result of past and future operations at the
Company's facilities, the Company may be required to incur environmental
remediation costs and other cleanup expenses. In addition, the Company cannot be
certain that the Company will be able to identify or be indemnified for all
potential environmental liabilities relating to any acquired business.
FOREIGN CURRENCY FLUCTUATIONS. A portion of the Company's consolidated
revenues are billed and collected in a foreign currency. Additionally,
substantially all of the operating expenses related to foreign locations are
incurred in a foreign currency. Consequently, the Company's reported financial
results are affected by fluctuations of foreign currencies against the U.S.
dollar. The Company periodically performs foreign currency hedging to reduce its
foreign currency transaction exposure.
SEASONALITY. Weather extremes cause increased parts wear and breakdowns of
trucks and trailers; however, extreme weather, particularly during winter
months, could inhibit general business activity. In addition, unusually warm
weather during the winter months will inhibit the need for the Company's parts
and services. These seasonal trends may cause fluctuations in the Company's
earnings. Additionally, quarterly results may be materially affected by the
timing of acquisitions, variations in the margins of products sold and services
performed during any particular quarter, the timing and magnitude of acquisition
assimilation projects and regional economic conditions. Accordingly, the
Company's operating results in any particular quarter may not be indicative of
the results that can be expected for any other quarter or for the entire year.
ITEM 2. PROPERTIES.
The Company operates 84 facilities in the United States, seven facilities
in Mexico and four facilities in Canada. Two of these facilities are owned by
the Company and the remaining facilities are leased. These facilities are used
as warehouses, repair shops and office space. A number of these leases are with
related parties. Generally, leases range from five to ten years and are on terms
the Company believes to be commercially reasonable. The Company also leases its
executive and administrative offices in Houston, Texas. The Company believes
that its facilities will be adequate for its expected needs over the next
several years. In order to maximize available capital, the Company generally
intends to continue to lease most of its properties.
11
<PAGE>
The following table sets forth the geographic locations of the Company's
heavy duty parts and repair facilities in the United States, Mexico and Canada:
STATE/COUNTRY CITY
Alabama Birmingham
Arizona Phoenix
Freemont, City of Commerce, Los Angeles, Oakland, Ontario,
Placentia, Rialto, South San Francisco, San Jose, South
California Gate and Stockton
Colorado Denver
Clearwater, Daytona Beach, Ellenton, Fort Lauderdale, Fort
Myers, Fort Pierce, Miami (3), Ocala (2), Orlando (3),
Florida Pembroke, Sunrise, Tallahassee, Tampa and West Palm Beach
Hawaii Honolulu (2), Kapaa and Lihue (2)
Iowa Des Moines
Illinois Litchfield
Fort Wayne (2), Gary, Knoxville, Nashville, Portage and
Indiana South Bend
Kansas Overland Park
Minnesota Brainerd, Eagan, Mahtomedi, Red Wing and St. Paul (2)
Missouri Columbia, Kansas City, Rolla and St. Louis (2)
Nevada Las Vegas and Sparks
Binghamton, Deposit, Elmira, Homer, Rochester, Rotterdam,
New York Syracuse, Utica and Watertown
North Dakota Fargo
Oklahoma Oklahoma City (2)
Pennsylvania Kingston, Pittston and Scranton
South Dakota Sioux Falls
Tennessee Johnson City and Memphis
Texas Laredo
Washington Vancouver
Wisconsin Appleton, Black River Falls and Wauwatosa
Aguascalientes, Mexico City, Guadalajara, Guadalupe,
Mexico Culiacan , Cordoba and Tijuana
Canada Winnipeg, Dryden, Thunder Bay and Regina
12
<PAGE>
The Company operates a fleet of approximately 400 owned or leased trucks,
trailers and other support vehicles. The Company believes these vehicles
generally are well-maintained and adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time party to litigation in the ordinary
course of business. There are currently no legal proceedings that, in
management's opinion, would have a material adverse effect on the Company's
operating results or financial condition if adversely determined.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded on The New York Stock Exchange since
June 19, 1998 under the symbol TUI. The following table sets forth the high and
low sale prices for the common stock for the period from June 19, 1998, the date
of the IPO, through March 22, 1999.
HIGH LOW
1998: ------- ------
June 19, 1998 to September 30, 1998 $11.50 $6.38
October 1, 1998 to December 31, 1998 $ 6.50 $3.38
1999:
January 1, 1999 to March 22, 1999 $ 5.50 $2.88
At March 22, 1999, there were approximately 167 stockholders of record of the
Company's common stock.
The Company has never declared or paid a cash dividend on its common
stock. The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions and does not anticipate paying any cash dividends on its common
stock for the foreseeable future. In addition, the Company's credit facility
includes restrictions on the ability of the Company to pay dividends without the
consent of the lender.
SALE OF UNREGISTERED SECURITIES
On October 9, 1997, the Company sold 2,162,388 shares (as adjusted for a
108.1194-to-one stock dividend) of common stock to Notre Capital Ventures II,
L.L.C. for a consideration of $1,000. This sale was exempt from registration
under Section 4(2) of the Securities Act, no public offering being involved.
On November 27, 1997, the Company issued and sold shares of common stock
at $0.01 per share to the following parties in the amounts indicated (as
adjusted for a 108.1194-to-one stock dividend): J. David Gooch - 275,329 shares;
Shellie LePori - 20,000 shares; Steven J. Blum - 40,000 shares; Richard T.
Howell - 10,000 shares; Kenneth V. Garcia - 20,000 shares; Jennifer Jackson -
10,000 shares; Melinda Malek - 1,000 shares; Jerry Gonzalez - 12,000 shares;
Mario Rodriguez - 12,000 shares; Rodolfo A. Duemichen - 27,000 shares; and
Infoscope Partners, Inc. - 5,000 shares. These sales were exempt from
registration under Section 4(2) of the Securities Act, no public offering being
involved.
On February 15, 1998, the Company issued and sold shares of common stock
for $0.01 per share to the following parties in the amounts indicated (as
adjusted for a 108.1194-to-one stock dividend): T. Michael Young - 250,000
shares; Mac McConnell - 100,000 shares; Paul E. Pryzant - 75,000 shares; Daniel
T. Bucaro - 75,000 shares; Louie A. Hamilton - 50,000 shares; Marlise C. Skinner
- - - 50,000 shares; Wayne S. Rachlen - 50,000 shares; Valerie Summers - 2,500
shares; Tina Rose - 2,000 shares; Lawrence K. King - 10,000 shares; and I.T.
"Tex" Corley - 10,000 shares. These sales were exempt from registration under
Section 4(2) of the Securities Act, no public offering being involved.
Effective April 10, 1998, the Company issued 1,912,388 shares of
Restricted Voting Common Stock to Notre Capital Ventures II, L.L.C. in exchange
for 1,912,388 shares of common stock. This sale was exempt from registration
under Section 4(2) of the Securities Act, no public offering being involved.
Simultaneously with the completion of its Initial Public Offering on June
24, 1998, the Company issued 7,493,394 shares of its common stock in connection
with the mergers of the nine Founding Partner Companies. Each of these
transactions was exempt from registration under Section 4(2) of the Securities
Act, no public offering being involved.
14
<PAGE>
Simultaneously with the completion of the initial public offering on June
24, 1998, the Company issued warrants exercisable within five years to purchase
669,894 shares of common stock at an exercise price of $6.12 per share. Of these
warrants, 334,947 were issued to Thomas A. Work and 334,947 were issued to
Thomas H. Ketchum. This sale was exempt from registration under Section 4(2) of
the Securities Act, no public offering being involved.
In connection with the acquisition of companies completed in the third and
fourth quarters of 1998, the Company issued subordinated notes convertible into
1,599,667 shares of common stock to stockholders of those companies. These notes
mature three years after the date of issuance, and may be converted at any time
after the first anniversary of the issuance date at an average conversion price
of $9.52. These sales were exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.
ITEM 6. SELECTED FINANCIAL DATA
TransCom acquired the nine Founding Partner Companies in connection with
the Company's initial public offering on June 24, 1998. During the third and
fourth quarters of 1998, the Company acquired nine additional companies (the
"Purchased Companies"). All 18 acquisitions were accounted for as purchases. The
following selected historical financial data has been derived from the audited
financial statements of the Company for the year ended December 31, 1998 and the
period from inception (October 9, 1997) to December 31, 1997. The historical
financial statement data reflects the acquisitions of the Founding Partner
Companies and the Purchased Companies as of their respective acquisition dates.
The selected historical financial data below should be read in conjunction with
the audited historical Consolidated Financial Statements of Transportation
Components, Inc. and the Notes thereto included in Item 8. "Financial Statements
and Supplementary Data."
PERIOD FROM
INCEPTION
YEAR ENDED (OCTOBER 9, 1997) TO
DECEMBER 31, DECEMBER 31,
1998 1997
-----------------------------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $ 133,713 $ --
Operating income (loss) ................ 2,444 (3,108)
Net loss ............................... (1,606) (3,108)
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
(IN THOUSANDS)
BALANCE SHEET DATA
Working capital ........................ $ 75,444 $ 26
Total assets ........................... 218,905 342
Total debt, including current portion .. 76,574 --
Stockholders' equity ................... 97,877 26
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS SECTION CONTAINS STATEMENTS, WHICH CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SEE DISCLOSURE PRESENTED ON THE INSIDE OF THE FRONT COVER OF THIS
REPORT FOR CAUTIONARY INFORMATION WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS. IN PARTICULAR, THE COMPANY HAS IDENTIFIED SPECIFIC RISKS AND
UNCERTAINTIES RELEVANT TO THE COMPANY'S BUSINESS UNDER "ITEM 1. BUSINESS - RISK
FACTORS" ON PAGE 9 OF THIS REPORT. NO ASSURANCE CAN BE GIVEN THAT THESE ARE ALL
OF THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS.
The following discussion and analysis should be read in conjunction with
Item 6. "Selected Financial Data," and the Company's Consolidated Financial
Statements and related Notes thereto in Item 8. "Financial Statements and
Supplementary Data."
OVERVIEW AND SIGNIFICANT DEVELOPMENTS
The following discussion is based upon the historical consolidated
financial information for the year ended December 31, 1998, which includes the
operations of the Founding Partner Companies and the Purchased Companies from
their respective dates of acquisition. The Founding Partner Companies were
acquired on June 24, 1998, and the Purchased Companies were acquired in the
third and fourth quarters of 1998.
RESULTS OF OPERATIONS. During the fourth quarter ended December 31, 1998,
the Company had net income of $1.4 million, or $0.08 per diluted share. During
the year ended December 31, 1998, the Company had a net loss of $1.6 million, or
$0.15 per diluted share.
The results for the fourth quarter of 1998 included a special pre-tax
provision of approximately $840,000, or $0.03 per diluted share, which resulted
from an inventory adjustment at one of the Founding Partner Companies. The
Company, in coordination with its independent public accountants, is continuing
its analysis of the factors leading to the inventory adjustment. The Company
also is in the process of implementing improved procedures and controls at this
Founding Company.
The results for the year ended December 31, 1998 includes a non-recurring,
non-cash compensation charge of $4.9 million in the first quarter of 1998, as
well as the normal recurring general office costs of the Company subsequent to
the initial public offering ("IPO") in June 1998.
The Company's revenues in the fourth quarter of 1998 were $71.5 million.
Approximately $15 million of these revenues were contributed by the Purchased
Companies acquired in the third and fourth quarters of 1998.
During 1998, one of TransCom's companies recorded approximately $13
million of revenues from sales of parts, equipment and service to two major
oilfield service companies. As a result of the overall slowdown in the oilfield
services industry, TransCom expects sales to these two companies in 1999 to
decline significantly from 1998 levels, especially after the first quarter of
1999.
POST IPO ACQUISITIONS. The Company acquired the Purchased Companies in the
third and fourth quarters of 1998 with combined annualized revenues of
approximately $87 million. These acquisitions increased the Company's annualized
run rate to approximately $314 million. These companies were acquired for a
combination of cash, convertible notes and shares of the Company's common stock.
The nine acquired companies added 27 locations in six states in the United
States and three provinces in Canada which will add to the nationwide
distribution network of the original nine companies acquired in the Company's
IPO. TransCom now has 84 locations in the United States, seven in Mexico and
four in Canada. In particular, the new acquisitions have increased the Company's
market share in California where the Company now has eleven locations, and
Florida where the Company now has nineteen locations. The acquisitions also
created new platforms for the Company in the Midwest United States and in
Canada.
16
<PAGE>
IMPACT OF RECENT EVENTS ON THE COMPANY'S ACQUISITION STRATEGY. The
Company's initial strategy when it went public in June 1998 was to aggressively
grow through acquisitions to consolidate the heavy duty parts and repair
industry. This strategy was based on using the Company's common stock for a
substantial portion of the consideration. The Company, however, was unable to
effectively execute its initial strategy because of the following events:
o First, during the same time period when the Company went public, two
venture capital companies formed competitors with a similar
consolidation business strategy as the Company. These two
competitors subsequently acquired a significant number of the
acquisition candidates that the Company had been pursuing, offering
primarily cash as consideration rather than stock. This heightened
competition for acquisition candidates substantially increased the
prices for companies in the industry to levels higher than the
Company had originally anticipated. The Company expects the
competition for acquisition candidates to continue from these two
competitors.
o Second, the market price of the Company's common stock, as well as
the stock of most other consolidators, was negatively impacted by
the depressed stock market conditions in the Fall of 1998. During
the third and fourth quarters of 1998, the closing price of the
Company's common stock ranged from a high of $11.50 to a low of
$3.375. This volatility and the depressed stock price have made it
more difficult for the Company to use its common stock for
acquisitions. At the depressed market prices for the Company's
common Stock during the first quarter of 1999, the Company is not
willing to use its common stock for acquisitions since it would be
dilutive to the Company's existing shareholders.
When the Company was unable to use its common stock for acquisitions, the
Company used cash and convertible promissory notes as consideration. The
Company's ability to use cash and notes, however, is limited by its ability to
generate excess cash flow and borrow under its existing $75 million credit
facility. The Company's credit facility contains customary covenants, including
a covenant that will not permit the Company's total debt to exceed a certain
specified multiple of its earnings before interest, taxes and depreciation.
After closing the nine acquisitions in the third and fourth quarters of 1998,
the cash, notes and assumed debt used for the acquisitions, together with the
debt already outstanding, have used up a substantial portion of the available
credit under the Company's credit facility.
As a result of these factors, the Company does not plan to grow through
acquisitions in the near term unless the market price of the Company's common
stock rises to levels that will make acquisitions accretive to the Company's
earnings or the Company generates excess cash flow. The Company also may pursue
additional equity or debt financing to fund future acquisitions, although there
can be no assurances that additional financing would be available on terms
attractive to the Company.
OPERATING STRATEGY. The Company has shifted its focus in the near term
from aggressive acquisition growth to integrating its existing 18 companies. The
key elements of the Company's operating strategy (which are discussed in more
detail under "Item 1. Business" of this Report on Form 10-K) include:
(i) INCREASING PURCHASING SYNERGIES. The Company expects to realize
significant cost savings through purchasing economies of scale. The
Company is in the process of implementing product line commonality
among its 18 companies that will increase volume to the selected
vendors. The increased volume generated from TransCom's size and
common vendors will provide greater purchasing discounts for the
Company. These purchasing synergies began to be material in the
fourth quarter of 1998, and are expected to increase in significance
throughout 1999.
17
<PAGE>
(ii) ACHIEVING GEOGRAPHIC AND COMPANY-WIDE OPERATING EFFICIENCIES. The
Company believes that its geographic concentrations in California
and Florida will enable the Company to achieve operating
efficiencies within these geographic areas. Other efficiencies will
benefit the entire Company. These efficiencies include:
o The ability to provide greater product availability, decrease
duplicative inventory, and develop distribution efficiencies
within a region.
o The opportunity to cross-sell products and services to the
customers of its companies within each region.
o The opportunity to be a single-source, preferred provider for
replacement parts and installation and repair services for
national and regional fleet services.
o The opportunity to identify those "best practices" that can be
successfully implemented throughout TransCom's operations.
(iii) INSTALLING COMPANY-WIDE INFORMATION TECHNOLOGY SYSTEMS. The Company
is planning to install common operating and financial systems among
the companies over the next eighteen months. These systems are
described in more detail below under "Information Technology Systems
and Year 2000 Strategy." These systems are expected to provide
timely, accurate and uniform information to the Company's management
which will enable the Company to provide better service to its
customers and operate more efficiently with a lower cost structure.
While management estimates that it will take approximately eighteen
months to fully implement these systems throughout the Company, the
Company expects to begin realizing some benefits from these in the
second half of 1999.
(iv) CENTRALIZING APPROPRIATE ADMINISTRATIVE FUNCTIONS. The Company is
working to realize cost savings by consolidating administrative
functions such as purchasing, inventory financing, insurance, risk
management, employee benefits, marketing, accounts receivable and
accounts payable. While the consolidation of inventory financing and
insurance has already been substantially implemented, the
consolidation of the other areas is in various stages of being
implemented.
(v) OPERATING ON A DECENTRALIZED BASIS. The Company presently manages
its 18 companies on a decentralized basis, with local management
retaining responsibility for day-to-day operations, profitability
and growth of the business. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
structure helps to retain the entrepreneurial spirit in the
companies and allows TransCom to capitalize on the considerable
local market knowledge, goodwill, name recognition and customer
relationships possessed by each of the companies.
18
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED (OCTOBER 9, 1997) TO
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
1998 % 1997 %
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Revenues .............................. $ 133,713 100.0 $ -- --
Cost of Sales ......................... 93,352 69.8 -- --
--------- --------- --------- ---------
Gross Profit ...................... 40,361 30.2 -- --
Selling, general and administrative ... 37,917 28.4 3,108 --
--------- --------- --------- ---------
Income from operations ............ 2,444 1.8 (3,108) --
Interest expense ...................... (1,913) (1.4) -- --
Other income .......................... 517 0.4 -- --
--------- --------- --------- ---------
Income (loss) before income taxes . $ 1,048 0.8 $ (3,108) --
========= ========= ========= =========
</TABLE>
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE PERIOD FROM
INCEPTION (OCTOBER 9, 1997) TO DECEMBER 31, 1997
The Company was formed in October 1997 and had no operations prior its
initial public offering in June 1998, other than non-cash compensation charges
and other start-up expenses. Accordingly, the results of operations for 1997 are
not comparable in any respect to the results of operations for 1998.
REVENUES. There were no revenues during the period from inception (October
9, 1997) to December 31, 1997 compared to $133.7 million of revenues for the
year ended December 31, 1998. All of the 1998 revenues are from the Founding
Partner Companies which were acquired as of June 24, 1998, and the Purchased
Companies which were acquired in the second half of 1998.
GROSS PROFIT. There was no gross profit for the period from inception
(October 9, 1997) to December 31, 1997 compared to $40.4 million of gross profit
for the year ended December 31, 1998. All of the 1998 gross profit is associated
with the Founding Partner Companies which were acquired as of June 24, 1998, and
the Purchased Companies which were acquired in the second half of 1998.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $34.8 million from $3.1 million for the period from inception
(October 9, 1997) to December 31, 1997 to $37.9 million in 1998. Approximately
$30 million of the increase is associated with the operations of the Founding
Partner Companies which were acquired as of June 24, 1998, and the Purchased
Companies which were acquired in the second half of 1998. The Company's
establishment as a public company in 1998 resulted in approximately $1.8 million
of general office and management expenses in 1998 whereas no such corporate
expenses are reflected in 1997 since the Company was not yet public.
Amortization of goodwill accounted for $0.8 million of the increase. The
non-recurring, non-cash compensation charges of $3.1 million and $4.9 million
during 1997 and the first quarter of 1998, respectively, related to common stock
issued to the Company's management and consultants to the Company. These
compensation changes account for $1.8 million of the increase in selling,
general and administrative expense in 1998 over 1997.
INTEREST EXPENSE. There was no interest expense in 1997 compared to $1.9
million of interest expense for the year ended December 31, 1998. The 1998
interest expense is associated with debt assumed in connection with the
acquisition of the Founding Partner Companies, the consideration and assumed
debt to acquire the Purchased Companies, and debt incurred to provide general
working capital.
OTHER INCOME. Other income was $517,000 for the year ended December 31,
1998. Other income in 1998 includes $155,000 of interest income and a $318,000
gain on termination of a deferred compensation agreement resulting from the
death of the beneficiary under such agreement. Such gains, however, were
partially offset by losses of $265,000 from foreign currency translation and
transaction adjustments associated with the Company's operations in Mexico.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On June 24, 1998, the Company entered into a three-year revolving credit
facility which provides for a line of credit up to $75 million (the "Credit
Facility") with The First National Bank of Chicago, as agent. The Credit
Facility was used in part to fund the acquisition of the Purchased Companies,
refinance certain indebtedness of the Founding Partner Companies and Purchased
Companies and for general corporate and working capital requirements. The Credit
Facility matures on June 24, 2001, bears interest at either LIBOR plus an
applicable margin based on the ratio of funded debt to cash flows (as defined),
or the bank's prime rate, at the Company's option. An annual commitment fee of
up to 1/4% is payable on any unused portion of the Credit Facility. The Credit
Facility may be used to fund acquisitions, capital expenditures and working
capital requirements. Under the terms of the Credit Facility, the Company is
required to comply with various affirmative and negative covenants including:
(i) the maintenance of certain financial ratios, (ii) restrictions on additional
indebtedness, (iii) restrictions on liens, guarantees and dividends, (iv)
obtaining the lenders' consent with respect to certain individual acquisitions,
(v) the maintenance of a specified level of consolidated net worth, and (vi) a
restriction that total debt may not exceed a specified level of the Company's
earnings before interest, taxes and depreciation. In addition, the Company's
Credit Facility include restrictions on the ability of the Company to pay
dividends. Borrowings under the Credit Facility are secured by the pledge of all
of the capital stock of each of the Company's material subsidiaries (as
defined). The outstanding balance on the Credit Facility as of December 31, 1998
was $56.3 million. The average interest rate on the Credit Facility was
approximately 6.6% for the year ended December 31, 1998.
The Company provided $6.5 million in net cash from operating activities
for the year ended December 31, 1998. Net cash used for investing activities was
$42.1 million for the year ended December 31, 1998, primarily relating to the
acquisitions of the Founding Partner Companies and the Purchased Companies. Net
cash provided by financing activities was $39.7 million for the year ended
December 31, 1998. The cash provided by financing activities in 1998 consisted
primarily of $35.1 million in proceeds, net of offering costs, from the sale of
the 5,750,000 shares of common stock to the public at $8.00 per share, and $56.3
million from borrowings on the Company's line of credit, $3.2 million from other
borrowings, less $54.9 million in principal payments of debt acquired with the
acquisition of the Founding Partner Companies and the Purchased Companies. At
December 31, 1998, the Company had cash of $4.1 million, working capital of
$75.4 million and total debt of $76.6 million. At December 31, 1998, $2.9
million was available for borrowings under the most restrictive covenants under
the Credit Facility. Subsequent to December 31, 1998, the terms of the most
restrictive covenants under the Credit Facility were amended to increase the
availability of funds to the Company. If the amended covenants had been in
effect at December 31, 1998, $9.4 million would have been available for
borrowings under the Credit Facility. As of March 30, 1999, the Company had
total debt of $77.7 million.
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs. Planned capital
expenditures for equipment are expected to be funded from cash flow from
operations and supplemented as necessary by borrowings from the Credit Facility
or other sources of financing.
The Company will require additional capital to fund any future
acquisitions. At this time, the Company does not plan to grow through
acquisitions in the near term unless the market price of the Company's common
stock rises to levels that will make acquisitions accretive to the Company's
earnings or the Company generates excess cash flow. The Company also may pursue
additional equity or debt financing to fund future acquisitions, although there
can be no assurances that additional financing would be available on terms
attractive to the Company.
From October 1997 through March 1998, the Company sold an aggregate of
1,106,829 shares of common stock to management, directors and certain
consultants of the Company for $0.01 per share. As a result, the Company
recorded non-recurring, non-cash compensation charges of $3.1 million and $4.9
million during 1997 and the first quarter of 1998, respectively, representing
the difference between the amount paid for the shares and the estimated fair
value of the shares on the date of the sale as if the Founding Companies were
combined.
20
<PAGE>
The acquisitions of the Founding Partner Companies and Purchased Companies
were accounted for using the purchase method of accounting. Accordingly, the
estimated excess of the fair value of the consideration paid of $82.6 million
over the fair value of the net assets acquired by TransCom from such acquired
Companies was recorded as "goodwill". The goodwill is being amortized over its
estimated useful life of 40 years as a non-tax deductible charge to operating
income.
INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000 STRATEGY
IMPLEMENTATION OF NEW INFORMATION TECHNOLOGY SYSTEMS. Each of the TransCom
companies currently has separate information technology systems that use a
variety of software and computer systems for operations and accounting. Over the
next 18 months, however, TransCom plans to install common information technology
systems among all of its companies to track and manage inventory and provide
financial reporting. The information systems to be installed will include the
following:
o An advanced management information system from Karmak, Inc. that has
been specifically designed for the heavy duty parts industry. This
operating system is presently used at 33 of the Company's branch
locations and will be used to purchase, monitor and allocate
inventory on a real-time basis throughout the Company's branch
locations.
o A financial reporting system from ROSS Systems, Inc. which will
centralize the financial reporting of all of the TransCom
operations, and provide more timely and more detailed financial
information to management.
o An interface to be developed between the Karmak management
information system and the ROSS financial system which will greatly
enhance the utility of both systems and provide an integrated system
for management's use.
o A common wide area network that will connect all of the Company's
branch locations.
o An Oracle data warehouse which will collect valuable sales/margin
and customer information from all of the Company's operations.
These systems will be implemented as quickly as possible, but are not
expected to be fully operational at all of the Company's locations until the
second half of 2000. Management expects to start realizing some of the benefits
from these systems in the second half of 1999. The total expenditures for the
new information systems are estimated at $4.0 million. Funding for these
expenditures will come from operating cash flows and borrowings under the
Company's Credit Facility as necessary.
EXPECTED BENEFITS OF NEW INFORMATION TECHNOLOGY SYSTEMS. Once implemented,
the new information technology systems are expected to provide the following
benefits to the Company:
o An integrated system which will automate the sales, purchasing,
inventory management, accounts receivable and payable, and financial
reporting processes of the Company.
o The capability for Electronic Data Interchange with vendors and
customers that will further reduce costs for both the vendors and
TransCom.
o Help the Company increase service capabilities to customers, manage
inventory more efficiency and reduce administrative costs.
o Provide the Company with the necessary technology infrastructure to
fully integrate its operations and position the Company for future
growth.
21
<PAGE>
YEAR 2000 STRATEGY. Both the Karmak management information system and the
ROSS financial system have been certified by the vendors as being Year 2000
compliant. The Company has evaluated its existing operating and financial
systems for Year 2000 compliance and has found that most of its branch locations
will need to take some actions to be Year 2000 compliant. For a number of the
locations, the Company will need to implement the new systems to make such
locations Year 2000 compliant. Accordingly, the implementation schedule for the
new systems will be partially based on the need to bring certain locations into
Year 2000 compliance. The Company believes that all of its locations will be
Year 2000 compliant by the end of 1999.
The Company is in the preliminary stages of assessing the Year 2000
compliance of its non-information technology systems, such as telephone systems,
and the extent to which the Company's suppliers are Year 2000 compliant. The
Company does not believe that the Year 2000 compliance of its customers will
have any material effect on the Company. The Company expects to complete this
assessment by the end of the second quarter of 1999 and then develop and
implement any necessary plans to address deficiencies. Finally, the Company is
in the preliminary stages of developing a contingency plan for disruptions
caused by Year 2000 issues, and plans to finish such plan by the end of the
third quarter of 1999.
Since the Company is substantially replacing its information technology
systems, the Company does not believe that it can segregate the portion of its
overall $4.0 million technology systems budget that is directly attributable to
Year 2000 compliance measures. This assessment of costs, however, may change as
the Company continues its assessment of the Year 2000 issues facing the Company.
The Company faces significant risks in implementing its company-wide
information systems as well as developing and implementing a Year 2000 strategy.
There can be no assurance that the Company will be able to coordinate and
integrate the information systems economically or that the Company will not
experience delays, disruptions and unanticipated expenses in doing so. There can
also be no assurances that the Company will successfully develop and implement a
Year 2000 plan. Furthermore, any future acquisitions will further complicate the
Company's ability to implement its company-wide information systems and its Year
2000 strategy. Any failure with respect to such implementation could have a
material adverse effect on the Company's business, financial condition and
results of operations.
FOREIGN CURRENCY FLUCTUATIONS
A portion of the Company's consolidated revenues are billed and collected
in a foreign currency. Additionally, substantially all of the operating expenses
related to foreign locations are incurred in a foreign currency. Consequently,
the Company's reported financial results are affected by fluctuation of foreign
currencies against the U.S. dollar. The Company periodically performs foreign
currency hedging to reduce its foreign currency transaction exposures.
INTERNATIONAL BUSINESS
The Company derives approximately 6% of its revenues from its operations
in Mexico, approximately 2% of its revenues from exporting heavy duty parts and
supplies to customers in countries in South and Central America, Southeast Asia
and the Pacific Rim and approximately 3% of its revenues from its operations in
Canada. The risks of doing business in foreign countries include currency
exchange rate fluctuations, potential adverse changes in the diplomatic
relations of foreign countries with the United States, hostility from local
populations, adverse effects of currency exchange controls, restrictions on the
withdrawal of foreign investment and earnings, government policies against
businesses owned by non-nationals, expropriations of property, the potential
instability of foreign governments and the risk of insurrections that could
result in losses against which the Company is not insured. The Company's
international operations also are subject to economic uncertainties, including,
among others, risks of renegotiation or modification of existing agreements or
arrangements with governmental authorities, exportation and transportation
tariffs, foreign exchange restrictions and changes in taxation structure.
22
<PAGE>
SEASONALITY
Weather extremes cause increased parts wear and breakdowns of trucks and
trailers; however, extreme weather, particularly during winter months, could
inhibit general business activity. These seasonal trends may cause fluctuations
in the Company's earnings. Additionally, quarterly results may be materially
affected by the timing of acquisitions, variations in the margins of products
sold and services performed during any particular quarter, the timing and
magnitude of acquisition assimilation projects and regional economic conditions.
Accordingly, the Company's operating results in any particular quarter may not
be indicative of the results that can be expected for any other quarter or for
the entire year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk primarily from interest rates and
foreign currency exchange rates. The Company is actively involved in monitoring
its exposure to market risks and continues to develop and utilize appropriate
risk management techniques. Accordingly, the Company may enter into certain
derivative financial instruments such as interest rate caps or swaps and foreign
currency futures contracts or obligations. The Company does not use derivative
financial instruments for trading or to speculate on changes in interest rates
or foreign currency exchange rates.
The sensitivity analyses below, which hypothetically illustrate the
Company's potential market risk exposure, estimate the effects of hypothetical
sudden and sustained changes in the applicable market conditions on 1999
earnings. The sensitivity analyses presented do not consider any additional
actions the Company might take to mitigate its exposure to such changes. The
market changes, assumed to occur as of December 31, 1998, include a 100 basis
point change in market interest rates and a 10% weakening of all other
currencies relative to the U.S. dollar. The hypothetical changes and assumptions
may be different from what actually occurs in the future.
INTEREST RATES - As of December 31, 1998, the Company had no derivative
financial instruments to manage interest rate risk. Accordingly, the Company is
exposed to earnings and fair value risk due to changes in interest rates with
respect to the Company's long-term obligations. As of December 31, 1998,
approximately 80.5% of the Company's long-term obligations were floating rate
obligations. The detrimental effect on the Company's earnings of the
hypothetical 100 basis point increase in interest rates described above would be
approximately $0.6 million before income taxes. This effect is primarily due to
the floating rate borrowing under the Company's revolving credit facility.
FOREIGN CURRENCY EXCHANGE RATES - The Company's earnings and cash flows
are subject to fluctuations due to changes in foreign currency exchange rates.
The Company manages its exposure to changes in exchange rates by buying or
selling currency futures contracts and options. The Company's risk management
objective is to reduce its exposure to the effects of changes in exchange rates
on the value of its accounts receivable denominated in foreign currency on a
monthly basis. To a certain extent, foreign exchange rate changes may affect
business practices and/or pricing strategies of non-U.S. based competitors. The
Company's foreign currency risk policies entail entering into foreign currency
futures contracts only to manage risk - not for speculative investments.
Considering the anticipated cash flows from collections and anticipated
sales for the next month and the foreign currency future contracts and options
in place at year end, a hypothetical 10% weakening of all other currencies
relative to the U.S. dollar would not materially and adversely affect expected
first quarter 1999 earnings or cash flows. The hypothetical change in exchange
rates ignores the effect this movement may have on other variables including
competitive risk. If it were possible to quantify this competitive impact, the
results could well be different than the effects of the sensitivity analysis
shown above.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
TRANSPORTATION COMPONENTS, INC.
Report of Independent Public Accountants.................................. 25
Consolidated Balance Sheets at December 31, 1998 and December 31, 1997.... 26
Consolidated Statements of Operations for the year ended
December 31, 1998 and the period from inception (October 9, 1997)
to December 31, 1997..................................................... 27
Consolidated Statements of Stockholders' Equity for the period from
inception (October 9, 1997) to December 31, 1998........................... 28
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and the period from inception (October 9, 1997)
to December 31, 1997..................................................... 29
Notes to Consolidated Financial Statements................................. 30
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Transportation Components, Inc.:
We have audited the accompanying consolidated balance sheets of
Transportation Components, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, cash flows and stockholders' equity for the year ended December 31,
1998 and the period from inception (October 9, 1997) to December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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
Transportation Components, Inc. and subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
the year ended December 31, 1998 and the period from inception (October 9, 1997)
to December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 1999
25
<PAGE>
TRANSPORTATION COMPONENTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 4,090 $ 5
Accounts receivable, net ........................... 38,474 --
Receivables from related parties ................... 92 --
Notes receivable, current .......................... 962 --
Inventories ........................................ 71,354 --
Prepaid expenses and other ......................... 2,027 337
Deferred tax asset ................................. 3,439 --
--------- ---------
Total current assets .......................... 120,438 342
Property and equipment, net ............................ 12,604 --
Notes receivable, net .................................. 1,854 --
Notes receivable from related parties .................. 822 --
Goodwill, net .......................................... 81,832 --
Other assets ........................................... 1,355 --
--------- ---------
Total assets ................................... $ 218,905 $ 342
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .............. $ 41,342 $ 316
Payables to related parties ........................ 1,764 --
Current portion of long-term debt .................. 1,651 --
Other current liablities ........................... 237 --
--------- ---------
Total current liablities ....................... 44,994 316
Long-term debt, less current portion ................... 59,091 --
Deferred tax liability ................................. 2,875 --
Payables to related parties ............................ 14,068 --
--------- ---------
Total liablities ............................... 121,028 316
Commitments and contingencies Stockholders' equity:
Preferred stock, $0.01 par, 5,000,000 shares
authorized, none
Issued ........................................... -- --
Common stock, $0.01 par, 102,000,000 shares
authorized,
17,727,815 and 2,594,717 shares outstanding ...... 177 26
Additional paid-in capital ......................... 102,414 3,108
Retained deficit ................................... (4,714) (3,108)
--------- ---------
Total stockholders' equity ..................... 97,877 26
--------- ---------
Total liabilities and stockholders' equity . $ 218,905 $ 342
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION (OCTOBER
YEAR ENDED 9, 1997) TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------- ----------------
<S> <C> <C>
Revenues ........................................... $ 133,713 $ --
Cost of sales ...................................... 93,352 --
------------ ------------
Gross profit ................................... 40,361 --
Selling, general and administrative expenses ....... 37,917 3,108
------------ ------------
Income (loss) from operations ...................... 2,444 (3,108)
Other income (expense)
Interest expense ............................... (1,913) --
Other income, net .............................. 517 --
------------ ------------
Income (loss) before provision for income taxes .... 1,048 (3,108)
Provision for income taxes ......................... 2,654 --
------------ ------------
Net loss ........................................... $ (1,606) $ (3,108)
============ ============
Loss per share - basic and diluted.................. $ (0.15) $ (0.95)
============ ============
Number of shares used in the per share calculations:
Basic and diluted .............................. 10,448,470 3,269,217
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION (October 9, 1997) $ 108,119 $ 1 $ -- $ -- $ 1
Shares issued to sponsor ........... 2,054,269 21 -- -- 21
Shares issued to management,
consultants and directors ........ 432,329 4 3,108 -- 3,112
Net loss ........................... -- -- -- (3,108) (3,108)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 ............. 2,594,717 26 3,108 (3,108) 26
Shares issued to management,
consultants and directors ........ 674,500 7 4,850 -- 4,857
Shares issued in connection with the
initial public offering .......... 5,750,000 57 35,050 -- 35,107
Warrants issued in connection with
the initial public offering ...... -- -- 723 -- 723
Shares issued in connection with the
acquisition of the Founding
Partner Companies ................ 7,493,394 75 53,878 -- 53,953
Shares issued in connection with
the acquisition of the Purchased
Companies ........................ 1,215,204 12 4,805 -- 4,817
Net loss ................... -- -- -- (1,606) (1,606)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 ............. 17,727,815 $ 177 $ 102,414 $ (4,714) $ 97,877
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
28
<PAGE>
TRANSPORTATION COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED INCEPTION (OCTOBER
DECEMBER 31, 9, 1997) TO
1998 DECEMBER 31,1997
-------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................... $ (1,606) $ (3,108)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization .................. 1,907 --
Provision for bad debts ........................ 223 --
Gain on sale of assets ......................... (113) --
Compensation expense related to issuance
of common stock to management,
consultants, and directors ................... 4,850 3,108
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable and notes receivable ....... 1,072 --
Inventories .................................... 134 --
Other assets ................................... (861) 337
Accounts payable and accrued expenses .......... 844 (337)
-------- --------
Net cash provided by operating activities .. 6,450 --
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........... (2,515) --
Sales of property and equipment ................ 1,743 --
Cash paid for acquisitions, net of cash acquired (41,341) --
-------- --------
Net cash used in investing activities ...... (42,113) --
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of long term debt ............... 4,641 --
Proceeds from issuance of common stock,
net of offering costs ........................ 35,107 5
-------- --------
Net cash provided by financing activities .. 39,748 5
-------- --------
Net increase in cash and cash equivalents .. 4,085 5
Cash and cash equivalents, beginning of period ..... 5 --
-------- --------
Cash and cash equivalents, end of period ........... $ 4,090 $ 5
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
29
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Transportation Components, Inc., a Delaware corporation also known as
TransCom USA ("TransCom", and collectively with its subsidiaries, the
"Company"), was founded in October 1997 to become a leading national distributor
of replacement parts and supplies for commercial trucks, trailers and other
heavy duty vehicles and equipment. Prior to its initial public offering (the
"IPO"), TransCom had not conducted any operations. Concurrent with the
consummation of the IPO on June 24, 1998, TransCom acquired nine companies (the
"Founding Partner Companies") in separate merger transactions. After the IPO,
TransCom acquired an additional nine companies (the "Purchased Companies").
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of TransCom and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidation.
USE OF ESTIMATES AND ASSUMPTIONS - The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect (i) the reported amounts of assets
and liabilities, (ii) the disclosure of contingent assets and liabilities known
to exist as of the date the financial statements are published and (iii) the
reported amount of revenues and expenses recognized during the periods
presented. The Company reviews all significant estimates affecting its
consolidated financial statements on a recurring basis and records the effect of
any necessary adjustments prior to their publication. Adjustments made with
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of financial statements.
CASH FLOW INFORMATION - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Cash paid for interest and taxes during 1998 was $1.5 million and $2.0
million, respectively. There was no amounts paid for interest or taxes during
1997.
ACCOUNTS RECEIVABLE - The Company grants credit to its customers in the
ordinary course of business. The Company performs ongoing credit evaluations of
its customers and credit losses.
NOTES RECEIVABLE - The Company finances the purchase of trucks for
customers who meet certain financial qualifications. Notes receivable that
management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at their outstanding unpaid principal
balances reduced by any charge-off or specific valuation and adjustment.
Allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based upon past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral
and current economic conditions.
INVENTORIES - Inventories consist primarily of purchased parts stated at
the lower of cost or market, utilizing the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost, net of
accumulated depreciation. Depreciation is computed utilizing the straight-line
method at rates based upon the estimated useful lives of the
30
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
various classes of assets. Leasehold improvements are capitalized and amortized
over the lesser of the life of the lease or the estimated life of the asset.
Costs related to repairs and maintenance are expensed as incurred, while costs
related to betterments are capitalized and amortized over the estimated useful
life of the asset.
INVESTMENT - The Company participates in a joint venture that owns and
operates several automotive parts retail outlets. The investment in joint
venture is accounted for under the equity method. Sales to the joint venture
were approximately $1,424,000 for the period from acquisition of the Founding
Partner Company (June 24, 1998) to December 31, 1998. As of December 31,1998,
the Company had a receivable of approximately $363,000 related to such sales.
GOODWILL - Goodwill represents the excess of cost over the estimated fair
value of identifiable assets of the businesses acquired using the "purchase"
method of accounting. Goodwill is stated at cost, net of accumulated
amortization, and is being amortized over a 40 year life using the straight-line
method.
The Company applies Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Management continually evaluates whether events or
circumstances have occurred that indicate that the remaining estimated useful
lives of property and equipment, other identifiable intangible assets and
goodwill may warrant revision or that the remaining balances may not be
recoverable. The Company has not recorded any impairment losses with respect to
goodwill, other long-lived assets or other intangible assets as of December 31,
1998. Accumulated amortization totaled $816,000 as of December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of the notes payable
is estimated based on interest rates for the same or similar debt offered to the
Company having the same or similar remaining maturities and collateral
requirements. The carrying amounts of notes payable approximate fair value at
the applicable balance sheet dates.
CONCENTRATION OF CREDIT RISK - Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
cash deposits, trade accounts and notes receivable. The Company maintains cash
balances at financial institutions, which may at times be in excess of federally
insured levels. The Company has not incurred losses related to these balances to
date.
REVENUE RECOGNITION - The Company recognizes revenue from part sales when
products are shipped. Service revenues are recognized when repairs are
completed. Truck sales are recognized upon passage of title and, in the case of
credit sales, upon execution of the loan agreement and receipt of a designated
minimum down payment.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred income
taxes are recognized for the future tax consequences of differences between the
tax bases of assets and liabilities and their financial reporting amounts based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Provision for income taxes represents the amount of taxes
payable and the applicable changes in deferred tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION - In accordance with SFAS No. 52, "Foreign
Currency Translation," the U.S. dollar has been determined to be the functional
currency for TransCom's operations in Mexico, which were acquired in June 1998.
Translation gains and losses from operations in Mexico are reported in "other
expense, net." These losses for the period ended December 31, 1998 were
approximately $138,000.
The Canadian dollar has been determined to be the functional currency for
TransCom's operations in Canada, which were acquired in November 1998.
Translation gains and losses from operations in Canada are reported as a
component of comprehensive income. There were no significant Canadian
translation gains or losses for the year ended December 31, 1998.
31
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EARNINGS PER SHARE - Basic and diluted earnings per share are calculated
in accordance with SFAS No. 128, "Earnings per Share." All earnings per share
amounts for all periods presented conform to the requirements of Statement No.
128.
The 3,269,217 shares of common stock issued in connection with the
organization of TransCom, including shares issued to management, were considered
to be issued and outstanding from the date of inception without regard to the
date such shares were actually issued. The 5,750,000 shares issued in connection
with the IPO and the 8,708,598 shares issued in connection with the entities
acquired using the "purchase" method of accounting have been included in the
earnings per share computation only from their respective dates of issuance.
Basic and diluted earnings per share are the same because the inclusion of stock
options, warrants, and convertible debt would be antidilutive.
STOCK BASED COMPENSATION -SFAS No. 123, "Accounting for Stock-Based
Compensation," allows entities to choose between the fair value based method of
accounting for employee stock options or similar equity instruments and the
intrinsic, value-based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No 25 ("APB No. 25"), "Accounting for Stock issued to
Employees." The Company has elected to account for the stock options or similar
equity instruments using the intrinsic, value-based method of accounting
prescribed in APB No 25.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No.130 requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial methodology
that includes disclosure of certain financial information that historically has
not been recognized in the calculation of net income from operations. The
Company has adopted SFAS No. 130 effective January 1, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." This
statement requires disclosure related to each segment of an enterprise's
operations similar to that required under current standards with addition of
quarterly disclosure requirements and a finer partitioning of geographic
disclosures. The Company has adopted SFAS No. 131 for the fiscal year ending
December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1 providing guidance on
accounting for the costs of computer software developed or obtained for internal
use. This statement requires expenditures to be expensed as incurred. The
effective date of the pronouncement is for fiscal years beginning after December
15, 1998. The Company believes its current policies are materially consistent
with the SOP and the impact on the Company's future results of operations will
not be material.
In April 1998, SOP 98-5, "Reporting on the Costs of Start-Up Activities,"
was issued by the AICPA. SOP 98-5 requires that all non-governmental entities
expense costs of start-up activities as those costs are incurred. The Company is
required to adopt SOP 98-5 as of January 1, 1999. The Company does not expect
the adoption of SOP 98-5 to have a material effect on its future financial
position or results of operations.
32
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. BUSINESS COMBINATIONS
Concurrent with the completion of its IPO on June 24, 1998, TransCom
acquired the nine Founding Partner Companies, which are engaged in the
distribution of replacement parts and supplies for commercial trucks, trailers
and other types of specialized heavy duty vehicles and equipment. The companies
acquired were Charles W. Carter Co. headquartered in Placentia, California;
Transportation Components Co. headquartered in St. Paul, Minnesota; Gear &
Wheel, Inc. headquartered in Orlando, Florida; Amparts International, Inc.
headquartered in Laredo, Texas; The Cook Brothers Companies, Inc. headquartered
in Binghamton, New York; Plaza Automotive, Inc. headquartered in St. Louis,
Missouri; Universal Fleet Supply, Inc. headquartered in Fremont, California;
Perfection Equipment Company, Inc. headquartered in Oklahoma City, Oklahoma; and
Drive Line, Inc. headquartered in Sunrise, Florida. The acquisition of each of
the Founding Partner Companies was accounted for using the "purchase" method of
accounting in accordance with APB No 16. The aggregate consideration paid by
TransCom to acquire the Founding Partner Companies was approximately $58.6
million in cash (including the payoff of acquired debt) and 7.5 million shares
of common stock. Simultaneously with the completion of the IPO, the Company
issued warrants exercisable within five years to purchase 669,894 shares of
common stock.
Subsequent to the IPO, TransCom acquired the nine Purchased Companies
using the "purchase" method of accounting. The acquisition of Parts Pacific
headquartered in Los Angeles, California was completed in September 1998. The
acquisitions completed in October and November 1998 included Brake Service and
Equipment Co. of Florida, Inc. headquartered in Miami, Florida; DSS/Pro Diesel,
Inc. headquartered in Nashville, Tennessee; Fleet Products, Inc. headquartered
in Tampa, Florida; Hicks Enterprises headquartered in Commerce, California;
Hoosier Trailer & Truck Equipment, Inc. headquartered in Fort Wayne, Indiana;
Marc Industries headquartered in West Palm Beach, Florida; Phelps Holding, Inc.
headquartered in Portage, Indiana, and Wes-T-Rans Limited headquartered in
Winnipeg, Canada. The aggregate consideration paid by TransCom for the Purchased
Companies consists of $33.5 million in cash (including the payoff of acquired
debt), 1.2 million shares of common stock, and $15.2 million in subordinated
convertible notes.
The Company has recorded the excess of the purchase price over the
estimated fair value of identifiable assets acquired in connection with both the
Founding Partner Companies and the Purchased Companies as "goodwill" in the
accompanying consolidated balance sheet. The results of operations of the
Founding Partner Companies and the Purchased Companies are included in the
accompanying consolidated financial statements from their respective dates of
acquisition.
The unaudited pro forma data below reflect the results of operations for
TransCom, the Founding Partner Companies and the Purchased Companies, assuming
the transactions were completed on January 1, 1997. The proforma results
presented are not necessarily indicative of actual results which might have
occurred had the operations and management teams of the Founding Partner
Companies and the Purchased Companies been combined at the beginning of the
periods presented.
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues ................................ $ 314,044 $ 292,498
Net income .............................. 8,475 8,333
Net income per share - diluted .......... $ 0.46 $ 0.45
Weighted average shares used in the per
share Calculations .................... 19,468,847 19,454,058
Pro forma adjustments included in the preceding table reflect (a) the
reduction in certain related party rental and lease expenses which has been
contractually agreed to prospectively; (b) the reduction in salaries, bonuses
and benefits to the owners of the acquired companies which they have
contractually agreed to prospectively and the reversal of the non-cash
compensation charge related to the issuance of 674,500 and 2,594,717 shares of
common stock to management of and consultants to TransCom in 1998 and 1997,
respectively, partially offset by a charge for recurring salary expenses of
management; (c) the amortization of goodwill recorded as a result
33
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
of the acquisition of the Founding Partner Companies and Purchased Companies
over a forty-year estimated life; (d) the assumed reductions in interest expense
due to the refinancing of the outstanding indebtedness in conjunction with the
acquisition of the Founding Partner Companies and Purchased Companies, offset by
an assumed increase in interest expense incurred in connection with financing
the acquisitions; (e) the pre-acquisition results of operations for subsidiaries
or affiliates of the Founding Partner Companies which were acquired by the
Founding Partner Companies prior to the related acquisition by TransCom, as if
those previous acquisitions were completed as of January 1, 1997; (f) certain
other nonrecurring expenses with respect to the Purchased Companies, such as
expenses associated with compensation plans which were terminated in conjunction
with the acquisitions of their respective companies; (g) the incremental
interest expense and amortization of deferred financing costs incurred as a
result of the issuance of the Notes and the Credit Facility (as defined in Note
4), net of the repayment of outstanding indebtedness of the Company; and (h) the
incremental provision for federal and state income taxes for all entities being
combined.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1998
------------- ------------
Land............................ -- $ 967
Vehicles........................ 3-10 3,963
Building and improvements....... 5-40 1,955
Office furniture, fixtures and
equipment..................... 3-10 2,323
Leasehold improvements.......... 3-40 1,352
Machinery and equipment......... 3-10 3,135
----------
13,695
Less - Accumulated depreciation. (1,091)
----------
$ 12,604
==========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable consist of the following (in thousands):
DECEMBER 31,
1998
-----------
Accounts receivable, trade..................... $ 33,930
Accounts receivable, warranties................ 515
Accounts receivable, other..................... 1,831
Purchase rebates............................... 4,176
----------
40,452
Less - Allowance for doubtful accounts......... (1,978)
----------
$ 38,474
==========
34
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
1998
------------
Balance at beginning of year ............................... $ --
Allowance for doubtful accounts of Founding
Partner Companies and Purchased Companies at
acquisition dates ........................................ 1,931
Additions charged to cost and expenses ..................... 223
Deductions for uncollectible receivables written off ....... (219)
Bad debt recoveries ........................................ 43
-------
$ 1,978
=======
DECEMBER 31,
1998
-----------
Installment notes receivable .............................. $ 2,859
Due from employees ........................................ 53
-------
2,912
Less - current maturities ................................. (962)
-------
Notes receivable, net ..................................... 1,950
Less - Allowance for doubtful accounts .................... (96)
-------
$ 1,854
=======
Installment notes receivable represent amounts that are due beyond one year from
balance sheet dates bearing interest at varying amounts, from 7.75% to 14.25%
and are secured by new or used trucks.
Inventories consist of the following (in thousands):
DECEMBER 31,
1998
------------
Parts inventory................................ $ 68,831
Trucks, new and used........................... 2,523
--------
$ 71,354
========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
----------------------
1998 1997
------- -------
Accounts payable, trade ................... $28,462 $ 316
Accrued salaries and employee benefits .... 3,733 --
Accrued insurance ......................... 425 --
Accrued interest .......................... 494 --
Accrued taxes ............................. 4,643 --
Accrued other ............................. 3,585 --
------- -------
$41,342 $ 316
======= =======
35
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LONG TERM OBLIGATIONS
Long-term debt obligations consist of the following (in thousands):
DECEMBER 31,
1998
------------
Revolving credit facility........................... $ 56,300
Notes payable to a financial institution............ 4,024
Other............................................... 418
------------
Total long-term debt................................ 60,742
Less - current portion.............................. (1,651)
------------
$ 59,091
============
At December 31, 1998, future principal payments of long-term debt are as follows
(in thousands):
Year Ending December 31 -
1999........................ $ 1,651
2000........................ 1,198
2001........................ 57,142
2002........................ 457
2003........................ 187
Thereafter.................. 107
-------
$60,742
=======
CREDIT FACILITY
On June 24, 1998 the Company entered into a three-year revolving credit
facility which provides for a line of credit up to $75 million (the "Credit
Facility") with The First National Bank of Chicago, as agent. The Credit
Facility matures on June 24, 2001, bears interest at either LIBOR plus an
applicable margin based on the ratio of funded debt to cash flows (as defined),
or at the bank's prime rate, at the Company's option. An annual commitment fee
of up to 1/4% is payable on any unused portion of the CrediT Facility. The
Credit Facility is to be used to fund acquisitions, capital expenditures and
working capital requirements. Under the terms of the Credit Facility, the
Company is required to comply with various affirmative and negative covenants
including: (i) the maintenance of certain financial ratios, (ii) restrictions on
additional indebtedness, (iii) restrictions on liens, guarantees and dividends,
(iv) obtaining the lenders' consent with respect to certain individual
acquisitions, (v) the maintenance of a specified level of consolidated net worth
and (vi) a restriction that total debt may not exceed a specified multiple of
the Company's earnings before interest, taxes and depreciation. In addition, the
Credit Facility includes restrictions on the ability of the Company to pay
dividends. Borrowings under the Credit Facility are secured by the pledge of all
of the capital stock of each of the Company's material subsidiaries (as
defined).
The outstanding balance on the Credit Facility as of December 31, 1998 was
$56.3 million with a weighted average interest rate of approximately 6.6% during
1998. At December 31, 1998, $2.9 million was available for borrowings under the
most restrictive covenants under the Credit Facility.
36
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTES PAYABLE TO A FINANCIAL INSTITUTION
The Company has an arrangement with a lending institution to finance its
new and used truck inventory. The notes are payable in monthly installments of
approximately $162,000, including interest ranging from 4.9% to 11.3.%. The
notes are secured by certain vehicles, machinery and equipment, and are due at
various dates through 2003. The outstanding balance at December 31, 1998 was
$4.0 million.
6. PAYABLES - RELATED PARTIES
Long-term payables to related parties consists of the following (in
thousands):
DECEMBER 31,
1998
--------------
Convertible debt ..................................... $ 15,223
Deferred compensation payable to a former owner ...... 509
Note payable to a stockholder at 7% payable
upon demand ........................................ 100
--------
Payables - related parties ........................... 15,832
Less - current maturities ............................ (1,764)
--------
$ 14,068
========
As of December 31, 1998, the Company has outstanding $15.2 million of
convertible subordinated notes to certain former owners of the Purchased
Companies as partial consideration of the acquisition purchase price. The notes
bear interest at 5% and are convertible by the holder into shares of common
stock, at any time after one year of issuance, at an average conversion price of
$9.52 per share. Most of the notes are redeemable by the Company, as to 50% of
the principal, at any time after two years of issuance. The terms of the
outstanding notes require $1.6 million, $1.6 million, and $12.0 million of
principal payments in 1999, 2000, and 2001, respectively. Interest on the notes
is paid quarterly.
At December 31, 1998, future principal payments of long-term payables
related parties are as follows (in thousands):
Year Ending December 31 -
1999........................ $ 1,764
2000........................ 1,664
2001........................ 12,019
2002........................ 42
2003........................ 33
Thereafter.................. 310
--------
$ 15,832
========
37
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. INCOME TAXES
The Company's pretax income (loss) is made up of the following (in
thousands):
1998 1997
------ -------
Domestic................ $ 593 $(3,108)
Foreign................. 455 --
------ -------
$1,048 $(3,108)
The Company has implemented SFAS No. 109, "Accounting for Income Taxes,"
which provides for a liability approach to accounting for income taxes. The
components of the provision for income taxes are as follows (in thousands):
DECEMBER 31,
1998
-------------
Federal --
Current ............................ $ 2,900
Deferred ........................... (545)
-------
2,355
State --
Current ............................ 358
Deferred ........................... (59)
-------
299
Total provision ...................... $ 2,654
=======
The provision for income taxes differs from an amount computed at the
statutory rates as follows (in thousands):
YEAR ENDED
DECEMBER 31, 1998
-----------------
Federal income tax at statutory rates ............... $ 367
State income taxes, net of federal income tax
benefit ............................................. 299
Additional foreign income tax provision ............. 7
Nondeductible expenses:
Stock compensation .............................. 1,698
Amortization of goodwill ........................ 277
Other ........................................... 6
------
Total provision ..................................... $2,654
======
38
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The significant items giving rise to the deferred tax assets (liabilities)
are as follows (in thousands):
DECEMBER
31, 1998
-----------
Deferred tax assets -
Allowance for doubtful accounts .......... $ 797
Property and equipment ................... 12
Accrued liabilities ...................... 483
Deferred compensation .................... 375
Net operating loss carry forward ......... 572
-------
Total deferred tax assets ............ 2,239
-------
Deferred tax liabilities -
Inventory ................................ (165)
Other .................................... (974)
-------
Total deferred tax liabilities ....... (1,139)
-------
Valuation allowance .......................... (536)
-------
Net deferred tax assets .......... $ 564
=======
As of December 31, 1998, the Company's Mexico subsidiary had generated net
operating loss ("NOL") carryforwards of approximately $1,630,000 available to
reduce future income taxes. These carryforwards begin to expire in 2004.
However, because Mexico tax laws limit the time during which these carryforwards
may be applied against future taxes, the Company's Mexico subsidiary may not be
able to take full advantage of the NOL for income tax purposes. As the Company's
Mexico subsidiary has incurred tax losses in recent years, a valuation allowance
has been established to partially offset the NOL deferred tax asset at December
31,1998.
Additionally, deferred income taxes were not provided on the undistributed
foreign earnings of the foreign subsidiaries because such undistributed earnings
are expected to be reinvested indefinitely.
8. STOCKHOLDERS' EQUITY
COMMON STOCK AND PREFERRED STOCK
In connection with the organization and initial capitalization of the
Company, the Company issued 108,119 shares of common stock at $.01 per share to
Notre Capital Ventures II, L.L.C. ("Notre"). Notre incurred $20,535 of expenses
on behalf of the Company for which the Company issued 2,054,269 shares to Notre
in November 1997.
In November 1997, the Company issued a total of 432,329 shares of common
stock to management and directors of and consultants to the Company at a price
of $0.01 per share. As a result, the Company recorded a nonrecurring, noncash
compensation charge of $3.1 million, representing the difference between the
amount paid for the shares and an estimated fair value of the shares on the date
of sales if the Founding Companies were combined. During the first quarter of
1998, the Company issued an additional 674,500 shares to management of the
Company at a price of $0.01 per share. As a result, the Company recorded a
nonrecurring, noncash compensation charge of $4.9 million, representing the
difference between the amount paid for the shares and an estimated fair value of
the shares on the date of sales if the Founding Companies were combined.
39
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
TransCom effected a 108.1194-for-one stock dividend in April 1998, for
each share of common stock of the Company then outstanding. In addition, the
Company increased the number of authorized shares of common stock to 100,000,000
and authorized 5,000,000 shares of $.01 par value preferred stock. The effects
of the common stock dividend have been retroactively reflected on the balance
sheet.
On June 24, 1998, the Company sold 5,000,000 shares of common stock to the
public at $8.00 per share. The net proceeds to the Company from the IPO (after
deducting underwriting commissions and IPO costs) were $29.5 million. Of this
amount, $15.7 million was used to pay the cash portion of the purchase prices to
the Founding Partner Companies.
In connection with the IPO, the Company granted its underwriters an option
to sell an additional 750,000 shares at $8.00 per share. On June 30, 1998, the
underwriters exercised this option. Net proceeds to the Company from this sale
of shares were $5.6 million after deducting underwriting commissions.
On June 24, 1998, the Company issued 7,493,394 shares of common stock to
acquire the Founding Partner Companies. In connection with the IPO, the Company
issued five-year warrants to purchase 669,894 shares of common stock at an
exercise price of $6.12 per share. From the IPO date to December 31, 1998, the
Company issued an additional 1,215,204 shares of common stock as a portion of
the consideration to acquire the Purchased Companies.
RESTRICTED VOTING COMMON STOCK
In April 1998, the Company authorized 2,000,000 shares of $.01 par value
restricted voting common stock ("Restricted Common Stock") and the primary
stockholder exchanged 1,912,388 shares of common stock for an equal number of
shares of Restricted Common Stock. The holders of Restricted Common Stock are
entitled to elect one member of the Company's board of directors and to
represent 0.75 of one vote for each share on all other matters on which they are
entitled to vote. Holders of Restricted Common Stock are not entitled to vote on
the election of any other directors.
Each share of Restricted Common Stock will automatically convert to common
stock on a share-for-share basis (a) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution
which is a distribution by a holder to its partners or beneficial owners or a
transfer to a related party of such holder (as defined in Sections 267, 707, 318
and /or 4946 of the Internal Revenue Code of 1986, as amended), (b) in the event
any person acquires beneficial ownership of 15% or more of the total number of
outstanding shares of common stock of the Company, (c) in the event any person
offers to acquire 15% or more of the total number of outstanding shares of
common stock of the Company, (d) in the event a majority of the aggregate number
of votes which may be cast by the holders of outstanding shares of common stock
and Restricted Common Stock entitled to vote approve such conversion. After June
30, 2000, the board of directors may elect to convert any remaining shares of
Restricted Common Stock into shares of common stock in the event 80% or more of
the originally outstanding shares of Restricted Common Stock have been
previously converted into shares of common stock.
40
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
WEIGHTED AVERAGE SHARES
The following table summarizes the weighted average shares outstanding for
each of the periods presented:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 9,
YEAR ENDED 1997) TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Shares issued to Notre Capital Ventures, II,
L.L.C., management and consultants ...................... 3,269,217 3,269,217
Weighted average shares sold to public pursuant to the IPO 2,996,575 --
Weighted average shares issued to acquire the Founding
Partner Companies ................................... 3,921,201 --
Weighted average shares issued to acquire the
Purchased Companies ................................. 261,477 --
----------- -----------
Weighted average shares - basic and diluted ......... 10,448,470 3,269,217
=========== ===========
</TABLE>
The computation of diluted weighted average shares does not include shares
potentially issuable for options, warrants and conversion of the convertible
subordinated notes because their inclusion would have been antidilutive.
9. EMPLOYEE BENEFIT PLANS
Certain of the Company's subsidiaries sponsor various defined contribution
savings plans for their associates. Generally, the subsidiaries match a portion
of the amount deferred by participating associates. The Company's contribution
to these plans during 1998 was approximately $233,000.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment under non-cancelable
operating leases. Rent expense for the year ended December 31, 1998 was $2.5
million. Concurrent with the acquisitions of certain Founding Partner Companies
and Purchased Companies, the Company entered into various agreements with
previous owners to lease land and buildings used in the Company's operations.
The terms of these leases range from one to ten years and provide for certain
escalations in the rental expenses each year. Included in the 1998 rent expense
above is $1.3 million of rent paid to these related parties. The following
represents future minimum rental payments under non-cancelable operating leases
(in thousands):
Year Ending December 31 -
1999........................ $ 5,280
2000........................ 4,631
2001........................ 4,279
2002........................ 3,807
2003........................ 3,163
--------
$ 21,160
========
41
<PAGE>
TRANSPORTATION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
LITIGATION
The Company is from time to time party to litigation in the ordinary course
of business. There are currently no pending legal proceedings that, in
management's opinion, would have material adverse effect on the Company's
operating results or financial condition. The Company maintains various
insurance coverages in order to minimize financial risk associated with certain
claims. The Company has provided accruals for probable losses and legal fees
associated with certain of these actions in the accompanying consolidated
financial statements.
INSURANCE
The Company carries a broad range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
11. STOCK OPTION PLANS
LONG-TERM INCENTIVE PLAN
In March 1998, the Company's stockholders approved the Company's 1998
Long-Term Incentive Plan (the "Incentive Plan") which provides for the granting
or awarding of incentive or non-qualified stock options, stock appreciation
rights, restricted or deferred stock, dividend equivalents or other incentive
awards to directors, officers, key employees and consultants to the Company.
An aggregate of the greater of 2,500,000 or 15% of the total outstanding
shares of the Company's common stock are authorized to be issued under the
Incentive Plan. Options granted generally are at fair market value on the date
of grant and become exercisable in five equal annual installments beginning on
the first anniversary of the date of grant. The options expire ten years from
the date of grant if unexercised.
NON-EMPLOYEE DIRECTORS' STOCK PLAN
The Company's 1998 Non-Employee Directors' Stock Plan (the "Directors'
Stock Plan") provides for the granting of options to non-employee directors of
the Company to purchase shares of the Company's common stock at the fair market
value on the date of grant. An aggregate of 250,000 shares of common stock are
authorized to be issued under the Directors' Stock Plan. The granted options
become exercisable immediately upon grant. The options expire at the earlier of
(i) ten years from the date of grant or (ii) one year after the non-employee
director ceases to serve as a director of the Company.
42
<PAGE>
The following table summarizes activity under the Company's stock option
plans:
1998
----------
Options outstanding, beginning of year ........................ --
Granted (range of exercise prices, $3.50 to $8.00) ........ 2,139,725
Forfeited (range of exercise prices, $3.75 to $8.00) ...... (13,640)
----------
Options outstanding, end of year .............................. 2,126,085
==========
The Company accounts for its stock-based compensation under APB No. 25,
"Accounting for Stock Issued to Employees". Under this accounting method, no
expense in connection with a stock option is recognized in the consolidated
statements of operations if the exercise price of the option is equal to the
market price of the stock on the date of grant. In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires that if a company accounts for stock-based
compensation in accordance with APB No. 25, the company must also disclose the
effects on its results of operations as if an estimate of the value of
stock-based compensation at the date of grant was recorded as an expense in the
Company's statement of operations.
These effects for the Company are as follows (in thousands, except per share
data):
1998
--------
Net Loss
As reported............................. $ (1,606)
Pro forma for SFAS No. 123.............. (2,144)
Loss Per Share - Diluted
As reported............................. $ (0.15)
Pro forma for SFAS No. 123.............. (0.21)
The effects of applying SFAS No. 123 in the pro forma disclosure may not
be indicative of future amounts as additional awards in future years are
anticipated. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
Expected dividend yield................ 0.00%
Expected stock price volatility........ 45.0%
Risk free interest rate................ 5.74%
Expected life of options............... 7 years
Options outstanding at December 31, 1998, had exercise prices ranging from
$3.50 to $8.00, a weighted average remaining contractual life of 9.5 years, a
weighted average fair value of $4.56 per option and a weighted average exercise
price of $7.50 per option. Options to purchase 30,000 shares at $8.00 per share
were exercisable at December 31, 1998.
12. SEGMENT INFORMATION
TransCom adopted SFAS No. 131, "Disclosure About Segments of an Enterprise
and Related Information", beginning with the year ended December 31, 1998. SFAS
No. 131 established standards for reporting information about operating segments
in annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing performance.
43
<PAGE>
TransCom classifies its business into two reportable segments based on
geographic areas: "Domestic" (revenues generated to customers for use within the
United States) and "International" (revenues generated to customers for use
outside the United States - Canada, Mexico, South America, Central America,
Australia, New Zealand and Asia). All international operations have been
aggregated into one reportable segment because their operations are similar in
the nature of the product and production process, type of customer, and
distribution method.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. For purposes of
this presentation, general corporate expenses have been allocated between
operating segments on a pro rata basis based on revenue. In addition, general
corporate assets have been included in the calculation of identifiable assets
and are classified under domestic.
Information as to the operations of TransCom's reportable segments is as
follows (in thousands):
1998 DOMESTIC INTERNATIONAL TOTAL
---- ----------- ------------- -----
Revenues .................. $120,118 $ 13,595 $133,713
Operating income .......... 852 1,592 2,444
Identifiable assets ....... 183,897 35,008 218,905
Depreciation and
amortization expense ...... 1,735 172 1,907
Capital expenditures ...... 2,459 56 2,515
Information as to TransCom's operations in different geographical areas is
as follows (in thousands):
<TABLE>
<CAPTION>
UNITED ALL OTHER
1998 STATES MEXICO CANADA INTERNATIONAL(1) TOTAL
---- --------- -------- ------ ---------------- -------
<S> <C> <C> <C> <C> <C>
Revenues ........ $120,118 $ 8,841 $ 1,275 $ 3,479 $133,713
Long-lived assets 76,859 12,313 9,295 -- 98,467
</TABLE>
- - ----------------------
(1) Includes South America, Central America, Australia, New Zealand and Asia.
44
<PAGE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by
quarter for the year ended December 31, 1998 (in thousands, except per share
data):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
1998
Revenues ................ $ -- $ 3,786 $58,423 $71,504
Gross profit ............ -- 1,122 17,234 22,005
Net income (loss) ....... (4,850) 24 1,801 1,419
Earnings (loss) per share
Basic ................. $ (1.48) $ 0.01 $ 0.11 $ 0.08
Diluted ............... (1.48) 0.01 0.11 0.08
</TABLE>
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 is incorporated by reference from
the definitive Proxy Statement of the Company to be filed no later than April
30, 1999 for its Annual Meeting of Stockholders to be held on May 27, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference from
the definitive Proxy Statement of the Company to be filed no later than April
30, 1999 for its Annual Meeting of Stockholders to be held on May 27, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference from
the definitive Proxy Statement of the Company to be filed no later than April
30, 1999 for its Annual Meeting of Stockholders to be held on May 27, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference from
the definitive Proxy Statement of the Company to be filed no later than April
30, 1999 for its Annual Meeting of Stockholders to be held on May 27, 1999.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS:
(1) Consolidated Financial Statements of the Company which are
included at Item 8 of this report, and incorporated herein by
reference.
(2) Financial Statement Schedules are inapplicable or the required
information is included in the Company's Consolidated
Financial Statements or the Notes thereto.
(B) REPORTS ON FORM 8-K:
None
(C) EXHIBITS:
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW AND
TO THE FILING WITH THE
COMMISSION INDICATED BELOW
---------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
--------- ----------------------- --------- ------------
<S> <C> <C> <C> <C>
3.1 -- Amended and Restated Certificate of Incorporation of 3.1 333-50447
Transportation Components, Inc.
3.2 -- Bylaws of Transportation Components, Inc., as amended. 3.2 333-50447
4.1 -- Form of certificate evidencing ownership of Common Stock of 4.1 333-50447
Transportation Components, Inc.
10.1 -- Transportation Components, Inc. 1998 Long-Term Incentive Plan 10.1 333-50447
10.2 -- Transportation Components, Inc. 1998 Non-Employee Directors' 10.2 333-50447
Stock Plan.
10.3 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.3 333-50447
and among Transportation Components, Inc., Charles W. Carter Co. -
Los Angeles and the Stockholders named herein.
10.4 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.4 333-50447
and among Transportation Components, Inc., Proveedor Mayorista al
Refaccionario, S.A. de C.V. (Promare) and the Stockholders named
herein.
10.5 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.5 333-50447
and among Transportation Components, Inc., PIA Acquisition
Corporation, Plaza Automotive, Inc. and the Stockholders named
herein.
10.6 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.6 333-50447
and among Transportation Components, Inc., CBC Acquisition
Corporation, The Cook Brothers Companies, Inc. and the Stockholders
named herein.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW AND
TO THE FILING WITH THE
COMMISSION INDICATED BELOW
---------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
--------- ----------------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
10.7 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.7 333-50447
and among Transportation Components, Inc., TPE Acquisition
Corporation, TPE, Inc. and the Stockholders named herein.
10.8 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.8 333-50447
and among Transportation Components, Inc., UFS Acquisition
Corporation, Universal Fleet Supply and the Stockholders named
herein.
10.9 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.9 333-50447
and among Transportation Components, Inc., DLI Acquisition
Corporation, Drive Line, Inc. and the Stockholders named herein.
10.10 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.10 333-50447
and among Transportation Components, Inc., GWI Acquisition
Corporation, TOI Acquisition Corporation, OTP Acquisition
Corporation, Gear and Wheel, Inc., Try One, Inc. Ocala Truck Parts,
Inc. and the Stockholders named herein.
10.11 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.11 333-50447
and among Transportation Components, Inc., CTC Acquisition
Corporation, LLL Acquisition Corporation, MLS Acquisition
Corporation, Transportation Components Company, L.L.L., Inc. and
MSL, Inc. and the Stockholders named herein.
10.12 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.12 333-50447
and among Transportation Components, Inc., APM Acquisition
Corporation, AIII Acquisition Corporation, Amparts, Inc., Amparts
International, Inc. and the Stockholders named herein.
10.13 -- Agreement and Plan of Organization dated as of April 14, 1998, by 10.13 333-50447
and among Transportation Components, Inc., Perfection Equipment
Company and the Stockholders named herein.
10.14 -- Form of Employment Agreement between Transportation Components, 10.14 333-50447
Inc. and each of Messrs. Young, Gooch, McConnell, Pryzant, Bucaro
and Blum.
10.15 -- Credit Agreement dated as of June 24, 1998 among the Company, the 10.15 Second Quarter 1998
banks listed therein and The First National Bank of Chicago, as Form 10-Q
agent
10.20 -- Form of Founders' Employment Agreement 10.20 333-50447
10.21 -- Form of Agreement Among Certain Stockholders 10.21 333-50447
10.22 -- Form of Indemnity Agreement with Notre Capital Ventures II, 10.22 333-50447
L.L.C.
21.1 -- List of subsidiaries of Transportation Components, Inc. 21.1 Filed herewith
23.1 -- Consent of Arthur Andersen LLP 23.1 Filed herewith
23.2 -- Consent of Arthur Andersen LLP 23.2 Filed herewith
27 -- Financial Data Schedule 27 Filed herewith
99 -- Financial Statements of certain Founding Partner Companies 99 Filed herewith
(Transportation Components Group, Amparts Group, Plaza Automotive,
Inc., Perfection Group and Drive Line, Inc.) are set forth beginning
with the Index to Financial Statements on Page F-1 herein.
</TABLE>
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRANSPORTATION COMPONENTS, INC.
By: /s/ T. MICHAEL YOUNG
T. MICHAEL YOUNG, CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 31, 1999
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- --------- ---------
<S> <C> <C>
/S/ T. MICHAEL YOUNG Chairman of the Board, President, and Chief
T. MICHAEL YOUNG Executive Officer March 31, 1999
Senior Vice President, Chief
Financial Officer and Director
/S/ MAC MCCONNELL (PRINCIPAL FINANCIAL AND
MAC MCCONNELL ACCOUNTING OFFICER) March 31, 1999
/S/ MAURA L. BERNEY
MAURA L. BERNEY Director March 31, 1999
/S/ LOUIS J. BOGGEMAN, JR. Senior Vice President, Chief Operating
LOUIS J. BOGGEMAN, JR. Officer and Director March 31, 1999
/S/ HENRY B. COOK, JR.
HENRY B. COOK, JR. Vice President - Purchasing and Director March 31, 1999
/S/ I.T. CORLEY
I.T. CORLEY Director March 31, 1999
/S/ RODOLFO A. DUEMICHEN
RODOLFO A. DUEMICHEN Director March 31, 1999
/S/ J. DAVID GOOCH
J. DAVID GOOCH Director March 31, 1999
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ LAWRENCE K. KNG
LAWRENCE K. KING Director March 31, 1999
/S/ PETER D. LUND
PETER D. LUND Director March 31, 1999
/S/ JOHN R. OREN
JOHN R. OREN Director March 31, 1999
/S/ EVERETT W. PETRY
EVERETT W. PETRY Director March 31, 1999
/S/ RONALD G. SHORT
RONALD G. SHORT Director March 31, 1999
/S/ THOMAS A. WORK
THOMAS A. WORK Director March 31, 1999
</TABLE>
51
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF TRANSPORTATION COMPONENTS, INC.
1. Amparts International, Inc., a Texas corporation
2. Charles W. Carter Co. - Los Angeles, a California corporation
3. Charles W. Carter Co. - Arizona, Inc., an Arizona corporation
4. Charles W. Carter Co. - Hawaii, Inc., a Hawaii corporation
5. K.O.Y. Corp , a Hawaii corporation
6. The Cook Brothers Companies, Inc., a New York corporation
7. NEC Leasing, Inc., a New York corporation
8. Drive Line, Inc., a Florida corporation
9. Gear and Wheel, Inc., a Florida corporation
10. Perfection Equipment Company, an Oklahoma corporation
11. Plaza Automotive, Inc., a Missouri corporation
12. Brake & Spring, Inc., an Illinois corporation
13. Mobile Power & Hydraulics, Inc., a Missouri corporation
14. Hardy's Truck Parts, Inc., a Tennessee corporation
15. Transportation Components Company, a Minnesota corporation
16. Universal Fleet Supply, Inc., a California corporation
17. American Truck Transport Equipment, Inc., an Indiana corporation
18. Brake Service and Equipment Co. of Florida, Inc., a Florida corporation
19. DSS/ProDiesel, Inc., a Tennessee corporation
20. Fleet Products, Inc., a Florida corporation
21. Hoosier Trailer & Truck Equipment, Inc., an Indiana corporation
22. ITGM International, Inc., a California corporation
23. JDK Industries, Inc., a Florida corporation
24. WJV, Inc., a California corporation
25. Proveedor Mayorista al Refaccionario, S.A. de C.V., a Mexican
corporation
26. Wes-T-Rans Limited, a Manitoba corporation
27. TransCom USA Management Co., L.P., a Texas limited partnership
28. TUSA GP, Inc., a Delaware corporation
29. TUSA LP, Inc., a Nevada corporation
52
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-4 on August 3, 1998 (File No.
333-60533) and Registration Statement on Form S-8 on December 2, 1998 (File No.
333-68261).
ARTHUR ANDERSEN LLP
Houston, Texas
March 31, 1999
53
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Registration Statement on Form S-4 on August 3, 1998 (File No.
333-60533) and Registration Statement on Form S-8 on December 2, 1998 (File No.
333-68261).
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
March 31, 1999
54
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-K FOR 1998 - TRANSPORTATION COMPONENTS, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,090
<SECURITIES> 0
<RECEIVABLES> 41,506
<ALLOWANCES> 1,978
<INVENTORY> 71,354
<CURRENT-ASSETS> 120,438
<PP&E> 13,695
<DEPRECIATION> 1,091
<TOTAL-ASSETS> 218,905
<CURRENT-LIABILITIES> 44,994
<BONDS> 73,159
0
0
<COMMON> 177
<OTHER-SE> 97,700
<TOTAL-LIABILITY-AND-EQUITY> 218,905
<SALES> 133,713
<TOTAL-REVENUES> 133,713
<CGS> 93,352
<TOTAL-COSTS> 93,352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,913
<INCOME-PRETAX> 1,048
<INCOME-TAX> 2,654
<INCOME-CONTINUING> (1,606)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,606)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
EXHIBIT 99
INDEX TO FINANCIAL STATEMENTS
PAGE
TRANSPORTATION COMPONENTS GROUP
Report of Independent Public Accountants ................ F-2
Combined Balance Sheets.................................. F-3
Combined Statements of Operations........................ F-4
Combined Statements of Shareholders' Equity.............. F-5
Combined Statements of Cash Flows........................ F-6
Notes to Combined Financial Statements................... F-7
AMPARTS GROUP
Report of Independent Public Accountants................. F-14
Combined Balance Sheets.................................. F-15
Combined Statements of Operations........................ F-16
Combined Statements of Shareholders' Equity.............. F-17
Combined Statements of Cash Flows........................ F-18
Notes to Combined Financial Statements................... F-19
PLAZA AUTOMOTIVE, INC.
Report of Independent Public Accountants................. F-26
Consolidated Balance Sheets.............................. F-27
Consolidated Statements of Operations.................... F-28
Consolidated Statements of Shareholders' Equity.......... F-29
Consolidated Statements of Cash Flows.................... F-30
Notes to Consolidated Financial Statements............... F-31
PERFECTION GROUP
Report of Independent Public Accountants................. F-38
Consolidated Balance Sheets.............................. F-39
Consolidated Statements of Operations.................... F-40
Consolidated Statements of Shareholders' Equity.......... F-41
Consolidated Statements of Cash Flows.................... F-42
Notes to Consolidated Financial Statements............... F-43
DRIVE LINE, INC.
Report of Independent Public Accountants................. F-49
Balance Sheets........................................... F-50
Statements of Operations................................. F-51
Statements of Shareholders' Equity....................... F-52
Statements of Cash Flows................................. F-53
Notes to Financial Statements............................ F-54
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Transportation Components Group:
We have audited the accompanying combined balance sheets of Transportation
Components Group (the Group) (all Minnesota Corporations), as defined in Note 1
to the combined financial statements, as of September 30, 1996 and 1997, and the
related combined statements of operations, shareholders' equity and cash flows
for each of the three years in the period ended September 30, 1997 and for the
period from October 1, 1997 to June 24, 1998. These combined financial
statements are the responsibility of the Group's management. Our responsibility
is to express an opinion on these combined 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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of the
Group as of September 30, 1996 and 1997, and the results of their combined
operations and their combined cash flows for each of the three years in the
period ended September 30, 1997 and for the period from October 1, 1997 to June
24, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 1999
F-2
<PAGE>
TRANSPORTATION COMPONENTS GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30,
-------------------
1996 1997
------- ------
ASSETS
CURRENT ASSETS:
Cash .............................................. $ 399 $ 624
Accounts receivable, net .......................... 2,998 3,526
Receivables from related parties .................. 40 49
Inventories ....................................... 3,629 3,961
Prepaid expenses and other ........................ 498 432
Deferred tax asset ................................ 219 191
------ ------
Total current assets ............................ 7,783 8,783
PROPERTY AND EQUIPMENT, net ......................... 952 1,012
OTHER ASSETS ........................................ 190 154
------ ------
Total assets ............................ $8,925 $9,949
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ............. $4,126 $4,717
Payable to related party .......................... 119 5
Lines of credit ................................... 1,870 1,782
Current maturities of long-term debt .............. 87 109
------ ------
Total current liabilities ....................... 6,202 6,613
LONG-TERM DEBT, net ................................. 454 445
PAYABLE TO RELATED PARTY ............................ 10 5
DEFERRED TAX LIABILITY .............................. 332 356
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock ................................... 717 717
Common stock ...................................... 40 40
Retained Earnings ................................. 1,170 1,773
------ ------
Total shareholders' equity ................. 1,927 2,530
------ ------
Total liabilities and shareholders' equity ...... $8,925 $9,949
====== ======
The accompanying notes are an integral part of
these combined financialstatements.
F-3
<PAGE>
TRANSPORTATION COMPONENTS GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, PERIOD FROM
-------------------------------- OCTOBER 1, 1997
1995 1996 1997 TO JUNE 24, 1998
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
REVENUES .......................... $ 28,147 $ 29,876 $ 32,274 $ 27,496
COST OF SALES ..................... 20,460 21,677 23,331 20,076
-------- -------- -------- --------
Gross profit ................ 7,687 8,199 8,943 7,420
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................ 6,994 7,560 7,746 6,784
-------- -------- -------- --------
Income from operations ...... 693 639 1,197 636
OTHER INCOME (EXPENSE):
Interest expense ............. (235) (232) (225) (189)
Other income (expense), net .. (6) 59 101 8
- - ----------------------------------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES ........ 452 466 1,073 455
PROVISION FOR INCOME TAXES ........ 243 315 405 65
-------- -------- -------- --------
NET INCOME ........................ $ 209 $ 151 $ 668 $ 390
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-4
<PAGE>
TRANSPORTATION COMPONENTS GROUP
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON RETAINED SHAREHOLDERS
STOCK STOCK EARNINGS EQUITY
---------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1994 .......... $ 717 $ 40 $ 1,244 $ 2,001
Net income ..................... -- -- 209 209
Preferred stock dividends ...... -- -- (65) (65)
Distributions (L.L.L., Inc.) ... -- -- (166) (166)
------- ------- ------- -------
BALANCE, September 30, 1995 .......... 717 40 1,222 1,979
Net income ..................... -- -- 151 151
Acquisition of minority interest -- -- (138) (138)
Preferred stock dividends ...... -- -- (65) (65)
------- ------- ------- -------
BALANCE, September 30, 1996 .......... 717 40 1,170 1,927
Net income ..................... -- -- 668 668
Preferred stock dividends ...... -- -- (65) (65)
------- ------- ------- -------
BALANCE, September 30, 1997 .......... 717 40 1,773 2,530
Net income ..................... -- -- 390 390
Preferred stock dividends ...... -- -- (232) (232)
Redemption of preferred stock .. (717) -- -- (717)
------- ------- ------- -------
BALANCE, June 24, 1998 ............... $ -- $ 40 $ 1,931 $ 1,971
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-5
<PAGE>
TRANSPORTATION COMPONENTS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, PERIOD FROM
----------------------------- OCTOBER 1, 1997 TO
1995 1996 1997 JUNE 24, 1998
------- ------- ------- -------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ........................................... $ 209 $ 151 $ 668 $ 390
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization .................... 299 280 227 277
(Gain) loss on sale of assets .................... 4 (6) (36) (7)
Deferred income tax provision (benefit) .......... 182 64 52 (165)
Changes in assets and liabilities net of effect of
assets acquired --
Accounts receivable, net ....................... (133) (473) (528) (158)
Receivables from related parties ............... 33 26 (9) 49
Inventories .................................... 139 515 (332) (1,876)
Prepaid expenses and other ..................... 82 (203) 66 31
Other assets ................................... 183 (1) 36 144
Accounts payable and accrued expenses .......... (108) (450) 591 173
Payables to related parties .................... -- -- -- 1,340
------- ------- ------- -------
Net cash provided by (used in) operating
activities ..................................... 890 (97) 735 198
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of minority interest, net of cash paid ... -- (126) -- --
Acquisition of assets ................................ -- -- -- (431)
Proceeds from sale of property and equipment ......... 4 7 60 10
Purchases of property and equipment .................. (156) (73) (311) (220)
------- ------- ------- -------
Net cash used in investing activities ............ (152) (192) (251) (641)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt ......................... 208 457 333 377
Payments on long-term debt ........................... (346) (141) (527) (97)
Preferred stock dividends and distributions
(L.L.L., Inc.) ..................................... (231) (65) (65) (232)
Net borrowings on Line of Credit ..................... -- -- -- 199
------- ------- ------- -------
Net cash provided by (used in) financing
activities ..................................... (369) 251 (259) 247
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH ........................ 369 (38) 225 (196)
CASH, beginning of period .............................. 68 437 399 624
------- ------- ------- -------
CASH, end of period .................................... $ 437 $ 399 $ 624 $ 428
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for --
Interest ....................................... $ 232 $ 230 $ 221 $ 193
Income Taxes ................................... 281 320 333 210
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-6
<PAGE>
TRANSPORTATION COMPONENTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Transportation Components Group includes the financial statements of
the following group of companies under common control and ownership
(collectively, TCC or the Group): Transportation Components Co. and its wholly
and partially owned subsidiaries; L.L.L., Inc.; and MSL, Inc. (all Minnesota
Corporations). The Group, headquartered in St. Paul, Minnesota, was founded in
1946 and serves customers principally in Wisconsin, Minnesota, North Dakota,
South Dakota and Iowa. TCC primarily distributes commercial vehicle parts,
performs installation and maintenance services and relines brake shoes.
In April 1998, the Group and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of TransCom USA, providing for the
merger of the Group with the subsidiary of TransCom USA (the Merger). On June
24, 1998, TransCom USA completed its initial public offering and the merger with
the Company.
Concurrently with the Merger, the Group entered into an agreement with
the shareholders to lease certain facilities used in the Group's operations for
negotiated amounts and terms.
In connection with the Merger, TransCom USA assumed all debt of the
Company. Subsequent to the initial public offering, substantially all of the
debt has been repaid.
ACQUISITION
Effective January 2, 1998, the Group acquired certain inventory,
equipment and other rights of Heartland Truck and Trailer Center, Inc. (HTTC),
for $431,000, which included $50,000 for consulting services to be provided for
a term of 18 months after the acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and the results
of operations of the Group for all periods during which the companies were under
common control. All significant intercompany balances and transactions have been
eliminated in combination.
INVENTORIES
Inventories consist primarily of purchased parts stated at the lower of
cost or market, utilizing the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the
useful lives of assets are capitalized. Minor replacements, maintenance and
repairs which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
F-7
<PAGE>
TRANSPORTATION COMPONENTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
SHAREHOLDERS' EQUITY
The equity structure of the Group was as follows at September 30, 1996
and 1997:
<TABLE>
<CAPTION>
AUTHORIZED SHARES ISSUED
SHARES AND OUTSTANDING PAR VALUE
------------ --------------- -----------
<S> <C> <C> <C>
Preferred stock, nonvoting, 9% cumulative dividends
Transportation Components Co. ............... 12,500 7,171 $ 100
Common stock --
Transportation Components Co. ............... 12,500 3,768 $ 10
L.L.L., Inc. ................................ 2,500 120 $ 10
MSL, Inc. ................................... 2,500 200 No par
</TABLE>
REVENUE RECOGNITION
The Group recognizes revenue from part sales when products are shipped.
Service revenues are recognized when repairs are completed.
INCOME TAXES
Transportation Components Co. accounts for income taxes in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts to be
realized. The provision for income taxes is the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
L.L.L., Inc., and MSL, Inc., have elected S Corporation status as
defined by the Internal Revenue Code, whereby L.L.L., Inc., and MSL, Inc., are
not subject to federal taxation. Under S Corporation status, the shareholders
report their shares of the companies' taxable earnings or losses in their
personal tax returns. Accordingly, no provision was made for income taxes
related to L.L.L., Inc., and MSL, Inc., in the accompanying financial
statements. L.L.L., Inc., and MSL, Inc., will terminate their S Corporation
status concurrently with the effective date of this offering.
FINANCIAL INSTRUMENTS
The Group's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The Group believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Group to a
concentration of credit risk consist primarily of cash deposits and accounts
receivable. The Group maintains cash balances at financial institutions which
may at times be in excess of federally insured levels. The Group has not
incurred losses related to these balances to date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
TRANSPORTATION COMPONENTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER 30,
USEFUL LIVES -----------------------
IN YEARS 1996 1997
------------ ------- -------
<S> <C> <C>
Land .................................................. -- $ 137 $ 137
Buildings ............................................. 40 1,062 1,062
Vehicles .............................................. 5 496 550
Machinery and equipment ............................... 3-5 529 620
Office furniture and equipment ........................ 3-5 609 540
Leasehold improvements ................................ 10 296 306
------- -------
Total ......................................... 3,129 3,215
Less - Accumulated depreciation and amortization ...... (2,177) (2,203)
------- -------
Property and equipment, net ................... $ 952 $ 1,012
======= =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
SEPTEMBER 30,
1996 1997
------- -------
Accounts receivable, trade .................... $ 3,041 $ 3,546
Purchase Rebates .............................. 115 153
Less - Allowance for doubtful accounts ........ (158) (173)
------- -------
$ 2,998 $ 3,526
======= =======
Activity in the Group's allowance for doubtful accounts consists of the
following (in thousands):
SEPTEMBER 30,
----------------------
1995 1996 1997
----- ----- -----
Balance at beginning of year ......................... $ 133 $ 139 $ 158
Additions charged to costs and expenses .............. 6 33 43
Less - Deductions for uncollectible receivables ...... -- (14) (28)
----- ----- -----
$ 139 $ 158 $ 173
===== ===== =====
Accounts payable and accrued expenses consist of the following (in thousands):
SEPTEMBER 30,
---------------------
1996 1997
------ ------
Accounts payable, trade ...................... $3,340 $4,071
Accrued compensation and benefits ............ 346 348
Other accrued expenses ....................... 440 298
------ ------
$4,126 $4,717
====== ======
F-9
<PAGE>
TRANSPORTATION COMPONENTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
5. LINES OF CREDIT AND LONG-TERM DEBT:
LINES OF CREDIT
The Group has three lines of credit which provide for borrowings up to
$2.4 million or the borrowing base, as defined, whichever is less, with a
financial institution that are secured by accounts receivable, inventory,
equipment and general intangibles. These agreements are guaranteed jointly and
severally by the shareholders of the Group. Interest on two of the lines of
credit accrues at the financial institution's prime rate, which was 8.5 percent
at September 30, 1997. Interest on the other line of credit accrues at the
financial institution's prime rate plus .75 percent, which was 9.25 percent at
September 30, 1997. Two of the lines of credit are due on demand, while one line
of credit expires on June 1, 1998. As of September 30, 1997, outstanding
balances totaled $1.8 million for the three lines of credit.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30,
------------------
1996 1997
-------- ------
Notes payable to financial institutions
in total monthly installments of $2,275
including interest ranging from 8.5% to
10%, secured by accounts receivable,
inventory, equipment, general intangibles
and personal property of a shareholder of
the Group, guaranteed by shareholders of
the Group with final payments due between
June 1998, and May 1999 .............................. $ 58 $ 36
Note payables to financial institutions
in total monthly installments of $7,187
including interest ranging from 8.5%
to 9.97%, secured by a mortgage on real
estate of the Group, guaranteed by a
shareholder of the Group with final payment
due in August 2002 ................................... 223 220
Notes payable to a financial
institution in total monthly
installments of $1,682 including
interest ranging from 2.0% to 10.0%,
secured by a mortgage on real estate of
the Group, subordinated to long-term
debt held by another financial institution
with final payment due in February 2011 .............. 165 159
Notes payable to an automobile financing
institution in total monthly installments
of $7,650 including interest ranging
from 7.0% to 10.5%, secured by vehicles with final
payments due between November 1997 and June 2002 ..... 95 139
----- -----
Total ......................................... 541 554
Less - Current maturities ............................ (87) (109)
----- -----
$ 454 $ 445
===== =====
One of the Company's line of credit agreements contains requirements
regarding certain financial covenants and restrictions. According to the note
agreements, if a shareholder of the Group defaults on personal loan agreements
with the same financial institution, the Group's loan agreements would also be
in default. The Group was in compliance with all provisions of its loan
agreements at September 30, 1997.
F-10
<PAGE>
TRANSPORTATION COMPONENTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
The aggregate maturities of long-term debt as of September 30, 1997, are as
follows (in thousands):
1998............................................ $109
1999............................................ 88
2000............................................ 82
2001............................................ 83
2002............................................ 73
Thereafter...................................... 119
------
$554
In April 1998, TCC issued a subordinated promissory note in the amount
of $717,000 in redemption of all of its outstanding preferred stock. The note
bears interest at the annual rate of 9 percent and is payable in quarterly
installments through April 1, 2013. The note is subordinated to all other
indebtedness of TCC existing at April 1, 1998.
6. INCOME TAXES:
The components of the Group's provision for income taxes are as follows (in
thousands):
SEPTEMBER 30,
----------------------------- JUNE 24,
1995 1996 1997 1998
------ ------ ------ ---------
Federal --
Current .................... $-- $ 192 $ 271 $ 176
Deferred ................... 186 49 40 (127)
----- ----- ----- -----
186 241 311 49
----- ----- ----- -----
State --
Current .................... 61 59 82 54
Deferred ................... (4) 15 12 (38)
----- ----- ----- -----
57 74 94 16
----- ----- ----- -----
Total provision ...... $ 243 $ 315 $ 405 $ 65
===== ===== ===== =====
The provision for income taxes differs from an amount computed at the statutory
rate as follows (in thousands):
SEPTEMBER 30,
---------------------------- JUNE 24,
1995 1996 1997 1998
------ ------ ------- --------
Federal income tax at
statutory rates .............. $ 117 $ 120 $ 324 $ 136
State income taxes ............. 37 48 61 10
Effect of S Corporation
(income) losses .............. 88 147 32 (77)
Other .......................... 1 -- (12) (4)
----- ----- ----- -----
$ 243 $ 315 $ 405 $ 65
===== ===== ===== =====
F-11
<PAGE>
TRANSPORTATION COMPONENTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
The significant items giving rise to the deferred tax assets and liabilities are
as follows (in thousands):
SEPTEMBER 30,
---------------
1996 1997
----- ------
Deferred tax assets --
Accrued expenses ............................... $ 54 $ 59
Allowance for doubtful accounts ................ 67 73
Inventory ...................................... 370 400
Other .......................................... 67 73
---- ----
Total deferred tax assets ................ 558 605
---- ----
Deferred tax liabilities --
Bases differences in property and equipment .... 143 168
State taxes .................................... 7 3
Other .......................................... 521 599
---- ----
Total deferred tax liabilities ........... 671 770
---- ----
Net deferred tax liability ................ $113 $165
==== ====
7. RELATED-PARTY TRANSACTIONS:
The Group leases facilities under operating leases from certain
entities owned by shareholders of the Group. Rent expense on the leases totaled
approximately $513,000, $515,000, $515,000 and $478,000 for the years ended
September 30, 1995, 1996 and 1997 and for the period from October 1, 1997 to
June 24, 1998, respectively.
The Group is a party to a buying Group through which the Group made
approximately $906,000 of inventory purchases for the period from October 1,
1997 to June 24, 1998. A shareholder served a three year term that expired in
April 1998 on the board of directors of the buying group.
The Company has deferred compensation agreements with key employees
based on years of future service. The agreements provide retirement benefits to
key employees upon reaching the retirement age of 60 or to their beneficiaries
in the event of their untimely death prior to retirement. The present value of
deferred compensation, as of June 24, 1998, was approximately $201,113,
calculated using an interest rate of 6% covered under the agreements. The
Company maintains life insurance policies on each individual.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Group leases various facilities, equipment and vehicles under
noncancelable operating lease agreements, including leases with related parties.
These leases expire on various dates through 2007. The lease agreements are
subject to renewal under essentially the same terms and conditions as the
original leases.
Future minimum lease payments for noncancelable operating leases
including leases with related parties are as follows (in thousands):
Year ending September 30 --
1998............................................ $ 598
1999............................................ 641
2000............................................ 641
2001............................................ 655
2002............................................ 660
Thereafter...................................... 3,565
------
$6,760
======
F-12
<PAGE>
TRANSPORTATION COMPONENTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Total rent expense under all operating leases, including operating
leases with related parties, was approximately $633,000, $679,000, $598,000 and
$478,000 for the years ended September 30, 1995, 1996 and 1997 and for the
period from October 1, 1997 to June 24, 1998, respectively.
STOCK TRANSFER AND REDEMPTION AGREEMENT
Under the terms of a stock transfer and redemption agreement executed
in December 1994, if a shareholder desires to dispose of his shares of common
stock (Offered Shares), the Group has the exclusive right to purchase the
Offered Shares within 30 days from the shareholder. If the Group does not elect
to purchase the Offered Shares, the remaining shareholders have ten days to
purchase the portion of the Offered Shares not purchased by the Group.
GUARANTY
The group is contingently liable as guarantor of certain indebtedness
of its principal shareholder.
LITIGATION
At certain times, the Group is involved in legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Group's financial
position or results of operations.
INSURANCE
The Group carries a broad range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Group has not
incurred significant claims or losses on any of these insurance policies.
SELF-INSURANCE
The Group self-insures for actual losses below deductible amounts
resulting from medical claims. The Group has purchased employer's excess
indemnification and employee stop-loss insurance to mitigate potential losses to
the Group. Historically, the Group has not incurred any significant losses on
employee medical insurance claims and management believes the Group's reserves
are sufficient to cover the Group's liabilities for claims incurred.
EMPLOYEE 401(K) RETIREMENT PLAN
The Group participates in a 401(k) profit-sharing plan (the Plan) with
related companies which covers eligible employees at least 21 years of age who
have completed at least one year of service. The Plan allows for employee
contributions through salary deductions of up to 15 percent of total
compensation, subject to the statutory limits. Employer matching contributions
totaled approximately $14,000, $22,000, $25,000, and $24,000 for the years ended
September 30, 1995, 1996, 1997, and for the period from October 1, 1997 to June
24, 1998, respectively.
F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Amparts Group:
We have audited the accompanying combined balance sheets of Amparts
Group, as defined in Note 1 to the combined financial statements, as of December
31, 1996 and 1997, and the related combined statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997 and for the period from January 1, 1998 to June 24,
1998. These combined financial statements are the responsibility of Amparts
Group's management. Our responsibility is to express an opinion on these
combined 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 combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Amparts Group as of December 31, 1996 and 1997, and the results of their
combined operations and their combined cash flows for each of the three years in
the period ended December 31, 1997 and for the period from January 1, 1998 to
June 24, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 1999
F-14
<PAGE>
AMPARTS GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------
1996 1997
------ ------
ASSETS
CURRENT ASSETS:
Cash ................................................. $1,105 $ 165
Accounts receivable, net ............................. 1,425 2,576
Receivables from related parties ..................... 44 328
Inventories .......................................... 3,369 5,575
Prepaid expenses and other ........................... 41 93
------ ------
Total current assets ............................. 5,984 8,737
PROPERTY AND EQUIPMENT, net .............................. 184 375
DEFERRED TAX ASSET ....................................... 309 293
OTHER ASSETS ............................................. 38 38
------ ------
Total assets ..................................... $6,515 $9,443
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ................ $2,563 $3,316
Payables to related parties .......................... 28 49
Line of credit ....................................... 1,640 1,576
Deferred tax liability ............................... 302 792
------ ------
Total current liabilities ........................ 4,533 5,733
SHAREHOLDERS' EQUITY:
Common stock ......................................... 713 713
Retained earnings .................................... 1,269 2,997
------ ------
Total shareholders' equity ....................... 1,982 3,710
------ ------
Total liabilities and shareholders' equity ....... $6,515 $9,443
====== ======
The accompanying notes are an integral part of these
combined financial statements.
F-15
<PAGE>
AMPARTS GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------------- JANUARY 1, 1998 TO
1995 1996 1997 JUNE 24, 1998
------- ------- ------- ------------------
<S> <C> <C> <C> <C>
REVENUES ............................... $10,528 $14,806 $22,687 $12,894
COST OF SALES .......................... 7,709 11,278 17,240 9,415
------- ------- ------- -------
Gross profit ................. 2,819 3,528 5,447 3,479
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................... 1,779 2,326 2,857 1,756
------- ------- ------- -------
Income from operations ....... 1,040 1,202 2,590 1,723
OTHER EXPENSE:
Interest expense .................. 99 97 115 111
Other expense, net ................ 298 51 126 320
------- ------- ------- -------
INCOME BEFORE INCOME TAXES ............. 643 1,054 2,349 1,292
PROVISION FOR INCOME TAXES ............. 132 247 292 182
------- ------- ------- -------
NET INCOME ............................. $ 511 $ 807 $ 2,057 $ 1,110
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-16
<PAGE>
AMPARTS GROUP
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON RETAINED TOTAL SHAREHOLDERS'
STOCK EARNINGS EQUITY
-------- ---------- -------------------
BALANCE, December 31, 1994 ....... $ 713 $ 741 $ 1,454
Net income ................... -- 511 511
Dividends .................... -- (147) (147)
------- ------- -------
BALANCE, December 31, 1995 ....... 713 1,105 1,818
Net income ................... -- 807 807
Dividends .................... -- (643) (643)
------- ------- -------
BALANCE, December 31, 1996 ....... 713 1,269 1,982
Net income ................... -- 2,057 2,057
Dividends .................... -- (329) (329)
------- ------- -------
BALANCE, December 31, 1997 ....... 713 2,997 3,710
Net income ................... -- 1,110 1,110
Dividends .................... -- (3,992) (3,992)
------- ------- -------
BALANCE, June 24, 1998 ........... $ 713 $ 115 $ 828
======= ======= =======
The accompanying notes are an integral part of these
combined financial statements.
F-17
<PAGE>
AMPARTS GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------------ JANUARY 1, 1998 TO
1995 1996 1997 JUNE 24, 1998
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 511 $ 807 $ 2,057 $ 1,110
Adjustments to reconcile net income to net
cash provided by (used in) operating activities --
Deferred income tax provision (benefit) .......... (234) 82 506 333
Depreciation and amortization .................... 51 61 83 45
Changes in assets and liabilities
Accounts receivable, net ....................... 617 (230) (1,151) (789)
Receivables from related parties ............... (42) (2) (284) 328
Inventories .................................... 368 (1,753) (2,206) (1,077)
Prepaid expenses and other ..................... (147) 92 (52) 54
Accounts payable and accrued expenses .......... (830) 1,726 753 (505)
Payables to related parties .................... 38 (10) 21 202
------- ------- ------- -------
Net cash provided by (used in)
operating activities ....................... 332 773 (273) (299)
------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................ (35) (98) (274) (193)
------- ------- ------- -------
Net cash used in investing activities ........ (35) (98) (274) (193)
------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit ...... 7 730 (64) 4,424
Payment of dividends ............................... (147) (643) (329) (3,992)
------- ------- ------- -------
Net cash provided by (used in)
financing activities ....................... (140) 87 (393) 432
------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH ...................... 157 762 (940) (60)
CASH, beginning of period ............................ 186 343 1,105 165
------- ------- ------- -------
CASH, end of period .................................. $ 343 $ 1,105 $ 165 $ 105
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for .................... --
Interest ......................................... $ 90 $ 82 $ 98 $ 111
Income taxes ..................................... 1 3 5 2
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-18
<PAGE>
AMPARTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Amparts Group (the Group) consists of Amparts International, Inc., a
Texas corporation, headquartered in Laredo, Texas, was founded in 1990 and,
together with its affiliates Amparts, Inc., and Proveedor Mayorista al
Refaccionario S.A. de C.V. (Promare) (collectively, Amparts), serves customers
principally in Mexico and countries in South and Central America, Southeast Asia
and the Pacific Rim from its locations in Washington, Texas and Florida. Amparts
primarily exports commercial vehicle parts.
In April 1998, the Group and its shareholders entered into a definitive
agreement with a wholly owned subsidiary of TransCom USA, providing for the
merger of the Group with the subsidiary of TransCom USA (the Merger). On June
24, 1998, TransCom USA completed its initial public offering and the Merger with
the Company.
Concurrently with the Merger, the Group entered into an agreement with
KIC International (KICI) to lease land, equipment and buildings used in the
Group's operations for negotiated amounts and terms.
In connection with the merger, TransCom USA assumed all debt of the
Company subsequent to the initial public offering and substantially all of the
debt has been repaid.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and the results
of operations of the Group for all periods during which the companies were under
common control. All significant intercompany balances and transactions have been
eliminated in combination.
INVENTORIES
Inventories consist primarily of purchased parts stated at the lower of
cost or market, utilizing the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the
useful lives of assets are capitalized. Minor replacements, maintenance and
repairs which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
F-19
<PAGE>
AMPARTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
SHAREHOLDERS' EQUITY
The equity structure of the Group was as follows at each December 31,
1996 and 1997:
SHARES
AUTHORIZED ISSUED AND
SHARES OUTSTANDING PAR VALUE
------------ ------------ ---------
Common Stock --
Amparts International, Inc. .... 420 420 $ 1,000
Amparts, Inc. .................. 3,000 3,000 $ 1
Promare
Series A ................... 750,000 750,000 $ .32
Series B ................... 150,000 150,000 $ .32
REVENUE RECOGNITION
The Group recognizes revenue when products are shipped.
INCOME TAXES
Amparts International, Inc. has elected S Corporation status as defined
by the Internal Revenue Code, whereby Amparts International, Inc. is not subject
to federal taxation. Under S Corporation status, the shareholders report their
shares of taxable earnings or losses in their personal tax returns. Accordingly,
no provision was made for income taxes related to Amparts International, Inc. in
the accompanying historical financial statements. Amparts International, Inc.
has terminated its S Corporation status concurrently with the effective date of
the Merger.
Amparts, Inc., is qualified as an interest-charge Domestic
International Sales Corporation (DISC) under Internal Revenue Code provisions.
Under these provisions, taxable income distributed to the shareholders is
subject to tax in their respective individual income tax returns. The
shareholders may defer paying taxes on undistributed taxable income attributable
to a maximum of $10 million of qualified export gross receipts per year for each
year Amparts Inc., is a qualified interest-charge DISC. Such deferral requires
the shareholders to pay an interest charge computed on the deferred tax
liability on the accumulated and undistributed DISC income. Taxable income
attributable to sales greater than $10 million is reportable on the federal
income tax returns of Amparts, Inc.'s shareholders.
Promare accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts to be
realized. The provision for income taxes is the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52, "Foreign Currency Translation," the
U.S. dollar has been determined to be the functional currency for Promare.
Translation gains and losses are reported in other expense, net. These gains
(losses) were approximately $178,000, $(35,000), $(162,000) and $69,800 for the
years ended December 31, 1995, 1996 and 1997, and the period from January 1,
1998 to June 24, 1998, respectively.
FOREIGN EXCHANGE CONTRACTS
The Group occasionally enters into foreign exchange contracts only as a
hedge against certain existing economic exposures and not for speculative or
trading purposes. These contracts reduce exposure to currency movements
affecting existing assets and liabilities denominated in foreign currencies,
such exposure resulting primarily from trade receivables and payables and
intercompany transactions. Gains (losses) from these transactions in foreign
currencies were approximately $41,000, $(7,000), $(50,000) and $34,000 for the
years ended December 31, 1995, 1996, 1997, and the period from January 1, 1998
to June 24, 1998, respectively, and are included in other expense in the
accompanying combined statements of operations.
F-20
<PAGE>
AMPARTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
FINANCIAL INSTRUMENTS
The Group's financial instruments consist of cash, accounts receivable,
accounts payable and a line of credit. The Group believes that the carrying
value of these instruments on the accompanying combined balance sheets
approximates their fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Group to a
concentration of credit risk consist primarily of cash deposits and accounts
receivable. The Group maintains cash balances at financial institutions which
may at times be in excess of federally insured levels. The Group has not
incurred losses related to these balances to date. Concentrations of credit risk
with respect to trade accounts receivable are limited due to the large number of
customers and their dispersion across many geographic areas. However, a
significant amount of trade receivables are with transportation companies in
several countries. Although the Group does not currently foresee a credit risk
associated with these receivables, repayment is dependent upon the financial
stability of those countries' national economies. The Group performs periodic
credit evaluations of its customers and generally does not require collateral.
The Group monitors its exposure for credit losses and maintains an allowance for
anticipated losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3........PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
ESTIMATED USEFUL DECEMBER 31,
LIVES IN --------------------
YEARS 1996 1997
---------------- ------ ------
Vehicles.............................. 5 $ 121 $155
Machinery and equipment............... 5 9 76
Office furniture and equipment........ 5 264 273
Leasehold improvements................ 10 51 139
------ ------
Total........................... 445 643
Less - Accumulated depreciation
and amortization.................... (261) (268)
------ ------
Property and equipment, net..... $ 184 $ 375
====== ======
F-21
<PAGE>
AMPARTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31,
----------------------
1996 1997
------- -------
Accounts receivable, trade ................. $ 1,716 $ 2,815
Less -- Allowance for doubtful accounts .... (291) (239)
------- -------
$ 1,425 $ 2,576
======= =======
Activity in the Company's allowance for doubtful accounts consists of
the following (in thousands):
DECEMBER 31,
---------------------------
1995 1996 1997
----- ----- -----
Balance at beginning of year .............. $ 319 $ 236 $ 291
Additions charged to costs and expenses ... 33 23 --
Less: Deductions for uncollectible
receivables written off ................. (116) (18) (52)
Bad debt recoveries ....................... -- 50 --
----- ----- -----
$ 236 $ 291 $ 239
===== ===== =====
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
---------------------
1996 1997
------ ------
Accounts payable, trade ................. $1,469 $2,442
Accrued compensation and benefits ....... 252 357
Other accrued expenses .................. 842 517
------ ------
$2,563 $3,316
====== ======
5. LINE OF CREDIT:
The Group has $5 million available under a line of credit agreement
with a financial institution, subject to certain maximum borrowing restrictions
based on outstanding accounts receivable and inventory balances. This line of
credit is secured by accounts receivable, inventory, equipment and intangibles.
The agreement is guaranteed jointly and severally by the shareholders of the
Group and affiliates. In 1997, a LIBOR-based borrowing component was added to
the line of credit, allowing the Group to borrow at LIBOR plus 2.25 percent,
conditional upon $1 million in minimum borrowings and $500,000 borrowing
increments. The LIBOR-based rate at December 31, 1997, upon which the Group was
charged interest, was 8.16 percent. The line of credit expired on June 30, 1998.
There was approximately $1.6 million outstanding under the agreement at December
31, 1997.
The Group's line of credit agreement contains requirements regarding
working capital and certain financial ratios. The Group was in compliance with
the provisions of its loan agreements at December 31, 1997.
F-22
<PAGE>
AMPARTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
DECEMBER 31,
---------------------------- JUNE 24,
1995 1996 1997 1998
----- ----- ----- -----
Federal --
Current ................ $ 365 $ 163 $(219) $ (84)
Deferred ............... (234) 82 506 264
----- ----- ----- -----
131 245 287 180
----- ----- ----- -----
State --
Current ................ 1 2 5 2
Deferred ............... -- -- -- --
----- ----- ----- -----
1 2 5 2
----- ----- ----- -----
Total provision .. $ 132 $ 247 $ 292 $ 182
===== ===== ===== =====
The provision for income taxes differs from an amount computed at the statutory
rate as follows (in thousands):
DECEMBER 31,
------------------------ JUNE 24,
1995 1996 1997 1998
----- ----- ----- -----
Federal income tax at statutory rates .. $ 225 $ 369 $ 822 $ 445
State income taxes ..................... 1 2 5 2
Nondeductible expenses ................. 119 43 (6) 22
S Corporation and DISC income .......... (213) (167) (529) (287)
----- ----- ----- -----
$ 132 $ 247 $ 292 $ 182
===== ===== ===== =====
The significant items giving rise to the deferred tax assets and liabilities are
as follows (in thousands):
DECEMBER 31,
--------------------
1996 1997
------- -------
Deferred tax assets --
Allowance for doubtful accounts .............. $ 10 $ 12
Other revenues and deductions ................ 129 181
Inflationary revaluation ..................... 185 130
Net operating losses ......................... 317 301
------- -------
Total deferred tax assets ................ 641 624
------- -------
Deferred tax liabilities --
Inventory .................................... (626) (1,127)
Bases differences in property and equipment .. (8) (8)
Intangibles and leases ....................... -- 12
------- -------
Total deferred tax liabilities ........... (634) (1,123)
------- -------
Net deferred tax asset (liability) ....... $ 7 $ (499)
======= =======
F-23
<PAGE>
AMPARTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
7. RELATED-PARTY TRANSACTIONS:
The Group had the following transactions with KIC International, Inc.
(KICI), KIC Worldwide, Inc. and KIC Holdings, Inc., affiliates of the Group
through common shareholders (in thousands):
JUNE 24,
1995 1996 1997 1998
------ ------ ------ ---------
Sales............................ $ 83 $126 $ 85 $ 41
Purchases........................ 410 646 430 227
Year-end accounts receivable..... 42 44 328 176
Year-end accounts payable........ 38 28 49 251
The Group has an agreement with KICI whereby KICI is permitted to
allocate to and charge the Group for certain administrative expenses incurred by
KICI on the Group's behalf. These administrative expenses include office rent
paid by KICI on the Group's behalf, warehouse charges related to the Group's
products shipped through KICI's facilities and direct personnel costs incurred
by KICI on the Group's behalf. Total amounts charged to the Group by KICI for
these administrative expenses were approximately $293,000, $343,000, $299,000
and $147,000 for the years ended December 31, 1995, 1996, 1997, and for the
period from January 1, 1998 to June 24, 1998, respectively.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Group leases various facilities, equipment and vehicles under
noncancelable operating lease agreements, including leases with related parties.
These leases expire on various dates through 2000. The lease agreements are
subject to renewal under essentially the same terms and conditions as the
original leases.
Future minimum lease payments for noncancelable operating leases are as
follows (in thousands):
Year ending December 31 --
1998................................... $ 70
1999................................... 66
2000 and thereafter.................... 40
-----
$ 176
=====
Total rent expense under all operating leases, including operating
leases with related parties, was approximately $108,000, $112,000, $143,000 and
$103,000 for the years ended December 31, 1995, 1996, 1997 and for the period
from January 1, 1998 to June 24, 1998, respectively.
RESTRICTED STOCK AGREEMENT
The Group and its shareholders entered into a restricted stock
agreement whereby the shareholders agreed not to sell, assign, transfer,
encumber, pledge or in any other way dispose of their shares of stock without
allowing the shareholders the right of first refusal to purchase stock at the
time of an offer to sell by another shareholder.
LITIGATION
At certain times, the Group is involved in legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Group's financial
position or results of operations.
F-24
<PAGE>
AMPARTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
INSURANCE
The Group carries a broad range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Group has not
incurred significant claims or losses on any of these insurance policies.
EMPLOYEE PROFIT-SHARING PLAN
Amparts participates in KICI's 401(k) profit-sharing plan (the Plan)
which covers eligible employees at least 21 years of age who have completed at
least one year of service. The Plan includes a salary reduction arrangement and
a cash or deferred arrangement. Each Plan year, the employer can make
discretionary contributions to the Plan. The Plan allows for employee
contributions through salary deductions of up to 15 percent of total
compensation, subject to the statutory limits. There were no employer matching
contributions for the years ended December 31, 1995 or 1996. Employer matching
contributions were approximately $20,000 in 1997 while no employer matching
contributions were made during the period from January 1, 1998 to June 24, 1998.
In 1997, Promare began offering its employees a profit-sharing plan
whereby the employees may contribute a portion of their salaries. Employer
contributions under this plan were approximately $6,000 during 1997 while no
employer contributions were made during the period from January 1, 1998 to June
24, 1998.
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Plaza Automotive, Inc.:
We have audited the accompanying consolidated balance sheet of Plaza
Automotive, Inc., and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended and for the period from January 1, 1998 to June 24, 1998.
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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
Plaza Automotive, Inc., and subsidiaries as of December 31, 1997 and for the
period from January 1, 1998 to June 24, 1998, and the results of their
consolidated operations and their consolidated cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 1999
F-26
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
1997
-------------
ASSETS
CURRENT ASSETS:
Cash ................................................ $ 238
Accounts receivable, net ............................ 2,491
Inventories ......................................... 3,584
Prepaid expenses and other .......................... 72
------
Total current assets ............................ 6,385
PROPERTY AND EQUIPMENT, net ............................. 1,433
DEFERRED TAX ASSET ...................................... 202
OTHER ASSETS ............................................ 432
------
Total assets .................................... $8,452
======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ............... $2,172
Payables to related parties ......................... 183
Line of credit ...................................... 1,200
Current maturities of long-term debt ................ 67
Deferred tax liability .............................. 99
------
Total current liabilities ....................... 3,721
LONG-TERM DEBT, net ..................................... 223
PAYABLE TO RELATED PARTY ................................ 793
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $2.50 par value, 14,000 shares
authorized, 4,540 shares
issued and outstanding ......................... 11
Retained earnings ................................... 3,704
------
Total shareholders' equity ...................... 3,715
------
Total liabilities and shareholders' equity ...... $8,452
======
The accompanying notes are an integral part of these
consolidated financial statements.
F-27
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED PERIOD FROM JANUARY
DECEMBER 31, 1, 1998 TO
1997 JUNE 24, 1998
------------- -------------------
REVENUES ..................................... $ 20,721 $ 11,732
COST OF SALES ................................ 14,125 8,121
-------- --------
Gross profit ....................... 6,596 3,611
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES . 5,575 3,581
-------- --------
Income from operations ............. 1,021 30
OTHER INCOME (EXPENSE):
Interest expense ................... (119) (72)
Other income, net .................. 88 16
-------- --------
INCOME BEFORE INCOME TAXES ................... 990 (26)
PROVISION (BENEFIT) FOR INCOME TAXES ......... 396 (2)
-------- --------
NET INCOME (LOSS) ............................ $ 594 $ (24)
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-28
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED SHAREHOLDERS'
STOCK APIC EARNINGS EQUITY
-------- ------- --------- -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 ............ $ 11 -- $ 3,110 $ 3,121
Net income ........................ -- -- 594 594
------- ------- ------- -------
BALANCE, December 31, 1997 ............ 11 -- 3,704 3,715
Conversion of deferred compensation
to common stock ................ -- 175 -- 175
Recapitalization of common stock .. (11) 11 -- --
Net loss .......................... -- -- (24) (24)
------- ------- ------- -------
BALANCE, June 24, 1998 ................ $ -- 186 $ 3,680 $ 3,866
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-29
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1998 TO
DECEMBER 31, 1997 JUNE 24, 1998
----------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................. $ 594 $ (24)
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation and amortization .................. 193 92
Deferred income tax provision (benefit) ........ 145 (97)
Changes in assets and liabilities net of
effect of assets acquired --
Accounts receivable, net ................... (616) (1,007)
Inventories ................................ (214) (886)
Prepaid expenses and other ................. 14 32
Other assets ............................... (110) 426
Accounts payable and accrued expenses ...... 331 1,472
Payables to related parties ................ -- 100
------- -------
Net cash provided by operating
activities ........................... 337 108
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of assets .............................. -- (360)
Proceeds from sale of property and equipment ....... 3 44
Purchases of property and equipment ................ (248) --
Deposits toward purchase of equipment .............. (75) --
------- -------
Net cash used in investing
activities ........................... (320) (316)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit ................... 300 450
Payments on long-term debt ......................... (110) (34)
------- -------
Net cash provided by financing
activities ........................... 190 416
------- -------
NET INCREASE IN CASH ................................. 207 208
CASH, beginning of period ............................ 31 238
------- -------
CASH, end of period .................................. $ 238 $ 446
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest ....................................... $ 117 $ 71
Income taxes ................................... 251 158
Capital lease obligations incurred ................... 52 13
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-30
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Plaza Automotive, Inc. (the Company), a Missouri corporation,
headquartered in St. Louis, Missouri, was founded in 1946 and serves customers
principally in Missouri, Illinois, Colorado and Tennessee. The Company primarily
distributes commercial vehicle parts, performs installation and maintenance
services and relines brake shoes.
In February 1998, the Company purchased the inventory and equipment of
Muncie Power Products, Inc., for approximately $360,000. The purchase was
financed with excess cash of the Company.
The following unaudited pro forma summary presents information as if
the purchase had occurred at January 1, 1997. The pro forma information is
provided for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the consolidated
enterprise (in thousands):
PERIOD FROM
YEAR ENDED JANUARY 1, 1998 TO
DECEMBER 31, 1997 JUNE 24, 1998
(UNAUDITED) (UNAUDITED)
------------------- -------------------
Pro forma revenue................. $22,356 $11,885
Pro forma net income (loss)....... 759 (14)
In April 1998, the Company and its subsidiaries entered into a
definitive agreement with a wholly owned subsidiary of TransCom USA, providing
for the merger of the Company with the subsidiary of TransCom USA (the Merger).
On June 24, 1998, TransCom completed its initial public offering and the Merger
with the Company.
During June 1998, the Company adopted a resolution whereby its
shareholders approved a reorganization of the Company's common stock. Prior to
the resolution, 4,540 shares of common stock were issued and outstanding. The
effect of the capital reduction was to convert the 4,540 shares of the Company's
common stock into 100 shares of common stock.
Upon consummation of the Merger, the Company entered into a contract to
sell four of its facilities to a shareholder for approximately $1,519,000, the
estimated fair market value of the property. Upon closing of such contract, the
shareholder leased the facility back to the Company under certain negotiated
terms.
In connection with the Merger, TransCom USA assumed all debt of the
Company. Subsequent to the initial public offering, substantially all of the
debt has been repaid.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results
of operations of the Company and all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain accounts have been reclassified in prior years to conform to
the current period presentation.
INVENTORIES
Inventories consist primarily of purchased parts stated at the lower of
cost or market, utilizing the last-in, first-out (LIFO) method.
F-31
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
If the first-in, first-out (FIFO) method of inventory accounting had
been utilized by the Company, the effect would have been to increase net income
by approximately $35,400 and $35,000 for the year ended December 31, 1997 and
for the period from January 1, 1998 to June 24, 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the
useful lives of assets are capitalized. Minor replacements, maintenance and
repairs which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
REVENUE RECOGNITION
The Company recognizes revenue from parts sales when products are
shipped. Service revenues are recognized when repairs are completed.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts to be
realized. The provision for income taxes is the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and debt. The Company believes that the carrying
value of these instruments on the accompanying balance sheet approximates their
fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels. The Company has not
incurred losses related to these balances to date.
SIGNIFICANT SUPPLIERS
For the year ended December 31, 1997, two suppliers accounted for 23
percent and for the period from January 1, 1998 to June 24, 1998 one supplier
accounted for 22 percent of total inventory purchases.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-32
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
ESTIMATED USEFUL
LIVES IN DECEMBER 31,
YEARS 1997
---------------- ------------
Land.................................... -- $ 193
Buildings............................... 20-40 1,252
Vehicles................................ 3 319
Machinery and equipment................. 7 973
Office furniture and equipment.......... 5 432
Leasehold improvements.................. 3 127
---------
Total........................... 3,296
Less -- Accumulated depreciation
and amortization..................... (1,863)
---------
Property and equipment, net..... $ 1,433
=========
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31,
1997
-------------
Accounts receivable, trade................. $ 2,183
Purchase rebates........................... 368
Less - Allowance for doubtful accounts..... (60)
-------
$ 2,491
=======
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
1997
------------
Balance at beginning of year......................... $ 31
Additions charged to costs and expenses. 26
Less -- Deductions for uncollectible receivables..... (6)
Bad debt recoveries.................................. 9
-----
$ 60
=====
Inventory consists of the following (in thousands):
DECEMBER 31,
1997
------------
Inventory under the first-in, first-out (FIFO) method....... $4,344
Less -- LIFO reserve........................................ (760)
------
$3,584
======
F-33
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Accounts payable and accrued expenses consist of the following (in thousands):
DECEMBER 31,
1997
------------
Accounts payable, trade...................... $ 1,790
Accrued compensation and benefits............ 302
Other accrued expenses....................... 80
--------
$2,172
5. LINE OF CREDIT AND LONG-TERM DEBT:
LINE OF CREDIT
The Company has a line of credit agreement which provides for
borrowings up to $2 million with a financial institution that is secured by
accounts receivable, inventory and equipment. Interest accrues at the financial
institution's prime rate, which was 8.25 percent at December 31, 1997. There was
$1.2 million outstanding on the line at December 31, 1997.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
1997
------------
Note payable to a financial institution
in total monthly principal installments
of $3,889 plus variable interest equivalent
to the lender's prime rate plus .5%, which was
8.75% at December 31, 1997, secured by certain
buildings with final payment due in 2000 ............. $ 241
Lease payable to various leasing companies in total
monthly installments of approximately $2,200
including interest of 8.75%, secured by vehicles
with final payments due between 1998 and 2001 ........ 49
-----
290
Less - Current maturities ................................ (67)
-----
$ 223
=====
The aggregate maturities of long-term debt
as of December 31, 1997, are as follows (in thousands):
1998 ........................................ $ 67
1999 ........................................ 63
2000 ........................................ 159
2001 ........................................ 1
-----
$ 290
=====
F-34
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES:
The components of the Company's provision (benefit) for income taxes are as
follows (in thousands):
DECEMBER 31, JUNE 24,
1997 1998
------------ ----------
Federal --
Current ................................ $ 203 $ 82
Deferred ............................... 130 (84)
----- -----
333 (2)
State --
Current ................................ 48 16
Deferred ............................... 15 (16)
----- -----
63 --
----- -----
Total provision (benefit) ...... $ 396 $ (2)
===== =====
The provision (benefit) for income taxes differs from an amount computed at the
statutory rate as follows (in thousands):
DECEMBER 31, JUNE 24,
1997 1998
------------ ---------
Federal income tax at statutory rates ..... $ 346 $ (8)
State income taxes ........................ 41 --
Nondeductible expenses .................... 9 6
----- -----
$ 396 $ (2)
===== =====
The significant items giving rise to the deferred tax assets and liabilities are
as follows (in thousands):
DECEMBER 31,
1997
------------
Deferred tax assets --
Accrued expenses ................................... $ 81
Allowance for doubtful accounts .................... 25
Noncurrent liabilities ............................. 361
----
Total deferred tax assets ...................... 467
Deferred tax liabilities --
Bases differences in property and equipment ........ 61
Purchase rebates ................................... 150
Inventory .......................................... 95
Other .............................................. 58
----
Total deferred tax liabilities ................. 364
----
Net deferred tax asset ......................... $103
====
7. RELATED-PARTY TRANSACTIONS:
The Company has a consulting service agreement with a shareholder for
monthly payments of one-half of his monthly salary immediately prior to
retirement. An additional survivor annuity agreement provides for monthly
payments of $5,000 to the shareholder's spouse upon the shareholder's death. The
monthly payment is adjusted annually by the percentage increase in the consumer
price index over the base index of March 1990. At December 31, 1997, the
liability recorded related to these agreements (collectively, the Annuity
Agreements) was $876,000.
F-35
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company has a note payable to a shareholder with a fixed interest
rate of 7 percent, due on demand, with interest paid monthly. There was $100,000
due under this note at December 31, 1997.
The Company is a party to a buying group through which the Company made
$4 million of inventory purchases during 1997. A shareholder of the Company is
currently serving a three-year term that expires in November 2000 on the board
of directors of the buying group. Subsequent to June 24, 1998, the shareholder
resigned from the buying group effective December 31, 1998.
RESTRICTED STOCK AGREEMENT
The Company and its shareholders entered into a restricted stock
agreement whereby the shareholders agreed not to sell, assign, transfer,
encumber, pledge or in any other way dispose of their shares of stock without
allowing the shareholders the right of first refusal to purchase stock at the
time of an offer to sell by another shareholder.
SHAREHOLDER GUARANTEE
Amounts payable for purchases from a certain supplier are guaranteed up
to $100,000 by a shareholder of the Company.
8. COMMITMENTS AND CONTINGENCIES:
CAPITAL COMMITMENTS
The Company has made a commitment toward the purchase of certain
equipment and estimates that expenditures aggregating approximately $202,000
will be required in 1998, in connection with the commitment.
OPERATING LEASES
The Company leases various facilities, equipment and vehicles under
noncancelable operating lease agreements. These leases expire on various dates
through 2001. The lease agreements are subject to renewal under essentially the
same terms and conditions as the original leases.
Future minimum lease payments for noncancelable operating leases are as
follows (in thousands):
Year ending December 31 --
1998........................................... $163
1999........................................... 58
2000........................................... 22
2001........................................... 2
-----
$245
Total rent expense under all operating leases was approximately
$206,000 and $173,900 for the year ended December 31, 1997, and for the period
from January 1, 1998 to June 24, 1998, respectively.
LITIGATION
At certain times, the Company is involved in legal actions arising in
the ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
F-36
<PAGE>
PLAZA AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INSURANCE
The Company carries a broad range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
EMPLOYEE 401(K) RETIREMENT PLAN
The Company participates in a 401(k) profit-sharing plan (the Plan)
which covers eligible non-union employees at least 21 years of age who have
completed at least 1,000 hours of service in a one year period. The Plan allows
for employee contributions through salary deductions of up to 15 percent of
total compensation, subject to the statutory limits. Employer matching
contributions totaled approximately $108,000 and $35,200 for the year ended
December 31, 1997, and for the period from January 1, 1998 to June 24, 1998,
respectively.
DEFERRED COMPENSATION ARRANGEMENT
The Company has a deferred compensation agreement with three key
personnel based on corporate earnings and years of future service. The Company
provides for the expense as the benefits vest. For the year ended December 31,
1997, and for the period ended June 24, 1998, expense under these agreements was
approximately $24,000 and $55,000, respectively. Effective May 31, 1998, the
Company terminated this agreement. The employees received stock in exchange for
surrendering their rights under the agreement. The Company paid taxes of
$58,000, on behalf of the employees, which related to the employees tax
obligation upon conversion of the plan.
F-37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Perfection Group:
We have audited the accompanying consolidated balance sheets of
Perfection Group, as defined in Note 1 to the consolidated financial statements,
as of September 30, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended September
30, 1996 and 1997 and for the period from October 1, 1997 to June 24, 1998.
These consolidated financial statements are the responsibility of Perfection
Group's management. Our responsibility is to express an opinion on these
consolidated 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
Perfection Group as of September 30, 1996 and 1997, and the results of their
consolidated operations and their consolidated cash flows for the years then
ended September 30, 1996 and 1997 and for the period from October 1, 1997 to
June 24, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma
November 13, 1998
F-38
<PAGE>
PERFECTION GROUP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
--------------------
1996 1997
------- --------
ASSETS
CURRENT ASSETS:
Cash ............................................ $ 56 $ 61
Accounts receivable, net ........................ 1,379 1,504
Receivable from related party ................... 42 196
Inventories ..................................... 1,607 2,085
Prepaid expenses and other ...................... 77 32
Deferred tax asset .............................. 34 101
------- -------
Total current assets ...................... 3,195 3,979
PROPERTY AND EQUIPMENT, net ........................... 1,618 1,546
DEFERRED TAX ASSET .................................... 61 51
OTHER ASSETS .......................................... 11 8
------- -------
Total assets .............................. $ 4,885 $ 5,584
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY :
CURRENT LIABILITIES
Accounts payable and accrued expenses ........... $ 1,248 $ 2,005
Note payable to related party ................... 451 --
Current maturities of long-term debt ............ 131 669
------- -------
Total current liabilities ................. 1,830 2,674
------- -------
LONG-TERM DEBT, net ................................... 2,212 2,134
------- -------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY .......... 116 120
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par, 200,000 shares
authorized, 10,000 shares
issued and outstanding ................... 10 10
Additional paid-in capital ...................... 606 606
Treasury stock .................................. -- (172)
Retained earnings ............................... 111 212
------- -------
Total stockholders' equity ................ 727 656
------- -------
Total liabilities and
stockholders' equity ................. $ 4,885 $ 5,584
======= =======
The accompanying notes are an integral part of these
consolidated balance sheets.
F-39
<PAGE>
PERFECTION GROUP
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, PERIOD FROM
------------------------- OCTOBER 1, 1997 TO
1996 1997 JUNE 24, 1998
-------- -------- -------------------
<S> <C> <C> <C>
REVENUES .................................... $ 11,346 $ 11,925 $ 15,228
COST OF SALES ............................... 8,788 9,210 11,929
-------- -------- --------
Gross profit .......................... 2,558 2,715 3,299
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,992 2,276 1,903
-------- -------- --------
Income from operations ................ 566 439 1,396
OTHER INCOME (EXPENSE):
Interest expense ...................... (241) (260) (236)
Other income (expense), net ........... (123) 13 (145)
-------- -------- --------
Income before income taxes and minority
interest in income of consolidated
subsidiary .......................... 202 192 1,015
MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARY ............................... (13) (14) (57)
-------- -------- --------
INCOME BEFORE INCOME TAXES .................. 189 178 958
PROVISION FOR INCOME TAXES .................. 78 77 396
-------- -------- --------
NET INCOME .................................. $ 111 $ 101 $ 562
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-40
<PAGE>
PERFECTION GROUP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN TREASURY RETAINED STOCKHOLDERS'
STOCK CAPITAL STOCK EARNINGS EQUITY
---------- ------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, September 30, 1995 .. $ 5 $ 55 $ -- $ -- $ 60
Net income ............... -- -- -- 111 111
Issuance of common stock . 5 551 -- -- 556
------- ------- ------- ------- -------
BALANCE, September 30, 1996 .. 10 606 -- 111 727
Net income ............... -- -- -- 101 101
Purchase of treasury stock -- -- (172) -- (172)
------- ------- ------- ------- -------
BALANCE, September 30, 1997 .. 10 606 (172) 212 656
Net income ............... -- -- -- 562 562
Sale of treasury stock ... -- -- 31 -- 31
------- ------- ------- ------- -------
BALANCE, June 24, 1998 ....... $ 10 $ 606 $ (141) $ 774 $ 1,249
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-41
<PAGE>
PERFECTION GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, PERIOD FROM
---------------------------- OCTOBER 1, 1997
1996 1997 TO JUNE 24, 1998
--------------- ---------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................... $ 111 $ 101 $ 562
Adjustments to reconcile net income to
net cash provided by (used
in) operating activities --
Depreciation and amortization ............ 73 126 109
Deferred income tax benefit .............. (19) (57) (38)
Minority interest ........................ 13 14 57
Changes in assets and liabilities --
Accounts receivable, net .............. (349) (279) (701)
Inventories ........................... (58) (478) (3,157)
Prepaid expenses and other ............ 53 45 (85)
Accounts payable and accrued expenses . 44 757 2,491
------- ------- -------
Net cash provided by (used in)
operating activities ................... (132) 229 (762)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......... (337) (43) (321)
Receipt of cash surrender value life insurance -- -- 7
Deferred compensation ........................ 109 -- --
Purchases of subsidiary's stock .............. (58) -- --
Cash acquired in acquisition of subsidiary ... 68 -- --
------- ------- -------
Net cash used in investing activities .... (218) (43) (314)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit 374 118 1,697
Payments on long-term debt ................... (147) (81) (580)
Proceeds capital leases ...................... 195 -- --
Repayment of capital leases .................. (18) (46) (35)
(Purchase) sale of treasury stock ............ -- (172) 31
------- ------- -------
Net cash provided by (used in)
financing activities ................... 404 (181) 1,113
------- ------- -------
NET INCREASE IN CASH ........................... 54 5 37
CASH, beginning of period ...................... 2 56 61
------- ------- -------
CASH, end of period ............................ $ 56 $ 61 $ 98
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for --
Interest ................................... $ 238 $ 260 $ 233
Income taxes ............................... 44 109 191
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-42
<PAGE>
PERFECTION GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Perfection Group includes the financial statements of TPE, Inc.
("Perfection") and its wholly owned subsidiary, Perfection Equipment Company
("PECO") (both Oklahoma corporations). PECO, headquartered in Oklahoma City,
Oklahoma, was founded in 1946 and serves customers principally in Oklahoma. PECO
primarily distributes commercial vehicle parts, performs installation and
maintenance services and assembles specialty commercial vehicle equipment.
Perfection has no significant operations of its own.
Perfection was incorporated on August 25, 1995 by three members of
PECO's management for the purpose of acquiring ownership in PECO. On August 28,
1995, Perfection issued 4,500 shares of common stock to the members of PECO
management in exchange for $60,000. On October 1, 1995, Perfection received
10,000 shares of common stock, or 90.2%, of PECO's outstanding common stock in
exchange for 4,950 shares of Perfection's common stock, $57,500 in cash and
$517,500 in debt. In addition, Perfection issued an additional 550 shares of
common stock for transaction costs incurred. The acquisition of PECO was
accounted for using the purchase method of accounting.
In April 1998, the Company and its stockholders entered into a
definitive agreement with a wholly owned subsidiary of TransCom USA, providing
for the merger of the Company with the subsidiary of TransCom USA (the Merger).
On June 24, 1998, TransCom USA completed its initial public offering and the
Merger with the Company.
In connection with the merger, TransCom USA assumed all debt of the
Company. Subsequent to the initial public offering, substantially all of the
debt has been repaid.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and the
results of operations of Perfection and PECO (collectively the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
INVENTORIES
Inventories consist primarily of purchased parts stated at the lower of
cost or market, utilizing the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the
useful lives of assets are capitalized. Minor replacements, maintenance and
repairs which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
STOCKHOLDERS EQUITY
During fiscal year 1997, the Company purchased 1,500 shares of treasury
stock at a cost of $171,960.
F-43
<PAGE>
PERFECTION GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Effective May 1, 1986, PECO established an ESOP. The ESOP provides
retirement benefits to eligible employees, as defined by the ESOP agreement.
PECO contributions under the ESOP are discretionary, except that they are
limited to the maximum amount deductible for federal income tax purposes.
Benefits to participants are limited to the ESOP's assets. During fiscal 1996
and 1997 and the period from October 1, 1997 to June 24, 1998, contributions to
the ESOP charged to the Company's consolidated statements of operations totaled
approximately $148,000, $37,000 and $17,000, respectively. At September 30,
1996, 1997, and June 24, 1998, the ESOP owns approximately 8.9%, 8.8%, and 8.6%,
respectively, of PECO.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped. Service
revenues are recognized when installation or repairs are completed.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts to be
realized. The provision for income taxes is the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts
receivable, accounts payable, and debt. The Company believes that the carrying
value of these instruments on the accompanying balance sheets approximates their
fair value.
CONCENTRATION ON CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels. The Company has not
incurred losses related to these balances to date.
SIGNIFICANT CUSTOMERS
For the years ended September 30, 1996 and 1997, one customer accounted
for approximately 33 percent and 23 percent of sales, respectively. For the
period ended June 24, 1998, two customers accounted for approximately 54% of
sales.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-44
<PAGE>
PERFECTION GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER 30,
USEFUL LIVES -------------------------
IN YEARS 1996 1997
------------ --------- ----------
<S> <C> <C>
Land........................................ -- $ 367 $ 367
Buildings and improvements.................. 5-40 941 944
Vehicles.................................... 4-5 6 6
Machinery and equipment..................... 5-10 60 91
Office furniture and equipment.............. 3-10 317 335
Leasehold improvements...................... 5-10 -- 2
------- -------
Total............................... 1,691 1,745
Less - Accumulated depreciation
and amortization......................... (73) (199)
------- -------
Property and equipment, net......... $ 1,618 $ 1,546
======= =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
SEPTEMBER 30,
-----------------------
1996 1997
------- --------
Accounts receivable, trade .................. $ 1,402 $ 1,536
Less -- Allowance for doubtful accounts ..... (23) (32)
------- -------
Accounts receivable, net ................ $ 1,379 $ 1,504
======= =======
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
SEPTEMBER 30,
-------------------
1996 1997
------- ------
Balance at beginning of year ................ $ 33 $ 23
Additions charged to costs and expenses ..... 66 21
Less: Deductions for uncollectible
receivables written off ............... (76) (12)
---- ----
$ 23 $ 32
==== ====
Accounts payable and accrued expenses consist of the following (in thousands):
SEPTEMBER 30,
--------------------
1996 1997
------ -------
Accounts payable, trade ..................... $ 927 $1,562
Accrued compensation and benefits ........... 147 258
Other accrued expenses ...................... 174 185
------ ------
Accounts payable and accrued expenses ... $1,248 $2,005
====== ======
F-45
<PAGE>
PERFECTION GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following as of September 30, 1996 and 1997 (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1996 1997
-------- -------
<S> <C> <C>
Note payable to a financial institution in total monthly installments of $8,270
including interest at New York prime plus 1% (9.5% at September 30, 1997),
personally guaranteed by officers of the Company with final payment due on
September 1, 2004. In May, 1997 in conjunction with an increase of PECO's
revolving line of credit, the bank required Perfection Group to make
additional monthly installments of $97,000 starting in October 1997 with
final payment
due in February 1998 ........................................................ $ -- $ 472
Notes payable to financial institutions in monthly installments ranging
from $5,188 to $11,923, including interest at New York prime plus 1% (9.50%
at September 30, 1997), secured by essentially all assets of the Company and
is personally guaranteed by officers of the Company with
final payments due between March 2002 and March 2005 ....................... 1,303 1,218
Revolving credit agreement payable to a financial institution with monthly
interest payments at the New York prime plus 1% (9.50% at September 30,
1997), secured by essentially all assets of the Company and is personally
guaranteed by officers of the Company with final payment due in April 1998
Due to the subsequent refinancing of this agreement (as discussed below),
the outstanding balance at September 30, 1997, has been included in
long-term debt on the accompanying balance
sheet ...................................................................... 863 982
Capital lease agreements payable to financial institutions in monthly
installments ranging from $851 to $4,341, including interest at effective
rates ranging from 9.85% to 16.95%, with final payments due between
March 1999 and April 2000 .................................................. 177 131
------- -------
2,343 2,803
Less -- Current maturities ..................................................... (131) (669)
------- -------
$ 2,212 $ 2,134
======= =======
</TABLE>
On January 20, 1998, the Company refinanced the notes payable and
revolving credit agreement. The new notes have monthly principal and interest
payments of approximately $23,000 beginning February 1, 1998, with the
outstanding principal and all accrued and unpaid interest due on January 31,
1999. These notes are secured by essentially all assets of the Company and are
personally guaranteed by the president and two vice-presidents of the Company.
In March 1998, the Company's line of credit was amended to allow
borrowings up to $3,000,000. In addition, the interest rates on the Company's
line of credit and promissory notes with a bank were adjusted to New York Prime.
The aggregate maturities of long-term debt as of September 30, 1997,
considering the refinancing discussed above, are as follows (in thousands):
1998............................ $ 669
1999............................ 2,105
2000............................ 29
-------
Total....................... $ 2,803
=======
F-46
<PAGE>
PERFECTION GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES:
The components of the Company's provision for income taxes are as follows (in
thousands):
SEPTEMBER 30,
-------------------- JUNE 24,
1996 1997 1998
------ ------ --------
Federal --
Current ................... $ 82 $ 113 $ 369
Deferred .................. (16) (48) (32)
----- -----
66 65 337
State --
Current ................... $ 15 $ 21 $ 65
Deferred .................. (3) (9) (6)
----- -----
12 12 59
----- -----
Total provision ....... $ 78 $ 77 $ 396
===== ===== =====
The provision for income taxes differs from an amount computed at the statutory
rate as follows (in thousands):
SEPTEMBER 30,
----------------- JUNE 24,
1996 1997 1998
------ ------- ----------
Federal income tax at statutory rates . $ 69 $ 65 $ 337
State income taxes .................... 12 12 59
Nondeductible expenses ................ 2 5 (6)
Other ................................. (5) (5) 6
----- -----
$ 78 $ 77 $ 396
===== ===== =====
The significant items giving rise to the deferred tax assets and liabilities are
as follows (in thousands):
SEPTEMBER 30,
-----------------
1996 1997
------ ------
Deferred tax assets --
Allowance for doubtful accounts .............. $ 14 $ 12
Inventories .................................. 8 76
Bases differences in property and equipment .. 57 48
Accrued expenses ............................. 12 12
Other ........................................ 4 4
---- ----
Total deferred tax assets .................... 95 152
Deferred tax liabilities ..................... -- --
---- ----
Net deferred tax asset ....................... $ 95 $152
==== ====
7. RELATED-PARTY TRANSACTIONS:
In April 1990, PECO loaned $397,800 to the ESOP for the purpose of
purchasing shares of PECO's stock and repurchasing shares held by participants.
Payments were due quarterly at varying amounts which included principal and
interest. The payments were to be funded through PECO's contributions to the
ESOP. During fiscal 1996, the entire remaining balance of $108,693 was paid off.
During fiscal years 1996, 1997, and the period from October 1, 1997 to
June 24, 1998, approximately $176,000, $750,000 and $678,000 or approximately
1.6%, 6.3%, and 4.5% respectively, of the Company's sales were made to an entity
which is owned by several members of the Company's management. At September 30,
1996 and 1997, approximately $42,000 and $196,000, respectively, was included in
trade accounts receivable was due from this related entity. Effective February
1998, members of the Company's management sold their interest in the related
party.
F-47
<PAGE>
PERFECTION GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
During fiscal year 1996 the Company also had a note payable to a
stockholder of the Company due in monthly installments of $8,500 including
interest at the applicable mid-term federal rate, personally guaranteed by
officers of the Company. There was approximately $451,000 outstanding on the
note at September 30, 1996. The note was paid in full in March 1997.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases a warehouse facility under a noncancelable operating
lease agreement. This lease expires October 31, 1998. The lease agreement is
subject to renewal under essentially the same terms and conditions as the
original lease. Future minimum lease payments for the noncancelable operating
lease are approximately $52,000 at June 24, 1998. During fiscal years 1996 and
1997 and for the period from October 1, 1997 to June 24, 1998, total rent
expense relating to operating leases was approximately $0, $9,625 and $65,109,
respectively.
LITIGATION
At certain times, the Company is involved in legal actions arising in
the ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
ADVISORY SERVICES AGREEMENT
On February 6, 1998, the Company entered into an agreement with two
former stockholders of the Company (the "stockholders") to terminate the
stockholders Advisory Services Agreement. Under the agreement, the Company
agreed to pay the stockholders $170,000, payable in three monthly installments
of approximately $57,000 commencing on March 15, 1998. The entire $170,000 was
expensed for the period from October 1, 1997 to June 24, 1998. During fiscal
years 1996 and 1997, the Company expensed approximately $8,000 and $16,000,
respectively, relating to the Advisory Services Agreement.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Drive Line, Inc.:
We have audited the accompanying balance sheets of Drive Line, Inc. (a
Florida corporation), as of December 31, 1996 and 1997, and the related
statements of operations, shareholders' equity and cash flows for the two years
ended December 31, 1996 and 1997 and for the period from January 1, 1998 to June
24, 1998. These financial statements are the responsibility of Drive Line,
Inc.'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 financial statements referred to above present
fairly, in all material respects, the financial position of Drive Line, Inc., as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the two years ended December 31,1996 and 1997 and for the period from
January 1, 1998 to June 24, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 1999
F-49
<PAGE>
DRIVE LINE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------
1996 1997
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 111 $ 61
Accounts receivable, net .......................... 452 586
Receivables from related parties .................. 286 593
Inventories ....................................... 1,267 1,855
Prepaid expenses and other ........................ 62 --
------ ------
Total current assets .......................... 2,178 3,095
PROPERTY AND EQUIPMENT, net ........................... 392 1,564
INVESTMENT IN REAL ESTATE ............................. 397 --
RECEIVABLES FROM RELATED PARTIES, net ................. 214 --
------ ------
Total assets .................................. $3,181 $4,659
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ............. $ 378 $ 360
Payables to related parties ....................... 129 1,414
Line of credit .................................... 1,000 1,000
Current maturities of long-term debt .............. 31 65
------ ------
Total current liabilities ..................... 1,538 2,839
LONG-TERM DEBT, net ................................... 42 1,173
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 100 shares
authorized, issued and outstanding .............. -- --
Additional paid-in capital ........................ 37 37
Retained earnings ................................. 1,564 610
------ ------
Total shareholders' equity .................... 1,601 647
------ ------
Total liabilities and shareholders' equity .... $3,181 $4,659
====== ======
The accompanying notes are an integral part of these combined
financial statements.
F-50
<PAGE>
DRIVE LINE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
-------------------------- JANUARY 1, 1998
1996 1997 TO JUNE 24, 1998
-------- ------- ----------------
<S> <C> <C> <C>
REVENUES ............................. $ 4,227 $ 5,997 $ 3,047
COST OF SALES ........................ 2,290 3,385 1,955
------- ------- -------
Gross profit ................. 1,937 2,612 1,092
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ......................... 1,008 1,530 1,030
------- ------- -------
Income from operations ....... 929 1,082 62
OTHER INCOME (EXPENSE):
Interest expense ................. (54) (191) (172)
Other income, net ................ 67 47 46
------- ------- -------
NET INCOME (LOSS) .................... $ 942 $ 938 $ (64)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-51
<PAGE>
DRIVE LINE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
---------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 ...... $-- $ 37 $ 1,152 $ 1,189
Net income ................ -- -- 942 942
Distributions ............. -- -- (530) (530)
------- ------- -------
BALANCE, December 31, 1996 ...... -- 37 1,564 1,601
Net income ................ -- -- 938 938
Distributions ............. -- -- (1,892) (1,892)
------- ------- -------
BALANCE, December 31, 1997 ...... -- 37 610 647
Net loss .................. -- -- (64) (64)
Distributions ............. -- -- (438) (438)
------- ------- -------
BALANCE, June 24, 1998 .......... $-- $ 37 $ 108 $ 145
==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-52
<PAGE>
DRIVE LINE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------ JANUARY 1, 1998 TO
1996 1997 JUNE 24, 1998
-------- ------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................... $ 942 $ 938 (64)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities --
Depreciation and amortization ............... 14 31 31
Changes in assets and liabilities --
Accounts receivable, net .................. (64) (134) 40
Receivables from related parties .......... 492 (561) (27)
Inventories ............................... (464) (588) (406)
Prepaid expenses and other ................ (205) (7) (20)
Accounts payable and accrued expenses ..... (55) (18) 670
Payables to related parties ............... 101 1,285 362
------- ------- -------
Net cash provided by operating
activities .......................... 761 946 586
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate ....................... (397) -- --
Purchases of property and equipment ............. (148) (1,188) (247)
------- ------- -------
Net cash used in investing activities . (545) (1,188) (247)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit ... 405 -- 193
Proceeds from long-term debt .................... 30 1,667 186
Payments on long-term debt ...................... (23) (502) (25)
Distributions to shareholders ................... (530) (973) (438)
------- ------- -------
Net cash provided by (used in)
financing activities ............... (118) 192 (84)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ..................................... 98 (50) 255
CASH AND CASH EQUIVALENTS, beginning of period ...... 13 111 61
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period ............ $ 111 $ 61 $ 316
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for --
Interest ...................................... $ 54 $ 191 $ 134
Non-cash distribution to shareholders ........... -- 919 --
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-53
<PAGE>
DRIVE LINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Drive Line, Inc. (the Company), a Florida corporation, headquartered in
Sunrise, Florida, was founded in 1988 and serves customers nationally from its
facility in Florida. The Company primarily distributes commercial vehicle parts
to Original Equipment Manufacturers (OEMs) and other end-users and military
vehicle parts to the United States military.
In April 1998, the Company and its shareholders entered into a
definitive agreement with a wholly owned subsidiary of TransCom USA, providing
for the merger of the Company with the subsidiary of TransCom USA (the Merger).
On June 24, 1998, TransCom USA completed its initial public offering and the
Merger with the Company.
Concurrently with the Merger, the Company entered into an agreement
with the shareholders to lease certain facilities used in the Company's
operations for negotiated amounts and terms.
In connection with the Merger, TransCom USA assumed all debt of the
Company. Subsequent to the initial public offering, substantially all of the
debt has been repaid.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist primarily of purchased parts stated at the lower of
cost or market, utilizing the first-in, first-out method (FIFO).
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated life of the asset.
Expenditures for major additions or improvements which extend the
useful lives of assets are capitalized. Minor replacements, maintenance and
repairs which do not improve or extend the life of such assets are charged to
operations as incurred. Disposals are removed at cost less accumulated
depreciation, and any resulting gain or loss is reflected in other income.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby Drive Line, Inc., is not subject to federal taxation.
Under S Corporation status, the shareholders report their shares of the
Company's taxable earnings or losses in their personal tax returns. Accordingly,
no provision was made for income taxes in the accompanying
F-54
<PAGE>
DRIVE LINE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
historical financial statements. Drive Line, Inc., terminated its S Corporation
status concurrently with the effective date of this offering.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, accounts receivable, accounts payable and debt. The Company
believes that the carrying value of these instruments on the accompanying
balance sheets approximates their fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels. The Company has not
incurred losses related to these balances to date.
SIGNIFICANT SUPPLIERS
For the years ended December 31, 1996 and 1997 and for the period from
January 1, 1998 to June 24, 1998, three suppliers accounted for 37 percent, 48
percent, and 63 percent of the total inventory purchases, respectively.
SIGNIFICANT CUSTOMERS
For the years ended December 31, 1996 and 1997, two customers accounted
for 22 percent and 16 percent of total revenues, respectively. No customer
accounted for greater than ten percent of total sales for the period from
January 1, 1998 to June 24, 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-55
<PAGE>
DRIVE LINE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31,
LIVES IN -----------------------
YEARS 1996 1997
---------------- ------------------------
<S> <C> <C>
Land ........................................... -- $ 162 $ 162
Buildings ...................................... 30 169 1,313
Vehicles ....................................... 5 100 86
Machinery and equipment ........................ 5-7 29 39
Office furniture and equipment ................. 5 58 62
Leasehold improvements ......................... 7 8 8
------- -------
Total .................................... 526 1,670
Less - Accumulated depreciation and amortization (134) (106)
------- -------
Property and equipment, net .............. $ 392 $ 1,564
======= =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following (in thousands):
DECEMBER 31,
--------------------
1996 1997
------ ------
Accounts receivable, trade ................ $ 518 $ 652
Less - Allowance for doubtful accounts .... (66) (66)
----- -----
$ 452 $ 586
===== =====
Accounts payable and accrued expenses consist of the following (in thousands):
DECEMBER 31,
--------------------
1996 1997
------- -------
Accounts payable, trade .................. $299 $280
Accrued compensation and benefits ........ 79 80
---- ----
$378 $360
==== ====
5. LINE OF CREDIT AND LONG-TERM DEBT:
LINE OF CREDIT
The Company has a line of credit agreement which provides for
borrowings up to $1 million with a financial institution that is secured by
accounts receivable and inventory. The agreement is guaranteed jointly and
severally by the shareholders of the Company. Interest accrues at the financial
institution's prime rate plus 0.5 percent, which was nine percent at December
31, 1997. The line of credit expires on September 18, 1998. The total $1 million
available under the agreement was outstanding at December 31, 1996 and 1997,
respectively.
F-56
<PAGE>
DRIVE LINE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Notes payable to financial institutions in total monthly installments of
$15,630, including interest ranging from 8.25% to 9%, partially secured by
certain vehicles and a building, guaranteed jointly and severally by the
shareholders of the Company,
with final payments due between January 2002 to April 2006 ............... $ 73 $ 1,238
Less -- Current maturities ................................................. (31) (65)
------- -------
$ 42 $ 1,173
======= =======
</TABLE>
Certain of the Company's loan agreements contain requirements regarding
working capital and financial ratios. The Company was in compliance with all
provisions of its loan agreements at December 31, 1997.
The aggregate maturities of long-term debt as of December 31, 1997, are as
follows (in thousands):
1998................... $ 65
1999................... 61
2000................... 37
2001................... 28
2002................... 23
Thereafter............. 1,024
------
$1,238
6. RELATED-PARTY TRANSACTIONS: $65
The Company has entered into several transactions with related
entities, resulting in loans receivable, notes receivable and notes payable with
related parties.
The receivable bears interest of ten percent, matures in June 1998 and
is partially secured by residential property. The receivable totaled
approximately $500,000 and $593,000, including accrued interest of approximately
$25,000 and $50,000, respectively, at December 31, 1996 and 1997, respectively.
In addition, the Company has notes payable to shareholders of
approximately $129,000 and $1,414,000 at December 31, 1996 and 1997,
respectively. The notes payable to shareholders bear interest of ten percent
annually and are due in June 1998.
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company leases its warehouse and office space under noncancelable
lease agreements, including leases with related parties. These leases expire on
various dates through February 1998. The lease agreements are subject to renewal
under essentially the same terms and conditions as the original leases. Minimum
operating lease payments for 1998 are $8,000.
F-57
<PAGE>
DRIVE LINE, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
Total rent expense under all operating leases, including leases with
related parties was approximately $46,000, $48,000 and $10,000 for the years
ended December 31, 1996, 1997, and for the period from January 1, 1998 to June
24, 1998, respectively.
LITIGATION
In March 1995, the Company and two of its officers and controlling
persons, pled guilty to one felony count of submission of a false document to
the Defense Logistics Agency of the United States government. The Company paid a
fine of $200,000 and the officers each paid a fine of $2,500 in satisfaction of
the judgments against them. The violation occurred during 1989 in the course of
a transaction between the Company and the Defense Logistics Agency involving
heavy duty parts valued at approximately $6,200. The Company remains a vendor
for the United States government and derives approximately 15 percent of its
revenues from parts sales to the United States government.
At certain times, the Company is involved in legal actions arising in
the ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including
business auto liability, general liability, workers' compensation, excess
liability, commercial property and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.
EMPLOYEE RETIREMENT PLANS
The Company participates in a profit-sharing and a money purchase
pension plan (the Plans) which cover eligible employees at least 20 years of age
who have completed at least one year of service. The money purchase pension plan
requires an annual employer contribution on behalf of qualified employees in the
amount of five percent of total compensation. Employer contributions to the
profit-sharing plan are discretionary with no minimum contributions required.
Employer matching contributions for both plans totaled approximately $78,000 and
$79,000 for the years ended December 31, 1996 and 1997. The plan ended as of
December 31, 1997 and remaining contributions as of that date were paid during
the second quarter. No further contributions were matched.
F-58
