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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21803
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AFTERMARKET TECHNOLOGY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4486486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE OAK HILL CENTER, SUITE 400
WESTMONT, IL 60559
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 455-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by
non-affiliates of the Registrant (based on the closing price of such stock, as
reported by The Nasdaq National Market, on February 4, 1999) was $71.6 million.
The number of shares outstanding of the Registrant's Common
Stock, as of February 4, 1999, was 20,245,768 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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AFTERMARKET TECHNOLOGY CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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ITEM 1. BUSINESS.............................................................. 1
ITEM 2. PROPERTIES............................................................13
ITEM 3. LEGAL PROCEEDINGS.....................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................................14
ITEM 6. SELECTED FINANCIAL DATA...............................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................................17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................54
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................54
ITEM 11. EXECUTIVE COMPENSATION................................................56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................................62
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................64
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......66
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FORWARD LOOKING STATEMENT NOTICE
Certain statements contained in this Annual Report that are not related
to historical results are forward-looking statements. Actual results may differ
materially from those projected or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under Item 1. "Business--Certain Factors Affecting
the Company" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Further, certain forward-looking
statements are based upon assumptions as to future events that may not prove to
be accurate.
PART I
ITEM 1. BUSINESS
BACKGROUND
Aftermarket Technology Corp. ("ATC") was incorporated under the laws
of Delaware in July 1994 at the direction of Aurora Capital Partners L.P. to
acquire Aaron's Automotive Products, Inc. ("Aaron's"), H.T.P., Inc. ("HTP"),
Mamco Converters, Inc. ("Mamco") and RPM Merit, Inc. ("RPM") (collectively,
the "Initial Acquisitions"). Aaron's, HTP, Mamco and RPM as they existed
prior to the Initial Acquisitions are hereinafter collectively referred to as
the "Predecessor Companies." Subsequent to the Initial Acquisitions, the
Company acquired Component Remanufacturing Specialists, Inc. ("CRS") and
Mascot Truck Parts Inc. ("Mascot") in June 1995, and King-O-Matic Industries
Limited ("King-O-Matic") in September 1995 (collectively, the "1995
Acquisitions"), Tranzparts, Inc. ("Tranzparts") in April 1996 and Diverco,
Inc. ("Diverco") in October 1996 (collectively, the "1996 Acquisitions"),
Replacement and Exchange Parts Co., Inc. ("REPCO") in January 1997, ATS
Remanufacturing ("ATS") in July 1997, Trans Mart, Inc. ("Trans Mart") in
August 1997 and the Metran companies (Metran Automatic Transmission Parts
Corp., Metran Boston, Inc. and Metran Parts of Pennsylvania, Inc.) ("Metran")
in November 1997 (collectively, the "1997 Acquisitions"), and the OEM
Division ("Autocraft") of The Fred Jones Companies, Inc. (formerly known as
Autocraft Industries, Inc.) in March 1998 (the "Autocraft Acquisition" and,
together with the Initial Acquisitions, the 1995 Acquisitions, the 1996
Acquisitions and the 1997 Acquisitions, the "Acquisitions"). At the end of
1997, Diverco, HTP, Mamco, Metran, REPCO, Trans Mart and Tranzparts were
merged together to form ATC Distribution Group, Inc. RPM was merged into ATC
Distribution Group, Inc. at the end of 1998. In February 1999, ATC sold
Mascot. ATC conducts all of its operations through its wholly-owned
subsidiaries and each of their respective subsidiaries. Throughout this
Annual Report, except where the context otherwise requires, the "Company"
refers collectively to ATC and its subsidiaries and the Predecessor Companies.
On December 20, 1996, ATC consummated an initial public offering of
its Common Stock (the "IPO"). Simultaneous with the consummation of the IPO,
Aftermarket Technology Holdings Corp. ("Holdings"), the sole stockholder of
ATC prior to the IPO, was merged into ATC (the "Reorganization"). Upon the
effectiveness of the Reorganization, each outstanding share of Holdings
Common Stock was converted into one share of ATC Common Stock, and each
outstanding share of Holdings Redeemable Exchangeable Cumulative Preferred
Stock was converted into one share of ATC Redeemable Exchangeable Cumulative
Preferred Stock, which was immediately thereafter redeemed for an amount in
cash equal to $100.00 plus an amount in cash equal to accrued and unpaid
dividends on the Holdings Preferred Stock to the date of the Reorganization.
GENERAL
The Company is a leading remanufacturer and distributor of drive
train products used in the repair of vehicles in the automotive aftermarket.
The Company's principal products include remanufactured transmissions, torque
converters, engines, electronic control modules, instrument and display
clusters, cellular phones and radios, as well as remanufactured and new parts
for the repair of automotive drive train assemblies. The Company also
provides logistics services and material recovery services. The Company has
two reportable segments: the Original Equipment Manufacturer ("OEM") segment
and the Independent Aftermarket segment.
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The first of these segments consists of four operating units (Aaron's,
Autocraft Industries, Autocraft UK and CRS/ATS) that principally sell factory
approved remanufactured transmissions directly to OEMs for use as replacement
parts by their domestic dealers during the warranty and post-warranty periods
following the sale of a vehicle. The principal customers for these transmissions
are DaimlerChrysler Corporation, Ford Motor Company, General Motors Corporation
and certain foreign OEMs. In addition, the OEM segment sells select
remanufactured engines to DaimlerChrysler and certain European OEMs and a broad
range of remanufactured foreign and domestic engines to general repair shops and
retail automotive parts stores.
The Company's Independent Aftermarket segment (the ATC Distribution
Group) primarily sells transmission repair kits, soft parts, remanufactured
torque converters and both new and remanufactured hard parts used in drive train
repairs to independent transmission rebuilders for repairs generally during the
period following the expiration of the vehicle warranty. To a lesser extent, the
Distribution Group also sells its products to general repair shops, wholesale
distributors and retail automotive parts stores.
In addition to the OEM and Independent Aftermarket segments, the
Company has three "other" operating units, all of which were acquired in the
Autocraft Acquisition: an electronic parts remanufacturing and distribution
business; warehouse and distribution services for AT&T Wireless (the cellular
telephone subsidiary of AT&T); and a material recovery processing business for
Ford. None of these operating units has ever met the quantitative thresholds for
determining reportable segments.
Since the Initial Acquisitions, the Company has grown both internally
and through ten additional acquisitions at a compound annual revenue growth rate
of approximately 32.5%. The Company believes the key elements of its success are
the quality and breadth of its product offerings and its strong technical
support, rapid delivery time, innovative product development and competitive
pricing. In addition, the Company has benefited from the increasing use of
remanufactured products as the industry recognizes that remanufacturing provides
a higher quality, lower cost alternative to rebuilding the assembly or replacing
it with a new assembly manufactured by an OEM.
The Company's strategy is to continue to grow both internally and
through strategic acquisitions. The Company intends to expand its business by:
(i) increasing penetration of its current customer base; (ii) gaining new OEM
and Independent Aftermarket customers; and (iii) introducing new products to
both existing and new customers. The Company plans to continue to support these
growth strategies through strategic acquisitions in the future. In addition, the
Company believes that its core competency of remanufacturing, which has been
applied to the drive train products segment of the automotive aftermarket, has
the potential to be utilized in other aftermarket segments.
See "Certain Factors Affecting the Company."
REMANUFACTURING
Remanufacturing is a process through which used assemblies are returned
to a central facility where they are disassembled and their component parts
cleaned, refurbished and tested. The usable component parts are then combined
with new parts in a high volume, precision assembly line manufacturing process
to create remanufactured assemblies.
When an assembly such as a transmission or engine fails, there are
generally three alternatives available to return the vehicle to operating
condition. The dealer or independent repair shop may: (i) remove the assembly,
disassemble it into its component pieces, replace worn or broken parts with
remanufactured or new components, and reinstall the assembly in the vehicle
("rebuild"); (ii) replace the assembly with an assembly from a remanufacturer
such as the Company; or (iii) in rare instances, replace the assembly with a new
assembly manufactured by the OEM.
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted by vehicle make and model and either placed into
immediate production or stored until needed. In the remanufacturing process, the
cores are evaluated and disassembled into their component parts and the
components that can be incorporated into the remanufactured product are cleaned,
refurbished and tested. All components determined not reusable or repairable are
replaced by other remanufactured or
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new components. Inspection and testing are conducted at various stages of the
remanufacturing process, and each finished assembly is tested on equipment
designed to simulate performance under operating conditions. After testing,
completed products are then packaged for immediate delivery or shipped to one
of the Company's distribution centers.
The cores used in the Company's remanufacturing process for sale to its
OEM customers are provided primarily by the OEMs. In the case of OEMs other than
DaimlerChrysler, the dealers return cores to the OEM, which then ships them to
the Company. Chrysler cores are sent to the Company through its central core
return center. See "OEM Customers."
The majority of the cores used in the Company's remanufacturing process
for sale to its non-OEM customers are obtained from customers as trade-ins. The
Company encourages these 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 provide cores as needed at reasonable prices.
There are three primary benefits of using remanufactured components
rather than rebuilt or new components in repair of vehicles:
- First, costs to the OEM associated with remanufactured assemblies generally
are 50% less than new or dealer-rebuilt assemblies due to the
remanufacturer's use of high volume manufacturing techniques and salvage
methods that enable the remanufacturer to refurbish and reuse a high
percentage of original components.
- Second, remanufactured assemblies are generally of consistent high quality
due to of the precision manufacturing techniques, technical upgrades and
rigorous inspection and testing procedures employed in remanufacturing. The
quality of a rebuilt assembly is heavily dependent on the skill level of
the particular mechanic. In addition, the proliferation of transmission and
engine designs, the increasing complexity of transmissions and engines that
incorporate electronic components and the shortage of highly trained
mechanics qualified to rebuild assemblies are leading to what management
believes is a trend toward the use of remanufactured assemblies for
aftermarket repairs. For warranty repairs, consistent quality is important
to the OEM providing the applicable warranty, because once installed, the
remanufactured product is usually covered by the OEM's warranty for the
balance of the original warranty period.
- Third, replacement of a component with a remanufactured component generally
takes considerably less time than the time needed to rebuild the component,
thereby significantly reducing the time the vehicle is at the dealer or
repair shop and allows the dealer and repair shops to increase their volume
of business.
The Company believes that because of this combination of high quality,
low cost and efficiency, the use of remanufactured assemblies for aftermarket
repairs is growing compared to the use of new or rebuilt assemblies. Although
the primary customers for the Company's remanufactured components have
historically been OEMs, the Company expects the Independent Aftermarket to
increase its use of remanufactured components in the future.
ORIGINAL EQUIPMENT MANUFACTURER SEGMENT
The Company's OEM segment consists of four operating units that
remanufacture and sell transmissions directly to automobile manufacturers. In
addition, the OEM segment sells select remanufactured engines to DaimlerChrysler
and certain European OEMs and a broad range of remanufactured foreign and
domestic engines to general repair shops and retail automotive parts stores.
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REMANUFACTURED TRANSMISSIONS
The Company remanufactures factory approved transmissions for warranty
and post-warranty replacement of transmissions for DaimlerChrysler, Ford,
General Motors and several foreign OEMs, including Hyundai Motor America,
Mitsubishi and American Isuzu, for their United States dealer networks. The
number of transmission models remanufactured by the Company has been increasing
to accommodate the greater number of models currently used in vehicles
manufactured by the Company's OEM customers.
REMANUFACTURED ENGINES
The Company remanufactures select factory approved engine models for
Chrysler vehicles and through the Autocraft Acquisition also operates a facility
in England that remanufactures factory approved engines for several European
OEMs, including Jaguar and the European divisions of Ford and General Motors.
These engines are used for warranty and post-warranty replacement. The facility
in England also does assembly and modification of new production engines for
certain of its OEM customers.
The Company also remanufactures engines for use as post-warranty
replacements in many domestic and foreign passenger cars and light trucks. In
addition, the Company sources remanufactured engines for other foreign passenger
cars and light trucks from independent suppliers. The Company distributes these
engines through a growing network of 22 local distribution centers located
throughout the eastern half of the United States. Principal customers include
Advanced Auto Parts (a large retail automotive parts store chain) as well as
general repair garages and wholesale distributors. Over the past five years, the
variety of engine models offered by the Company has increased from 250 to more
than 1,000 as the Company has expanded the range of engines offered to meet
customer requirements.
OEM CUSTOMERS
The Company's largest OEM segment customer is DaimlerChrysler, to whom
the Company supplies remanufactured transmissions and certain remanufactured
engines for use in Chrysler automobiles and light trucks. As a result of the
Autocraft Acquisition, the Company also provides remanufactured components to
several other OEMs including transmissions to Ford and engines to Jaguar, Land
Rover, Aston Martin and the European divisions of Ford and General Motors. The
Company added General Motors as a transmission customer in July 1997 with the
purchase of ATS and expanded its General Motors business with the Autocraft
Acquisition. Products are sold to each OEM pursuant to supply arrangements for
individual transmission or engine models, which supply arrangements typically
may be terminated by the OEM at any time.
OEM segment sales accounted for 58.5%, 53.0% and 52.0% of the Company's
1996, 1997 and 1998 revenues, respectively. Sales to DaimlerChrysler accounted
for 37.2%, 32.0% and 18.2% of the Company's revenues in 1996, 1997 and 1998,
respectively, and sales to Ford accounted for 17.1% of the Company's revenues in
1998. On a pro forma basis as if the Autocraft Acquisition had occurred on
January 1, 1998, OEM segment sales would have accounted for approximately 53.0%
of pro forma 1998 revenues with sales to DaimlerChrysler and Ford accounting for
approximately 17.2% and 16.2%, respectively, of the total pro forma revenues.
Over the past 15 years, the Company has developed and maintained strong
relationships at many levels of both the corporate and the factory organizations
of Chrysler (which was merged with Daimler Benz in 1998 to form
DaimlerChrysler). In recognition of the Company's consistently high level of
service and product quality throughout its relationship with DaimlerChrysler, in
each of the last four years the Company was awarded the Platinum Pentastar
award, the highest award DaimlerChrysler bestows on a Chrysler supplier. The
Company is one of only six of Chrysler's approximately 3,500 suppliers to
receive the Platinum Pentastar every year since the creation of the award.
The Company's facilities that remanufacture transmissions for
DaimlerChrysler, Ford and General Motors, as well as certain of its other OEM
segment facilities, have QS-9000 certification, a complete quality management
system developed for DaimlerChrysler, Ford, General Motors and truck
manufacturers who subscribe to the ISO 9002 quality standards. The system is
designed to help suppliers, such as the Company, develop a quality system that
emphasizes
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defect prevention and continuous improvement in manufacturing processes.
Certain of the Autocraft facilities have also received Ford's Q1 quality
certification.
DaimlerChrysler began implementing remanufacturing programs for its
Chrysler transmission models in 1986 and selected the Company as its sole
supplier of remanufactured transmissions in 1989. DaimlerChrysler has advised
the Company that, by implementing a remanufacturing program for Chrysler
vehicles, DaimlerChrysler has realized substantial warranty cost savings,
standardized the quality of its dealers' aftermarket repairs and reduced its own
inventory of replacement parts. Currently, the Company provides all
remanufactured front wheel drive transmissions purchased by DaimlerChrysler for
use in Chrysler vehicles. In late 1998, the Company commenced production of
remanufactured Chrysler rear wheel drive transmissions. The Company presently
does not provide remanufactured transmissions or other components to
DaimlerChrysler's Mercedes Benz division.
Autocraft began remanufacturing transmissions for Ford in 1989 and for
General Motors in 1985. The Company believes that as a result of the acquisition
of Autocraft, the Company provides approximately 85% of the remanufactured
transmissions purchased by Ford and approximately 50% of the remanufactured
transmissions purchased by General Motors.
INDEPENDENT AFTERMARKET SEGMENT
The Company's Independent Aftermarket segment primarily sells
transmission repair kits, soft parts, remanufactured torque converters and new
and remanufactured hard parts used in drive train repairs to independent
transmission rebuilders throughout the United States and Canada. To a lesser
extent, these products are also sold to general repair shops, wholesale
distributors and retail automotive parts stores.
The market for parts sales and services for vehicles after their
original purchase has been non-cyclical and has generally experienced steady
growth over the past several years, unlike the market for new vehicle sales.
According to the Automotive Parts & Accessories Association, between 1988 and
1997 (the most recent period for which data is available), estimated
industry-wide revenue for the automobile aftermarket increased from
approximately $99.2 billion to $151.2 billion. This consistent growth is due
principally to the increase in the number of vehicles in operation, the increase
in the average age of vehicles, and the increase in the average number of miles
driven annually per vehicle. The Company competes primarily in the aftermarket
segment for automotive transmissions, engines and other drive train related
products, which represents more than $7 billion of the entire automotive
aftermarket.
PRODUCTS
Repair kits sold by the Company consist of gaskets, friction plates,
seals, bands, filters, clutch components and other "soft" parts that are used in
rebuilding transmissions for substantially all domestic and most imported
passenger cars and light trucks. Each kit is designed to include substantially
all of the soft parts necessary for rebuilding a particular transmission model.
Due to its high volume of kit sales, the Company maintains a variety of
strategic supply relationships that enable the Company to purchase components
for its kits at prices that the Company believes are more favorable than those
available to its lower volume competitors. The Company also believes that its
remanufacturing capability provides a cost advantage over some of its
competitors who purchase all their parts from suppliers.
The Company remanufactures torque converters (the coupler between the
transmission and engine) and certain "hard" parts such as planetary gears (speed
regulating devices inside the transmission) and transmission fluid pumps. Many
of the Company's competitors do not distribute as broad a line of hard parts or
remanufacture the hard parts that they distribute. The Company believes these
factors provide it both an availability and cost advantage over many of its
competitors.
The Company's Independent Aftermarket customers typically require
repair kits, torque converters and hard parts in order to complete a vehicle
repair. For this reason, the Company believes that the breadth of its product
line, which enables a customer to obtain all the parts for a repair job from a
single source, gives the Company a competitive advantage. The Company is one of
the few full line transmission parts suppliers in the industry, with access to
over 20,000 individual part numbers.
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INDEPENDENT AFTERMARKET CUSTOMERS
The Company, through its ATC Distribution Group, supplies transmission
repair kits, soft parts, torque converters and hard parts used in drive train
repairs to independent transmission rebuilders throughout the United States and
Canada. To a lesser extent, the Company also sells to general repair shops and
wholesale distributors. 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 filter kits to less than 2,000 of the approximately 40,000
retail automotive parts stores located in the United States and Canada, which
principally sell to "do-it-yourself" customers and general repair shops.
As the number of vehicle models has proliferated and repairs have
become increasingly complex, independent transmission rebuilders and general
repair shops have grown more dependent on their suppliers for technical support
and assistance in managing inventory by delivering product on a just-in-time
basis at competitive prices. To address these needs, the Company maintains more
than 50 distribution centers located in metropolitan areas throughout the United
States and Canada from which the Company provides technical support and a wide
range of drive train related products that are delivered on a same day basis by
trucks or delivery service to customers in and around metropolitan areas and on
a next day basis by overnight carrier to customers in more remote areas. The
Company believes that its distribution system is the most extensive in the drive
train segment of the automotive aftermarket and represents a competitive
advantage for the Company relative to its typically smaller, local competitors.
The Company believes there are opportunities for further geographic penetration
in this relatively fragmented market. See "Business Strategy."
The Company conducts telemarketing that, when coupled with the
Company's next day delivery strategy to more remote areas, enables the Company
to establish customer relationships in areas that cannot support the costs
associated with setting up and maintaining a distribution center. Additionally,
new customers are developed by the Company's direct sales force operating from
its distribution centers, by advertising in national and local trade
publications, and by participating in various trade shows. The Company believes
its DIVERCO, HTP, KING-O-MATIC, MAMCO, METRAN, REPCO, RPM, TRANS MART and
TRANZPARTS trademarks are well recognized and respected in their regional
markets.
The Company believes it is well positioned within the highly fragmented
aftermarket for drive train products as a result of its extensive product line,
diverse customer base and broad geographic presence, with over 50 local
distribution centers throughout the United States and Canada. The Independent
Aftermarket segment accounted for 39.2%, 44.8% and 38.4% of the Company's
revenues in 1996, 1997 and 1998, respectively.
OTHER OPERATING UNITS
The Company's other operating units, acquired as part of the Autocraft
Acquisition, were determined not to be reportable segments. They consist of an
electronic parts remanufacturing and distribution business, warehouse and
distribution services and a material recovery processing business.
Prior to the Autocraft Acquisition, the Company's "other" operating
units consisted solely of Mascot, which remanufactured heavy duty and medium
truck transmissions, differentials and air compressors primarily for sales to
truck dealers in Canada. However, during 1998 the Company decided to concentrate
on the remanufacturing of automobile and light truck drive train components
rather than on heavy duty truck components. For that reason, in February 1999
the Company sold all of Mascot's assets to a third party buyer.
ELECTRONIC COMPONENTS
The electronic components operating unit remanufactures automotive
electronic control modules (which manage various engine functions) for General
Motors, remanufactures and distributes radios and instrument and display
clusters for General Motors and Ford, and remanufactures and distributes
cellular telephones and other cellular products (E.G., navigation systems) for
Ford, General Motors, Audi, Jaguar and Volkswagen.
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LOGISTICS SERVICES
The logistics services operating unit provides centralized warehouse
and distribution services for AT&T Wireless, the cellular telephone subsidiary
of AT&T. As part of this service, the Company handles all warranty-service
exchanges and inventory tracking for AT&T Wireless.
MATERIAL RECOVERY
As part of its relationship with Ford, the Company also provides
material recovery services to assist Ford with the management of its dealer
parts inventory. Under this program, Ford dealers send their excess parts
inventory to Autocraft. The parts are then sorted and disposed of in one of
three ways: useful parts that are needed by other dealers are redistributed;
useful parts that are not needed by other dealers are sold to remanufacturers,
wholesale distributors and other third parties through an innovative on-line
Internet auction process; and useless parts are scrapped. As a result of the
introduction of the materials recovery program, the number of parts that are
scrapped has been significantly reduced to less than 2%.
BUSINESS STRATEGY
The Company's strategy is to achieve growth both internally and through
strategic acquisitions. The Company intends to expand its business by: (i)
increasing penetration of its current customer base; (ii) gaining new OEM and
Independent Aftermarket customers; and (iii) introducing new products to both
existing and new customers. Strategic acquisitions have been an important
element in the Company's historical growth, and the Company plans to continue to
support its growth strategy through strategic acquisitions in the future. In
addition, the Company believes that its core competency of remanufacturing,
which has been applied to the drive train products segment of the automotive
aftermarket, has the potential to be utilized in other aftermarket segments.
INCREASING SALES TO EXISTING CUSTOMERS
OEM CUSTOMERS. The Company intends to increase its business with its
existing OEM customers by working with OEMs to increase dealer utilization of
remanufactured transmissions in both the warranty and post-warranty periods. 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
significantly larger than the OEM dealer warranty repair market, presents a
growth opportunity. Currently, the vast majority of post-warranty repairs are
performed in the Independent Aftermarket rather than at OEM dealers. Given the
relatively low cost and high quality of remanufactured components, OEM dealers
can enhance their cost competitiveness compared to independent service centers
through the increased use of remanufactured components as well as providing end
customers with a high quality product. To the extent that OEM dealers increase
their level of post-warranty repairs, the Company is well positioned to
capitalize on this market growth. The Company has introduced a number of new
transmission models and related drive train products in the last several years
for its OEM customers. In March 1998, the Company expanded its business with
General Motors by purchasing Autocraft, one of General Motors' other three
remanufactured transmission suppliers.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that it
currently supplies approximately 15% of the remanufactured or new drive train
component requirements of its independent transmission rebuilder and general
repair shop customers. The Company believes it will be well positioned to expand
sales to these customers through common product identification and numbering in
conjunction with a computer network that will electronically link its
distribution centers. This will enable the Company to offer its full line of
products throughout the entire Distribution Group.
INTRODUCING NEW PRODUCTS
OEM CUSTOMERS. The Company believes that OEMs recognize that the use of
remanufactured assemblies provide a high quality, lower cost alternative to
rebuilding damaged assemblies or replacing them with new assemblies. For this
reason, the Company believes that OEMs are interested in working with large,
high quality remanufacturers to
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reduce the OEMs warranty costs and increase their parts sales into the
post-warranty aftermarket. The Company continues to work with its OEM
customers to identify additional remanufactured products and services where
the Company can provide value to the OEM. In this way, the Company believes
that it will be able to leverage its customer relationships and
remanufacturing competency. For example, in 1998 the Company began
remanufacturing rear wheel drive transmissions for Chrysler.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its
reputation for high quality products and customer service enables it to leverage
its relationships with existing customers to sell additional products. The
Company monitors sales trends and is in frequent communication with customers
regarding potential new products. The Company is beginning to remanufacture
complete transmissions for sale to its independent transmission rebuilder
customers. In addition, the Company has begun offering new hard parts such as
planetary gears, sun gears and oversized pump gears. In introducing new
products, the Company focuses on components that are difficult to find and
typically require a high rate of replacement.
OTHER. The Company also intends to leverage the capability of its
electronics remanufacturing and distribution business by introducing
remanufactured electronic components to some of its other OEM customers.
ESTABLISHING NEW CUSTOMER RELATIONSHIPS
OEM CUSTOMERS. The Company believes that opportunities for growth exist
with several foreign OEMs regarding their United States based remanufacturing
programs. The Company believes that this represents an opportunity for growth
and is currently working to develop programs with certain of these OEMs. Through
the March 1998 Autocraft Acquisition the Company expanded its OEM customer base
to include Ford and certain European OEMs.
INDEPENDENT AFTERMARKET CUSTOMERS. The Company believes that its
product mix and distribution network position it to expand its Independent
Aftermarket customer base in three ways. First, although the Company's
distribution network is currently the most extensive in the drive train segment
of the automotive aftermarket, there are select opportunities for the Company to
expand to additional geographic markets. Second, through its telemarketing
capability, the Company expects to reach new Independent Aftermarket customers
in non-metropolitan areas. Third, the Company expects to attract additional
Independent Aftermarket customers with its extensive product offering and
technical support capability.
OTHER. The Company believes that its logistics services should be
attractive to new customers who recognize that outsourcing this function will
enable them to both focus on their core competencies and have an efficient
product distribution system. The Company also believes that the cost savings and
environmental benefits provided by its material recovery business will be
attractive to other OEMs.
ADDITIONAL REMANUFACTURING OPPORTUNITIES
The Company has begun to look beyond the automotive aftermarket to
identify other aftermarket segments that utilize the Company's core competency
of remanufacturing. The Company believes that other markets may have similar
characteristics to those experienced by the Company in the automotive
aftermarket. If remanufacturing opportunities are identified in these other
markets, the Company will review them and may pursue those that are expected to
be consistent with its capabilities and investment objectives.
The foregoing discussion of the Company's business strategy contains
forward looking statements. See "Forward Looking Statement Notice."
COMPETITION
The Company competes in the highly fragmented automobile aftermarket
for transmissions, engines and other drive train components, in which the
majority of industry supply comes from small local or regional participants.
Competition is based primarily on product quality, service, delivery, technical
support and price. Many of the
8
<PAGE>
Company's competitors operate only in certain geographic regions with a
limited product line. The Company is the largest participant in the
aftermarket for remanufactured drive train components, offers a more complete
line of products across a diverse customer base and has a much broader
geographic presence than many of its competitors. As a result, the Company
believes that it is well positioned to enhance its competitive position by
expanding its product line through the development of new products or
acquisition of new businesses as well as by expanding its distribution
network into new geographic markets. Nevertheless, the aftermarket for
remanufactured drive train components remains highly competitive, and certain
of the Company's competitors are larger than the Company and have greater
financial and other resources available to them than does the Company.
EMPLOYEES
As of December 31, 1998, the Company had approximately 4,800 full-time
employees. The Company believes its employee and labor relations are good. The
Company has never experienced any work stoppage and none of its employees are
members of any labor union.
ENVIRONMENTAL
The Company is subject to various evolving Federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and non-
hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances.
In connection with the Acquisitions, the Company conducted certain
investigations of the acquired companies' facilities and their compliance with
applicable environmental laws. The investigations, which included "Phase I"
assessments by independent consultants of all manufacturing and certain
distribution facilities, found that certain facilities have had or may have had
releases of hazardous materials that may require remediation and also may be
subject to potential liabilities for contamination from off-site disposal of
substances or wastes. These assessments also found that certain reporting and
other regulatory requirements, including certain waste management procedures,
were not or may not have been satisfied. Although there can be no assurance, the
Company believes that, based in part on the investigations conducted, in part on
certain remediation completed prior to the acquisitions, and in part on the
indemnification provisions of the agreements entered into in connection with the
Company's acquisitions, the Company will not incur any material liabilities
relating to these matters.
The company from which RPM acquired its assets (the "Prior RPM
Company") has been identified by the United States Environmental Protection
Agency (the "EPA") as one of many potentially responsible parties for
environmental liabilities associated with a "Superfund" site located in the area
of RPM's former manufacturing facilities and current distribution facility in
Azusa, California. The Federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"),
provides for cleanup of sites from which there has been a release or threatened
release of hazardous substances, and authorizes recovery of related response
costs and certain other damages from potentially responsible parties ("PRPs").
PRPs are broadly defined under CERCLA, and generally include present owners and
operators of a site and certain past owners and operators. As a general rule,
courts have interpreted CERCLA to impose strict, joint and several liability
upon all persons liable for cleanup costs. As a practical matter, however, at
sites where there are multiple PRPs, the costs of cleanup typically are
allocated among the PRPs according to a volumetric or other standard. The EPA
has preliminarily estimated that it will cost approximately $47 million to
construct and approximately $4 million per year for an indefinite period to
operate an interim remedial groundwater pumping and treatment system for the
part of the Superfund site within which RPM's former manufacturing facilities
and current distribution facility, as well as those of many other potentially
responsible parties, are located. The actual cost of this remedial action could
vary substantially from this estimate, and additional costs associated with the
Superfund site are likely to be assessed. The Company has significantly reduced
its presence at the site and has moved all manufacturing operations off-site.
Since July 1995, the Company's only real property interest in this site has been
the lease of a 6,000 square foot storage and distribution facility. The RPM
acquisition agreement and the leases pursuant to which the Company leased RPM's
facilities after the Company acquired the assets of RPM (the "RPM Acquisition")
expressly provide that the Company did not assume any liabilities
9
<PAGE>
for environmental conditions existing on or before the RPM Acquisition,
although the Company could become responsible for these liabilities under
various legal theories. The Company is indemnified against any such
liabilities by the seller of RPM as well as the Prior RPM Company
shareholders. There can be no assurance, however, that the Company would be
able to make any recovery under any indemnification provisions. Since the RPM
Acquisition, the Company has been engaged in negotiations with the EPA to
settle any liability that it may have for this site. Although there can be no
assurance, the Company believes that it will not incur any material liability
as a result of these environmental conditions.
CERTAIN FACTORS AFFECTING THE COMPANY
Set forth below are certain factors that may affect the Company's
business:
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company's largest customer, DaimlerChrysler, accounted for
approximately 37.2%, 32.0% and 18.2% of the Company's net sales for 1996, 1997
and 1998, respectively. As a result of the Autocraft Acquisition, Ford accounted
for 17.1% of net sales in 1998. No other customer accounted for more than 10% of
the Company's net sales during any of these years.
DaimlerChrysler and Ford, like other North American OEMs, generally
require their dealers using remanufactured products to use only those from
approved suppliers. Although the Company is currently the only factory-approved
supplier of remanufactured transmissions for Chrysler vehicles and one of two
suppliers to Ford, DaimlerChrysler and Ford (like the Company's other OEM
customers) are not obligated to continue to purchase the Company's products and
there can be no assurance that the Company will be able to maintain or increase
the level of its sales to them or that they will not approve other suppliers in
the future. In addition, within the last three years the standard new vehicle
warranty for Chrysler vehicles was reduced from seven years/70,000 miles to
three years/36,000 miles and a shorter warranty could be implemented in the
future. Any such action could have the effect of reducing the amount of warranty
work performed by Chrysler dealers. An extended, substantial decrease in orders
from DaimlerChrysler would have a material adverse effect on the Company. See
"Customers--OEM Customers."
SHORTAGE OF TRANSMISSION CORES AND COMPONENT PARTS
In its remanufacturing operations, the Company obtains used
transmissions, hard parts, engines and related components, commonly known as
"cores," which are sorted and either placed into immediate production or stored
until needed. The majority of the cores remanufactured by the Company are
obtained from OEMs or from Independent Aftermarket customers as trade-ins. The
ability to obtain cores of the types and in the quantities required by the
Company is critical to the Company's ability to meet demand and expand
production. With the increased acceptance in the aftermarket of remanufactured
assemblies, the demand for cores has increased. The Company periodically has
experienced situations in which the inability to obtain sufficient cores has
limited its ability to accept all of the orders available to it. 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 Company's OEM transmission
remanufacturing process are manufactured by the Company's OEM customers. The
Company has experienced shortages of such component parts from time to time in
the past, and future shortages could have a material adverse effect on the
Company.
ABILITY TO ACHIEVE AND MANAGE GROWTH
An important element in the Company's growth strategy is the
acquisition and integration of complementary businesses in order to broaden
product offerings, capture market share and improve profitability. There can be
no assurance that the Company will be able to identify or reach mutually
agreeable terms with acquisition candidates, or that the Company will be able to
manage additional businesses profitably or successfully integrate such
additional businesses into the Company without substantial costs, delays or
other problems. Acquisitions may involve a number of special risks, including:
initial reductions in the Company's reported operating results; diversion of
management's
10
<PAGE>
attention; unanticipated problems or legal liabilities; and a possible
reduction in reported earnings due to amortization of acquired intangible
assets in the event that such acquisitions are made at levels that exceed the
fair market value of net tangible assets. Some or all of these items could
have a material adverse effect on the Company. There can be no assurance that
businesses acquired in the future will achieve sales and profitability that
justify the investment therein. In addition, to the extent that consolidation
becomes more prevalent in the industry, the prices for attractive acquisition
candidates may increase to unacceptable levels. See "Business Strategy."
The Company's Distribution Group, which serves the Independent
Aftermarket, is composed of what were nine separate businesses, each with its
own independent distribution, planning and accounting system that did not work
with the systems of the other Distribution Group businesses. In furtherance of
the Company's business strategy to integrate these nine businesses into the ATC
Distribution Group, the Company began replacing these systems with an
enterprise-wide information system. However, as a result of system complexities
and unanticipated issues relating to the conversion of data from the old systems
to the new system, the business disruption experienced by the Distribution Group
has been greater than originally anticipated. As a result, of these problems,
the cost and the timing of the system implementation has exceed the Company's
plan. The Company expects to resolve these problems by the middle of 1999, after
which it will commence the final phase of the system implementation. However, no
assurance can be given that implementation will be completed within this time
frame.
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 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 successfully integrated into the Company's existing operations or will
be profitable. See "Business Strategy."
In addition, the Company is exploring possible additional markets for its
remanufacturing capabilities, but no assurance can be given that the Company
will pursue any such opportunity or be successful outside the automotive
aftermarket. See "Business Strategy--Additional Remanufacturing Opportunities."
INDEBTEDNESS AND LIQUIDITY
The Company had outstanding long-term indebtedness of $270.5 million at
December 31, 1998. The level of the Company's consolidated indebtedness could
have important consequences, including the following: (i) a substantial portion
of the Company's cash flow from operations must be dedicated to the payment of
principal of, and interest on, its indebtedness and will not be available for
other purposes; (ii) the ability of the Company to obtain financing in the
future for working capital needs, capital expenditures, acquisitions,
investments, general corporate purposes or other purposes may be materially
limited or impaired; (iii) the Company's level of indebtedness may reduce its
flexibility to respond to changing business and economic conditions or take
advantage of business opportunities that may arise; and (iv) the ability of the
Company to pay dividends is restricted. See Item 5. "Market for Registrant's
Common Equity and Related Stockholder Matters." In addition, the Company's bank
credit agreement contains covenants that (i) require the Company to meet certain
financial ratios and (ii) limit the Company's ability to, among other things,
incur indebtedness, make capital expenditures, make investments, engage in
mergers and dispose of assets. The indenture that governs the Company's Senior
Subordinated Notes contains, among other things, a covenant that limits the
Company's ability to incur additional indebtedness. Any default by the Company
with respect to such covenants, or any inability on the part of the Company to
obtain necessary liquidity, could have a material adverse effect on the Company.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
ENVIRONMENTAL MATTERS
The Company is subject to various evolving federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and
non-hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances. In
11
<PAGE>
connection with the Acquisitions, the Company conducted certain
investigations of the acquired companies' facilities and their compliance
with applicable environmental laws. These investigations found various
environmental matters and conditions that could, under certain circumstances,
expose the Company to liability. Furthermore, the company from which RPM
acquired its assets has been identified by the United States Environmental
Protection Agency as one of the many potentially responsible parties for
environmental liabilities associated with a "Superfund" site located in the
area of RPM's former manufacturing facilities and one of its current
distribution facilities. Although no assurances can be given, the Company
believes that it will not incur any material liabilities relating to these
matters. See "Environmental Matters."
COMPETITION
The automotive aftermarket for transmissions, engines and other drive
train products is highly fragmented and highly competitive. There can be no
assurance that the Company will compete successfully with other companies in its
industry segment, some of which are larger than the Company and have greater
financial and other resources available to them than does the Company. See
"Competition."
CONTROL OF THE COMPANY; ANTI-TAKEOVER MATTERS
The Company is controlled by Aurora Equity Partners L.P. and Aurora
Overseas Equity Partners I, L.P. (collectively, the "Aurora Partnerships"),
which hold approximately 55% of the voting power in the Company (through direct
ownership and certain voting arrangements). Therefore, the Aurora Partnerships
will be able to elect all of the directors of the Company and approve or
disapprove any matter submitted to a vote of the Company's stockholders. As a
result of the Aurora Partnerships' substantial ownership interest in the Common
Stock, it may be more difficult for a third party to acquire the Company. A
potential buyer would likely be deterred from any effort to acquire the Company
absent the consent of the Aurora Partnerships or their participation in the
transaction. The general partner of each of the Aurora Partnerships is
controlled by Richard R. Crowell, Gerald L. Parsky and Richard K. Roeder, each
of whom is a director of the Company. The Indentures governing the Company's 12%
Senior Subordinated Notes due 2004 (the "Senior Notes") contain provisions that
would allow a holder to require the Company to repurchase such holder's Senior
Notes at a cash price equal to 101% of the principal amount thereof, together
with accrued interest, upon the occurrence of a "change of control" of the
Company (as defined therein), which could also have the effect of discouraging a
third party from acquiring the Company. See Item 12. "Security Ownership of
Certain Beneficial Owners and Management."
In addition, the Company's Board of Directors is authorized, subject to
certain limitations prescribed by law, to issue up to 2,000,000 shares of
preferred stock in one or more classes or series and to fix the designations,
powers, preferences, rights, qualifications, limitations or restrictions,
including voting rights, of those shares without any further vote or action by
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate transactions, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of preferred stock.
12
<PAGE>
ITEM 2. PROPERTIES
The Company conducts its remanufacturing and other non-distribution
operations at the following facilities:
<TABLE>
<CAPTION>
LEASE
APPROXIMATE EXPIRATION
LOCATION SQ. FEET DATE PRODUCTS PRODUCED/SERVICES PROVIDED
- ----------------------- ---------- ---------- -----------------------------------
<S> <C> <C> <C>
Rancho Cucamonga, CA 153,000 2002 torque converters
Joplin, MO 264,000 2008 transmissions
Springfield, MO 280,800 2004 transmissions and engines
Springfield, MO 200,000 2006 core return center
Springfield, MO 30,000 (1) torque converters
Springfield, MO 34,000 (1) cleaning and testing equipment
Gastonia, NC 130,000 2000 transmissions and valve bodies
Mahwah, NJ 160,000 2003 transmissions, transfer cases and assorted components
Dayton, OH 42,000 2004 torque converters
Oklahoma City, OK 13,400 1999 radios, instrument and display clusters, and
cellular products
Oklahoma City, OK 90,000 (2) transmissions
Oklahoma City, OK 98,000 owned material recovery
Oklahoma City, OK 207,000 owned transmissions
Carrollton, TX 39,000 2006 radios and instrument and display clusters
Houston, TX 50,000 2002 engine control modules and radios
Grantham, England 120,000 owned engines and related components
Mexicali, Mexico 77,100 (3) torque converters
</TABLE>
- ------------
(1) Terminable by either party on 30 days' notice.
(2) Terminable by either party on six months' notice.
(3) During the second quarter of 1999 this operation will be moved to a new
43,800 square foot facility with a lease term expiring in 2007.
The Company distributes transmission repair kits, soft parts, torque
converters and drive train hard parts and/or engines to non-OEM customers
through 65 local and seven regional distribution centers in the United States
and Canada, all of which are leased. The local distribution centers generally
range in size from 5,000 to 20,000 square feet and are typically leased for
five-year terms with a portion of the leases expiring every year. The regional
distribution centers range in size from 14,000 to 168,000 square feet and have
lease expiration dates at various times through 2012. The Company leases a
220,000 square foot facility in Fort Worth, Texas from which it distributes
cellular telephones for AT&T Wireless. This lease expires in 2008. The Company
also leases assorted warehouses and space for its corporate offices and computer
services.
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 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. Historically, the Company has been able to renew leases or
find alternate space upon the expiration of its leases without material
interruption in the subject facilities' operations. Many of the Company's leases
are renewable at the option of the Company.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company has been and is involved in various
legal proceedings. Management believes that all of such litigation is routine in
nature and incidental to the conduct of its business, and that none of such
13
<PAGE>
litigation, if determined adversely to the Company, would have a material
adverse effect, individually or in the aggregate, on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "ATAC" since the IPO in December 1996. As of March 4,
1999, there were approximately 101 record holders of its Common Stock. The
following table sets forth for the periods indicated the range of high and low
sale prices of the Common Stock as reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
1997
<S> <C> <C>
First quarter........................................... 19-5/8 14-3/8
Second quarter.......................................... 23 14-3/4
Third quarter........................................... 27-1/4 18-1/2
Fourth quarter.......................................... 24-3/4 15-1/2
1998
First quarter........................................... 27-1/4 17
Second quarter.......................................... 23-7/16 16-1/4
Third quarter........................................... 18-1/2 9-1/8
Fourth quarter.......................................... 11-1/2 3-7/8
</TABLE>
On March 4, 1999, the last sale price of the Common Stock, as reported by
Nasdaq, was $5-7/8 per share.
The Company has not paid cash dividends on its Common Stock to date.
Because the Company currently intends to retain any earnings to provide funds
for the operation and expansion of its business and for the servicing and
repayment of indebtedness, the Company does not intend to pay cash dividends on
its Common Stock in the foreseeable future. Furthermore, as a holding company
with no independent operations, the ability of the Company to pay cash dividends
is dependent upon the receipt of dividends or other payments from its
subsidiaries. Under the terms of the Indentures governing the Senior Notes, the
Company is not permitted to pay any dividends on its Common Stock unless certain
financial ratio tests are satisfied. In addition, the Company's Credit Facility
contains certain covenants that, among other things, prohibit the payment of
dividends by the Company. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
Any determination to pay cash dividends on the Company's Common Stock in the
future will be at the sole discretion of the Company's Board of Directors.
During 1998, the Company did not issue any securities that were not
registered under the Securities Act of 1933, as amended.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below with respect to the
statements of income data for the years ended December 31, 1996, 1997 and 1998
and the balance sheet data at December 31, 1997 and 1998 are derived from the
Consolidated Financial Statements of the Company that have been audited by Ernst
& Young LLP, independent auditors, and are included elsewhere herein, and are
qualified by reference to such financial statements and notes related thereto.
The selected financial data with respect to the statement of income data for the
seven months ended July 31, 1994, the five months ended December 31, 1994 and
for the year ended December 31, 1995 and the balance sheet data at December 31,
1994, 1995 and 1996, are derived from the audited Combined Financial Statements
of the Predecessor Companies and the Consolidated Financial Statements of the
Company that have been audited by Ernst & Young LLP, independent auditors, but
are not included herein. The data provided should be read in conjunction with
the Consolidated Financial Statements, related notes and other financial
information included in this Annual Report.
<TABLE>
<CAPTION>
COMBINED
-------- CONSOLIDATED
FOR THE ------------------------------------------------------------------
SEVEN MONTHS FOR THE FIVE
ENDED MONTHS ENDED FOR THE YEAR ENDED DECEMBER 31,
JULY 31, DECEMBER 31, ------------------------------------------------
1994(1) 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ---------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales................... $90,056 $67,736 $190,659 $272,878 $346,110 $486,773
Cost of sales............... 52,245 40,112 115,499 166,810 212,416 348,443
------ -------- --------- -------- -------- --------
Gross profit................ 37,811 27,624 75,160 106,068 133,694 138,330
Selling, general and
administrative expenses... 20,475 14,206 38,971 55,510 73,768 109,357
Amortization of intangible
assets.................... 16 1,210 3,308 3,738 4,501 6,806
Special charges............. -- -- -- -- -- 8,744
---------- ---------- ---------- ---------- ---------- ---------
Operating income............ 17,320 12,208 32,881 46,820 55,425 13,423
Interest expense (income), net (158) 6,032 16,915 19,106 16,910 23,714
Income tax expense
(benefit)(2)................. (5) 2,565 6,467 11,415 15,512 (3,176)
----------- --------- ----------- -------- --------- ----------
Income (loss) before
extraordinary items (3)(4).. $ 17,483 3,611 9,499 16,299 23,003 (7,115)
Preferred stock dividends... 853 2,093 2,222 -- --
---------- ----------- --------- ---------- ----------
Income (loss) before
extraordinary items
available to common
stockholders.............. $ 2,758 $ 7,406 $ 14,077 $ 23,003 $ (7,115)
======== ========= ======== ======== =========
Earnings (loss) per share
before extraordinary
items (5).................. $ 0.65 $ 1.02 $ 1.19 $ (0.36)
Shares used in computation
of earnings per share
before extraordinary
items (5).................. 14,616 15,918 19,335 19,986
OTHER DATA:
Capital expenditures (6).... $ 1,850 $ 1,336 $ 5,187 $ 7,843 $ 8,682 $ 23,525
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED
-------------------------------------------------------------------
DECEMBER 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 40,499 $ 60,012 $103,371 $ 98,523 $ 87,934
Property, plant and equipment, net.......... 6,196 10,784 17,482 24,414 63,903
Total assets................................ 187,293 247,932 320,747 368,677 531,905
Long-term liabilities (7)................... 121,483 165,724 167,233 152,571 258,042
Preferred stock............................. 20,853 22,946 -- -- --
Common stockholders' equity................. 22,757 30,188 105,832 175,429 168,011
</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. 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 prior to the Initial Acquisitions; therefore, for federal and
state income tax purposes, any income or loss generally was not taxed to
these companies but was reported by their respective stockholders. A pro
forma provision for taxes based on income reflecting the estimated
provision for federal and state income taxes that would have been provided
had these companies been C Corporations and included in consolidated
returns with the Company was $7,004 for the seven months ended July 31,
1994.
(3) Income before extraordinary item for the year ended December 31, 1997
excludes an extraordinary item in the amount of $3,749 ($6,269 less related
income tax benefit of $2,520). This amount is comprised of (i) a $3,425
charge resulting from the early redemption of $40,000 in principal amount
of the Company's Senior Subordinated Notes in February 1997, which included
the payment of a 12.0% early redemption premium and the write-off of
related debt issuance costs and (ii) a charge of $324 for the write-off of
previously capitalized debt issuance costs in connection with the
termination of the Company's previous revolving credit facility.
(4) Loss before extraordinary item for the year ended December 31, 1998
excludes an extraordinary item in the amount of $703 ($1,172 less related
income tax benefit of $469). This amount is comprised of (i) a $340 charge
resulting from the early redemption of $9,615 in principal amount of the
Company's Senior Subordinated Notes in September and October of 1998, which
included the payment of a 4.0% early redemption premium and the write-off
of related debt issuance costs, and (ii) a charge of $363 for the write-off
of previously capitalized debt issuance costs in connection with the
termination of the Company's previous revolving credit facility.
(5) See Note 14 to Consolidated Financial Statements for a description of the
computation of earnings per share.
(6) Excludes capital expenditures made by certain of the Company's subsidiaries
prior to such subsidiaries' respective acquisitions and any capital
expenditures made in connection with such acquisitions.
(7) Includes deferred tax liabilities of $1,438, $3,478, $5,252, $8,044 and
$11,492 at December 31, 1994, 1995, 1996, 1997 and 1998, respectively.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and notes thereto included
elsewhere in this Annual Report. See Item 8. "Consolidated Financial Statements
and Supplementary Data."
Readers are cautioned that the following discussion contains certain
forward-looking statements and should be read in conjunction with the
"Forward-Looking Statement Notice" appearing at the beginning of this Annual
Report.
OVERVIEW
The Company's revenues are generated primarily through the sale of
drive train products used in the repair of vehicles in the automotive
aftermarket. Since its formation, the Company has benefited from a combination
of internal and acquisition-related revenue growth, achieving compounded annual
growth in revenue of approximately 32.5% from 1994 through 1998.
From 1994 through 1998, the Company's revenues from sales to the OEM
segment increased by 31.2% compounded annually from $85.3 million to $253.0
million due to increased sales to existing customers, including DaimlerChrysler,
and the addition of Ford and General Motors as customers. During the same
period, revenues from sales to the Independent Aftermarket segment increased by
26.7% compounded annually from $72.5 million to $186.7 million. This growth was
due to acquisitions, geographic expansion through the addition of distribution
centers, a broadened product line, effective sales efforts, and the development
of new customers.
The Company regularly evaluates strategic acquisition opportunities in
the automotive aftermarket and expects to continue to do so in the future. On
March 6, 1998, the Company completed the acquisition of substantially all the
assets of the OEM Division of Autocraft. See Item 1. "Business."
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 remained relatively constant from 1994 through 1997. The
increased costs during 1998 were in part related to non-recurring costs totaling
$12.7 million, which are described below. Excluding such non-recurring costs,
cost of goods sold in 1998 as a percentage of sales would have been 69.0% as
compared to 61.4% in 1997. The increase as a percentage of net sales was
primarily due to changes in mix within the OEM segment and costs relating to the
implementation of the Independent Aftermarket segment's enterprise-wide
information system.
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
22.0% in 1994 to 21.3% in 1997 principally due to the effect of spreading
certain fixed costs over a larger revenue base. During 1998, SG&A expense as a
percentage of sales increased to 22.5% primarily due to non-recurring costs of
$7.5 million as described below. Excluding such non-recurring costs, SG&A
expense in 1998 would have been 20.9% as a percentage of net sales.
17
<PAGE>
Income (loss) before income taxes and extraordinary items for 1998 was
negatively impacted by costs that management believes are non-recurring and
other special charges totaling $30.1 million before income taxes ($18.1 million,
net of income taxes). The table below sets out such costs and charges by each
reportable segment expressed in millions of dollars:
<TABLE>
<CAPTION>
INDEPENDENT
OEM AFTERMARKET UNALLOCATED TOTAL
------- ------------ ----------- ------
<S> <C> <C> <C> <C>
NON-RECURRING COSTS:
Core liability.................................... $ 5.2 $ - $ - $ 5.2
Expenses related to start-up costs and
internal use software.......................... 0.4 2.4 0.3 3.1
Changes in Company policies related to employee
benefits and warranty.......................... 0.8 1.1 - 1.9
Changes in estimates of inventory and
other reserves................................. 3.6 5.8 0.6 10.0
Loss on sale of Mascot............................ - - 1.2 1.2
------- ------- ------- ------
10.0 9.3 2.1 21.4
SPECIAL CHARGES:
Restructuring..................................... 0.6 1.6 1.6 3.8
Facility consolidation............................ 2.0 0.5 - 2.5
Non-income related taxes.......................... 2.4 - - 2.4
------- ------- ------- ------
5.0 2.1 1.6 8.7
------- ------- ------- ------
Total charges before income tax benefit........... 15.0 11.4 3.7 30.1
Income tax benefit................................ (6.0) (4.6) (1.4) (12.0)
------- ------- ------- ------
Total charges, net................................ $ 9.0 $ 6.8 $ 2.3 $18.1
======= ======= ======== ======
</TABLE>
NON-RECURRING COSTS. During 1998, the Company recorded charges for
non-recurring costs totaling $21.4 million. Of these charges, $10.0 million
related to changes in certain of its estimates. The Company's implementation of
an enterprise-wide information system in its Independent Aftermarket segment
provided for access to inventory information previously unavailable. Based in
part on this new information, the Company refined its methodologies for the
determination of inventory reserve requirements and, as a result, recorded a
charge of $6.7 million to increase its inventory reserves. Similarly, the
Company recorded increases of $3.3 million in certain of its other reserves. The
Company believes that these charges were one-time in nature due to the
application of new information and estimate methodologies and intends to
consistently apply them in the future. Additionally, the Company recorded
reserves of $5.2 million for a liability related to the purchase of excess
cores.
SPECIAL CHARGES. In 1998, the Company recorded special charges of $8.7
million, primarily related to certain initiatives designed to improve operating
efficiencies and reduce costs. The special charges consisted of (i)
restructuring costs of $3.8 million consisting principally of employee severance
costs and certain other exit costs and (ii) facility consolidation costs of $2.5
million relating principally to idle plant capacity costs. The Company also
incurred a fourth quarter charge of $2.4 million for non-income related taxes
due to a state's 1998 interpretation of its tax law. The interpretation was
required to be applied retroactively to previous periods. The Company expects to
incur approximately $4 million of additional special charges during 1999.
Excluding the 1998 costs and charges, income before income taxes and
extraordinary items would have been $19.8 million in 1998 as compared to $38.5
million in 1997. This decrease was primarily attributable to (i) a decline in
demand for remanufactured Chrysler transmissions and related reduction of
inventory at DaimlerChrysler and (ii) problems related to the Company's
implementation of the enterprise-wide information system in the Independent
Aftermarket segment.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial statement data
expressed in millions of dollars and as a percentage of net sales.
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------
1996 1997 1998
------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales.............................. $272.9 100.0% $346.1 100.0% $486.8 100.0%
Cost of sales.......................... 166.8 61.1 212.4 61.4 348.5 71.6
------- ------ ------- ------ ------- -------
Gross profit........................... 106.1 38.9 133.7 38.6 138.3 28.4
SG&A expenses.......................... 55.5 20.3 73.8 21.3 109.4 22.5
Amortization of intangible assets...... 3.8 1.4 4.5 1.3 6.8 1.3
Special charges........................ - - - - 8.7 1.8
------- ------ ------- ------ ------- -------
Operating income....................... 46.8 17.2 55.4 16.0 13.4 2.8
Interest expense, net and other........ 19.1 7.0 16.9 4.9 23.7 4.9
------- ------ ------- ------ ------- -------
Income (loss) before income taxes
and extraordinary items.............. 27.7 10.2 38.5 11.1 (10.3) (2.1)
Income tax expense (benefit)........... 11.4 4.2 15.5 4.5 (3.2) (.7)
------- ------ ------- ------ ------- -------
Income (loss) before extraordinary items $ 16.3 6.0% $ 23.0 6.6% $( 7.1) (1.4)%
====== ====== ====== ====== ======= ======
</TABLE>
The Company has two reportable segments: the OEM segment and the
Independent Aftermarket segment. The OEM segment consists of four operating
units that sell remanufactured transmissions directly to automobile
manufacturers, principally DaimlerChrysler Corporation, Ford Motor Company,
General Motors Corporation and several foreign OEMs, for use as replacement
parts by their domestic dealers during the warranty and post-warranty periods
following the sale of a vehicle. In addition, the OEM segment sells select
remanufactured engines to DaimlerChrysler and certain European OEMs and a broad
range of remanufactured domestic and foreign engines to general repair shops and
retail automotive parts stores. The Company's Independent Aftermarket segment
primarily sells transmission repair kits, soft parts, remanufactured torque
converters and new and remanufactured hard parts used in drive train repairs to
independent transmission rebuilders for repairs generally during the period
following the expiration of the vehicle warranty. To a lesser extent, the
Independent Aftermarket segment also sells its products to general repair shops,
wholesale distributors and retail automotive parts stores. In addition to the
OEM and Independent Aftermarket segments, the Company has three operating units
reflected as "other" segments due to their relative size, all of which were
acquired in the Autocraft Acquisition: an electronic parts remanufacturing and
distribution business; warehouse and distribution services for AT&T Wireless
(the cellular telephone subsidiary of AT&T); and a material recovery processing
business for Ford. None of these operating units meet the quantitative
thresholds for determining reportable segments. See Item 8. "Financial
Statements and Supplementary Data--Note 17."
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Income (loss) before extraordinary items decreased $30.1 million from
$23.0 million in 1997 to a $7.1 million loss in 1998. Excluding the
non-recurring costs and other special charges, income before extraordinary items
would have been $11.0 million. This decrease was primarily attributable to (i) a
decline in demand for remanufactured Chrysler transmissions and related
reduction of inventory at DaimlerChrysler and (ii) problems related to the
Company's implementation of the enterprise-wide information system in the
Independent Aftermarket segment. On a per share basis, income (loss) before
extraordinary items decreased from $1.19 per diluted share in 1997 to a loss of
$0.36 per share in 1998.
NET SALES. Net sales increased $140.7 million, or 40.7%, from $346.1
million in 1997 to $486.8 million in 1998. Of this increase, $131.8 million
related to the March 1998 Autocraft Acquisition
19
<PAGE>
and $32.3 million related to a full year's net sales for the 1997
Acquisitions, partially offset by a $23.4 million decline in sales by the
Company's other businesses.
GROSS PROFIT. Gross profit increased $4.6 million, or 3.4%, from $133.7
in 1997 to $138.3 million in 1998. As a percentage of net sales, gross profit
decreased from 38.6% to 28.4% between the two periods. The decrease in gross
profit margins was primarily related to (1) changes in OEM segment sales mix and
(2) system complexities and problems with data conversion encountered during the
implementation of the Independent Aftermarket segment's enterprise-wide
information system, which resulted in an internalization of management's focus
and hampered inventory management functions, pricing initiatives and sales
growth efforts. In addition, the Company incurred $12.7 million of non-recurring
costs primarily consisting of (i) $6.7 million for increased inventory reserves
and (ii) $5.2 million for a liability related to the purchase of excess cores.
Excluding these costs, gross profit in 1998 would have been $151.0 million or
31.0% of net sales.
SG&A EXPENSES. SG&A expenses increased $35.6 million, or 48.2%, from
$73.8 million in 1997 to $109.4 million in 1998. As a percentage of net sales,
SG&A expenses increased from 21.3% to 22.5% between the two periods. During
1998, the Company incurred $7.5 million of non-recurring costs including (i)
$3.0 million in increased changes in estimates and other reserves, (ii) $2.7
million related to start-up costs and internal use software and (iii) $1.8
million related to changes in employee benefits and warranty policies. Excluding
these costs, SG&A expenses in 1998 would have been $101.9 million or 20.9% of
net sales as compared to 21.3% in 1997. On an absolute dollar basis, the
increase is primarily attributable to additional SG&A expenses for the Autocraft
businesses acquired in March 1998 and a full year's expense for the 1997
Acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $2.3 million, or 51.1%, from $4.5 million in 1997 to $6.8 million in
1998. The increase was primarily attributable to the March 1998 Autocraft
Acquisition.
SPECIAL CHARGES. During 1998, the Company incurred $8.7 million of
special charges. These charges consisted of (i) $3.6 million of charges during
the second quarter in connection with the consolidation of certain manufacturing
plants and restructuring charges and (ii) $5.1 million incurred primarily
relating to restructuring costs and a state's interpretation of its tax law that
subjected a portion of the OEM segment's operations over the past four years to
a state tax for the first time.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations decreased $42.0 million, or 75.8%, from
$55.4 million in 1997 to $13.4 million in 1998.
INTEREST EXPENSE, NET AND OTHER. Interest expense, net and other
increased $6.8 million, or 40.2%, from $16.9 million in 1997 to $23.7 million in
1998. The increase primarily resulted from borrowing under the Company's $120.0
million term loan credit facility in March 1998 to finance the Autocraft
Acquisition and increased borrowings under the Company's $100.0 million
revolving credit facility (such term loan and revolving facilities are referred
to as the "Credit Facility") partially offset by the early redemption in
September and October 1998 of $9.6 million in principal amount of Senior Notes.
In addition, the Company recognized a $1.2 million loss on the sale of Mascot.
EXTRAORDINARY ITEMS. In 1997, an extraordinary item in the amount of
$3.8 million ($6.3 million before related income tax benefit of $2.5 million)
was recorded. This amount is comprised of (i) a $3.4 million charge resulting
from the early redemption of $40.0 million of the Senior Notes in February 1997,
which included the payment of a 12.0% early redemption premium and the write-off
of related debt issuance costs and (ii) a charge of approximately $0.4 million
for the write-off of previously capitalized debt issuance costs in connection
with the termination of the Company's previous revolving credit facility.
In 1998, an extraordinary item in the amount of $0.7 million ($1.2
million before related income tax benefit of $0.5 million) was recorded. This
amount was comprised of (i) a $0.4 million charge for the write-
20
<PAGE>
off of deferred financing fees in connection with the Company's new Credit
Facility and (ii) a $0.3 million charge resulting from the repurchase of $9.6
million in principal amount of the Senior Notes in open market transactions.
OEM SEGMENT
The following table presents net sales, special charges and segment
profit expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1997 1998
------------------- ----------------
<S> <C> <C> <C> <C>
Net sales........................ $ 180.3 100.0% $ 253.0 100.0%
======= ===== ======= =====
Special charges.................. $ -- --% $ 5.0 2.0%
======= ===== ======= =====
Segment profit................... $ 32.7 18.1% $ 5.5 2.2%
======= ===== ======= =====
</TABLE>
NET SALES. Net sales increased $72.7 million, or 40.3%, from $180.3
million in 1997 to $253.0 million in 1998. This increase was due to the March
1998 Autocraft Acquisition, which accounted for approximately $91.5 million in
incremental net sales, partially offset by an $18.8 million decline in sales to
existing customers, particularly DaimlerChrysler. As previously reported, the
demand for Chrysler transmissions declined in 1998 primarily due to (i) moderate
weather during the winter of 1997-1998 and (ii) improved quality of late model
original equipment front wheel drive transmissions. The decline in demand led to
reduced inventory requirements at DaimlerChrysler. In order to assist
DaimlerChrysler in meeting these inventory requirements by the end of 1998, the
Company significantly reduced its shipments to DaimlerChrysler during the second
half of the year. The Company believes that the reduction in inventory levels is
complete. The Company also believes that reduced demand for Chrysler front wheel
drive transmissions due to improved quality will be mostly offset by demand for
Chrysler rear wheel drive transmissions, which the Company began remanufacturing
during the third quarter of 1998. Sales to DaimlerChrysler accounted for 32.0%
and 18.2% of the Company's revenues (61.4% and 34.9% of segment revenues) in
1997 and 1998, respectively. Sales to Ford, (which became a customer in March
1998) accounted for 17.1% of the Company's revenues (32.9% of segment revenues)
in 1998.
SPECIAL CHARGES. The OEM segment incurred $5.0 million of special
charges in 1998. These charges consisted of (i) $2.6 million incurred during the
second quarter of the year in connection with the consolidation of certain
manufacturing plants and (ii) $2.4 million incurred in the fourth quarter
relating to a state's interpretation of its tax law that subjected a portion of
the segment's operations over the past four years to a state tax for the first
time.
SEGMENT PROFIT. Segment profit decreased $26.9 million, or 82.3%, from
$32.7 million (18.1% of OEM net sales) in 1997 to $5.5 million (2.2% of OEM net
sales) in 1998. Excluding the special charges of $5.0 million and the
non-recurring costs of $10.0 million discussed above, segment profit in 1998
would have been $20.5 million (8.1% of segment net sales). The decline was
primarily the result of changes in the sales mix in the OEM segment and to the
lower fixed cost absorption as a result of decreased DaimlerChrysler sales in
1998.
21
<PAGE>
INDEPENDENT AFTERMARKET SEGMENT
The following table presents net sales, special charges and segment
profit (loss) expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1997 1998
------------------- ----------------
<S> <C> <C> <C> <C>
Net sales........................ $ 158.4 100.0% $ 186.7 100.0%
======= ===== ======= =====
Special charges.................. $ -- --% $ 2.1 1.1%
======= ===== ======= =====
Segment profit (loss) ........... $ 3.6 2.3% $ (22.1) (11.8)%
======= ===== ======= =====
</TABLE>
NET SALES. Net sales increased $28.3 million, or 17.9%, from $158.4
million in 1997 to $186.7 million in 1998. The increase related to a full year's
net sales from the three Independent Aftermarket companies acquired in 1997 of
$32.3 million.
Sales for the remainder of the segment's units were relatively flat year over
year.
SPECIAL CHARGES. The Independent Aftermarket segment incurred $2.1
million of special charges in 1998. These charges consisted of (i) $1.6 million
for restructuring charges ($0.3 million in the second quarter and $1.3 million
in the fourth quarter), which included severance and certain other exit costs,
and (ii) $0.5 million incurred in the fourth quarter relating to facility
consolidation.
SEGMENT PROFIT (LOSS). Segment profit decreased $25.7 million from $3.6
million (2.3% of segment net sales) in 1997 to a $22.1 million loss in 1998.
Excluding the special charges of $2.1 million and the non-recurring costs of
$9.3 million discussed above, segment loss would have been $10.7 million in
1998. The decline was primarily the result of problems relating to the
enterprise-wide information systems implementation and the continued operational
consolidation from nine separate entities into one during 1998.
OTHER OPERATING UNITS
The following table presents net sales and segment profit (loss)
expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1997 1998
------------------- ----------------
<S> <C> <C> <C> <C>
Net sales........................ $ 7.4 100.0% $ 47.1 100.0%
======= ===== ======= =====
Segment profit (loss)............ $ (0.2) (2.7)% $ 2.3 4.9%
======= ===== ======= =====
</TABLE>
NET SALES. Net sales increased $39.7 million, or 536.5%, from $7.4
million in 1997 to $47.1 million in 1998. The increase was attributable to
sales by the electronic components, logistics services and material recovery
business units, which were acquired in March 1998 as part of the Autocraft
Acquisition. See Item 1. "Business--Other Operating Units" for a description
of these business units. Prior to the Autocraft Acquisition, revenue in this
segment was entirely attributable to Mascot, the Company's Canadian
heavy-duty truck remanufacturing operation, which was sold in February 1999.
SEGMENT PROFIT (LOSS). Segment profit increased $2.5 million from a
loss of $0.2 million in 1997 to $2.3 million in 1998. The increase was primarily
the result of sales volume from the Autocraft Acquisition.
22
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Income before extraordinary items increased $6.7 million, or 41.1%,
from $16.3 million in 1996 to $23.0 million in 1997. Net sales increased 26.8%,
from $272.9 million in 1996 to $346.1 million in 1997, primarily due to sales
generated by the 1997 Acquisitions as well as increased sales volumes to OEM
customers. In general, cost of goods sold and SG&A expenses increased
proportionally.
On a per share basis, income before extraordinary items increased from
$1.02 per diluted share in 1996 to $1.19 per diluted share in 1997. The number
of shares used in the per share calculations were 15.9 million in 1996 and 19.3
million in 1997. The increase in shares resulted primarily from the Company's
public offering of Common Stock in October 1997.
NET SALES. Net sales increased $73.2 million, or 26.8%, from $272.9
million in 1996 to $346.1 million in 1997. Of this increase, $23.2 million was
due to internal growth and $50.0 million was due to the incremental net sales
generated by the 1997 Acquisitions. Net sales to DaimlerChrysler represented
37.2% of total net sales in 1996, as compared to 32.0% in 1997.
GROSS PROFIT. Gross profit as a percentage of net sales remained
relatively constant at 38.6% in 1997 as compared to 38.9% in 1996.
SG&A EXPENSES. SG&A expenses increased $18.3 million, or 33.0%, from
$55.5 million in 1996 to $73.8 million in 1997. As a percentage of net sales,
SG&A expenses increased from 20.3% to 21.3% between the two periods. The
increase in SG&A expenses was primarily due to the ongoing incremental expenses
of the 1996 and 1997 Acquisitions, certain enhancements to the Company's
infrastructure (including additional management and information systems) and
additional selling and other variable overhead costs associated with the higher
sales volume (including increased production capacity). The increase in SG&A
expenses as a percentage of net sales was primarily attributable to (i) the
deferred compensation expense described below, (ii) certain enhancements to the
Company's infrastructure (including additional management and information
systems) and (iii) the additional ongoing expenses associated with being a
publicly held company.
Included in SG&A expenses were non-cash charges totaling $0.5 million
in 1996 and $1.8 million in 1997, representing the pro rata portion for each
year of deferred compensation expense relating to stock options.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased $0.7 million, or 18.4%, from $3.8 million in 1996 to $4.5 million in
1997. The increase resulted from the additional intangible assets arising from
the 1996 and 1997 Acquisitions.
INCOME FROM OPERATIONS. Principally as a result of the factors
described above, income from operations increased $8.6 million, or 18.4%, from
$46.8 million in 1996 to $55.4 million in 1997.
INTEREST EXPENSE, NET AND OTHER. Interest expense, net and other
decreased $2.2 million, or 11.5%, from $19.1 million in 1996 to $16.9 million in
1997. The lower interest resulted from the net effect of the early redemption in
February 1997 of $40.0 million of the Senior Notes offset to some extent by
increased borrowings under the Credit Facility. The Credit Facility carries a
significantly lower effective interest rate than did the Senior Notes.
EXTRAORDINARY ITEMS. An extraordinary item in the amount of $3.8
million ($6.3 million before related income tax benefit of $2.5 million) was
recorded in 1997. This amount was comprised of (i) a $3.4 million charge
resulting from the early redemption of $40.0 million of the Senior Notes in
February 1997, which included the payment of a 12.0% early redemption premium
and the write-off of related debt issuance costs and (ii) a charge of $0.4
million for the write-off of previously capitalized debt issuance costs in
connection with the termination of the Company's previous revolving credit
facility.
23
<PAGE>
OEM SEGMENT
The following table presents net sales and segment profit expressed in
millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1997
------------------- ----------------
<S> <C> <C> <C> <C>
Net sales........................ $ 159.5 100.0% $ 180.3 100.0%
======= ===== ======= =====
Segment profit................... $ 26.9 16.9% $ 32.7 18.1%
======= ===== ======= =====
</TABLE>
NET SALES. OEM segment net sales increased $20.8 million, or 13.0%,
from $159.5 million in 1996 to $180.3 million in 1997. The increase primarily
related to internal sales growth within the OEM segment with sales to
DaimlerChrysler representing 37.2% and 32.0% of the Company's revenues (63.6%
and 61.4% of segment revenues) in 1996 and 1997, respectively.
SEGMENT PROFIT. OEM segment profit as a percentage of OEM net sales
improved slightly from 16.9% to 18.1% between the two periods. The increase was
the result of increased segment net sales with slight improvement in gross
profit margins, as a percentage of segment net sales, due to the improvement of
fixed cost absorption driven by increased sales volume.
INDEPENDENT AFTERMARKET SEGMENT
The following table presents net sales and segment profit expressed in
millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1997
------------------- ----------------
<S> <C> <C> <C> <C>
Net sales........................ $ 107.0 100.0% $ 158.4 100.0%
======= ===== ======= =====
Segment profit................... $ 2.0 1.9% $ 3.6 2.3%
======= ===== ======= =====
</TABLE>
NET SALES. Independent Aftermarket segment net sales increased $51.4
million, or 48.0%, from $107.0 million in 1996 to $158.4 million in 1997. The
increase was primarily due to (i) $13.0 million from internal growth and (ii)
$35.1 million from incremental net sales generated by the Independent
Aftermarket segment companies acquired in 1996 and 1997.
SEGMENT PROFIT. Independent Aftermarket segment profit increased $1.6
million from $2.0 million in 1996 to $3.6 million in 1997. The increase was
primarily the result of increased sales volume.
24
<PAGE>
OTHER OPERATING UNITS
The following table presents net sales and segment profit (loss)
expressed in millions of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1997
------------------- ----------------
<S> <C> <C> <C> <C>
Net sales........................ $ 6.4 100.0% $ 7.4 100.0%
======= ===== ======= =====
Segment profit (loss)............ $ (0.3) (4.7)% $ (0.2) (2.7)%
======= ===== ======= =====
</TABLE>
NET SALES. Other operating units' net sales increased $1.0 million, or
15.6%, from $6.4 million in 1996 to $7.4 million in 1997. The increase was due
to increased sales by Mascot.
SEGMENT PROFIT (LOSS). Other operating units profit remained relatively
constant between years.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW & CAPITAL EXPENDITURES
The Company had total cash and cash equivalents on hand of $0.6 million
at December 31, 1998, representing an increase in net cash of $0.5 million in
1998. Net cash provided by operating activities was $26.9 million for 1998. Net
cash used in investing activities was $137.8 million for the period, including
$115.0 million for the Autocraft Acquisition and $23.5 million in capital
expenditures, primarily for equipment purchases, software and implementation
costs and leasehold improvements. Net cash provided by financing activities was
$111.3 million, including net borrowings of $127.3 million under the Credit
Facility partially offset by $10.0 million used to redeem Senior Notes.
The Company's capital expenditures in 1998 were $23.5 million. This
included (i) $9.3 million of expenditures in connection with the ongoing
implementation of the Distribution Group's enterprise-wide information system,
(ii) $6.0 million for various improvements to businesses and facilities
associated with the Autocraft Acquisition and (iii) $4.9 million for additional
transmission and engine remanufacturing equipment and other improvements to
support planned increases in production capacity and efficiencies in certain of
the Company's remanufacturing plants.
The Company has budgeted $19.8 million for capital expenditures during
1999. This amount includes (i) $13.8 million for replacement and additional
remanufacturing equipment to support planned increases in production capacity
and efficiencies in the Company's various facilities and (ii) $6.0 million for
the implementation of the Distribution Group's enterprise-wide information
system.
As part of the acquisition of ATS, the Company is required to make
additional payments on each of the first eight anniversaries of the closing
date. As of December 31, 1998, the Company had paid $1.0 million of these
additional payments. Substantially all of the additional payments to be made in
the future, which will aggregate to approximately $18.0 million (present value
of $13.7 million as of December 31, 1998), are contingent upon the attainment of
certain sales levels by ATS, which the Company believes are more likely than not
to be attained.
FINANCING
The Company raised total net proceeds of $61.6 million in the IPO and
concurrent private placement of Common Stock in December 1996 and an additional
$47.9 million in the secondary offering in October 1997. From the Company's
inception in July 1994 to December 1996, the Company funded its
25
<PAGE>
operations and investments in property and equipment, including acquisitions,
through the issuance of Senior Notes totaling $162.4 million, the private
sale of preferred stock of $20.0 million and Common Stock of $20.0 million,
and to a lesser extent through cash provided by operating activities and
revolving bank lines. In December 1996, the preferred stock and $40.0 million
in principal amount of the Senior Notes were redeemed with proceeds from the
IPO. In September and October 1998, the Company redeemed $2.2 million and
$7.4 million, respectively, in principal amount of the Senior Notes, with
borrowings under the Credit Facility. The net proceeds from the secondary
offering were used to repay borrowings under the Credit Facility.
The Company has an agreement with Bank of Montreal for a revolving
credit facility to accommodate the working capital needs of the Company's
Canadian subsidiaries. Borrowings under the agreement are limited to certain
advance rates based upon the eligible accounts receivable and inventory of the
Canadian subsidiaries up to an aggregate maximum of C$3.5 million.
In February 1997, the Company terminated its $30.0 million revolving
credit facility with The Chase Manhattan Bank (the "Bank") that had been
scheduled to mature in July 1999 and replaced it with the $100.0 million
revolving portion of the Credit Facility, which is also with the Bank. The
Credit Facility is available to finance the Company's working capital
requirements, future acquisitions and other general corporate needs, and will
expire in December 2003. Amounts advanced under the Credit Facility are secured
by substantially all assets of the Company.
In March 1998, the credit agreement for the Credit Facility was amended
and restated to also provide a $120.0 million term loan facility in addition to
the existing revolving facility. The Company borrowed $120.0 million under the
term loan facility on March 6, 1998 to purchase Autocraft and pay related
transaction expenses. The term loan is payable in quarterly installments through
December 31, 2003 and bears interest at a rate of at either (i) the Alternate
Base Rate plus a specified margin or (ii) the Eurodollar Rate plus a specified
margin. The "Alternate Base Rate" is equal to the highest of (a) the Bank's
prime rate, (b) the secondary market rate for three-month certificates of
deposit plus 1.0% and (c) the federal funds rate plus 0.5%, in each case as in
effect from time to time. The "Eurodollar Rate" is the rate offered by the Bank
for eurodollar deposits for one, two, three, six or, if available by all
lenders, nine months (as selected by the Company) in the interbank eurodollar
market. The applicable margins for both Alternate Base Rate and Eurodollar Rate
loans are subject to a quarterly adjustment based on the Company's leverage
ratio as of the end of the four fiscal quarters then completed. At December 31,
1998 the Alternate Base Rate margin was zero and the Eurodollar margin was 1.0%.
As of the effective date of the Credit Facility waivers and amendments described
below (March 26, 1999), the Alternate Base Rate margin was 1.25% and the
Eurodollar margin was 2.25%.
The Credit Facility contains several covenants, including ones that
require the Company to maintain certain levels of net worth, leverage, and, cash
flow coverage and others that limit the Company's ability to incur indebtedness,
make capital expenditures, create liens, engage in mergers and consolidations,
make restricted payments (including dividends), sell assets, make investments,
issue stock and engage in transactions with affiliates of the Company and its
subsidiaries.
Based on its operating results during 1998, the Company was in
technical default of the leverage and cash flow covenants of the Credit Facility
and the Company's interest rate swap agreement as of December 31, 1998. This
resulted in a cross default under the line of credit for the Company's Canadian
subsidiaries. Due to the defaults, the Company was prohibited from further
borrowings under the Credit Facility and the Canadian line of credit. In March
1999, the Company obtained from its lenders waivers of the various defaults and
certain amendments to the Credit Facility and the interest rate swap agreement
that the Company believes will enable it to comply with the covenants in the
future.
As of December 31, 1998, the Company's borrowing capacity under the
Credit Facility and the Canadian line of credit would have been $70.5 million
and $0.2 million, respectively, but for the defaults described above. As a
result of the bank waivers, the Company is again able to borrow under these
facilities.
26
<PAGE>
The Company believes that cash on hand, cash flow from operations and
existing borrowing capacity will be sufficient to fund its ongoing operations
and its budgeted capital expenditures. In pursuing future acquisitions, the
Company will continue to consider the effect that any such acquisition costs may
have on its liquidity. In order to consummate such acquisitions, the Company may
need to seek additional capital through additional borrowings or equity
financing.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated a part of a hedge and, if it is, the type of hedge
transaction. The Company anticipates that, due to its limited use of derivative
instruments, the adoption of SFAS No. 133 will not have a significant effect on
the Company's results of operations of its financial position. This statement is
effective for fiscal years beginning after June 15, 1999.
YEAR 2000 COMPLIANCE
The Company has assembled an internal project team that is addressing
the issue of computer programs and embedded computer chips being unable to
distinguish between the Year 1900 and the Year 2000. The project team has
developed and is in the process of implementing a three-step plan intended to
result in the Company's operations continuing with no or minimal interruption
through the Year 2000. The plan has been designed to comply with guidelines
established by the Automotive Industry Action Group (an industry association
supported by several of the major OEMs).
For purposes of this discussion, "Year 2000 compatible" means that the
computer hardware, software or device in question will function in 2000 without
modification or adjustment or will function in 2000 with a one-time manual
adjustment. However, there can be no assurance that any such Year 2000
compatible hardware, software or device will function properly when interacting
with any Year 2000 noncompatible hardware, software or device.
PROCESS OVERVIEW
The first step in the Company's plan is to inventory all of its
computer hardware and software and all of its devices having imbedded computer
technology. The Year 2000 project team is focusing on five areas: (i) business
systems; (ii) production (E.G., desk top computers and remanufacturing
machinery); (iii) financial management (E.G., banking software, postage
equipment and time clocks); (iv) facilities (E.G., heating and air conditioning
systems, elevators, telephones, and fire and security systems); and (v)
significant vendors and customers. As of March 1, 1999, the inventory is
approximately 95% complete and is expected to be finished by the end of March
1999.
In the second step, the project team is determining whether each
inventoried system, device, customer or vendor is Year 2000 compatible. In the
third step, those that are not compatible will be upgraded or replaced.
BUSINESS SYSTEMS. The business systems used by the Company's
electronics operation and the subsidiary that remanufactures transmissions for
Chrysler are both Year 2000 compatible. The systems used by the Distribution
Group, the logistical services operation and the subsidiaries that remanufacture
transmissions for Ford and General Motors are not currently Year 2000 compatible
but are in the process of being upgraded and are expected to be compatible by
the end of the first quarter of 1999. The subsidiary that remanufactures
transmissions for the Company's foreign OEM customers is beginning the
implementation of a new business system that is Year 2000 compatible and expects
to have the implementation completed by the end of the third quarter of 1999.
The business system used by the Company's European operation is not Year 2000
compatible and will be replaced with a compatible
27
<PAGE>
system. The upgrade or replacement of this system is expected to be completed
by the end of the third quarter of 1999.
PRODUCTION, FINANCIAL MANAGEMENT AND FACILITIES. Once they have been
inventoried, each device and each piece of hardware and non-business system
software (a "Non-System Item") that can be tested by the Company is being tested
for Year 2000 compatibility. In the case of any Non-System Item that cannot be
tested, the vendor is being asked for a certification regarding compatibility.
Each Non-System Item that is noncompatible will be either upgraded or replaced.
Approximately 95% of the Non-System Items that have been inventoried to date
have been tested or certified by the vendor. The Company expects substantially
all of its Non-System Items will have been tested or certified and upgraded or
replaced by the end of the second quarter of 1999.
CUSTOMERS AND VENDORS. The project team is in the process of contacting
each of the Company's significant customers and vendors and requesting that they
apprise the Company of the status of their Year 2000 compliance programs. The
Company had originally targeted the end of the first quarter of 1999 as the date
for receiving substantially all customer and vendor responses, but has now moved
the target to the end of the second quarter of 1999. There can be no assurance
as to when this process will be completed.
COSTS
The total cost associated with the Company becoming Year 2000
compatible is not expected to be material to its financial position. As of March
1, 1999, the Company had spent approximately $0.2 million in connection with the
project, consisting primarily of costs to upgrade noncompatible business
systems. Over the next nine months, the Company expects to spend approximately
$0.6 million to upgrade its business systems and less than $0.2 million to
upgrade or replace Non-System Items. The estimated cost to upgrade business
systems includes $0.2 million to replace the system used by the Company's
European operation.
The estimate of the cost to upgrade or replace Non-System Items is
subject to change once the inventory and the testing/certification processes are
completed. As a result, the actual amount that is ultimately expended to upgrade
or replace Non-System Items could be substantially higher or lower than the
above estimate.
Excluded from the above cost estimates are the costs associated with
the Distribution Group's enterprise-wide computer system to the extent that such
costs relate to implementation of the system as opposed to making it than Year
2000 compatible.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in or failure of certain normal business activities or operations
of the Company. Such failures could have a material adverse effect on the
Company. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of Year 2000 compliance by the Company's
significant customers and vendors, the Company is unable to determine at this
time whether the consequences of Year 2000 noncompliance will have a material
adverse effect on the Company, although its Year 2000 project is expected to
significantly reduce that uncertainty.
The Company believes that the areas that present the greatest risk to
the Company are (i) disruption of the Company's business due to Year 2000
noncompatibility of one of its critical business systems and (ii) disruption of
the business of certain of its significant customers and vendors due to their
noncompliance. At this time, the Company believes that all of its business
systems will be Year 2000 compatible before the end of 1999. Whether disruption
of a customer's or vendor's business due to noncompliance will have a material
adverse effect on the Company will depend on several factors including the
nature and duration of the disruption, the significance of the customer or
vendor and, in the case of vendors, the availability of alternate sources for
the vendor's products.
28
<PAGE>
The Company is in the process of developing a contingency plan to
address any material Year 2000 noncompliance issues. Originally, it expected to
have the plan completed by the end of 1998 but now expects to have the plan
completed by the end of May 1999.
FORWARD-LOOKING STATEMENT NOTICE
Readers are cautioned that the preceding discussion contains numerous
forward-looking statements and should be read in conjunction with the
"Forward-Looking Statement Notice" appearing at the beginning of this Annual
Report. Expectations about future Year 2000-related costs and the progress of
the Company's Year 2000 program are subject to various uncertainties that could
cause the actual results to differ materially from the Company's expectations,
including the success of the Company in identifying hardware, software and
devices that are not Year 2000 compatible, the nature and amount of remediation
required to make them compatible, the availability, rate and amount of related
labor and consulting costs and the success of the Company's significant vendors
and customers in addressing their Year 2000 issues.
INFLATION; LACK OF SEASONALITY
Although the Company is subject to the effects of changing prices, the
impact of inflation has not been a significant factor in results of operations
for the periods presented. In some circumstances, market conditions or customer
expectations may prevent the Company from increasing the prices of its products
to offset the inflationary pressures that may increase its costs in the future.
Historically, there has been little seasonal fluctuation in the Company's
business.
ENVIRONMENTAL MATTERS
See Item 1. "Business--Environmental" for a discussion of certain
environmental matters relating to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not hold or issue derivative financial instruments for
trading purposes. The Company uses derivative financial instruments to manage
its exposure to fluctuations in interest rates. Neither the aggregate value of
these derivative financial instruments nor the market risk posed by them is
material to the Company. The Company uses interest rate swaps to convert
variable rate debt to fixed rate debt to reduce volatility risk. For additional
discussion regarding the Company's use of such instruments, see Item 8.
"Consolidated Financial Statements and Supplemental Data--Note 2."
INTEREST RATE EXPOSURE
Based on the Company's overall interest rate exposure during the year
ended December 31, 1998, and assuming similar interest rate volatility in the
future, a near-term (12 months) change in interest rates would not materially
affect the Company's consolidated financial position, results of operation or
cash flows. Interest rate movements of 10% would not have a material effect on
the Company's financial position, results of operation or cash flows.
FOREIGN EXCHANGE EXPOSURE
The Company has three foreign operations that expose it to translation
risk when the local currency financial statements are translated to U.S.
dollars. Since changes in translation risk are reported as adjustments to
stockholders' equity, a 10% movement in foreign exchange would not have a
material effect on the Company's financial position, results of operation or
cash flows.
29
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Aftermarket Technology Corp.
Consolidated Financial Statements
For the years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...........................31
Consolidated Balance Sheets.................................................32
Consolidated Statements of Operations.......................................33
Consolidated Statements of Stockholders' Equity.............................34
Consolidated Statements of Cash Flows.......................................35
Notes to Consolidated Financial Statements..................................36
</TABLE>
30
<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. and subsidiaries (the Company) as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the Index of Item 14 (a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Aftermarket Technology Corp. and subsidiaries at December 31, 1997 and 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
February 22, 1999,
(Except for Note 22, as to which the date is March 26, 1999)
31
<PAGE>
<TABLE>
<CAPTION>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
1997 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 78 $ 580
Accounts receivable, net 53,761 71,357
Inventories 76,166 98,696
Prepaid and other assets 4,706 3,959
Refundable income taxes 1,011 10,954
Deferred income taxes 3,478 8,240
------------------ ------------------
Total current assets 139,200 193,786
Property, plant and equipment, net 24,414 63,903
Debt issuance costs, net 4,260 5,044
Cost in excess of net assets acquired, net 200,393 267,947
Other assets 410 1,225
------------------ ------------------
Total assets $ 368,677 $ 531,905
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 16,055 $ 35,945
Accrued expenses 16,977 42,643
Amounts due to acquired companies 3,049 10,204
Bank line of credit 4,596 2,060
Current portion of credit facility - 15,000
------------------ ------------------
Total current liabilities 40,677 105,852
12% Series B and D Senior Subordinated Notes 121,288 111,394
Amount drawn on credit facility, less current portion 11,100 123,350
Amounts due to acquired companies 9,097 8,483
Deferred compensation 3,042 3,323
Deferred income taxes 8,044 11,492
Stockholders' equity:
Preferred stock, $.01 par value; shares authorized -
2,000,000; none issued - -
Common stock, $.01 par value; shares authorized - 30,000,000;
Issued - 19,577,274 and 20,411,768 (including shares
held in treasury) 195 204
Additional paid-in capital 131,604 135,104
Retained earnings 43,494 35,676
Accumulated other comprehensive income (loss) 136 (979)
Common stock held in treasury, at cost (172,000 shares) - (1,994)
------------------ ------------------
Total stockholders' equity 175,429 168,011
------------------ ------------------
Total liabilities and stockholders' equity $ 368,677 $ 531,905
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES
32
<PAGE>
<TABLE>
<CAPTION>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the years ended December 31,
1996 1997 1998
----------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 272,878 $ 346,110 $ 486,773
Cost of sales 166,810 212,416 348,443
----------------- ---------------- ----------------
Gross profit 106,068 133,694 138,330
Selling, general and
administrative expense 55,510 73,768 109,357
Amortization of intangible assets 3,738 4,501 6,806
Special charges - - 8,744
----------------- ---------------- ----------------
Income from operations 46,820 55,425 13,423
Other income (expense), net 1,181 1,912 (41)
Interest expense 20,287 18,822 23,673
----------------- ---------------- ----------------
Income (loss) before income taxes
and extraordinary items 27,714 38,515 (10,291)
Income tax expense (benefit) 11,415 15,512 (3,176)
----------------- ---------------- ----------------
Income (loss) before extraordinary items 16,299 23,003 (7,115)
Extraordinary items, net of income taxes - (3,749) (703)
----------------- ---------------- ----------------
Net income (loss) 16,299 19,254 (7,818)
Dividends accrued on preferred stock 2,222 - -
----------------- ---------------- ----------------
Net income (loss) available to common
stockholders $ 14,077 $ 19,254 $ (7,818)
================= ================ ================
Per common share - basic:
Income (loss) before extraordinary items $ 1.15 $ 1.31 $ (0.36)
Extraordinary items - (0.21) (0.03)
----------------- ---------------- ----------------
Net income (loss) $ 1.15 $ 1.10 $ (0.39)
================= ================ ================
Per common share - diluted:
Income (loss) before extraordinary items $ 1.02 $ 1.19 $ (0.36)
Extraordinary items - (0.20) (0.03)
----------------- ---------------- ----------------
Net income (loss) $ 1.02 $ 0.99 $ (0.39)
================= ================ ================
</TABLE>
SEE ACCOMPANYING NOTES
33
<PAGE>
<TABLE>
<CAPTION>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share data)
Accumulated
Other
Preferred Common Additional Retained Comprehensive Treasury
Stock Stock Paid-In Capital Earnings Income (Loss) Stock Total
---------- ------- --------------- -------- ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 22,946 $ 120 $ 19,880 $ 10,163 $ 25 $ - $ 53,134
Issuance of 4,980,794 shares of common
stock for cash at $13.50 per share,
net of offering costs of $4,788 - 49 61,500 - - - 61,549
Redemption of preferred stock (25,168) - - - - - (25,168)
Accrued dividends on preferred stock 2,222 - - (2,222) - - -
Net income - - - 16,299 - - 16,299
Translation adjustment - - - - 18 - 18
-------
Comprehensive income 16,317
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 - 169 81,380 24,240 43 - 105,832
Issuance of 2,200,000 shares of common
stock for cash at $22.03 per share,
net of offering costs of $530 - 22 47,915 - - - 47,937
Issuance of 396,480 shares of common
stock from exercise of stock options - 4 2,309 - - - 2,313
Net income - - - 19,254 - - 19,254
Translation adjustment - - - - 93 - 93
------
Comprehensive income 19,347
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 - 195 131,604 43,494 136 - 175,429
Issuance of 834,494 shares of common
stock from exercise of stock options - 9 3,500 - - - 3,509
Purchase of 172,000 shares of common
stock for treasury - - - - - (1,994) (1,994)
Net loss - - - (7,818) - - (7,818)
Translation adjustment - - - - (1,115) - (1,115)
-------
Comprehensive loss (8,933)
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ - $ 204 $ 135,104 $ 35,676 $ (979) $ (1,994) $168,011
============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES
34
<PAGE>
<TABLE>
<CAPTION>
AFTERMARKET TECHNOLOGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended December 31,
1996 1997 1998
-------------------- -------------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 16,299 $ 19,254 $ (7,818)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary items - 6,269 1,172
Depreciation and amortization 5,773 7,890 15,351
Amortization of debt issuance costs 842 905 766
Provision for losses on accounts receivable 668 921 1,877
Capitalized interest - - (461)
Loss on sale of equipment 22 8 101
Deferred income taxes 1,769 1,586 (1,314)
Changes in operating assets and liabilities
(net of acquired businesses):
Accounts receivable (4,537) (10,258) 388
Inventories (12,574) 544 (3,530)
Prepaid and other assets (988) (1,583) 1,780
Accounts payable and accrued expenses 10,521 (13,803) 18,634
-------------------- -------------------- -----------------
Net cash provided by operating activities 17,795 11,733 26,946
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,843) (8,682) (23,525)
Acquisition of companies, net of cash received (12,199) (62,871) (114,995)
Proceeds from sale of equipment 85 77 762
-------------------- -------------------- -----------------
Net cash used in investing activities (19,957) (71,476) (137,758)
FINANCING ACTIVITIES:
Borrowings on credit facility, net - 11,100 127,250
Borrowings (payments) on bank line of credit, net 3,523 171 (2,261)
Payment of debt issuance costs - (786) (2,425)
Redemption of senior subordinated notes - (44,800) (10,000)
Sale of common stock, net of offering costs 61,549 47,937 -
Redemption of preferred stock (25,168) - -
Proceeds from exercise of stock options - 662 1,394
Purchase of common stock for treasury - - (1,994)
Payments on amounts due to acquired companies - (961) (650)
-------------------- -------------------- -----------------
Net cash provided by financing activities 39,904 13,323 111,314
-------------------- -------------------- -----------------
Increase (decrease) in cash and cash equivalents 37,742 (46,420) 502
Cash and cash equivalents at beginning of year 8,756 46,498 78
-------------------- -------------------- -----------------
Cash and cash equivalents at end of year $ 46,498 $ 78 $ 580
==================== ==================== =================
Cash paid during the year for:
Interest $ 19,412 $ 19,094 $ 21,335
Income taxes 10,970 10,880 4,420
</TABLE>
SEE ACCOMPANYING NOTES
35
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY
Aftermarket Technology Corp. and its subsidiaries ("ATC" or the
"Company") is primarily a remanufacturer and distributor of drive train products
used in the repair of vehicles in the automotive aftermarket. The Company's
principal products include remanufactured transmissions, torque converters,
engines, electronic control modules, instrument and display clusters, radios and
remanufactured and new parts for the repair of automotive drive train
assemblies. In addition, the Company provides value-added, third-party
distribution and material logistical services. The Company also provides reverse
logistics and material recovery services. The Company's automotive customers
include original equipment manufacturers, independent transmission rebuilders,
general repair shops, wholesale distributors and retail automotive parts stores.
Established in 1994, the Company maintains manufacturing facilities and/or
distribution centers in the United States, Canada, Mexico and the United
Kingdom.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
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, cores and finished goods. Consideration is given to deterioration,
obsolescence, and other factors in evaluating the estimated market value of
inventory based upon management's judgement and available information.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed using accelerated and straight-line
methods over the estimated useful lives of the assets for financial reporting
purposes, as follows: five to twelve years for machinery and equipment, three to
six years for autos and trucks, three to ten years for furniture and fixtures
and up to forty years for buildings and leasehold improvements. Depreciation
expense was $2,035, $3,394 and $8,545 for the years ended December 31, 1996,
1997 and 1998, respectively.
INTERNAL USE COMPUTER SOFTWARE
In 1998, the Company early adopted the provisions of SOP 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. Historically, the Company had capitalized all costs related to software and
implementation services in connection with its internal use software systems,
which were not material prior to 1998, and classified them as part of property,
plant and equipment. During
36
<PAGE>
1998, in accordance with SOP 98-1, the Company expensed software development
costs principally related to training and data conversion. The effects of the
change in accounting principle were immaterial to prior periods. As of
December 31, 1998, capitalized internal use software costs were $10,494,
including capitalized interest of $461.
START-UP COSTS
In 1998, the Company early adopted the provisions of SOP 98-5,
REPORTING THE COSTS OF START-UP ACTIVITIES. Prior to the adoption of SOP 98-5,
the Company capitalized certain costs related to start-up activities. As
required by the provisions of SOP 98-5, the Company has expensed these costs.
The effects of the change in accounting principle were immaterial to prior
periods.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the
applicable local currency. Accordingly, all balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date and
income statement amounts have been translated using the average exchange rate
for the year. The translation adjustments resulting from the changes in exchange
rates have been reported separately as a component of stockholders' equity. The
effects of transaction gains and losses were not material for the periods
presented.
DEBT ISSUANCE COSTS
Debt issuance costs incurred in connection with the sale of the Senior
Notes (see Note 10) and the Credit Facility (see Note 9) are being amortized
over the life of the debt using a method which approximates the interest method.
Debt issuance costs are reflected net of accumulated amortization of $2,018 and
$2,433 at December 31, 1997 and 1998, respectively.
COST IN EXCESS OF NET ASSETS ACQUIRED
The excess of cost over the fair market value of the net assets of
businesses acquired (goodwill) is amortized on a straight-line basis over 40
years. Cost in excess of net assets acquired is reflected net of accumulated
amortization of $12,758 and $19,561 at December 31, 1997 and 1998, respectively.
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.
LONG-LIVED ASSETS
The Company evaluates its long-lived assets (including related Cost in
excess of net assets acquired) on an ongoing basis. Identifiable intangibles are
reviewed for impairment wherever events or changes in circumstances indicate
that the carrying amount of the related asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the asset to future undiscounted cash flows expected to be
generated by the asset. If the asset is determined to be impaired, the
impairment recognized is measured by the amount by which the carrying value of
the asset exceeds its fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist of accounts receivable from its
customers, which are primarily in the automotive aftermarket industry throughout
the United States, and to a lesser extent Canada and the United Kingdom. The
credit risk associated with the Company's accounts receivable is mitigated by
its credit evaluation process and 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.
Accounts receivable is reflected net of an allowance for doubtful
accounts of $1,146 and $2,404 at December 31, 1997 and 1998, respectively.
37
<PAGE>
OFF BALANCE SHEET DERIVATIVE INSTRUMENTS
During 1998 the Company entered into an interest rate swap agreement.
The interest rate swap agreement is used by the Company to manage interest rate
risk on a portion of its floating rate credit facility. The interest rate swap
is matched as a hedge against and has the same maturity date as the Credit
Facility. The interest rate swap agreement converts the floating interest rate
on a portion of the Credit Facility to a fixed rate. The cost of the interest
rate swap is recorded as part of interest expense and accrued expenses. Fair
value of these instruments is based on estimated current settlement cost.
WARRANTY POLICY
The Company estimates warranty cost as sales are made.
STOCK- BASED COMPENSATION
The Company has elected to follow APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for the
stock options awarded under the Company's 1996 and 1998 stock option plans.
Accordingly, compensation expense is recognized only for those options whose
price is less than fair market value at the measurement date. The Company has
adopted the disclosure only provisions of SFAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on the type
of hedge transaction. The Company anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a significant
effect on the Company's results of operations or its financial position. The
Company is required to adopt SFAS No. 133 on January 1, 2000.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
1998 presentation.
NOTE 3. ACQUISITIONS
The Company acquired Tranzparts, Inc. ("Tranzparts") for $4.2 million
and Diverco, Inc. ("Diverco") for $10.9 million, including transaction fees and
related expenses, in April 1996 and October 1996, respectively. Goodwill
recorded for Tranzparts and Diverco approximated $2.4 million and $6.6 million,
respectively. The operations of Tranzparts and Diverco were not material to the
Company's consolidated operations.
In January 1997, the Company acquired Replacement & Exchange Parts Co.,
Inc. ("REPCO"); a Texas based distributor of transmission repair parts, for a
purchase price of approximately $12.3 million, including transaction fees and
related expenses. Goodwill recorded approximated $6.8 million. The operations of
REPCO were not material to the Company's consolidated operations.
In July 1997, the Company acquired substantially all of the assets of
ATS Remanufacturing ("ATS"), a remanufacturer of automatic transmissions and
related components located in Gastonia, North Carolina. To complete this
acquisition, the Company made cash payments totaling $12.9 million, including
transaction fees and related expenses. In addition, the ATS acquisition requires
subsequent payments due on each of the first eight anniversaries of the closing
date. As of December 31, 1998, the Company had made $1.0 million of additional
payments related to the ATS acquisition. Substantially all of the additional
payments to be made in the future, which will aggregate to approximately $18.0
million (present value $13.7 million as of December 31, 1998), are contingent
upon the attainment of certain sales levels by ATS, which the Company believes
are more likely than not to be attained. Goodwill recorded for ATS approximated
$26.1 million. The operations of ATS were not material to the Company's
consolidated operations.
38
<PAGE>
In August 1997, the Company acquired Trans Mart, Inc. ("Trans Mart"), a
distributor of automatic and standard transmission parts and related drive train
components based in Florence, Alabama. To complete this acquisition, the Company
made cash payments of $27.9 million, including transaction fees and related
expenses. Goodwill recorded for Trans Mart approximated $20.9 million. The
operations of Trans Mart were not material to the Company's consolidated
operations.
In November 1997, the Company acquired Metran Automatic Transmission
Parts Corp. ("Metran"), a New York based distributor of automatic and manual
transmission parts and related drive train components, for a purchase price of
approximately $8.1 million, including transaction fees and related expenses.
Goodwill recorded approximated $5.3 million. The operations of Metran were not
material to the Company's consolidated operations.
In January 1998, the Company acquired the inventory, accounts
receivable and related customer lists of Automatic Parts & Equipment, Inc., a
Minnesota based distributor of automatic and manual transmission parts and
related drive train components, for a purchase price of approximately $0.2
million, including transaction fees and related expenses. Goodwill recorded
approximated $0.1 million. The operations of Automatic Parts & Equipment, Inc.
were not material to the Company's consolidated operations.
In March 1998, the Company acquired substantially all the assets of the
OEM Division of Autocraft Industries, Inc. ("Autocraft"), a remanufacturer and
distributor of drive train and electronic parts used in the warranty and
aftermarket repair of passenger cars and light trucks. The purchase price was
approximately $115.9 million, including transaction fees and related expenses.
The Company has estimated an additional payment of approximately $5.9 million to
be paid in 1999 based on the performance of the OEM Division's European
operations during 1998. Goodwill recorded of approximately $73.2 million
includes the additional payment. The financial statements reflect the
preliminary allocation of the purchase price. The purchase price allocation will
be finalized upon a final valuation of the acquired company's property, plant
and equipment and certain other information.
These acquisitions have been accounted for under the purchase method of
accounting. 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.
On a pro forma basis, had the Autocraft acquisition occurred as of the
beginning of the following fiscal years, the Company would have reported:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1998
--------------------------
(UNAUDITED)
--------------------------
<S> <C> <C>
Net sales........................................ $ 480,203 $ 513,844
Income (loss) before extraordinary items......... 24,281 (7,154)
Net income (loss)................................ 20,169 (7,857)
Earnings (loss) per share:
Basic....................................... $ 1.15 $ (0.39)
Diluted..................................... 1.04 (0.39)
</TABLE>
The proforma information is not necessarily indicative of the results
of operations as they would have been had the transaction been effected on the
assumed date.
NOTE 4. RELATED-PARTY TRANSACTIONS
The Company believes the following transactions were on terms at least
as favorable to the Company as could have been obtained from unaffiliated third
parties pursuant to arms-length negotiations.
Amounts due to acquired companies are comprised primarily of additional
purchase price payable to former owners and certain officers of companies
acquired in 1996, 1997 and 1998. Amounts are payable through 2005.
39
<PAGE>
During 1998, the Company received fees totaling $1,062 from The Fred
Jones Companies, Inc. for computer systems support services provided by the
Company. In addition, the Company sold $95 of products to certain automobile
dealerships owned by a limited liability company in which The Fred Jones
Companies has a significant equity interest. Fred Hall, a director of the
Company, is Chairman, President, Chief Executive Officer and a significant
stockholder of The Fred Jones Companies.
Rent expense includes amounts paid to related parties, including The
Fred Jones Companies and certain former officers of the Company, of $940, $1,574
and $1,863 for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company paid Aurora Capital Partners ("ACP"), which controls the
Company's largest stockholders, $299, $1,395 and $1,875 in fees for investment
banking services provided in connection with companies acquired in 1996, 1997
and 1998, respectively. In addition, ACP was paid management fees of $513, $534
and $541 in 1996, 1997 and 1998, respectively. The Company reimburses ACP for
out of pocket expenses incurred in connection with providing management
services. ACP is also entitled to various additional fees depending on the
Company's profitability or certain significant corporate transactions. No such
additional fees were paid in 1996, 1997 or 1998.
NOTE 5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
------------------------------------
<S> <C> <C>
Raw materials, including core inventories...... $ 24,788 $ 46,102
Work-in-process................................ 3,125 3,051
Finished goods................................. 48,253 49,543
------------------------------------
$ 76,166 $ 98,696
====================================
</TABLE>
Finished goods include purchased parts which are available for sale.
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
------------------------------------
<S> <C> <C>
Land.................................... $ -- $ 1,982
Buildings............................... -- 10,031
Machinery and equipment................. 19,335 54,165
Autos and trucks........................ 2,712 4,045
Furniture and fixtures.................. 3,139 3,997
Leasehold improvements.................. 6,058 11,751
------------------------------------
31,244 85,971
Less: Accumulated depreciation and amortization (6,830) (22,068)
------------------------------------
$ 24,414 $ 63,903
====================================
</TABLE>
40
<PAGE>
NOTE 7. ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
-------------------------------------
<S> <C> <C>
Payroll and related costs......................... $ 5,820 $ 11,478
Interest payable.................................. 6,253 6,885
Core liability ................................... -- 5,170
Warranty.......................................... 1,682 3,364
Non-income related taxes.......................... 438 3,220
Restructuring and other costs..................... -- 2,994
Other............................................. 2,784 9,532
-------------------------------------
$ 16,977 $ 42,643
=====================================
</TABLE>
NOTE 8. BANK LINE OF CREDIT
In September 1998, the Company's Canadian subsidiaries renewed their
revolving credit agreement with the Bank of Montreal (the "BOM Revolving Credit
Agreement"), providing for a C$3.5 million revolving credit facility to
accommodate the working capital needs of the Canadian subsidiaries. The funds
available to be advanced may not exceed the aggregate of 75% of the eligible
accounts receivable and 50% of the eligible inventory of the Canadian
subsidiaries. Amounts advanced are secured by substantially all assets of the
Canadian subsidiaries and are guaranteed by the Company. Interest is payable
monthly at the Bank of Montreal's prime lending rate (7.75% at December 31,
1998) plus 0.25%. At December 31, 1998, $2.1 million was outstanding under this
line of credit.
The BOM Revolving Credit Agreement contains certain covenants,
including a tangible net worth covenant for the combined results of the
Company's Canadian subsidiaries, and provides for cross-default in the event of
a default under the Company's Credit Facility (see Note 9.) As of December 31,
1998, the Company was in technical default of the BOM Revolving Credit Agreement
due to the cross-default provision and was restricted from making further
borrowings. In March 1999, the Company obtained the necessary amendments and
waivers to cure the default on its Credit Facility as well as the cross-default
provisions of the BOM Revolving Credit Agreement (See Note 22.)
NOTE 9. CREDIT FACILITY
In March 1998, the credit agreement for the Company's $100.0 million
credit facility with The Chase Manhattan Bank, as agent (the "Bank"), was
amended and restated to provide for a new credit facility comprised of a $100.0
million line of credit and a $120.0 million term loan (the "Credit Facility") to
finance the Company's working capital requirements, future acquisitions and the
acquisition of Autocraft (see Note 3). Amounts advanced under the Credit
Facility are secured by substantially all the assets of the Company. Amounts
advanced under the revolving portion of the Credit Facility will become due on
December 31, 2003. The balance outstanding on the term loan as of December 31,
1998 was $110.0 million. The Company may prepay outstanding advances under the
line of credit or the term loan portion of the Credit Facility in whole or in
part without incurring any premium or penalty. At December 31, 1998, $28.4
million was outstanding under the line of credit.
At the Company's election, amounts advanced under the revolving portion
of the Credit Facility will bear interest at either (i) the Alternate Base Rate
plus a specified margin, or (ii) the Eurodollar Rate plus a specified margin.
The "Alternate Base Rate" is equal to the highest of (a) the Bank's prime rate,
(b) the secondary market rate for three-month certificates of deposit plus 1.0%
and (c) the federal funds rate plus 0.5%, in each case as in effect from time to
time. The "Eurodollar Rate" is the rate offered by the Bank for eurodollar
deposits for one, two, three, six or, if available by all lenders, nine months
(as selected by the Company). The applicable margins for both Alternate Base
Rate and Eurodollar Rate loans are subject to a quarterly adjustment based on
the Company's leverage ratio as of the end of the four fiscal quarters then
completed. At December 31, 1998, the Alternate Base Rate and the Eurodollar Rate
margins are 0.0% and
41
<PAGE>
1.0%, respectively. Interest payments on advances that bear interest based
upon the Alternate Base Rate are due quarterly in arrears and on the
termination date, and interest payments on advances that 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 blended interest rate on the credit facility for the
year ended December 31, 1998 was 6.72%.
The Company paid the Bank a one-time facility and commitment fee upon
the effective date of the Credit Facility and is required to pay the Bank
quarterly in arrears a commitment fee equal to a per annum percentage of the
average daily unused portion of the Credit Facility during such quarter. The
commitment is subject to a quarterly adjustment based on the Company's leverage
ratio as of the end of the four fiscal quarters then completed. The quarterly
commitment fee percentage is 0.375%. 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 rate per annum equal to the applicable margin then in
effect for advances bearing interest at the Eurodollar Rate.
During 1998, in order to convert $50.0 million of its Credit
Facility to a fixed rate, the Company entered into an interest rate swap
agreement.
The Credit Facility contains several covenants, including ones that
require the Company to maintain certain levels of net worth, leverage and cash
flow coverage, and others that limit the Company's ability to incur
indebtedness, make capital expenditures, create liens, engage in mergers and
consolidations, make restricted payments (including dividends), sell assets,
make investments, issue stock and engage in transactions with affiliates of the
Company and its subsidiaries.
Based on its operating results during 1998, the Company was in
technical default of the leverage and cash flow covenants of the Credit Facility
and the Company's interest rate swap agreement as of December 31, 1998. Due to
the defaults, the Company was not able to borrow under the Credit Facility. In
March 1999, the Company obtained from its lenders waivers of the various
defaults and certain amendments to the Credit Facility and the interest rate
swap agreement.
Annual maturities of the Company's Credit Facility are as follows as
of December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999........................................ $ 15,000
2000........................................ 20,000
2001........................................ 25,000
2002........................................ 25,000
2003........................................ 53,350
---------
$138,350
=========
</TABLE>
NOTE 10. 12% SERIES B AND D SENIOR SUBORDINATED NOTES
On August 2, 1994, the Company completed a private placement issuance
of $120.0 million of 12% Series A Senior Subordinated Notes due in 2004.
Proceeds from the issuance were used to partially finance the acquisitions made
by the Company in 1994. The privately placed debt was subsequently exchanged for
public debt (Series B).
On June 1, 1995, the Company completed another private placement
issuance of $40.0 million of 12% Series C Senior Subordinated Notes due in 2004.
Proceeds of $42.4 million from the issuance were used to finance acquisitions
made by the Company during 1995. These notes have an effective interest rate of
10.95%. The privately placed debt was subsequently exchanged for public debt
(Series D).
Interest on the 12% Series B and Series D Senior Subordinated Notes
(the "Senior Notes") is payable semiannually on February 1 and August 1 of each
year. The Senior Notes will mature on August 1, 2004. On or after August 1,
1999, the Senior Notes may be redeemed at the option of the Company, in whole or
in part, at specified redemption prices plus accrued and unpaid interest:
42
<PAGE>
<TABLE>
<CAPTION>
YEAR REDEMPTION 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
could have, subject to certain requirements, redeemed up to $30.0 million of the
Series B Senior Notes and $10.0 million of the Series D Senior 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. On
February 16, 1997, the Company exercised its right and redeemed $30.0 million in
principal amount of the Series B Senior Notes and $10.0 million in principal
amount of the Series D Senior Notes. In connection with these redemptions, the
Company recorded an extraordinary loss of $3.8 million, net of tax.
During 1998, the Company purchased and retired a total of $2.2 million
in principal amount of the Series D Senior Notes and $7.4 million in principal
amount of the Series B Senior Notes in open market transactions. In connection
with these purchases, the Company recorded an extraordinary loss of $0.3
million, net of tax.
In the event of a change in control, the Company would be required to
offer to repurchase the Senior Notes at a price equal to 101% of the principal
amount plus accrued and unpaid interest.
The Senior Notes are general obligations of the Company, subordinated
in right of payment to all existing and future senior debt (including the
Company's Credit Facility). The Senior Notes are guaranteed by each of the
Company's existing and future subsidiaries other than any subsidiary designated
as an unrestricted subsidiary (as defined). As of December 31, 1998, the Company
had no unrestricted subsidiaries. The Company may incur additional indebtedness,
including borrowings under its Credit Facility (See Note 9), subject to certain
limitations.
The indentures under which the Senior Notes were issued contain certain
covenants that, among other things, limit the Company's ability to incur
additional indebtedness under certain conditions, issue disqualified capital
stock, engage in transactions with affiliates, incur liens, make certain
restricted payments (including dividends), make certain asset sales and permit
certain restrictions on the ability of its subsidiaries to make distributions.
As of December 31, 1998, the Company was in compliance with such covenants.
NOTE 11. INCOME TAXES
The Company uses an asset and liability approach to financial
accounting and reporting for income taxes. Income tax expense (benefit) consist
of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1997 1998
----------------------------------------
<S> <C> <C> <C>
Current:
Federal............................... $ 8,350 $ 11,902 $ (1,938)
State................................. 1,147 1,919 (277)
Foreign............................... 149 105 353
----------------------------------------
Total current............................ 9,646 13,926 (1,862)
Deferred:
Federal............................... 1,621 1,366 (1,150)
State................................. 148 220 (164)
-----------------------------------------
Total deferred........................... 1,769 1,586 (1,314)
Extraordinary items...................... -- ( 2,520) (469)
-----------------------------------------
$ 11,415 $ 12,992 $ (3,645)
=========================================
</TABLE>
43
<PAGE>
In addition, the Company has recognized tax benefits related to the
exercise of certain non-qualified stock options as an increase in stockholders'
equity of $1,696 and $2,196 for the years ended December 31, 1997 and 1998,
respectively.
The reconciliation of income tax expense (benefit) computed at the U.S.
federal statutory tax rates to income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1997 1998
-----------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ 9,700 35.0% $ 11,286 35.0% $ (4,012) 35.0%
State income taxes, net of
federal tax benefit...... 842 3.0 1,167 3.6 (573) 5.0
Foreign income taxes...... -- -- -- -- 516 (4.5)
Other..................... 873 3.2 539 1.7 424 (3.7)
-----------------------------------------------------------------------------------
$ 11,415 41.2% $ 12,992 40.3% $ (3,645) 31.8%
===================================================================================
</TABLE>
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,
1997 1998
------------------------
<S> <C> <C>
Deferred tax assets:
Inventory obsolescence reserve........................ $ 854 $ 3,774
Allowance for doubtful accounts....................... 378 566
Product warranty accruals............................. 506 1,117
Other accruals and deferrals.......................... 1,740 2,783
------------------------
Total deferred tax assets................................ 3,478 8,240
------------------------
Deferred tax liabilities:
Amortization of intangible assets .................... 6,987 10,123
Accelerated depreciation.............................. 1,057 1,217
Other accruals and deferrals.......................... -- 152
------------------------
Total deferred tax liabilities........................... 8,044 11,492
------------------------
Net deferred tax liability............................... $ 4,566 $ 3,252
========================
</TABLE>
NOTE 12. STOCK OPTIONS AND WARRANTS
The Company provides stock options to employees, non-employee
directors, and independent contractors under its 1996 Stock Incentive Plan (the
"1996 Plan") and its 1998 Stock Incentive Plan (the "1998 Plan"). The Plans
provide for granting of non-qualified and incentive stock option awards. Options
under the Plans are generally granted at fair value and vest over a period of
time to be determined by the Board of Directors, generally from three to five
years. Options under the Plans expire 10 years from the date of grant. The
Company has reserved 2.4 million and 1.2 million shares of common stock under
the 1996 and 1998 Plans, respectively. Options available for grant under the
Plans were 9,606 and 525,106 as of December 31, 1997 and 1998, respectively.
44
<PAGE>
A summary of the status of the Company's option plans are presented
below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ----------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 1,526,778 $1.67 2,272,218 $ 2.65 1,993,914 $ 3.82
Granted............................ 745,440 $4.67 130,176 $17.64 1,336,000 $ 9.54
Exercised.......................... -- -- (396,480) $ 1.67 (834,494) $ 1.67
Canceled........................... -- -- (12,000) $ 4.67 (651,500) $ 7.97
--------- --------- --------- -------- ---------- ------------
Outstanding at end of year......... 2,272,218 $2.65 1,993,914 $ 3.82 1,843,920 $ 7.46
--------- --------- ---------
Exercisable at end of year......... 1,117,113 $1.67 1,163,944 $ 2.27 600,234 $ 4.71
========= ========= =========
Weighted-average fair value of
options granted during the
year............................. $7.10 $12.11 $ 5.98
</TABLE>
The following summarizes information about options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ---------------------------------
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICES SHARES PRICES
------------------- ------------- ---------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
$1.67 295,804 5.9 years $1.67 126,060 $ 1.67
$4.60-$6.90 990,440 7.4 years $4.96 450,783 $ 4.97
$6.91-$11.50 206,000 10.0 years $10.03 -- --
$11.51-$16.10 35,088 8.2 years $14.75 11,695 $14.75
$16.11-$20.50 316,588 9.3 years $18.02 11,696 $17.25
------------------- -----------------
1,843,920 7.8 years $7.46 600,234 $ 4.71
=================== ==================
</TABLE>
In connection with the Company's initial acquisitions in July of 1994,
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 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.
Had compensation cost for the Company's Plans been determined in
accordance with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income (loss) and earnings (loss) per share would have been
reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1997 1998
-------------------------------------
<S> <C> <C> <C>
Income (loss) before extraordinary items:
As reported................................ $16,299 $23,003 $(7,115)
Pro forma.................................. 15,982 22,127 (9,457)
Basic earnings (loss) per common share:
As reported................................ $ 1.15 $ 1.31 $ (0.36)
Pro forma.................................. 1.13 1.26 (0.47)
</TABLE>
45
<PAGE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1997 1998
--------------------------------------
<S> <C> <C> <C>
Expected volatility........................ 51.31% 51.31% 71.16%
Risk-free interest rates................... 6.00% 6.00% 5.25%
Expected lives............................. 8.2 years 8.2 years 6.3 years
</TABLE>
The Company has not paid and does not anticipate paying dividends;
therefore, the expected dividend yield is assumed to be zero.
NOTE 13. COMMON AND PREFERRED STOCK
On December 17, 1996, the Company sold 4.0 million shares of common
stock at $13.50 per share through an initial public offering. In addition, the
Company sold to General Electric Pension Trust 1.0 million shares of common
stock at $12.555 per share in a private placement.
On October 28, 1997, the Company completed a secondary public offering
of 3.7 million shares of its common stock at $23.25 per share. Of the shares
sold in the offering, 2.2 million shares were sold by the Company and 1.5
million shares were sold by certain stockholders. The Company did not receive
any proceeds from the sale of shares by the selling stockholders.
On May 6, 1998, the stockholders of the Company approved the amendment
to the Company's Amended and Restated Certificate of Incorporation to reduce the
number of authorized shares of preferred stock from 5,000,000 to 2,000,000.
On August 26, 1998, the Company's Board of Directors authorized the
Company to repurchase 350,000 shares of the Company's Common Stock. As of
December 31, 1998, the Company had repurchased 172,000 shares at an average
price $11.59 per share.
NOTE 14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1997 1998
-----------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss)...................................... $16,299 $19,254 $(7,818)
-----------------------------------------------------
Denominator:
Weighted-average common shares outstanding............. 12,203,021 17,496,173 19,985,850
Common shares issued to redeem preferred stock ........ 1,948,767 -- --
-----------------------------------------------------
Denominator for basic earnings per common share........ 14,151,788 17,496,173 19,985,850
Effect of dilutive securities:
Employee stock options and warrants................. 1,766,596 1,839,186 --
-----------------------------------------------------
Denominator for diluted earnings per common share ..... 15,918,384 19,335,359 19,985,850
=====================================================
Basic earnings (loss) per common share.................... $1.15 $1.10 $(0.39)
Diluted earnings (loss) per common share.................. 1.02 0.99 (0.39)
</TABLE>
The share calculation for 1996 is based upon the pro forma effects from
the estimated number of shares of Common Stock issued in the Company's initial
public offering from which net proceeds were used to redeem the outstanding
preferred stock including accrued dividends.
Due to the loss reported in 1998, the applicable share calculation
above excludes the antidilutive effect of stock options and warrants which would
have been 1,092,511 had the Company not reported a loss.
46
<PAGE>
NOTE 15. EMPLOYEE RETIREMENT PLAN
The Company's defined contribution plans provide substantially all
U.S. salaried and hourly employees of the Company an opportunity to
accumulate personal funds for their retirement, subject to minimum duration
of employment requirements. Contributions are made on a before-tax basis to
substantially all of these plans.
As determined by the provisions of each plan, the Company matches a
portion of the employees' basic voluntary contributions. Company matching
contributions to the plans were approximately $206, $359 and $532 for the plan
years ending in 1996, 1997 and 1998, respectively.
NOTE 16. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under various
operating lease agreements, which expire on various dates through 2012. Facility
leases that expire generally are expected to be renewed or replaced by other
leases. Future minimum rental commitments under non-cancelable operating leases
with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
<S> <C>
1999................................................ $11,792
2000................................................ 10,071
2001................................................ 7,810
2002................................................ 6,264
2003................................................ 4,647
Thereafter.......................................... 7,960
------------------
$48,544
==================
</TABLE>
Rent expense for all operating leases approximated $4,582, $7,228
and $9,561 for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company is subject to various evolving Federal, state, local and
foreign environmental laws and regulations governing, among other things,
emissions to air, discharge to waters and the generation, handling, storage,
transportation, treatment and disposal of a variety of hazardous and non-
hazardous substances and wastes. These laws and regulations provide for
substantial fines and criminal sanctions for violations and impose liability for
the costs of cleaning up, and certain damages resulting from, past spills,
disposals or other releases of hazardous substances.
In connection with the acquisition of certain subsidiaries, the Company
conducted certain investigations of these companies' facilities and their
compliance with applicable environmental laws. The investigations, which
included "Phase I" assessments by independent consultants of all manufacturing
and certain distribution facilities, found that certain facilities have had or
may have had releases of hazardous materials that may require remediation and
also may be subject to potential liabilities for contamination from off-site
disposal of substances or wastes. These assessments also found that certain
reporting and other regulatory requirements, including certain waste management
procedures, were not or may not have been satisfied. Although there can be no
assurance, the Company believes that, based in part on the investigations
conducted, in part on certain remediation completed prior to the acquisitions,
and in part on the indemnification provisions of the agreements entered into in
connection with the Company's acquisitions, the Company will not incur any
material liabilities relating to these matters.
The company from which RPM Merit ("RPM") acquired its assets (the
"Prior RPM Company") has been identified by the United States Environmental
Protection Agency (the "EPA") as one of many potentially responsible parties for
environmental liabilities associated with a "Superfund" site located in the area
of RPM's former manufacturing facilities and current distribution facility in
Azusa, California. The Federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund")
provides for cleanup of sites from which there has been a release or threatened
release of hazardous substances, and authorizes recovery of related response
costs and certain other damages from
47
<PAGE>
potentially responsible parties ("PRPs"). PRPs are broadly defined under
CERCLA, and generally include present owners and operators of a site and
certain past owners and operators. As a general rule, courts have interpreted
CERCLA to impose strict, joint and several liability upon all persons liable
for cleanup costs. As a practical matter, however, at sites where there are
multiple PRPs, the costs of cleanup typically are allocated among the PRPs
according to a volumetric or other standard. The EPA has preliminarily
estimated that it will cost approximately $47.0 million to construct and
approximately $4.0 million per year for an indefinite period to operate an
interim remedial groundwater pumping and treatment system for the part of the
Superfund site within which RPM's former manufacturing facilities and current
distribution facility, as well as those of many other potentially responsible
parties, are located. The actual cost of this remedial action could vary
substantially from this estimate, and additional costs associated with the
Superfund site are likely to be assessed. The Company has significantly
reduced its presence at the site and has moved all manufacturing operations
off-site. Since July 1995, the Company's only real property interest in this
site has been the lease of a 6,000 square foot storage and distribution
facility. The RPM acquisition agreement and the leases pursuant to which the
Company leased RPM's facilities after the Company acquired the assets of RPM
(the "RPM Acquisition") expressly provide that the Company did not assume any
liabilities for environmental conditions existing on or before the RPM
Acquisition, although the Company could become responsible for these
liabilities under various legal theories. The Company is indemnified against
any such liabilities by the seller of RPM as well as the Prior RPM Company
shareholders. There can be no assurance, however, that the Company would be
able to make any recovery under any indemnification provisions. Since the RPM
Acquisition, the Company has been engaged in negotiations with the EPA to
settle any liability that it may have for this site. Although there can be no
assurance, the Company believes that it will not incur any material liability
as a result of these environmental conditions.
NOTE 17. REPORTABLE SEGMENTS
The Company has two reportable segments: Original Equipment
Manufacturer ("OEM") segment and Independent Aftermarket segment. The Company's
OEM segment consists of four operating units that primarily sell remanufactured
transmissions and engines directly to the OEMs. The Company's Independent
Aftermarket segment consists of the Company's Distribution Group, which
primarily sells transmission repair kits, soft parts, remanufactured torque
converters and new and remanufactured hard parts used in drive train repairs to
independent transmission rebuilders and to a lesser extent to general repair
shops, wholesale distributors and retail automotive parts stores. Other
operating units, which are not reportable segments, consist of an electronic
parts remanufacturing and distribution business, warehouse and distribution
services for AT&T Wireless (the cellular telephone subsidiary of AT&T) and a
material recovery processing business for Ford.
The Company evaluates performance and allocates resources based upon
profit or loss before income taxes and extraordinary items ("EBT"). The
reportable segments' accounting policies are the same as those described in the
summary of significant accounting policies (see Note 2). Intersegment sales and
transfers are recorded at the Company's standard cost and all intersegment
profits, if any, are eliminated.
48
<PAGE>
The reportable segments are each managed and measured separately
primarily due to the differing customers, production processes, products sold
and distribution channels. The reportable segments are as follows:
<TABLE>
<CAPTION>
INDEPENDENT
OEM AFTERMARKET OTHER TOTALS
--------- ----------- ---------- --------
<S> <C> <C> <C> <C>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998:
Revenues from external customers................. $ 252,962 $ 186,730 $ 47,081 $ 486,773
Intersegment revenues............................ 720 1,069 - 1,789
Other income..................................... 2,454 529 441 3,424
Interest expense................................. 20,795 10,985 2,911 34,691
Depreciation and amortization expense............ 8,676 4,416 1,628 14,720
Special charges.................................. 5,050 2,070 - 7,120
Segment profit (loss)............................ 5,523 (22,057) 2,265 (14,269)
Segment assets................................... 351,560 158,914 44,535 555,009
Expenditures for long-lived assets............... 7,936 12,761 2,560 23,257
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997:
Revenues from external customers................ $ 180,280 $ 158,415 $ 7,415 $ 346,110
Intersegment revenues........................... 3,364 314 - 3,678
Other income..................................... 810 1,160 - 1,970
Interest expense................................. 15,168 8,248 309 23,725
Depreciation and amortization expense............ 5,125 2,576 110 7,811
Segment profit (loss)........................... 32,650 3,573 (208) 36,015
Segment assets.................................. 239,409 140,930 5,880 386,219
Expenditures for long-lived assets.............. 5,634 2,466 112 8,212
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996:
Revenues from external customers................ $ 159,522 $ 107,002 $ 6,354 $ 272,878
Intersegment revenues........................... 5,405 328 - 5,733
Other income..................................... 489 627 - 1,116
Interest expense................................. 14,115 5,483 401 19,999
Depreciation and amortization expense............ 4,152 1,480 136 5,768
Segment profit (loss)........................... 26,854 1,994 (297) 28,551
Segment assets.................................. 202,179 88,228 5,406 295,813
Expenditures for long-lived assets.............. 6,382 1,357 31 7,770
</TABLE>
49
<PAGE>
A reconciliation of the reportable segments to consolidated
net sales, income (loss) before income taxes and extraordinary items
and consolidated assets are as follows:
<TABLE>
<CAPTION>
As of and for the
Years Ended December 31,
-------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
NET SALES:
External revenues from reportable segments..... $ 266,524 $ 338,695 $ 439,692
Intersegment revenues for reportable segments.. 5,733 3,678 1,789
Other revenues................................. 6,354 7,415 47,081
Elimination of intersegment revenues........... (5,733) (3,678) (1,789)
--------- --------- ---------
Consolidated net sales.................. $ 272,878 $ 346,110 $ 486,773
========= ========= =========
PROFIT:
Total profit (loss) for reportable segments.... $ 28,848 $ 36,223 $ (16,534)
Other profit (loss)............................ (297) (208) 2,265
Unallocated amounts:
Elimination of intersegment profits.......... 107 (171) -
Special charges.............................. - - (1,624)
Corporate expenses........................... (716) (2,095) (1,320)
Depreciation and amortization................ (5) (79) (631)
Other income (expense), net.................. 65 (58) (3,465)
Interest expense............................. (288) 4,903 11,018
--------- --------- ---------
Income (loss) before income taxes and
Extraordinary item.................... $ 27,714 $ 38,515 $ (10,291)
========= ========= =========
ASSETS:
Total assets for reportable segments........... $ 290,407 $ 380,339 $ 510,474
Other assets................................... 5,406 5,880 44,535
Elimination of intercompany accounts........... (18,245) (29,281) (26,556)
Unallocated assets............................. 43,179 11,739 3,452
--------- --------- ---------
Consolidated assets..................... $ 320,747 $ 368,677 $ 531,905
========= ========= =========
</TABLE>
Other significant items as disclosed within the reportable segments are
reconciled to the consolidated totals as follows:
<TABLE>
<CAPTION>
Segment
Totals Adjustments Consolidated
------ ----------- ------------
<S> <C> <C> <C>
OTHER SIGNIFICANT ITEMS:
FOR THE YEAR ENDED DECEMBER 31, 1998
Other income (expense), net.................. $ 3,424 $(3,465) $ (41)
Interest expense............................. 34,691 (11,018) 23,673
Depreciation and amortization expense........ 14,720 631 15,351
Special charges.............................. 7,120 1,624 8,744
Expenditures for long-lived assets........... 23,257 268 23,525
FOR THE YEAR ENDED DECEMBER 31, 1997
Other income (expense), net.................. $ 1,970 $ (58) $ 1,912
Interest expense............................. 23,725 (4,903) 18,822
Depreciation and amortization expense........ 7,811 79 7,890
Expenditures for long-lived assets........... 8,212 470 8,682
FOR THE YEAR ENDED DECEMBER 31, 1996
Other income (expense), net.................. $ 1,116 $ 65 $ 1,181
Interest expense............................. 19,999 288 20,287
Depreciation and amortization expense........ 5,768 5 5,773
Expenditures for long-lived assets........... 7,770 73 7,843
</TABLE>
50
<PAGE>
Revenues and long-lived assets by geographic area are determined by
the location of the Company's facilities as follows:
<TABLE>
<CAPTION>
As of and for the
Years Ended December 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
NET SALES:
United States..................... $ 254,598 $ 324,219 $ 442,759
Canada and Europe................. 18,280 21,891 44,014
--------- --------- ---------
Consolidated net sales............ $ 272,878 $ 346,110 $ 486,773
========= ========= =========
LONG-LIVED ASSETS:
United States..................... $ 162,166 $ 221,963 $ 318,184
Canada and Europe................. 7,528 7,514 19,935
--------- --------- ---------
Consolidated long-lived assets.... $ 169,694 $ 229,477 $ 338,119
========= ========= =========
</TABLE>
For the year ended December 31, 1998 the Company had two
significant external customers. Both customers were within the OEM segment
and represented $88,379 and $83,155 of consolidated net sales.
For the years ended December 31, 1996 and 1997 sales to one
customer within the OEM segment represented approximately $101,499 and
$110,671 of consolidated net sales, respectively.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
With the exception of the Company's Senior Notes and interest rate
swap agreement, the carrying amounts of the Company's financial instruments
approximate their fair values due to the fact that they are either short-term
in nature or re-priced to fair value through floating interest rates.
The carrying amounts and fair values of these financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1998
--------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------
<S> <C> <C> <C> <C>
Series B Senior Notes............... $ 90,000 $ 98,811 $ 82,570 $89,118
Series D Senior Notes............... 30,000 32,937 27,815 30,021
Interest rate swap agreement........ -- -- -- (1,854)
</TABLE>
NOTE 19. SPECIAL CHARGES
The Company has commenced certain initiatives designed to improve
operating efficiencies and reduce costs. In the second quarter of 1998 the
Company recorded $3,580 in special charges related to these initiatives,
consisting of $1,085 of restructuring charges and $2,495 of other charges. The
restructuring charges included $822 of severance costs for 11 people and $263 of
exit costs. The severance costs were incurred in connection with the
reorganization of the ATC Distribution Group's management structure,
centralization of the ATC Distribution Group's Management Information Systems
("MIS") operations and certain other personnel matters. The exit costs were
incurred to consolidate the Company's Joplin and Springfield, Missouri engine
remanufacturing lines into the Springfield facility. The other charges consisted
of $2,044 of idle plant capacity costs incurred at the Joplin facility due to
the consolidation of the remanufacturing lines and $451 of relocation costs
related to the centralization of the ATC Distribution Group's management team
and to centralize the ATC Distribution Group's MIS operations.
51
<PAGE>
In the fourth quarter of 1998 the Company recorded an additional $5,164
in special charges comprised of $2,764 in restructuring costs and $2,400 in
non-income related taxes. The $2,764 restructuring cost includes $1,868 of
severance costs for seven people, $596 of exit costs and $300 of other costs.
The severance costs were incurred in connection with the replacement of the
Company's Chief Executive Officer and other members of management as well as
additional reorganization of the ATC Distribution Group's management structure.
The Company is continuing to evaluate its business to identify additional
improvements that may result in additional special charges. The non-income
related tax charge is due to a state's 1998 interpretation of tax laws. This
interpretation was applied retroactively to prior fiscal years. Due to a change
in distribution operations, the Company's exposure to the effect of this tax
interpretation will be significantly reduced in future tax periods.
The following table summarizes the provisions and reserves for
restructuring and special charges as included in accrued expenses:
<TABLE>
<CAPTION>
Termination
Benefits Exit/Other Costs Total
------------ ---------------- -------
<S> <C> <C> <C>
Provision 1998.................... $ 2,690 $ 6,054 $ 8,744
Payments 1998..................... (822) (2,528) (3,350)
----------- ---------------- ---------
Reserve at December 31, 1998...... $ 1,868 $ 3,526 $ 5,394
=========== ================ =========
</TABLE>
NOTE 20. EXTRAORDINARY ITEMS
The extraordinary item in 1997 of $3,749, net of income tax benefit of
$2,520, consists largely of a pre-tax charge of $5,727 related to the early
redemption of $40,000 in principal amount of the Company's Senior Notes,
consisting of the early redemption premium charge of $4,316 plus unamortized
deferred financing fees of $1,411. The extraordinary item also includes a
pre-tax charge of $542 related to the restructuring of the Company's original
revolving credit facility. Both events occurred in February 1997.
In March 1998, in connection with the restatement and amendment of the
credit agreement to provide for the Credit Facility, the Company recorded an
extraordinary item of $363, net of income tax benefit of $242, related to the
write-off of previously capitalized debt issuance costs.
In September and October 1998, the Company purchased and retired $9,615
in principal amount of the Company's Senior Notes in open market transactions.
In connection with these repurchases, the Company recorded an extraordinary item
of $340, net of income tax benefit of $227, related to the purchase price
premium and the write-off of unamortized deferred financing fees.
NOTE 21. SALE OF SUBSIDIARY
In December 1998, the Company entered into an agreement to sell the
assets of Mascot Truck Parts, Inc. for $3.8 million. As part of this
transaction, the Company recorded a $1.2 million loss in 1998. This amount is
reported on the income statement under the heading "Other income and (expense),
net."
NOTE 22. SUBSEQUENT EVENTS
In March 1999, the Company obtained from its lenders, waivers of
the various defaults under the Credit Facility as of December 31, 1998 and
certain amendments to the Credit Facility and interest rate swap agreement.
52
<PAGE>
NOTE 23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
--------------------------------------------
FIRST SECOND THIRD FOURTH
--------------------------------------------
<S> <C> <C> <C> <C>
1996
- ----
Net sales................................................. $ 64,146 $ 66,873 $ 68,287 $ 73,572
Gross profit.............................................. 25,788 25,063 25,998 29,219
Net income................................................ 4,399 3,891 4,051 3,958
Pro forma earnings per share.............................. $0.28 $0.25 $0.26 $0.23
1997
- ----
Net sales................................................. $ 82,688 $ 85,410 $ 88,392 $ 89,620
Gross profit.............................................. 31,575 33,363 33,873 34,883
Income before extraordinary item.......................... 5,567 5,912 5,652 5,872
Diluted earnings per share................................ $0.29 $0.31 $0.30 $0.29
1998
- ----
Net sales................................................. $ 107,001 $ 130,468 $125,003 $124,301
Gross profit.............................................. 37,478 41,430 38,072 21,350
Income (loss) before extraordinary item................... 6,303 3,998 2,553 (19,969)
Earnings (loss) per share................................. $ 0.30 $ 0.19 $ 0.12 $ (0.99)
</TABLE>
Due to the loss reported in the fourth quarter of 1998, the applicable per share
calculation above excludes the antidilutive effect of stock options and warrants
in the fourth quarter of 1998.
The Company recorded 1998 year-end adjustments of approximately $21.1
million, net of tax. These adjustments were as follows:
<TABLE>
<CAPTION>
<S> <C>
Inventory reserves $ 6,894
Accruals and other reserves 6,226
Special charges (See Note 19) 5,164
Core liability 5,170
Start-up activities and software costs expensed 3,881
Loss on sale of subsidiary 1,182
Other 4,317
Income tax benefit of adjustments (11,745)
---------
Total $ 21,089
=========
</TABLE>
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Michael T. DuBose 45 Chairman of the Board, President and Chief Executive Officer
Ronald E. Bradshaw 54 Executive Vice President and President, Autocraft Electronics
Barry C. Kohn 43 Vice President and Chief Financial Officer
John J. Machota 47 Vice President--Human Resources
Joseph Salamunovich 39 Vice President, General Counsel and Secretary
Kenneth A. Bear 47 President, Aaron's Automotive Products, Inc.
Thomas R. Kawsky 50 President, Autocraft Industries, Inc.
Michael L. LePore 45 President, Component Remanufacturing Specialists, Inc.
Robert Anderson 78 Director
Richard R. Crowell 44 Director
Dale F. Frey 66 Director
Fred J. Hall 47 Director
Mark C. Hardy 35 Director
Dr. Michael J. Hartnett 53 Director
Gerald L. Parsky 56 Director
Richard K. Roeder 50 Director
William A. Smith 53 Director
J. Richard Stonesifer 62 Director
</TABLE>
MICHAEL T. DUBOSE joined the Company as Chairman of the Board of
Directors, President and Chief Executive Officer on December 15, 1998. Prior to
that he served as a consultant to Aurora Capital Partners ("ACP") from December
1997. From 1995 to 1997 Mr. DuBose was Chairman and Chief Executive Officer of
Grimes Aerospace Company, an international engineering, manufacturing and
distribution company. From 1993 to 1995 he served as Senior Vice President of
SAI Corporation's computer equipment manufacturing and systems sector. Prior to
that Mr. DuBose held various positions at General Instrument and General
Electric Company.
RONALD E. BRADSHAW has served as Executive Vice President of the
Company since March 1998 and as President of the Company's Autocraft Electronics
subsidiary since March 1, 1999. Mr. Bradshaw joined the Company following the
completion of its acquisition of Autocraft from The Fred Jones Companies, Inc.
(which was formerly known as Autocraft Industries, Inc.). Prior to that, Mr.
Bradshaw served as President and Chief Operating Officer of The Fred Jones
Companies since October 1997 and as Senior Vice President and Chief Financial
Officer from 1994 to 1997 and as Treasurer from 1990 to 1994. Autocraft
Electronics remanufactures engine control modules, radios, instrument and
display clusters, and certain other electronic components for General Motors,
Ford and certain other OEMs.
BARRY C. KOHN joined the Company as Vice President and Chief Financial
Officer on January 25, 1999. During 1998 he served as a self-employed financial
consultant. From 1995 to 1997 Mr. Kohn was Senior Vice President and Chief
Financial Officer of Grimes Aerospace Company, an international engineering,
manufacturing and distribution company. Between 1987 and 1995 he held
increasingly senior positions at Grimes including Treasurer, Controller and
Manager of Business Planning. Mr. Kohn is a Certified Public Accountant.
54
<PAGE>
JOHN J. MACHOTA has served as Vice President--Human Resources of the
Company since June 1997. From 1996 to 1997, he was a self-employed human
resources consultant. From 1995 to 1996, Mr. Machota was Vice President--
Compensation for Waste Management, Inc. and from 1993 to 1995 served as
Waste Management's Vice President--Human Resource Services. From 1986 to 1993
Mr. Machota was Vice President--Human Resources for a subsidiary of Waste
Management and prior to that held various other positions in the human resources
area.
JOSEPH SALAMUNOVICH joined the Company as Vice President, General
Counsel and Secretary in March 1997. From 1995 to March 1997, Mr. Salamunovich
was a partner in the law firm of Gibson, Dunn & Crutcher LLP, where he
specialized in corporate and securities law matters. From 1986 to 1995, Mr.
Salamunovich was an associate of the same firm.
KENNETH A. BEAR became President of the Company's Aaron's Automotive
Products, Inc. subsidiary in February 1998. Prior to that he held various
other positions with Aaron's, including Executive Vice President since 1989.
Mr. Bear joined Aaron's in 1983. Aaron's remanufactures transmissions and
engines for Chrysler and engines for sale to independent aftermarket
customers.
THOMAS R. KAWSKY became President of the Company's Autocraft
Industries, Inc. subsidiary in March 1998 following the Autocraft Acquisition.
Prior to that he served as Vice President and General Manager of the OEM
Division of The Fred Jones Companies, Inc. since October 1997 and before joining
Fred Jones he served as Vice President--Manufacturing for the G&O Division of
TransPro, Inc. since March 1997. Prior to that, Mr. Kawsky was employed by
Cummins Engine Company for 26 years, where he served most recently as General
Manager--Engines for the Cummins Diesel ReCon Division. Autocraft Industries
remanufactures transmissions for Ford.
MICHAEL L. LEPORE has been President of the Company's Component
Remanufacturing Specialists, Inc. subsidiary 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. CRS remanufactures transmissions
for General Motors, Isuzu, Hyundai and certain other OEMs.
ROBERT ANDERSON became a director of the Company in March 1997. Mr.
Anderson has been associated with Rockwell International Corporation since 1968,
where he has been Chairman Emeritus since 1990 and served previously as Chairman
of the Executive Committee from 1988 to 1990 and as Chairman of the Board and
Chief Executive Officer from 1979 to 1988. Mr. Anderson is a director of
Gulfstream Aerospace Corporation, Motor Cargo Industries, Inc. and Optical Data
Systems Company.
RICHARD R. CROWELL became a director of the Company in July 1994. Mr.
Crowell is President and a founding partner 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.
DALE F. FREY became a director of the Company in August 1997. Prior to
his retirement in early 1997, Mr. Frey was Chairman of the Board, President and
Chief Executive Officer of General Electric Investment Corporation, a position
he had held since 1984, and was a Vice President of General Electric Company
since 1980. Mr. Frey is a director of USF&G Corporation, Praxair, Inc., First
American Financial Corporation (until April 1999), Roadway Express and Promus
Hotel Corp.
MARK C. HARDY became a director of the Company in July 1994. Mr. Hardy
is a Principal of ACP and joined ACP in June 1993. Prior to joining ACP, Mr.
Hardy was an Associate at Bain & Company, a consulting firm.
FRED J. HALL became a director of the Company in May 1998. Mr. Hall is
Chairman of the Board, President and Chief Executive Officer of The Fred Jones
Companies, Inc. which in March 1998 completed the sale of Autocraft to the
Company. In addition to being employed in various capacities by The Fred Jones
Companies and its affiliates since 1977, Mr. Hall served as Deputy Assistant
Secretary of State for European and Canadian Affairs from 1986 to 1988.
55
<PAGE>
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. 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.
GERALD L. PARSKY became a director of the Company in March 1997. Mr.
Parsky is the Chairman and a founding partner of ACP. Prior to forming ACP in
1991, Mr. Parsky was a senior partner and a member of the Executive and
Management Committees of the law firm of Gibson, Dunn & Crutcher LLP. Prior to
that, he served as an official with the United States Treasury Department and
the Federal Energy Office, and as Assistant Secretary of the Treasury for
International Affairs.
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.
WILLIAM A. SMITH has been a director of the Company since July 1994. He
served as Chairman Emeritus of the Board of Directors from August 1997 to
December 1998 and prior to that served as Chairman of the Board since July 1994.
Mr. Smith was 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. Prior to that, Mr. Smith held various positions with
Navistar International Transportation Corporation, Labinal, Inc. (a French
automotive and aerospace equipment manufacturer) and Cummins Engine Company.
J. RICHARD STONESIFER became a director of the Company in August 1997.
Prior to his retirement in 1996, Mr. Stonesifer was employed with the General
Electric Company for 37 years, serving most recently as President and Chief
Executive Officer of GE Appliances, and an executive officer and Senior Vice
President of the General Electric Company, from January 1992 until his
retirement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who own more than 10% of
any equity security of the Company to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and to furnish copies of
these reports to the Company. Based solely on a review of the copies of the
forms that the Company received, the Company believes that the following forms
were not filed on timely basis: a Form 3 for Mr. DuBose that was due in December
1998; Form 4s for James R. Wehr (former President of Aaron's) that were due in
June and July 1998 to report the disposition of 31,000 and 45,000 shares of
Common Stock, respectively; a Form 4 for Mr. Kawsky that was due in October 1998
to report the grant of options to purchase 15,000 shares of Common Stock; and a
Form 4 for Mr. LePore that was due in July 1998 to report the exercise of
options to purchase 11,696 shares of Common Stock and the grant of options to
purchase 15,000 shares of Common Stock. These oversights were subsequently
corrected when Mr. DuBose filed a Form 3 in February 1999, Mr. Wehr filed Form
4s in August 1998, and Messrs. Kawsky and LePore filed Form 5s in February 1999.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the three most recently completed
fiscal years, the cash compensation for services in all capacities to the
Company of those persons who were, as of December 31, 1998, (i) the Company's
current Chief Executive Officer, (ii) the Company's former Chief Executive
Officer, and (iii) the four other most highly compensated executive officers of
the Company and its subsidiaries during the last fiscal year (collectively, the
"Named Executive Officers"):
56
<PAGE>
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
------------------------ --------------------
NUMBER OF SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS (2) OPTIONS (#) (3) COMPENSATION
- --------------------------- ---- ---------- --------- ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Michael T. DuBose (4) 1998 $ 17,534 -- 500,000 --
Chairman, President and 1997 -- -- -- --
Chief Executive Officer 1996 -- -- -- --
Stephen J. Perkins (5) 1998 335,000 -- 332,000(6) --
Former Chairman, President 1997 300,000 $ 225,000 -- --
and Chief Executive Officer 1996 70,385 125,000 498,000(6) --
Ronald E. Bradshaw (7) 1998 227,417 157,552 45,000 --
Executive Vice President and 1997 -- -- -- --
President, Autocraft Electronics 1996 -- -- -- --
Michael L. LePore 1998 236,376 23,637 15,000 --
President, CRS 1997 232,425 71,377 -- --
1996 226,520 181,745 -- --
Wesley N. Dearbaugh (8) 1998 215,000 -- -- 94,734(9)
Former President, ATC 1997 200,000 47,400 -- --
Distribution Group 1996 116,457 50,000 140,352 --
Kenneth A. Bear (10) 1998 176,538 18,000 20,000 --
President, Aaron's 1997 120,368 52,662 -- --
1996 104,000 80,000 -- --
</TABLE>
- --------------
(1) For information regarding the base salary of each Named Executive
Officer in 1999 see "Executive Compensation--Employment Agreements."
(2) Bonuses for a particular year are paid during the first quarter of the
following year.
(3) Consists of options to purchase securities of the Company, which options
were issued pursuant to the Company's 1996 Stock Incentive Plan (the
"1996 Plan") or its 1998 Stock Incentive Plan (the "1998 Plan"). Pursuant
to the 1996 and 1998 Plans, the Compensation and Human Resources
Committee of the Board of Directors makes recommendations to the Board of
Directors regarding the terms and conditions of each option to be
granted.
(4) Mr. DuBose became Chairman, President and Chief Executive Officer in
December 1998.
(5) Mr. Perkins became Chairman, President and Chief Executive Officer in
October 1996 and ceased to hold such positions in December 1998.
(6) The options granted in 1998 replaced the options granted in 1996. See
"Executive Compensation--Option Repricing Table."
(7) Mr. Bradshaw became Executive Vice President in March 1998.
(8) Mr. Dearbaugh became President of the ATC Distribution Group in June 1996
and ceased to hold such position in March 1999.
(9) Consists of (i) a one-time bonus paid in connection with Mr. Dearbaugh's
relocation from Arizona to Illinois and (ii) reimbursement of certain
real estate costs incurred by Mr. Dearbaugh in such relocation, grossed
up for tax effect.
(10) Mr. Bear became President of Aaron's in February 1998. Prior to that he
served as Executive Vice President of Aaron's.
57
<PAGE>
OPTION GRANTS TABLE
Shown below is information concerning grants of options issued by the
Company to the Named Executive Officers during 1998:
<TABLE>
<CAPTION>
INDIVIDUAL POTENTIAL REALIZABLE
GRANTS VALUE AT ASSUMED
------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ----------------------- --------------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael T. DuBose...... 300,000(2) 26.5 $ 5.00 12/15/08 $943,342 $2,390,614
200,000(3) 17.7 10.00 12/15/08 -- 593,742
Stephen J. Perkins..... 332,000(4) 29.3 5.00 12/31/02 357,740 770,406
Michael L. LePore...... 15,000(5) 1.3 18.125 5/12/08 174,035 438,162
Ronald E. Bradshaw..... 30,000(6) 2.7 20.25 4/1/08 382,053 968,199
15,000(5) 1.3 18.125 5/12/08 174,035 438,162
Wesley N. Dearbaugh.... -- -- -- -- -- --
Kenneth A. Bear........ 20,000(5) 1.8 18.125 5/12/08 232,047 584,216
</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 1998 Plan and vest and become
exercisable as follows: 166,667 on December 15, 1999 and 133,333 on
December 15, 2000.
(3) These options were granted under the 1998 Plan and vest and become
exercisable as follows: 33,334 on December 15, 2000 and 166,666 on
December 15, 2001.
(4) These options were granted under the 1996 Plan and are fully vested and
exercisable. These options were granted in replacement of a like number
of fully vested and exercisable options that were granted in October 1996
having an exercise price of $4.67 per share that would have terminated on
January 30, 1999. See "Executive Compensation--Option Repricing Table."
(5) These options were granted under the 1998 Plan. One third of the options
vest and become exercisable on each of May 12, 1999, 2001 and 2003.
(6) These options were granted under the 1996 Plan. One third of the options
vest and become exercisable on each of April 1, 1999, 2001 and 2003.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE
Shown below is information relating to the exercise of stock options
during 1998 by the Named Executive Officers and the value of unexercised options
for each of the Named Executive Officers as of December 31, 1998:
58
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
ACQUIRED ON VALUE ---------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael T. DuBose...... -- -- -- 500,000 -- $862,500
Stephen J. Perkins..... -- -- 332,000 -- $954,500 --
Michael L. LePore...... 11,696 $180,762 11,696 26,696 72,574 72,574
Ronald E. Bradshaw..... -- -- -- 45,000 -- --
Wesley N. Dearbaugh.... -- -- 35,088 105,264 112,457 337,371
Kenneth A. Bear........ -- -- 46,784 43,392 290,295 145,147
</TABLE>
- ---------------
(1) Calculated using the closing price of the Common Stock on the Nasdaq
National Market System on December 31, 1998, which was $7.875 per share.
OPTION REPRICING TABLE
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF ORIGINAL
SECURITIES MARKET PRICE OPTION TERM
UNDERLYING OF STOCK AT EXERCISE REMAINING AT
OPTIONS TIME OF PRICE AT TIME DATE OF
REPRICED OR REPRICING OR OF REPRICING NEW EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT OR AMENDMENT PRICE AMENDMENT
- -------------------- -------- ----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Perkins 12/15/98 498,000(1) $5.00 $4.67 $5.00 46 days(2)
</TABLE>
- ------------------
(1) These options were replaced with new options to purchase 332,000 shares
of Common Stock.
(2) The replaced options by their terms were to expire on October 1, 2007
unless Mr. Perkins ceased to be employed by the Company prior to then, in
which case they would have terminated 30 days after he ceased to be so
employed. Mr. Perkins' employment with the Company ended December 31,
1998.
REPORT OF THE COMPENSATION & HUMAN RESOURCES COMMITTEE ON REPRICING OF OPTIONS
Mr. Perkins joined the Company in October 1996, at which time he was
granted options to purchase 498,000 shares of the Common Stock at $4.67 per
share. These options were to vest over three years and would expire ten years
after the date of grant unless Mr. Perkins ceased to be an employee of the
Company before then, in which case the options would terminated 30 days after he
ceased to be employed. At the time that Mr. Perkins resigned as Chief Executive
Officer of the Company, 332,000 of the options had vested and were exercisable.
As a result of Mr. Perkins' resignation, these vested options would have expired
at the end of January 1999.
The Compensation and Human Resources Committee concluded that, in
recognition of Mr. Perkins' many contributions to the growth of the Company, it
was appropriate to permit Mr. Perkins an additional four years in which to
exercise his vested options. Therefore, the Company canceled the 332,000 vested
options and replaced them with an equal number of fully vested new options that
will expire on December 31, 2002 and have an exercise price equal to the fair
market value of the Common Stock on the date of grant of the new options
($5.00). The new exercise price represents a 7% increase over the old exercise
price. By increasing the exercise price to fair market value, the Company is not
required to recognize any compensation expense in connection with the grant of
the new options. The 166,000 old stock options that were not vested as of the
time Mr. Perkins resigned were terminated according to their terms.
The Compensation and Human Resources Committee
J. Richard Stonesifer, Chairman
Richard R. Crowell
Gerald L. Parsky
59
<PAGE>
EMPLOYMENT AGREEMENTS
The Company typically enters into an employment agreement with each of
its executive officers (including the Named Executive Officers) that provides
for a three-year term and is automatically renewable thereafter on a
year-to-year basis. The agreement includes a noncompetition provision for a
period of 18 months from the termination of the executive officer's employment
with the Company (except in the case of Mr. LePore, whose noncompetition
provision expires June 1, 2002) and a nondisclosure provision which is effective
for the term of the employment agreement and indefinitely thereafter. The
executive officer is entitled to severance equal to his base salary for a period
of 12 months after termination if he is terminated without cause (as defined in
the employment agreement), except in the cases of (i) Mr. DuBose, whose
severance period is the longer of 24 months or the balance of the initial
contract term, and (ii) Messrs. Perkins and LePore, whose severance period is 18
months. Set forth below is the current annual base salary for each of the Named
Executive Officers:
<TABLE>
<CAPTION>
ANNUAL END OF INITIAL
NAME BASE SALARY CONTRACT TERM
- ------------------------------------------ ----------- ---------------
<S> <C> <C>
Michael T. DuBose......................... $400,000 12/15/02
Stephen J. Perkins........................ 335,000 (1) (2)
Ronald E. Bradshaw........................ 275,000 3/6/01
Michael L. LePore......................... 240,158 6/1/00
Wesley N. Dearbaugh....................... 215,000 (3) (4)
Kenneth A. Bear........................... 200,000 year-to-year
</TABLE>
- ----------------
(1) Mr. Perkins is receiving severance payments at this rate through
June 30, 2000.
(2) Mr. Perkins ceased to be an employee of the Company on December 31, 1998.
(3) Mr. Dearbaugh is receiving severance payments at this rate through
August 18, 2000.
(4) Mr. Dearbaugh ceased to be an employee of the Company on March 31, 1999.
1996 AND 1998 STOCK INCENTIVE PLANS
Pursuant to the 1996 and 1998 Plans, officers, directors, employees and
consultants of the Company and its affiliates are eligible to receive options to
purchase Common Stock and other awards. Awards under the 1996 Plan 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.
Awards under the 1998 Plan may take the form of stock options, annual incentive
bonuses and incentive stock.
The Plans are administered by the Compensation and Human Resources
Committee of the Board of Directors (the "Committee"), although the Board of
Directors may exercise any authority of the Committee under the Plans in lieu of
the Committee's exercise thereof. While the Plans permit the Committee to grant
awards, such grants are typically made by the Board of Directors based on the
Committee's recommendations regarding the recipients and type and amount of
awards. Subject to the express provisions of the Plans, the Committee has broad
authority in administering and interpreting the Plans. Options granted to
employees 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. Awards to employees 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 Committee, any change of control of the
Company.
The aggregate number of shares of Common Stock that can be issued under
the 1996 Plan may not exceed 2,400,000. As of February 4, 1999, there were
outstanding options to purchase an aggregate of 922,332 shares of Common Stock
granted to officers and employees of the Company and its subsidiaries and
certain independent contractors pursuant to the 1996 Plan, and the number of
shares available for issuance pursuant to options yet to be granted under the
1996 Plan was 240,694.
60
<PAGE>
The aggregate number of shares of Common Stock that can be issued under
the 1998 Plan may not exceed 1,200,000. As of February 4, 1999, there were
outstanding options to purchase an aggregate of 880,500 shares of Common Stock
granted to directors, officers and employees of the Company and its subsidiaries
pursuant to the 1998 Plan, and the number of shares available for issuance
pursuant to options yet to be granted under the 1998 Plan was 319,500.
In most cases, outstanding options are subject to certain vesting
provisions and expire on the tenth anniversary of the date of grant. The
exercise prices of options outstanding under the 1996 and 1998 Plans as of
February 4, 1999 are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION SHARES EXERCISE PRICE
<S> <C>
289,804 $1.67
235,440 4.67
632,000 5.00
120,000 5.3125
3,000 5.5625
200,000 10.00
6,000 10.938
35,088 14.75
1,500 18.00
250,000 18.125
30,000 20.25
</TABLE>
For information regarding options granted to directors and officers
of the Company, see Item 12. "Security Ownership of Certain Beneficial Owners
and Management."
COMPENSATION AND HUMAN RESOURCES COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
The members of the Compensation and Human Resources Committee are
Messrs. Crowell, Parsky and Stonesifer. Messrs. Crowell and Parsky are (i)
two of the three stockholders and directors of Aurora Advisors, Inc., the
general partner of ACP, which is the general partner of Aurora Equity
Partners, L.P. ("AEP"), a significant stockholder of the Company, and (ii)
two of the three stockholders and directors of Aurora Overseas Advisors,
Ltd., the general partner of Aurora Overseas Capital Partners L.P., the
general partner of Aurora Overseas Equity Partners I, L.P. ("AOEP"), also a
significant stockholder of the Company. See Item 12. "Security Ownership of
Certain Beneficial Owners and Management." In addition, Messrs. Crowell and
Parsky are two of the three managing directors of ACP, which provides
management services to the Company pursuant to a management services
agreement. See Item 13. "Certain Relationships and Related Transactions."
61
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Common Stock (the only class of issued and outstanding voting securities of
the Company), as of February 4, 1999, 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 was known by the Company
to beneficially own more than 5% of the outstanding shares of any class of
voting securities of the Company.
<TABLE>
<CAPTION>
NUMBER OF VOTING
SHARES (1) PERCENTAGE
------------ ----------
<S> <C> <C>
Aurora Equity Partners L.P. (other beneficial owners: Richard R.
Crowell, Gerald L. Parsky and Richard K. Roeder) (2)(3)................. 9,927,536 49.0
Aurora Overseas Equity Partners I, L.P. (other beneficial owners:
Richard R. Crowell, Gerald L. Parsky and Richard K. Roeder) (4)......... 4,069,392 20.1
General Electric Pension Trust (5)......................................... 2,038,152 10.1
Investment Advisors, Inc. (6).............................................. 1,141,400 5.6
Michael T. DuBose (7)...................................................... 5,000 *
Stephen J. Perkins (8)..................................................... 335,000 1.6
Ronald E. Bradshaw (9)..................................................... 11,000 *
Michael L. LePore (10)..................................................... 60,080 *
Wesley N. Dearbaugh (11)................................................... 36,088 *
Kenneth A. Bear (12)....................................................... 47,084 *
Robert Anderson (13)(14)................................................... 36,918 *
Richard R. Crowell (2)(3)(4)(14)........................................... 11,040,453 54.5
Dale F. Frey (15).......................................................... 22,000 *
Fred J. Hall (16).......................................................... 25,600 *
Mark C. Hardy (3)(14)(17).................................................. 16,460 *
Dr. Michael J. Hartnett (18)............................................... 80,176 *
Gerald L. Parsky (2)(3)(4)(14)(19)......................................... 11,040,453 54.5
Richard K. Roeder (2)(3)(4)(14)............................................ 11,040,453 54.5
J. Richard Stonesifer (20)................................................. 17,000 *
William A. Smith (21)...................................................... 545,984 2.7
All directors and officers as a group (19 persons) (22).................... 11,895,663 58.2
</TABLE>
- ---------------
* Less than 1%.
(1) The shares of Common Stock underlying options or warrants that are
exercisable as of February 4, 1999 or that will become exercisable within
60 days thereafter (such options being referred to as "Exercisable") are
deemed to be outstanding for the purpose of calculating the beneficial
ownership of the holder of such options or warrants, but are not deemed
to be outstanding for the purpose of computing the beneficial ownership
of any other person.
(2) Consists of (i) 6,971,061 shares owned by AEP (one of the Aurora
Partnerships), (ii) 2,038,152 shares owned by the General Electric
Pension Trust ("GEPT") (see Note 5 below) and (iii) 918,323 shares that
are subject to an irrevocable proxy granted to the Aurora Partnerships by
certain holders of Common Stock, including Messrs. Anderson, Crowell,
Hardy, Parsky and Roeder, certain other limited partners of AEP and
certain affiliates of a limited partner of AOEP (the other Aurora
Partnership). The proxy terminates upon the earlier of the transfer of
such shares or July 31, 2004. AEP is a Delaware limited partnership the
general partner of which is ACP, a Delaware limited partnership whose
general partner is Aurora Advisors, Inc. Messrs. Crowell, Parsky and
Roeder are the sole stockholders and directors of Aurora Advisors, are
limited partners of ACP and may be deemed to beneficially share ownership
of the Common Stock beneficially
62
<PAGE>
owned by AEP and may be deemed to be the organizers of the Company under
regulations promulgated under the Securities Act of 1933.
(3) The address of this stockholder is 10877 Wilshire Boulevard, Suite 2100,
Los Angeles, CA 90024.
(4) Consists of (i) 1,112,917 shares owned by AOEP, (ii) 2,038,152 shares
owned by GEPT (see Note 5 below) and (iii) 918,323 shares that are
subject to an irrevocable proxy granted to the Aurora Partnerships by
certain holders of Common Stock, including Messrs. Anderson, Crowell,
Hardy, Parsky and Roeder, certain other limited partners of AEP and
certain affiliates of a limited partner of AOEP. The proxy terminates
upon the earlier of the transfer of such shares or July 31, 2004. AOEP is
a Cayman Islands limited partnership the general partner of which is
Aurora Overseas Capital Partners, L.P., a Cayman Islands limited
partnership, whose general partner is Aurora Overseas Advisors, Ltd.
Messrs. Crowell, Parsky and Roeder are the sole stockholders and
directors of Aurora Overseas Advisor,, are limited partners of Aurora
Overseas Capital Partners and may be deemed to beneficially own the
shares of the Company's Common Stock beneficially owned by AOEP. AOEP's
address is West Wind Building, P.O. Box 1111, Georgetown, Grand Cayman,
Cayman Islands, B.W.I.
(5) With limited exceptions, GEPT has agreed to vote these shares in the same
manner as the Aurora Partnerships vote their respective shares of Common
Stock. This provision terminates upon the earlier of the transfer of such
shares or July 31, 2004. GEPT's address is 3003 Summer Street, Stamford,
CT 06905.
(6) Based on a Schedule 13G filed with the Securities and Exchange Commission
on January 29, 1999. The address of Investment Advisors, Inc., is 3700
First Bank Place, Box 357, Minneapolis, MN 55440.
(7) Excludes 500,000 shares subject to options granted under the 1998 Plan
that are not Exercisable. Mr. DuBose's address is One Oak Hill Center,
Suite 400, Westmont, IL 60559.
(8) Includes 322,000 shares subject to options granted under the 1996 Plan
that are Exercisable. Mr. Perkins' address is 14735 Pine Tree Road, Orland
Park, IL 60462.
(9) Includes 10,000 shares subject to options granted under the 1996 Plan
that are Exercisable. Excludes 35,000 shares subject to options granted
under the 1996 and 1998 Plans that are not Exercisable. Mr. Bradshaw's
address is 201 Robert S. Kerr, Suite 201, Oklahoma City, OK 73102.
(10) Includes 11,696 shares subject to options granted under the 1996 Plan
that are Exercisable. Excludes 26,696 shares subject to options granted
under the 1996 and 1998 Plans that are not Exercisable.
Mr. LePore's address is 400 Corporate Drive, Mahwah, NJ 07430.
(11) Includes 35,088 shares subject to options granted under the 1996 Plan
that are Exercisable. Excludes 105,264 shares subject to options granted
under the 1996 Plan that are not Exercisable. Mr. Dearbaugh's address is
2318 Brookwood Court, Aurora, IL 60504.
(12) Includes 46,784 shares subject to options granted under the 1996 Plan
that are Exercisable. Excludes 43,392 shares subject to options granted
under the 1996 and 1998 Plans that are not Exercisable.
Mr. Bear's address is 2699 North Westgate, Springfield, MO 65803.
(13) Includes (i) 4,290 shares held by Mr. Anderson's wife (including 2,790
shares held by her as trustee for her relatives), as to which Mr.
Anderson disclaims beneficial ownership, and (ii) 12,000 shares subject
to options granted under the 1998 Plan that are Exercisable. Excludes
24,000 shares subject to options granted under the 1998 Plan that are not
Exercisable. Mr. Anderson's address is 10877 Wilshire Boulevard, Suite
1405, Los Angeles, CA 90024-4341.
(14) The shares actually owned by this person (as distinguished from the
shares that this person is deemed to beneficially own) are subject to an
irrevocable proxy granted to the Aurora Partnerships.
(15) Includes 12,000 shares subject to options granted under the 1998 Plan
that are Exercisable. Excludes 24,000 shares subject to options granted
under the 1998 Plan that are not Exercisable. Mr. Frey's address is One
Gorham Island, Westport, CT 06880.
(16) Consists of (i) 4,000 shares subject to options granted under the 1998
Plan that are Exercisable, and (ii) 21,600 shares owned by Fred Jones
Industries A Limited Partnership, a Texas limited partnership ("Fred
63
<PAGE>
Jones Industries"), which is a significant stockholder of The Fred Jones
Companies, Inc. The general partner of Fred Jones Industries is a
corporation of which Mr. Hall is a director, officer and significant
stockholder. Mr. Hall is also a limited partner of Fred Jones Industries.
Excludes 8,000 shares subject to options granted under the 1998 Plan that
are not Exercisable. Mr. Hall disclaims beneficial ownership of the
shares owned by Fred Jones Industries. Mr. Hall's address is 123 South
Hudson Avenue, Oklahoma City, OK 73102
(17) Includes 8,000 shares subject to options granted under the 1996 Plan that
are Exercisable. Excludes 4,000 shares subject to options granted under
the 1996 Plan that are not Exercisable.
(18) Includes 70,176 shares subject to exercisable warrants. Mr. Hartnett's
address is 60 Round Hill Road, Fairfield, CT 06430.
(19) Includes 2,000 shares held by Mr. Parsky's wife, as to which Mr. Parsky
disclaims beneficial ownership.
(20) Includes 12,000 shares subject to options granted under the 1998 Plan
that are Exercisable. Excludes 24,000 shares subject to options granted
under the 1998 Plan that are not Exercisable. Mr.
Stonesifer's address is 8473 Bay Colony Drive, Naples, FL 34108.
(21) Mr. Smith's address is 629 SW 293rd Street, Federal Way, WA 98023.
(22) Excludes shares held by Named Executive Officers who are no longer
officers of the Company. Includes 198,352 shares subject to warrants and
options that are Exercisable. Excludes 252,480 shares subject to options
granted under the 1996 and 1998 Plans that are not Exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company believes the transactions described below were beneficial
to the Company and were on terms at least as favorable to the Company as could
have been obtained from unaffiliated third parties pursuant to arms-length
negotiations.
RELATIONSHIP WITH ACP
The Company was formed in 1994 at the direction of ACP, which is
affiliated with the Aurora Partnerships. ACP is controlled by Messrs. Crowell,
Parsky and Roeder, who are directors of the Company. See Item 12. "Securities
Ownership of Certain Beneficial Owners and Management." As of March 1, 1999, the
Company had paid ACP aggregate fees of approximately $4.4 million for investment
banking services provided by ACP in connection with the Company's acquisitions
in 1995-1998.
The Company also pays to ACP a base annual management fee of $550,000
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 has not been increased as a result of any of the Company's
acquisitions. The base annual management fee is also subject to increase for
specified cost of living increases pursuant to which the base annual management
fee was most recently increased in January 1999 from $540,000. 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 1998, ACP did not
receive this additional management fee in 1998. In the event the Company
consummates any significant acquisitions or dispositions, 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
Company's bank credit facility. The Management Services Agreement also provides
that the Company shall provide
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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 the Aurora Partnerships
declines below 50% as follows: for any period during which the collective
beneficial ownership of the Aurora Partnerships 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 discretionary increases by the Board of
Directors or cost of living increases as described above, the "Original Fee");
for any period during which the Aurora Partnerships' 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 the Aurora Partnerships 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 the Aurora Partnerships' collective
beneficial ownership declines below 20%, the Management Services Agreement will
terminate. As of February 4, 1999, the collective beneficial ownership of the
Aurora Partnerships for purposes of the Management Services Agreement was
approximately 55%. See Item 12. "Security Ownership of Certain Beneficial Owners
and Management."
In October 1996, the Company granted options for an aggregate of 48,000
shares of Common Stock to Mark C. Hardy (a director of the Company), Kurt Larsen
(a former director of the Company) and two consultants of the Company, all four
of whom were then employees of ACP. These options, which have an exercise price
of $4.67 per share, become exercisable in one-third increments on each of the
first three anniversaries of the date of grant and expire in 2006. In 1997,
12,000 of these options terminated when Mr. Larsen resigned from ACP.
RELATIONSHIP WITH THE FRED JONES COMPANIES
In March 1998 the Company purchased Autocraft from The Fred Jones
Companies, Inc. (then known as Autocraft Industries, Inc.) for $112.5 million in
cash plus up to an additional $12.5 million to be paid in 1999 based on the
performance of Autocraft's European operations during 1998. Of the $112.5
million, $1.25 million was paid to Fred Jones Industries in exchange for an
agreement from Fred Jones Industries to cooperate with the Company and not
compete against it for a specified period of time following the Autocraft
Acquisition.
In connection with the Autocraft Acquisition, the Company entered into
a lease with The Fred Jones Companies pursuant to which the Company leases a
manufacturing facility in Oklahoma City at a base rental rate of $26,500 per
month. The lease may be terminated by either party on six months' written
notice.
As part of the Autocraft Acquisition, the Company purchased
substantially all of The Fred Jones Companies' computer business systems
equipment and related software and support capabilities. The parties entered
into an agreement under which the Company provides computer systems support to
The Fred Jones Companies for a monthly fee plus the Company's cost to provide
any specialized services required by The Fred Jones Companies. Through March 31,
1999 the monthly fee is $108,300, and thereafter it will be $102,500. The
agreement will expire on March 31, 2000.
The Company sells certain electronic components to automobile
dealerships that are owned by a limited liability company in which The Fred
Jones Companies has a significant equity interest. Sales to these dealerships
totaled $95,000 during 1998.
Fred J. Hall, who is a director of the Company, is (i) the Chairman of
the Board, President and Chief Executive Officer and a significant stockholder
of The Fred Jones Companies, and (ii) a director, officer and significant
stockholder of the corporation that is the general partner of Fred Jones
Industries, which is also a significant stockholder of The Fred Jones Companies.
Mr. Hall is also a limited partner of Fred Jones Industries.
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INDEMNIFICATION AGREEMENTS
The Company has entered into separate but identical indemnification
agreements (the "Indemnification Agreements") with each director and executive
officer of the Company. The Indemnification Agreements provide for, among other
things, the following: (i) indemnification to the fullest extent permitted by
law against any and all expenses (including attorneys' fees and all other costs
and obligations of any nature whatever), judgments, fines, penalties and amounts
paid in settlement (including all interest, assessments and other charges paid
or payable in connection therewith) of any claim, unless the Company determines
that such indemnification is not permitted under applicable law; (ii) the prompt
advancement of expenses to the director or officer, including attorneys' fees
and all other costs, fees, expenses and obligations paid or incurred in
connection with investigating or defending any threatened, pending or completed
action, suit or proceeding related to the fact that such director or officer is
or was a director or officer of the Company or is or was serving at the request
of the Company as a director, officer, employee, trustee, agent or fiduciary of
another corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise, and for repayment to the Company if it is found that such
director or officer is not entitled to such indemnification under applicable
law; (iii) a mechanism through which the director or officer may seek court
relief in the event the Company determines that the director or officer is not
permitted to be indemnified under applicable law (and therefore is not entitled
to indemnification under the Indemnification Agreement); and (iv)
indemnification against expenses (including attorneys' fees) incurred in seeking
to collect from the Company an indemnity claim or advancement of expenses to the
extent successful.
REGISTRATION RIGHTS
The holders of the Common Stock outstanding before the IPO in December
1996 have certain "demand" and "piggyback" registration rights pursuant to a
stockholders agreement. In addition, GEPT has certain "demand" and "piggyback"
registration rights with respect to a portion of the shares of Common Stock
owned by it.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Index to Financial Statements, Financial Statement Schedules and Exhibits:
1. Financial Statements Index
See Index to Financial Statements and Supplemental Data on page 25.
2. Financial Statement Schedules Index
II - Valuation and Qualifying Accounts.......................... S-1
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and therefore
have been omitted.
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3. Exhibit Index
The following exhibits are filed as part of this Annual Report
on Form 10-K, or are incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
Aftermarket Technology Corp. (previously filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by this
reference)
3.2 Certificate of Designations, Preferences, and Relative,
Participating, Option and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions Thereof of
Redeemable Exchangeable Cumulative Preferred Stock of Aftermarket
Technology Corp. (previously filed as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by this reference)
3.3 Amended and Restated Bylaws of Aftermarket Technology Corp.
(previously filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (File No. 333-35543)
filed on September 12, 1997 and incorporated herein by this
reference)
*3.4 Certificate of Amendment of Restated Certificate of
Incorporation of Aftermarket Technology Corp. filed with
the Delaware Secretary of State on August 7, 1998
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 (previously filed
as Exhibit 4.3 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-6697, and incorporated herein by this reference)
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 (previously filed as
Exhibit 4.4 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
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 (previously
filed as Exhibit 4.5 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed on October 25, 1996,
Commission File No. 333-5597, and incorporated herein by this
reference)
*4.6 Fourth Supplemental Indenture to the Series B Indenture and
Second Supplemental Indenture to the Series D Indenture, dated as
of June 1, 1998, 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
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)
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10.2 Amendment No. 1 to the Stockholders Agreement, dated as
of June 24, 1996 (previously filed as Exhibit 10.38 to
Amendment No. 2 to the Company's Registration Statement
on Form S-1 filed on November 6, 1996, Commission File No.
333-5597, and incorporated herein by this reference)
10.3 Amendment No. 2 to the Stockholders Agreement, dated as of
October 24, 1996 (previously filed as Exhibit 10.39 to
Amendment No. 2 to the Company's Registration Statement
on Form S-1 filed on November 6, 1996, Commission File No.
333-5597, and incorporated herein by this reference)
10.4 Amendment No. 3 to Stockholders Agreement, dated as of
December 4, 1996 (previously filed as Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by this reference)
10.5 Amendment No. 4 to Stockholders Agreement, dated as of December
16, 1996 (previously filed as Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by this reference)
10.6 Amended and Restated Credit Agreement, dated as of March 6, 1998,
among Aftermarket Technology Corp., the Lenders from time to time
parties thereto and The Chase Manhattan Bank (the Credit
Agreement) (previously filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by this reference)
10.7 Guarantee and Collateral Agreement, dated as of March 6, 1998, by
Aftermarket Technology Corp. and each of the signatories thereto
in favor of The Chase Manhattan Bank as Agent for the banks and
other financial institutions from time to time parties to the
Amended and Restated Credit Agreement (see Exhibit 10.6)
(previously filed as Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 and
incorporated herein by this reference)
10.8 Amended and Restated Tax Sharing Agreement, dated as of December
20, 1996, among Aftermarket Technology Holdings Corp., Aaron's
Automotive Products, Inc., ATC Components, Inc., CRS Holdings
Corp., Diverco Acquisition Corp., H.T.P., Inc., Mamco Converters,
Inc., R.P.M. Merit, Inc. and Tranzparts Acquisition Corp.
(previously filed as Exhibit 10.8 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference)
10.9 Amended and Restated Management Services Agreement, dated as of
November 18, 1996, by and among Aftermarket Technology Corp., the
subsidiaries of Aftermarket Technology Corp., and Aurora Capital
Partners L.P. (previously filed as Exhibit 10.4 to Amendment No.
4 to the Company's Registration Statement on Form S-1 filed on
October 25, 1996, Commission File No. 333-5597, and incorporated
herein by this reference)
10.10 Aftermarket Technology Corp. 1996 Stock Incentive Plan
(previously filed as Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference)
10.11 Form of Incentive Stock Option Agreement (previously filed as
Exhibit 10.36 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
10.12 Form of Non-Qualified Stock Option Agreement (previously filed as
Exhibit 10.37 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 filed on October 25, 1996, Commission File
No. 333-5597, and incorporated herein by this reference)
10.13 Employment Agreement dated as of August 1, 1997 between William
A. Smith and Aftermarket Technology Corp. (previously filed as
Exhibit 10.13 to the Company's Registration Statement on Form S-1
(File No. 333-35543) filed on September 12, 1997 and incorporated
herein by this reference)
10.14 Employment Agreement, dated as of October 7, 1996,
between Stephen J. Perkins and Aftermarket Technology
Corp. (previously filed as Exhibit 10.35 to Amendment No. 1
to the Company's Registration Statement on Form S-1 filed on
October 25, 1996, Commission File No. 333-5597, and
incorporated herein by this reference)
10.15 Employment Agreement, dated as of October 1, 1996, between
John C. Kent and Aftermarket Technology Corp. (previously
filed as Exhibit 10.7 to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed on November 6, 1996,
Commission File No. 333-5597, and incorporated herein by
this reference)
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<PAGE>
10.16 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)
10.17 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)
10.18 Amended and Restated Warrant Certificate, dated as of August 2,
1994, for 280,704 warrants issued to William E. Myers, Jr.
(previously filed as Exhibit 10.18 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference)
10.19 Amended and Restated Warrant Certificate, dated as of August 2,
1994, for 70,176 warrants issued to Brian E. Sanderson
(previously filed as Exhibit 10.19 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 and
incorporated herein by this reference)
10.20 Amended and Restated Warrant Certificate, dated June 24, 1996,
for 70,176 warrants issued to Michael J. Hartnett (previously
filed as Exhibit 10.20 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and incorporated herein
by this reference)
10.21 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)
10.22 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)
10.23 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)
10.24 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)
10.25 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)
10.26 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)
10.27 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)
10.28 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. (previously filed as Exhibit 10.23 to Amendment No. 1 to
the Company's Registration Statement on Form S-1 filed on
October 25, 1996, Commission File No. 333-5597, and
incorporated herein by this reference)
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<PAGE>
10.29 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. (previously filed as Exhibit 10.34 to Amendment No.
1 to the Company's Registration Statement on Form S-1
filed on October 25, 1996, Commission File No. 333-5597, and
incorporated herein by this reference)
10.30 Stock Purchase Agreement, dated as of January 31, 1997,
by and among S. Jay Wilemon, Ricki J. Wilemon, Bradley J.
Wilemon, Corby L. Wilemon, Replacement & Exchange Parts Co.,
Inc., Aftermarket Technology Corp. and Repco Acquisition
Corp. (previously filed as Exhibit 10.30 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by this reference)
10.31 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 (previously filed as Exhibit 10.24 to Amendment No. 2
to the Company's Registration Statement on Form S-1 filed on
November 6, 1996, Commission File No. 333-5597, and incorporated
herein by this reference)
10.32 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)
10.33 Amended and Restated Lease, dated as of June 1, 1997, by and
among Confar Investors II, L.L.C. and Aaron's Automotive
Products, Inc. (previously filed as Exhibit 10.33 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1997 and incorporated herein by this reference)
10.34 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
(previously filed as Exhibit 10.40 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 filed on November 6,
1996, Commission File No. 333-5597, and incorporated herein by
this reference)
10.35 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 (previously
filed as Exhibit 10.41 to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed on November 6, 1996,
Commission File No. 333-5597, and incorporated herein by this
reference)
10.36 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)
10.37 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)
10.38 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 (previously filed as Exhibit 10.33 to Amendment
No. 1 to the Company's Registration Statement on Form S-1 filed
on October 25, 1996, Commission File No. 333-5597, and
incorporated herein by this reference)
10.39 Stock Subscription Agreement, dated as of November 18, 1996,
between Aftermarket Technology Corp. and the Trustees of the
General Electric Pension Trust (previously filed as Exhibit 10.44
to Amendment No. 4 to the Company's Registration Statement on
Form S-1 filed on October 25, 1996, Commission File No. 333-5597,
and incorporated herein by this reference)
10.40 Amendment and Consent dated as of July 25, 1997 to the Credit
Agreement dated as of February 14, 1997 among Aftermarket
Technology Corp., the several banks and other financial
institutions from time to time parties thereto and The Chase
Manhattan Bank, as agent (previously filed as Exhibit 10.40 to
the
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Company's Registration Statement on Form S-1 (File No. 333-35543)
filed on September 12, 1997 and incorporated herein by this
reference)
10.41 Asset Purchase Agreement dated as of July 31, 1997 among
Automatic Transmission Shops Inc., C.W. Smith, ATS
Remanufacturing, Inc. and Aftermarket Technology Corp.
(previously filed as Exhibit 10.41 to the Company's Registration
Statement on Form S-1 (File No. 333-35543) filed on September 12,
1997 and incorporated herein by this reference)
10.42 Lease Agreement dated as July 31, 1997 between C.W. Smith and ATS
Remanufacturing, Inc. (previously filed as Exhibit 10.42 to the
Company's Registration Statement on Form S-1 (File No. 333-35543)
filed on September 12, 1997 and incorporated herein by this
reference)
10.43 Stock Purchase Agreement dated as of July 21, 1997 among
Gary A. Gamble, James E. Henderson, Trans Mart, Inc.,
TM-AL Acquisition Corp. and Aftermarket Technology
Corp. (previously filed as Exhibit 10.43 to the
Company's Registration Statement on Form S-1 (File No.
333-35543) filed on September 12, 1997 and incorporated
herein by this reference)
10.44 Amendment No. 1 to Stock Purchase Agreement dated as of
August 15, 1997 among Gary A. Gamble, James E. Henderson,
Trans Mart, Inc., TM-AL Acquisition Corp. and Aftermarket
Technology Corp. (previously filed as Exhibit 10.44 to the
Company's Registration Statement on Form S-1 (File No.
333-35543) filed on September 12, 1997 and incorporated herein
by this reference)
10.45 Amendment No. 2 to Stock Purchase Agreement dated as of
August 15, 1997 among Gary A. Gamble, James E. Henderson,
Trans Mart, Inc., TM-AL Acquisition Corp. and Aftermarket
Technology Corp. (previously filed as Exhibit 10.45 to the
Company's Registration Statement on Form S-1 (File No.
333-35543) filed on September 12, 1997 and incorporated herein
by this reference)
10.46 Form of Indemnification Agreement between Aftermarket Technology
Corp. and directors and certain officers (previously filed as
Exhibit 10.46 to Amendment No. 1 the Company's Registration
Statement on Form S-1 (File No. 333-35543) filed on October 1,
1997 and incorporated herein by this reference)
10.47 Amendment Agreements dated August 25, 1997 to Firstbank Lending
Agreement between Bank of Montreal, Mascot Truck Parts, Inc. and
King-O-Matic Industries Limited (previously filed as Exhibit
10.47 to Amendment No. 1 the Company's Registration Statement on
Form S-1 (File No. 333-35543) filed on October 1, 1997 and
incorporated herein by this reference)
10.48 Stock Purchase Agreement, dated as of November 14, 1997, by and
among Matthew Obeid, Metran Automatic Transmission Parts Corp.,
Metran of Boston, Inc., Metran Parts of Pennsylvania, Inc., TM-AL
Acquisition Corp. and Aftermarket Technology Corp. (previously
filed as Exhibit 10.48 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein
by this reference)
10.49 Asset Purchase Agreement, dated as of February 10, 1998, by and
among Autocraft Industries, Inc., Fred Jones Industries A Limited
Partnership, and Aftermarket Technology Corp. (previously filed
as Exhibit 10.49 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by this
reference)
10.50 Amendment No. 1 to Asset Purchase Agreement, dated as of February
10, 1998, by and among Autocraft Industries, Inc., Fred Jones
Industries A Limited Partnership, and Aftermarket Technology
Corp. (previously filed as Exhibit 10.50 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 and
incorporated herein by this reference)
10.51 Employment Agreement, dated as of July 28, 1994, between Kenneth
A. Bear and Aaron's Automotive Products, Inc. (previously filed
as Exhibit 10.51 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 and incorporated herein by this
reference)
10.52 Employment Agreement, dated as of February 21, 1997, between
Joseph Salamunovich and Aftermarket Technology Corp. (previously
filed as Exhibit 10.52 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and incorporated herein
by this reference)
10.53 Employment Agreement, dated as of March 6, 1998, between Ronald
E. Bradshaw and Aftermarket Technology Corp. (previously filed as
Exhibit 10.53 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by this
reference)
*10.54 Employment Agreement, dated as of December 15, 1998,
between Michael T. DuBose and Aftermarket
71
<PAGE>
Technology Corp.
*10.55 Aftermarket Technology Corp. 1998 Stock Incentive Plan
*10.56 Waiver and Amendment dated as of March 26, 1999 to the Amended
and Restated Credit Agreement, dates as of March 26, 1998, among
Aftermarket Technology Corp., the several banks and other
financial institutions from time to time parties thereto and The
Chase Manhatten Bank, as agent
*11 Statement Re Computation of Net Income Per Share
*21 List of Subsidiaries
*23 Consent of Ernst & Young LLP, independent auditors
*27 Financial Data Schedules
</TABLE>
- -----------
* Filed herewith
(b) Reports on Form 8-K
During the last quarter of 1998, the Company filed a Report on Form 8-K
dated October 12, 1998 disclosing the following pursuant to Item 5 of Form 8-K:
(i) management's estimates of earnings per share for the third and fourth
quarters of 1998 and for 1999, (ii) management's expectations for performance of
the Company's Distribution Group, (iii) management's view regarding improved
quality of Chrysler transmissions, and (iv) a press release regarding projected
earnings per share.
(c) Refer to (a) 3 above.
(d) Refer to (a) 2 above.
72
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 29, 1999.
AFTERMARKET TECHNOLOGY CORP.
By: /s/ Michael T. DuBose
---------------------------
Michael T. DuBose
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on Form 10-K has been signed by the following persons
in the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael T. DuBose Chairman of the Board, President and Chief
----------------------- Executive Officer (Principal Executive Officer) March 29, 1999
Michael T. DuBose
/s/ Barry C. Kohn Chief Financial Officer (Principal Financial and
----------------------- Accounting Officer) March 29, 1999
Barry C. Kohn
/s/ Robert Anderson
----------------------- Director March 29, 1999
Robert Anderson
/s/ Richard R. Crowell
----------------------- Director March 29, 1999
Richard R. Crowell
----------------------- Director March __, 1999
Dale F. Frey
/s/ Fred J. Hall
----------------------- Director March 29, 1999
Fred J. Hall
/s/ Mark C. Hardy
----------------------- Director March 29, 1999
Mark C. Hardy
----------------------- Director March __, 1999
Michael J. Hartnett
73
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Gerald L. Parsky
----------------------- Director March 29, 1999
Gerald L. Parsky
/s/ Richard K. Roeder
----------------------- Director March 29, 1999
Richard K. Roeder
/s/ William A. Smith
----------------------- Director March 29, 1999
William A. Smith
/s/ J. Richard Stonesifer
----------------------- Director March 29, 1999
J. Richard Stonesifer
</TABLE>
74
<PAGE>
AFTERMARKET TECHNOLOGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGE TO BALANCE
BEGINNING OF COSTS AND OTHER AT END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------ --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Reserve and allowances deducted from asset accounts:
Allowance for uncollectible accounts $ 2,469 $ 668 $ 14(2) $ 1,825(1) $ 1,326
Reserve for inventory obsolescence 2,114 1,411 - 784 2,741
Year ended December 31, 1997:
Reserve and allowances deducted from asset accounts:
Allowance for uncollectible accounts 1,326 921 183(2) 1,284(1) 1,146
Reserve for inventory obsolescence 2,741 930 - 1,575 2,096
Year ended December 31, 1998:
Reserve and allowances deducted from asset accounts:
Allowance for uncollectible accounts 1,146 1,877 214(2) 833(1) 2,404
Reserve for inventory obsolescence 2,096 7,788 1,456(2) 380 10,960
(1) Accounts written off, net of recoveries
(2) Balances added through new acquisitions
</TABLE>
S-1
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
AFTERMARKET TECHNOLOGY CORP.
Joseph Salamunovich hereby certifies as follows:
FIRST: Joseph Salamunovich is Vice President of Aftermarket
Technology Corp., a Delaware corporation (the "Corporation").
SECOND: Section 1 of Article IV of the Restated Certificate of
Incorporation of the Corporation is hereby amended to read in its entirety as
follows:
SECTION 1. AUTHORIZED SHARES. The Corporation shall be
authorized to issue two classes of shares of stock to be designated,
respectively, "Preferred Stock" and "Common Stock"; the total number of
shares that the Corporation shall have authority to issue is Thirty-Two
Million (32,000,000); the total number of shares of Preferred Stock
shall be Two Million (2,000,000) and each such share shall have a par
value of one cent ($.01); and the total number of shares of Common
Stock shall be Thirty Million (30,000,000) and each such share shall
have a par value of one cent ($.01).
THIRD: The foregoing amendment of the Restated Certificate of
Incorporation of the Corporation has been duly approved in accordance with
Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by Joseph Salamunovich, its Vice President, as of
August 6, 1998.
/s/Joseph Salamunovich
-----------------------
Joseph Salamunovich
Vice President
<PAGE>
EXHIBIT 4.6
FOURTH SUPPLEMENTAL INDENTURE TO SERIES B INDENTURE
SECOND SUPPLEMENTAL INDENTURE TO SERIES D INDENTURE
Fourth Supplemental Indenture to the Series B Indenture (as defined
below) and Second Supplemental Indenture to the Series D Indenture (as
defined below), dated as of June 1, 1998 (this "Supplemental Indenture"),
among Aftermarket Technology Corp., a Delaware corporation (the "Company"),
the Guarantors named herein and Firstar Bank of Minnesota, N.A., formerly
known as American Bank National Association, as Trustee
Each party hereto agrees as follows for the benefit of each other
party and for the equal and ratable benefit of the Holders of the Company's
12% Series B Senior Subordinated Notes due 2004 (the "Series B Notes") and
the Holders of the Company's 12% Series D Senior Subordinated Notes due 2004
(the "Series D Notes"). All capitalized terms used in this Supplemental
Indenture and not defined herein shall have the meanings specified in the
Indentures (defined below).
WHEREAS, the Company, the Trustee, and each of the Guarantors other
than ACI Electronics Holding Corp., a Delaware corporation ("ACI Holding"),
ACI Electronics Investment Corp., a Delaware corporation ("ACI Investment"),
Aftermarket Technology (U.K.) Holdings Limited, a United Kingdom company
("U.K. Holdings"), ATC Distribution Group, Inc., a Delaware corporation
("ATCDG"), ATC Electronics & Logistics, L.P., a Delaware limited partnership
("ATC Electronics"), ATS Remanufacturing, Inc., a Delaware corporation
("ATS"), Autocraft Industries, Inc., a Delaware corporation ("Autocraft
Industries"), Autocraft Remanufacturing Corp., a Delaware corporation
("Autocraft Remanufacturing"), Automotive Developments Limited, a United
Kingdom company ("ADL"), and Metran Automatic Transmission Parts, Corp., a
New York corporation ("Metran"), have entered into (i) that certain
Indenture, dated as of August 2, 1994, as supplemented by the First
Supplemental Indenture, dated as of February 23, 1995, the Second
Supplemental Indenture, dated as of June 1, 1995, and the Third Supplemental
Indenture, dated as of June 25, 1996, relating to the issuance of the Series
B Notes (the "Series B Indenture") and (ii) that certain Indenture, dated as
of June 1, 1995, as supplemented by the First Supplemental Indenture, dated
as of June 25, 1996, relating to the issuance of the Series D Notes (the
"Series D Indenture" and, collectively with the Series B Indenture, the
"Indentures").
WHEREAS, pursuant to the terms of each of the Indentures, the
Company and the Guarantors have covenanted and agreed that they shall cause
each person that is or becomes a Subsidiary of the Company or any Guarantor
to execute a Guaranty and to cause such Subsidiary to execute an indenture
supplement to the Indentures for the purpose of adding such Subsidiary as a
Guarantor under the Indentures;
WHEREAS, ACI Holding, ACI Investment, U.K. Holdings, ATCDG, ATC
Electronics, ATS, Autocraft Industries, Autocraft Remanufacturing, ADL and
Metran (collectively, the "New Subsidiaries"), each of which is a Subsidiary
of the Company or a Guarantor, are not currently included as Guarantors in
the Indentures;
WHEREAS, the parties hereto desire that the New Subsidiaries assume
the rights, duties and obligations of a Guarantor under the Indentures;
<PAGE>
WHEREAS, all things necessary to make this Supplemental Indenture a
valid, binding and legal instrument supplemental to the Indentures have been
performed;
NOW, THEREFORE, THIS INDENTURE WITNESSETH: that, in consideration of
the covenants and premises, receipt whereof is hereby acknowledged, each of
the New Subsidiaries (i) hereby agrees and provides, for the equal and
proportionate benefit of the respective Holders, that each of the New
Subsidiaries hereby assumes the rights, duties and obligations of a Guarantor
under the Indentures, as amended hereby, including without limitation the
execution of a Guaranty in the form attached hereto, and (ii) shall be bound
by the terms and conditions of the Indentures, as amended hereby, as if the
New Subsidiaries were originally parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first written above.
AFTERMARKET TECHNOLOGY CORP.
By: /S/ JOHN C. KENT
-------------------
John C. Kent
Chief Financial Officer
Attest:
/S/ JOSEPH SALAMUNOVICH
------------------------------
Joseph Salamunovich, Secretary
FIRSTAR BANK OF MINNESOTA, N.A.,
As Trustee
By: /S/ FRANK LESLIE
----------------
Frank Leslie
Vice President
<PAGE>
THE "GUARANTORS":
AARON'S AUTOMOTIVE PRODUCTS, INC.
a Delaware corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
ACI ELECTRONICS HOLDING CORP.
a Delaware corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
ACI ELECTRONICS INVESTMENT CORP.
a Delaware corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
AFTERMARKET TECHNOLOGY (U.K.) HOLDINGS
LIMITED
a United Kingdom company
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Director
ATC DISTRIBUTION GROUP, INC.
a Delaware corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
<PAGE>
ATC ELECTRONICS & LOGISTICS, L.P.
a Delaware limited partnership
By: ACI Electronics Holding Corp.,
general partner
By: /S/ JOSEPH SALAMUNOVICH
----------------------
Joseph Salamunovich
Vice President
ATS REMANUFACTURING, INC.
a Delaware corporation
By: /S/JOSEPH SALAMUNOVICH
----------------------
Joseph Salamunovich
Vice President
AUTOCRAFT INDUSTRIES, INC.
a Delaware corporation
By: /S/ JOSEPH SALAMUNOVICH
----------------------
Joseph Salamunovich
Vice President
AUTOCRAFT REMANUFACTURING CORP.
a Delaware corporation
By: /S/JOSEPH SALAMUNOVICH
----------------------
Joseph Salamunovich
Vice President
AUTOMOTIVE DEVELOPMENTS LIMITED
a United Kingdom company
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Director
COMPONENT REMANUFACTURING
SPECIALISTS, INC.
a New Jersey corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
<PAGE>
CRS HOLDINGS, INC.
a New Jersey corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
KING-O-MATIC INDUSTRIES LIMITED,
an Ontario corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
MASCOT TRUCK PARTS, INC.
an Ontario corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
METRAN AUTOMATIC TRANSMISSION PARTS CORP.
a Delaware corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
PARTES REMANUFACTURADES DE
MEXICO, S.A. DE C.V.
a Mexico corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
RPM MERIT, INC.,
a Delaware corporation
By: /S/ JOSEPH SALAMUNOVICH
-----------------------
Joseph Salamunovich
Vice President
<PAGE>
GUARANTY
For value received, ________________, a ______________ corporation, hereby
unconditionally guarantees to the Holder of the security upon which this
guaranty is endorsed the due and punctual payment, as set forth in the Indenture
pursuant to which such Security and this Guaranty were issued, of the principal
of, premium (if any) and interest on such Security when and as the same shall
become due and payable for any reason according to the terms of such Security
and Article XIII of the Indenture. The Guaranty of the Security upon which this
Guaranty is endorsed will not become effective until the Trustee signs the
certificate of authentication on such Security.
________________________________
a ______________ corporation
By: ______________________________
Name:
Title:
<PAGE>
EXHIBIT 10.54
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of December
15, 1998 by and between Michael T. DuBose, an individual ("Executive"), and
Aftermarket Technology Corp., a Delaware corporation (the "Company" or "ATC").
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 the Chairman, President and
Chief Executive Officer of the Company and Executive hereby accepts such
employment. In addition, Executive shall serve as (i) President and Chief
Executive Officer of each of ACI Electronics Investment Corp. and Metran
Automatic Transmission Parts Corp. and (ii) Chief Executive Officer of each of
Aaron's Automotive Products, Inc., ACI Electronics Holding Corp., ATC
Distribution Group, Inc., ATC Information Services, Inc., ATS Remanufacturing,
Inc., Autocraft Industries, Inc., Autocraft Remanufacturing Corp., Component
Remanufacturing Specialists, Inc., King-O-Matic Industries Limited and RPM
Merit, Inc. During the term of his employment with the Company, Executive shall
devote his full time, best efforts and attention to the performance of his
duties hereunder and to the business and affairs of the Company, and will not
engage in any other employment or business activities for any direct or indirect
remuneration that would be directly harmful or detrimental to, or that may
compete with, the business and affairs of the Company, or that would interfere
with his duties hereunder.
(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"). Executive agrees to devote his
entire professional time, energies and skills to his employment hereunder while
so employed (reasonable vacations and absences because of illness excepted).
(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 December 15, 1998 and end on December 14, 2001
(such three year period, the "Initial Term"), subject to the provisions for
termination set forth in Section 5 below and renewal as provided in Section 1(e)
below.
(e) RENEWAL. Unless the Company shall have given Executive
notice that this Agreement shall not be renewed at least 90 days prior to the
end of the Initial Term, the term of this Agreement shall be automatically
extended for a period of one year, such procedure to be followed in each such
successive period. Each extended term shall continue to be subject to the
provisions for termination set forth herein.
<PAGE>
2. COMPENSATION AND BENEFITS.
(a) SALARY. Executive shall receive for services to be
rendered hereunder an annual base salary (the "Base Salary") initially equal to
Four Hundred Thousand Dollars ($400,000) payable on a monthly basis, subject to
standard withholdings for taxes and social security and the like. Executive's
annual Base Salary will be reviewed annually by the Board and adjusted when
deemed appropriate by the Board to adequately reflect the scope and success of
the Company's operations.
(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. To the extent
that Executive is not immediately eligible for such benefit plans, the Company
will reimburse Executive for his reasonable expenses relating to comparable
coverage until he becomes eligible under the Company's plans. The Company may,
in its sole discretion and from time to time, establish additional senior
management benefit programs as it deems appropriate.
(c) VACATION. Executive shall be entitled to a period of
annual vacation time equal to that provided to senior managers 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 the Company and Executive.
(d) 401(K) PLAN. To the extent legally permitted and subject
to all eligibility requirements, 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 Executive.
(e) DISABILITY INSURANCE. To the extent that Executive's
disability insurance coverage in effect immediately prior to the date hereof may
be continued after the date hereof, the Company shall pay the premiums for such
insurance to the extent that the annual coverage provided thereby does not
exceed the Base Salary.
(f) AUTOMOBILE ALLOWANCE. Executive shall be entitled to a
monthly automobile allowance of One Thousand Two Hundred Dollars ($1,200.00).
(g) RELOCATION EXPENSES. Executive shall recover all benefits
to which he is entitled under the Company's relocation policy and will be
entitled to the following additional benefits (to the extent such benefits are
not provided by the Company's relocation policy): (i) an amount equal to three
months of Base Salary (grossed up to cover standard withholdings for tax and
social security purposes) as a transfer allowance; (ii) reimbursement of actual
travel and temporary living expenses (grossed up to cover standard withholdings
for tax and social security purposes) to cover associated costs relating to
temporary living expenses in the Chicago, Illinois area; and (iii) the
reimbursement of actual costs incurred in transporting household goods to the
2
<PAGE>
Chicago, Illinois area and expenses incidental to the purchase of a new
residence in the Chicago, Illinois area.
3. OPTION AND BONUS PLANS.
(a) PARTICIPATION. During the term hereof, Executive shall be
entitled to participate in any stock option plan and any bonus or incentive 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; PROVIDED, HOWEVER, that Executive's annual
cash bonus will be as provided in Section 3(c) below. Executive understands that
any such plan may be modified or eliminated in the Company's discretion in
accordance with applicable law.
(b) OPTIONS. Executive shall be entitled to receive stock
options ("Options") under the Company's 1998 Stock Incentive Plan to purchase
500,000 shares of the Company's common stock. The Options will be "incentive
stock options" if and to the extent permitted under the Internal Revenue Code
and shall have the following terms:
(i) VESTING. The Options shall vest for so long as
Executive shall be employed under this Agreement as follows: (x) one-third on
the first anniversary of the date hereof; (y) one-third on the second
anniversary of the date hereof; and (z) one-third on the third anniversary of
the date hereof. Notwithstanding the immediately preceding sentence and
notwithstanding the provisions of the Company's Standard Terms and Conditions
Governing Employee Non-Qualified Stock Options under the 1998 Stock Incentive
Plan (the "Standard Terms and Conditions") the Options shall vest on the
occurrence of a Change of Control (as defined in the Standard Terms and
Conditions) and neither the Board nor a duly authorized committee of the Board
may, without Executive's written consent, amend the terms and conditions of the
Company's 1998 Stock Incentive Plan in such a way as to adversely affect
Executive's right to immediate vesting pursuant to this Section 3(b)(i).
(ii) EXERCISE PRICE. The Options shall have an
exercise price as follows: (x) options to purchase 300,000 shares of the
Company's common stock shall have an exercise price of $5.00 per share and (y)
options to purchase 200,000 shares of the Company's common stock shall have an
exercise price of $10.00 per share.
(iii) DURATION. The Options shall expire 10 years
from the date hereof, subject to the terms of the 1998 Stock Incentive Plan and
the Standard Terms and Conditions.
(c) ANNUAL CASH BONUS. For all annual periods subsequent to
December 31, 1998, 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, PROVIDED that the annual cash bonus target for Executive shall
not exceed 75% of the Base Salary for such year. Such bonuses shall be paid at
the end of the year in which such bonus is earned.
3
<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 (as defined below), 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, which in
this event shall be the date upon which notice of termination is given. The
Company shall have no further obligation to pay further compensation or
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)
unsatisfactory performance (other than unsatisfactory performance resulting from
Executive's incapacity due to physical or mental illness that would qualify
Executive for disability benefits under the Company's short-term or long-term
disability plans) of Executive's duties or responsibilities as determined by the
Board, PROVIDED that the Company has given Executive written notice specifying
the unsatisfactory performance of his duties and responsibilities, which remains
uncorrected by Executive after the lapse of 30 days following the receipt of the
written notice; (b) a material breach by Executive of any of his material
obligations hereunder which remains uncured after the lapse of 30 days following
the date that the Company has given Executive written notice thereof; (c) a
material breach by 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 Executive written notice thereof; (d) the
repeated unsatisfactory performance or material breach by Executive of any
obligation or duty referred to in clause (a), (b) or (c) above as to which at
least one written notice has been given pursuant to such clause (a), (b) or (c);
(e) any act of willful dishonesty, misappropriation, embezzlement, intentional
fraud or similar conduct involving the Company or any of its Affiliates; (f) the
conviction or the plea of NOLO CONTENDERE or the equivalent in respect of a
felony involving moral turpitude; (g) the repeated non-prescription use of any
controlled substance or the repeated use of alcohol or any other non-controlled
substance which, in the reasonable determination of the Board, in any case
described in this clause (g), renders Executive unfit to serve in his capacity
as an officer or employee of the Company or its Affiliates; or (h) gross
negligence or willful misconduct in the performance of his duties
4
<PAGE>
hereunder, which conduct is materially injurious to the Company, or a willful
and material breach of this Agreement.
(b) VOLUNTARY TERMINATION. Executive may voluntarily terminate
his employment with the Company at any time upon 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. The Company may terminate
Executive's employment in the event Executive shall be unable to perform his
duties hereunder because of illness or other incapacity, and such illness or
other incapacity shall continue for a period of six consecutive months
("Disability"). After the Termination Date, which in this event shall be the
date upon which notice of termination is given, no further compensation of any
kind or severance payment will be payable under this Agreement except that (i)
Executive shall receive 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, and (ii) Executive shall be entitled to (x) continued
health insurance coverage, at the Company's expense, for 12 months following the
Termination Date and (y) such other benefits as are provided under the Company's
long-term disability plan, if any, then in effect.
(d) TERMINATION WITHOUT CAUSE. In the event Executive's
employment is terminated by the Company without Cause, including a termination
due to the non-renewal by the Company of this Agreement pursuant to Section
1(e), and such termination is not due to Disability, the Company shall pay
Executive as severance the following:
(i) if the Termination Date occurs during the Initial
Term, an amount equivalent to the then Base Salary for the remainder of the
Initial Term or for a period of 24 months from the Termination Date, whichever
period is longer, or
(ii) if the Termination Date occurs after the end of
the Initial Term, an amount equivalent to the then Base Salary for a period of
24 months from the Termination Date,
in either case less standard withholdings for tax and social security purposes,
payable over such 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. During the period that Executive is entitled to receive
payments under this Section 5(d) and to the extent permissible under applicable
law, Executive shall be entitled to (x) continued health insurance coverage, at
the Company's expense, and (y) such other benefits as are provided under the
Company's long-term disability plan, if any, then in effect.
(e) TERMINATION IN CONNECTION WITH A CHANGE IN CONTROL. If
Executive's employment with the Company terminates in a Qualifying Termination
in Connection with a Change of Control (as defined below), the Company shall pay
Executive as severance an amount equivalent to the then Base Salary for a period
of 24 months from the Termination Date, less standard withholdings for tax and
social security purposes, payable over such period in monthly
5
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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 that
Executive is entitled to receive payments under this Section 5(e) and to the
extent permissible under applicable law, Executive shall be entitled to (i)
continued health insurance coverage, at the Company's expense and (ii) such
other benefits as are provided under the Company's long-term disability plan, if
any, then in effect. For purposes of this Section 5(e), "Qualifying Termination
in Connection with a Change of Control" means the termination of Executive's
employment with the Company within 18 months after a Change of Control by reason
of Executive's resignation within 60 days after the occurrence of Good Reason
(as defined below). For purposes of this Section 5(e), "Good Reason" means the
occurrence following a Change of Control of any of the following events that
remains uncured 15 days after Executive shall have given the Company written
notice thereof: (i) a reduction (which is not consented to by Executive) in
Executive's Base Salary in effect immediately prior to a Change of Control, (ii)
a material reduction in the aggregate level of employee benefits (other than
stock-based compensation) from the levels in effect immediately prior to the
Change of Control, or (iii) a material and adverse change in Executive's duties
or responsibilities (other than reporting responsibilities) from those in effect
immediately prior to the Change of Control.
(f) TERMINATION UPON DEATH. If Executive dies prior to the
expiration of the term of this Agreement, the Company shall (i) continue, for a
period of 12 months following Executive's death, health insurance coverage of
Executive's dependents (if any) under all benefit plans or programs in which
Executive participated at the time of his death, 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, and no further compensation of any kind or severance payment will be
payable under this Agreement.
(g) RELOCATION UPON TERMINATION OF EMPLOYMENT. Upon
termination of Executive's employment by the Company pursuant to Section 5(c),
(d) or (e), Executive shall recover all benefits to which he is entitled under
the Company's relocation policy and will be entitled to the following additional
benefits (to the extent such benefits are not provided by the Company's
relocation policy): (i) reimbursement of actual travel and temporary living
expenses for a period not to exceed three months (grossed up to cover standard
withholdings for tax and social security purposes) to cover associated costs
relating to temporary living expenses in the Williams, Oregon area and (ii) the
reimbursement of actual costs incurred in transporting household goods to the
Williams, Oregon area and expenses incidental to the sale of Executive's
residence in the Chicago, Illinois area.
(h) SECTIONS 280G AND 4999 OF THE INTERNAL REVENUE CODE. In
the event Executive is, as the result of the operation of this Agreement, the
recipient of an excess parachute payment, the Company will pay to Executive an
additional gross-up payment in order to put Executive in the same after-tax
position that Executive would have been in had no excise tax been imposed.
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6. PROPRIETARY INFORMATION OBLIGATIONS. 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. Executive agrees that during his employment
and, if this Agreement is terminated pursuant to Section 5, for a period of 18
months after the Termination Date, he will not, without the prior consent of the
Company, 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 his employment
and, if this Agreement is terminated pursuant to Section 5(a), 5(b) or 5(c), for
a period of 18 months after the Termination Date, 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 as it existed during the term of this Agreement in any
state in which the Company was conducting business on or before the Termination
Date and continues to do so thereafter; PROVIDED, HOWEVER, that the foregoing
shall not prevent 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. 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
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or telex) or the third day after mailing by first class mail to the recipient at
the address indicated below:
To the Company:
Aftermarket Technology Corp.
1 Oak Hill Center, Suite 400
Westmont, Illinois 60559
Attn: Joseph Salamunovich
Telecopier: (630) 455-2621
With a copy to:
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Bruce D. Meyer, Esq.
Telecopier: (213) 229-7520
To Executive:
Michael T. DuBose
2220 Kincaid Road
Williams, Oregon 97544
Telecopier: (541) 846-0103
With a copy to:
Porter Wright
41 So. High Street
Columbus, Ohio 43215
Attention: Dan Costello, Esq.
Telecopier: (614) 227-2100
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
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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) 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.
(g) 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.
(h) INTERPRETATION. In interpreting this Agreement, all terms
shall be construed in accordance with their fair meaning and not strictly
against any party as the drafter hereof.
10. ARBITRATION.
(a) Any disputes or claims arising out of or concerning
Executive's employment or termination by the Company, whether arising under
theories of liability or damages based upon contract, tort or statute, shall be
determined exclusively by arbitration before a single arbitrator in accordance
with the employment arbitration rules of the American Arbitration Association
("AAA"), except as modified by this Agreement. The arbitrator's decision shall
be final and binding on both parties. Judgment upon the award rendered by the
arbitrator may be entered in any court of competent jurisdiction. In recognition
of the fact that resolution of any disputes or claims in the courts is rarely
timely or cost effective for either party, the Company and Executive enter this
mutual agreement to arbitrate in order to gain the benefits of a speedy,
impartial and cost-effective dispute resolution procedure.
(b) Any arbitration shall be held in Executive's place of
employment with the Company. The arbitrator shall be an attorney with
substantial experience in employment matters, selected by the parties
alternately striking names from a list of five such persons
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provided by the AAA office located nearest to the place of employment, following
a request by the party seeking arbitration for a list of five such attorneys
with substantial professional experience in employment matters. If either party
fails to strike names from the list, the arbitrator shall be selected from the
list by the other party.
(c) Each party shall have the right to take the deposition of
one individual and any expert witness designated by the other party. Each party
shall also have the right to propound requests for production of documents to
any party and the right to subpoena documents and witnesses for the arbitration.
Additional discovery may be made only where the arbitrator selected so orders
upon a showing of substantial need. The arbitrator shall have the authority to
entertain a motion to dismiss and/or a motion for summary judgment by any party
and shall apply the standards governing such motions under the Federal Rules of
Civil Procedure. The arbitrator will have authority in his or her discretion to
grant injunctive relief, award specific performance and impose sanctions upon
any party to any such arbitration.
(d) The Company and Executive agree that they will attempt,
and they intend that they and the arbitrator should use their best efforts in
that attempt, to conclude the arbitration proceeding and have a final decision
from the arbitrator within 120 days from the date of selection of the
arbitrator; PROVIDED, HOWEVER, that the arbitrator shall be entitled to extend
such 120-day period for a total of two 120-day periods. The arbitrator shall
immediately deliver a written award with respect to the dispute to each of the
parties, who shall promptly act in accordance therewith.
(e) The Company and Executive shall each pay half of the fees
and expenses of the arbitrator. Each party shall pay its own attorney fees and
costs including, without limitation, fees and costs of any experts. However,
attorney fees and costs incurred by the party that prevails in any such
arbitration commenced pursuant to this Section 10 or any judicial action or
proceeding seeking to enforce the agreement to arbitrate disputes as set forth
in this Section 10 or seeking to enforce any order or award of any arbitration
commenced pursuant to this Section 10 may be assessed against the party or
parties that do not prevail in such arbitration in such manner as the arbitrator
or the court in such judicial action, as the case may be, may determine to be
appropriate under the circumstances. If any party prevails on a statutory claim
that entitles the prevailing party to a reasonable attorney fees (with or
without expert fees) as part of the costs, the arbitrator may award reasonable
attorney fees (with or without expert fees) to the prevailing party in accord
with such statute. Any controversy over whether a dispute is an arbitrable
dispute or as to the interpretation or enforceability of this paragraph with
respect to such arbitration shall be determined by the arbitrator.
(f) In a contractual claim under this Agreement, the
arbitrator shall have no authority to add, delete or modify any term of this
Agreement.
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IN WITNESS WHEREOF, the parties have executed this agreement effective
as of the date it is last executed below by either party.
/s/Michael T. Dubose
------------------------------------------
MICHAEL T. DUBOSE
Aftermarket Technology Corp.
By: /s/Joseph Salamunovich
-------------------------------------
Joseph Salamunovich, Vice President
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EXHIBIT 10.55
AFTERMARKET TECHNOLOGY CORP.
1998 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE OF PLAN
The purpose of this 1998 Stock Incentive Plan (this "Plan") of
Aftermarket Technology Corp., a Delaware corporation (the "Company"), is to
enable the Company to attract, retain and motivate its employees, non-employee
directors and independent contractors, and to further align the interests of
such employees, non-employee directors and independent contractors with those of
the stockholders of the Company, by providing for or increasing the proprietary
interest of such employees, non-employee directors and independent contractors
in the Company.
SECTION 2. ADMINISTRATION OF PLAN
2.1 COMPOSITION OF COMMITTEE. Subject to Section 2.04, this Plan shall
be administered by the Compensation and Human Resources Committee of the Board
of Directors (the "Committee"), as appointed from time to time by the Board of
Directors, PROVIDED, HOWEVER, that with respect to any Award intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), the term "Committee"
shall refer to a committee of two or more "outside directors" as determined for
purposes of applying Code Section 162(m). The Board of Directors shall fill
vacancies on and from time to time may remove or add members to the Committee.
The Committee shall act pursuant to a majority vote or unanimous written
consent. The Committee may designate the Secretary of the Company or other
Company employees to assist the Committee in the administration of this Plan,
and may grant authority to such persons to execute agreements or other documents
evidencing Awards made under this Plan or other documents entered into under
this Plan on behalf of the Committee or the Company.
2.2 POWERS OF THE COMMITTEE. Subject to the express provisions of this
Plan, the Committee shall be authorized and empowered to do all things necessary
or desirable, in its sole discretion, in connection with the administration of
this Plan, including, without limitation, the following:
(a) to prescribe, amend and rescind rules and regulations
relating to this Plan and to define terms not otherwise defined herein;
PROVIDED that, unless the Committee shall specify otherwise, for
purposes of this Plan (i) the term "fair market value" shall mean, as
of any date, the closing price for a Share reported for that date by
the Nasdaq National Market System (or such other stock exchange or
quotation system on which Shares are then listed or quoted) or, if no
Shares traded on the Nasdaq National Market System (or such other stock
exchange or quotation system) on the date in question, then for the
next preceding date for which Shares traded on the Nasdaq National
Market System (or such other stock exchange or quotation system); and
(ii) the term "Company" shall mean the Company and its subsidiaries and
affiliates, unless the context otherwise requires.
(b) to determine which persons are Eligible Persons (as
defined in Section 4), to which of such Eligible Persons, if any,
Awards shall be granted hereunder and the timing of any such Awards;
(c) to determine the number of Shares subject to Awards and
the exercise or purchase price of such Shares;
(d) to establish and verify the extent of satisfaction of any
performance goals applicable to Awards;
(e) to prescribe and amend the terms of the agreements or
other documents evidencing Awards made under this Plan (which need not
be identical);
<PAGE>
(f) to determine whether, and the extent to which,
adjustments are required pursuant to Section 10;
(g) to interpret and construe this Plan, any rules and
regulations under this Plan and the terms and conditions of any Award
granted hereunder, and to make exceptions to any such provisions in
good faith and for the benefit of the Company; and
(h) to make all other determinations deemed necessary or
advisable for the administration of this Plan.
2.3 DETERMINATIONS OF THE COMMITTEE. All decisions, determinations and
interpretations by the Committee regarding this Plan shall be final and binding
on all Eligible Persons and Participants. The Committee shall consider such
factors as it deems relevant to making such decisions, determinations and
interpretations including, without limitation, the recommendations or advice of
any director, officer or employee of the Company and such attorneys, consultants
and accountants as it may select.
2.4. AUTHORITY OF THE BOARD OF DIRECTORS. The Board of Directors, in
its sole discretion, may exercise any authority of the Committee under this Plan
in lieu of the Committee's exercise thereof.
SECTION 3. STOCK SUBJECT TO PLAN
3.1 AGGREGATE LIMITS. At any time, the aggregate number of shares of
the Company's Common Stock, $.01 par value ("Shares"), issued and issuable
pursuant to all Awards (including all ISOs (as defined in Section 5.1)) granted
under this Plan shall not exceed 1,200,000; PROVIDED that no more than 1,000,000
of such Shares may be issued pursuant to all Incentive Bonuses and Incentive
Stock Awards granted under this Plan, and PROVIDED FURTHER that, notwithstanding
Section 3.3, the aggregate number of Shares that may be issued pursuant to the
exercise of ISOs (as defined in Section 5.1(a)) granted under this Plan shall
not exceed 1,200,000. The Shares subject to this Plan may be either Shares
reacquired by the Company, including Shares purchased in the open market, or
authorized but unissued Shares. Such limits shall be subject to adjustment as
provided in Section 10.
3.2 CODE SECTION 162(m) LIMITS. The aggregate number of Shares subject
to Options granted under this Plan during any calendar year to any one Employee
shall not exceed 100,000. The aggregate number of Shares issued or issuable
under all Awards granted under this Plan, other than Options, during any
calendar year to any one Employee shall not exceed 75,000. Notwithstanding
anything to the contrary in this Plan, the foregoing limitations shall be
subject to adjustment under Section 10 only to the extent that such adjustment
will not affect the status of any Award intended to qualify as "performance
based compensation" under Code Section 162(m).
3.3 ISSUANCE OF SHARES. For purposes of Section 3.1, the aggregate
number of Shares issued under this Plan at any time shall equal only the number
of Shares actually issued upon exercise or settlement of an Award and not
returned to the Company upon cancellation, expiration or forfeiture of an Award
or in payment or satisfaction of the purchase price, exercise price or tax
withholding obligation of an Award.
SECTION 4. PERSONS ELIGIBLE UNDER PLAN
Any person who is an employee, prospective employee, consultant,
director or advisor of the Company (an "Eligible Person") shall be eligible to
be considered for the grant of Awards hereunder. A "Participant" is any current
or former Eligible Person to whom an Award has been made and any person
(including any estate) to whom an Award has been assigned or transferred
pursuant to Section 9.1.
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SECTION 5. PLAN AWARDS
5.1 AWARD TYPES. The Committee, on behalf of the Company, is authorized
under this Plan to enter into certain types of arrangements with Employees and
to confer certain benefits on them. The following arrangements or benefits are
authorized under this Plan if their terms and conditions are not inconsistent
with the provisions of this Plan: Options, Incentive Bonuses and Incentive
Stock. Such arrangements and benefits are sometimes referred to herein as
"Awards." The authorized types of arrangements and benefits for which Awards may
be granted are defined as follows:
(a) OPTIONS: An Option is a right granted under Section 6 to
purchase a number of Shares at such exercise price, at such times, and
on such other terms and conditions as are specified in the agreement or
other document evidencing the Award (the "Option Document "). Options
intended to qualify as Incentive Stock Options ("ISOs") pursuant to
Code Section 422 and Options not intended to qualify as ISOs
("Nonqualified Options") may be granted under Section 6.
(b) INCENTIVE BONUS: An Incentive Bonus is a bonus opportunity
awarded under Section 7 pursuant to which a Participant may become
entitled to receive an amount based on satisfaction of such performance
criteria as are specified in the agreement or other document evidencing
the Award (the "Incentive Bonus Document").
(c) INCENTIVE STOCK: Incentive Stock is an award or issuance
of Shares made under Section 8, the grant, issuance, retention, vesting
and/or transferability of which is subject during specified periods of
time to such conditions (including performance conditions) and terms as
are expressed in the agreement or other document evidencing the Award
(the "Incentive Stock Document").
5.2 GRANTS OF AWARDS. An Award may consist of one such arrangement or
benefit or two or more of them in tandem or in the alternative.
SECTION 6. OPTIONS
The Committee may grant an Option or provide for the grant of an
Option, either from time-to-time in the discretion of the Committee or
automatically upon the occurrence of specified events, including, without
limitation, the achievement of performance goals, the satisfaction of an event
or condition within the control of the recipient of the Award or within the
control of others.
6.1 OPTION DOCUMENT. Each Option Document shall contain provisions
regarding (a) the number of Shares that may be issued upon exercise of the
Option, (b) the purchase price of the Shares and the means of payment for the
Shares, (c) the term of the Option, (d) such terms and conditions of
exercisability as may be determined from time to time by the Committee, (e)
restrictions on the transfer of the Option and forfeiture provisions, and (f)
such further terms and conditions, in each case not inconsistent with this Plan
as may be determined from time to time by the Committee. Option Documents
evidencing ISOs shall contain such terms and conditions as may be necessary to
comply with the applicable provisions of Section 422 of the Code.
6.2 OPTION PRICE. The purchase price per share of the Shares subject to
each Option granted under this Plan shall equal or exceed 100% of the fair
market value of such Stock on the date the Option is granted, except that (i)
the exercise price of an Option may be higher or lower in the case of Options
granted to employees of a company acquired by the Company in assumption and
substitution of options held by such employees at the time such company is
acquired, (ii) in the event an Employee is required to pay or forego the receipt
of any cash amount in consideration of receipt of an Option, the exercise price
plus such cash amount shall equal or exceed 100% of the fair market value of
such Stock on the date the Option is granted, and (iii) the exercise price of an
Option granted to a non-employee director may be lower.
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6.3 OPTION TERM. The "Term" of each Option granted under this Plan,
including any ISOs, shall be ten (10) years from the date of its grant, unless
the Committee shall provide otherwise.
6.4 OPTION VESTING. Options granted under this Plan shall be
exercisable at such time and in such installments during the period prior to the
expiration of the Option's Term as determined by the Committee. The Committee
shall have the right to make the timing of the ability to exercise any Option
granted under this Plan subject to such performance requirements as deemed
appropriate by the Committee. At any time after the grant of an Option the
Committee may reduce or eliminate any restrictions surrounding any Participant's
right to exercise all or part of the Option.
6.5 TERMINATION OF EMPLOYMENT. Subject to Section 11, upon a
termination of employment by a Participant prior to the full exercise of an
Option, the unexercised portion of the Option shall be subject to such
procedures as the Committee may establish except, in the case of an ISO, if and
to the extent that other procedures are necessary to comply with the provisions
of Section 421, 422 or 424 of the Code.
6.6 PAYMENT OF EXERCISE PRICE. The exercise price of an Option shall be
paid in the form of one of more of the following, as the Committee shall
specify, either through the terms of the Option Document or at the time of
exercise of an Option: (a) cash or certified or cashiers' check, (b) shares of
capital stock of the Company that have been held by the Participant for such
period of time as the Committee may specify, (c) other property deemed
acceptable by the Committee, (d) a reduction in the number of Shares or other
property otherwise issuable pursuant to such Option, (e) a promissory note of or
other commitment to pay by the Participant or of a third party, the terms and
conditions of which shall be determined by the Committee, or (f) any combination
of (a) through (e).
SECTION 7. INCENTIVE BONUSES
Each Incentive Bonus Award will confer upon the Employee the
opportunity to earn a future payment tied to the level of achievement with
respect to one or more performance criteria established for a performance period
of not less than one year.
7.1 INCENTIVE BONUS DOCUMENT. Each Incentive Bonus Document shall
contain provisions regarding (a) the target and maximum amount payable to the
Participant as an Incentive Bonus, (b) the performance criteria and level of
achievement versus these criteria that shall determine the amount of such
payment, (c) the term of the performance period as to which performance shall be
measured for determining the amount of any payment, (d) the timing of any
payment earned by virtue of performance, (e) restrictions on the alienation or
transfer of the Incentive Bonus prior to actual payment, (f) forfeiture
provisions, and (g) such further terms and conditions, in each case not
inconsistent with this Plan as may be determined from time to time by the
Committee. The maximum amount payable as an Incentive Bonus may be a multiple of
the target amount payable, but the maximum amount payable pursuant to that
portion of an Incentive Bonus Award granted under this Plan for any fiscal year
to any Participant that is intended to satisfy the requirements for "performance
based compensation" under Code Section 162(m) shall not exceed $1,000,000.
7.2 PERFORMANCE CRITERIA. The Committee shall establish the performance
criteria and level of achievement versus these criteria that shall determine the
target and maximum amount payable under an Incentive Bonus Award, which criteria
may be based on financial performance and/or personal performance evaluations.
The Committee may specify the percentage of the target Incentive Bonus that is
intended to satisfy the requirements for "performance-based compensation" under
Code Section 162(m). Notwithstanding anything to the contrary herein, the
performance criteria for any portion of an Incentive Bonus that is intended by
the Committee to satisfy the requirements for "performance-based compensation"
under Code Section 162(m) shall be a measure based on one or more Qualifying
Performance Criteria (as defined in Section 9.2) selected by the Committee and
specified at the time the Incentive Bonus Award is granted. The Committee shall
certify the extent to which any Qualifying Performance Criteria has been
satisfied, and the amount payable as a result thereof, prior to payment of any
Incentive Bonus that is intended to satisfy the requirements for
"performance-based compensation" under Code Section 162(m).
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7.3 TIMING AND FORM OF PAYMENT. The Committee shall determine the
timing of payment of any Incentive Bonus. The Committee may provide for or,
subject to such terms and conditions as the Committee may specify, may permit a
Participant to elect for the payment of any Incentive Bonus to be deferred to a
specified date or event.
7.4 DISCRETIONARY ADJUSTMENTS. Notwithstanding satisfaction of any
performance goals, the amount paid under an Incentive Bonus Award on account of
either financial performance or personal performance evaluations may be reduced
by the Committee on the basis of such further considerations as the Committee
shall determine.
SECTION 8. INCENTIVE STOCK
Incentive Stock is an award or issuance of Shares the grant, issuance,
retention, vesting and/or transferability of which is subject during specified
periods of time to such conditions (including performance conditions) and terms
as the Committee deems appropriate.
8.1 INCENTIVE STOCK DOCUMENT. Each Incentive Stock Document shall
contain provisions regarding (a) the number of Shares subject to such Award or a
formula for determining such, (b) the performance criteria, if any, and level of
achievement versus these criteria that shall determine the number of Shares
granted, issued, retainable and/or vested, (c) the period, if any, as to which
performance shall be measured for determining achievement of performance, (d)
forfeiture, (e) tranferability and (f) such further terms and conditions, not
inconsistent with this Plan as may be determined from time to time by the
Committee.
8.2 SALE PRICE. Subject to the requirements of applicable law, the
Committee shall determine the price, if any, at which Shares of Incentive Stock
shall be sold or awarded to an Eligible Person, which may vary from time to time
and among Eligible Persons and which may be below the fair market value of such
Shares at the date of grant or issuance.
8.3 PERFORMANCE CRITERIA. The grant, issuance, retention and/or vesting
of each Incentive Share may but need not be subject to such performance criteria
and level of achievement versus these criteria as the Committee shall determine,
which criteria may be based on financial performance and/or personal performance
evaluations. Notwithstanding anything to the contrary herein, the performance
criteria for any Incentive Stock that is intended to satisfy the requirements
for "performance-based compensation" under Code Section 162(m) shall be a
measure based on one or more Qualifying Performance Criteria selected by the
Committee and specified at the time the Incentive Stock Award is granted.
8.4 DISCRETIONARY ADJUSTMENTS. Notwithstanding satisfaction of any
performance goals, the number of Shares granted, issued, retainable and/or
vested under an Incentive Stock Award on account of either financial performance
or personal performance evaluations may be reduced by the Committee on the basis
of such further considerations as the Committee shall determine.
8.5 TERMINATION OF EMPLOYMENT. Subject to Section 11, upon a
termination of employment by a Participant prior to the vesting of or the
lapsing of restrictions on Incentive Stock, the Incentive Stock Awards granted
to such Participant shall be subject to such procedures as determined by the
Committee.
SECTION 9. OTHER PROVISIONS APPLICABLE TO AWARDS
9.1 TRANSFERABILITY. Unless the agreement or other document evidencing
an Award (or an amendment thereto authorized by the Committee) expressly states
that the Award is transferable as provided hereunder, no Award granted under
this Plan, nor any interest in such Award, may be sold, assigned, conveyed,
gifted, pledged, hypothecated or otherwise transferred in any manner prior to
the vesting or lapse of any and all restrictions applicable thereto, other than
by will or the laws of descent and distribution. The Committee may grant an
Award or amend an outstanding Award to provide that the Award is transferable or
assignable to a member or members of the Participant's "immediate family," as
such term is defined in Rule 16a-1(e) under the
5
<PAGE>
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or to a trust
for the benefit solely of a member or members of the Participant's immediate
family, or to a partnership or other entity whose only owners are members of the
Participant's immediate family, PROVIDED that (i) no consideration is given in
connection with the transfer of such Award, and (ii) following any such transfer
or assignment the Award will remain subject to substantially the same terms
applicable to the Award while held by the Participant, as modified as the
Committee shall determine appropriate, and the transferee shall execute an
agreement agreeing to be bound by such terms.
9.2 QUALIFYING PERFORMANCE CRITERIA. For purposes of this Plan, the
term "Qualifying Performance Criteria" shall mean any one or more of the
following performance criteria, either individually, alternatively or in any
combination, applied to either the Company as a whole or to a business unit or
subsidiary, either individually, alternatively or in any combination, and
measured either annually or cumulatively over a period of years, on an absolute
basis or relative to a pre-established target, to previous years' results or to
a designated comparison group, in each case as specified by the Committee in the
Award: (a) cash flow, (b) earnings per share, (c) earnings before interest,
taxes and amortization), (d) return on equity, (e) total stockholder return, (f)
return on capital, (g) return on assets or net assets, (h) revenue, (i) income
or net income, (j) operating income or net operating income, (k) operating
profit or net operating profit, (l) operating margin, (m) return on operating
revenue, (n) market share, and (o) overhead or other expense reduction. The
Committee shall appropriately adjust any evaluation of performance under a
Qualifying Performance Criteria to exclude any of the following events that
occurs during a performance period: (i) asset write-downs, (ii) litigation or
claim judgments or settlements, (iii) the effect of changes in tax law,
accounting principles or other such laws or provisions affecting reported
results, (iv) accruals for reorganization and restructuring programs, and (v)
any extraordinary non-recurring items as described in Accounting Principles
Board Opinion No. 30 and/or in management's discussion and analysis of financial
condition and results of operations appearing in the Company's annual report to
stockholders for the applicable year.
9.3 DIVIDENDS. Unless otherwise provided by the Committee, no
adjustment shall be made in Shares issuable under Awards on account of cash
dividends that may be paid or other rights that may be issued to the holders of
Shares prior to their issuance under any Award. The Committee shall specify
whether dividends or dividend equivalent amounts shall be paid to any
Participant with respect to the Shares subject to any Award that have not vested
or been issued or that are subject to any restrictions or conditions on the
record date for dividends.
9.4 DOCUMENTS EVIDENCING AWARDS. The Committee shall, subject to
applicable law, determine the date an Award is deemed to be granted, which for
purposes of this Plan shall not be affected by the fact that an Award is
contingent on subsequent stockholder approval of this Plan. The Committee or,
except to the extent prohibited under applicable law, its delegate(s) may
establish the terms of agreements or other documents evidencing Awards under
this Plan and may, but need not, require as a condition to any such agreement's
or document's effectiveness that such agreement or document be executed by the
Participant and that such Participant agree to such further terms and conditions
as specified in such agreement or document. The grant of an Award under this
Plan shall not confer any rights upon the Participant holding such Award other
than such terms, and subject to such conditions, as are specified in this Plan
as being applicable to such type of Award (or to all Awards) or as are expressly
set forth in the agreement or other document evidencing such Award.
9.5 TANDEM STOCK OR CASH RIGHTS. Either at the time an Award is granted
or by subsequent action, the Committee may, but need not, provide that an Award
shall contain as a term thereof, a right, either in tandem with the other rights
under the Award or as an alternative thereto, of the Participant to receive,
without payment to the Company, a number of Shares, cash or a combination
thereof, the amount of which is determined by reference to the value of the
Award.
9.6 FINANCING. The Committee may provide financing to a Participant in
a principal amount sufficient to pay the purchase price of any Award and/or to
pay the amount of taxes required by law to be withheld with respect to any
Award. Any such loan shall be subject to all applicable legal requirements and
restrictions pertinent thereto, including Regulation G promulgated by the
Federal Reserve Board. The grant of
6
<PAGE>
an Award shall in no way obligate the Company or the Committee to provide any
financing whatsoever in connection therewith.
SECTION 10. CHANGES IN CAPITAL STRUCTURE
If the outstanding securities of the class then subject to this Plan
are increased, decreased or exchanged for or converted into cash, property or a
different number or kind of shares or securities, or if cash, property or shares
or securities are distributed in respect of such outstanding securities, in
either case as a result of a reorganization, merger, consolidation,
recapitalization, restructuring, reclassification, dividend (other than a
regular, quarterly cash dividend) or other distribution, stock split, reverse
stock split, spin-off or the like, or if substantially all of the property and
assets of the Company are sold, then, unless the terms of such transaction shall
provide otherwise, the Committee shall make appropriate and proportionate
adjustments in (i) the number and type of shares or other securities or cash or
other property that may be acquired pursuant to Awards theretofore granted under
this Plan and the exercise or settlement price of such Awards, PROVIDED,
HOWEVER, that such adjustment shall be made in such a manner that will not
affect the status of any Award intended to qualify as an ISO under Code Section
422 or as "performance based compensation" under Code Section 162(m), and (ii)
the maximum number and type of shares or other securities that may be issued
pursuant to such Awards thereafter granted under this Plan.
SECTION 11. CHANGE OF CONTROL
11.1 EFFECT OF CHANGE OF CONTROL. The Committee may through the terms
of the Award or otherwise provide that any or all of the following shall occur,
in connection with a Change of Control or a Change of Control Transaction (as
those terms are defined in Section 11.2), or upon termination of the
Participant's employment following a Change of Control or a Change of Control
Transaction: (a) in the case of an Option, the acceleration of the Participant's
ability to exercise any portion of the Option not previously exercisable, (b) in
the case of an Incentive Bonus, the acceleration of the Participant's right to
receive a payment equal to the target amount payable or, if greater, a payment
based on performance through a date determined by the Committee prior to the
Change of Control, and (c) in the case of Shares issued in payment of any
Incentive Bonus, and/or in the case of Incentive Stock, the lapse and expiration
of any conditions to the grant, issuance, retention, vesting or transferability
of, or any other restrictions applicable to, such Award. The Committee also may,
through the terms of the Award or otherwise, provide for an absolute or
conditional exercise, payment or lapse of conditions or restrictions on an Award
that shall only be effective if, upon the announcement of a Change of Control
Transaction, no provision is made in such Change of Control Transaction for the
exercise, payment or lapse of conditions or restrictions on the Award, or other
procedure whereby the Participant may realize the full benefit of the Award.
11.2 DEFINITIONS. Unless the Committee shall provide otherwise,
"Change of Control" shall mean an occurrence of any of the following
events:
(a) an acquisition (other than directly from the Company) of
any voting securities of the Company (the "Voting Securities") by any
"person or group" (within the meaning of Section 13(d)(3) or 14(d)(2)
of the Exchange Act) immediately after which such person or group has
"Beneficial Ownership" (within the meaning of Rule 13d-3 under the
Exchange Act) of more than 50% of the combined voting power of the
Company's then outstanding Voting Securities, except in the case of an
acquisition by any person or group that immediately prior to such
acquisition already had Beneficial Ownership of more than 50% of the
combined voting power of the Company's then outstanding Voting
Securities;
(b) approval by the stockholders of (i) a merger,
consolidation or reorganization involving the Company, unless the
company resulting from such merger, consolidation or reorganization
(the "Surviving Corporation") shall adopt or assume this Plan and all
Participants' Awards under this Plan and either (A) the stockholders of
the Company immediately before such
7
<PAGE>
merger, consolidation or reorganization own, directly or indirectly
immediately following such merger, consolidation or reorganization,
more than 50% of the combined voting power of the Surviving Corporation
in substantially the same proportion as their ownership immediately
before such merger, consolidation or reorganization, or (B) at least a
majority of the members of the Board of Directors of the Surviving
Corporation were directors of the Company immediately prior to the
execution of the agreement providing for such merger, consolidation or
reorganization, or (ii) a complete liquidation or dissolution of the
Company; or
(c) such other events as the Committee from time to time may
specify.
"Change of Control Transaction" shall mean any tender offer, offer,
exchange offer, solicitation, merger, consolidation, reorganization or other
transaction that is intended to or reasonably expected to result in a change of
control.
SECTION 12. TAXES
12.1 WITHHOLDING REQUIREMENTS. The Committee may make such provisions
or impose such conditions as it may deem appropriate for the withholding or
payment by a Participant of any taxes that the Committee determines are required
in connection with any Award granted under this Plan, and a Participant's rights
in any Award are subject to satisfaction of such conditions.
12.2 PAYMENT OF WITHHOLDING TAXES. Notwithstanding the terms of Section
12.1, the Committee may provide in the agreement or other document evidencing an
Award or otherwise that all or any portion of the taxes required to be withheld
by the Company or, if permitted by the Committee, desired to be paid by the
Participant, in connection with the exercise of a Nonqualified Option or the
exercise, vesting, settlement or transfer of any other Award shall be paid or,
at the election of the Participant, may be paid by the Company by withholding
shares of the Company's capital stock otherwise issuable or subject to such
Award, or by the Participant delivering previously owned shares of the Company's
capital stock, in each case having a fair market value equal to the amount
required or elected to be withheld or paid. Any such election is subject to such
conditions or procedures as may be established by the Committee and may be
subject to disapproval by the Committee.
SECTION 13. AMENDMENTS OR TERMINATION
The Board may amend, alter or discontinue this Plan or any agreement or
other document evidencing an Award made under this Plan, but no such amendment
shall, without the approval of the stockholders of the Company:
(a) materially increase the maximum number of shares of Common
Stock for which Awards may be granted under this Plan;
(b) reduce the price at which Options may be granted below the
price provided for in Section 6.2;
(c) reduce the exercise price of outstanding Options;
(d) impair the rights of any Award holder, without such
holder's consent, under any Award granted prior to the date of any
Change of Control;
(e) extend the term of this Plan; or
(f) change the class of persons eligible to be Participants.
8
<PAGE>
SECTION 14. COMPLIANCE WITH OTHER LAWS AND REGULATIONS.
This Plan, the grant and exercise of Awards thereunder, and the
obligation of the Company to sell, issue or deliver Shares under such Awards,
shall be subject to all applicable federal, state and foreign laws, rules and
regulations and to such approvals by any governmental or regulatory agency as
may be required. The Company shall not be required to register in a
Participant's name or deliver any Shares prior to the completion of any
registration or qualification of such Shares under any federal, state or foreign
law or any ruling or regulation of any government body which the Committee shall
determine to be necessary or advisable. This Plan is intended to constitute an
unfunded arrangement for a select group of management or other key employees,
directors and consultants.
No Option shall be exercisable unless a registration statement with
respect to the Option is effective or the Company has determined that such
registration is unnecessary. Unless the Awards and Shares covered by this Plan
have been registered under the Securities Act of 1933, as amended, or the
Company has determined that such registration is unnecessary, each person
receiving an Award and/or Shares pursuant to any Award may be required by the
Company to give a representation in writing that such person is acquiring such
Shares for his or her own account for investment and not with a view to, or for
sale in connection with, the distribution of any part thereof.
SECTION 15. OPTION GRANTS BY SUBSIDIARIES
In the case of a grant of an option to any Eligible Person employed by
a subsidiary of the Company, such grant may, if the Committee so directs, be
implemented by the Company issuing any subject shares to the subsidiary, for
such lawful consideration as the Committee may determine, upon the condition or
understanding that the subsidiary will transfer the shares to the optionholder
in accordance with the terms of the option specified by the Committee pursuant
to the provisions of this Plan. Notwithstanding any other provision hereof, such
option may be issued by and in the name of the subsidiary and shall be deemed
granted on such date as the Committee shall determine.
SECTION 16. NO RIGHT TO COMPANY EMPLOYMENT
Nothing in this Plan or as a result of any Award granted pursuant to
this Plan shall confer on any individual any right to continue in the employ of
the Company or interfere in any way with the right of the Company to terminate
an individual's employment at any time. The agreements or other documents
evidencing Awards may contain such provisions as the Committee may approve with
reference to the effect of approved leaves of absence.
SECTION 17. EFFECTIVENESS AND EXPIRATION OF PLAN
This Plan shall be effective on the date the Board adopts this Plan.
All Awards granted under this Plan are subject to, and may not be exercised
before, the approval of this Plan by the stockholders prior to the first
anniversary date of the effective date of this Plan, by the affirmative vote of
the holders of a majority of the outstanding shares of the Company present, or
represented by proxy, and entitled to vote, at a meeting of the Company's
stockholders or by written consent in accordance with the laws of the State of
Delaware; PROVIDED that if such approval by the stockholders of the Company is
not forthcoming, all Awards previously granted under this Plan shall be void. No
Awards shall be granted pursuant to this Plan more than ten (10) years after the
effective date of this Plan.
SECTION 18. NON-EXCLUSIVITY OF PLAN
Neither the adoption of this Plan by the Board nor the submission of
this Plan to the stockholders of the Company for approval shall be construed as
creating any limitations on the power of the Board or the Committee to adopt
such other incentive arrangements as either may deem desirable, including
without
9
<PAGE>
limitation, the granting of restricted stock or stock options otherwise than
under this Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
SECTION 19. GOVERNING LAW
This Plan and any agreements or other documents hereunder shall be
interpreted and construed in accordance with the laws of the State of Delaware
and applicable federal law. The Committee may provide that any dispute as to any
Award shall be presented and determined in such forum as the Committee may
specify, including through binding arbitration. Any reference in this Plan or in
the agreement or other document evidencing any Award to a provision of law or to
a rule or regulation shall be deemed to include any successor law, rule or
regulation of similar effect or applicability.
10
<PAGE>
EXHIBIT 10.56
WAIVER AND AMENDMENT
WAIVER AND AMENDMENT, dated as of March 26, 1999 (this
"AMENDMENT"), to the Amended and Restated Credit Agreement, dated as of March
6, 1998 (as amended, supplemented or otherwise modified from time to time,
the "AGREEMENT"), among AFTERMARKET TECHNOLOGY CORP., a Delaware corporation
(the "BORROWER"), the several banks and other financial institutions from
time to time parties thereto (the "LENDERS") and THE CHASE MANHATTAN BANK, a
New York banking corporation, as agent (in such capacity, the "AGENT").
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders and the Agent are
parties to the Agreement;
WHEREAS, the Borrower has requested that the Lenders and
the Agent agree to amend or waive certain provisions of the Agreement, and
the Lenders and the Agent are agreeable to such request upon the terms and
subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual
agreements contained herein, and for other valuable consideration the receipt
of which is hereby acknowledged, the Company, the Lenders and the Agent
hereby agree as follows:
1. DEFINITIONS. All terms defined in the Agreement
shall have such defined meanings when used herein unless otherwise defined
herein.
2. AMENDMENT OF SUBSECTION 1.1. Subsection 1.1 of
the Agreement is hereby amended as follows:
(a) The first paragraph of the definition of "APPLICABLE
MARGIN" is hereby deleted (up to clause (a) thereof) and replaced with the
following new paragraph:
""APPLICABLE MARGIN": from and after March 26, 1999, 1.25% in
the case of ABR Loans and 2.25% in the case of Eurodollar
Loans (it being understood that prior thereto the Applicable
Margin shall be as provided in this Agreement prior to the
effectiveness of the Waiver and Amendment hereto dated as of
March 26, 1999); PROVIDED that, such Applicable Margin will be
adjusted on each Adjustment Date to the applicable rate per
annum set forth under the heading "ABR Applicable Margin" or
"Eurodollar Applicable Margin" on Schedule A which corresponds
to the Leverage Ratio determined based on the financial
statements and Compliance Certificate relating to the end of
the four fiscal quarters of the Borrower immediately
<PAGE>
2
preceding such Adjustment Date; PROVIDED FURTHER, that,
notwithstanding the foregoing, for the period from March
26, 1999 until the first Adjustment Date to occur after
delivery of the Borrower's financial statements for the
fiscal quarter ended June 30, 1999 pursuant to Section
7.1(b), the Applicable Margin in respect of Loans shall not
be less than the initial Applicable Margin set forth above;
and PROVIDED, FURTHER, that in the event that the financial
statements required to be delivered pursuant to subsection
7.1(a) or 7.1(b), as applicable, and the related Compliance
Certificate required to be delivered pursuant to subsection
7.2(b), are not delivered when due, then".
(b) The definition of "CONSOLIDATED CAPITAL EXPENDITURES" is
amended by inserting at the end thereof the following proviso:
"; PROVIDED that, in calculating Consolidated Capital
Expenditures for any test period of four consecutive fiscal
quarters that includes any of the fiscal quarters ending March
31, 1999, June 30, 1999, September 30, 1999 or December 31,
1999 for purposes of determining compliance with Subsection
8.1(b) (but not the purposes of subsection 8.9 or any other
purpose), the portion of "J.D. Edwards implementation" costs
that would otherwise be included in such Consolidated Capital
Expenditures, in amount and nature not materially different
from those items presented to the Lenders at their meeting
with the Borrower on March 10, 1999, may be subtracted from
Consolidated Capital Expenditures so long as the aggregate
amount of such costs so subtracted in calculating Consolidated
Capital Expenditures for all such four quarter test periods
does not exceed $18,000,000".
(c) The definition of "CONSOLIDATED EBITDA" is amended by (i)
inserting at the end of each of clause (d), (e) and (f) the parenthetical
"(subject, in the case of any thereof constituting Special Charges, to the
limits set forth in the definition thereof)" and (ii) adding the following new
clause (g) after the existing clause (f):
"and (g) for any calculation of Consolidated EBITDA for the
purpose of determining the Applicable Margin or compliance
with subsections 8.1(a) or 8.1(b), in each case for any test
period
<PAGE>
3
that includes the fiscal quarter ended December 31, 1998,
the amount of Special Charges".
(d) The following new definition is added in appropriate
alphabetical order:
"SPECIAL CHARGES": (a) extraordinary losses, special
charges and non-cash charges recorded in the fiscal quarters
ended June 30, 1998 and December 31, 1998, in amount and
nature not materially different from those items presented to
the Lenders at their meeting with the Borrower on March 10,
1999, and in any case in an aggregate amount not to exceed
$36,700,000, PROVIDED that the items included therein
described as a $5,170,000 cash charge resulting from core
returns by Chrysler and a $2,400,000 cash charge for
additional state tax liabilities may exceed such figures by
amounts that, when added together, are not greater than
$2,500,000 in the aggregate for both such items, and in such
event the foregoing $36,700,000 limit may be increased to the
extent of such excess to an amount not to exceed $39,200,000,
and (b) severance and restructuring charges recorded in any
fiscal quarter ending in 1999, in amount and nature not
materially different from those items presented to the Lenders
at their meeting with the Borrower on March 10, 1999, and in
any case in an aggregate amount not to exceed $4,000,000."
3. WAIVER OF CERTAIN REPRESENTATIONS. Any breach of the
representations and warranties of the Borrower (i) set forth in the first
sentence of Subsection 5.2 (no material adverse change since December 31, 1996),
the first sentence of Subsection 5.4 (to the extent addressing the legal right
to borrow) and Subsection 5.7 (no default), and (ii) made or deemed made
pursuant to Subsection 6.2 or the Waiver, dated as of January 6, 1999, to the
Credit Agreement, to the extent that by virtue of such Subsection 6.2 or such
Waiver the Borrower made or was deemed to have made the representations
described in the foregoing clause (i), is hereby waived to the extent, and only
to the extent, that such representation and warranty was made or deemed made
prior to the date hereof and was or may have been incorrect solely by virtue of
or to the extent of facts or circumstances specifically presented to the Lenders
at their meeting with the Borrower on March 10, 1999.
4. WAIVER OF SUBSECTION 6.2(e) AND 7.2(f). The requirements of
Subsections 6.2(e) and 7.2(f) of the Agreement are hereby waived to the extent,
and only to the extent, that prior to the time hereof the Borrower may have
failed to deliver, on one or more occasions, complete certificates required by
Subsection 6.2(e) or 7.2(f), as applicable.
5. WAIVER OF SUBSECTION 7.2(c). The requirements of Subsection
7.2(c) of the Agreement are hereby waived to the extent, and only to the extent,
that a certificate with respect to projections for the 1999 fiscal year has not
been delivered within the period set forth therein, so long as such certificate
is delivered on or prior to March 26, 1999,
<PAGE>
4
it being understood that the projections provided for 1999 by the Borrower to
the Lenders at their meeting on March 10, 1999 shall constitute the
projections required by Subsection 7.2(c).
6. WAIVER OF SUBSECTION 8.1(a). The requirements of Subsection
8.1(a) of the Agreement are hereby waived to the extent, and only to the extent,
that the Leverage Ratio on the last day of the Borrower's fiscal quarter ended
December 31, 1998 exceeded 4.00 to 1.0, so long as the Leverage Ratio as of such
date did not exceed 4.50 to 1.00 after giving effect to this Amendment.
7. WAIVER OF SUBSECTION 8.1(b). The requirements of Subsection
8.1(b) of the Agreement are hereby waived to the extent, and only to the extent,
that the interest coverage ratio calculated in accordance with Section 8.1(b) of
the Agreement for the period of four consecutive fiscal quarters ended December
31, 1998 was less than 2.00 to 1.0 before giving effect to this Amendment, so
long as such ratio for such period was not less than 2.00 to 1.0 after giving
effect to this Amendment.
8. AMENDMENT OF SUBSECTION 4.1(a). Subsection 4.1(a) of the
Agreement is hereby amended by inserting at the end thereof the following
proviso:
"PROVIDED FURTHER, that, notwithstanding the foregoing, for
the period from March 26, 1999 until the first Adjustment Date
to occur after delivery of the Borrower's financial statements
for the fiscal quarter ended March 31, 1999 pursuant to
Section 7.1(b), the commitment fee rate shall be .500%."
9. AMENDMENT OF SUBSECTION 6.2(e). Subsection 6.2(e) of
the Agreement is hereby amended by:
(a) deleting the clause "the sum of (i) the aggregate unpaid
principal amount of the Term Loans and (ii)" from the second line of existing
Subsection 6.2(e);
(b) deleting the words "Extensions of Credit"from the ninth
line of existing Subsection 6.2(e) and inserting in lieu thereof "Revolving
Credit Exposures of all Lenders"; and
(c) inserting the clause "or (z) the Agent shall have received
a certificate of a Responsible Officer of the Borrower, dated the requested
Borrowing Date, demonstrating that the incurrence of such Extensions of Credit
is permitted under provisions of Section 4.11 of the Indenture other than
subsections 4.11(a) or 4.11(f)" at the end of Subsection 6.2(e),
such that Subsection 6.2(e), as amended, reads as follows:
"(e) DEBT INCURRENCE COMPLIANCE CERTIFICATE. If, on
any requested Borrowing Date, the aggregate Revolving Credit
Exposures of all Lenders, after
<PAGE>
5
giving effect to the Extensions of Credit requested to be
made on such Borrowing Date, exceeds 90% of the Borrowing
Base (as such term is defined in the Indentures) as
determined in the most recent calculation thereof delivered
pursuant to subsection 7.2(f), the Agent shall have
received a calculation of the Borrowing Base as at such
requested Borrowing Date, together with a certificate of a
Responsible Officer of the Borrower, dated the requested
Borrowing Date, demonstrating that the aggregate Revolving
Credit Exposures of all Lenders after giving effect to the
Revolving Credit Loans requested to be made on such
Borrowing Date will not exceed the Borrowing Base
calculated as at such date, PROVIDED that if the foregoing
would not be sufficient to demonstrate that such Extensions
of Credit can be made in compliance with the applicable
terms of the Indentures, such Borrowing Base calculation
and certificate shall not be so required, so long as (x)
the total amount of such requested Extensions of Credit,
when added to the total amount of any other Extensions of
Credit and the total amount of Indebtedness and
Disqualified Capital Stock (each as defined in the
Indenture) incurred after the date of the latest
calculation of the Total Incurrence Amount (as defined in
subsection 7.2(f)), does not exceed 90% of such Total
Incurrence Amount or (y) the Agent shall have received a
certificate of a Responsible Officer of the Borrower, dated
the requested Borrowing Date, demonstrating that the
applicable Consolidated Coverage Ratio (as such term is
defined in the Indentures) of the Borrower after giving
effect to such Extensions of Credit as set forth in the
Indentures satisfies the relevant terms thereof or (z) the
Agent shall have received a certificate of a Responsible
Officer of the Borrower, dated the requested Borrowing
Date, demonstrating that the incurrence of such Extensions
of Credit is permitted under provisions of Section 4.11 of
the Indenture other than subsections 4.11(a) or 4.11(f)."
10. AMENDMENT OF SUBSECTION 8.1(a). Subsection 8.1(a) of the
Agreement is hereby amended by deleting the permitted maximum Leverage Ratios
listed therein for the last day of the Borrower's fiscal quarters ending
December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999 and
December 31, 1999 and inserting in lieu thereof the following permitted maximum
Leverage Ratios:
<TABLE>
<S> <C>
"December 31, 1998 4.50 to 1.0
March 31, 1999 5.50 to 1.0
June 30, 1999 5.75 to 1.0
September 30, 1999 5.25 to 1.0
December 31, 1999 4.00 to 1.0".
</TABLE>
11. AMENDMENT OF SUBSECTION 8.1(b). Subsection 8.1(b) of the
Agreement is hereby amended by deleting the minimum permitted interest coverage
ratios listed therein for the Borrower's four consecutive fiscal quarters ending
March 31, 1999, June 30, 1999,
<PAGE>
6
September 30, 1999 and December 31, 1999 and inserting in lieu thereof the
following interest coverage ratios:
<TABLE>
<S> <C>
"March 31, 1999 1.25 to 1.0
June 30, 1999 1.25 to 1.0
September 30, 1999 1.40 to 1.0
December 31, 1999 1.85 to 1.0".
</TABLE>
12. AMENDMENT OF SUBSECTION 8.4(f). Subsection 8.4(f) of the
Agreement is hereby amended by deleting the existing clause (f) and inserting in
lieu thereof the following new clause:
"(f) Guarantee Obligations in respect of letters of credit
issued for the account of the Borrower or any of its
Subsidiaries in the ordinary course of business in an
aggregate face amount not to exceed $10,000,000 at any time."
13. AMENDMENT OF SUBSECTION 8.7. Subsection 8.7 of the
Agreement regarding permissible Consolidated Lease Expenses is hereby amended by
deleting the words "and $10,000,000 for each fiscal year thereafter" and
inserting in lieu thereof "and $15,000,000 for each fiscal year thereafter."
14. AMENDMENT OF SUBSECTION 8.9. Subsection 8.9 of the
Agreement is hereby amended by deleting the permitted levels of capital
expenditures listed therein for fiscal years 1999 through 2003 and inserting in
lieu thereof the following permitted levels of capital expenditures:
<TABLE>
<S> <C>
"1999 $28,000,000
2000 $30,000,000
2001 $30,000,000
2002 $30,000,000
2003 $30,000,000".
</TABLE>
15. AMENDMENT TO SUBSECTION 8.10(J). Subsection 8.10(j) of the
Agreement is hereby amended by:
(a) deleting "$30,000,000" from clause (v) and inserting
in lieu thereof "$15,000,000"; and
(b) adding the following new clause (vi) after existing
clause (v):
<PAGE>
7
"and (vi) the aggregate consideration for all such
acquisitions after the Closing Date shall not exceed
$25,000,000."
16. AMENDMENT OF SUBSECTION 8.13. Subsection 8.13 of the
Agreement is hereby amended inserting at the end thereof the following proviso:
"PROVIDED that, notwithstanding the foregoing, the Borrower or
any of its Subsidiaries may enter into arrangements in the
ordinary course of business pursuant to which it purchases
equipment or similar property and, within 180 days of such
purchase, conveys such property to another Person, for cash
consideration at least equal to the consideration paid by it
in such purchase, and concurrently enters into a lease of such
property from such Person, in each case so long as such
transactions (including, without limitation, the amount of any
such lease) are permitted by the other applicable provisions
of this Agreement and no Default or Event of Default exists or
would result therefrom."
17. AMENDMENT OF SCHEDULE A. Schedule A to the Agreement is
hereby amended by deleting such Schedule A and replacing it with the Schedule A
attached hereto.
18. REPRESENTATIONS; NO DEFAULT. On and as of the date hereof,
and after giving effect to this Amendment, the Company confirms, reaffirms and
restates that the representations and warranties set forth in Section 5 of the
Agreement and in the other Loan Documents are true and correct in all material
respects, provided that the references to the Agreement therein shall be deemed
to be references to this Amendment and to the Agreement as amended by this
Amendment.
19. CONDITIONS TO EFFECTIVENESS. This Amendment shall become
effective on and as of the date that the Agent shall have received:
(a) counterparts of this Amendment, duly executed and
delivered by a duly authorized officer of each of the Borrower, the Agent, and
the Required Lenders, along with the written consent of each Subsidiary
Guarantor in the form attached hereto;
(b) an executed certificate of an officer of the Borrower in
form satisfactory to the Agent as to the accuracy of the Borrower's
representations and warranties set forth in Section 5 of the Agreement and in
the other Loan Documents, the absence of any Default or Event of Default after
giving effect to this Amendment, and calculations in reasonable detail
demonstrating that the Term Loans, at the time of incurrence thereof, could be
incurred under subsection 4.11(a) of the Senior Subordinated Indenture in
accordance with the provisions thereof and as to such other customary matters as
the Agent may reasonably request;
(c) an executed legal opinion of each of (i) internal counsel
to the Borrower with respect to authorization and absence of conflict with
contracts or laws in respect of this
<PAGE>
8
Amendment and the Credit Agreement as amended hereby and (ii) Gibson, Dunn &
Crutcher LLP, in each case in form satisfactory to the Agent; and
(d) an amendment fee for the account of each Lender executing
this Amendment and delivering its executed signature page to the Agent prior to
5:00 p.m. on March 26, 1999, in the amount equal to 0.125% of the sum of such
Lender's Aggregate Outstanding Extensions of Credit and its unutilized
Commitments as of such date.
20. LIMITED WAIVER AND AMENDMENT. Except as expressly waived
and amended herein, the Agreement shall continue to be, and shall remain, in
full force and effect. This Amendment shall not be deemed to be a waiver of, or
consent to, or a modification or amendment of, any other term or condition of
the Agreement or any other Loan Document or to prejudice any other right or
rights which the Lenders may now have or may have in the future under or in
connection with the Agreement or any of the instruments or agreements referred
to therein, as the same may be amended from time to time.
21. COSTS AND EXPENSES. The Company agrees to pay or reimburse
the Agent for all its reasonable and customary out-of-pocket costs and expenses
incurred in connection with the preparation, negotiation and execution of this
Amendment, and the consummation of the transactions contemplated hereby,
including, without limitation, the reasonable fees and disbursements of its
counsel.
22. COUNTERPARTS. This Amendment may be executed by one or
more of the parties hereto in any number of separate counterparts and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.
23. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
9
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed and delivered by their respective duly authorized
officers as of the date first above written.
AFTERMARKET TECHNOLOGY CORP.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
THE CHASE MANHATTAN BANK, as
Agent and as a Lender
By: /s/ Julie S. Long
----------------------------
Name: Julie S. Long
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: Steven T. Standbridge
----------------------------
Name: Steven T. Standbridge
Title: Senior Vice President
BANK OF NOVA SCOTIA
By: /s/ P.C.H. Ashby
----------------------------
Name: P.C.H. Ashby
Title: Senior Manager-Loan
Operations
<PAGE>
10
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Glenn A. Currin
----------------------------
Name: Glenn A. Currin
Title: Vice President
FIRST UNION NATIONAL BANK
By: /s/ Leo G. Leitner
----------------------------
Name: Leo G. Leitner
Title: Managing Director/Senior
Vice President
HARRIS TRUST & SAVINGS BANK
By: /s/ Melissa A. Witson
----------------------------
Name: Melissa A. Witson
Title: Vice President
LASALLE NATIONAL BANK
By: /s/ James J. Hess
----------------------------
Name: James J. Hess
Title: Assistant Vice President
NATIONAL CITY BANK
By: /s/ Matthew R. Klinger
----------------------------
Name: Matthew R. Klinger
Title: Assistant Vice President
<PAGE>
11
BANK OF NEW YORK
By: /s/ John M. Lokay, Jr.
----------------------------
Name: John M. Lokay, Jr.
Title: Vice President
CREDIT AGRICOLE INDOSUEZ
By: /s/ W. Leroy Startz
----------------------------
Name: W. Leroy Startz
Title: First Vice President
By: /s/ Kathryn L. Abbott
----------------------------
Name: Kathryn L. Abbott
Title: First Vice President
<PAGE>
12
CONSENT
Each of the undersigned Guarantors hereby consents and agrees to the
provisions of the foregoing Amendment, and hereby affirms that upon the
effectiveness of the foregoing Amendment, each Loan Document to which it is a
party shall continue to be, and shall remain, in full force and effect.
AFTERMARKET TECHNOLOGY CORP.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
AARON'S AUTOMOTIVE PRODUCTS, INC.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
ACI ELECTRONICS HOLDING CORP.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
ACI ELECTRONICS INVESTMENT CORP.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
ATC ELECTRONICS & LOGISTICS, L.P.
By: ACI ELECTRONICS HOLDING CORP.,
its General Partner
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
<PAGE>
13
ATC DISTRIBUTION GROUP, INC.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
ATS REMANUFACTURING, INC.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
COMPONENT REMANUFACTURING SPECIALISTS, INC.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
AUTOCRAFT REMANUFACTURING CORP.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
AUTOCRAFT INDUSTRIES, INC.
By: /s/ Joseph Salamunovich
----------------------------
Name: Joseph Salamunovich
Title: Vice President
<PAGE>
14
SCHEDULE A
Pricing Grid
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Commitment Eurodollar ABR
Leverage Ratio Fee Rate Applicable Margin Applicable Margin
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Greater than 5.0:1.00 .500% 2.50% 1.50%
- --------------------------------------------------------------------------------------------------------------
Less than or equal to 5.00:1.00, and .500% 2.25% 1.25%
greater than 4.50:1.00
- --------------------------------------------------------------------------------------------------------------
Less than or equal to 4.50:1.00, and .500% 2.00% 1.00%
greater than 4.00:1.00
- --------------------------------------------------------------------------------------------------------------
Less than or equal to 4.00:1.00, and .375% 1.25% .25%
greater than 3.50:1.0
- --------------------------------------------------------------------------------------------------------------
Less than or equal to 3.50:1.00, and .375% 1.00% 0%
greater than 2.50:1.00
- --------------------------------------------------------------------------------------------------------------
Less than or equal to 2.50:1.00, and .300% .875% 0%
greater than 2.00:1.00
- --------------------------------------------------------------------------------------------------------------
Less than or equal to 2.00:1.00 .250% .750% 0%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 11
AFTERMARKET TECHNOLOGY CORP.
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1997 1998 (a)
----------------- ------------------ -----------------
<S> <C> <C> <C>
Income (loss) before extraordinary items $ 16,299 $ 23,003 $ (7,115)
Extraordinary items - net of income taxes -- (3,749) (703)
------------------ ------------------ -----------------
------------------ ------------------ -----------------
Net income (loss) per statements of income $ 16,299 $ 19,254 $ (7,818)
------------------ ------------------ -----------------
------------------ ------------------ -----------------
Shares:
Weighted average common shares outstanding 12,203,021 17,496,173 19,985,850
Net effect of stock options granted during the twelve
months prior to the Company's filing of its initial
public offering, calculated using the
treasury stock method at an offering price
of $13.50 per share (pro forma) 523,772 -- --
Net effect of stock options and warrants outstanding,
excluding those discussed above, calculated
using the treasury stock method at the
average price for the period 1,242,824 1,839,186 n/a (b)
Number of shares of common stock assumed to be
issued in the Company's initial
public offering whose net proceeds would be
used to redeem the outstanding
preferred stock including accrued
dividends (pro forma) 1,948,767 -- --
------------------ ------------------ -----------------
Total 15,918,384 19,335,359 19,985,850
------------------ ------------------ -----------------
------------------ ------------------ -----------------
Per common share - diluted:
Income before extraordinary items $ 1.02 $ 1.19 $ (0.36)
Extraordinary items -- (0.20) (0.03)
------------------ ------------------ -----------------
------------------ ------------------ -----------------
Net income (loss) per share $ 1.02 $ 0.99 $ (0.39)
------------------ ------------------ -----------------
</TABLE>
(a) The December 31, 1996 share data includes the pro forma effects of the
Company's initial public offering.
(b) Due to the loss reported in 1998, the applicable share calculation above
excludes the antidulitive effect of stock options and warrants.
64
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
The direct and indirect subsidiaries of Aftermarket Technology Corp. are:
<TABLE>
<CAPTION>
- -------------------------------------------------- ------------------ ---------------------------------------
JURISDICTION OF NAME UNDER WHICH
NAME INCORPORATION BUSINESS IS CONDUCTED
- -------------------------------------------------- ------------------ ---------------------------------------
<S> <C> <C>
Aaron's Automotive Products, Inc. Delaware Aaron's Automotive Products
- -------------------------------------------------- ------------------ ---------------------------------------
ACI Electronics Holding Corp. Delaware Not Applicable
- -------------------------------------------------- ------------------ ---------------------------------------
ACI Electronics Investment Corp. Delaware Not Applicable
- -------------------------------------------------- ------------------ ---------------------------------------
ATC Distribution Group, Inc. Delaware ATC Distribution Group
ATC Diverco
ATC HTP
ATC Mamco
ATC Metran
ATC REPCO
ATC RPM
ATC Trans Mart
ATC Tranzparts
Diverco
HTP
Mamco Converters
Metran
REPCO Industries
RPM
Trans Mart
Tranzparts
- -------------------------------------------------- ------------------ ---------------------------------------
ATC Electronics & Logistics, L.P. Delaware Autocraft Electronics
Logistics Services
Materials Recovery
- -------------------------------------------------- ------------------ ---------------------------------------
ATS Remanufacturing Corp. Delaware ATS
CRS Gastonia
- -------------------------------------------------- ------------------ ---------------------------------------
Autocraft Industries, Inc. Delaware Autocraft Industries
- -------------------------------------------------- ------------------ ---------------------------------------
Autocraft Remanufacturing Corp. Delaware ATC Distribution Group
ATC Reman Center
Autocraft Industries
- -------------------------------------------------- ------------------ ---------------------------------------
Automotive Development Limited England Autocraft UK
Autocraft Industries
South East Lincs Engineering
- -------------------------------------------------- ------------------ ---------------------------------------
Aftermarket Technology (U.K.) Holding Limited England Not Applicable
- -------------------------------------------------- ------------------ ---------------------------------------
Component Remanufacturing Specialists, Inc. New Jersey CRS
- -------------------------------------------------- ------------------ ---------------------------------------
King-O-Matic Industries Limited Ontario, Canada ATC King-O-Matic
King-O-Matic Industries
- -------------------------------------------------- ------------------ ---------------------------------------
Partes Remanufacturadas de Mexico Mexico ATC RPM
RPM
- -------------------------------------------------- ------------------ ---------------------------------------
</TABLE>
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-18495) pertaining to the 1996 Stock Incentive Plan of
Aftermarket Technology Corp. of our report dated February 22, 1999 (except
for Note 22, as to which the date was March 26, 1999) with respect to the
consolidated financial statements and schedule of Aftermarket Technology
Corp. included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
Ernst & Young LLP
Chicago, Illinois
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 580
<SECURITIES> 0
<RECEIVABLES> 73,761
<ALLOWANCES> 2,404
<INVENTORY> 98,696
<CURRENT-ASSETS> 193,786
<PP&E> 85,971
<DEPRECIATION> 22,068
<TOTAL-ASSETS> 531,905
<CURRENT-LIABILITIES> 105,852
<BONDS> 111,394
0
0
<COMMON> 204
<OTHER-SE> 167,807
<TOTAL-LIABILITY-AND-EQUITY> 531,905
<SALES> 486,773
<TOTAL-REVENUES> 486,732
<CGS> 348,443
<TOTAL-COSTS> 471,473
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,877
<INTEREST-EXPENSE> 23,673
<INCOME-PRETAX> (10,291)
<INCOME-TAX> (3,176)
<INCOME-CONTINUING> (7,115)
<DISCONTINUED> 0
<EXTRAORDINARY> 703
<CHANGES> 0
<NET-INCOME> (7,818)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
