FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-27864
THE PARTS SOURCE, INC.
d/b/a Ace Auto Parts
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-3149403
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1751 S. Missouri Avenue, Clearwater, Florida 34616
-------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(813) 588-0377
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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
--------- ----------
At April 30, 1997, 3,412,273 shares of Common Stock of the Registrant were
outstanding.
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
------
<S> <C>
Item 1. Financial Statements
Condensed Statements of Earnings--Three months ended
March 31, 1996 (unaudited) and March 31, 1997 (unaudited) 3
Condensed Balance Sheets--December 31, 1996 and
March 31, 1997 (unaudited) 4
Condensed Statement of Stockholders' Equity (Deficit)--
Year ended December 31, 1996 and three months ended
March 31, 1997 (unaudited) 5
Condensed Statements of Cash Flows--Three months ended
March 31, 1996 (unaudited) and March 31, 1997 (unaudited) 6
Notes to Condensed Financial Statements--March 31, 1997
(unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
PART II. OTHER INFORMATION 15
SIGNATURES 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
(unaudited)
1996 1997
----------- -----------
<S> <C> <C>
Net sales $ 6,240,718 $ 9,667,979
Cost of goods sold 3,990,115 6,149,624
----------- -----------
Gross profit 2,250,603 3,518,355
Operating, selling, general and administrative expenses 2,039,263 3,277,196
----------- -----------
Earnings from operations 211,340 241,159
----------- -----------
Other income (expense)
Interest expense (162,372) (135,057)
Other, net 6,801 (21,354)
----------- -----------
(155,571) (156,411)
----------- -----------
Earnings before income taxes 55,769 84,748
Provision for income taxes -- 33,500
----------- -----------
Net earnings $ 55,769 $ 51,248
=========== ===========
Net earnings per common share $ .02
===========
Weighted average common shares outstanding 3,412,273
===========
Pro forma information
Historical earnings before income taxes $ 55,769
Provision for income taxes 20,986
-----------
Pro forma net earnings $ 34,783
===========
Pro forma net earnings per common share $ .02
===========
Weighted average common shares outstanding 2,000,000
===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 20,508 $ 136,710
Accounts receivable
Trade, net of allowance for doubtful accounts of
$116,000 and $140,000, respectively 2,144,752 2,750,802
Other-primarily suppliers 703,800 981,109
Inventories 12,864,797 13,786,177
Refundable income taxes 46,400 5,900
Prepaid expenses 67,287 218,100
Deferred tax benefit 69,475 80,400
----------- -----------
Total current assets 15,917,019 17,959,198
PROPERTY AND EQUIPMENT, NET 2,604,594 2,870,653
OTHER ASSETS
Excess of cost over net assets acquired, net of accumulated
amortization of $46,600 and $70,000, respectively 1,274,903 1,271,443
Non-compete agreement, net of accumulated
amortization of $1,400 and $5,700, respectively 168,583 164,333
Other 96,903 133,017
----------- -----------
1,540,389 1,568,793
----------- -----------
$20,062,002 $22,398,644
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of
Long-term obligations $ 105,484 $ 94,108
Notes payable, related parties 179,823 142,073
Accounts payable, trade 2,661,063 3,744,717
Accrued liabilities 1,141,325 1,113,035
----------- -----------
Total current liabilities 4,087,695 5,093,933
LONG-TERM OBLIGATIONS, less current portion 5,756,011 7,057,087
NOTES PAYABLE, RELATED PARTIES, less current portion 97,450 76,015
OTHER LIABILITIES 23,520 19,110
DEFERRED INCOME TAXES 143,875 147,800
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 3,412 3,412
Additional paid-in capital 9,828,318 9,828,318
Retained earnings 121,721 172,969
----------- -----------
9,953,451 10,004,699
----------- -----------
$20,062,002 $22,398,644
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
4
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Retained
Common Additional Earnings
Stock Paid-in Capital (Deficit) Total
------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996
as previously reported $2,000 $ -- $(668,894) $ (666,894)
Restatement for change in inventory
pricing method from LIFO to FIFO
(Note B) -- -- (61,973) (61,973)
------ ----------- --------- ------------
Balance at January 1, 1996, as restated 2,000 -- (730,867) (728,867)
Initial public offering, net of offering 1,185 7,941,670 -- 7,942,855
costs of $305,000
Recapitalization for change in income
tax status, S Corporation to
C Corporation -- (613,125) 613,125 --
Sale of restricted stock 227 2,499,773 -- 2,500,000
------ ----------- --------- ------------
Net earnings -- -- 239,463 239,463
Balance at December 31, 1996 3,412 9,828,318 121,721 9,953,451
Net earnings (unaudited) -- -- 51,248 51,248
------ ----------- --------- ------------
Balance at March 31, 1997 (unaudited) $3,412 $ 9,828,318 $ 172,969 $ 10,004,699
====== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of this condensed statement.
5
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(unaudited)
--------------------------
1996 1997
--------- -----------
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
Net earnings $ 55,769 $ 51,248
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 55,877 134,514
Deferred income taxes, net -- (7,000)
Other (4,168) (6,503)
Changes in assets and liabilities, net of acquisition of business:
(Increase) in accounts receivable (183,436) (883,359)
(Increase) in inventories (312,588) (726,551)
Decrease in refundable income taxes -- 40,500
(Increase) in prepaid expenses (79,982) (150,813)
(Increase) decrease in other assets 12,960 (36,114)
Increase in accounts payable 894,104 1,083,654
(Decrease) in accrued liabilities (13,128) (58,490)
(Decrease) in other liabilities (5,000) --
--------- -----------
Net cash provided by (used in) operating activities 420,408 (558,914)
--------- -----------
Cash flows from investing activities:
Cash paid for acquisition of business -- (222,904)
Purchases of property and equipment (254,222) (349,520)
Proceeds from disposition of property and equipment 7,467 17,025
--------- -----------
Net cash used in investing activities (246,755) (555,399)
--------- -----------
Cash flows from financing activities:
Net borrowings under line of credit agreement -- 1,312,035
Repayments of long-term obligations (58,307) (81,520)
Deferred offering costs (49,014) --
--------- -----------
Net cash provided by (used in) financing activities (107,321) 1,230,515
--------- -----------
Increase in cash 66,332 116,202
Cash, January 1 192,026 20,508
--------- -----------
Cash, March 31 $ 258,358 $ 136,710
========= ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
6
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
NOTE A: BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared in accordance
with the instructions to Form 10-QSB and do not include all the information and
footnote disclosures required by generally accepted accounting principles for
complete financial statements. The condensed financial statements as of March
31, 1997 and for the three months ended March 31, 1996 and 1997 are unaudited
and reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the interim periods. The
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1997. The condensed financial statements should be read in
conjunction with the financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, included in the annual report on Form 10-KSB for the year ended
December 31, 1996.
Certain reclassifications have been made to the prior year's statements to
conform with the 1997 presentation.
NOTE B: INVENTORIES
Effective January 1, 1997, the Company elected to change its method of inventory
valuation from the last-in, first-out (LIFO) method to the first-in, first-out
(FIFO) method. Under the current economic environment of low inflation, the
Company believes that the FIFO method will result in a better measurement of
operating results and is also an accounting method used in the Company's
industry. The Company has applied to the Internal Revenue Service to change to
the FIFO method of inventory valuation for income tax purposes.
As required by generally accepted accounting principles, the Company has
retroactively adjusted prior years financial statements for this change. The
effect of the restatement was to decrease retained earnings at January 1, 1996
by $61,973. The restatement had an insignificant effect on the results of
operations for the three months ended March 31, 1996 and 1997.
NOTE C: ACQUISITIONS
During the first quarter of 1997, the Company acquired substantially all the
assets of one auto parts store. This acquisition was accounted for as a purchase
and accordingly, the purchase price was allocated to the assets and liabilities
based upon estimated fair value as of the date of acquisition. The Company paid
consideration totaling approximately $223,000 and assumed liabilities totaling
approximately $10,000 in exchange for approximately $233,000 of assets. The
results of operations of the acquisition is included in the accompanying
statements of earnings from the acquisition date. Had the acquisition occurred
at the beginning of the periods ended March 31, 1996 or 1997, the results would
not have been materially different from those reported.
7
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
NOTE C: ACQUISITIONS (continued)
The following unaudited pro forma information presents the combined results of
operations as if the APS and Central Motor Supply acquisitions (see Annual
Report on Form 10-KSB) that were reported in the fourth quarter of 1996 had
occurred at the beginning of the period ended March 31, 1996. The unaudited pro
forma information is not necessarily indicative of the results which would
have actually occurred had the transactions been in effect on the dates and
for the period indicated or which may result in the future.
Three Months Ended
March 31, 1996
-------------------
Net sales $ 8,939,483
Net earnings $ 78,250
Net earnings per common share $ .04
NOTE D: NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share, which is effective for
financial statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were computed. The
adoption of this new standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements. The effect of
adopting this new standard has not been determined.
NOTE E: INITIAL PUBLIC OFFERING
On April 8, 1996, the Company completed an initial public offering of 1,185,000
shares of common stock, par value of $.001 per share, for $8.00 per share. The
proceeds, net of offering costs, were credited to additional paid-in capital in
1996. A portion of such proceeds were used to reduce approximately $5,600,000 of
long-term indebtedness. The remaining proceeds were used to expand operations
and for general working capital purposes.
8
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
NOTE F: LINES OF CREDIT
The Company's revolving line of credit agreement was amended in January 1997, to
provide for up to twelve million of borrowings subject to the amount of eligible
inventory and accounts receivable. The Company also has available a $500,000
non-revolving line of credit. At March 31, 1997, the Company had borrowings of
$6,855,580 outstanding under these lines of credit, which are due on September
30, 1998. These borrowings are classified in long term obligations and carry a
7.7% interest rate at March 31, 1997. At March 31, 1997, the Company had approx-
imately $2,194,000 available under these lines of credit.
NOTE G: PRO FORMA NET EARNINGS PER COMMON SHARE
Pro forma net earnings per common share is computed by dividing pro forma net
earnings by the weighted average common shares outstanding during the period.
Pro forma net earnings includes a pro forma provision for income taxes assuming
the Company had been subject to income taxes as a C Corporation for the period
presented prior to its initial public offering.
If the initial public offering of 1,185,000 shares of common stock had occurred
on January 1, 1996 and approximately $5,551,600 of the total net proceeds had
been applied to the reduction of debt, pro forma net earnings per share would
have been $.07 for the three months ended March 31, 1996 (assuming 2,693,947
weighted average common shares outstanding).
NOTE H: INCOME TAXES
For the three months ended March 31, 1996 the Company was taxed as an S
Corporation under the provisions of the Internal Revenue Code. As such, the
Company's taxable income was includable in the individual income tax returns of
its stockholders for federal and state income tax purposes. Accordingly, no
provisions for federal and state income taxes has been recorded in the
accompanying historical financial statements.
In conjunction with the completion of the initial public offering on April 8,
1996, the Company has terminated its S Corporation election and has become
subject to federal and state income taxes as a C Corporation from that date
forward.
9
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
NOTE I: CONTINGENCIES
On March 20, 1997, Automotive One Parts Stores, Inc., a Florida Corporation,
filed an action in the Circuit Court in and for Orange County, Florida, against
the Company and certain of its employees. The action follows the termination in
October 1996 of negotiations for the sale of the assets of Automotive One Parts
Stores, Inc. to the Company. The Plaintiffs allege that the Company interfered
with its business relations by inducing certain employees to terminate their
employment with the Plaintiff and become employees of the Company and misused
confidential information obtained during the negotiations for the sale of the
assets. The Plaintiffs are seeking damages in excess of $400,000. The Company
denies the allegations and intends to vigorously defend this action.
NOTE J: STATEMENTS OF CASH FLOW
Supplemental disclosures of cash flow information:
Three Months Ended
March 31,
(unaudited)
-----------------------
1996 1997
---------- ----------
Cash paid for interest $ 171,673 $ 144,840
========== ==========
Supplemental schedule of noncash investing and financing activities:
The Company purchased substantially all the assets of one auto parts store
during the three months ended March 31, 1997. In conjunction with the
acquisition, assets acquired and liabilities assumed were as follows:
Fair value of assets acquired $ 233,104
Cash paid 222,904
---------
Liabilities assumed $ 10,200
=========
10
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations for the three
months ended March 31, 1996 and March 31, 1997 should be read in conjunction
with the Condensed Financial Statements of the Company with the accompanying
notes.
RESULTS OF OPERATIONS
The following table sets forth selected financial information derived from the
Company's statements of earnings expressed as a percentage of net sales for the
periods indicated.
Three Months Ended
March 31,
(unaudited)
------------------------
1996 1997
------- ------
Net sales 100.0% 100.0%
Cost of goods sold 63.9 63.6
----- -----
Gross profit 36.1 36.4
Operating, selling, general
and administrative expenses 32.7 33.9
----- -----
Earnings from operations 3.4 2.5
Other income (expense)
Interest expense (2.6) (1.4)
Other, net 0.1 (0.2)
----- -----
Earnings before income taxes 0.9 0.9
Provision for income taxes - (0.3)
----- -----
Net earnings 0.9 0.6%
=====
Pro forma provision for income taxes (0.3)
-----
Pro forma net earnings 0.6%
=====
11
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
NET SALES. Product sales increased by approximately $3.4 million or 54.9% from
$6.2 million for the three months ended March 31, 1996 to $9.6 million for the
three months ended March 31, 1997. $2.8 million of this increase was due to an
increase in sales relating to 14 store acquisitions and 2 new store openings
since March 31, 1996. The remaining $611,000 or 9.8% increase in net sales
resulted from same store sales growth.
COST OF GOODS SOLD. Cost of goods sold increased from $4.0 million for the three
months ended March 31, 1996 to $6.1 million for the three months ended March 31,
1997. This increase was primarily attributable to sales increases. Cost of goods
sold as a percentage of sales was relatively constant.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE ("OSG&A") EXPENSES. OSG&A
expenses increased $1.2 million from $2.1 million for the three months ended
March 31, 1996 to $3.3 million for the three months ended March 31, 1997. The
increased dollar amount of OSG&A expenses resulted primarily from additional
store personnel and delivery expenses to support the increased sales volume and
other overhead expenses incurred in anticipation of acquiring new stores. The
increase in OSG&A expenses as a percentage of net sales resulted primarily from
certain new stores who initially operate at a higher expense percentage. These
new stores expenses as a percentage of net sales will gradually decrease as
sales volume increase in the future.
INTEREST EXPENSE. Interest expense decreased $27,315 from $162,372 for the three
months ended March 31, 1996 to $135,057 for the three months ended March 31,
1997. Although outstanding borrowings were higher for the three months ended
March 31, 1997 than the comparable 1996 period, the Company experienced lower
interest rates charged by almost 2.5% points.
PROVISION FOR INCOME TAXES. For the three months ended March 31, 1996 the
Company was taxed as an S Corporation under the provisions of the Internal
Revenue Code. Accordingly, no provisions for federal and state income taxes has
been recorded in the accompanying historical financial statements for the 1996
period. In conjunction with the completion of the initial public offering on
April 8, 1996, the Company terminated its S Corporation election and became
subject to federal and state income taxes as a C Corporation from that date
forward. Therefore, a provision for income taxes has been provided in the three
months ended March 31, 1997.
12
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CHANGE IN ACCOUNTING PRINCIPLE. Effective January, 1 1997, the Company elected
to change its method of inventory valuation from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method. Under the current economic
environment of low inflation, the Company believes that the FIFO method will
result in a better measurement of operating results and is also an accounting
method used in the Company's industry. The Company has applied to the Internal
Revenue Service to change to the FIFO method of inventory valuation for income
tax purposes. As required by generally accepted accounting principles,
the Company has retroactively adjusted prior years financial statements for
this change. The effect of the restatement was to decrease retained earnings
at January 1, 1996 by $61,973. The restatement had an insignificant effect on
the results of operations for the three months ended March 31, 1996 and 1997.
NEW ACCOUNTING PRONOUNCEMENT. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share,
which is effective for financial statements issued after December 15, 1997.
Early adoption of the new standard is not permitted. The new standard eliminates
primary and fully diluted earnings per share and requires presentation of basic
and diluted earnings per share together with disclosure of how the per share
amounts were computed. The adoption of this new standard is not expected to
have a material impact on the disclosure of earnings per share in the financial
statements. The effect of adopting this new standard has not been determined.
LIQUIDITY AND CAPITAL RESOURCES
Net cash of $558,914 was used in operating activities for the three months
ended March 31, 1997 as compared to $420,408 of net cash provided by operating
activities for the three months ended March 31, 1996 primarily as a result of
increases in accounts receivable and inventories which were partially offset by
an increase in accounts payable. These increases are principally due to new
stores acquired in the fourth quarter of 1996, a new store opened in January
1997 and increased sales levels in existing stores.
Net cash used in investing activities has increased from $246,755 in the
three months ended March 31, 1996 to $555,399 in the three months ended March
31, 1997. This increase is primarily from a new store acquisition and an
increase in purchases of delivery vehicles and computer equipment.
Net cash of $1.2 million was provided by financing activities for the
three months ended March 31, 1997 as compared to $107,321 of net cash used in
financing activities for the three months ended March 31, 1996. This increase
resulted primarily from borrowings under the Company's credit facilities. The
borrowings were used to fund the acquisition and for general working capital
purposes.
13
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company proposes to continue to expand its operations primarily
through acquisitions when an opportunity is available. In January 1997, the
Company amended its existing $7.0 million revolving line of credit with Barnett
Bank N.A. by increasing the borrowing limit to $12.0 million. The borrowing
limit for the revolving line is determined by the amount of eligible inventory
and accounts receivable. This line of credit is available through September 30,
1998 and carries a variable interest rate of the London Interbank Offered Rates
(LIBOR) plus 2%. This line, among other provisions, requires the Company to
maintain, at the minimum, a current ratio of one to one, the ratio of total
liabilities to tangible net worth not to exceed 2.25 to 1 and a times interest
earned multiple of 1.25 or greater. The Company also has available a $500,000
non-revolving line of credit. At March 31, 1997 the Company had approximately $
2,194,000 available under these lines. In April 1997, the amount available under
these lines was increased to approximately $5,641,000 by increasing the amount
of eligible inventory.
Management believes that the cash expected to be provided by operating
activities, existing cash, existing bank credit facilities and trade credit will
be sufficient to fund both the short and long-term capital and liquidity needs
of the Company for the foreseeable future.
The above discussion contains statements regarding matters that are not
historical facts (including statements as to beliefs or expectations of the
Company) which are forward-looking statements. Because such forward-looking
statements include risks and uncertainties, the Company's actual results could
differ materially from those discussed herein.
14
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On March 20, 1997, Automotive One Parts Stores, Inc., a Florida
Corporation, filed an action in the Circuit Court in and for Orange
County, Florida, against the Company and certain of its employees. The
action follows the termination in October 1996 of negotiations for the
sale of the assets of Automotive One Parts Stores, Inc. to the Company.
The Plaintiffs allege that the Company interfered with its business
relations by inducing certain employees to terminate their employment
with the Plaintiff and become employees of the Company and misused
confidential information obtained during the negotiations for the sale
of the assets. The Plaintiffs are seeking damages in excess of $400,000.
The Company denies the allegations and intends to vigorously defend this
action.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Report on Form 8-KA, dated February 10, 1997, to amend report on Form
8-K, dated November 7, 1996, reporting the Registrant's acquisition from
Central Motor Supply, Inc., Central Motor Supply of Alachua, Inc.,
Central Motor Supply of Williston, Inc., Central Motor Supply of
Hawthrone, Inc., Central Motor Supply of East Gainesville, Inc. and Mr.
William Stanley, of the business (consisting of certain assets,
principally inventory and fixed assets) of five auto parts stores
located in and around the Gainesville, Florida area.
Exhibit 18 - Accountant's preferability letter immediately follows the
signature page.
15
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
SIGNATURES
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.
The Parts Source, Inc.
d/b/a Ace Auto Parts
-------------------------------------------
(Registrant)
May 14, 1997
- ---------------------
(Date)
/s/ Robert B. Morgan
--------------------------------------------
Robert B. Morgan
Chief Financial and Accounting Officer
(Principal Financial and Accounting Officer)
16
Exhibit 18.
May 14, 1997
Board of Directors
The Parts Source, Inc.
d/b/a Ace Auto Parts
As stated in note B to the condensed financial statements of The Parts Source,
Inc. d/b/a Ace Auto Parts (the "Company") for the three months ended March 31,
1997, the Company changed its accounting policy for its method of inventory
valuation from the last-in, first-out (LIFO) method to the first-in, first-out
(FIFO) method. Management believes the newly adopted accounting principle is
preferable in the circumstances because under the current economic environment
of low inflation, the FIFO method will result in a better measurement of
operating results and, is also an accounting method used in the industry in
which the Company operates. At your request, we have reviewed and discussed
with management the circumstances, business judgment, and planning that formed
the basis for making this change in accounting principle.
It should be recognized that professional standards have not been established
for selecting among alternative principles that exist in this area or for
evaluating the preferability of alternative accounting principles. Accordingly,
we are furnishing this letter solely for purposes of the Company's compliance
with the requirements of the Securities and Exchange Commission, and it should
not be used or relied on for any other purpose.
Based on our review and discussion, we concur with management's judgment that
the newly adopted accounting principle is preferable in the circumstances. In
formulating this position, we are relying on management's business planning and
judgment, which we do not find unreasonable.
We have not audited any financial statements of The Parts Source, Inc. d/b/a Ace
Auto Parts as of any date or for any period subsequent to December 31, 1996.
Accordingly, we are unable to express an opinion on whether the method of
accounting for the effect of the change is in conformity with generally accepted
accounting principles or if the financial information included in Part I of this
Form 10-QSB is fairly presented.
Very truly yours,
/s/ GRANT THORNTON LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE PARTS SOURCE, INC. (D/B/A ACE AUTO PARTS) FOR THE
THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 573,351
<SECURITIES> 0
<RECEIVABLES> 2,890,777
<ALLOWANCES> 139,975
<INVENTORY> 13,786,177
<CURRENT-ASSETS> 17,959,198
<PP&E> 3,603,671
<DEPRECIATION> 733,018
<TOTAL-ASSETS> 22,398,644
<CURRENT-LIABILITIES> 5,093,933
<BONDS> 7,133,102
0
0
<COMMON> 3,412
<OTHER-SE> 10,001,287
<TOTAL-LIABILITY-AND-EQUITY> 22,398,644
<SALES> 9,667,979
<TOTAL-REVENUES> 9,667,979
<CGS> 6,149,624
<TOTAL-COSTS> 3,277,196
<OTHER-EXPENSES> 21,354
<LOSS-PROVISION> 25,207
<INTEREST-EXPENSE> 135,057
<INCOME-PRETAX> 84,748
<INCOME-TAX> 33,500
<INCOME-CONTINUING> 51,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,248
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
