<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996
REGISTRATION NO. 333-6697
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
AFTERMARKET TECHNOLOGY CORP.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 3714 95-4486486
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
-------------------
33309 FIRST WAY SOUTH, SUITE A-206
FEDERAL WAY, WASHINGTON 98003
(206) 838-0346
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
-------------------
STEPHEN J. PERKINS
CHIEF EXECUTIVE OFFICER
AFTERMARKET TECHNOLOGY CORP.
33309 FIRST WAY SOUTH, SUITE A-206
FEDERAL WAY, WASHINGTON 98003
(206) 838-0346
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
-------------------
WITH COPIES TO:
<TABLE>
<S> <C>
BRUCE D. MEYER, ESQ. JEROME L. COBEN, ESQ.
Gibson, Dunn & Crutcher LLP Skadden, Arps, Slate, Meagher & Flom
333 South Grand Avenue LLP
Los Angeles, California 90071-3197 300 South Grand Avenue
(213) 229-7000 Los Angeles, California 90071-3144
(213) 687-5000
</TABLE>
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
-------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(a) OF THE SECURITIES ACT OF 1933,
AS AMENDED, AND ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NO. AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Facing Page of Registration Statement; Cross
Reference Sheet; Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page of Prospectus; Additional
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriters
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Prospectus
Summary; Underwriters
9. Description of Securities to be Registered........... Description of Capital Stock; Certain United States
Federal Tax Consequences to Non-United States
Holders
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; Recent Developments;
Reorganization and GEPT Private Placement; Dividend
Policy; Capitalization; Selected Financial Data; Pro
Forma Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Management; Ownership of
Voting Securities; Certain Transactions; Description
of Capital Stock; Description of Certain
Indebtedness; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED NOVEMBER 18, 1996
3,500,000 SHARES
[LOGO]
COMMON STOCK
-----------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
PRIOR TO THIS OFFERING,
THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL OFFERING PRICE PER SHARE WILL BE BETWEEN
$12.50 AND $14.50. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE
FACTORS CONSIDERED IN DETERMINING THE INITIAL PUBLIC
OFFERING PRICE.
CONCURRENTLY WITH THE CLOSING OF THIS OFFERING, THE COMPANY WILL SELL TO THE
TRUSTEES OF THE GENERAL ELECTRIC PENSION TRUST $12.0 MILLION OF RESTRICTED
SHARES OF COMMON STOCK. FOR A DESCRIPTION OF THE TERMS AND CONDITIONS OF SUCH
SALE, SEE "REORGANIZATION AND GEPT PRIVATE PLACEMENT."
-------------------
APPLICATION HAS BEEN MADE FOR QUOTATION OF THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ATAC."
-------------------
]SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------------- --------------- ------------
<S> <C> <C> <C>
PER SHARE............................ $ $ $
TOTAL (3)............................ $ $ $
</TABLE>
- ------------
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $750,000.
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN
30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 525,000
ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING DISCOUNTS AND
COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE
UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC,
UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY WILL BE
$ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS."
------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT THE DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT ,
1996 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST
PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY & CO.
INCORPORATED
WILLIAM BLAIR & COMPANY
DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1996
<PAGE>
(THIS IS A NARRATIVE DESCRIPTION OF THE GRAPHICS)
On the inside front cover will be the following pictures and text:
- -- upper left corner:
-- "ATC Distribution Centers"
-- picture of standard transmission parts
-- picture of remanufactured torque converter
-- picture of automatic transmission parts
-- picture of Intercont parts washer
-- "Ability to Serve:" "17,000 Transmission Shops" "54,000 General Repair
Shops"
- -- upper right corner:
-- Aftermarket Technology Corp. logo
-- "Leading Position in the Automotive Aftermarket"
- -- lower left corner:
-- "OEM Customers"
-- picture of remanufactured engine
-- picture of remanufactured transmission
-- "American Isuzu" "AWTEC (Toyota)" "BMW" "Chrysler" "Hyundai" "Jaguar"
"Mitsubishi Fuso" "Mitsubishi" "Nissan Diesel" "Saab" "Subaru" "Volvo"
- -- lower right corner:
-- "Retail Parts Stores"
-- picture of remanufactured engine
-- picture of engine overhaul kit
-- picture of remanufactured crank kit
-- picture of clutch kits and standard rebuild kits
-- "Advance Auto" "O'Reilly's" "Western Auto"
On the inside back cover will be the following pictures and text:
- -- map of the United States with distribution centers denoted by o's and
manufacturing facilities denoted by x's.
- -- "Manufacturing Facilities" "Rancho Cucamonga, California" "Harvey, Illinois"
"Louisville, Kentucky (3)" "Joplin, Missouri" "Springfield, Missouri (3)"
"Mahwah, New Jersey" "Dayton, Ohio" "Memphis, Tennessee" "Janesville,
Wisconsin" "Edmonton, Alberta -- Canada" "Mississauga, Ontario -- Canada
(2)" "Mexicali, Mexico"
- -- "Distribution Centers" "Phoenix, Arizona" "Tucson, Arizona" "Azusa,
California" "Fresno, California" "Los Angeles, California" "Oakland,
California" "Rancho Cucamonga, California" "Sacramento, California" "San
Diego, California" "San Jose, California" "Van Nuys, California" "Colorado
Springs, Colorado" "Denver, Colorado" "Atlanta, Georgia" "Chicago, Illinois"
"Harvey, Illinois" "Louisville, Kentucky" "Grand Rapids, Michigan" "Taylor,
Michigan" "Kansas City, Missouri" "Springfield, Missouri" "St. Louis,
Missouri" "Las Vegas, Nevada" "Mahwah, New Jersey" "Albuquerque, New Mexico"
"Charlotte, North Carolina" "Portland, Oregon" "Memphis, Tennessee" "Dallas,
Texas" "Salt Lake City, Utah" "Norfolk, Virginia" "Seattle, Washington"
"Spokane, Washington" "Janesville, Wisconsin" "Calgary, Alberta -- Canada"
"Edmonton, Alberta -- Canada" "Vancouver, British Columbia -- Canada (2)"
"Moncton, New Brunswick -- Canada" "Mississauga, Ontario -- Canada"
"Montreal, Quebec -- Canada" "Regina, Saskatchewan -- Canada"
- -- lower left corner:
-- Aftermarket Technology Corp. logo
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT RELATED TO
HISTORICAL RESULTS ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE PROJECTED OR IMPLIED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
FURTHER, CERTAIN FORWARD-LOOKING STATEMENTS ARE BASED UPON ASSUMPTIONS AS TO
FUTURE EVENTS THAT MAY NOT PROVE TO BE ACCURATE. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, THOSE
SET FORTH UNDER "RISK FACTORS."
-------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Prospectus Summary............................... 4
Risk Factors..................................... 9
Recent Developments.............................. 13
Reorganization and GEPT Private Placement........ 13
Use of Proceeds.................................. 14
Dividend Policy.................................. 14
Capitalization................................... 15
Dilution......................................... 16
Selected Financial Data.......................... 17
Pro Forma Financial Data......................... 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 21
Business......................................... 26
<CAPTION>
PAGE
-----------
<S> <C>
Management....................................... 37
Ownership of Voting Securities................... 43
Certain Transactions............................. 45
Description of Capital Stock..................... 47
Description of Certain Indebtedness.............. 49
Shares Eligible for Future Sale.................. 51
Certain United States Federal Tax Consequences to
Non-United States Holders...................... 52
Underwriters..................................... 54
Legal Matters.................................... 55
Experts.......................................... 55
Additional Information........................... 56
Index to Financial Statements.................... F-1
</TABLE>
-------------------
The Company intends to furnish to its stockholders annual reports containing
consolidated financial
statements audited by an independent public accounting firm and quarterly
reports for the first three quarters of each fiscal year containing interim
unaudited financial information.
-------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL FOR SUCH PERSON TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS OF THE
COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE HEREIN. THROUGHOUT
THIS PROSPECTUS, EXCEPT WHERE THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY"
REFERS COLLECTIVELY TO AFTERMARKET TECHNOLOGY CORP. ("ATC") AND ITS
SUBSIDIARIES, INCLUDING THE PREDECESSOR COMPANIES (AS DEFINED HEREIN) FOR
PERIODS PRIOR TO THE INITIAL ACQUISITIONS (AS DEFINED HEREIN). UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE INFORMATION CONTAINED HEREIN GIVES EFFECT TO (I)
THE SIX-FOR-ONE STOCK SPLIT TO BE CONSUMMATED BY AFTERMARKET TECHNOLOGY HOLDINGS
CORP. ("HOLDINGS") PRIOR TO THE COMPLETION OF THIS OFFERING OF COMMON STOCK
(THIS "OFFERING") AND (II) THE REORGANIZATION (AS DEFINED HEREIN), PURSUANT TO
WHICH HOLDINGS WILL BE MERGED INTO ATC. UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF (I) THE UNDERWRITERS'
OVER-ALLOTMENT OPTION, (II) OUTSTANDING EMPLOYEE STOCK OPTIONS TO PURCHASE
2,272,218 SHARES OF COMMON STOCK AND (III) OUTSTANDING WARRANTS TO PURCHASE
421,056 SHARES OF COMMON STOCK.
THE COMPANY
The Company is a leading remanufacturer and distributor of drive train
products used in the aftermarket repair of passenger cars and light trucks. The
Company's principal products include remanufactured transmissions, torque
converters and engines, as well as remanufactured and new parts for the repair
of automotive drive train and engine assemblies. The Company's principal
customers include: (i) independent transmission rebuilders, general repair shops
and distributors (the "Independent Aftermarket"); (ii) original equipment
manufacturers ("OEMs"), principally Chrysler, for use as replacement parts by
their dealers; and (iii) retail automotive parts stores. The Company believes it
is uniquely positioned within the highly fragmented aftermarket for drive train
products as a result of its extensive product line, diverse customer base and
broad geographic presence, with 43 distribution centers throughout the United
States and Canada.
The automotive aftermarket in the United States and Canada, which consists
of sales of parts and services for vehicles after their original purchase, has
been noncyclical and has generally experienced steady growth over the past ten
years, unlike the market for new vehicle sales. According to the Automotive
Parts & Accessories Association, between 1985 and 1995, estimated industry-wide
revenue for the automobile aftermarket increased from approximately $126 billion
to $170 billion. This consistent growth is due principally to the increase in
the number of vehicles in operation that are in the prime repair age of four to
12 years and the increase in the average number of miles driven annually per
vehicle. The Company competes specifically in the aftermarket segment for
automotive transmissions, engines and other drive train related products, which
represents more than $7 billion of the entire automotive aftermarket. The
Company believes that within this segment the market for remanufactured drive
train products has grown faster than the overall automotive aftermarket.
The Company was organized in 1994 by Aurora Capital Partners ("ACP") and a
management team led by William A. Smith to combine the businesses of four
existing companies serving the drive train remanufacturing market. Since that
time the Company has grown both internally and through five additional
acquisitions completed during 1995 and 1996. The Company and its predecessor
companies have achieved compound annual growth in revenue of 38.5% from 1992
through September 30, 1996 (29.7% if the Company's acquisitions in 1995 and the
first nine months of 1996 are excluded). The Company believes the key elements
of its success are the quality and breadth of its product offerings and the
Company's emphasis on strong customer relationships, promoted by strong
technical support, rapid delivery time, innovative product development and
competitive pricing. In addition, the Company has benefited from the increasing
use of remanufactured transmissions, engines and other parts for aftermarket
repairs as the industry recognizes that remanufacturing provides a higher
quality, lower cost alternative to rebuilding the assembly or replacing it with
a new assembly manufactured by an OEM.
The Company's strategy is to achieve growth both internally and through
strategic acquisitions. The Company intends to expand its existing business by:
(i) increasing penetration of its current customer base; (ii) gaining new OEM,
Independent Aftermarket and retail customers; and (iii) introducing new products
to
4
<PAGE>
both existing and new customers. Strategic acquisitions have also been an
important element in the Company's historical growth. The Company sees
significant opportunities to continue expanding its customer base, geographic
presence and product offerings through additional strategic acquisitions,
particularly among companies serving the highly fragmented Independent
Aftermarket. Management believes that future acquisitions will enable it to
enhance the Company's revenues and profitability by expanding the Company's
existing distribution base, increasing the range of products sold through the
Company's distribution network and realizing economies of scale in areas
including purchasing, administration and inventory management.
HISTORY; REORGANIZATION
ATC and Holdings, its sole stockholder prior to the Reorganization, were
incorporated under the laws of Delaware in July 1994 at the direction of Aurora
Capital Partners L.P. ("ACP") to acquire Aaron's Automotive Products, Inc.
("Aaron's"), H.T.P., Inc. ("HTP"), Mamco Converters, Inc. ("Mamco") and RPM
Merit, Inc. ("RPM") (collectively, the "Initial Acquisitions"). Aaron's, HTP,
Mamco and RPM as they existed prior to the Initial Acquisitions are hereinafter
collectively referred to as the "Predecessor Companies." Subsequent to the
Initial Acquisitions, the Company acquired Component Remanufacturing
Specialists, Inc. ("CRS") and Mascot Truck Parts Inc. ("Mascot") in June 1995,
and King-O-Matic Industries Limited ("King-O-Matic") in September 1995
(collectively, the "1995 Acquisitions") and Tranzparts, Inc. ("Tranzparts") in
April 1996 and Diverco, Inc. ("Diverco") in October 1996 (the "1996
Acquisitions" and, together with the Initial Acquisitions and the 1995
Acquisitions, the "Acquisitions"). ATC conducts all of its operations through
its wholly-owned subsidiaries and each of their respective subsidiaries.
Simultaneous with the consummation of this Offering, Holdings will be merged
into ATC (the "Reorganization"). Upon the effectiveness of such merger, each
outstanding share of Holdings Common Stock will be converted into one share of
ATC Common Stock, and each outstanding share of Holdings Redeemable Exchangeable
Cumulative Preferred Stock (the "Holdings Preferred Stock") will be converted
into the right to receive an amount in cash equal to $100.00 plus an amount in
cash equal to accrued and unpaid dividends to the date of the Reorganization
(the "Preferred Stock Reorganization Consideration"). As of December 31, 1996,
the aggregate Preferred Stock Reorganization Consideration would be
approximately $25.2 million (including $5.2 million of accrued dividends). As of
October 31, 1996, 12,000,000 shares of Holdings Common Stock and 200,000 shares
of Holdings Preferred Stock were outstanding, all of which were issued in July
and August of 1994 when the Company was formed. See "Reorganization and GEPT
Private Placement." Certain officers and directors of the Company own Holdings
Preferred Stock and will therefore receive a portion of the Preferred Stock
Reorganization Consideration. See "Ownership of Voting Securities" and "Certain
Transactions."
The principal executive offices of the Company are located at 33309 First
Way South, Suite A-206, Federal Way, Washington 98003, and its telephone number
is (206) 838-0346.
CONTROL OF THE COMPANY
Prior to this Offering, approximately 92% of the voting power (through
direct ownership of shares and the grant of irrevocable proxies) and 72% of the
common equity in the Company are held by Aurora Equity Partners L.P. and Aurora
Overseas Equity Partners I, L.P. (collectively, the "Aurora Partnerships"). The
general partner of each of the Aurora Partnerships is indirectly controlled by
Messrs. Richard R. Crowell, Richard K. Roeder and Gerald L. Parsky. Messrs.
Crowell and Roeder are also directors of the Company. Upon consummation of this
Offering and the GEPT Private Placement, the Company will continue to be
controlled by the Aurora Partnerships, which will hold approximately 73% of the
voting power (through direct ownership and the grant of irrevocable proxies) and
50% of the common equity in the Company. See "Risk Factors -- Control of the
Company; Anti-Takeover Matters," "Ownership of Voting Securities" and "Certain
Transactions."
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company............................ 3,500,000 shares
Common Stock to be outstanding after
this Offering...................... 16,455,794 shares (1)
Use of proceeds..................... For (i) the retirement of $40 million aggregate
principal amount of the Company's outstanding 12%
Series B Senior Subordinated Notes Due 2004 (the
"Series B Notes") and 12% Series D Senior
Subordinated Notes Due 2004 (the "Series D Notes"
and, collectively with the Series B Notes, the
"Senior Notes"), and the payment of the related
retirement premium of up to $4.8 million as of
December 31, 1996 and accrued interest of $2.0
million as of the same date on the Senior Notes to be
retired, and (ii) for the payment of a portion of the
aggregate Preferred Stock Reorganization
Consideration. The balance of the Preferred Stock
Reorganization Consideration will be borrowed under
the Company's revolving credit facility. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol............................. "ATAC"
</TABLE>
In addition, the Company will sell to the Trustees of the General Electric
Pension Trust ("GEPT"), which presently owns approximately 8.9% of the Common
Stock, the number of shares of restricted Common Stock equal to $12.0 million
divided by the Price to Public less Underwriting Discounts and Commissions (the
"GEPT Private Placement") simultaneously with the closing of this Offering. See
"Reorganization and GEPT Private Placement."
- ---------
(1) Reflects the issuance of 955,794 shares of Common Stock in the GEPT Private
Placement (assuming a Price to Public of $13.50 per share) and excludes the
issuance of 421,056 shares reserved for issuance upon the exercise of
outstanding warrants and 2,272,218 shares reserved for issuance upon the
exercise of outstanding employee stock options.
RISK FACTORS
See "Risk Factors" for a description of certain risks to be considered
before making an investment in the Common Stock.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present summary historical statement of income data for
the year ended December 31, 1993, summary pro forma statement of income data for
the years ended December 31, 1994 and December 31, 1995 and for the nine months
ended September 30, 1995 and 1996, and summary historical balance sheet data at
December 31, 1995 and September 30, 1996. The 1993 data were derived from the
Combined Financial Statements of the Predecessor Companies. The pro forma 1994
data were derived from the Combined Financial Statements of the Predecessor
Companies and the Consolidated Financial Statements of the Company. The 1995 and
1996 data were derived from the Consolidated Financial Statements of the
Company. The pro forma adjustments give effect to the Company's formation and
its subsequent acquisitions (including related financings) as indicated in the
applicable footnotes below. The "as adjusted" amounts give effect to this
Offering, the GEPT Private Placement and borrowings under the Company's
revolving credit facility and the anticipated application of the net proceeds
therefrom. See "Use of Proceeds." This data should be read in connection with
the "Selected Financial Data," "Pro Forma Financial Data," "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the Combined and Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED PRO FORMA PRO FORMA YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30,
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, --------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996
1993 (1) 1994 (2) 1995 (3) AS ADJUSTED (3)(4) 1995 (3) 1996 (5) AS ADJUSTED (4)(5)
------------ ------------ ------------ ------------------ -------- -------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................ $110,702 $157,792 $224,837 $224,837 $163,030 $208,066 $208,066
Cost of sales............ 66,687 92,857 138,140 138,140 101,614 128,355 128,355
------------ ------------ ------------ -------- -------- -------- --------
Gross profit............. 44,015 64,935 86,697 86,697 61,416 79,711 79,711
Selling, general and
administrative
expenses................ 25,682 30,361 45,181 45,181 32,430 40,177 40,177
Amortization of
intangible assets....... 28 3,057 3,943 3,943 2,979 2,895 2,895
------------ ------------ ------------ -------- -------- -------- --------
Operating income......... 18,305 31,517 37,573 37,573 26,007 36,639 36,639
Interest expense
(income), net........... (302) 14,521 19,571 16,097 14,908 14,845 12,019
Income taxes............. 471 6,902 7,291 8,722 4,495 8,979 10,143
------------ ------------ ------------ -------- -------- -------- --------
Net income............... 18,136 10,094 10,711 12,754 6,604 12,815 14,477
Preferred stock dividends
(6)..................... -- 2,000 2,093 -- 1,542 1,689 --
------------ ------------ ------------ -------- -------- -------- --------
Net income available to
common stockholders..... $ 18,136 $ 8,094 $ 8,618 $ 12,754 $ 5,062 $ 11,126 $ 14,477
------------ ------------ ------------ -------- -------- -------- --------
------------ ------------ ------------ -------- -------- -------- --------
Pro forma (7):
Net income per share... $ 0.74 $ 0.80
Shares used in
computation of net
income per share...... 17,297 18,080
OTHER DATA:
Capital expenditures
(8)..................... $ 2,310 $ 3,186 $ 5,187 $ 5,187 $ 3,905 $ 5,893 $ 5,893
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
DECEMBER 31, 1995 ACTUAL AS ADJUSTED (9)
----------------- --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................... $ 57,066 $ 65,140 $ 57,908
Property, plant and equipment (net)................................ 10,784 15,386 15,386
Total assets....................................................... 247,932 267,346 267,468
Long-term debt (10)................................................ 162,246 162,047 136,579
Preferred stock (6)................................................ 20,000 20,000 --
Common stockholders' equity........................................ 30,188 40,847 92,650
</TABLE>
- ---------
(FOOTNOTES ON FOLLOWING PAGE)
7
<PAGE>
(FOOTNOTES FROM PRIOR PAGE)
(1) Represents the combined historical results of the Predecessor Companies.
These results do not reflect the taxes that would have been payable by
certain of the Predecessor Companies if they had been taxed as C
Corporations rather than S Corporations during the period. In addition, the
results do not reflect the following adjustments related to the Initial
Acquisitions: (i) the interest expense and amortization of related financing
costs incurred in connection with the Initial Acquisitions; (ii) the
amortization of the goodwill created in connection with the Initial
Acquisitions; and (iii) the adjustment of compensation expense to levels
provided in new employment agreements following the Initial Acquisitions.
Accordingly, the 1993 combined results are not presented on the same basis
as the other periods presented.
(2) Reflects: (i) the results of operations of the Predecessor Companies as if
the Initial Acquisitions had occurred on January 1, 1994; (ii) federal and
state income taxes that would have been incurred for the year had all
Predecessor Companies been taxed as C Corporations and filed under a
consolidated tax return for the full period; and (iii) the initial capital
contribution made by Holdings in connection with the Initial Acquisitions as
if it had been made on January 1, 1994. The following reconciles the
Predecessor Companies' combined net income for the seven months ended July
31, 1994 (the date of the Initial Acquisitions) and the Company's
consolidated net income for the five months ended December 31, 1994 to the
pro forma net income for the year ended December 31, 1994:
<TABLE>
<S> <C>
Predecessor Companies' combined net income for the seven months ended July
31, 1994................................................................. $ 17,483
Company's consolidated net income for the five months ended December 31,
1994..................................................................... 3,611
---------
21,094
Net increase in interest expense on debt incurred in the Initial
Acquisitions............................................................. (8,640)
Increase in amortization of intangible assets acquired..................... (1,838)
Decrease in expenses associated with special bonuses paid by the
Predecessor Companies and other costs not duplicated..................... 4,320
Increase in cost of sales related to inventory write-up.................... (500)
Increase in provision for taxes for certain Predecessor Companies
previously taxed as S Corporations....................................... (4,342)
---------
$ 10,094
---------
---------
</TABLE>
(3) Reflects the results of operations of CRS, Mascot, King-O-Matic, Tranzparts
and Diverco as if the 1995 Acquisitions (including related financings) and
the 1996 Acquisitions had occurred on January 1, 1995.
(4) As adjusted to give effect to the application of the estimated net proceeds
from this Offering, the GEPT Private Placement and borrowings under the
Company's revolving credit facility as if such transactions had occurred at
the beginning of the respective periods. Amounts do not reflect the impact
of the premium associated with the early retirement of $40 million in
aggregate principal amount of the Senior Notes that, combined with the
related unamortized debt issuance costs, will be expensed as an
extraordinary item at the time of retirement. As of September 30, 1996, the
extraordinary item would have been $3.4 million after the effect of taxes.
See "Use of Proceeds."
(5) Reflects the results of operations of Tranzparts and Diverco as if the 1996
Acquisitions had occurred on January 1, 1996.
(6) Consists of Holdings Preferred Stock. See "Reorganization and GEPT Private
Placement."
(7) Pro forma net income per share amounts are based on the number of shares
determined in accordance with Note 1 of Notes to Consolidated Financial
Statements, adjusted for the number of shares assumed to be issued in
connection with this Offering and the GEPT Private Placement as if this
Offering and the GEPT Private Placement had occurred at the beginning of the
respective periods.
(8) Excludes capital expenditures made by each of CRS, Mascot, King-O-Matic,
Tranzparts and Diverco prior to such subsidiaries' respective acquisitions
and any capital expenditures made in connection with such acquisitions.
(9) As adjusted to give effect to (i) the application of the estimated net
proceeds from this Offering and the GEPT Private Placement (based on an
assumed Price to Public of $13.50 per share) and (ii) borrowings under the
Company's revolving credit facility. See "Use of Proceeds" and
"Capitalization."
(10) Excludes deferred tax liabilities. See Note 5 of Selected Financial Data.
8
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SPECIFIC FACTORS SET
FORTH BELOW AS WELL AS THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE
DECIDING TO INVEST IN THE COMMON STOCK OFFERED HEREBY.
DEPENDENCE ON SIGNIFICANT CUSTOMER. The Company's largest customer,
Chrysler, accounted for approximately $67.6 million and $72.7 million of the
Company's combined net sales for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively, or approximately 35.4% and 36.5%,
respectively, of the Company's net sales for such periods. No other customer
accounted for more than 10% of the Company's net sales during either of such
periods. Chrysler, like other North American OEMs, generally requires its
dealers using remanufactured products to use only those from approved suppliers.
Although the Company is currently the only factory-approved supplier of
remanufactured transmissions to Chrysler, Chrysler is not obligated to continue
to purchase the Company's products and there can be no assurance that the
Company will be able to maintain or increase the level of its sales to Chrysler
or that Chrysler will not approve other suppliers in the future. In addition,
within the last two years Chrysler reduced its standard new vehicle warranty
from seven years/70,000 miles to three years/36,000 miles and could implement a
shorter warranty in the future. Any such action could have the effect of
reducing the amount of warranty work performed by Chrysler dealers. An extended,
substantial decrease in orders from Chrysler would have a material adverse
effect on the Company. See "Business -- Marketing and Distribution; OEM
Customers."
SHORTAGE OF TRANSMISSION CORES AND COMPONENT PARTS. In its remanufacturing
operations, the Company obtains used transmissions, hard parts, engines and
related components, commonly known as "cores," which are sorted and either
placed into immediate production or stored until needed. The majority of the
cores remanufactured by the Company are obtained from customers as trade-ins.
The ability to obtain cores of the types and in the quantities required by the
Company is critical to the Company's ability to meet demand and expand
production. With the increased acceptance in the aftermarket of remanufactured
assemblies, the demand for cores has increased. The Company periodically has
experienced situations in which the inability to obtain sufficient cores has
limited its ability to accept all of the orders available to it. As part of its
expanding relationship with Chrysler and in response to the periodic shortage of
cores, in 1995 the Company established a central core return center for all of
Chrysler's transmission product lines. The operation of this facility enables
the Company to receive cores on a more timely basis and better monitor the
availability of cores. There can be no assurance that the Company will not
experience core shortages in the future. If the Company were to experience such
a shortage, it could have a material adverse effect on the Company.
Certain component parts required in the remanufacturing process are
manufactured by Chrysler and the Company's other OEM customers. The Company has
experienced shortages of such component parts from time to time in the past and
future shortages could have a material adverse effect on the Company.
ABILITY TO ACHIEVE AND MANAGE GROWTH. An important element in the Company's
growth strategy is the acquisition and integration of complementary businesses
in order to broaden its product offerings, capture market share and improve
profitability. There can be no assurance that the Company will be able to
identify or reach mutually agreeable terms with acquisition candidates, or that
the Company will be able to manage additional businesses profitably or
successfully integrate such additional businesses into the Company without
substantial costs, delays or other problems. Acquisitions may involve a number
of special risks, including: initial reductions in the Company's reported
operating results; diversion of management's attention; unanticipated problems
or legal liabilities; and a possible reduction in reported earnings due to
amortization of acquired intangible assets in the event that such acquisitions
are made at levels that exceed the fair market value of net tangible assets.
Some or all of these items could have a material adverse effect on the Company.
There can be no assurance that businesses acquired in the future will achieve
sales and profitability that justify the investment therein. In addition, to the
extent that consolidation becomes more prevalent in the industry, the prices for
attractive acquisition candidates may increase to unacceptable levels. See
"Business -- Business Strategy -- External Growth."
In addition to growth through acquisitions, the Company plans to expand its
existing operations by broadening its product lines and increasing the number of
its distribution centers in the United States. There
9
<PAGE>
can be no assurance that any new product lines introduced by the Company will be
successful, that the Company will manage successfully the start-up and marketing
of new products or that additional distribution centers will be integrated into
the Company's existing operations or will be profitable. See "Business --
Business Strategy -- Internal Growth."
INDEBTEDNESS AND LIQUIDITY. The Company had outstanding indebtedness of
$165.0 million at September 30, 1996, bearing interest at a weighted average
rate of 11.7%, and the Company's ratio of earnings to fixed charges for the nine
months then ended was 2.3 to 1. After giving effect to the consummation of this
Offering, the GEPT Private Placement, borrowings under the Company's revolving
credit facility and the application of the estimated net proceeds therefrom
(after deducting the underwriting discount and estimated expenses of this
Offering), the consolidated long-term indebtedness of the Company at September
30, 1996 would have been $136.6 million and the Company's ratio of earnings to
fixed charges for the nine months then ended would have been 2.8 to 1. On
October 1, 1996, the Company borrowed $6.9 million under its revolving credit
facility to purchase Diverco. The level of the Company's consolidated
indebtedness could have important consequences to the holders of Common Stock,
including the following: (i) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal of and interest on
its indebtedness and will not be available for other purposes; (ii) the ability
of the Company to obtain financing in the future for working capital needs,
capital expenditures, acquisitions, investments, general corporate purposes or
other purposes may be materially limited or impaired; (iii) the Company's level
of indebtedness may reduce its flexibility to respond to changing business and
economic conditions or take advantage of business opportunities that may arise;
and (iv) the ability of the Company to pay dividends is restricted. See
"Dividend Policy." Any default by the Company with respect to its outstanding
indebtedness, or any inability on the part of the Company to obtain necessary
liquidity, would have a material adverse effect on the Company. See "Use of
Proceeds" and "Description of Certain Indebtedness."
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the continued
services of its management team, including William A. Smith, Chairman of the
Board and Stephen J. Perkins, President and Chief Executive Officer. Mr.
Perkins, Mr. Smith, Wesley N. Dearbaugh, President and General Manager of
Independent Aftermarket, and the presidents of the operating subsidiaries have
an average of 21 years experience in the automotive aftermarket industry.
Although the Company believes it could replace key employees in an orderly
fashion should the need arise, the loss of such personnel could have a material
adverse effect on the Company.
ENVIRONMENTAL MATTERS. The Company is subject to various evolving federal,
state, local and foreign environmental laws and regulations governing, among
other things, emissions to air, discharge to waters and the generation,
handling, storage, transportation, treatment and disposal of a variety of
hazardous and non-hazardous substances and wastes. These laws and regulations
provide for substantial fines and criminal sanctions for violations. The
operation of automotive parts remanufacturing plants involves environmental
risks.
The company from which RPM acquired its assets (the "Prior RPM Company"),
has been identified by the United States Environmental Protection Agency (the
"EPA") as one of the many potentially responsible parties for environmental
liabilities associated with a "Superfund" site located in the area of RPM's
former manufacturing facilities and current distribution facility in Azusa,
California. The EPA has preliminarily estimated that it will cost approximately
$47 million to construct and approximately $4 million per year for an indefinite
period to operate an interim remedial groundwater pumping and treatment system
for a part of the subregion of the Superfund site within which RPM's former
manufacturing facilities and current distribution facility, as well as those of
many other potentially responsible parties, are located. The actual cost of this
remedial action could vary substantially from this estimate, and additional
costs associated with the Superfund site are likely to be assessed. The Company
has significantly reduced its presence at the site and has moved all
manufacturing operations off-site. Since July 1995, the Company's only real
property interest in this site has been the lease of a 6,000 square foot storage
and distribution facility. The RPM acquisition agreement and the leases pursuant
to which the Company leased RPM's facilities after the Company acquired the
assets of RPM (the "RPM Acquisition") expressly provide that the Company did not
10
<PAGE>
assume any liabilities for environmental conditions existing on or before the
RPM Acquisition, although the Company could become responsible for these
liabilities under various legal theories. The Company is indemnified against any
such liabilities by the seller of RPM as well as the Prior RPM Company
shareholders. There can be no assurance, however, that the Company would be able
to make any recovery under any indemnification provisions. Since the RPM
Acquisition, the Company has been engaged in negotiations with the EPA to settle
any liability that it may have for this site. The Company believes, although
there can be no assurance, that it will not incur any material liability as a
result of these pre-existing environmental conditions.
In connection with the Initial Acquisitions, the Company conducted certain
investigations of Aaron's, RPM's, HTP's and Mamco's facilities (in addition to
the Prior RPM Company's Azusa facilities) and their compliance with applicable
environmental laws. The Company conducted similar investigations in connection
with its subsequent acquisitions of CRS, Mascot, King-O-Matic, Tranzparts and
Diverco. The investigations, which included "Phase I" assessments by independent
consultants of all manufacturing and certain distribution facilities, found that
certain remedial, reporting and other regulatory requirements, including certain
waste management procedures, were not or may not have been satisfied. Based in
part on the investigations conducted, and the indemnification provisions of the
agreements entered into in connection with the Initial Acquisitions and the
Company's subsequent acquisitions, the Company believes, although there can be
no assurance, that its liabilities relating to these environmental matters will
not have a material adverse effect, individually or in the aggregate, on the
Company. See "Business -- Environmental."
COMPETITION. The automotive aftermarket for transmissions, engines and
other drive train products is highly fragmented and highly competitive. There
can be no assurance that the Company will compete successfully with other
companies in its industry segment, some of which are larger than the Company and
have greater financial and other resources available to them than does the
Company.
CONTROL OF THE COMPANY; ANTI-TAKEOVER MATTERS. Upon consummation of this
Offering and the GEPT Private Placement, the Company will continue to be
controlled by the Aurora Partnerships, which will hold approximately 73% of the
voting power in the Company (through direct ownership and the grant of
irrevocable proxies). Therefore, the Aurora Partnerships will be able to elect
all of the directors of the Company and to approve or disapprove any matter
submitted to a vote of the Company's stockholders. As a result of the Aurora
Partnerships' substantial ownership interest in the Common Stock, it may be more
difficult for a third party to acquire the Company. A potential buyer would
likely be deterred from any effort to acquire the Company absent the consent of
the Aurora Partnerships or their participation in the transaction. The general
partner of each of the Aurora Partnerships is controlled by Messrs. Crowell,
Roeder and Parsky. Messrs. Crowell and Roeder are directors of the Company. The
Indentures governing the Senior Notes contain provisions that would allow a
holder to require the Company to repurchase such holder's Senior Notes at a cash
price equal to 101% of the principal amount thereof, together with accrued
interest, upon the occurrence of a change of control of the Company. See
"Ownership of Voting Securities" and "Description of Certain Indebtedness."
In addition, the Company's Board of Directors is authorized, subject to
certain limitations prescribed by law, to issue up to 1,000,000 shares of
preferred stock in one or more classes or series and to fix the designations,
powers, preferences, rights, qualifications, limitations or restrictions,
including voting rights, of those shares without any further vote or action by
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate transactions, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of preferred stock.
POSSIBLE EFFECT ON SHARE PRICE OF SHARES ELIGIBLE FOR FUTURE SALE. Upon
consummation of this Offering and the GEPT Private Placement, the Company will
have approximately 16,455,794 shares of Common Stock outstanding, of which
approximately 12,955,794 shares will be "restricted securities" within the
meaning of Rule 144 ("Rule 144") promulgated under the Securities Act of 1933,
as amended (the
11
<PAGE>
"Securities Act"), and may not be sold without registration under the Securities
Act unless an exemption from registration is available. Each of the Company's
current stockholders (including GEPT) and certain holders of the Company's
outstanding options have been granted certain "piggyback" registration rights
and will be granted certain "demand" registration rights with respect to the
shares of Common Stock owned by them or to be issued to them. However, subject
to certain exceptions, the Company will agree not to offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase an option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Common Stock for a period of 180 days from the date of this Prospectus without
the prior written consent of Morgan Stanley & Co. Incorporated. Each of the
Company's current stockholders (including GEPT), directors, executive officers
and warrant holders will enter into or is bound by a similar agreement. No
predictions can be made as to the effect, if any, that public sales of shares or
the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of the Common
Stock in the public market, particularly by directors and officers of the
Company, or the perception that such sales could occur, could have an adverse
effect on the market price of the Common Stock. See "Shares Eligible for Future
Sale."
DILUTION. The initial public offering price per share of Common Stock will
exceed the net tangible book value per share of Common Stock. Accordingly, the
current stockholders of the Company will experience an immediate appreciation in
the net tangible book value of their equity investment in the Company, and the
purchasers of Common Stock will experience immediate and substantial dilution in
the net tangible book value of their equity investment in the Company. In
addition, there will be outstanding after the consummation of this Offering and
the GEPT Private Placement options and warrants to purchase approximately
2,693,274 shares of Common Stock at exercise prices ranging from $1.67 to $4.67
per share, the exercise of which would cause further dilution to new investors.
See "Dilution."
ABSENCE OF A PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior to this
Offering, there has been no public market for the Common Stock. Consequently,
the initial public offering price will be determined through negotiations
between the Company and representatives of the Underwriters. See "Underwriters"
for factors to be considered in determining the initial public offering price.
There can be no assurance that a regular trading market for the Common Stock
will develop after this Offering or, if developed, that a public trading market
can be sustained. The initial public offering price will not necessarily
reflect, and may be higher than, the market price of the Common Stock after this
Offering.
12
<PAGE>
RECENT DEVELOPMENTS
On October 1, 1996 the Company acquired Diverco, Inc., a distributor of
standard drive train parts (primarily gears, transfer cases, synchronizers,
bearings), engine parts (valve train components), gaskets and other soft parts
for transmission and engine repair and complete transmissions for light trucks
and automobiles for aftermarket customers. On the acquisition closing date, the
Company made an initial cash payment of $8.5 million, with a potential future
post-closing purchase price adjustment to be made based upon Diverco's financial
performance for the year ending December 31, 1996. Diverco's sales have
increased from $6.7 million for the year ended December 31, 1993 to $7.3 million
for the 12 months ended August 31, 1996. Diverco is located in Harvey, Illinois.
The Company periodically evaluates acquisition opportunities in the
automotive aftermarket business and expects to continue to do so in the future.
The Company has entered into a non-binding letter of intent for another North
American drive train parts distributor. The letter of intent provides for a
purchase price of approximately $10 million and is subject to certain
contingencies, including the Company's satisfactory completion of business,
legal, accounting and environmental due diligence reviews, negotiation of
definitive agreements, and approval of the respective transactions by the
Company's Board of Directors. The letter of intent does not obligate either the
Company or the potential acquisition candidate to enter into a definitive
agreement, and there can be no assurance given that the Company will enter into
a definitive acquisition agreement or consummate such acquisition.
REORGANIZATION AND GEPT PRIVATE PLACEMENT
Simultaneous with the consummation of this Offering, Holdings will be merged
into ATC. Upon the effectiveness of such merger, each outstanding share of
Holdings Common Stock will be converted into one share of ATC Common Stock and
each outstanding share of Holdings Preferred Stock will be converted into the
right to receive the Preferred Stock Reorganization Consideration. As of
December 31, 1996 the aggregate Preferred Stock Reorganization Consideration
would be approximately $25.2 million (including $5.2 million of accrued
dividends as of such date). Holdings' 1994 Stock Incentive Plan will become
ATC's plan (the "Stock Incentive Plan"), and outstanding employee stock options
that were issued by Holdings pursuant to the Holdings plan will be converted
into options to purchase ATC Common Stock. Outstanding warrants that were issued
by Holdings will be converted into warrants to purchase ATC Common Stock. Prior
to the completion of this Offering, Holdings will amend and restate its charter
to increase its authorized capitalization to 30,000,000 shares of Common Stock
and 5,000,000 shares of Preferred Stock, and will consummate a six-for-one stock
split.
The Company will sell to GEPT $12.0 million of Common Stock in the GEPT
Private Placement simultaneously with the closing of this Offering. The price
per share for such Common Stock will be the price per share paid by the
Underwriters in this Offering, that is, the public offering price per share less
Underwriters' discounts and commissions. Assuming a public offering price of
$13.50 per share in this Offering, GEPT's price would be approximately $12.56
per share and it would purchase 955,794 shares of Common Stock. Although GEPT
would receive Common Stock which has not been registered under the Securities
Act, it will also receive a "demand" registration right with respect to such
stock and 300,000 shares of Common Stock it currently owns, which right is not
exercisable until after the end of the 180-day "lock-up" period described in
"Underwriting." See "Shares Eligible for Future Sale." The GEPT Private
Placement is conditioned on consummation of an initial public offering by the
Company.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares
offered hereby are estimated to be approximately $43.2 million (approximately
$49.8 million if the Underwriters' over-allotment option is exercised in full),
based upon an assumed offering price of $13.50 per share and after deducting
estimated underwriting discounts and offering expenses. The proceeds to the
Company from the GEPT Private Placement will be approximately $12 million.
The net proceeds of this Offering will be used by the Company to retire
$40,000,000 in aggregate principal amount of the Company's Senior Notes. Such
Senior Notes may be retired pursuant to provisions thereof permitting redemption
out of the net proceeds of certain sales of equity securities or pursuant to
repurchases in the open market. Redemption would be made at a redemption price
of 112% plus accrued interest thereon (assuming a December 31, 1996 redemption
date) and after the giving of at least 30 days' prior written notice to the
holders of the Senior Notes to be redeemed. Any remaining proceeds of this
Offering (including from any exercise of the Underwriters' over-allotment
option), together with the proceeds from the GEPT Private Placement and
borrowings under the Company's revolving credit facility, will be used by the
Company to pay the aggregate Preferred Stock Reorganization Consideration
(approximately $25.2 million, assuming a December 31, 1996 Reorganization date).
Pending application of the net proceeds of this Offering as described
herein, the Company intends to invest the proceeds in investment-grade,
short-term, interest-bearing securities.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock to date. Because
the Company currently intends to retain any earnings to provide funds for the
operation and expansion of its business and for the servicing and repayment of
indebtedness, the Company does not intend to pay cash dividends on the Common
Stock in the foreseeable future. Furthermore, as a holding company with no
independent operations, the ability of the Company to pay cash dividends will be
dependent upon the receipt of dividends or other payments from its subsidiaries.
Under the terms of the Indentures governing the Senior Notes, the Company is not
permitted to pay any dividends on the Common Stock unless certain financial
ratio tests are satisfied. In addition, the Company's revolving credit facility
contains certain covenants which, among other things, prohibit the payment of
dividends by the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." Any
determination to pay cash dividends on the Common Stock in the future will be at
the sole discretion of the Company's Board of Directors.
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1996, and as adjusted to give effect to the estimated
net proceeds from the sale of 3,500,000 shares of Common Stock at an assumed
offering price of $13.50 per share in this Offering, the receipt of $12.0
million from the GEPT Private Placement, and the application thereof and of
borrowings under the Company's revolving credit facility as described under "Use
of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT:
12% Senior Notes due 2004........................................................... $ 162,047 $ 121,536
Revolving credit facility(1)........................................................ -- 15,043
---------- -----------
Total long-term debt.............................................................. 162,047 136,579
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized; 200,000 shares issued
and outstanding; no shares issued and outstanding, as adjusted (2)................. 20,000 --
Common stock, $.01 par value, 30,000,000 shares authorized; 12,000,000 shares issued
and outstanding; 16,455,794 shares as
adjusted (3)....................................................................... 20,000 75,193
Retained earnings................................................................... 20,815 17,425(4)
Cumulative translation adjustment................................................... 32 32
---------- -----------
Total stockholders' equity........................................................ 60,847 92,650
---------- -----------
Total capitalization............................................................ $ 222,894 $ 229,229
---------- -----------
---------- -----------
</TABLE>
- ---------
(1) The Company had approximately $26 million available under its $30 million
revolving credit facility as of September 30, 1996. On October 1, 1996, the
Company borrowed $6.9 million under the revolving credit facility to
purchase Diverco.
(2) Consists of Holdings Preferred Stock. See "Recapitalization."
(3) Does not give effect to the issuance of shares reserved for issuance upon
the exercise of outstanding warrants and employee stock options. See "Shares
Eligible for Future Sale."
(4) The 12% Senior Notes are assumed to be retired at their redemption premium.
This premium, combined with the related unamortized debt issuance costs,
will be expensed as an extraordinary item at the time of redemption. As of
September 30, 1996, the extraordinary item would have been $3.4 million
after the effect of taxes.
15
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1996 was ($99.4) million, or ($8.28) per share of Common Stock. Net tangible
book value per share is determined by dividing the tangible net worth of the
Company (total assets less intangible assets and total liabilities) by the
number of common shares outstanding, after giving effect to the payment of the
Preferred Stock Reorganization Consideration. Without taking into account any
changes in such net tangible book value after September 30, 1996, other than to
give effect to the sale of the 3,500,000 shares of Common Stock at an assumed
initial public offering price of $13.50 per share, the GEPT Private Placement
and the anticipated application of the net proceeds therefrom, pro forma net
tangible book value of the Company as of September 30, 1996 would have been
approximately ($47.6) million, or ($2.89) per share (after giving effect to the
use of the net proceeds from this Offering and the GEPT Private Placement). This
represents an immediate increase in net tangible book value of $5.39 per share
to current ATC stockholders and an immediate dilution of $16.39 per share to new
stockholders. Dilution to new stockholders is determined by subtracting the net
tangible book value per share after this Offering from the initial public
offering price per share. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share........... $ 13.50
Net tangible book value per share before this
Offering....................................... ($8.28)
Increase per share attributable to sale of
Common Stock................................... 5.39
---------
Pro forma net tangible book value per share after
this Offering.................................... (2.89)
---------
Dilution per share to new investors............... $ 16.39
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996, the difference between existing stockholders after giving effect to the
payment of the Preferred Stock Reorganization Consideration and the purchasers
of shares in this Offering and in the GEPT Private Placement with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by purchasers of the shares offered hereby (before deducting
the underwriting discount and estimated offering expenses payable by the
Company).
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 12,000,000 72.9% $ 20,000,000 25.2% $ 1.67
New investors......................... 3,500,000 21.3 47,250,000 59.7 13.50
GEPT (GEPT Private Placement only).... 955,794 5.8 12,000,000 15.1 12.56
------------ ----- ------------- -----
Total............................. 16,455,794 100.0% $ 79,250,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ---------
(1) Does not give effect to the issuance of shares reserved for issuance upon
the exercise of outstanding warrants and employee stock options. See "Shares
Eligible for Future Sale." To the extent warrants or options are exercised,
there will be further dilution to new investors.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the statements
of income for the year ended December 31, 1993, seven months ended July 31,
1994, five months ended December 31, 1994, and the year ended December 31, 1995
and the balance sheets at December 31, 1994 and 1995 are derived from the
Combined Financial Statements of the Predecessor Companies and Consolidated
Financial Statements of the Company that have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere herein, and are qualified by
reference to such financial statements and notes related thereto. The selected
financial data with respect to the statement of income data for the year ended
December 31, 1992 and the balance sheet data at December 31, 1992 and 1993, are
derived from the audited Combined Financial Statements of the Predecessor
Companies that have been audited by Ernst & Young LLP, independent auditors, but
are not included herein. The balance sheet data at December 31, 1991 and the
statement of income data for the year then ended are derived from the unaudited
financial statements of the Predecessor Companies. The balance sheet data at
September 30, 1996 and the statement of income data for the nine months ended
September 30, 1995 and 1996 are derived from unaudited consolidated financial
statements. The unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, the Company
considers necessary for a fair presentation of the financial position at such
date and the results of operations for such periods. Operating results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. The data
provided should be read in conjunction with the Consolidated Financial
Statements, related notes, and other financial information included in this
Prospectus.
<TABLE>
<CAPTION>
COMBINED
--------------------------------------------- CONSOLIDATED
------------------------------------------------
FOR THE FOR THE NINE
YEAR ENDED FOR THE FOR THE FIVE FOR THE YEAR MONTHS ENDED
DECEMBER 31, SEVEN MONTHS MONTHS ENDED ENDED SEPTEMBER 30,
-------------------------- ENDED DECEMBER 31, DECEMBER 31, ------------------
1991 1992 1993 JULY 31, 1994 (1) 1994 1995 1995 1996
------- ------- -------- ----------------- ------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales......................... $63,612 $75,264 $110,702 $90,056 $67,736 $190,659 $132,472 $199,307
Cost of sales..................... 39,770 45,588 66,687 52,245 40,112 115,499 82,051 122,458
------- ------- -------- ------- ------------ ------------ -------- --------
Gross profit...................... 23,842 29,676 44,015 37,811 27,624 75,160 50,421 76,849
Selling, general and
administrative expenses.......... 18,220 22,103 25,682 20,475 14,206 38,971 26,438 38,651
Amortization of intangible
assets........................... 28 28 28 16 1,210 3,308 2,392 2,781
------- ------- -------- ------- ------------ ------------ -------- --------
Operating income.................. 5,594 7,545 18,305 17,320 12,208 32,881 21,591 35,417
Interest expense (income), net.... (314) (258) (302) (158) 6,032 16,915 12,290 14,430
Income taxes (2).................. 145 150 471 (5) 2,565 6,467 3,080 8,646
------- ------- -------- ------- ------------ ------------ -------- --------
Net income........................ $ 5,763 $ 7,653 $ 18,136 $17,483 3,611 9,499 6,221 12,341
------- ------- -------- -------
------- ------- -------- -------
Preferred stock dividends......... 853 2,093 1,542 1,689
------------ ------------ -------- --------
Net income available to common
stockholders..................... $ 2,758 $ 7,406 $ 4,679 $ 10,652
------------ ------------ -------- --------
------------ ------------ -------- --------
Pro forma (unaudited)(3):
Net income per share............ $ 0.65 $ 0.79
Shares used in computation of
net income per share........... 14,616 15,555
OTHER DATA:
Capital expenditures (4).......... $ 1,149 $ 1,141 $ 2,310 $ 1,850 $ 1,336 $ 5,187 $ 3,905 $ 5,893
</TABLE>
- ---------
(FOOTNOTES ON FOLLOWING PAGE)
17
<PAGE>
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
------------------------- -----------------------------
DECEMBER 31, DECEMBER 31,
------------------------- ------------------ SEPTEMBER
1991 1992 1993 1994 1995 30, 1996
------- ------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $14,825 $18,639 $26,651 $ 39,646 $ 57,066 $ 65,140
Property, plant and equipment
(net)............................. 3,167 3,274 4,678 6,196 10,784 15,386
Total assets....................... 26,558 32,654 45,618 187,293 247,932 267,346
Long-term debt (5)................. 1,060 1,497 998 121,483 165,724 166,793
Preferred stock.................... -- -- -- 20,000 20,000 20,000
Common stockholders' equity........ 18,144 22,107 31,720 22,757 30,188 40,847
</TABLE>
- ---------
(1) The combined financial statements for the seven months ended July 31, 1994
include the operations of the Predecessor Companies up to their respective
acquisition dates; operations for RPM between July 20, 1994 and July 31,
1994 and for the other three Predecessor Companies for August 1st and 2nd,
1994 are not significant. All material transactions between the Predecessor
Companies have been eliminated.
(2) Two of the Predecessor Companies elected to be taxed as S Corporations for
all periods through consummation of the Initial Acquisitions; therefore, for
federal and state income tax purposes, any income or loss generally was not
taxed to these companies but was reported by their respective stockholders.
A pro forma provision for taxes based on income reflecting the estimated
provision for federal and state income taxes which would have been provided
had these companies been C Corporations and included in consolidated returns
with the Company is as follows: $2,304, $3,036 and $7,334 for the years
ended December 31, 1991, 1992 and 1993, respectively, and $7,004 for the
seven months ended July 31, 1994.
(3) See Note 1 of Notes to Consolidated Financial Statements for description of
the computation of pro forma net income per share. Giving effect to this
Offering, the GEPT Private Placement, borrowings under the Company's
revolving credit facility and the application of such funds as set forth
under "Use of Proceeds" as if the same had occurred on January 1, 1995, pro
forma net income per share would have been $0.67 for the year ended December
31, 1995, and assuming such transactions had occurred on January 1, 1996,
pro forma net income per share would have been $0.77 for the nine months
ended September 30, 1996.
(4) Excludes capital expenditures made by each of CRS, Mascot, King-O-Matic,
Tranzparts and Diverco prior to such subsidiaries' respective acquisitions
and any capital expenditures made in connection with such acquisitions.
(5) Includes deferred tax liabilities of $1,438, $3,478 and $4,746 at December
31, 1994 and 1995 and September 30, 1996, respectively.
18
<PAGE>
PRO FORMA FINANCIAL DATA
The Unaudited Pro Forma Consolidated Statements of Income give effect to
business acquisitions made in 1995 and 1996 which were accounted for using the
purchase method of accounting. The acquisitions were as follows:
<TABLE>
<S> <C>
Component Remanufacturing Specialists, Inc. (CRS).......... June 1995
Mascot Truck Parts (Mascot)................................ June 1995
King-O-Matic Industries Limited (King-O-Matic)............. September 1995
Tranzparts, Inc. (Tranzparts).............................. April 1996
Diverco, Inc. (Diverco).................................... October 1996
</TABLE>
The Unaudited Pro Forma Consolidated Statements of Income for the year ended
December 31, 1995 and for the nine months ended September 30, 1996 assume that
the 1995 Acquisitions and the 1996 Acquisitions occurred on January 1, 1995 and
the 1996 Acquisitions occurred on January 1, 1996, respectively. The Unaudited
Pro Forma Statements of Income include the historical consolidated statements of
income of the Company (which includes the operations of CRS, Mascot,
King-O-Matic and Tranzparts from the dates of their respective acquisitions),
adjusted for the pro forma effects of the 1995 and 1996 Acquisitions. The
Unaudited Pro Forma Consolidated Statements of Income, as adjusted, for the year
ended December 31, 1995 and for the nine months ended September 30, 1996,
reflect this Offering, the GEPT Private Placement, borrowings under the
Company's revolving credit facility and the application of such funds as set
forth under "Use of Proceeds," as if the same had occurred on January 1, 1995
and January 1, 1996, respectively.
The Unaudited Pro Forma Consolidated Statements of Income are not
necessarily indicative of the results of the operations that would actually have
occurred if the transactions had been consummated as of January 1, 1995 or
January 1, 1996 or of the future operations. These statements should be read in
conjunction with the Consolidated Financial Statements, related notes, and other
financial information included in this Prospectus.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
ACQUIRED PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
COMPANY BUSINESSES (1) ADJUSTMENTS CONSOLIDATED FOR OFFERING AS ADJUSTED (2)
-------- -------------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................. $190,659 $34,178 $224,837 $224,837
Cost of sales.............................. 115,499 21,537 $ 1,104(3) 138,140 138,140
-------- ------- ------------ ---------------
Gross profit............................... 75,160 12,641 86,697 86,697
Selling, general and administrative 38,971 8,008 (2,144)(4) 45,181 45,181
expenses.................................. (38)(5)
296(6)
88(7)
Amortization of intangible assets.......... 3,308 231 404(8) 3,943 3,943
-------- ------- ------------ ---------------
Income from operations..................... 32,881 4,402 37,573 37,573
Interest expense, net...................... 16,915 157 2,639(9) 19,571 $(4,431)(10) 16,097
(140)(11) 957(12)
-------- ------- ------------ ---------------
Income before income taxes................. 15,966 4,245 18,002 21,476
Provision for income taxes................. 6,467 95 729(13) 7,291 1,431(14) 8,722
-------- ------- ------------ ---------------
Net income................................. $ 9,499 $ 4,150 $ 10,711 $ 12,754
-------- ------- ------------ ---------------
-------- ------- ------------ ---------------
</TABLE>
- ---------
(FOOTNOTES ON FOLLOWING PAGE)
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED ADJUSTMENTS
ACQUIRED PRO FORMA PRO FORMA FOR PRO FORMA
COMPANY BUSINESSES ADJUSTMENTS CONSOLIDATED OFFERING AS ADJUSTED (2)
-------- ---------- ------------ ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................................... $199,307 $8,759 $208,066 $208,066
Cost of sales.................................. 122,458 5,897 128,355 128,355
-------- ---------- ------------ ---------------
Gross profit................................... 76,849 2,862 79,711 79,711
Selling, general and administrative expenses... 38,651 2,265 $(787)(4) 40,177 40,177
(18)(5)
66(7)
Amortization of intangible assets.............. 2,781 53 61(8) 2,895 2,895
-------- ---------- ------------ ---------------
Income from operations......................... 35,417 544 36,639 36,639
Interest expense (income), net................. 14,430 (17) 398(9) 14,845 $(3,699)(10) 12,019
(45)(11) 873(12)
79(15)
-------- ---------- ------------ ---------------
Income before income taxes..................... 20,987 561 21,794 24,620
Provision for income taxes..................... 8,646 41 292(13) 8,979 1,164(14) 10,143
-------- ---------- ------------ ---------------
Net income..................................... $12,341 $ 520 $ 12,815 $ 14,477
-------- ---------- ------------ ---------------
-------- ---------- ------------ ---------------
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(1) Includes the historical operations of the acquired businesses prior to their
acquisition by the Company. Accordingly, included in the 1995 amounts are
CRS and Mascot for the five months ended June 1, 1995 and June 6, 1995,
respectively, King-O-Matic for the eight months ended September 12, 1995 and
Tranzparts and Diverco for the year ended December 31, 1995. The 1996
amounts include Tranzparts for the three months ended April 2, 1996 and
Diverco for the nine months ended September 30, 1996.
(2) As adjusted to give effect to the anticipated application of the net
proceeds from this Offering, the GEPT Private Placement and borrowings under
the Company's revolving credit facility as if such transactions had occurred
at the beginning of the respective periods. Amounts do not reflect the
impact of the early retirement premium on the Senior Notes that, combined
with the related unamortized debt issuance costs, will be expensed as an
extraordinary item at the time of retirement. As of September 30, 1996, the
extraordinary item would have been $3.4 million after the effect of taxes.
(3) Prior to its acquisition by the Company, one of the acquired companies
reduced its inventory reserve to state inventory at its fair value at the
time of the acquisition. Such amount would have been reflected as a purchase
price adjustment on January 1, 1995, and accordingly, is excluded from the
pro forma results for the period.
(4) Adjusts the compensation of the former owners of the acquired companies to
the amount payable under his employment agreement entered into with the
Company at the time of the acquisition.
(5) Reflects the revised rental payments on facilities based upon the lease
agreements signed at the time of the acquisition.
(6) Prior to its acquisition by the Company, one of the acquired companies
reduced its bad debt reserve to reflect estimated net realizable value of
receivables at the time of the acquisition. Such amount would have been
reflected as a purchase price adjustment on January 1, 1995, and
accordingly, is excluded from the pro forma results for the period.
(7) Reflects additional depreciation expense for the acquired companies from the
beginning of the period through the respective acquisition dates.
(8) Reflects additional amortization expense for the acquired companies from the
beginning of the period through the respective acquisition date.
(9) Reflects additional interest expense on debt issued in connection with the
acquisitions, as if the issuance had been consummated as of the beginning of
the periods presented. Amount includes $89,000 of debt issuance costs
amortized over the life of the related debt.
(10) Eliminates interest on the Senior Notes that are assumed to have been
retired.
(11) Eliminates interest on debt not assumed in the acquisitions.
(12) Reflects interest on borrowings under the Company's revolving credit
facility. See "Use of Proceeds."
(13) Reflects the adjustment of income taxes as a result of the pro forma
adjustments described in these Notes and the additional taxes that would
have been expensed had certain acquired companies been taxed as C
Corporations rather than S Corporations.
(14) Reflects additional income taxes resulting from the adjustments for
interest expense.
(15) Eliminates gain on sale to former owner of a building which was
subsequently leased to the Company.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the Combined
Financial Statements of the Predecessor Companies and the Consolidated Financial
Statements of the Company and notes thereto included elsewhere in this
Prospectus. The Combined Financial Statements of the Predecessor Companies
represent the combination of the historical financial statements of the four
separate businesses of the Predecessor Companies.
The Company's revenues are generated through the sale of drive train
products used in the automotive aftermarket repair of passenger cars and light
trucks. Since its formation, the Company has benefited from a combination of
internal and acquisition-related revenue growth. The Company achieved compound
annual growth in revenue of 38.5% from 1992 through September 30, 1996 (29.7% if
the 1995 and 1996 Acquisitions are excluded).
The Company's revenues from sales to Independent Aftermarket customers
increased by 55.6% from $58.5 million to $91.0 million between 1992 and 1995.
This growth was due to geographic expansion through the addition of distribution
centers, a broadened product line, enhanced customer service, effective sales
efforts and acquisitions. During the same period, revenues from sales to OEM
customers increased 407.7% from $16.8 million to $85.3 million due to increased
sales to existing customers, including Chrysler, and the addition of new
customers. Revenues from sales to retail automotive parts stores increased from
virtually zero in 1992 to $14.4 million in 1995.
The primary components of the Company's cost of goods sold are the cost of
cores and component parts, labor costs and overhead. While certain of these
costs have fluctuated as a percentage of sales over time, cost of goods sold as
a percentage of sales has remained relatively constant from 1992 through 1995.
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries, commissions, rent, marketing expenses and other management
infrastructure expenses. SG&A expenses as a percentage of sales declined from
23.2% in 1993 to 20.5% in 1995 principally due to the effect of spreading
certain fixed costs over a larger sales base.
The Company regularly evaluates strategic acquisition opportunities in the
automotive aftermarket business and expects to continue to do so in the future.
The Company is a party to negotiations involving the potential acquisition by
the Company of a North American distributor of drive train components. See
"Recent Developments."
In the fourth quarter of 1996, the Company will record a non-cash charge of
approximately $477,000 for deferred compensation expense relating to the
difference between the exercise price and the intrinsic value for financial
statement presentation purposes of the Company's Common Stock for 628,176
options granted in October 1996. Substantially all of such options were granted
to Mr. Perkins and other members of senior management at $4.67 per share. This
compensation expense will aggregate $2.3 million, and will be recognized over
the respective vesting periods of the options, which generally range from three
to five years.
RESULTS OF OPERATIONS
The following table sets forth certain financial statement data expressed in
millions of dollars and as a percentage of net sales. The pro forma statement of
income for the year ended December 31, 1994 reflects the combined financial
statements for the seven months ended July 31, 1994 for Aaron's, HTP, Mamco and
21
<PAGE>
RPM, and the consolidated operations of these companies for the five months
ended December 31, 1994. Pro forma expense adjustments were made to reflect the
Initial Acquisitions as if they had occurred on January 1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
COMBINED PRO FORMA CONSOLIDATED -------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................................... $110.7 100.0% $157.8 100.0% $190.7 100.0% $132.5 100.0% $199.3 100.0%
Cost of sales.................................. 66.7 60.3 92.9 58.9 115.5 60.6 82.1 62.0 122.5 61.5
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit................................... 44.0 39.7 64.9 41.1 75.2 39.4 50.4 38.0 76.8 38.5
Selling, general and administrative............ 25.7 23.2 30.4 19.2 39.0 20.5 26.4 19.9 38.7 19.4
Amortization of intangible assets.............. -- -- 3.0 1.9 3.3 1.7 2.4 1.8 2.8 1.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Operating income............................... 18.3 16.5 31.5 20.0 32.9 17.2 21.6 16.3 35.4 17.7
Interest expense (income), net................. (.3) (.3) 14.5 9.2 16.9 8.8 12.3 9.3 14.4 7.2
Provision for income taxes..................... 0.5 0.4 6.9 4.4 6.5 3.4 3.1 2.3 8.7 4.4
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income..................................... $ 18.1 16.4% $ 10.1 6.4% $ 9.5 5.0% $ 6.2 4.7% $ 12.3 6.1%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
NET SALES. Total net sales increased $66.8 million or 50.4%, from $132.5
million for the nine month period ended September 30, 1995 to $199.3 million for
the nine month period ended September 30, 1996. Of this increase, $39.0 million
was due to internal growth and $27.8 million was due to the incremental net
sales generated by the companies acquired in 1995 and 1996, including CRS,
Mascot, King-O-Matic and Tranzparts which were acquired on June 1, June 9, and
September 12, 1995, and April 2, 1996, respectively.
The internal growth was generated primarily from increased sales volumes
with existing OEM customers. To a lesser extent, internal growth was also
generated by the incremental sales from five new distribution centers opened
during the second half of 1995, increased sales volumes through existing
distributions centers and increased sales volumes with existing retail
customers.
Net sales to Chrysler of $72.7 million for the nine month period ended
September 30, 1996 represented 36.5% of the Company's total net sales for the
period, as compared to $46.1 million and 34.8% for the nine month period ended
September 30, 1995. Management believes, although there can be no assurance,
that the Chrysler inventory reduction discussed below in the net sales
comparison between 1995 and 1994 was a one-time effort to reverse an inventory
build-up in 1994 and is not expected to recur.
GROSS PROFIT. Gross profit as a percentage of net sales increased from
38.0% for the nine month period ended September 30, 1995 to 38.5% for the nine
month period ended September 30, 1996. The increase in gross profit margin was
primarily attributable to a shift in product mix, lower direct labor cost, and a
higher absorption of overhead resulting from increased production and sales
volumes of remanufactured transmissions. The gross profit margin improved
despite certain non-recurring start-up costs incurred during 1996 in connection
with the Company's new plant in Joplin, Missouri and the expansion of capacity
at the Company's plant in Springfield, Missouri needed to support sales growth
to retail and OEM customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a result of an increase in
revenues, SG&A decreased as a percentage of net sales from 19.9% for the nine
month period ended September 30, 1995 to 19.4% for the nine month period ended
September 30, 1996. However, SG&A increased in absolute dollars from $26.4
million for the nine month period ended September 30, 1995 to $38.7 million for
the nine month period ended September 30, 1996, representing an increase of
$12.3 million or 46.6%. The increase in SG&A was due largely to the ongoing
incremental SG&A expenses of CRS, Mascot, King-O-Matic and Tranzparts. Other
significant factors contributing to the increase in SG&A include the ongoing
incremental expenses associated with the five new distribution centers opened
during the second half of 1995, and certain start-up and ongoing SG&A expenses
incurred in connection with the Company's new plant in Joplin, Missouri.
22
<PAGE>
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $0.4 million for the nine month period ended September 30, 1996 as
compared to the nine month period ended September 30, 1995 reflecting the
increase in intangible assets that occurred as a result of the acquisitions of
CRS, Mascot, King-O-Matic and Tranzparts.
INCOME FROM OPERATIONS. Principally as a result of the factors described
above, income from operations increased 63.9% from $21.6 million for the nine
month period ended September 30, 1995 to $35.4 million for the nine month period
ended September 30, 1996.
INTEREST EXPENSE (INCOME), NET. Interest expense increased $2.1 million
from $13.0 million for the nine month period ended September 30, 1995 to $15.1
million for the nine month period ended September 30, 1996. The increase in
interest expense was due to the interest on the Series D Notes which were used
to finance the acquisitions of CRS, Mascot and King-O-Matic, and the related
amortization of debt issuance costs. The Series D Notes were issued on June 1,
1995 and therefore were only outstanding for four months during the nine month
period ended September 30, 1995.
CONSOLIDATED YEAR ENDED DECEMBER 31, 1995 COMPARED TO PRO FORMA YEAR ENDED
DECEMBER 31, 1994
NET SALES. Net sales increased by $32.9 million from $157.8 million in 1994
to $190.7 in 1995 primarily as a result of the acquisitions of CRS, Mascot, and
King-O-Matic. The three new acquisitions provided $24.7 million in additional
revenues. Net sales of remanufactured transmissions increased from $68.4 million
in 1994 to $85.9 million in 1995. The volume increase of remanufactured
transmissions resulted principally from the acquisitions of CRS and Mascot,
partially offset by a reduction in net sales of remanufactured transmissions to
Chrysler from $66.8 million in 1994 to $64.8 million in 1995. Net sales to
Chrysler reflected a decrease from $19.8 million during the third quarter of
1994 to $13.2 million for the third quarter of 1995 as Chrysler reduced its
inventory of remanufactured transmissions, partially offset by an increase from
$16.4 million during the fourth quarter of 1994 to $18.9 million for the fourth
quarter of 1995. Net sales of repair kits, hard parts and other drive train
products increased $6.0 million from $69.0 million in 1994 to $75.0 million in
1995 primarily as a result of the Company's acquisition of King-O-Matic. Net
sales of remanufactured engines increased $4.6 million from $15.2 million in
1994 to $19.8 million in 1995. The volume increase of remanufactured engines
resulted from increased demand from Western Auto at its retail outlets, and the
addition of new retail customers.
GROSS PROFIT. Gross profit as a percentage of net sales decreased from
41.1% in 1994 to 39.4% in 1995. The gross profit decrease of 1.7% of net sales
was due in large part to increased labor costs relating to remanufactured
engines and transmissions. The Company was not able to recover all of the
additional costs through increased selling prices.
In addition, the aggregate gross profit was affected by the acquisitions
that occurred in 1995. Total net sales in 1995 includes $24.7 million for CRS,
Mascot and King-O-Matic at a combined gross profit which was somewhat lower than
that of the Company as a whole for 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased from
$30.4 million in 1994 to $39.0 in 1995 or, as a percentage of net sales, from
19.2% in 1994 to 20.5% in 1995. The increase was partly due to the Company's
acquisitions of CRS, Mascot and King-O-Matic, which comprised $3.3 million of
the Company's SG&A expenses in 1995. Other significant factors that contributed
to the increase in SG&A expenses were the relocation of RPM's main facilities
from Azusa, California to Rancho Cucamonga, California and the addition of a new
manufacturing plant in Joplin, Missouri, both of which resulted in an increase
in ongoing SG&A expenses and a significant amount of non-recurring SG&A expenses
being incurred during 1995. Legal, audit, tax and other professional fees were
also higher in 1995 principally due to a full year of ATC operations as compared
with only five months of operations in 1994.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $0.3 million in 1995 reflecting the increase in intangible assets that
occurred as a result of the acquisitions of CRS, Mascot and King-O-Matic.
INCOME FROM OPERATIONS. Principally as a result of the factors described
above, income from operations increased from $31.5 million in 1994 to $32.9
million in 1995.
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INTEREST EXPENSE (INCOME), NET. Interest expense increased $2.4 million
from $14.5 million in 1994 to $16.9 million in 1995. The increase in interest
expense reflects additional interest on the Series D Notes that were issued
principally to finance the acquisitions of CRS, Mascot and King-O-Matic and the
related amortization of debt issuance costs.
PRO FORMA 1994 COMPARED TO COMBINED 1993
NET SALES. Net sales increased by $47.1 million from $110.7 million in 1993
to $157.8 million in 1994 primarily as a result of increases in the number of
units sold. The increase in net sales is primarily comprised of an increase in
net sales of remanufactured transmissions from $37.5 million during 1993 to
$68.4 million during 1994. The volume increase of remanufactured transmissions
resulted principally from increased demand from Chrysler due to an increased use
of remanufactured transmissions in lieu of rebuilt transmissions for OEM
warranty-related service. Net sales of repair kits, hard parts and other drive
train products increased $9.7 million from $59.3 million in 1993 to $69.0
million in 1994, despite facility relocation of five distribution centers and
the relocation of the Company's Dayton, Ohio torque converter plant to expand
capacity. Net sales of remanufactured engines increased $4.8 million from $10.4
million in 1993 to $15.2 million in 1994. The volume increase of remanufactured
engines resulted from increased demand from Western Auto at its retail outlets.
GROSS PROFIT. Gross profit as a percentage of net sales increased from
39.7% in 1993 to 41.1% in 1994, primarily as a result of an increase in gross
profit due to higher sales volume resulting in greater absorption of overhead.
During 1994, the Company began its program of increasing capacity and has
realized increased labor efficiencies with the upgrading and reorganization of
certain manufacturing facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales,
SG&A expenses decreased from 23.2% of net sales in 1993 to 19.2% of net sales in
1994, primarily due to higher sales volume. The improvement in the percentage
occurred despite the additional expenses incurred by the Company related to the
start-up of the new Dayton torque converter plant, increases in legal,
accounting and professional fees relating to the integration of the Predecessor
Companies and increases in administrative support expenses. Management believes
that approximately half of these expenses are non-recurring in nature. SG&A
expenses for purposes of the pro forma financial statements for 1994 exclude
$3.5 million of one time employee bonuses and $0.8 million of excess executive
compensation and other costs, which were paid by the Predecessor Companies, net
of certain new overhead expenses.
INCOME FROM OPERATIONS. Principally as a result of the factors described
above, income from operations increased from $18.3 million in 1993 to $31.5
million in 1994.
INTEREST EXPENSE (INCOME), NET. Interest expense increased $14.8 million
from $(0.3) million in 1993 to $14.5 million in 1994. The increase in interest
expense reflects interest on the Series B Senior Notes, interest on the
outstanding amounts from time to time under the Revolving Credit Agreement, and
the amortization of deferred debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in July 1994, the Company has funded its
operations and investments in property and equipment, including acquisitions,
through the issuance of Senior Notes totaling $162.4 million and the private
sale of Preferred and Common Stock totaling $40.0 million, and, to a lesser
extent, through cash provided by operating activities.
The Company had total cash and cash equivalents on hand of $8.3 million at
September 30, 1996, representing a decrease in net cash of $0.4 million for the
nine months then ended. The Company had total cash and cash equivalents on hand
of $8.3 million at September 30, 1996, representing a decrease in net cash of
$0.4 million for the nine months then ended. Net cash provided by operating
activities was $10.8 million in 1995. Net cash provided by operating activities
was $7.4 million for the nine months ended September 30, 1996. Net cash used in
investing activities was $45.4 million and $10.0 million for 1995 and for the
nine months ended September 30, 1996, respectively. The net cash used in
investing activities in 1995 was attributable to capital expenditures of $5.2
million, due primarily to investments in the Company's Joplin, Missouri and
Rancho Cucamonga, California manufacturing facilities and $40.3 million used to
acquire CRS, Mascot and King-O-Matic. Net cash used in investing activities was
$10.0 million for the nine months ended September 30, 1996, including $4.1
million for the acquisition of Tranzparts and $5.9 million in capital
expenditures largely for transmission and engine remanufacturing equipment and
other improvements
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related to the Company's new plant in Joplin, Missouri. Net cash used in
investing activities was $10.0 million for the nine months ended September 30,
1996, including $4.1 million for the acquisition of Tranzparts and $5.9 million
in capital expenditures largely for transmission and engine remanufacturing
equipment and other improvements related to the Company's new plant in Joplin,
Missouri. Net cash provided by financing activities was $34.0 million in 1995,
due principally to the issuance of $42.4 million of Senior Notes, which was
partially offset by certain payments on other debt facilities and amounts due to
former stockholders. Net cash provided by financing activities was $2.1 million
during the nine months ended September 30, 1996 due to additional borrowings.
The Company has budgeted $9.8 million for capital expenditures for all of
1996. The budget includes $2.1 million for additional engine remanufacturing
equipment and $3.1 million for transmission remanufacturing equipment to provide
additional capacity. Of the budgeted capital expenditures, as of September 30,
1996, the Company had incurred $5.9 million and had placed purchase orders of
$2.2 million for additional equipment and leasehold improvements.
The Company has a $30.0 million revolving credit facility that matures in
July 1999. As of September 30, 1996, the Company had approximately $26 million
available under the revolving credit facility. On October 1, 1996, the Company
borrowed $6.9 million under the revolving credit facility to purchase Diverco.
The Company has entered into a non-binding letter of intent for another North
American drive train parts distributor. The letter of intent provides for a
purchase price of approximately $10 million, which would be drawn from the
revolving credit facility if the transaction is consummated. Upon consummation
of this Offering and the GEPT Private Placement, the Company expects to borrow
approximately $17 million under its revolving credit facility to pay the balance
of the Preferred Stock Reorganization Consideration. See "Use of Proceeds."
In July 1996, the Company entered into an agreement with Bank of Montreal
("BOM") for a $3.0 million Canadian revolving credit facility to accommodate the
working capital needs of the Company's Canadian subsidiaries, King-O-Matic and
Mascot. Borrowings under the agreement are limited to certain advance rates
based upon the eligible accounts receivable and inventory of King-O-Matic and
Mascot up to an aggregate maximum of $3.0 million Canadian, are due upon demand
and bear interest at the BOM prime lending rate plus 0.25%. The agreement
contains certain covenants including a tangible net worth covenant for
King-O-Matic and Mascot combined, and the terms of the agreement are subject to
annual review.
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations,
including amounts that the Company estimates would be expended in connection
with the potential acquisition discussed under "Recent Developments." In
pursuing additional future acquisitions, the Company expects to have to consider
the effect any such acquisition costs may have on its liquidity. In order to
consummate such acquisitions, the Company may accordingly need to seek to raise
additional capital through additional borrowings or equity financings. The
information in this paragraph is forward-looking and involves risks and
uncertainties that could significantly impact the Company's expected liquidity
requirements in the short and long term. While it is impossible to itemize the
many factors and specific events that could affect the Company's outlook for its
liquidity requirements, such factors would include the possible reduction in
deliveries to one or more significant customers for any reason and the possible
effect of assimilating acquisitions into the Company's existing operations and
the expansion of those operations.
INFLATION; LACK OF SEASONALITY
Although the Company is subject to the effects of changing prices, the
impact of inflation has not been a significant factor in results of operations
for the periods presented. In some circumstances, market conditions or customer
expectations may prevent the Company from increasing the prices of its products
to offset the inflationary pressures that may increase its costs in the future.
Historically, there has been little seasonal fluctuation in the Company's
business.
ENVIRONMENTAL MATTERS
See "Business -- Environmental" for a discussion of certain environmental
matters relating to the Company.
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<PAGE>
BUSINESS
GENERAL
The Company is a leading remanufacturer and distributor of drive train
products used in the aftermarket repair of passenger cars and light trucks. The
Company's principal products include remanufactured transmissions, torque
converters and engines, as well as remanufactured and new parts for the repair
of automotive drive train and engine assemblies. The Company's principal
customers include: (i) independent transmission rebuilders, general repair shops
and distributors (I.E., the Independent Aftermarket); (ii) OEMs, principally
Chrysler, for use as replacement parts by their dealers; and (iii) retail
automotive parts stores. The Company believes it is uniquely positioned within
the highly fragmented aftermarket for drive train products as a result of its
extensive product line, diverse customer base and broad geographic presence,
with 43 distribution centers throughout the United States and Canada.
The Company was organized in 1994 by Aurora Capital Partners and a
management team led by William A. Smith to combine the businesses of four
existing companies serving the drive train remanufacturing market. Since that
time the Company has grown both internally and through five additional
acquisitions completed during 1995 and 1996. The Company and its predecessor
companies have achieved compound annual growth in revenue of 38.5% from 1992
through September 30, 1996 (29.7% if the Company's acquisitions in 1995 and the
first nine months of 1996 are excluded). The Company believes the key elements
of its success are the quality and breadth of its product offerings and the
Company's emphasis on strong customer relationships, promoted by strong
technical support, rapid delivery time, innovative product development and
competitive pricing. In addition, the Company has benefited from the increasing
use of remanufactured transmissions, engines and other parts for aftermarket
repairs as the industry recognizes that remanufacturing provides a higher
quality, lower cost alternative to rebuilding the assembly or replacing it with
a new assembly manufactured by an OEM.
The Company's strategy is to achieve growth both internally and through
strategic acquisitions. The Company intends to expand its existing business by:
(i) increasing penetration of its current customer base; (ii) gaining new OEM,
Independent Aftermarket and retail customers; and (iii) introducing new products
to both existing and new customers. Strategic acquisitions have also been an
important element in the Company's historical growth. The Company sees
significant opportunities to continue expanding its customer base, geographic
presence and product offerings through additional strategic acquisitions,
particularly among companies serving the highly fragmented Independent
Aftermarket. Management believes that future acquisitions will enable it to
enhance the Company's revenues and profitability by expanding the Company's
existing distribution base, increasing the range of products sold through the
Company's distribution network and realizing economies of scale in areas
including purchasing, administration and inventory management.
AUTOMOTIVE AFTERMARKET INDUSTRY
MARKET SIZE AND GROWTH
The automotive aftermarket in the United States and Canada, which consists
of sales of parts and services for vehicles after their original purchase, has
been noncyclical and has generally experienced steady growth over the past ten
years, unlike the market for new vehicle sales. According to the Automotive
Parts & Accessories Association, between 1985 and 1995, estimated industry-wide
revenue for the automobile aftermarket increased from approximately $126 billion
to $170 billion. This consistent growth is due principally to the increase in
the number of vehicles in operation that are in the prime repair age of four to
12 years and the increase in the average number of miles driven annually per
vehicle. The Company competes specifically in the aftermarket segment for
automotive transmissions, engines and other drive train related products, which
represents more than $7 billion of the entire automotive aftermarket. The
Company believes that within this segment the market for remanufactured drive
train products has grown faster than the overall automotive aftermarket.
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REMANUFACTURING
Remanufacturing is a process through which used assemblies, such as
transmissions or engines, are returned to a central facility where they are
disassembled and their component parts cleaned, refurbished and tested. The
usable component parts are then combined with new parts in a high volume,
precision manufacturing process to create remanufactured assemblies.
When a drive train assembly such as a transmission or engine fails, there
are generally three alternatives available to return the vehicle to operating
condition. The dealer or independent repair shop may: (i) remove the assembly,
disassemble the unit into its component pieces, replace worn or broken parts
with remanufactured or new components, and reinstall that assembly ("rebuild");
(ii) replace the assembly with a remanufactured assembly or; (iii) in limited
instances, replace the assembly with a new assembly manufactured by the OEM.
Costs to the OEM associated with remanufactured assemblies generally are 50%
less than new or rebuilt assemblies due to the remanufacturers' use of high
volume manufacturing techniques and salvage methods that increase the number of
reusable components. In addition, remanufactured assemblies are generally of
higher quality than rebuilt assemblies because of the precision manufacturing
techniques, technical upgrades and rigorous inspection and testing procedures
employed in remanufacturing. In contrast, the quality of a rebuilt assembly is
heavily dependent on the skill level of the particular mechanic, who typically
is less able to remain current with engineering changes than remanufacturers,
who work in close liaison with OEM engineers. In addition, the proliferation of
transmission and engine designs, the increasing complexity of transmissions and
engines that incorporate electronic components, and the shortage of highly
trained mechanics qualified to rebuild assemblies all have tended to favor
remanufacturing over rebuilding assemblies for aftermarket repairs. For warranty
repairs, consistent quality of warranty repairs is important to the OEM standing
behind the applicable warranty, because once installed, the remanufactured
product is usually covered by the OEM for the balance of the original warranty
period. The Company believes that because of this combination of high quality
and low cost, the use of remanufactured assemblies for aftermarket repairs is
growing compared to the use of new or rebuilt assemblies.
PRODUCTS
The principal product lines of the Company are remanufactured transmissions,
repair kits and hard parts used in drive train repairs, and remanufactured
engines. The following table sets forth, by product line, the Company's combined
net sales (dollars in millions) and the percentage of the Company's total net
sales for the years 1993, 1994 and 1995 and the first nine months of 1995 and
1996:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------------ -----------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transmissions....... $ 37.5 33.9% $ 68.4 43.4% $ 85.9 45.0% $57.5 43.4% $100.7 50.5%
Repair Kits and Hard
Parts.............. 59.3 53.5 69.0 43.8 75.0 39.4 54.2 40.9 69.6 34.9
Engines............. 10.4 9.4 15.2 9.6 19.8 10.4 15.0 11.3 20.2 10.1
Other............... 3.5 3.2 5.2 3.2 10.0 5.2 5.8 4.4 8.8 4.5
------ ------ ------ ------ ------ ------ ----- ------ ----- ------
Total............... $110.7 100.0% $157.8 100.0% $190.7 100.0% $132.5 100.0% $199.3 100.0%
------ ------ ------ ------ ------ ------ ----- ------ ----- ------
------ ------ ------ ------ ------ ------ ----- ------ ----- ------
</TABLE>
TRANSMISSIONS
The Company remanufactures transmissions which are factory approved and
suitable for warranty and post-warranty replacement of transmissions for
Chrysler and 12 foreign OEMs, including Hyundai Motor America, Subaru of America
and American Isuzu, for their United States dealer networks. The number of
transmission models remanufactured by the Company has been increasing to
accommodate the greater number of models currently used in vehicles manufactured
by the Company's OEM customers. The majority of the Company's transmissions are
sold to Chrysler under Chrysler's MOPAR brand name. In addition, the Company
rebuilds heavy duty and light duty truck transmissions and air compressors.
REPAIR KITS AND HARD PARTS
Repair kits sold by the Company consist of gaskets, friction plates, seals,
bands, filters and other "soft" parts that are used in rebuilding transmissions
for substantially all domestic and most imported passenger cars and light
trucks. Kits are currently sold principally to the Independent Aftermarket. Each
kit is designed
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specifically to include substantially all of the soft parts necessary for
rebuilding a particular model of transmission. In addition to manufacturing or
remanufacturing certain of the components that are used in its kits, the Company
maintains a variety of supply relationships that allow it to purchase components
for its kits at competitive prices. The components manufactured or
remanufactured by the Company include various friction plates, gaskets and
bands. Many of the Company's competitors do not manufacture any of the
components that they distribute and the Company believes this provides it a cost
advantage over its competitors. The repair kits are sold under the RPM, HTP,
KING-O-MATIC, TRANZPARTS and DIVERCO brand names.
The Company remanufactures torque converters (the coupler between the
transmission and engine), planetary gears (speed regulating devices inside the
transmission) and transmission fluid pumps. These "hard" parts are sold
principally to the Independent Aftermarket for use in drive train repairs. Many
of the Company's competitors do not distribute as broad a line of hard parts or
remanufacture hard parts that they distribute. The Company believes these
factors provide it both an availability and cost advantage over its competitors.
Hard parts are sold under the RPM, HTP, MAMCO, TRANZPARTS and DIVERCO brand
names.
ENGINES
The Company remanufactures engines designed as replacement engines for use
in many domestic passenger cars and light trucks. Principal customers are
Western Auto and O'Reilly Auto Parts, as well as the Independent Aftermarket.
Over the past three years, the variety of engine models remanufactured by the
Company has increased from 50 to 75 as the Company has expanded the range of
engines offered to meet customer requirements. In June 1996, the Company
introduced engine repair kits marketed to the Independent Aftermarket under the
PROFORMANCE brand name. These kits are designed to provide mechanics with the
components required to repair or rebuild a broad selection of domestic engine
models.
OTHER
Other products consist principally of remanufactured rack and pinion
assemblies and CV axles for passenger cars and light trucks for the Independent
Aftermarket, and cleaning and testing equipment for the Independent Aftermarket
and other industrial businesses. These products are sold under the RPM, HTP,
KING-O-MATIC, TRANZPARTS and INTERCONT brand names. In the fourth quarter of
1995, the Company became the sole supplier of fully enclosed aqueous cleaning
equipment to Safety-Kleen (a provider of parts cleaner services). This equipment
permits the cleaning of automotive and industrial components without the use of
environmentally damaging solvents.
MARKETING AND DISTRIBUTION
The Company distributes its products to: (i) the Independent Aftermarket;
(ii) its OEM customers for use as replacement parts by their dealers; and (iii)
retail automotive parts stores.
INDEPENDENT AFTERMARKET
The Company supplies transmission repair kits and hard parts used in drive
train repairs to over 11,000 of the approximately 17,000 independent
transmission rebuilders and distributors in the United States and Canada, such
as AAMCO Transmissions Inc., MOTRA Corp. and Lee Myles Associates Corp. These
products are used in the Independent Aftermarket to rebuild transmissions and
other assemblies using remanufactured and new component parts purchased from a
variety of suppliers. In addition, the Company supplies transmission and engine
repair kits, hard parts used in drive train repairs, remanufactured engines and
certain remanufactured components such as CV axles to over 1,000 of the
approximately 54,000 general repair shops in the United States. Transmission and
engine repairs performed in the Independent Aftermarket are generally for
vehicles no longer covered by warranty or for OEM dealers who do not have access
to remanufactured assemblies or lack the in-house capabilities to repair
transmissions.
There are two characteristics of the Independent Aftermarket that influence
the Company's business strategy. First, as the number of vehicle models has
proliferated and repairs have become increasingly complex, the Independent
Aftermarket has grown more dependent on its suppliers for technical support and
for assistance in managing inventory by delivering product on a just-in-time
basis at competitive prices. Second, Independent Aftermarket customers
(including those affiliated with larger organizations such as
28
<PAGE>
AAMCO, MOTRA and Lee Myles) generally purchase parts at the individual repair
shop level. Independent Aftermarket customers tend to make purchasing decisions
based on availability and rapid delivery of products, competitive pricing,
breadth of product offering and technical assistance. To respond to these
requirements, the Company has developed a strategy of geographic expansion of
its distribution system to provide its Independent Aftermarket customers with
short-notice rapid delivery, high service levels and technical support for a
broad product offering in each local market. This is accomplished through 43
distribution centers located throughout the United States and Canada from which
the Company provides local technical support and a wide range of products
delivered by Company-operated trucks to its customers. The Company believes that
this system is the most extensive in the drive train segment of the automotive
aftermarket and represents a competitive advantage for the Company relative to
its typically smaller, local competitors. Accordingly, the Company believes
there are opportunities for further geographic penetration in this relatively
fragmented market. See "-- Business Strategy -- Internal Growth -- Independent
Aftermarket."
The Company has developed a common product identification and numbering
system which is currently being implemented on a Company-wide basis. In
addition, the Company is in the process of electronically linking its
distribution centers through a computer network that will enable each center to
determine more quickly if and where a particular part is located within the
distribution system, thereby further enhancing customer service. The Company
expects to implement this process in stages during 1996 and 1997, and it
believes that the process will be completed by the end of 1997. These changes
are expected to improve customer service, increase product availability, enhance
inventory management and improve operational efficiencies.
New customers are developed by a direct sales force operating from the
Company's local distribution centers, by national and local trade publication
advertising and by telemarketing. The Company also participates in trade shows.
The Company believes its RPM, HTP, KING-O-MATIC, MAMCO, TRANZPARTS, INTERCONT
and DIVERCO brand names are well recognized and respected in their regional
markets. Sales to Independent Aftermarket customers accounted for 47.7% of the
Company's revenues in 1995 and 41.5% in the first nine months of 1996.
OEM CUSTOMERS
The Company provides factory-approved remanufactured transmissions to OEMs
for use in warranty and, to a lesser extent, post-warranty repair work by their
dealers. The Company's largest OEM customer is Chrysler, to whom the Company
also supplies certain factory-approved remanufactured engines. The Company sells
to 12 foreign OEMs, including Hyundai Motor America, Subaru of America and
American Isuzu. Products are sold to each OEM pursuant to supply arrangements
for individual transmission models. Sales to the Company's OEM customers
accounted for 44.9% of the Company's 1995 revenues and 50.7% of revenues in the
first nine months of 1996. Sales to Chrysler accounted for 35.4% and 36.5% of
the Company's revenues in 1995 and in the first nine months of 1996,
respectively. See "Risk Factors -- Dependence on Significant Customer."
Over the past 12 years, the Company has developed and maintained strong
relationships at many levels of both the corporate and the factory organizations
of Chrysler. In recognition of the Company's consistently high level of service
and product quality throughout its relationship with Chrysler, in 1995 the
Company was awarded the Platinum Pentastar award, the highest award Chrysler
bestows on a supplier. The Company's Platinum Pentastar was one of only 14
awarded to Chrysler's 3,500 suppliers in 1995 and marks the first time that the
Platinum Pentastar has been awarded to a remanufacturer or to a supplier that
serves exclusively as a MOPAR aftermarket parts supplier. In addition to its
Platinum Pentastar, the Company received Gold Pentastar awards in 1993, 1994 and
1995. Only seven suppliers received the Gold Pentastar award in each of these
years.
Chrysler began implementing remanufacturing programs for its transmission
models in 1986 and selected the Company as its sole supplier of remanufactured
transmissions in 1989. Chrysler has advised the Company that, by implementing a
remanufacturing program, Chrysler has realized substantial warranty cost
savings, standardized the quality of its dealers' aftermarket repairs and
reduced its own inventory of
29
<PAGE>
replacement parts. Currently, Chrysler has remanufacturing programs for
transmission models that are used in less than 70% of its vehicles, and the
Company is the only factory-approved supplier of remanufactured transmissions
for these models. The Company estimates that, of the Chrysler transmissions for
which there is a remanufacturing program, the Company currently provides less
than 50% of the transmissions subject to major repair by Chrysler dealers, with
the balance being rebuilt by the dealers. This has been due to dealers' electing
to rebuild transmissions, generally through their own service departments,
rather than replacing them with remanufactured assemblies, as well as historical
constraints on the availability to the Company of parts from Chrysler used in
the remanufacturing process and, to a lesser extent, the availability of cores
to the Company.
As part of its expanding relationship with Chrysler and in response to the
periodic shortage of cores, the Company recently established a central core
return center for all of Chrysler's transmission models. Chrysler dealers make
arrangements to ship transmission and engine cores to a regional depot, which
then ships directly to the Company's central core return center located near its
main remanufacturing facility. The Company thus assists Chrysler by improving
the efficient and timely return of cores at a cost savings to Chrysler.
Furthermore, the Company performs value-added services such as core audit and
analysis in conjunction with Chrysler engineers. The Company is currently
working with Chrysler to improve the tracking and management of cores, which
will allow the Company to schedule its production more efficiently. The Company
believes that this central core facility has reduced the risk of future Chrysler
core shortages. In addition, the increased number of cores has resulted in a
greater number of reusable parts, which, together with recently expanded
production capacity at Chrysler, has increased the Company's supply of parts
required in the remanufacturing process.
Net sales to Chrysler grew from $14.9 million in 1991 to $67.6 million in
1995 and were $72.7 million for the first nine months of 1996. The Company has
developed a new production line dedicated to remanufacturing certain of the
Chrysler transmission models that are not yet covered by the remanufacturing
programs and has received an initial purchase order from Chrysler, although the
Company has not begun remanufacturing these transmission models.
RETAIL AUTOMOTIVE PARTS STORES
The Company supplies remanufactured engines, transmission filter kits,
engine components and engine repair kits to a portion of the approximately
60,000 automotive aftermarket retail stores throughout the United States, which
offer new and remanufactured parts and assemblies to a broad range of customers,
principally "do-it-yourself" customers and general repair shops. The retail
automotive parts store market is highly fragmented with most retail stores
obtaining products similar to those provided by the Company from a variety of
regional suppliers. These customers tend to make purchasing decisions based on
price, rapid delivery of products and breadth of product offering. As a supplier
with a national scope and a broader product line than many of its competitors,
the Company provides high quality products, competitive prices and high service
levels as well as promotional literature and advertisements. The Company's
principal retail customers are Western Auto (595 retail locations in 29 states),
O'Reilly Auto Parts (188 retail locations in four states) and Advance Auto (535
retail locations in nine states). Sales to retail automotive parts stores have
grown from virtually zero in 1991 to $14.4 million in 1995 and $15.6 million in
the first nine months of 1996.
BUSINESS STRATEGY
The Company's strategy is to achieve growth both internally and through
strategic acquisitions. The Company intends to expand its existing business by:
(i) increasing penetration of its current customer base; (ii) gaining new OEM,
Independent Aftermarket and retail customers; and (iii) introducing new products
to both existing and new customers. Strategic acquisitions have also been an
important element in the Company's historical growth. The Company sees
significant opportunities to continue expanding its customer base, geographic
presence and product offerings through additional strategic acquisitions,
particularly among companies serving the highly fragmented Independent
Aftermarket. Management believes that future acquisitions will enable it to
improve the Company's revenues and profitability by
30
<PAGE>
expanding the Company's existing distribution base, increasing the range of
products sold through the Company's distribution network and realizing economies
of scale in areas including purchasing, administration and inventory management.
INTERNAL GROWTH -- INDEPENDENT AFTERMARKET
INCREASING SALES TO EXISTING CUSTOMERS. The Company believes that it
currently supplies less than one-third of the remanufactured or new drive train
component requirements of its Independent Aftermarket customers. The Company
believes it is well positioned to expand sales to these customers through the
implementation of a common parts numbering system, a systemwide computer-based
inventory tracking system and the stocking in a central location of certain hard
parts that the Company's customers have previously had difficulty obtaining. The
Company also intends to expand its business with existing customers by
cross-selling products among its subsidiaries' customers. For example,
King-O-Matic has recently introduced Mamco torque converters to its customers
and RPM has increased its hard parts sales by offering HTP products.
ESTABLISHING NEW CUSTOMER RELATIONSHIPS. The Company believes that its
product mix and distribution network position it to expand its Independent
Aftermarket customer base in two ways. First, although the Company's
distribution network is currently the most extensive in the drive train segment
of the automotive aftermarket, there are significant opportunities for the
Company to expand to additional geographic markets. The Company currently has
facilities in 41 markets in the United States and Canada and has identified
expansion opportunities in over 60 additional markets. The Company opened ten
and closed two distribution centers in 1995. Second, the Company recently has
expanded its customer base to include general repair shops in the United States.
Although the Company began supplying this market on a selected basis with a
limited product line in 1993, since January 1995 the Company has expanded its
distribution of remanufactured engines and engine repair kits from two to ten
distribution centers and plans to expand the availability of these product lines
to its other distribution centers. The Company now serves approximately 1,000 of
the approximately 54,000 general repair shops in the United States. The
Company's product line breadth and depth and its distribution network contrast
with those of many other suppliers which offer only a limited product line on a
regional or local level. These factors are expected to enable the Company to
broaden its penetration among general repair shops with minimal additional
investment.
INTRODUCING NEW PRODUCTS. The Company regularly introduces new products for
the Independent Aftermarket. The Company monitors sales trends and is in
frequent communication with customers regarding potential new products. For
example, the Company has increased its remanufactured engine models from 50 to
75 since the beginning of 1995. The Company believes that its reputation for
high quality products and customer service enables it to leverage its
relationships with existing customers to sell additional products.
The Company also explores other opportunities to service the Independent
Aftermarket. For example, the Company has become the sole supplier of fully
enclosed aqueous cleaning equipment to Safety-Kleen, a provider of parts cleaner
services. The Company expects that the market for aqueous cleaning equipment,
which allows automotive and industrial parts to be cleaned without the use of
environmentally damaging solvents, will grow due to increasingly stringent
environmental regulations regarding the use and disposal of solvents.
INTERNAL GROWTH -- OEM
INCREASING SALES TO EXISTING CUSTOMERS. The Company intends to increase its
business with its existing OEM customers by working with the OEMs to increase
dealer utilization of remanufactured transmissions in both the warranty and
post-warranty period. The Company estimates that, of the transmissions for which
its OEM customers have remanufacturing programs, the Company currently provides
less than 50% of the transmissions subject to major repair by such customers,
with the balance being transmissions rebuilt by dealer mechanics. The Company is
working in tandem with OEMs to highlight to dealers the quality and cost
advantages of using remanufactured assemblies versus rebuilding. In addition,
the post-warranty repair market, which the Company believes is approximately
eight times as large as the OEM dealer warranty repair market, presents a growth
opportunity. Currently, the vast majority of post-warranty repairs are
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<PAGE>
performed in the Independent Aftermarket rather than at OEM dealers. Given the
relatively low cost and higher quality of remanufactured components, OEM dealers
can enhance their cost competitiveness compared to independent service centers
through the increased use of remanufactured components as well as providing end
customers with a higher quality product. To the extent that OEM dealers increase
their level of post-warranty repairs, the Company is well positioned to
capitalize on this market growth.
INTRODUCING NEW PRODUCTS. The Company has introduced 33 new transmission
models and a number of related drive train products in the last three years for
its OEM customers. The Company has developed a new production line dedicated to
remanufacturing certain of the Chrysler transmission models that are not yet
covered by the remanufacturing program and has received an initial purchase
order, although the Company has not begun remanufacturing these new products.
The Company's ability to add new products is in part dependent on the support
and approval of the OEM. The Company believes that its reputation for high
quality products and customer service will generate increased demand from OEMs
for additional remanufactured components.
ESTABLISHING NEW CUSTOMER RELATIONSHIPS. The Company believes that
opportunities exist with several foreign automotive OEMs relative to United
States based remanufacturing programs. The Company believes that this represents
an opportunity for growth and is currently working to develop programs with
certain foreign OEMs. In 1995, the Company initiated a remanufactured
transmission program for Mitsubishi and currently supplies remanufactured
transmissions models used in approximately 65% of the Mitsubishi vehicles.
INTERNAL GROWTH -- RETAIL STORES
INCREASING SALES TO EXISTING CUSTOMERS. The Company intends to increase its
business with its existing retail customers by increasing the distribution of
its current products throughout these customers' networks. For example, in 1992
the Company began supplying remanufactured engines to Western Auto and in 1996,
was selected to supply remanufactured engines to Western Auto's fourth
distribution center, thereby expanding this relationship to include all 885
Western Auto stores. The Company has generally increased its business with its
existing retail customers as they have increased their market coverage and
expects to continue to do so. In addition, the Company intends to increase sales
to existing customers by providing customized marketing programs. For example,
in 1995 the Company introduced an extended warranty program for remanufactured
engines to certain of its retail store customers.
INTRODUCING NEW PRODUCTS. The Company plans to increase its sales to
existing retail automotive parts store customers by introducing additional
products such as clutch kits, engine components and engine repair kits.
Recently, the Company's product offerings to retail chain stores were enhanced
by the acquisition of King-O-Matic, which added transmission filter kits to the
Company's product line. King-O-Matic products have been subsequently sold to
certain existing retail customers, allowing the Company to increase revenues
with limited incremental expenses.
ESTABLISHING NEW CUSTOMER RELATIONSHIPS. Of the 60,000 retail automotive
parts stores in the United States, the Company currently sells products to
approximately 1,000 stores, principally through three retail chains. The Company
believes that its position as a leading national supplier of remanufactured
engines affords it the opportunity to service additional national retail chains
as certain of these chains convert from a currently fragmented base of suppliers
and as other chains expand their product lines to include remanufactured
engines. For example, in 1995 the Company added O'Reilly Auto Parts and in 1996
the Company added Advance Auto as customers.
EXTERNAL GROWTH -- ACQUISITIONS
Strategic acquisitions have been an important element in the Company's
historical growth, and the Company plans to continue expanding its customer
base, geographic locations and product offerings through strategic acquisitions
in the future. The Independent Aftermarket supplier base is highly fragmented
and many local independent drive train product distributors lack the financial
and managerial resources to expand. Many such distributors also have limited
opportunities to realize their investment in the business. This dynamic has
historically created a significant number of attractive potential acquisition
candidates and the Company believes that significant opportunities for
profitable growth through acquisitions will continue
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<PAGE>
to exist for the foreseeable future. By integrating an acquired company's
products into the Company's distribution system, the Company is able to offer
these products to a substantially greater number of markets than was the case
prior to the acquisition. In addition, the Company expects to realize economies
of scale in areas including purchasing, administration and inventory management.
The Company's management is experienced in identifying acquisition
opportunities and completing and integrating acquisitions within the automotive
aftermarket. Since its formation and acquisition of Aaron's, HTP, Mamco and RPM
in 1994, ATC has acquired CRS, Mascot and King-O-Matic in 1995 and Tranzparts
and Diverco in 1996. The Company is a party to negotiations involving the
potential acquisition by the Company of a North American distributor of drive
train components. See "Recent Developments."
REMANUFACTURING OF TRANSMISSIONS, HARD PARTS AND ENGINES
In its remanufacturing operations, the Company obtains used transmissions,
hard parts, engines and related components, commonly known as "cores," which are
sorted by make and model and either placed into immediate production or stored
until needed. In the remanufacturing process, the cores are evaluated and
disassembled into their component parts. The components that can be incorporated
into the remanufactured product are cleaned, tested and refurbished. All
components determined not reusable or repairable are replaced by other
remanufactured or new components. The units are then reassembled using
high-volume precision manufacturing techniques into finished assemblies.
Inspection and testing are conducted at various stages of the remanufacturing
process, and each finished assembly is tested on equipment designed to simulate
performance under operating conditions. Primarily as a result of its rigorous
quality control procedures, the Company has experienced an insignificant number
of warranty claims on its products. After testing, completed products are then
packaged for immediate delivery or shipped to one of the Company's distribution
centers.
The majority of the cores used in the Company's remanufacturing process for
sale to its Independent Aftermarket and retail customers are obtained from
customers as trade-ins. The Company encourages its Independent Aftermarket and
retail customers to return cores on a timely basis and charges customers a
supplemental core charge in connection with purchases of engines and critical
hard parts. The customer can satisfy this charge by returning a usable core or
making a cash payment equal to the amount of the supplemental core charge. If
cores are not returned in a timely manner, the Company then must procure cores
through its network of independent core brokers. While core prices are subject
to supply and demand price volatility, the Company believes its procurement
network for cores will continue to provide cores at reasonable prices.
COMPETITION
The Company competes in the highly fragmented automobile aftermarket for
transmissions, engines and other drive train components, in which the majority
of industry supply comes from small local/regional participants. Competition is
based primarily on product quality, service, delivery, technical support and
price. Many of the Company's competitors operate only in certain geographic
regions with a limited product line. The Company is one of the largest
participants in the aftermarket for remanufactured drive train components,
offers a more complete line of products across a varied customer base and has a
much broader geographic presence than many of its competitors. As a result, the
Company believes that it is well positioned to enhance its competitive position
by expanding its product line through the development of new products or
acquisition of new businesses as well as by expanding its distribution network
into new geographic markets. Nevertheless, the aftermarket for remanufactured
drive train components remains highly competitive, and certain of the Company's
competitors are larger than the Company and have greater financial and other
resources available to them than does the Company.
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FACILITIES
The Company currently leases 58 facilities with total leased space of
approximately 2.0 million square feet. The following table sets forth certain
information regarding the manufacturing facilities and distribution centers of
the Company.
<TABLE>
<CAPTION>
LEASE
APPROXIMATE EXPIRATION
LOCATION SQ. FEET DATE TYPE OF FACILITY/PRODUCTS MANUFACTURED
- ---------------------------- ------------ --------------- ---------------------------------------------------------
<S> <C> <C> <C>
Phoenix, Arizona 22,000 1997 Distribution Center
Tucson, Arizona 6,400 1998 Distribution Center
Azusa, California 6,000 1998 Distribution Center
Fresno, California 14,000 1997 Distribution Center
Los Angeles, California 4,700 1998 Distribution Center
Oakland, California 10,000 1997 Distribution Center
Rancho Cucamonga, California 153,000 2002 Distribution Center, Torque Converters, Repair Kits, Hard
Parts
Sacramento, California 11,200 1998 Distribution Center
San Diego, California 10,000 1997 Distribution Center
San Jose, California 10,000 2000 Distribution Center
Van Nuys, California 6,800 2000 Distribution Center
Colorado Springs, Colorado 5,000 1997 Distribution Center
Denver, Colorado 9,000 1997 Distribution Center
Atlanta, Georgia 14,900 1998 Distribution Center
Chicago, Illinois 20,000 2000 Distribution Center
Harvey, Illinois 46,000 2001 Distribution Center, Transmissions, Hard Parts, Engine
Repair Kits
Louisville, Kentucky 51,500 1999 Distribution Center, Repair Kits, Hard Parts
Louisville, Kentucky 12,000 (1) CV Axles
Louisville, Kentucky 9,200 (1) CV Axles
Grand Rapids, Michigan 9,000 1998 Distribution Center
Jackson, Michigan 10,000 (1) Core Storage
Taylor, Michigan 12,200 2000 Distribution Center
Joplin, Missouri 264,000 1998 Transmissions, Engines
Kansas City, Missouri 10,200 2000 Distribution Center
Springfield, Missouri 280,800 2004 Transmissions, Engines
Springfield, Missouri 30,000 1998 Torque Converters
Springfield, Missouri 12,100 2001 Distribution Center
Springfield, Missouri 34,000 1998 Cleaning and Testing Equipment
Springfield, Missouri 20,000 1996 Core Storage
Springfield, Missouri 98,800 (1) Core Storage
Springfield, Missouri 10,000 1996 Core Storage
Springfield, Missouri 200,000 2006 Core Storage
St. Louis, Missouri 9,700 1998 Distribution Center
Las Vegas, Nevada 7,500 1999 Distribution Center
Mahwah, New Jersey 92,900 2002 Distribution Center, Transmissions
Albuquerque, New Mexico 7,000 1997 Distribution Center
Charlotte, North Carolina 23,000 2001 Distribution Center
Dayton, Ohio 42,000 1999 Torque Converters
Portland, Oregon 20,000 1997 Distribution Center
Memphis, Tennessee 37,800 2003 Distribution Center, Repair Kits
Dallas, Texas 15,000 1997 Distribution Center
Salt Lake City, Utah 15,000 1997 Distribution Center
Norfolk, Virginia 9,700 2000 Distribution Center
Federal Way, Washington 1,600 1998 Corporate Offices
Seattle, Washington 22,000 1997 Distribution Center
Spokane, Washington 9,500 2000 Distribution Center
Janesville, Wisconsin 30,000 2001 Distribution Center, Repair Kits, Hard Parts
Calgary, Alberta 3,000 1996 Distribution Center
Edmonton, Alberta 14,800 1998 Distribution Center, Heavy Duty Truck Transmissions
Vancouver, British Columbia 7,800 1997 Distribution Center
Vancouver, British Columbia 7,300 1997 Distribution Center
Moncton, New Brunswick 12,000 2000 Distribution Center
Mississauga, Ontario 35,100 1998 Distribution Center, Heavy Duty Truck Transmissions and
Air Compressors
Mississauga, Ontario 12,200 2001 Repair Kits
Mississauga, Ontario 24,000 2000 Distribution Center
Montreal, Quebec 11,200 2000 Distribution Center
Regina, Saskatchewan 600 (1) Distribution Center
Mexicali, Mexico 77,100 1998 Torque Converters, Cleaning and Testing Equipment
</TABLE>
- ------------
(1) Month-to-month lease.
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<PAGE>
The Company believes that its current manufacturing facilities and
distribution centers are adequate for the current level of the Company's
activities. The Company's transmission and engine remanufacturing facility in
Springfield, Missouri is currently employing two work shifts, seven days a week.
Other manufacturing sites have the flexibility to add both additional shifts and
production workers needed to accommodate additional demand for products and
services. However, in the event the Company were to experience a material
increase in sales, the Company may require additional manufacturing facilities.
The Company believes such additional facilities are readily available on a
timely basis on commercially reasonable terms. Further, the Company believes
that the leased space housing its existing manufacturing and distribution
facilities is not unique and could be readily replaced, if necessary, at the end
of the terms of its existing leases on commercially reasonable terms. Many of
the Company's leases are renewable at the option of the Company.
ENVIRONMENTAL
The Company is subject to various evolving federal, state, local and foreign
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of a variety of hazardous and non-hazardous substances
and wastes. These laws and regulations provide for substantial fines and
criminal sanctions for violations. The operation of automotive parts
remanufacturing plants involves environmental risks.
Prior to the RPM Acquisition, the company from whom RPM acquired its assets
(the "Prior RPM Company") leased nine properties in the City of Azusa,
California (the "Azusa Properties") from a general partnership consisting of the
Prior RPM Company shareholders. The Azusa Properties are within an area which,
as a result of regional groundwater contamination, has been designated by the
EPA as the Baldwin Park Operable Unit ("BPOU") of the San Gabriel Valley
Superfund Sites. The federal Superfund law (the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA")) both
provides for the appropriate cleanup of contaminated sites and assigns liability
for the cost of such cleanups. The parties held responsible for cleanup costs
are broadly defined under CERCLA, and generally include present owners and
operators of a site and certain past owners and operators. Liability for cleanup
costs imposed against such "responsible parties" is strict, joint and several.
However, such costs are typically allocable among responsible parties through
settlement or litigation based on factors including each particular party's
relative contribution of contaminants to the site and ability to pay.
The EPA has proposed a groundwater treatment system as an interim remedial
measure for the BPOU. The EPA has estimated that it will cost approximately $47
million to construct this system and approximately $4 million per year for an
indefinite period to operate it. The Company has not independently evaluated
this estimate, and the actual cost may vary substantially from this estimate. In
addition, the EPA has incurred substantial costs to date and will likely
continue to incur such costs in overseeing the implementation of remedial
measures. The EPA has informally estimated that these costs may be in excess of
$1 million. Further, if the EPA determines that the interim remedial measures
are not adequate, additional costs could be incurred. As discussed above, the
"responsible parties" for this site could be held liable for these EPA costs. In
addition to cleanup costs, the responsible parties may be required to pay for
damages for injuries to natural resources such as soil, groundwater or wildlife
caused by the contamination at the BPOU. To date, the government agencies
authorized to claim natural resource damages for this site have not made any
assessment of the value, if any, of such damages. In 1993, the EPA notified the
Prior RPM Company, the general partnership consisting of the Prior RPM Company
shareholders which owns the Azusa Properties and approximately 100 other
entities that they may be potentially responsible parties ("PRPs") for the San
Gabriel Valley Superfund Sites as present or former owners or operators of
properties located within that Site. In January 1995, the EPA sent letters to 16
of these parties with respect to 15 properties in the BPOU, describing 4 of
those properties as apparently the "largest contributors to the groundwater
contamination" and the remaining 11 properties as apparently in a range of
moderate to lesser contributors. The letters identify the recipients as PRPs for
the proposed interim remediation and request that they enter into negotiations
to design, construct and operate the cleanup remedy. The recipients of the
letters included a
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general partnership comprised of the Prior RPM Company shareholders, which was
informed that the EPA considers it responsible for two of the sites described as
lesser to moderate contributors to the contamination.
In conjunction with the federal and state environmental investigation of
this area, the Prior RPM Company has been required by the California Regional
Water Quality Control Board (the "Water Board") to conduct an investigation on
the Azusa Properties. This investigation has detected soil contamination on
certain of the Azusa Properties formerly leased by RPM and as a result, the
Prior RPM Company is being required by the Water Board to undertake further
investigations and may be required to undertake remedial action on those
properties.
For one year after the RPM Acquisition, the Company leased the Azusa
Properties pursuant to leases which provide that the Company has not assumed any
liabilities with respect to environmental conditions existing on or about these
properties prior to the commencement of the lease period, although the Company
could be held responsible for such liabilities under various legal theories.
Since the RPM Acquisition, the Company has been engaged in negotiations with the
EPA to settle any liability that it may have for this site. The RPM acquisition
agreement provides that the Company did not assume any environmental liabilities
associated with hazardous substances existing on or about the Azusa Properties
occupied by the Prior RPM Company prior to the RPM Acquisition and that the
Prior RPM Company and the Prior RPM Company shareholders will jointly and
severally indemnify the Company for all liabilities or damages (other than
consequential damages) that the Company may reasonably incur as a result of any
claim asserted against the Company relating to unassumed environmental
liabilities. There can be no assurance, however, that the Company would be able
to make any recovery under any indemnification provisions. The Company also
could become responsible if the conduct of its business contributed to any
environmental contamination on these properties. The Company took steps to
insure that its business at these properties was conducted in compliance with
applicable environmental laws and in a manner that does not contribute to any
environmental contamination. Moreover, the Company has significantly reduced its
presence at the site and has moved all manufacturing operations off-site. Since
July 18, 1995, the Company's only real property interest in the Azusa Properties
has been the lease of a 6,000 square foot storage and distribution facility. The
Company believes, although there can be no assurance, that it will not incur any
material liability as a result of the pre-existing environmental conditions.
In connection with the CRS, Mascot, King-O-Matic, Aaron's, RPM, HTP, Mamco,
Tranzparts and Diverco acquisitions, the Company conducted certain
investigations of these companies' facilities and their compliance with
applicable environmental laws and is presently conducting similar investigations
with respect to one other potential acquisition. The investigations, which
included "Phase I" assessments by independent consultants of all manufacturing
and certain distribution facilities, found that certain remedial, reporting and
other regulatory requirements, including certain waste management procedures,
were not or may not have been satisfied. Based in part on the investigations
conducted, and the indemnification provisions of the agreements entered into in
connection with these acquisitions, the Company believes, although there can be
no assurance, that its liabilities relating to these environmental matters will
not have a material adverse effect, individually or in the aggregate, on the
Company.
LEGAL PROCEEDINGS
From time to time, the Company has been and is involved in various legal
proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
litigation, if determined adversely to the Company, would have a material
adverse effect, individually or in the aggregate, on the Company.
EMPLOYEES
As of September 30, 1996, the Company employed approximately 3,075 people.
The Company believes its employee and labor relations are good. None of the
Company's subsidiaries has experienced a work stoppage in its history, and the
Company has not experienced any work stoppage since its formation in 1994. None
of the Company's employees are members of any labor union.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company
of each of the persons who serve as directors and executive officers of the
Company. Each director of the Company will hold office until the next annual
meeting of stockholders of the Company or until his successor has been elected
and qualified. Officers of the Company are elected by the Board of Directors of
the Company and serve at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ----------------------------------- ----------- ----------------------------------------------------------------------
<S> <C> <C>
William A. Smith 50 Chairman of the Board of Directors
Stephen J. Perkins 49 President, Chief Executive Officer and Director
John C. Kent 44 Chief Financial Officer
Wesley N. Dearbaugh 44 President and General Manager, Independent Aftermarket
Daniel C. Buie 38 Corporate Controller
James R. Wehr 43 President, Aaron's
Michael L. LePore 42 President, CRS
Barry E. Schwartz 51 President, Mascot
Kenneth A. Bear 45 Executive Vice President and General Manager, Aaron's
Richard R. Crowell 41 Director
Mark C. Hardy 33 Director
Dr. Michael J. Hartnett 51 Director
Kurt B. Larsen 32 Director
William E. Myers, Jr. 36 Director
Richard K. Roeder 48 Director
</TABLE>
WILLIAM A. SMITH has been the Chairman of the Board of Directors since July
1994. Mr. Smith was the President and Chief Executive Officer of the Company
from July 1994 until October 1996. From March 1993 to July 1994, Mr. Smith
served as a consultant to ACP in connection with the Initial Acquisitions. From
March 1992 to March 1993, Mr. Smith was President of the Rucker Fluid Power
Division of Lucas Industries, plc. From October 1988 to March 1992, Mr. Smith
was Vice President of Parts Operations for Navistar International Transportation
Corporation, a truck engine manufacturer, where Mr. Smith managed its
aftermarket parts business, including four new aftermarket business lines. From
July 1985 to October 1988, Mr. Smith served as President for Labinal, Inc., a
French automotive and aerospace equipment manufacturer, where he was in charge
of its North American operations. From 1979 to 1985, Mr. Smith was Vice
President of Marketing of the Cummins Diesel Recon business, Cummins Engine
Company's aftermarket remanufacturing division. From 1972 to 1979, Mr. Smith
held several director level positions at Cummins Engine Company covering
distribution, technical service, service training, market planning, parts
marketing, service publications and warranty administration.
STEPHEN J. PERKINS was elected as the President and Chief Executive Officer
of the Company in October 1996. From February 1992 to October 1996, Mr. Perkins
was President and Chief Executive Officer of Senior Flexonics, an international
division of Senior Engineering, plc. Senior Flexonics included 20 operations in
13 countries which manufactured and distributed engineered flexible tubular
products for the automotive, aerospace and industrial markets. From September
1983 to February 1992, Mr Perkins was President and Chief Executive Officer of
Flexonics, Inc., the privately held predecessor of Senior Flexonics. From March
1979 to September 1983, Mr Perkins was the Director of Manufacturing and then
Vice President and General Manager of the Flexonics Division of what is now
Allied Signal. From July 1971 to March 1979, Mr. Perkins held several management
positions in manufacturing at multiple facilities for the Steel Tubing Group of
Copperweld Corporation. Mr Perkins began his career with U.S. Steel as an
Industrial Engineer.
WESLEY N. DEARBAUGH joined ATC as President and General Manager of
Independent Aftermarket in June 1996. From 1993 to June 1996, Mr. Dearbaugh was
a Partner and Vice President of Marketing for Cummins, S.W., a multi-branch
distributor of heavy duty parts and service. From 1992 to 1993, he was Vice
President of Marketing for SEI, a large pension consulting firm. From 1983 to
1992, Mr. Dearbaugh held
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<PAGE>
senior management and partner positions in value investment funds and limited
partnerships. From 1979 to 1983, Mr. Dearbaugh held positions at Cummins Diesel
Recon, Cummins Engine Company's Aftermarket Remanufacturing Division including
General Manager of Fuel Systems, Director-Product Management, and Manager of
Sales & Marketing. From 1974 to 1979, Mr. Dearbaugh held several positions in
industrial engineering and technical sales at Atlas Crankshaft, a manufacturing
division of Cummins Engine Company.
JOHN C. KENT became Chief Financial Officer of the Company in July 1994.
From March 1990 to July 1994, Mr. Kent was Vice President, Finance and Chief
Financial Officer of Aerotest, Inc., an aircraft maintenance and modification
company. In March 1995, Aerotest filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. The Aerotest bankruptcy
proceedings are still pending. From 1987 to March 1990, Mr. Kent was an
Assistant Treasurer at Security Pacific Auto Finance. From 1978 to 1987 Mr. Kent
served in several capacities at Western Airlines, Inc., including Director of
Cash and Risk Management.
DANIEL C. BUIE became the Corporate Controller of the Company in November
1995. Mr. Buie, a CPA, was the Chief Financial Officer of The Bagel Place, Inc.
(a subsidiary of Specialty Foods Corp.) from 1994 to 1995. Mr. Buie was the Vice
President, Finance and Administration of Davey Roofing Inc. from 1991 to 1994,
and Controller of Davey Roofing from 1987 to 1991. In August 1993, Davey Roofing
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code, largely as a result of the severe real estate recession in
Southern California. Prior to joining Davey Roofing, Mr. Buie was an Audit
Manager with the public accounting firm of Deloitte & Touche.
JAMES R. WEHR has been President of Aaron's, since August 1990 and has
responsibility for developing and maintaining the relationships between Aaron's
and Chrysler, other OEMs and Western Auto. In 1983 Mr. Wehr founded Intercont,
Inc., a cleaning and testing equipment division of Aaron's. Mr. Wehr has been
involved in the automotive aftermarket since 1969.
MICHAEL L. LEPORE has been President of CRS since 1984. From 1976 to 1984
Mr. LePore was manager of U.S. Operations for Borg-Warner Parts and Service
Division, a subsidiary of Borg Warner LTD U.K.
BARRY E. SCHWARTZ has been the President of Mascot since 1988.
KENNETH A. BEAR has been Executive Vice President and General Manager at
Aaron's since 1983.
RICHARD R. CROWELL became a director of the Company in July 1994. Mr.
Crowell is a founding partner and Managing Director of ACP. Prior to forming ACP
in 1991, Mr. Crowell was a Managing Director of Rosecliff, Inc., the management
company for Acadia Partners L.P. since its inception in 1987.
MARK C. HARDY became a director of the Company in July 1994. Mr. Hardy is a
Vice President of ACP and joined ACP in June 1993. Prior to joining ACP, Mr.
Hardy was an Associate at Bain & Company, a consulting firm.
DR. MICHAEL J. HARTNETT became a director of the Company in July 1994. Since
March 1992 Dr. Hartnett has been Chairman, President and Chief Executive Officer
of Roller Bearing Company of America, Inc., a manufacturer of ball and roller
bearings that is controlled by an affiliate of ACP. Prior to joining Roller
Bearing in 1990 as General Manager of its Industrial Tectonics subsidiary, Dr.
Hartnett spent 18 years with The Torrington Company, a bearing manufacturer.
KURT B. LARSEN became a director of the Company in July 1994. Mr. Larsen is
a Principal of ACP and joined ACP at its founding in 1991. Prior to joining ACP,
Mr. Larsen was an Associate at Drexel Burnham Lambert Inc.
WILLIAM E. MYERS, JR. became a director of the Company in July 1994. Mr.
Myers has been, for more than the past five years, the Chairman of the Board and
Chief Executive Officer of W.E. Myers and Company, a private merchant bank.
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RICHARD K. ROEDER became a director of the Company in July 1994. Mr. Roeder
is a founding partner and Managing Director of ACP. Prior to forming ACP in
1991, Mr. Roeder was a partner in the law firm of Paul, Hastings, Janofsky &
Walker, where he served as Chairman of the firm's Corporate Law Department and a
member of its National Management Committee.
Mr. Larsen is expected to resign his position as a director of the Company
shortly after completion of this Offering. In that event, the remaining
directors, pursuant to the Company's Bylaws, will select a new director to fill
the resulting vacancy on the Board of Directors. It is expected that the new
director will have no prior affiliation with the Company or ACP.
BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
The Board of Directors of the Company has appointed two committees: the
Audit Committee and the Compensation Committee. The members of the Audit
Committee are Messrs. Roeder, Hardy and Larsen. After Mr. Larsen resigns as a
director, the Board will select one of the directors to succeed him on the Audit
Committee. The members of the Compensation Committee are Messrs. Crowell, Roeder
and Smith. The Compensation Committee administers the Company's Stock Incentive
Plan. Directors do not receive compensation for service on the Board of
Directors or its committees, and the Company does not expect to pay fees to its
directors for the foreseeable future.
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth, for the period beginning with the
commencement of the Company's operations in July 1994 and ending on December 31,
1994, and for the year ended December 31, 1995, the cash compensation paid or
awarded by the Company to the Chief Executive Officer, and the other four most
highly compensated Executive Officers of the Company (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL NUMBER OF
COMPENSATION SECURITIES ALL OTHER
-------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)(1) ($)
- ---------------------------------------------- --------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
William A. Smith.............................. 1995 300,000 -- -- --
Chairman of the Board of Directors, President 1994 150,000 -- 842,106 250,000(2)
and Chief Executive Officer(3)
James R. Wehr................................. 1995 258,000 -- -- --
President, Aaron's 1994 109,000 -- 140,352 --
Michael L. LePore............................. 1995 160,838(4) 179,038(5) 70,176 --
President, CRS 1994 120,451 131,119 -- --
Kenneth A. Bear............................... 1995 103,200 60,000 -- --
Executive Vice President and 1994 44,140 32,960 70,176 --
General Manager, Aaron's
John C. Kent.................................. 1995 124,615 12,000 -- --
Chief Financial Officer 1994 56,154 -- 70,176 --
</TABLE>
- ---------
(1) Includes only options to purchase securities of the Company, which options
were issued pursuant to the Stock Incentive Plan. Pursuant to the Stock
Incentive Plan, the Compensation Committee of the Board of Directors
determines the terms and conditions of each option granted.
(2) In July 1994 the Company paid Mr. Smith $250,000 for consultation services
rendered in connection with the Initial Acquisitions.
(3) Mr. Perkins was appointed as the Company's President and Chief Executive
Officer in October 1996.
(4) Includes five months salary of $56,777 prior to the acquisition by the
Company of CRS in April 1995.
(5) Includes $86,759 of bonus earned prior to the acquisition by the Company of
CRS in April 1995.
39
<PAGE>
OPTION GRANTS
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers for the year ended December 31, 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL POTENTIAL REALIZABLE
GRANTS VALUE AT ASSUMED
------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (1)
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION --------------------
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ------------------------------------------- ---------------- ------------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
William A. Smith........................... -- -- -- -- -- --
James R. Wehr.............................. -- -- -- -- -- --
Michael L. LePore.......................... 35,088(2) 28.5% $ 1.67 6/1/2005 $ 36,842 $ 93,334
35,088(3) 28.5 1.67 12/31/2005 36,842 93,334
Kenneth A. Bear............................ -- -- -- -- -- --
John C. Kent............................... -- -- -- -- -- --
</TABLE>
- ---------
(1) The potential gains shown are net of the option exercise price and do not
include the effect of any taxes associated with exercise. The amounts shown
are for the assumed rates of appreciation only, do not constitute
projections of future stock price performance, and may not necessarily be
realized. Actual gains, if any, on stock option exercises depend on the
future performance of the Common Stock, continued employment of the optionee
through the term of the options, and other factors.
(2) These options were granted under the Stock Incentive Plan. One third of the
options vest and become exercisable on each of the first three anniversaries
of the date of grant.
(3) These options were granted under the Stock Incentive Plan. One third of the
options vest and become exercisable on the first, third and fifth
anniversaries of the date of the grant.
EXERCISES OF OPTIONS AND AGGREGATE YEAR-END OPTION VALUES
Shown below is information with respect to the year-end values of all
options held by the Named Executive Officers. No Named Executive Officer
exercised any options during the fiscal year ended December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William A. Smith.......................................... 561,408 280,698 $ 746,673 $ 373,328
James R. Wehr............................................. 46,782 93,570 62,220 124,448
Michael L. LePore......................................... -- 70,176 -- 93,334
Kenneth A. Bear........................................... 23,394 46,782 31,114 62,220
John C. Kent.............................................. 23,394 46,782 31,114 62,220
</TABLE>
- ---------
(1) The exercise price of each option is $1.67 per share, the same price per
share as paid by all purchasers of the Company's Common Stock at the time of
the Initial Acquisitions. There have been no subsequent issuances of the
Common Stock since such time. The values of the unexercised options
represent the Company's estimated net value of the Common Stock underlying
the options as of December 31, 1995, $3.00, less the applicable per share
exercise price of the option, $1.67.
40
<PAGE>
MANAGEMENT COMPENSATION AND EMPLOYMENT AGREEMENTS
William A. Smith entered into an employment agreement with the Company
effective as of October 7, 1996, pursuant to which he will serve as Chairman of
the Board of Directors of the Company at an annual salary of $300,000 (subject
to cost-of-living adjustments which make the current annual salary approximately
$316,000) through December 31, 1998. The employment agreement with Mr. Smith
contains a noncompete provision for a period of five years from the cessation of
his employment with the Company and a nondisclosure provision which is effective
for the term of the employment agreement and indefinitely thereafter. Mr. Smith
is also entitled to participate in any bonus, incentive or other benefit plans
provided by the Company to its employees.
Stephen J. Perkins entered into an employment agreement with the Company
effective as of October 7, 1996, pursuant to which he will serve as President
and Chief Executive Officer of the Company at an annual salary of $300,000 for a
period of three years. The employment agreement with Mr. Perkins contains a
noncompete provision for a period of 19 months from the cessation of his
employment with the Company and a nondisclosure provision which is effective for
the term of the employment agreement and indefinitely thereafter. Mr. Perkins is
also entitled to participate in any bonus, incentive or other benefit plans
provided by the Company to its employees.
John C. Kent entered into an employment agreement with the Company effective
as of October 1, 1996, pursuant to which he will serve as Chief Financial
Officer of the Company at an annual salary of $150,000 for a period of three
years. The employment agreement with Mr. Kent contains a noncompete provision
for a period of five years from the cessation of his employment with the Company
and a nondisclosure provision which is effective for the term of the employment
agreement and indefinitely thereafter. Mr. Kent is also entitled to participate
in any bonus, incentive or other benefit plans provided by the Company to its
employees.
James R. Wehr entered into an employment agreement with Aaron's effective as
of August 2, 1994, pursuant to which he will serve as President of Aaron's at an
annual salary of $260,000 (subject to cost-of-living adjustments which make the
current annual salary approximately $274,000) for a period of three years, which
Aaron's may renew annually for an additional one year term. The employment
agreement and related agreements with Mr. Wehr contain a noncompete provision
for a period ending August 1, 1999 and a nondisclosure provision which is
effective for the term of his employment with Aaron's and indefinitely
thereafter. Mr. Wehr is also entitled to participate in any bonus, incentive or
other benefit plans provided by Aaron's to its employees.
Michael L. LePore entered into an employment agreement with CRS effective as
of June 1, 1995, pursuant to which he will serve as President of CRS at an
annual salary of approximately $180,000 (subject to cost-of-living adjustments
which make the current annual salary approximately $185,000) for a period of
five years, which CRS may renew for an additional one year term. The employment
agreement and related agreements with Mr. LePore contain a noncompete provision
for a period ending June 1, 2002 and a nondisclosure provision which is
effective for the term of his employment with CRS and indefinitely thereafter.
Mr. LePore is also entitled to participate in any bonus, incentive or other
benefit plans provided by CRS to its employees.
Kenneth A. Bear entered into an employment agreement with Aaron's effective
July 28, 1994, pursuant to which he will serve as Executive Vice President and
General Manager of Aaron's at an annual salary of $104,000 for a period of three
years, which Aaron's may renew annually for an additional one year term. The
employment agreement with Mr. Bear contains a nondisclosure provision which is
effective for the term of his employment with Aaron's and indefinitely
thereafter. Mr. Bear is also entitled to participate in any bonus, incentive or
other benefit plans provided by Aaron's to its employees.
The Compensation Committee is also considering implementation of one or more
forms of retirement or similar plans for its officers and employees. In
addition, the Compensation Committee reviews the employment contracts described
above on an annual basis.
41
<PAGE>
1994 STOCK INCENTIVE PLAN
The 1994 Stock Incentive Plan was adopted in order to provide incentives to
employees and directors of the Company by granting them awards tied to the
Company's Common Stock. In February 1995, the Stock Incentive Plan was amended
to include non-employee directors and independent contractors. The Stock
Incentive Plan is administered by the Compensation Committee, which has broad
authority in administering and interpreting the Stock Incentive Plan. Awards are
not restricted to any specified form or structure and may include, without
limitation, sales or bonuses of stock, restricted stock, stock options, reload
stock options, stock purchase warrants, other rights to acquire stock,
securities convertible into or redeemable for stock, stock appreciation rights,
phantom stock, dividend equivalents, performance units or performance shares
(collectively, "Awards"). Options granted to employees under the Stock Incentive
Plan may be options intended to qualify as incentive stock options under Section
422 of the Internal Revenue Code of 1986, as amended, or options not intended to
so qualify. An Award granted under the Stock Incentive Plan to an employee or
independent contractor may include a provision terminating the Award upon
termination of employment under certain circumstances or accelerating the
receipt of benefits upon the occurrence of specified events, including, at the
discretion of the Compensation Committee, any change of control of the Company.
As of October 31, 1996, the Company has granted options to purchase an
aggregate of up to 2,272,218 shares of Common Stock to officers and employees of
the Company. The exercise price for these options to purchase an aggregate of
1,526,778 shares is $1.67 per share and $4.67 per share for options to purchase
an aggregate of 745,440 shares. Each option is subject to certain vesting
provisions. All options expire on the tenth anniversary of the date of grant. As
of the same date, the number of shares available for issuance pursuant to
options granted under the Stock Incentive Plan is 127,782. For certain
information regarding options granted to officers of the Company, see "Ownership
of Voting Securities."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Richard K. Roeder, William A.
Smith and Richard R. Crowell. Mr. Smith does not participate in any matters
considered by the Committee relating to his compensation.
42
<PAGE>
OWNERSHIP OF VOTING SECURITIES
The following table sets forth the beneficial ownership of each class of
issued and outstanding voting securities of the Company, as of October 31, 1996,
by each director of the Company, each of the Named Executive Officers, the
directors and executive officers of the Company as a group and each person who
at such time beneficially owned more than 5% of the outstanding shares of any
class of voting securities of the Company. Prior to the Reorganization, the
stockholders set forth below held the same ownership interest in Holdings, the
sole stockholder of the Company.
<TABLE>
<CAPTION>
VOTING PERCENTAGE
------------------------------
AFTER OFFERING
NUMBER OF BEFORE AND GEPT
SHARES (1) OFFERING PRIVATE PLACEMENT
------------ ----------- -----------------
<S> <C> <C> <C>
Aurora Equity Partners L.P. (Other beneficial owners: Richard R.
Crowell, Richard K. Roeder and Gerald L. Parsky) (2)(4)(5)........... 9,831,972 81.9% 65.6%
Aurora Overseas Equity Partners I, L.P. (Other beneficial owners:
Richard R. Crowell, Richard K. Roeder and Gerald L. Parsky)
(3)(4)(5)............................................................ 3,579,522 29.8 27.6
General Electric Pension Trust(4) .................................... 1,062,858 8.9 12.3
3003 Summer Street
Stanford, CT 06905
William A. Smith (6)(7)............................................... 885,984 6.9 5.1
Stephen J. Perkins (7)(8)............................................. 0 * *
John C. Kent (7)(9)................................................... 23,388 * *
James R. Wehr (10)(11)................................................ 971,064 8.0 5.9
Michael L. LePore (12) ............................................... 11,694 * *
400 Corporate Drive
Mahwah, NJ 07430
Kenneth A. Bear (11)(13).............................................. 23,388 * *
Richard R. Crowell (2)(3)(4)(14)(15).................................. 11,020,122 91.8 72.8
Richard K. Roeder (2)(3)(4)(14)(15)................................... 11,020,122 91.8 72.8
Mark C. Hardy (14)(15)(16)............................................ 18,240 * *
Dr. Michael J. Hartnett (17) ......................................... 46,314 * *
60 Round Hill Road
Fairfield, CT 06430
Kurt B. Larsen (14)(15)(16)........................................... 26,622 * *
William E. Myers, Jr. (18) ........................................... 280,704 2.3 1.7
2 North Lake Avenue, Suite 650
Pasadena, CA 91101
All directors and officers as a group (15 persons)(19)................ 13,288,716 99.6 74.6
</TABLE>
- ---------
* Less than 1%.
(1) The shares of Common Stock underlying options, warrants, rights or
convertible securities that are exercisable as of October 31, 1996 or that
will become exercisable within 60 days thereafter are deemed to be
outstanding for the purpose of calculating the beneficial ownership of the
holder of such options, warrants, rights or convertible securities, but are
not deemed to be outstanding for the purpose of computing the beneficial
ownership of any other person.
(2) Includes 1,328,514 shares of Holdings Common Stock that are subject to an
irrevocable proxy granted to Aurora Equity Partners L.P. ("AEP") and Aurora
Overseas Equity Partners I, L.P. ("AOEP") by certain holders of Holdings
Common Stock, including Messrs. Crowell, Hardy, Larsen and Roeder, Gerald L.
Parsky, certain other limited partners of AEP and certain affiliates of a
limited partner of AOEP. The proxy terminates upon the transfer of such
shares. AEP is a Delaware limited partnership the general partner of which
is ACP, a Delaware limited partnership whose general partner is Aurora
Advisors, Inc. ("AAI"). Messrs. Crowell, Roeder and Parsky are the sole
stockholders and directors of AAI, are limited partners of ACP and may be
deemed to beneficially share ownership of Holdings
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
43
<PAGE>
Common Stock beneficially owned by AEP and all the shares of Common Stock of
the Company held by Holdings and may be deemed to be the organizers of the
Company under regulations promulgated under the Securities Act. Also
includes the 1,062,858 shares of Holdings Common Stock held by GEPT. See
Footnote (4) below.
(3) Includes 1,328,514 shares of Holdings Common Stock that are subject to an
irrevocable proxy granted to AEP and AOEP by certain holders of Holdings
Common Stock, including Messrs. Crowell, Hardy, Larsen, Roeder, Parsky,
certain other limited partners of AEP and certain affiliates of a limited
partner of AOEP. The proxy terminates upon the transfer of such shares. AOEP
is a Cayman Islands limited partnership the general partner of which is
Aurora Overseas Capital Partners P.L. ("AOCP"), a Cayman Islands limited
partnership whose general partner is Aurora Overseas Advisors, Ltd.
("AOAL"). Messrs. Crowell, Roeder and Parsky are the sole stockholders and
directors of AOAL, are limited partners of AOCP and may be deemed to
beneficially own the shares of Holdings Common Stock beneficially owned by
AOEP and all the shares of Common Stock of the Company held by Holdings.
Also includes the 1,062,858 shares of Holdings Common Stock held by GEPT.
See Footnote (4) below.
(4) With limited exceptions, GEPT has agreed to vote these shares in the same
manner as AEP and AOEP vote their respective shares of Holdings Common
Stock. This provision terminates upon the transfer of such shares.
(5) The address for this beneficial holder is West Wind Building, P.O. Box
1111, Georgetown, Grand Cayman, Cayman Islands, B.W.I.
(6) Includes 842,106 shares of Common Stock subject to options granted under
the Stock Incentive Plan that are exercisable as of October 31, 1996 or that
will become exercisable within 60 days thereafter.
(7) The address for this beneficial holder is 33309 First Way South, Suite
A-206, Federal Way, WA 98003.
(8) Excludes 498,000 shares of Common Stock subject to options granted under
the Stock Incentive Plan that are not exercisable within 60 days of October
31, 1996.
(9) Consists of shares of Common Stock subject to options granted under the
Stock Incentive Plan that are exercisable as of October 31, 1996 or that
will become exercisable within 60 days thereafter. Excludes 81,896 shares of
Common Stock subject to options granted under the Stock Incentive Plan that
are not exercisable within 60 days of October 31, 1996.
(10) Includes 93,564 shares of Common Stock subject to options granted under the
Stock Incentive Plan that are exercisable as of October 31, 1996 or that
will become exercisable within 60 days thereafter. Excludes 46,788 shares of
Common Stock subject to options granted under the Stock Incentive Plan that
are not exercisable within 60 days of October 31, 1996.
(11) The address for this beneficial holder is 2699 North Westgate, Springfield,
MO 65803.
(12) Consists of shares of Common Stock subject to options granted under the
Stock Incentive Plan that are exercisable as of October 31, 1996 or that
will become exercisable within 60 days thereafter. Excludes 58,482 shares of
Common Stock subject to options granted under the Stock Incentive Plan that
are not exercisable within 60 days of October 31, 1996.
(13) Consists of shares of Common Stock subject to options granted under the
Stock Incentive Plan that are exercisable as of October 31, 1996 or that
will become exercisable within 60 days thereafter. Excludes 46,788 shares of
Common Stock subject to options granted under the Stock Incentive Plan that
are not exercisable within 60 days of October 31, 1996.
(14) The address for this beneficial holder is 1800 Century Park East, Suite
1000, Los Angeles, CA 90067.
(15) The holder of these shares has granted an irrevocable proxy covering these
shares to AEP and AOEP.
(16) Includes 12,000 shares of Common Stock subject to vested options granted in
October 1996 under the Stock Incentive Plan.
(17) Consists of shares of Common Stock subject to warrants that are exercisable
as of October 31, 1996 or that will become exercisable within 60 days
thereafter. Excludes 23,862 shares of Common Stock subject to warrants that
are not exercisable within 60 days of October 31, 1996.
(18) Consists of shares of Common Stock subject to exercisable warrants.
(19) Includes 1,347,156 shares of Common Stock subject to warrants and employee
stock options that are exercisable as of October 31, 1996 or that will
become exercisable within 60 days thereafter.
44
<PAGE>
CERTAIN TRANSACTIONS
The Company believes the transactions described below that were entered into
by the Company and its subsidiaries were beneficial to the respective companies,
and were at least as favorable to the respective companies as could have been
obtained from unaffiliated third parties pursuant to arms-length negotiations.
RELATIONSHIP WITH ACP
Fees of approximately $1.1 million were paid to ACP for investment banking
services provided in connection with the acquisitions of Mascot, CRS and
King-O-Matic in 1995 and Tranzparts and Diverco in 1996. The Company has also
agreed to pay to ACP a base annual management fee of approximately $530,000 for
advisory and consulting services pursuant to a written management services
agreement (the "Management Services Agreement"). ACP is also entitled to
reimbursements from the Company for all of its reasonable out-of-pocket costs
and expenses incurred in connection with the performance of its obligations
under the Management Services Agreement. The base annual management fee is
subject to increase, at the discretion of the disinterested members of the
Company's Board of Directors, by up to an aggregate of $250,000 in the event the
Company consummates one or more significant corporate transactions. The base
annual management fee was not increased as a result of the acquisitions of CRS,
Mascot, King-O-Matic, Tranzparts and Diverco. The base annual management fee is
also subject to increase for specified cost of living increases. If the
Company's EBITDA in any year exceeds management's budgeted EBITDA by 15.0% or
more for that year, ACP will be entitled to receive an additional management fee
equal to one half of its base annual management fee for such year. Because the
Company's EBITDA did not exceed management's budgeted EBITDA by 15.0% in 1995,
ACP did not receive this additional management fee in 1995. In the event the
Company consummates any significant corporate transaction (which will not
include this Offering or the GEPT Private Placement), ACP will be entitled to
receive a closing fee from the Company equal to 2.0% of the first $75.0 million
of the acquisition consideration (including debt assumed and current assets
retained) and 1.0% of acquisition consideration (including debt assumed and
current assets retained) in excess of $75.0 million. Notwithstanding the
foregoing, no payment will be made to ACP pursuant to the Management Services
Agreement at any time that certain events of default shall have occurred and be
then continuing under any of the Indentures governing the Senior Notes or the
Revolving Credit Agreement. The Management Services Agreement also provides that
the Company shall provide ACP and its directors, employees, partners and
affiliates with customary indemnification against all actions not involving
gross negligence or willful misconduct. The base annual management fee payable
to ACP will be reduced as the collective beneficial ownership of Common Stock by
AEP and AOEP declines below 50%: for any period during which the collective
beneficial ownership of AEP and AOEP is less than 50% but at least 40%, the base
annual management fee payable for the period will be 80% of the original base
annual management fee (as such original base annual management fee may
previously have been adjusted due to cost of living increases, the "Original
Fee"); for any period during which AEP's and AOEP's collective beneficial
ownership is less than 40% but at least 30%, the base annual management fee
payable for the period will be 60% of the Original Fee; and for any period
during which the collective beneficial ownership of AEP and AOEP is less than
30% but at least 20%, the base annual management fee payable for the period will
be 40% of the Original Fee. If AEP's and AOEP's collective beneficial ownership
declines below 20%, the Management Services Agreement will terminate. For
information regarding the general and certain of the limited partners of ACP,
see "Ownership of Voting Securities."
In October 1996, the Company granted options for an aggregate of 48,000
shares to certain directors and consultants of the Company who are employees of
ACP, including Messrs. Hardy and Larsen.
FACILITY LEASES
In connection with its acquisition of Aaron's, the Company entered into a
lease with CRW, Inc., an affiliate of C.R. Wehr and James R. Wehr (whose
individual family trusts owned all of the outstanding capital stock of Aaron's
prior to its acquisition by the Company), for Aaron's headquarters and primary
remanufacturing facility located in Springfield, Missouri with an initial term
beginning as of January 1, 1994 and expiring as of December 31, 2004, subject to
the Company's option to extend the term for a period of five years. The monthly
base rent is $33,105 and the Company is responsible for paying property taxes,
insurance
45
<PAGE>
and maintenance expenses for the leased premises. The Company also entered into
three leases with C.R. Wehr, Westway Partnership, JRW, Inc. and C.J. Cates Real
Estate Co. (each, an affiliate of C.R. Wehr and James R. Wehr) for three
manufacturing facilities comprising approximately 84,000 square feet for an
aggregate rent of $12,000 per month with an initial term beginning as of January
1, 1994 and expiring as of December 31, 1996 and December 31, 1998 (depending
upon the facility), subject to the Company's option to extend the term of the
lease for a 30,000 square foot facility for one successive period of five years
through December 31, 2003. In November 1994, the Company entered into another
lease with the same parties for a 98,800 square foot storage facility for
monthly rent of $7,300 per month. The initial term of the lease expired during
1995 and pursuant to its terms, continues as a month-to-month lease until
terminated. The Company is responsible for paying property taxes, insurance and
maintenance expenses for each of these leased premises. James R. Wehr is an
executive officer of the Company.
In addition, the Company recently entered into a new lease with Patricia L.
Bridgeforth, Mr. Wehr's sister. The lease for Aaron's 200,000 square foot core
storage facility has an initial term of ten years, expiring October 31, 2006,
with an option to renew for five years. The base monthly rent is $35,833 for the
initial term, with specified increases for each renewal term. The Company is
also required to pay taxes, maintenance and operating expenses.
Mascot is a party to a lease with The Estate of Murray Schwartz, Barry
Schwartz, Bernard Schwartz and Bertha Schwartz for Mascot's remanufacturing
facility located in Mississauga, Ontario. Rent payments under such lease for the
approximately 35,100 square foot facility are $9,505 Canadian per month
beginning as of October 1, 1993 and expiring as of September 30, 1998. The
Company has an option to extend the term for a period of five years subject to
renegotiation of the annual rent amount. The Company is responsible for paying
property taxes, insurance and maintenance expenses for the leased premises.
Barry Schwartz is an executive officer of the Company.
PAYMENT OF PREFERRED STOCK REORGANIZATION CONSIDERATION
Upon the effectiveness of the Reorganization, each outstanding share of
Holdings Common Stock will be converted into one share of ATC Common Stock and
each outstanding share of Holdings Preferred Stock will be converted into the
right to receive the Preferred Stock Reorganization Consideration in cash, which
will be an amount in cash equal to $100.00 per share of Holdings Preferred Stock
plus an amount equal to accrued and unpaid dividends to the date of the
Reorganization.
In connection with the formation of the Company, in July and August 1994
Holdings issued Holdings Preferred Stock to each purchaser of Holdings Common
Stock for consideration of $100 per share, totaling an aggregate of 200,000
outstanding shares. As of December 31, 1996, the aggregate Preferred Stock
Reorganization Consideration would be approximately $25 million (including
approximately $5 million of accrued and unpaid dividends). Messrs. Smith, Wehr,
Crowell, Hardy, Larsen and Roeder (each of whom is a director and/or executive
officer of the Company) hold the following shares of Holdings Preferred Stock,
respectively: 563; 11,250; 1,624; 109; 187; and 243. Such shares will be
converted into the right to receive the following respective amounts in
Preferred Stock Reorganization Consideration: $70,375; $1,406,250; $203,000;
$13,625; $23,375; and $30,375. AEP and AOEP originally purchased 95,392 and
15,233 shares of Holdings Preferred Stock, respectively, which were subsequently
distributed to their general and limited partners.
REGISTRATION RIGHTS
The holders of the Company's Common Stock outstanding before this Offering
have been or will be granted certain "demand" and "piggyback" registration
rights pursuant to a Stockholders Agreement. In addition, GEPT will be granted a
"demand" registration right with respect to 300,000 shares of Common Stock owned
by GEPT and the shares to be sold in the GEPT Private Placement. See "Shares
Eligible for Future Sale."
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Giving effect to the Reorganization, the authorized capital stock of ATC
consists of 30,000,000 shares of Common Stock, par value $0.01 per share, and
5,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred
Stock"). As of October 31, 1996, 12,000,000 shares of Common Stock were issued
and outstanding and were held of record by 37 stockholders and 2,693,274 shares
were reserved for issuance under outstanding options and warrants. As of the
same date after giving effect to the Reorganization, no shares of Preferred
Stock were outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. Holders of Common
Stock do not have the right to cumulate their votes in the election of
Directors. Subject to preferences that may be granted to the holders of
Preferred Stock, each holder of Common Stock is entitled to share ratably in
distributions to stockholders and to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor and,
in the event of the liquidation or dissolution of the Company, is entitled to
share ratably in all assets of the Company remaining after payment of
liabilities. Holders of Common Stock have no conversion, preemptive or other
subscription rights, and there are no redemption rights or sinking fund
provisions with respect to the Common Stock. The outstanding Common Stock is,
validly issued, fully paid and non-assessable.
Additional shares of Common Stock may be issued from time to time by the
Company. The Company's Certificate of Incorporation provides that the Board of
Directors has no power to alter the rights of any outstanding shares of Common
Stock. Certain other provisions of the Company's Certificate of Incorporation
affect the rights of holders of Common Stock and may have the effect of
delaying, deferring or preventing a change in control of the Company.
PREFERRED STOCK
The Board of Directors, without further action by the holders of Common
Stock, may issue shares of Preferred Stock and may fix or alter the voting
rights, redemption provisions (including sinking fund provisions), dividend
rights, dividend rates, liquidation preferences, conversion rights and the
designation of and number of shares constituting any wholly unissued series of
Preferred Stock. The issuance of Preferred Stock could adversely affect the
voting power and other rights of the holders of Common Stock. See "Risk Factors
- -- Control of the Company; Anti-Takeover Matters."
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult to achieve or more costly. The Board of Directors
may issue Preferred Stock with voting and conversion rights that could adversely
affect the voting power of the holders of Common Stock. There are no agreements
or understandings for the issuance of Preferred Stock and the Board of Directors
has no present intention to issue any Preferred Stock.
WARRANTS
In August 1994, the Company issued warrants to Mr. Myers and another
individual to purchase an aggregate of 350,880 shares of Common Stock, which are
exercisable at any time. In December 1994, the Company issued warrants to Dr.
Hartnett to purchase an aggregate of 70,176 shares of Common Stock, which
warrants vest one third annually beginning December 31, 1994.
Each warrant, when exercised, entitles the holder thereof to receive the
number of shares of Common Stock set forth on such warrant at $1.67 per share.
The warrants will automatically expire on the tenth anniversary of the date of
grant. The exercise price and the number of warrant shares are subject to
customary anti-dilution provisions that are effective upon the occurrence of
certain events such as stock splits and stock dividends. In the event of an
issuance of Common Stock to either AEP, AOEP or their affiliates below the fair
market value of the Common Stock on the date of such issuance, the exercise
price of 350,880 of the warrants and the number of shares issuable upon the
exercise thereof will be adjusted accordingly; the other 70,176 warrants do not
contain this adjustment provision. In addition, the warrants are
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subject to customary provisions regarding the assumption by a successor
corporation in the event of reorganization, reclassification, consolidation,
merger or sale of the Company. The issuance of Common Stock pursuant to this
Offering will not cause any adjustment in the warrants.
The warrant holders have no right to vote on matters submitted to the
stockholders of the Company and have no right to receive dividends. The warrant
holders are not entitled to share in the assets of the Company in the event of
the liquidation or dissolution of the Company or the winding up of the Company's
affairs.
ANTI-TAKEOVER STATUTE
Section 203 of the DGCL generally prohibits a Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) prior to the date of the business
combination, the transaction is approved by the board of directors of the
corporation, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the outstanding voting stock, or (iii) on or after the date such
stockholder became an interested stockholder, the business combination is
approved by the board and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. A
"business combination" includes mergers, certain asset sales and certain other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the corporation's voting stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability for (i) any
breach of their duty of loyalty to the company or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL or (iv) any
transaction from which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall pay all costs and
expenses (including legal expenses) incurred by and indemnify from any monetary
liability its present and former officers and directors who are named or
threatened to be named, a party to any administrative, civil, investigative or
criminal proceeding potentially seeking to impose liability on such person for
acts alleged to have been committed by such person while a director or officer
of the Company or while serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, unless a determination is made that the person did
not act in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, or, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Such determination shall be made (i) by the Board by a majority vote
of a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (ii) of such a quorum is not obtainable, or even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written option, or (iii) by the stockholders of the Company. There is no action
or proceeding pending or, to the knowledge of the Company, threatened which may
result in a claim for indemnification by any director officer, employee or agent
of the Company.
The Company believes that the provisions in its Certificate of Incorporation
and its Bylaws are necessary to attract and retain qualified persons as officers
and Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The materials terms of certain indebtedness of the Company are described
below. Each of the following summaries is subject to and qualified in its
entirety by reference to the detailed provisions of the respective agreements
and instruments to which each summary relates. Copies of such agreements and
instruments have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
BANK LINES OF CREDIT
In July 1994, the Company entered into a Revolving Credit Agreement with The
Chase Manhattan Bank (formerly known as Chemical Bank, the "Bank") and Heller
Financial, Inc. providing for a $30.0 million revolving credit facility
available to the Company for working capital purposes. Subject to the
satisfaction of customary conditions, advances under the Revolving Credit
Agreement may be made, and letters of credit may be issued, in each case up to
an aggregate of $30.0 million and up to $10.0 million with respect to any
individual letter of credit, at any time prior to July 19, 1999 (the
"Termination Date"). The funds available to be advanced may not exceed the
aggregate of 85% of the Company's eligible accounts receivable and 60% of the
Company's eligible inventory, in each case as defined in the Revolving Credit
Agreement. All amounts advanced under the Revolving Credit Agreement become due
and payable on the Termination Date. The Company may pre-pay outstanding
advances in whole or in part without incurring any premium or penalty.
All obligations of the Company and its subsidiaries under the Revolving
Credit Agreement are secured by a first priority security interest in all of the
accounts receivable and inventory of the Company and its existing and future
subsidiaries. The obligations of the Company under the Revolving Credit
Agreement are guaranteed by each of the Company's existing and future
subsidiaries.
At the Company's election, amounts advanced under the Revolving Credit
Agreement will bear interest at either (i) the Alternate Base Rate plus 1.25%,
or (ii) the Eurodollar Rate plus 2.25%. The "Alternate Base Rate" is equal to
the highest of (a) the Bank's prime rate, (b) the secondary market rate for
three-month certificates of deposit plus 1.0%, and (c) the federal funds rate
plus 0.5%, in each case as in effect from time to time. The "Eurodollar Rate" is
the rate offered by the Bank for eurodollar deposits for one, two, three or six
months (as selected by the Company) in the interbank eurodollar market in the
approximate amount of the Bank's share of the advance under the Revolving Credit
Agreement. Interest payments on advances which bear interest based upon the
Alternate Base Rate are due quarterly in arrears and on the Termination Date,
and interest payments on advances which bear interest based upon the Eurodollar
Rate are due on the last day of each relevant interest period (or, if such
period exceeds three months, quarterly after the first day of such period).
The Revolving Credit Agreement contains extensive affirmative and negative
covenants, including, among others, covenants relating to levels of net worth,
leverage, EBITDA and cash flow coverage and certain limits on the ability of the
Company to incur indebtedness, make capital expenditures, create liens, engage
in mergers and consolidations, make restricted payments, make asset sales, make
capital expenditures or investments, issue stock and engage in transactions with
affiliates of the Company and its subsidiaries. The Revolving Credit Agreement
also contains customary events of default provisions.
The Company paid the Bank a one time facility and commitment fee upon the
effectiveness of the Revolving Credit Agreement and is required to pay the Bank
quarterly in arrears a commitment fee equal to 0.5% per annum of the average
daily unused portion of the Revolving Credit Agreement during such quarter. The
Company must also reimburse the Bank for certain legal and other costs of the
Bank and pay a fee on outstanding letters of credit at a per annum equal to the
applicable margin then in effect for advances bearing interest at the Eurodollar
Rate.
In July 1996, the Company entered into a Revolving Credit Agreement with
Bank of Montreal (the "BOM Revolving Credit Agreement") for a $3.0 million
Canadian revolving credit facility to accommodate the working capital needs of
the Company's Canadian subsidiaries. Subject to the satisfaction of customary
conditions, advances under the BOM Revolving Credit Agreement may be made, and
letters of credit may be issued, in each case up to an aggregate of $3.0 million
Canadian, due upon demand, and subject to annual review. The funds available to
be advanced may not exceed the aggregate of 75% of the eligible accounts
receivable of Mascot and King-O-Matic and 50% of the eligible inventory of
Mascot and King-O-Matic in each case as defined in the BOM Revolving Credit
Agreement. The amounts advanced under the BOM
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Revolving Credit Agreement bear interest at the Bank of Montreal prime lending
rate plus 0.25%. The agreement contains certain convenants including a tangible
net worth convenant for the combined results of Mascot and King-O-Matic.
SENIOR NOTES
GENERAL. ATC's $120,000,000 aggregate principal amount of its Series B
Notes and $40,000,000 aggregate principal amount of its Series D Notes were
issued pursuant to indentures by and among ATC, each of ATC's subsidiaries and
Firstar Bank of Minnesota, N.A. (formerly known as American Bank N.A.), as
trustee. The Senior Notes are fully and unconditionally guaranteed on a joint
and several basis by each of ATC's subsidiaries. Each series of Senior Notes has
substantially identical terms. The Senior Notes may be redeemed at the option of
the Company in whole or in part at (a) 106% of the principal amount redeemed on
or after August 1, 1999 but prior to August 1, 2000, (b) 104% of the principal
amount redeemed on or after August 1, 2000 but prior to August 1, 2001, (c) 102%
of the principal amount redeemed on or after August 1, 2001 but prior to August
1, 2002 or (d) 100% of the principal amount redeemed on or after August 1, 2002
through maturity, in each case plus accrued and unpaid interest, if any.
Notwithstanding the foregoing, at any time prior to August 1, 1997, the Company
may also redeem up to $30 million and $10 million in aggregate principal amount
of the Series B Notes and Series D Notes, respectively, at 112% of the principal
amount redeemed with the net cash proceeds from one or more public equity
offerings of the Company.
The Indentures governing the Senior Notes contain various restrictive
covenants that, among other things, limit: (i) the incurrence of certain
additional indebtedness by the Company or its subsidiaries; (ii) the creation of
Senior Debt of the Company which is, by its terms, subordinated in right of
payment to other indebtedness of the Company; and (iii) the payment of dividends
on capital stock of the Company and its subsidiaries (see "Risk Factors --
Absence of Dividends"). Affirmative covenants include, among others, an
obligation to pay principal, interest and premium, if any, when due, hold funds
for note payments in trust, maintain its corporate existence, maintain its
properties in good condition, pay taxes when due, furnish to the trustee copies
of certain financial information, and certify as to whether the Company is in
default within 120 days after the end of each fiscal year of the Company. Events
of default under the Indentures governing the Senior Notes include, among other
things: (i) a default in the payment of any interest on any Senior Note when
due, which default continues for 30 days; (ii) a default in the payment of any
principal of or premium, if any, on any Senior Note when due; (iii) the failure
by the Company to comply with any agreement or covenant in the Indentures
governing the Senior Notes, which failure continues for 30 days after a Notice
of Default (as defined in the Indentures governing the Senior Notes) is given;
(iv) final unsatisfied judgments in excess of $2.5 million (excluding amounts
covered by insurance) not discharged, waived or stayed for 60 days; (v) default
under indebtedness of the Company or any of its subsidiaries, which indebtedness
has a principal amount of over $2.5 million either resulting from the failure to
pay principal at maturity or as a result of which the maturity of such
indebtedness has been accelerated prior to its stated maturity; and (vi) certain
events of bankruptcy, insolvency or reorganization of the Company or any of its
subsidiaries.
CHANGE OF CONTROL PUT. Upon the occurrence of a Change of Control, the
Company will be required to make an offer to repurchase the Senior Notes at a
price equal to 101% of the principal amount thereof, together with accrued and
unpaid interest thereon. A "Change of Control" is defined as (i) any sale or
transfer of all or substantially all of the assets of the Company, on a
consolidated basis, in one transaction or a series of related transactions, if,
immediately after giving effect to such transaction, any person (other than the
Company, its subsidiaries or certain other entities related to ACP (an "Excluded
Person")) is or becomes the "beneficial owner," directly or indirectly, of more
than 35% of the total voting power, (ii) any person (other than an Excluded
Person) is or becomes the "beneficial owner," directly or indirectly, of more
than 35% of the total voting power in the aggregate of all classes of
outstanding capital stock of the Company unless the percentage so owned by an
Excluded Person is greater. The occurrence of this Offering will not constitute
a "Change of Control" for purposes of the Senior Notes.
In addition, indebtedness under the Indentures governing the Senior Notes
and the Revolving Credit Agreement would be accelerated or trigger a similar
repurchase right upon a change of control, as defined in the relevant debt
instrument, and other debt the Company may incur could contain a similar
provision. In the event of any such occurrence, the Company would be required to
repay such indebtedness. See "Risk Factors -- Control of the Company,
Anti-Takeover Matters."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and the GEPT Private Placement, the Company
will have approximately 16,455,794 shares of Common Stock outstanding. The
3,500,000 shares sold in this Offering (4,025,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction under the Securities Act, except for any such shares held at any
time by an "affiliate" of the Company, as such term is defined under Rule 144
promulgated under the Securities Act.
The 12,000,000 shares of Common Stock outstanding immediately prior to the
consummation of this Offering and the shares to be issued in the GEPT Private
Placement were or will be issued in private transactions and may be publicly
sold only if registered under the Securities Act or sold in accordance with an
applicable exemption from registration, such as Rule 144. In general, under Rule
144, as currently in effect, a person who has beneficially owned shares for at
least two years, including an "affiliate," as that term is defined in Rule 144,
is entitled to sell, within any three-month period, a number of "restricted"
shares that does not exceed the greater of one percent (1%) of the then
outstanding shares of Common Stock (approximately 164,558 shares immediately
after this Offering) or the average weekly trading volume during the four
calendar weeks preceding such sale. Sales under Rule 144 are subject to certain
manner of sale limitations, notice requirements and the availability of current
public information about the Company. Rule 144(k) provides that a person who is
not deemed an "affiliate" and who has beneficially owned shares for at least
three years is entitled to sell such shares at any time under Rule 144 without
regard to the limitations described above.
In addition, the Commission has published a notice of proposed rule making
which, if adopted as proposed, would shorten the applicable holding periods
under Rule 144(d) and Rule 144(k) to one and two years, respectively (from the
current periods of two and three years). The Company cannot predict whether such
amendments will be adopted or the effect thereof on the trading market for its
Common Stock.
The Company currently has outstanding warrants to purchase an aggregate of
421,056 shares of Common Stock and employee stock options to purchase an
aggregate of 2,272,218 shares of Common Stock. The shares issuable upon the
exercise of such warrants and options will be "restricted" shares for Rule 144
purposes.
The parties to a Stockholders Agreement among the Company and its
stockholders (including GEPT), certain of its optionholders and its warrant
holders (the "Stockholders Agreement"), who in the aggregate held all of the
outstanding shares of Common Stock as of September 30, 1996, have been granted
certain "piggy-back" registration rights with respect to shares of the Common
Stock in connection with a qualified initial public offering by the Company
(which have been waived with respect to this Offering) and in connection with
certain secondary public offerings effected by the Company.
The Stockholders Agreement is being amended to provide that if, after the
Aurora Partnerships distribute their shares of Common Stock to their limited
partners, any such limited partner holds 10% or more of the outstanding Common
Stock, such limited partner (the "Demand Holder") will have the right to require
the Company to use its best efforts to file a registration statement under the
Securities Act covering the resale of the Demand Holder's shares in an
underwritten offering. If following such offering the Demand Holder still holds
10% or more of the outstanding Common Stock, the Demand Holder will have one
additional "demand" registration right.
The Company will bear all expenses incident to any registration effected
pursuant to the Stockholders Agreement, including the fees and expenses of a
single counsel retained by the selling stockholders; however, each selling
stockholder will be responsible for the underwriting discounts and commissions
and transfer taxes in connection with shares sold by such stockholder. Each
selling stockholder and the underwriters through whom shares are sold on behalf
of a selling stockholder will be entitled to customary indemnification from the
Company against certain liabilities, including liabilities under the Securities
Act.
In connection with the GEPT Private Placement, the Company will grant a
"demand" registration right to GEPT. Such registration right will cover the
shares being issued in the GEPT Private Placement as well as 300,000 shares of
Common Stock owned by GEPT prior to the GEPT Private Placement. Pursuant to this
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registration right, GEPT may, subject to certain limitations, require the
Company to use its best efforts to file a registration statement under the
Securities Act covering the resale of such Common Stock owned by GEPT. All fees,
costs and expenses of such registration (other than underwriting discounts and
commissions) will be borne by the Company. GEPT and any underwriters through
whom shares are sold on behalf of GEPT will be entitled to customary
indemnification from the Company against certain liabilities, including
liabilities under the Securities Act. GEPT's registration right may not be
exercised until after the end of the 180-day "lock-up" period described below
and may not be exercised after the third anniversary of the consummation of this
Offering.
The Company will agree with the Underwriters, subject to certain exceptions,
not to sell or otherwise dispose of any shares of Common Stock for a period of
180 days from the date of this Prospectus without the prior written consent of
Morgan Stanley & Co. Incorporated. Each of the Company's current stockholders
(including GEPT), directors, executive officers and warrant holders will enter
into or is bound by a similar agreement. See "Underwriters."
The Company is unable to estimate the number of shares that may be sold in
the future by the existing stockholders or the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
such stockholders could adversely affect prevailing market prices.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States Federal tax
consequences of the acquisition, ownership, and disposition of the Common Stock
by an initial purchaser that, for United States Federal income tax purposes, is
not a "United States person" (a "Non-United States Holder"). This discussion is
based upon the United States Federal tax law now in effect, which is subject to
change, possibly retroactively. For purposes of this discussion, a "United
States person" means a citizen or resident of the United States, a corporation,
partnership, or other entity created or organized in the United States or under
the laws of the United States or of any political subdivision thereof, or an
estate or trust whose income is includible in gross income for United States
Federal income tax purposes regardless of its source. This discussion does not
consider any specific facts or circumstances that may apply to a particular
Non-United States Holder. Prospective investors are urged to consult their tax
advisors regarding the United States Federal tax consequences of acquiring,
holding, and disposing of Common Stock, as well as any tax consequences that may
arise under the laws of any foreign, state, local, or other taxing jurisdiction.
DIVIDENDS
Dividends on Common Stock paid to a Non-United States Holder generally will
be subject to withholding of United States Federal income tax at the rate of
30%, unless the withholding rate is reduced under an applicable income tax
treaty between the United States and the country of tax residence of the
Non-United States Holder. The 30% withholding tax will not apply if the dividend
is effectively connected with a trade or business conducted within the United
States by the Non-United States Holder (or, alternatively, where an income tax
treaty applies, if the dividend is effectively connected with a permanent
establishment maintained within the United States by the Non-United States
Holder), but, instead, the dividend will be subject to the United States Federal
income tax on net income that applies to United States persons (and, with
respect to corporate holders, also may be subject to the branch profits tax). A
Non-United States Holder may be required to satisfy certain certification
requirements in order to claim treaty benefits or to otherwise claim a reduction
of or exemption from withholding under the foregoing rules. A Non-United States
Holder that is eligible for a reduced rate of U.S. withholding tax pursuant to a
tax treaty may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the United States Internal Revenue Service.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
Federal income tax on gain recognized on a sale, redemption, or other
disposition of Common Stock unless (i) the gain is effectively
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connected with the conduct of a trade or business within the United States by
the Non-United States Holder, or (ii) in the case of a Non-United States Holder
who is a nonresident alien individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year and certain other requirements are met.
Also, special rules apply to Non-United States Holders if the Company is or
becomes a "United States real property holding corporation" for United States
Federal income tax purposes. In general, gain on the disposition of interests in
a United States real property holding corporation is subject to United States
Federal income tax. A corporation is generally a United States real property
holding corporation if the fair market value of its United States real property
interests equals or exceeds 50 percent of the sum of the fair market value of
its worldwide real property interests plus its other assets used or held for use
in a trade of business. The Company believes it is not currently, and is not
likely to become, a United States real property holding corporation for United
States Federal income tax purposes.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as specifically defined for United States Federal estate tax
purposes) of the United States at the date of death, or Common Stock subject to
certain lifetime transfers made by such an individual, will be included in such
individual's estate for United States Federal estate tax purposes and may be
subject to United States Federal estate tax, unless an applicable estate tax
treaty provides otherwise. Estates of nonresident aliens are generally allowed a
credit that is equivalent to an exclusion of $600,000 of assets from the estate
for United States Federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report to the holders of the Common Stock and to the
Internal Revenue Service the amount of any dividends paid on Common Stock in
each calendar year and the amounts of tax withheld, if any, with respect to such
payments. That information may also be made available to the tax authorities of
the country in which a Non-United States Holder resides.
Under temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax will generally not
apply to dividends paid on the Common Stock to a Non-United States Holder.
Payments by a United States office of a broker of the proceeds of a sale of the
Common Stock is subject to both backup withholding at a rate of 31% and
information reporting unless the holder certifies its Non-United States Holder
status under penalties of perjury or otherwise establishes an exemption.
Information reporting requirements (but not backup withholding) will also apply
to payments of the proceeds of sales of the Common Stock by foreign offices of
United States brokers, or foreign brokers with certain types of relationships to
the United States, unless the broker has documentary evidence in its records
that the holder is a Non-United States Holder and certain other conditions are
met, or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and their application to the Common Stock could be
changed by future regulations. On April 15, 1996, the IRS issued proposed
Treasury Regulations concerning the withholding of tax and reporting for certain
amounts paid to non-resident individuals and foreign corporations. The proposed
Treasury Regulations, if adopted in their present form, would be effective for
payments made after December 31, 1997. Prospective investors should consult
their tax advisors concerning the potential adoption of such proposed Treasury
Regulations and the potential effect on their ownership of the Common Stock.
THE FOREGOING IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL INCOME TAX
ASPECTS OF HOLDING COMMON STOCK AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING
AND ADVICE BASED UPON THE INDIVIDUAL CIRCUMSTANCES OF THE HOLDER.
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UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated, William Blair & Company, L.L.C. and Donaldson,
Lufkin & Jenrette Securities Corporation are serving as Representatives, have
severally agreed to purchase, and the Company has agreed to sell to them, the
respective number of shares of Common Stock set forth opposite the name of such
Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Morgan Stanley & Co. Incorporated................................................
William Blair & Company, L.L.C...................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
----------
Total........................................................................ 3,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions, including the conditions that no stop order
suspending the effectiveness of the Registration Statement of which this
Prospectus is a part is in effect and no proceedings for such purpose are
pending before or threatened by the Securities and Exchange Commission and that
there has been no material adverse change or any development involving a
prospective material adverse change in the business, financial condition or
results of operations of ATC and its subsidiaries, taken as a whole, from that
set forth in such Registration Statement. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are taken.
The Underwriters propose to offer part of the shares of Common Stock offered
hereby directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price which represents a
concession not in excess of $ per share under the public offering price.
Any Underwriter may allow, and such dealers may re-allow, a concession not in
excess of $ per share to other Underwriters or to certain other dealers.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an additional 525,000 shares of Common Stock at
the public offering price set forth on the cover page hereof, less underwriting
discounts and commissions. The Underwriters may exercise such option to purchase
solely for the purpose of covering over-allotments, if any, incurred in the sale
of the shares of Common Stock offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock offered by the
Underwriters hereby.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.
The Company, on the one hand, and the Underwriters, on the other hand, have
agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act.
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The Company will agree in the Underwriting Agreement that it will not,
without the prior written consent of Morgan Stanley & Co. Incorporated, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common or any securities convertible into or exercisable or
exchangeable for Common Stock or enter into any swap or other arrangement that
transfers to another, in whole on in part, any of the economic consequences of
ownership of the Common Stock, for a period of 180 days after the date of this
Prospectus, other than stock or stock option issuances by the Company pursuant
to existing employee benefit plans. Each of the Company's current stockholders,
directors, executive officers and warrant holders will enter into or is bound by
a similar agreement.
At the request of the Company, the Underwriters have reserved up to 175,000
shares of the shares of Common Stock offered hereby for sale at the public
offering price to certain directors, officers and employees of the Company. The
number of shares of Common Stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby. All
purchasers of the shares of Common Stock reserved pursuant to this paragraph who
are also directors or executive officers of the Company will be required to
enter into agreements identical to those described in the immediately preceding
paragraph restricting the transferability of such shares for a period of 180
days after the date of this Prospectus.
PRICING OF THE OFFERING
Prior to this Offering, there has been no public market for the shares of
Common Stock of the Company. The initial public offering price will be
determined by negotiation between the Company and the Representatives. Among the
factors considered in determining the initial public offering price will be the
future prospects of the Company and its industry in general, sales, earnings and
certain other financial and operating information of the Company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of companies engaged
in activities similar to those of the Company. The estimated initial public
offering price range set forth on the cover page of this preliminary Prospectus
is subject to change as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles,
California. Upon consummation of the Initial Acquisitions, certain partners of
Gibson, Dunn & Crutcher LLP acquired beneficial interests in shares representing
in the aggregate less than 1% of all outstanding Common Stock at the same price
per share paid by other purchasers of Common Stock on or prior to that date.
Certain matters in connection with this Offering will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California.
EXPERTS
The consolidated financial statements of Aftermarket Technology Corp. as of
December 31, 1994 and 1995 and for the five months ended December 31, 1994 and
for the year ended December 31, 1995, the combined financial statements of the
Predecessor Companies to Aftermarket Technology Corp. for the year ended
December 31, 1993 and for the seven months ended July 31, 1994, and the
financial statements of Component Remanufacturing Specialists, Inc. as of March
31, 1995 and for the ten months then ended included in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance on such reports
given upon the authority of such firm as experts in accounting and auditing.
55
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement") under the
Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain items of which are omitted as permitted by the rules and regulations of
the Commission. Statements made in this Prospectus as to the contents of any
agreement or other document referred to herein are not necessarily complete, and
reference is made to the copy of such agreement or other document filed as an
exhibit or schedule to the Registration Statement and each such statement shall
be deemed qualified in its entirety by such reference. For further information,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith, which are available for inspection without charge at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of the material containing
this information may be obtained from the Commission upon payment of the
prescribed fees.
The Company is subject to the periodic reporting and other information
requirements of the Securities Exchange Act of 1934, as amended. Such reports
may be inspected at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material may be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm accompanied by an opinion expressed by such independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information in each case prepared in
accordance with generally accepted accounting principles.
The "Aaron's Transmissions" trademark is a federally protected servicemark
of the Company. This Prospectus also contains the registered trademarks of other
companies.
56
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Aftermarket Technology Corp.
Report of Ernst & Young LLP, Independent Auditors........................................................ F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Income........................................................................ F-4
Consolidated Statements of Stockholders' Equity.......................................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-8
Component Remanufacturing Specialists, Inc.
Report of Ernst & Young LLP, Independent Auditors........................................................ F-19
Balance Sheet............................................................................................ F-20
Statement of Income...................................................................................... F-21
Statement of Stockholders' Equity........................................................................ F-22
Statement of Cash Flows.................................................................................. F-23
Notes to Financial Statements............................................................................ F-24
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Aftermarket Technology Corp.
We have audited the accompanying consolidated balance sheets of Aftermarket
Technology Corp. (the Company) as of December 31, 1994 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
five months ended December 31, 1994, and for the year ended December 31, 1995.
We have also audited the accompanying combined statements of income,
stockholders' equity, and cash flows of the Predecessor Companies to Aftermarket
Technology Corp. (the Predecessor Companies) for the year ended December 31,
1993 and for the seven months ended July 31, 1994. These financial statements
are the responsibility of the Company's and Predecessor Companies' managements.
Our responsibility is to express an opinion on these financial statements 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 consolidated financial position of Aftermarket
Technology Corp. at December 31, 1994 and 1995, and the consolidated results of
the Company's operations and cash flows for the five months ended December 31,
1994, and for the year ended December 31, 1995 and the combined results of the
operations of the Predecessor Companies to Aftermarket Technology Corp. and
their cash flows for the year ended December 31, 1993, and for the seven months
ended July 31, 1994, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Seattle, Washington
June 21, 1996,
except as to Note 13,
as to which the date is , 1996
- --------------------------------------------------------------------------------
The foregoing report is the form that will be signed upon the completion of
the stock split, described in Note 13 to the consolidated financial statements.
ERNST & YOUNG LLP
Seattle, Washington
November 18, 1996
F-2
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 (1)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
(UNAUDITED) (NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents....................... $ 9,427,318 $ 8,755,691 $ 8,307,369 $ 8,307,369
Accounts receivable, net........................ 24,622,834 32,965,874 37,889,351 37,889,351
Inventories..................................... 26,635,133 43,064,712 53,305,883 53,305,883
Prepaid and other assets........................ 579,002 2,032,671 2,807,626 2,807,626
Deferred tax assets............................. 1,435,000 2,267,000 2,534,960 2,534,960
------------- ------------- ------------- -------------
Total current assets.............................. 62,699,287 89,085,948 104,845,189 104,845,189
Equipment and leasehold improvements:
Machinery and equipment......................... 3,373,435 7,187,840 10,836,264 10,836,264
Autos and trucks................................ 958,296 1,503,760 1,818,222 1,818,222
Furniture and fixtures.......................... 429,744 858,070 1,373,432 1,373,432
Leasehold improvements.......................... 1,823,208 2,860,711 4,264,799 4,264,799
------------- ------------- ------------- -------------
6,584,683 12,410,381 18,292,717 18,292,717
Less accumulated depreciation and
amortization................................... 388,520 1,625,917 2,906,930 2,906,930
------------- ------------- ------------- -------------
6,196,163 10,784,464 15,385,787 15,385,787
Debt issuance costs, net.......................... 5,715,838 7,162,690 6,537,558 6,537,558
Cost in excess of net assets acquired, net........ 112,344,868 140,652,620 140,237,861 140,237,861
Other assets...................................... 337,252 245,897 339,231 339,231
------------- ------------- ------------- -------------
Total assets...................................... $ 187,293,408 $ 247,931,619 $267,345,626 $267,345,626
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 5,897,091 $ 12,951,575 $ 21,306,676 $ 21,306,676
Accrued payroll and related costs............... 1,433,142 2,094,237 3,550,075 3,550,075
Accrued interest payable........................ 6,066,835 8,097,647 3,371,661 3,371,661
Other accrued expenses.......................... 2,652,723 3,170,162 3,104,571 3,104,571
Bank lines of credit............................ 1,160,000 811,067 2,924,475 2,924,475
Due to former stockholders...................... 4,989,867 36,734 36,734 36,734
Income taxes payable............................ -- 1,912,116 775,401 775,401
Dividends payable............................... 853,288 2,946,300 4,635,252 --
------------- ------------- ------------- -------------
Total current liabilities......................... 23,052,946 32,019,838 39,704,845 35,069,593
Deferred tax liabilities.......................... 1,483,000 3,478,000 4,746,161 4,746,161
Revolving credit facility......................... -- -- -- 24,635,252
12% Series B and D Senior Subordinated Notes...... 120,000,000 162,245,762 162,047,458 162,047,458
Commitments and contingencies.....................
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares -- 5,000,000
Issued and outstanding shares -- 200,000
Aggregate liquidation and redemption value of
$22,946,300 at December 31, 1995 ($24,635,252
at
September 30, 1996)........................... 20,000,000 20,000,000 20,000,000 --
Common stock, $.01 par value:
Authorized shares -- 30,000,000
Issued and outstanding shares -- 12,000,000.... 20,000,000 20,000,000 20,000,000 20,000,000
Retained earnings............................... 2,757,462 10,163,019 20,815,391 20,815,391
Cumulative translation adjustment............... -- 25,000 31,771 31,771
------------- ------------- ------------- -------------
Total stockholders' equity........................ 42,757,462 50,188,019 60,847,162 40,847,162
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity........ $ 187,293,408 $ 247,931,619 $267,345,626 $267,345,626
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
- ------------
(1) The pro forma balance sheet reflects the redemption of all outstanding
preferred stock, including accrued dividends, without the application of
the net proceeds from the Company's proposed initial public offering. Such
amounts were assumed to have been funded from the Company's available line
of credit.
See accompanying notes.
F-3
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
----------------------------- -----------------------------------------------------------
FOR THE FOR THE
SEVEN MONTHS FIVE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31, ---------------------------
1993 1994 1994 1995 1995 1996
------------- ------------- ------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $110,702,341 $90,055,996 $67,735,869 $190,659,143 $132,471,865 $199,306,548
Cost of sales...................... 66,686,938 52,245,178 40,111,819 115,499,023 82,051,302 122,457,605
------------- ------------- ------------- ------------- ------------ ------------
Gross profit....................... 44,015,403 37,810,818 27,624,050 75,160,120 50,420,563 76,848,943
Selling, general, and
administrative expense............ 25,681,754 20,475,113 14,205,750 38,971,230 26,439,390 38,651,311
Amortization of intangible
assets............................ 28,202 15,534 1,209,971 3,307,563 2,391,467 2,780,654
------------- ------------- ------------- ------------- ------------ ------------
Income from operations............. 18,305,447 17,320,171 12,208,329 32,881,327 21,589,706 35,416,978
Interest and other income.......... 536,670 288,059 341,342 1,099,588 688,362 715,206
Interest expense................... 235,220 130,036 6,373,921 18,015,346 12,977,656 15,144,880
------------- ------------- ------------- ------------- ------------ ------------
Income before income taxes......... 18,606,897 17,478,194 6,175,750 15,965,569 9,300,412 20,987,304
Provision (benefit) for income
taxes............................. 471,000 (5,000) 2,565,000 6,467,000 3,080,332 8,645,980
------------- ------------- ------------- ------------- ------------ ------------
Net income......................... $ 18,135,897 $17,483,194 3,610,750 9,498,569 6,220,080 12,341,324
------------- -------------
------------- -------------
Dividends accrued on preferred
stock............................. 853,288 2,093,012 1,542,396 1,688,953
------------- ------------- ------------ ------------
Net income available to common
stockholders...................... $ 2,757,462 $ 7,405,557 $ 4,677,684 $ 10,652,371
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Pro forma (unaudited):
Income before income taxes per
above........................... $ 18,606,897 $17,478,194
Provision for income taxes....... 7,334,000 7,004,000
------------- -------------
------------- -------------
Pro forma net income............. $ 11,272,897 $10,474,194
------------- -------------
------------- -------------
Net income per share............. $ 0.65 $ 0.79
------------- ------------
------------- ------------
Shares used in calculation of pro
forma net income per share...... 14,616,160 15,555,098
------------- ------------
------------- ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMBINED
----------------------------
FOR THE
SEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, JULY 31,
1993 1994
------------- -------------
<S> <C> <C>
Stockholders' equity at beginning of period........................................ $ 22,106,960 $ 31,719,717
Distributions to stockholders.................................................... (8,523,140) (5,503,000)
Net income....................................................................... 18,135,897 17,483,194
------------- -------------
Stockholders' equity at end of period.............................................. $ 31,719,717 $ 43,699,911
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED
-----------------------------------------------------------------------
CUMULATIVE
PREFERRED COMMON RETAINED TRANSLATION
STOCK STOCK EARNINGS ADJUSTMENT TOTAL
------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of 200,000 shares of
preferred stock for cash at $100 per
share, August 2, 1994............... $ 20,000,000 $ -- $ -- $ $ 20,000,000
Issuance of 12,000,000 shares of
common stock for cash at $1.67 per
share, August 2, 1994............... -- 20,000,000 -- -- 20,000,000
Net income for the five months ended
December 31, 1994................... -- -- 3,610,750 -- 3,610,750
Accrued dividends on preferred
stock............................... -- -- (853,288) -- (853,288)
------------- ------------- ------------- ----------- -------------
Balance at December 31, 1994........... 20,000,000 20,000,000 2,757,462 -- 42,757,462
Translation adjustment............... -- -- -- 25,000 25,000
Net income for the year ended
December 31, 1995................... -- -- 9,498,569 -- 9,498,569
Accrued dividends on preferred
stock............................... -- -- (2,093,012) -- (2,093,012)
------------- ------------- ------------- ----------- -------------
Balance at December 31, 1995........... 20,000,000 20,000,000 10,163,019 25,000 50,188,019
Translation adjustment............... -- -- -- 6,771 6,771
Net income for the nine months ended
September 30, 1996 (unaudited)...... -- -- 12,341,324 -- 12,341,324
Accrued dividends on preferred stock
(unaudited)......................... -- -- (1,688,952) -- (1,688,952)
------------- ------------- ------------- ----------- -------------
Balance at September 30, 1996
(unaudited)........................... $ 20,000,000 $ 20,000,000 $ 20,815,391 $ 31,771 $ 60,847,162
------------- ------------- ------------- ----------- -------------
------------- ------------- ------------- ----------- -------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
-------------------------- -------------------------------------------------------
FOR THE FOR THE
SEVEN MONTHS FIVE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31, --------------------------
1993 1994 1994 1995 1995 1996
------------ ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net Income................................... $18,135,897 $17,483,194 $ 3,610,750 $ 9,498,569 $6,220,080 $12,341,324
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 1,111,547 726,761 1,598,491 4,680,388 3,403,440 4,167,746
Increase (decrease) in allowance for losses
on accounts receivable.................... (97,000 ) 249,176 192,208 496,591 454,565 129,300
Loss (gain) on sale of equipment........... (60,750 ) 24,276 4,804 (5,955) 4,506 28,634
Amortization of debt issuance costs........ -- -- 268,650 710,281 504,793 625,132
Increase (decrease) in net deferred tax
liability................................. -- -- 50,000 1,274,000 1,237,916 978,201
Changes in operating assets and
liabilities:
Accounts receivable...................... (6,926,601 ) (6,218,650) (1,799,626 ) (3,172,303) 720,961 (4,138,735)
Inventories.............................. (4,697,190 ) (2,716,807) (576,145 ) (8,118,364) (3,735,723 ) (9,179,984)
Prepaid and other assets................. (32,501 ) (519,553) 299,101 (1,137,901) (1,562,404 ) (849,761)
Accounts payable and accrued expenses.... 3,049,765 2,102,961 4,249,395 6,555,947 (5,828,570 ) 3,287,866
------------ ------------ ------------ ------------ ----------- -------------
Net cash provided by (used in) operating
activities.................................. 10,483,167 11,131,358 7,897,628 10,781,253 1,419,564 7,389,723
INVESTING ACTIVITIES
Purchases of equipment....................... (2,310,175 ) (1,850,224) (1,335,551 ) (5,187,400) (3,905,148 ) (5,892,715)
Proceeds from sale of fixed assets........... 130,236 78,657 55,603 7,685 (2,645 ) 48,232
Acquisition of companies, net of cash
received.................................... -- -- (146,954,457) (40,264,452) (39,875,396) (4,106,970)
------------ ------------ ------------ ------------ ----------- -------------
Net cash used in investing activities........ (2,179,939 ) (1,771,567) (148,234,405) (45,444,167) (43,783,189) (9,951,453)
</TABLE>
F-6
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
COMBINED CONSOLIDATED
---------------------------- ---------------------------------------------------------
FOR THE FOR THE
SEVEN MONTHS FIVE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31, --------------------------
1993 1994 1994 1995 1995 1996
------------- ------------ ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
FINANCING ACTIVITIES
Issuance of senior subordinated notes... $ -- $ -- $120,000,000 $42,400,000 $42,377,966 $ --
Borrowings on revolving credit
facility............................... -- -- 18,160,000 3,500,000 -- --
Payments on revolving credit facility... -- -- (17,000,000) (4,742,458) -- --
Payment of debt issuance costs.......... -- -- (5,697,413) (2,179,167) (1,788,481) --
Payment of offering costs............... -- -- (5,339,855) -- -- --
Net payments on other long-term debt.... (166,718) (100,584) (358,637) -- -- --
Borrowings (payments) on bank lines of
credit................................. 800,000 (1,000,000) -- -- 2,235,395 2,113,408
Payment on amounts due to former
stockholders........................... -- -- -- (4,987,088) (4,083,834) --
Net payments to related parties......... (579,344) (88,737) -- -- -- --
Sale of common stock.................... -- -- 20,000,000 -- -- --
Sale of preferred stock................. -- -- 20,000,000 -- -- --
Distributions to stockholders........... (8,523,140) (5,503,000) -- -- -- --
------------- ------------ ------------- ------------ ------------ -----------
Net cash (used in) provided by financing
activities............................. (8,469,202) (6,692,321) 149,764,095 33,991,287 38,741,046 2,113,408
------------- ------------ ------------- ------------ ------------ -----------
Increase (decrease) in cash and cash
equivalents............................ (165,974) 2,667,470 9,427,318 (671,627) (3,622,579) (448,322)
Cash and cash equivalents at beginning
of period.............................. 747,654 581,680 -- 9,427,318 9,427,318 8,755,691
------------- ------------ ------------- ------------ ------------ -----------
Cash and cash equivalents at end of
period................................. $ 581,680 $ 3,249,150 $ 9,427,318 $ 8,755,691 $ 5,804,739 $8,307,369
------------- ------------ ------------- ------------ ------------ -----------
------------- ------------ ------------- ------------ ------------ -----------
Cash paid during the period for:
Interest.............................. $ 233,133 $ 128,259 $ 185,817 $15,376,365 $15,236,248 $19,342,319
------------- ------------ ------------- ------------ ------------ -----------
------------- ------------ ------------- ------------ ------------ -----------
Income taxes.......................... $ 360,179 $ 209,671 $ 2,571,000 $ 3,221,356 $ 4,443,167 $8,438,414
------------- ------------ ------------- ------------ ------------ -----------
------------- ------------ ------------- ------------ ------------ -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Aftermarket Technology Corp.
include the combined results of Aftermarket Technology Holdings Corp. (Holdings)
and its wholly owned subsidiary, Aftermarket Technology Corp. (ATC)
(collectively, the "Company"). Concurrent with the completion of ATC's proposed
initial public offering, Holdings will be merged into ATC. The accompanying
financial statements are presented on a combined basis with the elimination of
intercompany accounts and transactions and will represent the historical
financial statements of ATC upon the completion of the merger.
The consolidated financial statements include the results of the following
remanufactured automotive products businesses which sell to customers throughout
the United States and Canada: (i) Aaron's Automotive Products, Inc. (Aaron's), a
Springfield, Missouri based remanufacturer of transmissions, engines, torque
converters, and other drive train parts for automotive original equipment
manufacturers, independent rebuilders and distributors, and retail chain store
customers; (ii) Component Remanufacturing Specialists (CRS), a Mahwah, New
Jersey based remanufacturer and distributor of automotive drive train and
transmission components; (iii) H.T.P., Inc. (HTP), a Louisville, Kentucky based
remanufacturer and warehouse distributor of new and remanufactured parts for
independent transmission rebuilders; (iv) Mamco Converters, Inc. (Mamco), a
Dayton, Ohio based remanufacturer of torque converters for independent
transmission rebuilders and distributors; (v) King-O-Matic and Mascot Truck
Parts Inc. (Mascot), Canadian based remanufacturers and distributors of
automotive components and a rebuilder of heavy duty truck transmissions,
respectively, are located in Mississauga, Canada; and (vi) RPM Merit (RPM), a
Rancho Cucamonga, California (formerly Azusa, California) based remanufacturer
of torque converters, constant velocity axles, and transmission fluid pumps, and
a warehouse distributor of remanufactured parts and new part kits to independent
transmission rebuilders.
The combined financial statements of the Predecessor Companies to
Aftermarket Technology Corp. (the Predecessor Companies) represent the
combination of the historical financial statements of Aaron's, RPM, HTP, and
Mamco. The Company was formed for the purpose of effecting the acquisitions of
the Predecessor Companies and is a wholly owned subsidiary of Holdings. Holdings
does not have any operations other than its investment in the Company. The
Predecessor Companies were acquired pursuant to four separate purchase
agreements for a total purchase price of approximately $160.4 million (the
Initial Acquisitions). The combined financial statements for the seven months
ended July 31, 1994 include the operations of the Predecessor Companies up to
their respective closing dates, which approximated July 31, 1994.
INTERIM FINANCIAL INFORMATION
The financial information at September 30, 1996 and for the nine months
ended September 30, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Operating results for the
nine months ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the entire year.
PRINCIPLES OF CONSOLIDATION
The Company's acquisitions have been accounted for as purchases, and the
consolidated financial statements for the twelve months ended December 31, 1995
and five months ended December 31, 1994 include operations of the Company and
its wholly owned operating subsidiaries from the dates of acquisition.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
F-8
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of new and used engine and transmission parts, and
cores and finished goods. Appropriate consideration is given to deterioration,
obsolescence, and other factors in evaluating estimated market value.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using accelerated and straight-line methods over the estimated useful
lives of the assets, which range from three to fifteen years.
FOREIGN CURRENCY TRANSLATION
The financial statements of Canadian subsidiaries have been translated into
U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement amounts have been translated using
the average exchange rate for the year. The translation gain resulting from the
changes in exchange rates has been reported separately as a component of
stockholders' equity.
The effect on the statements of income of transaction gains or losses is
insignificant for the periods presented.
DEBT ISSUANCE COSTS
Debt issuance costs incurred in connection with the sale of the 12% Series B
and Series D Senior Subordinated Notes (Note 6) and Revolving Credit Facility
(Note 5) are being amortized over the life of the debt of ten, nine, and seven
years, respectively.
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of the purchase price over the fair value of the assets purchased
is being amortized over 40 years on a straight-line basis. Cost in excess of net
assets acquired is reflected net of accumulated amortization of $1,199,809 and
$4,466,669 at December 31, 1994 and 1995, respectively.
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
assesses the recoverability of cost in excess of net assets acquired by
determining whether the amortization of the asset balance over its remaining
life can be recovered through the undiscounted future operating cash flows of
the acquired operation. The amount of the impairment, if any, is measured based
on projected discounted future operating cash flows. The Company believes that
no impairment has occurred and that no reduction in the estimated useful life is
warranted.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a significant
concentration of credit risk consist of accounts receivable from its customers,
which are primarily in the automotive aftermarket industry
F-9
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
throughout the United States and Canada. The credit risk associated with the
Company's accounts receivable is mitigated by its credit evaluation process,
reasonably short collection terms and, except for one significant customer, the
geographical dispersion of sales transactions.
The Company grants credit to certain customers who meet pre-established
credit requirements. Customers who do not meet those requirements are required
to pay for products upon delivery. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
Accounts receivable is reflected net of an allowance for doubtful accounts
of $766,000 and $2,469,000 at December 31, 1994 and 1995, respectively.
WARRANTY POLICY
The Company generally provides a warranty on its products for a period of up
to twelve months or 12,000 miles.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." Statement No. 123 is effective
for fiscal years beginning after December 15, 1995. Under Statement No. 123,
stock-based compensation expense is measured using either the intrinsic value
method, as prescribed by Accounting Principles Board Opinion No. 25, or the fair
value method described in Statement No. 123. Companies choosing the intrinsic
value method will be required to disclose the pro forma impact of the fair value
method on net income and earnings per share. The Company plans to implement
Statement No. 123 in 1996 using the intrinsic value method.
INCOME TAXES
Two of the Predecessor Companies elected to be taxed as S Corporations for
all periods through the respective closing dates of the Acquisitions; therefore,
for federal and state income tax purposes, any income or loss accrued prior to
that date generally was not taxed to these companies but was reported by their
respective stockholders. The pro forma provision for taxes reflects the
estimated provision for federal and state income taxes which could have been
provided had these companies been C Corporations and filed consolidated returns.
Because these pro forma income taxes do not represent obligations of, and will
not be paid by, the Predecessor Companies, they have not been reflected in the
combined balance sheets or in the combined statements of cash flows.
PRO FORMA DATA (UNAUDITED)
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is based on the weighted average number of
shares of common stock and common equivalent shares outstanding using the
treasury stock method and the estimated number of shares of common stock to be
issued in the Company's proposed initial public offering whose net proceeds will
be used to redeem the outstanding preferred stock including accrued dividends.
Pursuant to the Securities and Exchange Commission requirements, common and
common equivalent shares issued during the 12-month period prior to the filing
of the Company's proposed initial public offering have been included in the
calculation as if they were outstanding for all periods presented using the
treasury stock method, based on the assumed initial public offering price.
Historical earnings per share is not considered meaningful due to the
significant changes in the Company's capital structure that will occur upon the
closing of the Company's initial public offering; accordingly, such per share
information is not presented.
F-10
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRO FORMA BALANCE SHEET
As a result of the Company's proposed initial public offering, all
outstanding preferred stock, including accrued dividends, will be redeemed. The
pro forma balance sheet at September 30, 1996 reflects the redemption of the
preferred stock including accrued dividends without the application of net
proceeds from such offering. The amounts were assumed to have been funded from
the Company's available line of credit at September 30, 1996.
2. ACQUISITIONS
During the year ended December 31, 1995, the Company acquired three new
companies for a total purchase price of approximately $42.8 million. The CRS and
Mascot acquisitions closed on June 1, 1995, and June 9, 1995, respectively, and
the King-O-Matic acquisition closed on September 12, 1995 (collectively, the
1995 Acquisitions). The Company issued $40 million of principal amount of 12%
Senior Subordinated Notes due in 2004 concurrent with the acquisition of CRS,
the proceeds of which financed the New Acquisitions (Note 6). In addition, on
April 2, 1996, the Company acquired Tranzparts, Inc. for $4.0 million and on
October 1, 1996 the Company acquired Diverco, Inc. ("Diverco") for $8.5 million
for the 1996 Acquisitions. All such acquisitions have been accounted for as
purchases. Accordingly, the allocation of the cost of the acquired assets and
liabilities has been made on the basis of the estimated fair value.
The consolidated financial statements include the operating results of each
business from the date of acquisition. The following unaudited pro forma
information for the year ended December 31, 1994 reflects the acquisition of the
Predecessor Companies as if the acquisition had occurred on January 1, 1994,
adjusted to give effect for federal and state income taxes on the results of
operations had all Predecessor Companies been taxed as a corporation and filed a
consolidated return, and gives effect to the 1995 acquisitions as if such
acquisitions had occurred on January 1, 1994. The unaudited pro forma
information for the year ended December 31, 1995 gives effect to the 1995
Acquisitions and the 1996 Acquisitions as if such acquisitions occurred on
January 1, 1995. The unaudited pro forma information for the nine-months ended
September 30, 1996 gives effect as if such Acquisitions occurred at the
beginning of 1996. The pro forma information includes adjustments for interest
expense that would have been incurred to finance the acquisitions, additional
depreciation based on the fair market values of the property, plant, and
equipment acquired, and amortization of intangibles arising from the
transactions. The pro forma financial information is not necessarily indicative
of the results of operations as they would have been had the transactions been
effected on the assumed dates.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
---------------------- -------------
1994 1995 1996
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................. $ 192,431 $ 224,837 $ 208,066
Net income................................................ 8,824 10,711 12,815
</TABLE>
3. RELATED-PARTY TRANSACTIONS
Aaron's had sales to a company owned by Aaron's former stockholders
amounting to $327,472 for the year ended December 31, 1993 and $115,422 for the
seven months ended July 31,1994.
The Predecessor Companies leased land and buildings, primarily its
production facilities, under operating lease arrangements with the respective
stockholders, or entities controlled by the stockholders, of the Predecessor
Companies. Rent expense under these operating leases amounted to $1,156,000 for
the year
F-11
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
3. RELATED-PARTY TRANSACTIONS (CONTINUED)
ended December 31, 1993, and $808,000 for the seven months ended July 31, 1994.
Upon completion of the Prior Acquisitions, the Company entered into three- to
five-year lease agreements on most of the properties which had been leased from
related parties to the Predecessor Companies.
The Company had liabilities to former stockholders totaling $4,989,867 and
$36,734 at December 31, 1994 and 1995, respectively. These amounts are composed
primarily of an additional purchase price payable to Aaron's former
stockholders. The remaining amount will be paid upon collection of certain
accounts receivable in 1996.
The Company paid Aurora Capital Partners (ACP), which has a majority
interest in Holdings, the Company's parent, $800,000 in fees for investment
banking services provided in connection with the acquisitions of Mascot, CRS,
and King. In addition, ACP was paid management fees of $208,000 and $500,000 in
1994 and 1995, respectively. ACP is also entitled to various additional fees
depending on the Company's profitability or future acquisitions. No such fees
were paid in 1994 and 1995.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Raw materials, including core inventories........................... $ 7,415,495 $ 19,015,530 $ 29,539,596
Work-in-process..................................................... 186,338 1,394,479 974,496
Finished goods...................................................... 19,033,300 22,654,703 22,791,791
------------- ------------- -------------
$ 26,635,133 $ 43,064,712 $ 53,305,883
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Finished goods include purchased parts which are available for sale.
5. BANK LINES OF CREDIT
CURRENT LIABILITIES
On June 8, 1995, the Company entered into an agreement with the Royal Bank
of Canada (Royal Bank), as agent, providing for a C$1.35 million revolving
credit facility for working capital purposes. All amounts advanced are secured
by an irrevocable standby letter of credit from Chemical Bank in the amount of
the U.S. equivalent of C$1.35 million. At December 31, 1995, $811,067 was
outstanding under this line of credit. Amounts advanced under the credit
agreement bear interest at the Royal Bank prime rate and are payable on the 30th
of each quarter-end commencing September 30, 1995. The rate in effect at
December 31, 1995 was 7.5%.
REVOLVING CREDIT FACILITY
On July 19, 1994, the Company entered into an agreement with The Chase
Manhattan Bank (formerly known as Chemical Bank), as agent, providing for a $30
million revolving credit facility (Revolving Credit Facility) to finance the
Prior Acquisitions and for working capital purposes. The funds available to be
advanced may not exceed 85% of the Company's eligible accounts receivable and
60% of the Company's eligible inventories, as defined in the agreement. The
available borrowing base at December 31, 1995 was approximately $27 million. All
amounts advanced are secured by all accounts receivable and inventories and
become due on July 31, 1999. The Company may prepay outstanding advances in
whole or in part without incurring any premium or penalty.
F-12
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
5. BANK LINES OF CREDIT (CONTINUED)
At the Company's election, amounts advanced under the Revolving Credit
Facility will bear interest at either (i) the Alternate Base Rate plus 1.25% or
(ii) the Eurodollar Rate plus 2.25%. The Alternate Base Rate is equal to the
highest of (a) the Bank's prime rate, (b) the secondary market rate for
three-month certificates of deposit plus 1.0%, or (c) the federal funds rate
plus 0.5%. Interest payments on advances which bear interest based upon the
Alternate Base Rate are due quarterly in arrears, and interest payments on
advances which bear interest based upon the Eurodollar Rate are due on the last
day of each relevant interest period (or, if such period exceeds three months,
quarterly after the first day of such period).
The Company paid the Bank a one-time facility and commitment fee upon
establishing the Revolving Credit Facility and is required to pay the Bank
quarterly in arrears a commitment fee of 0.5% per annum of the average daily
unused portion of the Revolving Credit Facility.
The Revolving Credit Facility contains several covenants, including levels
of net worth, leverage, EBITDA and cash flow coverage, and certain limits on the
Company to incur indebtedness, make capital expenditures, create liens, engage
in mergers and consolidations, make restricted payments (including dividends),
make asset sales, make investments, issue stock, and engage in transactions with
affiliates of the Company and its subsidiaries. At December 31, 1995, no amounts
were outstanding under this line of credit.
6. 12% SERIES B AND SERIES D SENIOR SUBORDINATED NOTES
On August 2, 1994, the Company completed a private placement issuance of
$120 million of principal amount of 12% Series A Senior Subordinated Notes due
2004. Proceeds from the issuance, together with the $40 million capital
contribution, were used to finance the Initial Acquisitions. The privately
placed debt was exchanged for public debt (designated Series B) on February 22,
1995.
On June 1, 1995, the Company completed another private placement issuance of
$40 million of principal amount of 12% Series C Senior Subordinated Notes due in
2004. Proceeds of $42.4 million from the issuance were used to finance the 1995
Acquisitions. These notes have an effective interest rate of 10.95%. The
privately placed debt was exchanged for public debt (designated Series D) on
September 10, 1995.
Interest on the Notes is payable semiannually on February 1 and August 1 of
each year, commencing on February 1, 1995 for the Series B Notes and August 1,
1995 for the Series D Notes. The Notes will mature on August 1, 2004. On or
after August 1, 1999, the Notes may be redeemed at the option of the Company, in
whole or in part, at specified redemption prices plus accrued and unpaid
interest:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- ---------------
<S> <C>
1999................................................................... 106%
2000................................................................... 104
2001................................................................... 102
2002 and thereafter.................................................... 100
</TABLE>
In addition, at any time on or prior to August 1, 1997, the Company may,
subject to certain requirements, redeem up to $30 million of the Series B Notes
and $10 million of the Series D Notes of the aggregate principal amount of the
Notes with the net cash proceeds of one or more public equity offerings, at a
price equal to 112% of the principal amount to be redeemed plus accrued and
unpaid interest. In the event of a change in control, the Company would be
required to offer to repurchase the Notes at a price equal to 101% of the
principal amount plus accrued and unpaid interest.
F-13
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
6. 12% SERIES B AND SERIES D SENIOR SUBORDINATED NOTES (CONTINUED)
The Notes are general obligations of the Company, subordinated in right of
payment to all existing and future senior debt (including the Revolving Credit
Facility). The Notes are guaranteed by each of the Company's existing and future
subsidiaries other than any subsidiary designated as an unrestricted subsidiary
(as defined). The Company may incur additional indebtedness, including
borrowings under its $30 million Revolving Credit Facility (Note 5), subject to
certain limitations.
The indenture under which the Notes were issued contains certain covenants
that, among other things, limit the Company from incurring other indebtedness,
issuing disqualified capital stock, engaging in transactions with affiliates,
incurring liens, making certain restricted payments (including dividends),
making certain asset sales, and permitting certain restrictions on the ability
of its subsidiaries to make distributions. As of December 31, 1995, the Company
was in compliance with such covenants.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Book basis of intangible assets in excess of tax amounts............... $ 1,466,000 $ 3,208,000
Other.................................................................. 17,000 270,000
------------ ------------
Total deferred tax liabilities........................................... 1,483,000 3,478,000
Deferred tax assets:
Inventory obsolescence reserve......................................... 483,000 898,000
Bad debt reserves...................................................... 331,000 545,000
Product warranty accruals.............................................. 295,000 438,000
Other.................................................................. 326,000 386,000
------------ ------------
Total deferred tax assets................................................ 1,435,000 2,267,000
Valuation allowance for deferred tax assets.............................. -- --
------------ ------------
Net deferred tax asset................................................... 1,435,000 2,267,000
------------ ------------
Net deferred tax liability............................................... $ 48,000 $ 1,211,000
------------ ------------
------------ ------------
</TABLE>
F-14
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Current:
Federal.................................................................. $2,136,000 $4,429,000
State.................................................................... 379,000 764,000
------------ ------------
Total current.............................................................. 2,515,000 5,193,000
Deferred:
Federal.................................................................. 53,000 1,137,000
State.................................................................... (3,000) 137,000
------------ ------------
Total deferred............................................................. 50,000 1,274,000
------------ ------------
$2,565,000 $6,467,000
------------ ------------
------------ ------------
</TABLE>
The components of the provision for deferred income taxes are as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Amortization of intangible assets.......................................... $ 754,000 $1,759,000
Inventory obsolescence reserve............................................. (483,000) (333,000)
Bad debt reserves.......................................................... (85,000) (223,000)
Product warranty accruals.................................................. (56,000) (20,000)
Depreciation............................................................... 2,000 339,000
Other...................................................................... (82,000) (248,000)
------------ ------------
Provision for deferred income taxes........................................ $ 50,000 $1,274,000
------------ ------------
------------ ------------
</TABLE>
The reconciliation of income tax expense computed at the U.S. federal
statutory tax rates to income tax expense is as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
--------------------------- ---------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Tax at U.S. statutory rates.................. $ 2,159,000 35.0% $ 5,588,000 35.0%
State income taxes, net of federal tax
benefit..................................... 244,000 3.9 529,000 3.3
Other........................................ 162,000 2.7 350,000 2.2
------------ ------------- ------------ -------------
$ 2,565,000 41.6% $ 6,467,000 40.5%
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
8. PREFERRED STOCK
The Company has issued 200,000 shares of nonvoting preferred stock. The
preferred stock accrues dividends at 10% per annum and accrues interest at 10%
per annum on unpaid dividends. Dividends are payable annually on the last
business day in June if declared by the Board of Directors. Dividends on each
share of the preferred stock are cumulative and accrue from day to day, whether
or not earned or declared, commencing with the date of issue of such share. No
dividends have been paid to date.
F-15
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
8. PREFERRED STOCK (CONTINUED)
The preferred stock is exchangeable at the option of the Company, in whole
or in part, after July 31, 1996, for Subordinated Exchange Debentures due July
31, 2006. The Debentures shall be issued pursuant to an indenture the form of
which shall have been approved by the Company and the holders of a majority of
the outstanding shares of preferred stock.
The preferred stock may be redeemed at the option of the Board of Directors
at any time, in whole or in part, at a redemption price equal to the stated
value per share, together with accrued and unpaid dividends to the date fixed
for such redemption. Shares of preferred stock are also subject to mandatory
redemption should substantially all of the assets of the Company be sold or
transferred, or should there be a merger of Holdings with or into any other
corporation in which Holdings is not the surviving entity. In the case of a
mandatory redemption, outstanding shares of preferred stock would be redeemed at
a redemption price equal to the stated value per share, together with accrued
and unpaid dividends including accrued interest to the date fixed for such
redemption.
In the event of any liquidation, the preferred stockholders are entitled to
receive an amount equal to the stated value per share, together with accrued and
unpaid dividends. Thereafter, any remaining proceeds shall be distributed to the
common stockholders. If the assets of the Company are not sufficient to pay the
redemption amount, then holders of outstanding shares of preferred stock shall
share ratably in such distribution.
9. COMMON STOCK
At December 31, 1995, the Company had 2,221,056 shares of common stock
reserved for the exercise and future granting of stock options and warrants.
STOCK OPTION PLAN
The Company adopted its 1994 Stock Incentive Plan in July 1994 in order to
provide incentives to employees and directors of the Company. The Company has
reserved 1,800,000 shares of common stock for issuance under the plan. Options
are generally granted at the fair value on the date of grant and vest over a
period of time to be determined by the Board of Directors, generally five years.
The options expire 10 years from the date of grant.
The following table summarizes the stock option activity:
<TABLE>
<CAPTION>
SHARES
SUBJECT PRICE
TO OPTION PER SHARE
---------- -------------
<S> <C> <C>
Granted in 1994............................................................ 1,403,514 $ 1.67
----------
Balance, December 31, 1994.................................................. 1,403,514 1.67
Granted in 1995........................................................... 123,264 1.67
----------
Balance, December 31, 1995.................................................. 1,526,778 1.67
Granted in 1996........................................................... 117,264 $ 4.67
----------
Balance, September 30, 1996................................................. 1,644,042 $ 1.67-4.67
----------
----------
</TABLE>
At December 31, 1995, 760,236 options (1,103,406 options at September 30,
1996) are exercisable, and 273,222 options (755,958 options at September 30,
1996) options remain available for future grant.
In connection with the prior acquisitions, warrants to purchase 350,880
shares of common stock at $1.67 per share were issued to two individuals. The
warrants are exercisable through 2004. The Company has
F-16
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
9. COMMON STOCK (CONTINUED)
also issued a warrant to one member of the Board of Directors to purchase 70,176
shares of common stock at $1.67 per share, the fair value of the common stock on
the date of grant. The warrant vests one-third annually beginning December 31,
1994.
On September 19, 1996, the shareholders approved an amendment to the Plan to
increase the number of shares available for issuance to 2,400,000.
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under various operating lease
agreements which expire on various dates through 2004. Leases that expire
generally are expected to be renewed or replaced by other leases. Future minimum
lease payments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- ---------------------------------------------------------------------
<S> <C>
1996................................................................. $ 3,878,952
1997................................................................. 3,751,918
1998................................................................. 3,026,401
1999................................................................. 2,221,990
2000................................................................. 1,841,698
Thereafter........................................................... 3,134,820
-------------
$ 17,855,779
-------------
-------------
</TABLE>
Rent expense under operating leases approximated $1,800,000, $1,159,000,
$902,000, and $3,114,999 for the year ended December 31, 1993, the seven months
ended July 31, 1994, the five months ended December 31, 1994, and the year ended
December 31, 1995, respectively.
Rent expense includes amounts paid to related parties of $254,000 and
$611,000 for the five months ended December 31, 1994 and the year ended December
31, 1995, respectively.
The company from which RPM acquired its assets in 1994 (the "Prior RPM
Company") has been identified by the EPA as one of the many potentially
responsible parties for environmental liabilities associated with a "Superfund"
site located in the area of the Company's former manufacturing facilities and
current distribution facility in Azusa, California. The EPA has preliminarily
estimated that it will cost approximately $47 million to construct, and
approximately $4 million per year for an indefinite period to operate, an
interim remedial groundwater treatment system for the part of the Superfund Site
within which the Company's former manufacturing facilities and current
distribution facility, as well as those of many other potentially responsible
parties, are located. The actual cost of this remedial action could vary
substantially from this estimate, and additional costs associated with the
Superfund site are likely to be assessed. The Company has significantly reduced
its presence at the site and has moved all manufacturing operations off-site.
Since July 1995, the Company's only real property interest in this site has been
the lease of a 6,000 square foot storage and distribution facility. The RPM
acquisition agreement and the leases pursuant to which the Company leased RPM's
facilities after the RPM Acquisition expressly provide that the Company did not
assume any liabilities for environmental conditions existing on or before the
RPM Acquisition, although the Company could become responsible for these
liabilities under various legal theories. The Company is indemnified against any
such liabilities by the seller of RPM as well as the Prior RPM Company
shareholders. There can be no assurance, however, that the Company would be able
to make any recovery under any indemnification provisions. Since the RPM
Acquisition, the Company has been
F-17
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
engaged in negotiations with EPA to settle any liability that it may have for
this site. The Company's management believes that the Company will not incur any
material liability as a result of these pre-existing environmental conditions.
In connection with the acquisitions of Aaron's, RPM, HTP, Mamco, CRS,
King-O-Matic and Tranzparts, the Company conducted certain investigations of
these companies' facilities and their compliance with applicable environmental
laws. The investigations, which for all manufacturing and certain distribution
facilities also included "Phase I" assessments by independent consultants, found
that certain remedial, reporting and other regulatory requirements, including
certain hazardous waste management procedures, were not or may not have been
satisfied. Based in part on the investigations conducted and the indemnification
provisions of the Prior Acquisitions' agreements with respect to certain of
these matters, the Company's management believes that its liabilities relating
to these environmental matters will not have a material adverse effect on its
future consolidated financial position or results of operations.
The Company is also involved in several lawsuits which arise in the ordinary
course of business which management believes will not have a material adverse
effect, individually or in the aggregate, on the Company's consolidated
financial position or results of operations.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of all financial instruments approximate their fair
values at December 31, 1994 and 1995, except for the Series B and Series D
subordinated debt.
The fair values of the Company's Series B and Series D subordinated debt are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of these financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
12% subordinated notes (Series B)...................... $ 120,000 $ 123,600 $ 120,000 $ 126,600
12% subordinated notes (Series D)...................... -- -- 40,000 42,200
</TABLE>
12. SIGNIFICANT CUSTOMER
For the year ended December 31, 1993, the seven months ended July 31, 1994,
the five months ended December 31, 1994, and the year ended December 31, 1995,
sales to one customer accounted for 34%, 43%, 45%, and 35% of net sales,
respectively. Additionally, at December 31, 1994 and 1995, this customer
accounted for approximately 71% and 46% of accounts receivable, respectively. No
other customer accounted for more than 10% of net sales in any period.
13. SUBSEQUENT EVENTS
In June 1996, the Company's Board of Directors approved the reorganization
of the Company in which Holdings will be merged into ATC. This reorganization
will be effected simultaneous with the closing of the Company's initial public
offering (see Note 1).
On November , 1996, the Company's Board of Directors approved a six for
one stock split of the Company's common stock and an increase in the number of
authorized shares to 30,000,000 shares of common stock and 5,000,000 shares of
preferred stock. The accompanying financial statements have been retroactively
adjusted to reflect the stock split.
F-18
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Component Remanufacturing Specialists, Inc.
We have audited the accompanying balance sheet of Component Remanufacturing
Specialists, Inc. (the Company) as of March 31, 1995, and the related statements
of income, stockholders' equity and cash flows for the ten months then ended.
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 audit 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 audit provides 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 Component Remanufacturing
Specialists, Inc. at March 31, 1995 and the results of its operations and its
cash flows for the ten months then ended in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
White Plains, New York
May 3, 1995, except for Note 5
as to which the date is May 10, 1995
F-19
<PAGE>
COMPONENT REMANUFACTURING SPECIALISTS, INC.
BALANCE SHEET
MARCH 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents...................................... $1,909,060
Accounts receivable............................................ 3,209,663
Inventories.................................................... 2,518,626
Prepaid insurance.............................................. 107,141
----------
Total current assets......................................... 7,744,490
Equipment and leasehold improvements:
Machinery and equipment........................................ 1,069,900
Furniture and fixtures......................................... 50,236
Leasehold improvements......................................... 286,254
----------
1,406,390
Less accumulated depreciation and amortization................. (890,649)
----------
515,741
Covenants not to compete, net.................................... 88,434
Costs in excess of net assets acquired, net...................... 619,391
Other assets..................................................... 33,166
----------
Total assets................................................. $9,001,222
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $2,067,107
Accrued compensation........................................... 251,891
Accrued warranty............................................... 330,000
Other accrued expenses......................................... 133,202
Income taxes payable........................................... 49,796
Notes payable.................................................. 151,667
----------
Total current liabilities.................................... 2,983,663
Stockholders' equity:
Common stock (2,500 shares authorized, 300 shares issued and
outstanding -- no par value).................................. --
Additional paid-in capital..................................... 530,000
Retained earnings.............................................. 5,487,559
----------
Total stockholders' equity................................... 6,017,559
----------
Total liabilities and stockholders' equity................... $9,001,222
----------
----------
</TABLE>
See accompanying notes.
F-20
<PAGE>
COMPONENT REMANUFACTURING SPECIALISTS, INC.
STATEMENT OF INCOME
TEN MONTHS ENDED MARCH 31, 1995
<TABLE>
<S> <C>
Sales............................................................. $19,024,253
Cost of sales..................................................... 13,534,690
-----------
Gross profit...................................................... 5,489,563
Selling, general and administrative expense....................... 779,165
Amortization of intangible assets................................. 77,515
-----------
Income from operations............................................ 4,632,883
Interest income................................................... 53,250
Interest expense.................................................. 21,348
-----------
Income before income taxes........................................ 4,664,785
Provision for state income taxes.................................. 114,000
-----------
Net income........................................................ $ 4,550,785
-----------
-----------
</TABLE>
See accompanying notes.
F-21
<PAGE>
COMPONENT REMANUFACTURING SPECIALISTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
---------- ------------ ------------
<S> <C> <C> <C>
Balance at June 1, 1994................................................... $ 530,000 $ 2,644,180 $ 3,174,180
Dividends............................................................... -- 1,707,406 1,707,406
Net income.............................................................. -- 4,550,785 4,550,785
---------- ------------ ------------
Balance at March 31, 1995................................................. $ 530,000 $ 5,487,559 $ 6,017,559
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
See accompanying notes.
F-22
<PAGE>
COMPONENT REMANUFACTURING SPECIALISTS, INC.
STATEMENT OF CASH FLOWS
TEN MONTHS ENDED MARCH 31, 1995
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income...................................................................... $4,550,785
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.................................................................. 74,423
Amortization.................................................................. 77,515
Loss on sale of equipment..................................................... 79,788
Changes in operating assets and liabilities:
Accounts receivable......................................................... (1,266,650)
Inventories................................................................. (830,994)
Prepaid and other assets.................................................... (33,653)
Accounts payable and accrued expenses....................................... (475,820)
----------
Net cash provided by operating activities....................................... 2,175,394
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements............................... (466,213)
----------
Net cash used in investing activities........................................... (466,213)
FINANCING ACTIVITIES
Payments on long-term debt...................................................... (277,379)
Dividends....................................................................... (1,707,406)
----------
Net cash used in financing activities........................................... (1,984,785)
----------
Decrease in cash................................................................ (275,604)
Cash and cash equivalents at beginning of period................................ 2,184,664
----------
Cash and cash equivalents at end of period...................................... $1,909,060
----------
----------
Cash paid during the period for:
Interest...................................................................... $ 21,348
----------
----------
Income taxes.................................................................. $ 950,000
----------
----------
</TABLE>
See accompanying notes.
F-23
<PAGE>
COMPONENT REMANUFACTURING SPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company is a New Jersey based remanufacturer of automotive components
for original equipment manufacturers (OEMs). It has U.S. and Canadian
remanufacturing rights for designated transmissions, steering racks and water
pumps produced by certain foreign and domestic OEMs.
SIGNIFICANT CUSTOMERS
For the ten months ended March 31, 1995, sales to the Company's three
largest customers, all of whom are subsidiaries of foreign corporations,
approximated 51%, 15% and 13% of sales. Additionally, at March 31, 1995,
accounts receivable from these three customers approximated $1,403,000, $468,000
and $669,000, respectively. Contracts with customers may be terminated by either
party generally upon 30 days notice.
The Company generally sells to a limited number of OEMs. The Company grants
credit to substantially all of these customers. No credit losses are expected by
management, and no provision for credit losses are reflected in the financial
statements.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist primarily of new and used transmission parts. Reserves
consider deterioration, obsolescence and other factors in evaluating estimated
net realizable value.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation is
computed using accelerated and straight-line methods over the estimated useful
lives of the assets which range from five to twenty years.
CASH AND CASH EQUIVALENTS
Investments with maturities of less than 90 days when purchased are
considered the equivalent of cash. Cash and cash equivalents are principally
held by one financial institution.
INTANGIBLE ASSETS
The excess of the purchase price over the fair value of the assets purchased
is being amortized over 40 years on a straight-line basis. Cost in excess of net
assets acquired is reflected net of accumulated amortization of $74,965 at March
31, 1995.
Covenants not to compete are being amortized over five years and are
presented net of accumulated amortization of $576,566.
WARRANTY
The Company extends warranties upon installation ranging from one year or
12,000 miles to two years or 24,000 miles, whichever occurs first. The estimated
cost under existing warranties has been provided for in the financial
statements.
INCOME TAXES
As of June 1, 1994, the Company elected to be treated as an "S Corporation"
for Federal and State tax purposes under the provisions of the respective taxing
authorities.
The Company provides for state income taxes based on income reported for
financial reporting purposes.
F-24
<PAGE>
COMPONENT REMANUFACTURING SPECIALISTS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories consist of the following at March 31, 1995:
<TABLE>
<S> <C>
Raw material parts...................................................... $2,337,767
Work-in-process......................................................... 130,612
Finished goods.......................................................... 50,247
---------
$2,518,626
---------
---------
</TABLE>
3. BANK LINE OF CREDIT AND NOTES PAYABLE
The Company has a $1,200,000 line of credit which bears interest at the
prime rate (9%) plus .75% and is collateralized by all the tangible and
intangible property of the Company and is available through December 6, 1995. At
March 31, 1995, the Company did not have any outstanding borrowings under the
line of credit. The line of credit is subject to compliance provisions,
including working capital requirements, other borrowings, acquisitions,
redemption of Company stock and dividends. The agreement also provides covenants
as to ownership and management control (See Note 5).
Notes Payable of $151,667 bear interest at 10% and are payable in monthly
installments through December 1995 to the former majority shareholders of the
Company. Included in that amount is approximately $68,000 due to the president
of the Company who currently maintains a minority interest in the Company.
4. COMMITMENTS
In July 1994, the Company relocated its operations to a new manufacturing
facility. The facility is subleased under a five-year noncancelable lease
expiring July 12, 1999. There is an option to renew the lease for two additional
five year periods at an increased monthly rental. Rent expense for leased
facilities for the ten months ended March 31, 1995 was $251,110.
The facility lease also requires the Company to pay real estate taxes and
common area maintenance charges.
The following is a schedule of future minimum rental payments under
operating leases:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31 TOTAL
- ---------------------- ------------
<S> <C>
1996 $ 317,000
1997 301,000
1998 323,000
1999 330,000
2000 83,000
------------
$ 1,354,000
------------
------------
</TABLE>
5. SUBSEQUENT EVENTS
Effective April 1, 1995, the Company instituted a 401K plan covering
substantially all of its employees.
On May 10, 1995, the Company's shareholders signed a stock purchase
agreement to sell their common stock in the Company to Aftermarket Technology
Corp. The transaction is expected to close on or about June 1, 1995.
F-25
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with this Offering are as follows:
<TABLE>
<CAPTION>
EXPENSES AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
SEC Registration Fee.............................................................. $ 29,742
NASD Fee.......................................................................... 9,125
Nasdaq National Market Fee........................................................ 32,400*
Printing Expenses................................................................. 150,000*
Legal Fees and Expenses........................................................... 290,000*
Transfer Agent and Registrar Fees................................................. 2,500*
Accounting Fees and Expenses...................................................... 150,000*
Blue Sky Fees and Expenses........................................................ 20,000*
Miscellaneous Expenses............................................................ 66,233*
----------
TOTAL......................................................................... $ 750,000
----------
----------
</TABLE>
- ---------
* Estimated.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the DGCL makes provision for the indemnification of officers
and directors in terms sufficiently broad to indemnify officers and directors of
the Company under certain circumstances from liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933.
The Company's Certificate of Incorporation and Bylaws provide, in effect, that,
to the fullest extent and under the circumstances permitted by Section 145 of
the DGCL, the Company will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is a director or officer of the Company or is or was
serving at the request of the Company as a director or officer of another
corporation or enterprise. The Company may, in its discretion, similarly
indemnify its employees and agents. The Certificate of Incorporation relieves
its directors from monetary damages to the Company or its stockholders for
breach of such director's fiduciary duty as directors to the fullest extent
permitted by the DGCL. Under Section 102(b)(7) of the DGCL, a corporation may
relieve its directors from personal liability to such corporation or its
stockholders for monetary damages for any breach of their fiduciary duty as
directors except (i) for a breach of the duty of loyalty, (ii) for failure to
act in good faith, (iii) for intentional misconduct or knowing violation of law,
(iv) for willful or negligent violation of certain provisions in the DGCL
imposing certain requirements with respect to stock repurchases, redemption and
dividends, or (v) for any transactions from which the director derived an
improper personal benefit. Depending upon the character of the proceeding, under
Delaware law, the Company may indemnify against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding if the person
indemnified acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interest of the Company, and, with respect to
any criminal action or proceeding, had no cause to believe his or her conduct
was unlawful. To the extent that a director or officer of the Company has been
successful in the defense of any action, suit or proceeding referred to above,
the Company will be obligated to indemnify him or her against expenses
(including attorneys' fees) actually and reasonably incurred in connection
therewith.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In July 1996, the Company issued 1,000 shares of Common Stock to Holdings in
consideration of $13.5 million in cash. The Company believes that this
transaction was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof. Concurrent with the consummation of this Offering,
II-1
<PAGE>
Holdings will be merged into the Company, and each outstanding share of Holdings
Common Stock will be converted into one share of Common Stock of the Company.
The following is a description of the issuances of the unregistered securities
of Holdings.
Holdings sold all 12,000,000 currently outstanding shares of its Common
Stock in July 1994 at the time of the Initial Acquisitions at a price of $1.67
per share to AEP, AOEP and certain other investors. There have been no
subsequent issuances of the Common Stock of Holdings since such time. The
Company believes that this transaction was exempt from registration pursuant to
Section 4(2) of the Act.
In August 1994, Holdings issued options to purchase an aggregate of
1,298,250 shares of its Common Stock to Messrs. Smith, Wehr, Hester, Kent, Bear,
an employee and a consultant. In September 1994, Holdings issued options to
purchase an aggregate of 70,176 shares to two employees of the Company. In
October 1994, Holdings issued options to purchase 35,088 shares to an employee
of the Company. In connection with the acquisition of the outstanding capital
stock of CRS, Holdings in June 1995 issued options to purchase an aggregate of
41,088 shares of Common Stock to Mr. LePore and an employee, both of whom were
former shareholders of CRS. Also in June 1995, Holdings issued options to
purchase 35,088 shares of Common Stock to an employee. In August 1995 and
November 1995, Holdings issued options to purchase 6,000 shares to each of Mr.
Prugh and an employee, respectively. In December 1995, Holdings issued options
to purchase 35,088 shares to Mr. LePore. In June 1996, Holdings issued options
to purchase 105,324 shares to Mr. Dearbaugh. In August 1996, Holdings issued
options to purchase an aggregate of 12,000 shares to two employees. In October
1996, Holdings issued options to purchase an aggregate of 628,176 shares to
Messrs. Buie, Dearbaugh, Kent, Hardy, Larsen, Perkins and two consultants. The
exercise price for the options issued through 1995 is $1.67, and the exercise
price for the options issued after December 1995 is $4.67. Such options were
issued pursuant to the Stock Incentive Plan to incentivize such employees,
non-employee directors and consultants. The Company believes that the issuances
of these options were exempt from registration pursuant to Section 4(2) of the
Securities Act.
In August 1994, Holdings issued warrants to purchase an aggregate of 350,880
shares of its Common Stock to Mr. Myers and one other individual as part of a
fee for acting as a finder in connection with the formation of the Company. In
December 1994, Holdings issued warrants to purchase 70,176 shares of its Common
Stock to Dr. Hartnett as incentive compensation for Dr. Hartnett's duties as a
director of Holdings. The exercise price for such warrants is $1.67. The Company
believes that the issuances of such warrants were exempt from registration
pursuant to Section 4(2) of the Securities Act.
On August 2, 1994, the Company completed the sale of $120 million of Series
A Notes to Chemical Securities Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation (the "Initial Purchasers"). The Series A Notes were resold to
Qualified Institutional Buyers ("QIBs") and Accredited Institutional Investors
("AII"). The Company believes that the initial placement of the securities was
exempt from registration under Section 4(2) of the Act and the resale of the
Notes by the Initial Purchasers was exempt from Registration by virtue of Rule
144A under the Act ("Rule 144A").
On June 1, 1995, the Company completed the sale of an aggregate $40 million
principal amount of Series C Notes to the Initial Purchasers. The Series C Notes
were resold to QIBs and AIIs. The Company believes that the initial placement of
the securities was exempt from registration under Section 4(2) of the Act and
the resale of the Notes by the Initial Purchasers was exempt from Registration
by virtue of Rule 144A.
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
**3.1 Amended and Restated Certificate of Incorporation of Aftermarket Technology Corp.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------------------------------------
<C> <S>
3.2 Bylaws of Aftermarket Technology Corp. (previously filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-4 filed on November 30, 1994, Commission File No. 33-86838 and
incorporated herein by this reference)
4.1 Indenture, dated August 2, 1994, among Aftermarket Technology Corp., the Guarantors named therein
and Firstar Bank of Minnesota, N.A. (formerly known as American Bank N.A.), as Trustee for the
Series B Notes (previously filed as Exhibit 4.1 to the Company's Registration Statement on Form
S-4 filed on November 30, 1994, Commission File No. 33-86838 and incorporated herein by this
reference)
4.2 Indenture, dated June 1, 1995, among Aftermarket Technology Corp., the Guarantors named therein
and Firstar Bank of Minnesota, N.A. (formerly known as American Bank N.A.), as Trustee for the
Series D Notes (previously filed as Exhibit 4.1 to the Company's Registration Statement on Form
S-4 filed on June 21, 1995, Commission File No. 33-93776 and incorporated herein by this
reference)
**4.3 First Supplemental Indenture, dated as of February 23, 1995, among Aftermarket Technology Corp.,
the Guarantors named therein and Firstar Bank of Minnesota, N.A. (formerly known as American
Bank N.A.), as Trustee for the Series B Notes
**4.4 Second Supplemental Indenture, dated as of June 1, 1995, among Aftermarket Technology Corp., the
Guarantors named therein and Firstar Bank of Minnesota, N.A. (formerly known as American Bank
N.A.), as Trustee for the Series B Notes
**4.5 Third Supplemental Indenture to the Series B Indenture and First Supplemental Indenture to the
Series D Indenture, dated as of July 25, 1996, among Aftermarket Technology Corp., the
Guarantors named therein and Firstar Bank of Minnesota, N.A. (formerly known as American Bank
N.A.), as Trustee for the Notes
**5.1 Opinion and consent of Gibson, Dunn & Crutcher LLP
10.1 Stockholders Agreement, dated as of August 2, 1994, among Holdings, and certain of its
stockholders, optionholders and warrant holders (the "Stockholders Agreement") (previously filed
as Exhibit 10.1 to the Company's Registration Statement on Form S-4 filed on November 30, 1994,
Commission File No. 33-86838 and incorporated herein by this reference)
10.2 Revolving Credit Agreement, dated as of July 19, 1994, among Aftermarket Technology Corp., the
Lenders from time to time parties thereto and The Chase Manhattan Bank (formerly know as
Chemical Bank), as Agent (previously filed as Exhibit 10.5 to the Company's Registration
Statement on Form S-4 filed on November 30, 1994, Commission File No. 33-86838 and incorporated
herein by this reference)
10.3 Tax Sharing Agreement, dated July 19, 1994, among Aftermarket Technology Holdings Corp. and
Aftermarket Technology Corp. (previously filed as Exhibit 10.18 to the Registration Statement on
Form S-4 filed on November 30, 1994, Commission File No. 33-86838 and incorporated herein by
this reference)
10.4 Management Services Agreement, dated July 19, 1994, by and among Aftermarket Technology Corp.,
the subsidiaries of Aftermarket Technology Corp., and Aurora Capital Partners L.P. (previously
filed as Exhibit 10.12 to the Company's Registration Statement on Form S-4 filed on November 30,
1994, Commission File No. 33-86838 and incorporated herein by this reference)
**10.5 Aftermarket Technology Holdings Corp. Amended and Restated 1994 Stock Incentive Plan
*10.6 Employment Agreement, dated as of October 7, 1996, between Aftermarket Technology Corp. and
William A. Smith
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------------------------------------
<C> <S>
**10.7 Employment Agreement, dated as of October 1, 1996, between John C. Kent and Aftermarket
Technology Corp.
10.8 Employment Agreement, dated August 2, 1994, between Kenneth T. Hester and H.T.P., Inc.
(previously filed as Exhibit 10.8 to the Company's Registration Statement on Form S-4 filed on
November 30, 1994, Commission File No. 33-86838 and incorporated herein by this reference)
10.9 Employment Agreement, dated August 2, 1994, between James R. Wehr and Aaron's Automotive
Products, Inc. (previously filed as Exhibit 10.9 to the Company's Registration Statement on Form
S-4 filed on November 30, 1994, Commission File No. 33-86838 and incorporated herein by this
reference)
10.10 Employment Agreement, dated as of June 1, 1995, between Michael L. LePore and Component
Remanufacturing Specialists, Inc. (previously filed as Exhibit 10.11 to the Company's
Registration Statement on Form S-4 filed on June 21, 1995, Commission File No. 33-93776 and
incorporated herein by this reference)
10.11 Employment Agreement, dated as of June 9, 1995, between Barry E. Schwartz and Mascot Truck Parts
Inc. (previously filed as Exhibit 10.12 to the Company's Registration Statement on Form S-4
filed on June 21, 1995, Commission File No. 33-93776 and incorporated herein by this reference)
10.12 Employment Agreement, dated September 12, 1995, between Gordon King and King-O-Matic Industries
Limited (previously filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by this reference)
**10.13 Employment Agreement, dated as of April 2, 1996, between J. Peter Donoghue and Tranzparts, Inc.
10.14 Warrant Certificate, dated August 2, 1994, for 46,784 warrants issued to William E. Myers, Jr.
(previously filed as Exhibit 10.10 to the Company's Registration Statement on Form S-4 filed on
November 30, 1994, Commission File No. 33-86838 and incorporated herein by this reference)
10.15 Warrant Certificate, dated August 2, 1994, for 11,696 warrants issued to Brian E. Sanderson
(previously filed as Exhibit 10.11 to the Company's Registration Statement on Form S-4 filed on
November 30, 1994, Commission File No. 33-86838 and incorporated herein by this reference)
10.16 Stock Purchase Agreement, dated May 16, 1994, by and among C.R. Wehr, Jr., Rev. Liv. Trust, James
R. Wehr, Aaron's Automotive Products, Inc. and AAP Acquisition Corp. (previously filed as
Exhibit 10.14 to the Company's Registration Statement on Form S-4 filed on November 30, 1994,
Commission File No. 33-86838 and incorporated herein by this reference)
10.17 Stock Purchase Agreement, dated July 21, 1994, by and among John B. Maynard, Kenneth T. Hester,
H.T.P., Inc. and HTP Acquisition Corp. (previously filed as Exhibit 10.15 to the Company's
Registration Statement on Form S-4 filed on November 30, 1994, Commission File No. 33-86838 and
incorporated herein by this reference)
10.18 Stock Purchase Agreement, dated July 21, 1994, by and among John B. Maynard, Mamco Converters,
Inc. and Mamco Acquisition Corp. (previously filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-4 filed on November 30, 1994, Commission File No. 33-86838 and
incorporated herein by this reference)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------------------------------------
<C> <S>
10.19 Asset Purchase Agreement, dated June 24, 1994, by and among RPM Merit, Donald W. White, John A.
White, The White Family Trust and RPM Acquisition Corp. (previously filed as Exhibit 10.17 to
the Company's Registration Statement on Form S-4 filed on November 30, 1994, Commission File No.
33-86838 and incorporated herein by this reference)
10.20 Agreement and Plan of Merger and Reorganization, dated May 10, 1995, by and among Component
Remanufacturing Specialists, Inc., James R. Crane, Michael L. LePore, Aftermarket Technology
Corp., CRS Holdings Corp. and CRS Acquisition Corp. (previously filed as Exhibit 2 to the
Company's Current Report on Form 8-K filed on June 15, 1995, Commission File No. 33-80838-01 and
incorporated herein by this reference)
10.21 Stock Purchase Agreement, dated June 9, 1995, by and among Dianne Hanthorn, Jobian Limited,
Randall Robinson, Barry E. Schwartz, Bradley Schwartz, Angela White, John White, Incorporated
Investments Limited, Glenn M. Hanthorn, Guido Sala and Tony Macharacek, Mascot Truck Parts Inc.
and Mascot Acquisition Corp. (previously filed as Exhibit 10.22 to the Company's Registration
Statement on Form S-4 filed on June 21, 1995, Commission File No. 33-93776 and incorporated
herein by this reference)
10.22 Stock Purchase Agreement, dated September 12, 1995, by and among Gordon King, 433644 Ontario
Limited, 3179338 Canada Inc., King-O-Matic Industries Limited, KOM Acquisition Corp. and
Aftermarket Technology Corp. (previously filed as Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and incorporated herein by this reference)
**10.23 Stock Purchase Agreement, dated as of April 2, 1996, by and among the Charles T. and Jean F.
Gorham Charitable Remainder Trust dated March 27, 1996, Charles T. Gorham, J. Peter Donoghue,
Tranzparts, Inc. and Tranzparts Acquisition Corp.
**10.24 Lease, dated February 24, 1995, between 29 Santa Anita Partnership L.P. and Replacement Parts
Manufacturing with respect to property located at 12250 E. 4th Street, Rancho Cucamonga,
California
10.25 Lease, dated January 1, 1994, between CRW, Incorporated and Aaron's Automotive Products, Inc.
with respect to property located at 2600 North Westgate, Springfield, Missouri (previously filed
as Exhibit 10.4 to the Company's Registration Statement on Form S-4 filed on November 30, 1994,
Commission File No. 33-86838 and incorporated herein by this reference)
**10.26 Lease Purchase Agreement, dated April 21, 1995, between Fleming Companies, Inc. and Aaron's
Automotive Products, Inc. with respect to property located at 3001 Davis Boulevard, Joplin,
Missouri, as amended
10.27 Exchange and Registration Rights Agreement, dated August 2, 1994, by and among Aftermarket
Technology Corp., the subsidiaries of Aftermarket Technology Corp., Chemical Securities Inc.,
and Donaldson, Lufkin & Jenrette Securities Corporation (previously filed as Exhibit 10.13 to
the Company's Registration Statement on Form S-4 filed on November 30, 1994, Commission File No.
33-83868 and incorporated herein by this reference)
10.28 Exchange and Registration Rights Agreement, dated June 1, 1995, by and among Aftermarket
Technology Corp., the subsidiaries of Aftermarket Technology Corp., Chemical Securities Inc.,
and Donaldson, Lufkin & Jenrette Securities Corporation (previously filed as Exhibit 10.16 to
the Company's Registration Statement on Form S-4 filed on June 21, 1995, Commission File No.
33-93776 and incorporated herein by this reference)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -------------------------------------------------------------------------------------------------
<C> <S>
***10.29 Form of Merger Agreement Aftermarket Technology Holdings Corp. and Aftermarket Technology Corp.
**10.30 First Amendment, dated as of May 23, 1995, to the Credit Agreement, dated as of July 19, 1994,
among Aftermarket Technology Corp., the Lenders from time to time parties thereto and The Chase
Manhattan Bank (formerly known as Chemical Bank), as Agent (the "Credit Agreement")
**10.31 Second Amendment, dated as of June 7, 1996, to the Credit Agreement
**10.32 Waiver and Third Amendment, dated as of July 31, 1996, to the Credit Agreement
**10.33 Firstbank Lending Agreement, dated as of June 28, 1996, between Mascot Trust Parts Inc. and/or
King-O-Matic Industries Ltd. and Bank of Montreal
**10.34 Stock Purchase Agreement, dated as of October 1, 1996, by and among Robert T. Carren Qualified
Annuity Trust, Robert T. Carren, Diverco, Inc., and Diverco Acquisition Corp.
**10.35 Employment Agreement, dated as of October 7, 1996, between Stephen J. Perkins and Aftermarket
Technology Corp.
**10.36 Form of Incentive Stock Option Agreement
**10.37 Form of Non-Qualified Stock Option Agreement
**10.38 Amendment No. 1 to the Stockholders Agreement, dated as of June 24, 1996
**10.39 Amendment No. 2 to the Stockholders Agreement, dated as of October 24, 1996
**10.40 Sublease, dated April 20, 1994, between Troll Associates, Inc. and Component Remanufacturing
Specialists, Inc. with respect to property located at 400 Corporate Drive, Mahwah, New Jersey
**10.41 Sublease Modification and Extension Agreement, dated as of February 28, 1996, between Olde
Holding Company and Component Remanufacturing Specialists, Inc. with respect to property located
at 400 Corporate Drive, Mahwah, New Jersey
**10.42 Amendment No. 1 to Aftermarket Technology Holdings Corp. Amended and Restated 1994 Stock
Incentive Plan
**11.1 Computation of Pro Forma Net Income Per Share
**21.1 List of Subsidiaries
*23.1 Consent of Ernst & Young LLP, independent auditors (included on page II-8)
**23.2 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
24.1 Power of Attorney (previously filed with the signature page to the Company's Registration
Statement on Form S-1 (Registration No. 333-6697) and incorporated herein by this reference)
</TABLE>
- ---------
* Filed herewith.
** Previously filed.
*** To be filed by Amendment.
II-6
<PAGE>
(b) Financial Statement Schedules. The following financial statement
schedule is filed with Part II of this Registration Statement:
II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
applicable instructions or are inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising out of the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense in any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-7
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Federal Way, State of
Washington, on November 18, 1996.
AFTERMARKET TECHNOLOGY CORP.
By: /s/ STEPHEN J. PERKINS
-----------------------------------
Stephen J. Perkins
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------- ----------------------
/s/ STEPHEN J. PERKINS
--------------------------------- Chief Executive Officer (Principal Executive November 18, 1996
Stephen J. Perkins Officer)
/s/ JOHN C. KENT*
--------------------------------- Chief Financial Officer (Principal Financial November 18, 1996
John C. Kent Officer)
/s/ DANIEL C. BUIE*
--------------------------------- Corporate Controller (Principal Accounting November 18, 1996
Daniel C. Buie Officer)
/s/ WILLIAM A. SMITH
--------------------------------- Chairman of the Board of Directors November 18, 1996
William A. Smith
/s/ RICHARD R. CROWELL*
--------------------------------- Director November 18, 1996
Richard R. Crowell
/s/ MARK C. HARDY*
--------------------------------- Director November 18, 1996
Mark C. Hardy
/s/ MICHAEL J. HARTNETT*
--------------------------------- Director November 18, 1996
Michael J. Hartnett
/s/ KURT B. LARSEN*
--------------------------------- Director November 18, 1996
Kurt B. Larsen
/s/ WILLIAM E. MYERS, JR.*
--------------------------------- Director November 18, 1996
William E. Myers, Jr.
/s/ RICHARD K. ROEDER*
--------------------------------- Director November 18, 1996
Richard K. Roeder
*By: /s/ WILLIAM A. SMITH
-----------------------------
William A. Smith,
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our reports dated June 21, 1996,
except as to Note 13, as to which the date is , 1996 with respect to
Aftermarket Technology Corp. and May 3, 1995, except for Note 5 as to which the
date is May 10, 1995 with respect to Component Remanufacturing Specialists,
Inc., in the Registration Statement on Form S-1 and related Prospectus of
Aftermarket Technology Corp. for the registration of its common stock.
ERNST & YOUNG LLP
Seattle, Washington
, 1996
- --------------------------------------------------------------------------------
The foregoing consent is the form that will be signed upon the completion of
the stock split, described in Note 13 to the consolidated financial statements.
ERNST & YOUNG LLP
Seattle, Washington
November 18, 1996
II-9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
ON FINANCIAL STATEMENTS SCHEDULE
Stockholders and Board of Directors
Aftermarket Technology Corp.
We have audited the accompanying consolidated balance sheets of Aftermarket
Technology Corp. (the Company) as of December 31, 1994 and 1995 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
five months ended December 31, 1994 and for the year ended December 31, 1995
(included elsewhere in this Registration Statement). We have also audited the
related combined statements of income, stockholders' equity and cash flows of
the Predecessor Companies to Aftermarket Technology Corp. (the Predecessor
Companies) for the year ended December 31, 1993 and for the seven months ended
July 31, 1994 (included elsewhere in this Registration Statement). Our audit
also included the financial statement schedule as of and for each of the three
years in the period ended December 31, 1995 listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
June 21, 1996
S-1
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGE TO
BEGINNING COSTS AND OTHER BALANCE AT
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Combined:
Year ended December 31, 1993:
Reserve and allowances deducted from asset
accounts:
Allowance for uncollectible accounts........ $421,640 $ 459,753 $ -- $556,643(1) $ 324,750
Seven months ended July 31, 1994:
Reserve and allowances deducted from asset
accounts:
Allowance for uncollectible accounts........ 324,750 308,550 -- 32,588(1) 600,712
Consolidated:
Five months ended December 31, 1994:
Reserve and allowances deducted from asset
accounts:
Allowance for uncollectible accounts........ 600,712 190,044 -- 24,756(1) 766,000
Reserve for inventory obsolescence.......... -- 785,603 -- -- 785,605
Year ended December 31, 1995:
Reserve and allowances deducted from asset
accounts:
Allowance for uncollectible accounts........ 766,000 1,239,138 1,216,529(2) 752,667(1) 2,469,000
Reserve for inventory obsolescence.......... 785,603 1,034,259 294,442(2) -- 2,114,304
</TABLE>
- ------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Balances added through new acquisitions.
S-2
<PAGE>
3,500,000 Shares
AFTERMARKET TECHNOLOGIES CORP.
COMMON STOCK, PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
December __, 1996
<PAGE>
December __, 1996
Morgan Stanley & Co. Incorporated
William Blair & Company, L.L.C.
Donaldson, Lufkin & Jenrette Securities Corporation
c/o Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Dear Sirs and Mesdames:
Aftermarket Technologies Corp., a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "Underwriters") 3,500,000 shares of its Common Stock, par
value $.01 per share (the "Firm Shares"). The Company also proposes to issue
and sell to the several Underwriters not more than an additional 525,000 shares
of its Common Stock, par value $.01 per share (the "Additional Shares"), if and
to the extent that you, as Managers of the offering, shall have determined to
exercise, on behalf of the Underwriters, the right to purchase such shares of
common stock granted to the Underwriters in Section 2 hereof. The Firm Shares
and the Additional Shares are hereinafter collectively referred to as the
"Shares." The shares of Common Stock, par value $.01 per share, of the Company
to be outstanding after giving effect to the sales contemplated hereby are
hereinafter referred to as the "Common Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any
<PAGE>
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462 Registration Statement.
In connection with the Offering, Aftermarket Holdings, Inc., a
Delaware corporation ("Holdings") will be merged with and into the Company (the
"Merger").
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) Each part of the Registration Statement, when such part
became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set
forth in this paragraph 1(b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to
any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) The Company and Holdings each has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so quali-
2
<PAGE>
fied or be in good standing would not have a material adverse effect on
Holdings or on the Company and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company and Holdings has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has the corporate power
and authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a material adverse effect on Holdings or the Company and its
subsidiaries, taken as a whole.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) Schedule II contains a complete listing of all of the documents
which will be (i) entered into by the Company in order to effect the Merger
or (ii) assumed by the Company as a result of the Merger. The documents
listed on Schedule II are hereinafter collectively referred to as the
"Operative Documents."
(g) The Shares have been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance.
(h) Each of the Operative Documents has been, or on the Closing Date
will have been, duly authorized, executed and delivered by the Company and
Holdings, as the case may be, and constitutes a legal, valid and binding
obligation of the Company and Holdings, as the case may be, enforceable in
accordance with its terms, except to the extent that enforcement thereof
may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to creditors' rights
generally and (ii) general principles of equity (regardless of whether
considered in a proceeding at law or in equity).
(i) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
3
<PAGE>
(j) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(k) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(l) The execution and delivery by the Company or Holdings, as the
case may be, of, and the performance by the Company or Holdings, as the
case may be, of its obligations under, this Agreement and each of the
Operative Documents will not contravene any provision of applicable law or
the certificate of incorporation or by-laws of the Company or Holdings, as
the case may be, or any agreement or other instrument binding upon
Holdings, the Company or any of its subsidiaries that is material to
Holdings or the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over Holdings, the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company
of its obligations under this Agreement, except such as may be required by
the securities or Blue Sky laws of the various states in connection with
the offer and sale of the Shares.
(m) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of Holdings or the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any amendments
or supplements thereto subsequent to the date of this Agreement).
(n) There are no legal or governmental proceedings pending or
threatened to which Holdings or the Company or any of its subsidiaries is a
party or to which any of the properties of Holdings or the Company or any
of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the
4
<PAGE>
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(o) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(p) All Tax Returns (as defined below) required to be filed by
Holdings or the Company or any of its subsidiaries in any jurisdiction have
been filed, other than those filings being contested in good faith, and all
material taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due from such
entities have been paid, other than those being contested in good faith and
for which adequate reserves have been provided or those currently payable
without penalty or interest. To the best of the Company's knowledge, all
Tax Returns filed by Holdings or the Company and its subsidiaries prior to
the date hereof were complete and accurate, except such as could not
reasonably be expected to result, singly or in the aggregate, in a material
adverse effect on Holdings or the Company and its subsidiaries, taken as a
whole. No material claim for assessment or collection of Taxes is
presently being asserted against Holdings or the Company or its
subsidiaries. Furthermore, Holdings or the Company and its subsidiaries
are not parties to any pending action, proceeding or investigation by any
governmental authority for the assessment or collection of Taxes, nor does
the Company have knowledge of any such threatened action, proceeding or
investigation, except such as could not reasonably be expected to result,
singly or in the aggregate, in a material adverse effect on Holdings or the
Company and its subsidiaries, taken as a whole. No waivers of statutes of
limitation in respect of any Tax Returns have been given by or requested of
Holdings or the Company or any of its subsidiaries, nor has the Company or
any of its subsidiaries agreed to any extension of time with respect to a
Tax assessment or deficiency. No material claim by any authority in a
jurisdiction where Holdings or the Company or any of its subsidiaries does
not currently file a Tax Return is pending to the effect that Holdings or
the Company or any of its subsidiaries is or may be subject to taxation by
that jurisdiction. No Liens are presently imposed upon or asserted against
any of Holdings', the Company's or any of its subsidiaries' assets as a
result of or in connection with any failure, or alleged failure, to pay any
Tax. As of the
5
<PAGE>
Closing Date, Holdings or the Company and its subsidiaries will not have
any agreement, whether or not written, providing for the payment of Tax
liabilities or entitlements to refunds with any other party, other than
between the Company and its parent. To the best of the Company's
knowledge, Holdings or the Company and its subsidiaries have withheld and
paid all Taxes required to be withheld in connection with any amounts paid
or owing to any employee, creditor, independent contractor or other third
party with respect to the business of Holdings or the Company or its
subsidiaries. The unpaid Taxes of the Company and its subsidiaries do not
exceed the reserve for Tax liability (as opposed to any reserve for
deferred Taxes established to reflect timing differences between book and
tax income) set forth on the most recent balance sheet of the Company, as
adjusted for the passage of time through the date hereof in accordance with
the past custom and practice in filing Tax Returns. For purposes of this
Agreement, the terms "Tax" and "Taxes" shall mean all federal, state, local
or foreign income, payroll, employee withholding, unemployment insurance,
social security, sales, use, service use, leasing use, excise, franchise,
gross receipts, value added, alternative or add-on minimum, estimated,
occupation, real and personal property, stamp, transfer, workers'
compensation, severance, windfall profits, environmental (including taxes
under Section 59A of the Internal Revenue Code of 1986, as amended (the
"Code")), or other tax of the same or of a similar nature, including any
interest, penalty, or addition thereto, whether disputed or not. The term
"Tax Return" means any return, declaration, report, form, claim for refund,
or information return or statement relating to Taxes or income subject to
taxation, or any amendment thereto, and including any schedule or
attachment thereto.
(q) The Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
(r) Except as would not have, singularly or in the aggregate, a
materially adverse effect on Holdings or the Company and its subsidiaries,
taken as a whole, or otherwise require disclosure in the Registration
Statement, (i) none of Holdings or the Company or any of its subsidiaries
is in violation of any federal, state or local laws and regulations
relating to pollution or protection of human health or the environment,
including, without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of toxic or hazardous
substances, materials or wastes, or
6
<PAGE>
petroleum and petroleum products ("Materials of Environmental Concern"), or
otherwise relating to the protection of human health and safety, or the
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern (collectively, "Environmental Laws"), which violation
includes, but is not limited to, noncompliance with, or lack of, any
permits or other environmental authorizations, and (ii) (A) none of
Holdings or the Company or any of its subsidiaries has received any
communication (written or oral), whether from a governmental authority or
otherwise, alleging any such violation or noncompliance, and, to the best
of the Company's knowledge, there are no circumstances, either past,
present or that are reasonably foreseeable, that may lead to any such
violation in the future, (B) there is no pending, or, to the best of the
Company's knowledge, threatened claim, action, investigation or notice
(written or oral) by any person or entity alleging potential liability for
investigatory, cleanup, or governmental response costs, or natural
resources or property damages, or personal injuries, attorney's fees or
penalties relating to (x) the presence, or release into the environment, of
any Materials of Environmental Concern at any location owned or operated by
Holdings, the Company or any of its subsidiaries now or in the past, or (y)
circumstances forming the basis of any violation or alleged violation, of
any Environmental Law (collectively, "Environmental Claims"), and (C) there
are no past or present actions, activities, circumstances, conditions,
events or incidents that could form the basis of any Environmental Claim
against Holdings or the Company or any of its subsidiaries, or, to best of
the Company's knowledge, against any person or entity for whose acts or
omissions Holdings, the Company or any of its subsidiaries is or may
reasonably be expected to be liable, either contractually or by operation
of law. In the ordinary course of business, Holdings or the Company and
each of its subsidiaries, as appropriate, (i) conduct a periodic review of
the effect of Environmental Laws on the business, operations and properties
of Holdings, the Company and each of its subsidiaries, in the course of
which, or as a result of which, the Company has identified and evaluated
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for cleanup, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities, and any
potential liabilities to third parties, and (ii) have conducted
environmental investigations of, and have reviewed reasonably available
information regarding, the business, properties and operations of Holdings,
the Company and each of its subsidiaries, and of other properties within
the vicinity of their business, properties and operations, as
7
<PAGE>
appropriate for the circumstances of each such property and operation; on
the basis of such review, investigations and inquiries, the Company has
reasonably concluded that, except as disclosed in the Registration
Statement, any costs and liabilities associated with such matters would not
have, singularly or in the aggregate, a material adverse effect on Holdings
or the Company and its subsidiaries, taken as a whole, or otherwise require
disclosure in the Registration Statement.
(s) Except as disclosed in the Registration Statement, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement.
(t) No "prohibited transaction" (as defined in Section 406 of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"), or Section
4975 of the Code) or "accumulated funding deficiency" (as defined in
Section 302 of ERISA) or any of the events set forth in Section 4043(b) of
ERISA (other than events with respect to which the 30-day notice
requirement under Section 4043 of ERISA has been waived) has occurred with
respect to any employee benefit plan which might reasonably be expected to
have a material adverse effect on Holdings or the Company and its
subsidiaries, taken as a whole; each employee benefit plan is in compliance
in all material respects with applicable law, including ERISA and the Code;
each of Holdings and the Company has not incurred and does not expect to
incur liability under Title IV of ERISA with respect to the termination of,
or withdrawal from, any "pension plan"; and each "pension plan" (as defined
in ERISA) for which Holdings or the Company would have any liability that
is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which might reasonably be expected to cause
the loss of such qualification.
(u) Each of Holdings and the Company has complied with all provisions
of Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
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2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to 525,000 Additional
Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to
exercise such option, you shall so notify the Company in writing not later than
30 days after the date of this Agreement, which notice shall specify the number
of Additional Shares to be purchased by the Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
but not earlier than the Closing Date nor later than ten business days after the
date of such notice. Additional Shares may be purchased as provided in Section
4 hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as you may determine) that bears the same proportion to the total number
of Additional Shares to be purchased as the number of Firm Shares set forth in
Schedule I hereto opposite the name of such Underwriter bears to the total
number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period commencing on the date hereof and ending 180 days after the
date of the final prospectus relating to the Public Offering (the "Prospectus"),
(1) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or (2) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise.
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<PAGE>
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made
by wire transfer to the account of the Company at 7:00 A.M., local time in Los
Angeles, California, on December , 1996, or at such other time on the same or
such other date, not later than December , 1996, as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to
as the "Closing Date."
Payment for any Additional Shares shall be made by wire transfer to
the account of Company at 7:00 A.M., local time in Los Angeles, California, on
the date specified in the notice described in Section 2 or on such other date,
in any event not later than January , 1997, as shall be designated in writing
by you. The time and date of such payment are hereinafter referred to as the
"Option Closing Date."
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of
the Company to sell the Shares to the Underwriters and the several obligations
of the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than 3:00 P.M. (New York time) on the date hereof.
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<PAGE>
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of Holdings or
the Company and its subsidiaries, taken as a whole from that set forth
in the Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the chief executive
officer of the Company and by the chief financial officer of the Company,
to the effect set forth in clause (a)(i) above and to the effect that the
representations and warranties of the Company contained in this Agreement
are true and correct as of the Closing Date and that the Company has
complied with all of the agreements and satisfied all of the conditions on
its part to be performed or satisfied hereunder on or before the Closing
Date.
The officers signing and delivering such certificate may each rely
upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Gibson, Dunn & Crutcher LLP, outside counsel for the Company,
dated the Closing Date, to the effect that:
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<PAGE>
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole;
(iii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(iv) the shares of Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar rights;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
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<PAGE>
(vii) each of the Operative Documents has been duly authorized,
executed and delivered by the Company and Holdings, as the case may
be, and constitutes a legal, valid and binding obligation of the
Company and Holdings, as the case may be, enforceable in accordance
with its terms, except to the extent that enforcement thereof may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws then or thereafter in effect relating to creditors'
rights generally and (ii) general principles of equity (regardless of
whether considered in a proceeding at law or in equity);
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
and the Operative Documents will not contravene any provision of
applicable law or the certificate of incorporation or by-laws of the
Company or, to the best of such counsel's knowledge, any agreement or
other instrument binding upon the Company or any of its subsidiaries
that is material to the Company and its subsidiaries, taken as a
whole, or, to the best of such counsel's knowledge, any judgment,
order or decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
(ix) the statements (A) in the Prospectus under the captions
"Description of Certain Indebtedness," "Certain United States Federal
Tax Consequences to Non-United States Holders," "Description of
Capital Stock" and "Underwriters" and (B) in the Registration
Statement in Items 14 and 15, in each case insofar as such statements
constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(x) such counsel does not have actual knowledge of any legal
or governmental proceedings pending or threatened to which the Company
or any of its subsidiaries is a party or to which any of the
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<PAGE>
properties of the Company or any of its subsidiaries is subject that
are required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required;
(xi) the Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the Investment Company Act of 1940, as amended;
(xii) the Company (A) is in compliance with any and all
applicable Environmental Laws, (B) has received all permits, licenses
or other approvals required of it under applicable Environmental Laws
to conduct its business and (C) is in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the
Company;
(xiii) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules included therein as to which such counsel need not express
any opinion) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the
Commission thereunder, (B) has no reason to believe that (except for
financial statements and schedules as to which such counsel need not
express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became
effective contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading and (C) has no reason to
believe that (except for financial statements and schedules as to
which such counsel need not express any belief) the Prospectus
contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; and
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<PAGE>
(xiv) the Merger has become effective under the laws of the
State of Delaware.
(d) The Underwriters shall have received on the Closing Date an
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to in
subparagraphs (v), (vi), (ix) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters") and
(xiii) of paragraph (c) above.
With respect to subparagraph (xiii) of paragraph (c) above, Gibson,
Dunn & Crutcher LLP and Skadden, Arps, Slate, Meagher & Flom LLP may state
that their opinion and belief are based upon their participation in the
preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof,
but are without independent check or verification, except as specified.
The opinion of Gibson, Dunn & Crutcher LLP described in paragraph (c)
above shall be rendered to the Underwriters at the request of the Company
and shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from Ernst & Young LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; PROVIDED that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(f) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and the stockholders, all executive officers,
the holders of the Warrants described in the Prospectus under the caption
"Description of Capital Stock - Warrants" and the directors of the Company
relating to sales and certain other dispositions of shares of Common Stock
or certain other securities, delivered to you on or before the date hereof,
shall be in full force and effect on the Closing Date.
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<PAGE>
(g) The Merger shall have become effective under the laws of the
State of Delaware.
(h) The GEPT Private Placement (as defined in the Registration
Statement) shall have been consummated and the Company shall have received
cash proceeds therefrom in an amount equal to at least $ .
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such document as you may reasonably request with respect to the good standing
of the Company, the due authorization and issuance of the Additional Shares and
other matters related to the issuance of the Additional Shares.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, three signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 A.M. local time on the business day next succeeding
the date of this Agreement and during the period mentioned in paragraph (c)
below, as many copies of the Prospectus and any supplements and amendments
thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable period specified in Rule 424(b) under the Securities Act any
prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is deliv-
16
<PAGE>
ered to a purchaser, not misleading, or if, in the opinion of counsel for
the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission
and furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which Shares
may have been sold by you on behalf of the Underwriters and to any other
dealers upon request, either amendments or supplements to the Prospectus so
that the statements in the Prospectus as so amended or supplemented will
not, in the light of the circumstances when the Prospectus is delivered to
a purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request, PROVIDED, that the Company shall not be obligated to qualify as a
foreign corporation in any jurisdiction in which it is not so qualified or
to take any action that would subject it to general consent to service of
process in any jurisdiction in which it is now so subject.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-
month period ending September 30, 1997 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii) the cost of printing or producing any Blue Sky or
Legal Investment memorandum in connection with
17
<PAGE>
the offer and sale of the Shares under state securities laws and all
expenses in connection with the qualification of the Shares for offer and
sale under state securities laws as provided in Section 6(d) hereof,
including filing fees and the reasonable fees and disbursements of counsel
for the Underwriters in connection with such qualification and in
connection with the Blue Sky or Legal Investment memorandum, (iv) all
filing fees and disbursements of counsel to the Underwriters incurred in
connection with the review and qualification of the Offering by the
National Association of Securities Dealers, Inc., (v) all fees and expenses
in connection with the preparation and filing of the registration statement
on Form 8-A relating to the Common Stock and all costs and expenses
incident to having the Shares accepted for quotation on the Nasdaq National
Market, (vi) the cost of printing certificates representing the Shares,
(vii) the costs and charges of any transfer agent, registrar or depositary,
(viii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the
marketing of the Offering, including, without limitation, expenses
associated with the production of road show slides and graphics, fees and
expenses of any consultants engaged in connection with the road show
presentations with the prior approval of the Company, travel and lodging
expense of the representatives and officers of the Company and any such
consultants, and the cost of any aircraft chartered in connection with the
road show, and (ix) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section. It is understood, however, that
except as provided in this Section, Section 7 entitled "Indemnity and
Contribution," and the last paragraph of Section 9 below, the Underwriters
will pay all of their costs and expenses, including fees and disbursements
of their counsel, stock transfer taxes payable on resale of any of the
Shares by them, and any advertising expenses connected with any offers they
may make.
7. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
by any Underwriter or any such controlling person in connection with defending
or investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary
18
<PAGE>
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the Company
to such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to paragraph (a) or (b) of this Section 7, such
person (the "indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed
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<PAGE>
as they are incurred. Such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated, in the case of parties indemnified pursuant to the
second preceding paragraph, and by the Company, in the case of parties
indemnified pursuant to the first preceding paragraph. The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
and third sentences of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(d) To the extent the indemnification provided for in paragraph
(a) or (b) of this Section 7 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the Underwriters on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other hand
in connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company
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<PAGE>
and the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover of the
Prospectus, bear to the aggregate Public Offering Price of the Shares. The
relative fault of the Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Underwriters' respective obligations to contribute pursuant to this Section
7 are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Section 7 were determined by
PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) of this Section 7.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Section 7 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by
21
<PAGE>
or on behalf of the Company, its officers or directors or any person controlling
the Company and (iii) acceptance of and payment for any of the Shares.
8. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase
Shares that it has or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate number of the Shares to be purchased on such date,
the other Underwriters shall be obligated severally in the proportions that
the number of Firm Shares set forth opposite their respective names in
Schedule I bears to the aggregate number of Firm Shares set forth opposite
the names of all such non-defaulting Underwriters, or in such other
proportions as you may specify, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; PROVIDED that in no event shall the number of Shares that any
Underwriter has agreed to purchase pursuant to this Agreement be increased
pursuant to this Section 9 by an amount in excess of one-ninth of such number
of Shares without the written consent of such Underwriter. If, on the
Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Firm
22
<PAGE>
Shares to
be purchased, and arrangements satisfactory to you and the Company for the
purchase of such Firm Shares are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of any non-
defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter
or Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
10. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
12. HEADINGS. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
23
<PAGE>
Very truly yours,
Aftermarket Technologies Corp.
By
----------------------------
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
William Blair & Company, L.L.C.
Donaldson, Lufkin & Jenrette Securities Corporation
Acting severally on behalf
of themselves and the
several Underwriters named
herein.
By: Morgan Stanley & Co. Incorporated
By
-----------------------
Name:
Title:
<PAGE>
SCHEDULE I
Number of
Firm Shares
Underwriter To Be Purchased
- ----------- ---------------
Morgan Stanley & Co. Incorporated. . . . . . . . . . .
William Blair & Company, L.L.C.. . . . . . . . . . . .
Donaldson, Lufkin & Jenrette Securities Corporation. .
---------------
Total 3,500,000
---------------
---------------
SCHEDULE II
[TO COME]
<PAGE>
[FORM OF LOCK-UP LETTER]
December , 1996
Morgan Stanley & Co. Incorporated
William Blair & Company, L.L.C.
Donaldson, Lufkin & Jenrette Securities Corporation
c/o Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Dear Sirs:
The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), William Blair & Company, L.L.C. and Donaldson, Lufkin & Jenrette
Securities Corporation, as Representatives of the several Underwriters, proposes
to enter into an Underwriting Agreement (the "Underwriting Agreement") with
Aftermarket Technologies Corp. a Delaware corporation (the "Company") providing
for the public offering (the "Public Offering") by the several Underwriters,
including Morgan Stanley (the "Underwriters"), of up to 4,025,000 shares (the
"Shares") of the Common Stock, par value $.01 per share of the Company (the
"Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the prospectus relating to the
Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock (whether such
shares or any such securities are now owned by the undersigned or are hereafter
acquired), or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (1) or (2)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to the sale of any
Shares to the Underwriters
<PAGE>
Morgan Stanley & Co. Incorporated
William Blair & Company, L.L.C.
Donaldson, Lufkin & Jenrette Securities Corporation
August __, 1996
Page 3
pursuant to the Underwriting Agreement. In addition, the undersigned agrees
that, without the prior written consent of Morgan Stanley on behalf of the
Underwriters, it will not, during the period commencing on the date hereof and
ending 180 days after the date of the Prospectus, make any demand for or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
agreement between the Company and the Underwriters.
Very truly yours
-----------------------------
(Name)
-----------------------------
(Address)
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of October
7, 1996 by and between William A. Smith, an individual ("Executive"), and
Aftermarket Technology Corp., a Delaware corporation (the "Company" or "ATC").
WHEREAS, Executive and the Company entered into that certain
Employment Agreement dated July 29, 1994 (the "Prior Agreement");
WHEREAS, Executive and the Company desire to terminate the Prior
Agreement and Executive and the Company desire to enter into this Agreement to
replace the Prior Agreement;
WHEREAS, all things necessary to make this Agreement a valid, binding
and legal instrument have been performed;
NOW, THEREFORE, THIS AGREEMENT WITNESSETH: that in consideration of
the covenants and premises, receipt whereof is hereby acknowledged, Executive
and the Company hereby agree and provide:
1. EMPLOYMENT BY THE COMPANY AND TERM.
(a) FULL TIME AND BEST EFFORTS. Subject to the terms set forth
herein, the Company agrees to employ Executive as Chairman of the Board of
Directors and Executive hereby accepts such employment. During the term of his
employment with the Company, Executive will devote his full time, best efforts
and attention to the performance of his duties hereunder and to the business and
affairs of the Company.
(b) DUTIES. Executive shall serve in an executive capacity and shall
perform such duties as are customarily associated with his then current title,
consistent with the Bylaws of the Company and as required by the Company's Board
of Directors (the "Board") and the officers to whom the Executive reports.
(c) COMPANY POLICIES. The employment relationship between the
parties shall be governed by the general employment policies and practices of
the Company, including but not limited to those relating to protection of
confidential information and assignment of inventions, except that when the
terms of this Agreement differ from or are in conflict with the Company's
general employment policies or practices, this Agreement shall control.
(d) TERM. The initial term of employment of Executive under this
Agreement shall begin as of October 7, 1996 and end on December 31, 1998 (the
"Initial Term"), subject to the provisions for termination set forth herein and
renewal as provided in Section 1(e) below.
(e) RENEWAL. The term of this Agreement shall be extendable for one-
year periods at the option of the Company after the end of the Initial Term.
Each extended term shall continue to be subject to the provisions for
termination set forth herein.
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<PAGE>
2. COMPENSATION AND BENEFITS.
(a) SALARY. Executive shall receive for services to be rendered
hereunder an annual base salary of Three Hundred Thousand Dollars ($300,000)
(the "Base Salary") payable on a monthly basis, which shall be subject to
increase at the sole discretion of the Board, and subject to standard
withholdings for taxes and social security and the like.
(b) PARTICIPATION IN BENEFIT PLANS. During the term hereof,
Executive shall be entitled to participate in any group insurance,
hospitalization, medical, dental, health and accident, disability or similar
plan or program of the Company now existing or established hereafter to the
extent that he is eligible under the general provisions thereof. The Company
may, in its sole discretion and from time to time, establish additional senior
management benefit programs as it deems appropriate. Until such time as the
Company establishes a medical, dental, health and accident or disability plan or
program of its own, Executive shall be entitled to the extent legally permitted
to obtain coverage therefor under, and pursuant to the terms of, any such plans
or programs of the Company's subsidiaries, as may be designated by the
Executive.
(c) VACATION. Executive shall be entitled to a period of annual
vacation time equal to that provided to managers of equal position by the
Company's policies and procedures regarding vacation, but in any event not less
than four weeks per year. The days selected for Executive's vacation must be
mutually agreeable to Company and Executive.
(d) 401(k) PLAN. To the extent legally permitted, Executive shall be
entitled to place a portion of his Base Salary into a 401(K) or other qualified
deferred tax annuity plan of the Company or, if the Company does not have such a
plan, of any such plan of any of the Company's subsidiaries, as may be
designated by the Executive.
(e) LIFE INSURANCE. During the term hereof, the Company shall
procure and pay for a $1,000,000 life insurance policy covering Executive, for
the benefit of such beneficiaries as Executive shall designate.
3. BONUS PLANS.
(a) PARTICIPATION. During the term hereof, Executive shall be
entitled to participate in any bonus or incentive plan (a "Bonus Plan") of the
Company currently made available by the Company to executive employees of the
Company or which may be made available in the future to executive employees of
the Company, subject to and on a basis consistent with the terms, conditions and
administration of any such plan. Executive understands that any such plan may
be modified or eliminated in the Company's discretion in accordance with
applicable law.
(b) BONUSES. For the fiscal year ending December 31, 1996, Executive
shall receive a bonus equal to the greater of (i) $300,000 if, and only if, ATC
achieves the Management Budget approved by the Board of Directors of ATC (the
"Management Budget") for the full fiscal year and at the end of such fiscal year
Executive is employed pursuant to this Agreement or (ii) $600,000 if, and only
if, ATC achieves at least 15% above the Management Budget for the fiscal year
and at the end of such full fiscal year Executive is employed pursuant to this
Agreement. For all subsequent annual periods, Executive shall receive such cash
bonus as the Board shall determine in its sole discretion based upon the
performance of the Company and its subsidiaries. Such bonuses shall be paid at
such time as the Company pays cash bonuses to its executive employees.
2
<PAGE>
4. REASONABLE BUSINESS EXPENSES AND SUPPORT.
Executive shall be reimbursed for documented and reasonable business
expenses in connection with the performance of his duties hereunder. Executive
shall be furnished reasonable office space, assistance and facilities.
5. TERMINATION OF EMPLOYMENT. The date on which Executive's employment
by the Company ceases, under any of the following circumstances, shall be
defined herein as the "Termination Date."
(a) TERMINATION FOR CAUSE.
(i) TERMINATION; PAYMENT OF ACCRUED SALARY AND VACATION. The
Board may terminate Executive's employment with the Company at any time for
cause, immediately upon notice to Executive of the circumstances leading to such
termination for cause. In the event that Executive's employment is terminated
for cause, Executive shall receive payment for all accrued salary and vacation
time through the Termination Date, less standard withholdings for tax and social
security purposes, which in this event shall be the date upon which notice of
termination is given. The Company shall have no further obligation to pay
severance of any kind nor to make any payment in lieu of notice.
(ii) DEFINITION OF CAUSE. "CAUSE" means the occurrence or
existence of any of the following with respect to Executive, as determined by a
majority of the disinterested directors of the Board: (a) a material breach by
the Executive of his duty not to engage in any transaction that represents,
directly or indirectly, self-dealing with the Company or any of its affiliates
which has not been approved by a majority of the disinterested directors of the
Board or of the terms of his employment, if in any such case such material
breach remains uncured after the lapse of 30 days following the date that the
Company has given the Executive written notice thereof; (b) the repeated
material breach by the Executive of any duty referred to in clause (a) above as
to which at least one written notice has been given pursuant to such clause (a);
(c) any act of dishonesty, misappropriation, embezzlement, intentional fraud or
similar conduct involving the Company or any of its affiliates; (d) the
conviction or the plea of nolo contendere or the equivalent in respect of a
felony involving moral turpitude; (e) any intentional damage of a material
nature to any property of the Company or any of its affiliates; (f) the repeated
non-prescription use of any controlled substance or the repeated use of alcohol
or any other non-controlled substance which, in any case described in this
clause (f), the Board reasonably determines renders the Executive unfit to serve
in his capacity as an officer or employee of the Company or its affiliates; or
(g) conduct by the Executive which in the good faith determination of the Board
demonstrates gross unfitness to serve in his capacity as an officer or employee
of the Company or its affiliates.
(b) VOLUNTARY TERMINATION. Executive may voluntarily terminate his
employment with the Company at any time upon ninety (90) days prior written
notice, after which no further compensation of any kind or severance payment
will be payable under this Agreement.
(c) TERMINATION UPON DISABILITY. Company may terminate Executive's
employment in the event Executive suffers a disability that renders Executive
unable to perform the essential functions of his position, even with reasonable
accommodation, for four (4) months within any eight (8) month period. After the
Termination Date, which in this event shall be the date upon which notice of
termination is given, no further compensation will be payable under this
Agreement except that Executive shall receive the accrued portion of any bonus
through the Termination Date, less standard withholdings for tax and social
3
<PAGE>
security purposes, payable upon such date or over such period of time which is
in accordance with the applicable Bonus Plan.
(d) TERMINATION WITHOUT CAUSE.
(i) TERMINATION PAYMENT DURING THE INITIAL TERM. In the event
Executive's employment is terminated without "cause," as defined above, the
Company shall pay Executive as severance an amount equivalent to his then base
salary for the remaining period of the Initial Term or eighteen (18) months,
whichever period is shorter, less standard withholdings for tax and social
security purposes, payable over such term in monthly PRO RATA payments
commencing as of the Termination Date plus the accrued portion of any bonus
through the Termination Date, less standard withholdings for tax and social
security purposes, payable upon such date or over such period of time which is
in accordance with the applicable Bonus Plan.
(ii) TERMINATION PERIOD AFTER THE INITIAL TERM. In the event
that the term of this Agreement is extended pursuant to Section 1(e) hereof (an
"Extension Period") and during such Extension Period Executive's employment is
terminated without "cause," as defined above, the Company shall pay Executive as
severance an amount equal to his then base salary for the remaining period of
the Extension Period, less standard withholdings for tax and social security
purposes, payable over the remaining period of the Extension Period in monthly
PRO RATA payments commencing as of the Termination Date plus the accrued portion
of any bonus through the Termination Date, less standard withholdings for tax
and social security purposes, payable upon such date or over such period of time
which is in accordance with the applicable Bonus Plan.
(iii) FUNDAMENTAL CHANGES. In the event that Company makes a
substantial change which results in diminution in the Executive's duties,
authority, responsibility or compensation without performance or market
justification, he may terminate his employment; PROVIDED, HOWEVER, that
Executive shall provide the Company 10 days' notice prior to any such
termination and the Company shall have a reasonable period of time to cure. A
termination in such circumstances shall be treated as a Company termination
without cause and Executive shall be entitled to the same severance payments
provided in paragraphs 5(d)(i) and (5)(d)(ii), as applicable.
(e) BENEFITS UPON TERMINATION. All benefits provided under paragraph
2(b) and 2(e) hereof shall be extended, at Executive's election and Company's
cost, to the extent permitted by the Company's insurance policies and benefit
plans, for one year after Executive's Termination Date, except (i) as required
by law (e.g., COBRA health insurance continuation election), (ii) in the event
of a termination described in paragraphs 5(a) or (iii) to the extent that
comparable benefits are provided to Executive under any other arrangement with
the Company or its affiliates.
(f) TERMINATION UPON DEATH. If Executive dies prior to the
expiration of the term of this Agreement, the Company shall (i) continue
coverage of Executive's dependents (if any) under all benefit plans or programs
of the type listed above in paragraph 2(b) herein for a period of three (3)
months, and (ii) pay to Executive's estate the accrued portion of any bonus
through the Termination Date, less standard withholdings for tax and social
security purposes, payable upon such date or over such period of time which is
in accordance with the applicable Bonus Plan.
6. PROPRIETARY INFORMATION OBLIGATIONS.
4
<PAGE>
During the term of employment under this Agreement, Executive will
have access to and become acquainted with the Company's confidential and
proprietary information, including but not limited to information or plans
regarding the Company's customer relationships, personnel, or sales, marketing,
and financial operations and methods; trade secrets; formulas; devices; secret
inventions; processes; and other compilations of information, records, and
specifications (collectively "Proprietary Information"). Executive shall not
disclose any of the Company's Proprietary Information directly or indirectly, or
use it in any way, either during the term of this Agreement or at any time
thereafter, except as required in the course of his employment for the Company
or as authorized in writing by the Company. All files, records, documents,
computer-recorded information, drawings, specifications, equipment and similar
items relating to the business of the Company, whether prepared by Executive or
otherwise coming into his possession, shall remain the exclusive property of the
Company and shall not be removed from the premises of the Company under any
circumstances whatsoever without the prior written consent of the Company,
except when (and only for the period) necessary to carry out Executive's duties
hereunder, and if removed shall be immediately returned to the Company upon any
termination of his employment and no copies thereof shall be kept by Executive;
PROVIDED, HOWEVER, that Executive shall be entitled to retain documents
reasonably related to his interest as a shareholder and any documents that were
personally owned or acquired.
7. NONINTERFERENCE. While employed by the Company, Executive agrees not
to interfere with the business of the Company by directly or indirectly
soliciting, attempting to solicit, inducing, or otherwise causing any employee
of the Company to terminate his or her employment in order to become an
employee, consultant or independent contractor to or for any other employer.
8. NONCOMPETITION. Executive agrees that during the term of this
Agreement and for a period of five (5) years after the termination hereof, he
will not, without the prior consent of the Company, directly or indirectly, have
an interest in, be employed by, be connected with, or have an interest in, as an
employee, consultant, officer, director, partner, stockholder or joint venturer,
in any person or entity owning, managing, controlling, operating or otherwise
participating or assisting in any business which is similar to or in competition
with the business of the Company (i) during the term of this Agreement, in any
location, and (ii) for the five year period following the termination of this
Agreement, in any state in which the Company was conducting business at the date
of termination of Executive's employment and continues to do so thereafter;
provided, however, that the foregoing shall not prevent the Executive from being
a stockholder of less than 1% of the issued and outstanding securities of any
class of a corporation listed on a national securities exchange or designated as
national market system securities on an interdealer quotation system by the
National Association of Securities Dealers, Inc.
9. TERMINATION OF PRIOR AGREEMENT. Upon execution of this Agreement, the
Prior Agreement shall be terminated and this Agreement shall replace the Prior
Agreement.
10. MISCELLANEOUS.
(a) NOTICES. Any notices provided hereunder must be in writing and
shall be deemed effective upon the earlier of personal delivery (including
personal delivery by telecopy or telex) or the third day after mailing by first
class mail to the recipient at the address indicated below:
5
<PAGE>
To the Company:
Aftermarket Technology Corp.
c/o Aurora Capital Partners L.P.
1800 Century Park East
Suite 1000
Los Angeles, California 90067
Attention: Richard K. Roeder, Esq.
Facsimile: (310) 227-5591
To Executive:
William A. Smith
Aftermarket Technology Corp.
33309 First Way South
Suite A-209
Federal Way, Washington 98003
Facsimile: (206) 838-1841
or to such other address or to the attention of such other person as the
recipient party will have specified by prior written notice to the sending
party.
(b) SEVERABILITY. If any term or provision (or any portion thereof)
of this Agreement is determined by a court to be invalid, illegal or incapable
of being enforced by any rule of law or public policy, all other terms and
provisions (or other portions thereof) of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or provision (or
any portion thereof) is invalid, illegal or incapable of being enforced, this
Agreement shall be deemed to be modified so as to effect the original intent of
the parties as closely as possible to the end that the transactions contemplated
hereby and the terms and provisions hereof are fulfilled to the greatest extent
possible.
(c) ENTIRE AGREEMENT. This document constitutes the final, complete,
and exclusive embodiment of the entire agreement and understanding between the
parties related to the subject matter hereof and supersedes and preempts any
prior or contemporaneous understandings, agreements, or representations by or
between the parties, written or oral.
(d) COUNTERPARTS. This Agreement may be executed on separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
agreement.
(e) SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive and the Company, and
their respective successors and assigns, except that Executive may not assign
any of his duties hereunder and he may not assign any of his rights hereunder
without the prior written consent of the Company.
(f) ATTORNEYS FEES. If any legal proceeding is necessary to enforce
or interpret the terms of this Agreement, or to recover damages for breach
therefore, the prevailing party shall be entitled to reasonable attorney's fees,
as well as costs and disbursements, in addition to any other relief to which he
or it may be entitled.
6
<PAGE>
(g) AMENDMENTS. No amendments or other modifications to this
Agreement may be made except by a writing signed by both parties. No amendment
or waiver of this Agreement requires the consent of any individual, partnership,
corporation or other entity not a party to this Agreement. Nothing in this
Agreement, express or implied, is intended to confer upon any third person any
rights or remedies under or by reason of this Agreement.
(h) CHOICE OF LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the internal
law, and not the law of conflicts, of the State of Delaware.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement effective as
of the date it is last executed below by either party.
-----------------------------
WILLIAM A. SMITH
AFTERMARKET TECHNOLOGY CORP.
- ----------------------------------
By:
-------------------------------
Title:
----------------------------
