UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 1-14181
TRANSPORTATION COMPONENTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0562800
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
THREE RIVERWAY
SUITE 200
HOUSTON, TEXAS 77056
(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 332-2500
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 [ ]
The number of shares outstanding of the registrant's common stock, as of
August 11, 1999, was 17,732,130.
TRANSPORTATION COMPONENTS, INC.
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets of Transportation Components, Inc.
at June 30, 1999 (unaudited) and December 31, 1998........................ 3
Unaudited Consolidated Statements of Operations of Transportation
Components, Inc. for the three months and six months ended
June 30, 1999 and 1998.................................................... 4
Unaudited Consolidated Statements of Cash Flows of Transportation
Components, Inc. for the six months ended
June 30, 1999 and 1998.................................................... 5
Notes to Unaudited Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 10
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................... 19
Signature.................................................................... 20
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TRANSPORTATION COMPONENTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
----------- ------------
Current assets: (UNAUDITED) (NOTE 1)
Cash and cash equivalents .............................................. $ 3,994 $ 4,090
Accounts receivable, net of allowance for bad debts of $2,170 and $1,978 41,084 38,474
Receivables from related parties ....................................... 100 92
Notes receivable, current .............................................. 967 962
Inventories ............................................................ 67,577 71,354
Prepaid expenses and other ............................................. 1,733 2,027
Deferred tax asset ..................................................... 5,770 3,439
----------- ------------
Total current assets .............................................. 121,225 120,438
Property and equipment, net ................................................ 12,643 12,604
Notes receivable, net ...................................................... 1,538 1,854
Notes receivable from related parties ...................................... 840 822
Goodwill, net .............................................................. 87,212 81,832
Other assets ............................................................... 1,162 1,355
----------- ------------
Total assets ...................................................... $ 224,620 $ 218,905
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................................. $ 40,341 $ 41,342
Payables to related parties ............................................ 1,861 1,764
Current portion of long-term debt ...................................... 903 1,651
Other current liablities ............................................... 332 237
----------- ------------
Total current liablities .......................................... 43,437 44,994
Long-term debt, less current portion ....................................... 62,510 59,091
Deferred tax liability ..................................................... 2,917 2,875
Payables to related parties ................................................ 14,242 14,068
----------- ------------
Total liablities .................................................. 123,106 121,028
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par, 5,000,000 shares authorized, none issued ... -- --
Common stock, $0.01 par, 102,000,000 shares authorized,
17,727,815 shares outstanding ....................................... 177 177
Additional paid-in capital ............................................. 102,393 102,414
Retained deficit ....................................................... (1,056) (4,714)
----------- ------------
Total stockholders' equity ........................................ 101,514 97,877
----------- ------------
Total liabilities and stockholders' equity ........................ $ 224,620 $ 218,905
=========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
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TRANSPORTATION COMPONENTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues ........................................... $ 81,108 $ 3,786 $ 159,350 $ 3,786
Cost of sales ...................................... 56,481 2,664 110,244 2,664
------------ ------------ ------------ ------------
Gross profit ................................... 24,627 1,122 49,106 1,122
Selling, general and administrative expenses ....... 20,509 1,027 40,340 5,877
------------ ------------ ------------ ------------
Income (loss) from operations ...................... 4,118 95 8,766 (4,755)
Other income (expense):
Interest expense ............................... (1,366) (29) (2,614) (29)
Other income, net .............................. 294 (12) 522 (12)
------------ ------------ ------------ ------------
Income (loss) before income taxes .................. 3,046 54 6,674 (4,796)
Provision for income taxes ......................... 1,424 30 3,092 30
------------ ------------ ------------ ------------
Net income (loss) .................................. $ 1,622 $ 24 $ 3,582 $ (4,826)
============ ============ ============ ============
Income (loss) per share - Basic .................... $ .09 $ . 01 $ .20 $ (1.34)
============ ============ ============ ============
Income (loss) per share - Diluted .................. $ .09 $ .01 $ .20 $ (1.34)
============ ============ ============ ============
Number of shares used in the per share calculations:
Basic .......................................... 17,727,815 4,238,489 17,727,815 3,589,334
============ ============ ============ ============
Diluted ........................................ 19,339,510 4,268,999 19,334,080 3,589,334
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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TRANSPORTATION COMPONENTS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30
----------------------------
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................ $ 3,582 $ (4,826)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ............................................... 2,479 61
Provision for bad debts ..................................................... 266 18
Gain on sale of assets ...................................................... (37) -0-
Compensation expense related to issuance of management shares ............. -0- 4,850
Changes in operating assets and liabilities, net of assets acquired
Accounts receivable and notes receivable .................................... (2,708) -0-
Inventories ................................................................. (3,073) -0-
Other assets ................................................................ 195 (766)
Accounts payable and accrued expenses ....................................... (1,418) 7,261
------------ ------------
Net cash provided (used in) by operating activities ..................... (714) 6,598
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................................... (1,835) (48)
Cash paid for acquisitions .................................................. (1,031) (15,722)
Other ....................................................................... 363 -0-
------------ ------------
Net cash used in investing activities ................................... (2,503) (15,770)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of long term debt .................................... 3,107 (20,911)
Issuance of stock net of underwriting and offering costs ......................... -0- 35,650
------------ ------------
Net cash provided by financing activities ........................................ 3,107 14,739
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .......................................... 14 -0-
------------ ------------
Net increase (decrease) in cash and cash equivalents ............................. (96) 5,567
Cash and cash equivalents, beginning of period ................................... 4,090 -0-
------------ ------------
Cash and cash equivalents, end of period ......................................... $ 3,994 $ 5,567
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Transportation Components, Inc., a Delaware corporation also known as
TransCom USA ("TransCom", and collectively with its subsidiaries, the
"Company"), was founded in October 1997 to become a leading national distributor
of replacement parts and supplies for commercial trucks, trailers and other
heavy duty vehicles and equipment. Prior to its initial public offering (the
"IPO"), TransCom had not conducted any operations. Concurrent with the
consummation of its IPO on June 24, 1998, TransCom acquired nine companies (the
"Founding Partner Companies") in separate merger transactions. After the IPO,
TransCom acquired an additional nine companies (the "Purchased Companies") in
the third and fourth quarters of 1998.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presenation have been included. All significant intercompany transactions and
balances have been eliminated. Operating results for the three months and six
months ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1998.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
the disclosure of contingent assets and liabilities known to exist as of the
date the financial statements are published, and (iii) the reported amount of
revenues and expenses recognized during the periods presented. Uncertainties
with respect to such estimates and assumptions are inherent in the preparation
of financial statements. The Company regularly reviews all significant estimates
affecting its consolidated financial statements. Adjustments made with respect
to the use of estimates often relate to improved information not previously
available. The accompanying consolidated balance sheets include preliminary
allocations of the respective purchase price paid for the companies acquired
using the "purchase" method of accounting and, accordingly, is subject to final
adjustment. Effective June 24, 1999, the Company completed the valuation of the
acquired assets and liabilities of its Founding Partner Companies. This final
allocation resulted in an increase in goodwill of $5.6 million and was based on
additional valuation information as to the assets and liabilities acquired.
-6-
TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the periods indicated (in thousands, except for
share and per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
NET INCOME (LOSS)
Net income (loss) ..................................................... $ 1,622 $ 24 $ 3,582 $ (4,826)
Add interest on 5% convertible debt (assumed converted), net of
federal income tax effect ............................................. 114 -0- 229 -0-
----------- ----------- ----------- -----------
Adjusted net income (loss) ...................................... $ 1,736 $ 24 $ 3,811 $ (4,826)
=========== =========== =========== ===========
BASIC
Basic weighted average shares ...................................... 17,727,815 4,238,489 17,727,815 3,589,334
=========== =========== =========== ===========
DILUTED
Basic weighted average shares ...................................... 17,727,815 4,238,489 17,727,815 3,589,334
Effect on dilutive securities
Options ......................................................... 12,057 14,315 6,627 -0-
Warrants ........................................................ -0- 16,195 -0- -0-
Convertible debt ................................................ 1,599,638 -0- 1,599,638 -0-
----------- ----------- ----------- -----------
Diluted weighted average shares .................................... 19,339,510 4,268,999 19,334,080 3,589,334
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE
Basic .............................................................. $ .09 $ .01 $ .20 $ (1.34)
=========== =========== =========== ===========
Diluted ............................................................ $ .09 $ .01 $ .20 $ (1.34)
=========== =========== =========== ===========
3. LONG TERM OBLIGATIONS
Long-term debt obligations consist of the following (in thousands):
June 30, December 31,
1999 1998
------------ ------------
Revolving credit facility ...................... $ 60,900 $ 56,300
Notes payable to a financial institution ....... 2,176 4,024
Other .......................................... 337 418
------------ ------------
Total long-term debt ........................... 63,413 60,742
Less: current portion ......................... (903) (1,651)
------------ ------------
$ 62,510 $ 59,091
============ ============
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TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 130, "Reporting Comprehensive Income", which requires companies to
display comprehensive income and its components in the financial statements.
This adoption was required because of the acquisition of the Company's Canadian
operations in the fourth quarter of 1998. Accordingly, the components of
comprehensive income were not applicable for the first and second quarters of
1998. Comprehensive income, which encompasses net income (loss) and currency
translation adjustments, is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1999
------------------ ------------------
Net income attributable to common stockholders .. $ 1,622 $ 3,582
Currency translation adjustments ................ 10 72
------------------ ------------------
Comprehensive income ............................ $ 1,632 $ 3,654
================== ==================
5. SEGMENT INFORMATION
TransCom classifies its business into two reportable segments based on
geographic areas: "Domestic" (revenues generated from customers for use within
the United States) and "International" (revenues generated from customers for
use outside the United States - Canada, Mexico, South America, Central America,
Australia, New Zealand, Europe and Asia). All international operations have been
aggregated into one reportable segment because their operations are similar in
the nature of the product and production process, type of customer, and
distribution method. Operating income by segment is calculated using direct cost
of goods and services, direct selling, general and administration expenses, and
allocating general office expenses based on segment revenues.
Information as to the operations of TransCom's reportable segments is as
follows (in thousands):
THREE MONTHS ENDED JUNE 30, 1999 DOMESTIC INTERNATIONAL INTERSEGMENT TOTAL
-------------------------------- -------- ------------- ------------ --------
Revenues ............................ $ 71,022 $ 10,114 $ (28) $ 81,108
======== ============= ============ ========
Operating income .................... 3,142 984 (8) 4,118
======== ============= ============ ========
Depreciation and amortization expense 1,125 127 -0- 1,252
======== ============= ============ ========
Capital expenditures ................ 1,032 76 -0- 1,108
======== ============= ============ ========
SIX MONTHS ENDED JUNE 30, 1999
Revenues ............................ 141,173 18,269 (92) 159,350
======== ============= ============ ========
Operating income .................... 7,056 1,737 (27) 8,766
======== ============= ============ ========
Depreciation and amortization expense 2,181 298 -0- 2,479
======== ============= ============ ========
Capital expenditures ................ 1,674 161 -0- 1,835
======== ============= ============ ========
Identifiable assets ................. $193,112 $ 31,508 $ -0- $224,620
======== ============= ============ ========
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TRANSPORTATION COMPONENTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Information as to TransCom's operations in different geographical areas is
as follows (in thousands):
THREE MONTHS ENDED JUNE 30, 1999 UNITED ALL OTHER
- -------------------------------- STATES MEXICO CANADA INTERNATIONAL(1) TOTAL
-------- ------- ------ ---------------- --------
Revenues........................ $ 71,022 $ 5,444 $3,110 $ 1,532 $ 81,108
SIX MONTHS ENDED JUNE 30, 1999
Revenues........................ $141,173 $ 9,988 $5,738 $ 2,451 $159,350
Long-lived assets............... 87,153 10,674 5,568 - 103,395
- -------------
(1) Includes South America, Central America, Australia, Europe and Asia.
-9-
TRANSPORTATION COMPONENTS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS SOME "FORWARD-LOOKING STATEMENTS" WHICH
GIVE THE COMPANY'S CURRENT EXPECTATIONS OR FORECASTS OF FUTURE EVENTS. SUCH
STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMS SUCH AS
"BELIEVES," "EXPECTS," "MAY," "ESTIMATES," "WILL," "SHOULD," "PLANS" OR
"ANTICIPATES" OR OTHER SIMILAR WORDS IN ANY DISCUSSION OF FUTURE OPERATING OR
FINANCIAL PERFORMANCE. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF ANY NUMBER OF FACTORS, MOST OF WHICH ARE BEYOND THE CONTROL OF
MANAGEMENT. IN PARTICULAR, THE COMPANY HAS IDENTIFIED SPECIFIC RISKS AND
UNCERTAINTIES RELATED TO THE COMPANY'S BUSINESS UNDER "ITEM 1. BUSINESS - RISK
FACTORS" ON PAGE 9 OF THE COMPANY'S ANNUAL REPORT OR FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1998. NO ASSURANCE CAN BE GIVEN THAT THESE ARE ALL OF THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS. THIS DISCUSSION IS PROVIDED AS PERMITTED BY THE
PRIVATE LITIGATION SECURITIES LITIGATION REFORM ACT OF 1995.
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto in this
Report, and the Company's audited consolidated financial statements contained in
the Form 10-K for the year ended December 31, 1998. Any capitalized terms used
but not defined in this Item have the same meaning given to them in the Form
10-K.
OVERVIEW AND SIGNIFICANT DEVELOPMENTS
The following discussion is based upon the historical consolidated
financial information for the Company, which includes the operations of the nine
original companies (the "Founding Partner Companies") from the date of their
acquisition on June 24, 1998, and of the nine subsequent acquisitions (the
"Purchased Companies") from their respective acquisition dates in the third and
fourth quarters of 1998.
RESULTS OF OPERATIONS. During the quarter ended June 30, 1999, the Company
had net income of $1.6 million, or $.09 per diluted share, compared to a net
income of $24,000, or $.01 per diluted share, for the second quarter of 1998.
The Company's revenues in the second quarter of 1999 were $81.1 million.
Approximately $58.7 million of these revenues were contributed by the Founding
Partner Companies with the remaining approximately $22.4 million of revenues
being contributed by the Purchased Companies.
When the second quarter of 1999 revenues are compared with the combined
revenues of $83.1 million generated by the 18 companies in the second quarter of
1998 (prior to their acquisition by TransCom, and accordingly, not reflected in
these historical financial statements), revenues declined by 2.4%. This decrease
is a result of a decline in sales to the oilfield service industry, which is
discussed in more detail below.
Gross profit as a percentage of sales in the second quarter of 1999 was
30.4%, which is .8% higher than the gross profit of 29.6% for the 18 companies
in the comparable quarter of 1998. This increase in gross profit percentage is
primarily the result of improved pricing from vendors. Any further comparison of
second quarter 1998 pre-acquisition results is not meaningful because the
companies were privately owned with very different cost structures.
For the six months ended June 30, 1999, the Company had net income of $3.6
million, or $.20 per diluted share, compared to a net loss of $4.8 million, or
$1.34 per diluted share, for the six months ended June 30, 1998. The results for
the six months ended June 30, 1998 include a non-recurring, non-cash
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TRANSPORTATION COMPONENTS, INC.
compensation charge of $4.9 million related to common stock issued to the
Company's management and consultants in the first quarter of 1998.
During 1998, one of the Founding Partner Companies recorded approximately
$13 million of revenues from sales of parts, equipment and services to two major
oilfield service companies. As a result of the overall slowdown in the oilfield
services industry, the Company's sales to these two companies in 1999 have
declined significantly from 1998 levels. The Company's sales to these two
companies were $1.3 million in the second quarter of 1999 and $4.0 million for
the first six months of 1999. This Founding Partner Company, however, was
recently selected to be the exclusive crane supplier for Halliburton Energy
Services as a result of Halliburton's standardization efforts. The amount of
business that may result from this selection, however, cannot be estimated at
this time.
SUMMARY COMPARISON OF FIRST AND SECOND QUARTERS OF 1999. Second quarter
1999 sales exceeded first quarter 1999 sales by $2.9 million, or 3.7%. Increased
international sales and truck sales account for the majority of this increase.
Total gross profit dollars for the second quarter of 1999 increased by
$148,000 over the first quarter of 1999. As a percentage of sales, however,
gross profit declined from 31.3% for the first quarter of 1999 to 30.4% for the
second quarter of 1999. The decline in gross profit percentage is primarily a
result of lower margins for the increased international sales and truck sales.
Sales, general and administrative expenses ("SG&A") as a percentage of
sales was 25.3% for both the first and second quarters of 1999. During 1999, the
Company is building the infrastructure to integrate its 18 companies.
Accordingly, SG&A expenses are anticipated to increase as the Company adds staff
at the general office as part of the centralization of back office functions and
installation of the company-wide operating and financial systems, which is
discussed in more detail below.
Operating income for the second quarter of 1999 decreased approximately
$500,000 or 11% from the first quarter of 1999 as a result of SG&A increasing
more than the increase in gross profit. Interest expense for the second quarter
of 1999 increased $100,000 from the first quarter of 1999 as a result of the
increased average debt level during the second quarter.
OTHER EVENTS. In June 1999, the Company acquired the assets of a small
parts distributor in the Los Angeles area. This acquisition will provide an
additional facility for the Company's southern California operations.
The Company previously reported an inventory adjustment of $840,000 at one
of the Founding Partner Companies for the fourth quarter of 1998. After an
extensive review of this company's operations, the Company has taken a number of
steps to improve its operations and accounting controls. These steps include
installing the ROSS financial system and the Karmak operating system, and hiring
experienced executives to supplement the existing management team. Finally,
inventory specialists of the Company are continuing to improve this Founding
Partner Company's inventory purchasing process and reduce excess inventory. The
Company believes these steps will improve the future financial results of this
company.
OPERATING STRATEGY. The Company has shifted its focus in the near term
from aggressive acquisition growth to integrating its existing 18 companies, as
described in more detail below.
INCREASING PURCHASING SYNERGIES. The Company expects to realize
significant cost savings through purchasing economies of scale. The
Company is in the process of implementing product line commonality among
its 18 companies that will increase volume to selected vendors. The
increased volume generated from the Company's size and common vendors will
provide greater
-11-
TRANSPORTATION COMPONENTS, INC.
purchasing discounts for the Company. The purchasing synergies began to be
material in the fourth quarter of 1998, and are expected to increase in
significance throughout 1999
INSTALLING COMPANY-WIDE INFORMATION TECHNOLOGY SYSTEMS. The Company
is in the process of installing common operating and financial systems
among its operating facilities, and placing all of its facilities on a
common wide area network. These systems are described in more detail below
under "Information Technology Systems and Year 2000 Strategy." These
systems are expected to provide timely, accurate and uniform information
to the Company's management which will enable the Company to provide
better service to its customers and operate more efficiently with a lower
cost structure. Management had originally estimated that these systems
would not be fully implemented throughout the Company until the second
quarter of 2000. Because of the critical importance of these systems to
the Company, management has accelerated the implementation timetable. The
Company now believes that the system implementation will be substantially
completed by the end of 1999, with the exception of certain locations
which include its export, Hawaii and Mexican operations.
CENTRALIZING APPROPRIATE ADMINISTRATIVE FUNCTIONS. The Company is
working to realize cost savings by consolidating administrative functions
such as purchasing, financing, insurance, risk management, employee
benefits, marketing, accounts receivable and accounts payable. While the
consolidation of financing and insurance has already been implemented, the
consolidation of the other areas is in various stages of being
implemented. During the second and third quarters of 1999, the Company is
consolidating the payroll for all companies under one common service
provider and is introducing a common 401(k) plan for all of its U.S.
associates. The Company also is working to establish a common insurance
benefits program for all of its associates by the end of the year.
ACHIEVING GEOGRAPHIC AND COMPANY-WIDE OPERATING EFFICIENCIES. The
Company believes that its geographic concentrations in California and
Florida will enable the Company to achieve operating efficiencies within
these geographic areas. Other efficiencies will benefit the entire
Company. These efficiencies include:
o The ability to provide greater product availability, to decrease
duplicative inventory, and develop distribution efficiencies within
a region. The Company has started a program to improve the inventory
ordering and stocking practices throughout the Company in an effort
to reduce unnecessary inventory at the Company's facilities.
o The opportunity to cross-sell products and services to the customers
of its companies within each region.
o The opportunity to be a single-source, preferred provider for
replacement parts and installation and repair services for national
and regional fleet services. During the second and third quarters of
1999, the Company has substantially expanded its efforts to obtain
national preferred provider contracts from national and regional
fleet customers. As a result of these efforts, the Company was
recently selected to be the preferred provider for a national fleet.
The Company, however, cannot estimate at this time the amount of new
business that may be generated from this selection.
o The opportunity to identify those "best practices" that can be
successfully implemented throughout the Company's operations.
-12-
TRANSPORTATION COMPONENTS, INC.
OPERATING ON A DECENTRALIZED BASIS. The Company presently manages
its 18 companies on a decentralized basis, with local management retaining
primary responsibility for day-to-day operations, profitability and growth
of the business. The Company believes that, while maintaining strong
operating and financial controls, a decentralized structure helps to
retain the entrepreneurial spirit in the companies and allows the Company
to capitalize on the considerable local market knowledge, goodwill, name
recognition and customer relationships possessed by each of the companies.
GENERAL
On June 24, 1998, TransCom consummated its initial public offering ("IPO")
and the mergers (the "Mergers") of nine companies (the "Founding Partner
Companies"). After the IPO, TransCom acquired an additional nine companies (the
"Purchased Companies") in separate merger transactions in the third and fourth
quarters of 1998. TransCom, the Founding Partner Companies and the Purchased
Companies are hereinafter referred to as the Company.
From October 1997 through March 1998, the Company sold an aggregate of
1,106,829 shares of Common Stock to management, directors and certain
consultants of the Company for $0.01 per share. As a result, the Company
recorded a non-recurring, non-cash compensation charge of $3.1 million and $4.9
million during 1997 and the first quarter of 1998, respectively, representing
the difference between the amount paid for the shares and the estimated fair
value of the shares on the date of the sale.
The Mergers were accounted for using the purchase method of accounting.
Accordingly, the excess of the fair value of the Merger consideration paid over
the fair value of the net assets acquired by TransCom from the Founding Partner
Companies and Purchased Companies was recorded as "goodwill". The accompanying
consolidated balance sheets include preliminary allocations of the respective
purchase price paid for the companies acquired using the "purchase" method of
accounting and, accordingly, is subject to final adjustment. The goodwill will
be amortized over its estimated useful life of 40 years as a non-cash charge to
operating income, which is not deductible for tax purposes. Effective June 24,
1999, the Company completed the valuation of the acquired assets and liabilities
of its Founding Partner Companies. This final allocation resulted in an increase
in goodwill of $5.6 million and was based on additional valuation information as
to the assets and liabilities acquired.
-13-
TRANSPORTATION COMPONENTS, INC.
RESULTS OF OPERATIONS--COMBINED
THREE MONTHS ENDED JUNE 30,
--------------------------------------------
1999 % 1998 %
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues ............................. $ 81,108 100.0 $ 3,786 100.0
Cost of sales ........................ 56,481 69.6 2,664 70.4
-------- -------- -------- --------
Gross profit ..................... 24,627 30.4 1,122 29.6
Selling, general and administrative .. 20,509 25.3 1,027 27.1
-------- -------- -------- --------
Income from operations ........... 4,118 5.1 95 2.5
Interest expense ..................... (1,366) (1.7) (29) (.8)
Other income (expense) ............... 294 .4 (12) (.3)
-------- -------- -------- --------
Income before income taxes ....... $ 3,046 3.8 $ 54 1.4
======== ======== ======== ========
RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1998
The Company was formed in October 1997 and had no operations prior to the
IPO in June 1998, other than non-cash compensation charges and other start-up
expenses. The 1998 results include the Founding Partner Companies from the date
of acquisition on June 24, 1998 to June 30, 1998. The 1999 results, however,
include the Founding Partner Companies and the Purchased Companies for the full
periods presented in 1999. ACCORDINGLY, THE RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 1999 ARE NOT COMPARABLE IN ANY RESPECT TO THE RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998.
REVENUES. Revenues increased from $3.8 million for the three months ended
June 30, 1998 to $81.1million for the three months ended June 30, 1999.
GROSS PROFIT. Gross profit increased from $1.1 million for the three
months ended June 30, 1998 compared to $24.6 million of gross profit for the
three months ended June 30, 1999. As a percentage of revenues, gross profit
increased from 29.6% for the three months ended June 30, 1998 to 30.4% for the
three months ended June 30, 1999. The increase is primarily a result of improved
purchasing on a national level.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $1.0 million for the three months ended June 30, 1998 to
$20.5 million for the three months ended June 30, 1999. The Company's
establishment as a public company resulted in approximately $1.4 million of
general office and management expenses in 1999 whereas minimal corporate
expenses are reflected in 1998 since the Company went public on June 24, 1998.
Amortization of goodwill accounted for $.5 million of the increase.
INTEREST EXPENSE. Interest expense increased from a minimal amount for the
three months ended June 30, 1998 to $1.4 million for the three months ended June
30, 1999. The 1999 interest expense is associated with the consideration paid
and debt assumed in connection with the acquisition of the Founding Partner
Companies and the Purchased Companies, and debt incurred to provide general
working capital.
OTHER INCOME. Other income increased from a minimal amount for the three
months ended June 30, 1998 to $.3 million for the three months ended June 30,
1999. Other income in 1999 includes $.1 million of interest income, $.1 million
from gains on foreign currency translation and transaction adjustments
associated with the Company's operations in Mexico, and $.1 million from other
non-related transactions.
-14-
TRANSPORTATION COMPONENTS, INC.
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1999 % 1998 %
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Revenues ............................ $ 159,350 100.0 $ 3,786 100.0
Cost of sales ....................... 110,244 69.2 2,664 70.4
--------- --------- --------- ---------
Gross profit .................... 49,106 30.8 1,122 29.6
Selling, general and administrative . 40,340 25.3 5,877 155.2
--------- --------- --------- ---------
Income (loss) from operations ... 8,766 5.5 (4,755) (125.6)
Interest expense .................... (2,614) (1.6) (29) (.8)
Other income (expense) .............. 522 .3 (12) (.3)
--------- --------- --------- ---------
Income (loss) before income taxes $ 6,674 4.2 $ (4,796) (126.7)
========= ========= ========= =========
RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1998
The Company was formed in October 1997 and had no operations prior to the
IPO in June 1998, other than non-cash compensation charges and other start-up
expenses. The 1998 results include the Founding Partner Companies from the date
of acquisition on June 24, 1998 to June 30, 1998. The 1999 results, however,
include the Founding Partner Companies and the Purchased Companies for the full
period presented in 1999. ACCORDINGLY, THE RESULTS OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1999 ARE NOT COMPARABLE IN ANY RESPECT TO THE RESULTS OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998.
REVENUES. Revenues increased from $3.8 million during the six months ended
June 30, 1998 compared to $159.4 million of revenues for the six months ended
June 30, 1999.
GROSS PROFIT. Gross profit increased from $1.1 million for the six months
ended June 30, 1998 compared to $49.1 million for the six months ended June 30,
1999. As a percentage of revenues, gross profit increased from 29.6% for the six
months ended June 30, 1998 to 30.8% for the six months ended June 30, 1999. The
increase is primarily a result of improved purchasing on a national level.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased from $5.9 million for the six months ended June 30, 1998 to
$40.3 million for the six months ended June 30, 1999. The Company's
establishment as a public company resulted in approximately $2.6 million of
general office and management expenses in 1999 whereas minimal corporate
expenses are reflected in 1998 since the Company went public on June 24, 1998.
Amortization of goodwill accounted for $1.0 million of the increase. The
non-recurring, non-cash compensation charges of $4.9 million during the first
quarter of 1998 is related to common stock issued to the Company's management
and consultants to the Company.
INTEREST EXPENSE. Interest expense increased from a minimal amount for the
six months ended June 30, 1998 to $2.6 million for the six months ended June 30,
1999. The 1999 interest expense is associated with the consideration paid and
debt assumed in connection with the acquisition of the Founding Partner
Companies and the Purchased Companies, and debt incurred to provide general
working capital.
OTHER INCOME. Other income increased from a minimal amount for the six
months ended June 30, 1998 to $.5 million for the six months ended June 30,
1999. Other income in 1999 includes $.2 million of interest income, $.2 million
from gains on foreign currency translation and transaction adjustments
associated with the Company's operations in Mexico, and $.1 million from other
non-related transactions.
-15-
TRANSPORTATION COMPONENTS, INC.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $.7 million in net cash from operating activities in the
six months ended June 30, 1999, primarily relating to an increase in accounts
receivable and inventories and a decrease in accounts payable. Net cash used for
investing activities was $2.5 million for the six months ended June 30, 1999,
primarily relating to the purchase of vehicles, equipment, information
technology systems and acquisitions. Net cash provided from financing activities
was $3.1 million for the year ended June 30, 1999. At June 30, 1999, the Company
had cash of $4.0 million, working capital of $77.8 million and total debt of
$79.5 million.
The Company anticipates that over the near term, its cash flow from
operations will provide cash in excess of the Company's normal working capital
needs. Planned capital expenditures for equipment are expected to be funded from
cash flow from operations and supplemented as necessary by borrowings from the
Company's line of credit or other sources of financing.
The Company is currently in compliance with the financial covenants in its
credit facility. The Company, however, anticipates that it may need to
restructure these financial covenants during the third quarter of 1999, and is
in discussions with its lenders for this purpose. The Company believes that its
lenders will agree to restructure the financial covenants in the credit
facility, although the Company anticipates that the interest rate on the
facility may increase.
The Company will require additional capital to fund any future
acquisitions. At this time, the Company does not plan to grow through
acquisitions in the near term unless the market price of the Company's common
stock rises to levels that will make acquisitions, using the Company's common
stock as consideration, accretive to the Company's earnings or the Company
generates excess cash flow. The Company also may pursue additional equity or
debt financing to fund future acquisitions, although there can be no assurances
that additional financing would be available on terms attractive to the Company.
INFORMATION TECHNOLOGY SYSTEMS AND YEAR 2000 STRATEGY
IMPLEMENTATION OF NEW INFORMATION TECHNOLOGY SYSTEMS. Prior to their
acquisition, each of the TransCom companies had separate information technology
systems that used a variety of software and computer systems for operations and
accounting. TransCom has selected and is in the process of installing common
information technology systems among all of its companies to track and manage
inventory and provide financial reporting. The information systems being
installed include the following:
o An advanced management information system from Karmak, Inc. that has
been specifically designed for the heavy duty parts industry. This
operating system will be used to purchase, monitor and allocate
inventory on a real-time basis throughout the Company's branch
locations. At the end of July 1999, the Karmak System had been
installed at 43 of the Company's 97 locations. The Company
anticipates that the Karmak System will be installed at an
additional 24 locations by the end of the third quarter of 1999.
o A financial reporting system from ROSS Systems, Inc. which will
centralize the financial reporting of all of the TransCom
operations, and provide more timely and more detailed financial
information to management.
o An interface has been developed between the Karmak management
information system and the ROSS financial system which greatly
enhances the utility of both systems and provides an integrated
system for management's use.
-16-
TRANSPORTATION COMPONENTS, INC.
o A common wide area network that will connect all of the Company's
branch locations.
o An Oracle data warehouse which will collect valuable sales/margin
and customer information from all of the Company's operations.
Management had originally estimated that the systems would not be fully
implemented until the second quarter of 2000. Because of the critical importance
of these systems to the Company, management accelerated the implementation
timetable and now expects the systems to be substantially implemented by the end
of 1999, with the exception of certain locations which include its export,
Hawaii and Mexican operations. The total expenditures for the new information
systems are estimated at $4.0 million. Funding for these expenditures will come
from operating cash flows and borrowings under the Company's Credit Facility as
necessary.
EXPECTED BENEFITS OF NEW INFORMATION TECHNOLOGY SYSTEMS. Once implemented,
the new information technology systems are expected to provide the following
benefits to the Company:
o An integrated system which will automate the sales, purchasing,
inventory management, accounts receivable and payable, and financial
reporting processes of the Company.
o The capability for Electronic Data Interchange with vendors and
customers that will further reduce costs for both the vendors and
TransCom.
o Help the Company increase service capabilities to customers, manage
inventory more efficiency and reduce administrative costs.
o Provide the Company with the necessary technology infrastructure to
fully integrate its operations and position the Company for future
growth.
YEAR 2000 STRATEGY. Both the Karmak management information system and the
ROSS financial system have been certified by the vendors as being Year 2000
compliant. The Company has evaluated its existing operating and financial
systems for Year 2000 compliance and has found that most of its branch locations
will need to take some actions to be Year 2000 compliant. For a number of the
locations, the Company will need to implement the new systems to make such
locations Year 2000 compliant. Accordingly, the implementation schedule for the
new systems has been partially based on the need to bring certain locations into
Year 2000 compliance. The Company believes that all of its locations will be
Year 2000 compliant by the end of 1999.
The Company is in the preliminary stages of assessing the Year 2000
compliance of its non-information technology systems, such as telephone systems,
and the extent to which the Company's suppliers are Year 2000 compliant. The
Company does not believe that the Year 2000 compliance of its customers will
have any material effect on the Company. The Company expects to complete this
assessment by the end of the third quarter of 1999 and then develop and
implement any necessary plans to address deficiencies. Finally, the Company is
in the preliminary stages of developing a contingency plan for disruptions
caused by Year 2000 issues, and plans to finish such plan by the end of the
third quarter of 1999.
Since the Company is substantially replacing its information technology
systems, the Company does not believe that it can segregate the portion of its
overall $4.0 million technology systems budget that is directly attributable to
Year 2000 compliance measures. This assessment of costs, however, may change as
the Company continues its assessment of the Year 2000 issues facing the Company.
-17-
TRANSPORTATION COMPONENTS, INC.
The Company faces significant risks in implementing its company-wide
information systems as well as developing and implementing a Year 2000 strategy.
There can be no assurance that the Company will be able to coordinate and
integrate the information systems economically or that the Company will not
experience delays, disruptions and unanticipated expenses in doing so. There can
also be no assurances that the Company will successfully develop and implement a
Year 2000 plan. Furthermore, any future acquisitions will further complicate the
Company's ability to implement its company-wide information systems and its Year
2000 strategy. Any failure with respect to such implementation could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is developing a comprehensive contingency plan to address Year
2000 issues with respect to the Company's internal information technology
systems and those of its customers, vendors and other third parties. The
Company's contingency plans will include the use of vendors and other third
parties that are Year 2000 compliant and the use of alternative data processing
systems or temporary manual information systems as necessary. The contingency
plan is expected to be completed and approved by management within the next
three months.
FOREIGN CURRENCY FLUCTUATIONS
A portion of the Company's consolidated revenues are billed and collected
in Mexican pesos and Canadian dollars. Additionally, substantially all of the
operating expenses related to foreign locations are incurred in a foreign
currency. Consequently, the Company's reported financial results are affected by
fluctuation of foreign currencies against the U.S. dollar. The Company
periodically performs foreign currency hedging to reduce its foreign currency
transaction exposures.
SEASONALITY
Weather extremes cause increased parts wear and breakdowns of trucks and
trailers; however, extreme weather, particularly during winter months, could
inhibit general business activity. These seasonal trends may cause fluctuations
in the Company's earnings. Additionally, quarterly results may be materially
affected by the timing of acquisitions, variations in the margins of products
sold and services performed during any particular quarter, the timing and
magnitude of acquisition assimilation projects and regional economic conditions.
Accordingly, the Company's operating results in any particular quarter may not
be indicative of the results that can be expected for any other quarter or for
the entire year.
-18-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any litigation that management considers to
be of a material nature.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
10.1 Amendment No. 2 dated June 1, 1999 to the
Credit Agreement with The First National Bank
of Chicago, As agent, and the Lenders party
thereto.
27.1 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None
-19-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
TRANSPORTATION COMPONENTS, INC.
By: /S/ MAC MCCONNELL
Mac McConnell, Senior Vice President
Date: August 16, 1999 and Chief Financial Officer