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 September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14308
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 October 31, 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 and nine months ended
September 30, 1996 and September 30, 1997 (unaudited) 3
Condensed Balance Sheets--December 31, 1996 and
September 30, 1997 (unaudited) 4
Condensed Statement of Stockholders' Equity (Deficit)--
Year ended December 31, 1996 and nine months ended
September 30, 1997 (unaudited) 5
Condensed Statements of Cash Flows--Nine months ended
September 30, 1996 and September 30, 1997 (unaudited) 6
Notes to Condensed Financial Statements --September 30, 1997
(unaudited) 7-10
Item 2. Management's Discussion and Analysis or Plan of Operations 11-14
PART II. OTHER INFORMATION 15
SIGNATURES 16
</TABLE>
2
<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 Nine Months Ended
September 30, September 30,
(unaudited) (unaudited)
---------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 6,462,262 $ 10,401,137 $ 19,158,078 $ 30,251,531
Cost of goods sold 4,062,014 6,561,970 12,193,423 19,210,035
------------ ------------ ------------ ------------
Gross profit 2,400,248 3,839,167 6,964,655 11,041,496
Operating, selling, general and
administrative expenses 2,289,455 3,608,838 6,508,966 10,423,004
------------ ------------ ------------ ------------
Earnings from operations 110,793 230,329 455,689 618,492
------------ ------------ ------------ ------------
Other income (expense)
Interest expense (17,813) (178,437) (243,243) (456,397)
Other, net 5,467 9,596 39,568 24,612
------------ ------------ ------------ ------------
(12,346) (168,841) (203,675) (431,785)
------------ ------------ ------------ ------------
Earnings before income taxes 98,447 61,488 252,014 186,707
Provision for income taxes 36,823 9,088 118,000 59,788
------------ ------------ ------------ ------------
Net earnings $ 61,624 $ 52,400 $ 134,014 $ 126,919
============ ============ ============ ============
Net earnings per common share $ .02 $ .02 $ .04
============ ============ ============
Weighted average common shares outstanding 3,185,000 3,412,273 3,412,273
============ ============ =============
Pro forma information
Historical earnings before income taxes $ 252,014
Provision for income taxes 94,610
============
Pro forma net earnings $ 157,404
============
Pro forma net earnings per common share $ .06
============
Weighted average common shares outstanding 2,758,996
============
</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, September 30,
1996 1997
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 20,508 $ 69,524
Accounts receivable
Trade, net of allowance for doubtful accounts of $116,000
and $133,000, respectively 2,144,752 3,025,820
Other-primarily suppliers 703,800 1,140,000
Inventories 12,864,797 15,258,558
Refundable income taxes 46,400 --
Prepaid expenses 67,287 208,720
Deferred tax benefit 69,475 169,000
----------- -----------
Total current assets 15,917,019 19,871,622
PROPERTY AND EQUIPMENT, NET 2,604,594 3,197,331
OTHER ASSETS
Excess of cost over net assets acquired, net of accumulated
amortization of $46,600 and $117,000, respectively 1,274,903 1,247,867
Non-compete agreement, net of accumulated
amortization of $1,400 and $14,200, respectively 168,583 155,835
Other 96,903 126,577
----------- -----------
1,540,389 1,530,279
----------- -----------
$20,062,002 $24,599,232
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of
Long-term obligations $ 105,484 $ 63,076
Notes payable, related parties 179,823 135,271
Accounts payable, trade 2,661,063 3,663,507
Income taxes payable -- 11,788
Accrued liabilities 1,141,325 1,440,929
----------- -----------
Total current liabilities 4,087,695 5,314,571
LONG-TERM OBLIGATIONS, less current portion 5,756,011 8,919,498
NOTES PAYABLE, RELATED PARTIES, less current portion 97,450 42,664
OTHER LIABILITIES 23,520 10,290
DEFERRED INCOME TAXES 143,875 235,000
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 3,412 3,412
Additional paid-in capital 9,828,318 9,825,158
Retained earnings 121,721 248,640
----------- -----------
9,953,451 10,077,210
----------- -----------
$20,062,002 $24,599,232
=========== ===========
</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>
Additional Retained
Common Paid-in Earnings
Stock 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
Registration fees related to sale of restricted
stock (unaudited) -- (3,160) -- (3,160)
Net earnings (unaudited) -- -- 126,919 126,919
------------ ------------ ------------ ------------
Balance at September 30, 1997 (unaudited) $ 3,412 $ 9,825,158 $ 248,640 $ 10,077,210
============ ============ ============ ============
</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>
Nine Months Ended
September 30,
(unaudited)
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities:
Net earnings $ 134,014 $ 126,919
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 214,019 470,077
Deferred income taxes, net 37,000 (8,400)
Other (7,305) (11,738)
Changes in assets and liabilities, net of acquisitions
of businesses:
(Increase) in accounts receivable (355,283) (1,317,268)
(Increase) in inventories (1,020,595) (1,959,796)
Decrease in refundable income taxes -- 46,400
(Increase) in prepaid expenses (6,285) (141,433)
Decrease (increase) in other assets 56,067 (52,359)
(Decrease) increase in accounts payable (3,579,016) 1,002,444
Increase in income taxes payable -- 11,788
Increase (decrease) in accrued liabilities 72,571 (36,066)
(Decrease) in other liabilities (15,000) --
----------- -----------
Net cash used in operating activities (4,469,813) (1,869,432)
----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions of businesses (602,423) (222,904)
Purchases of property and equipment (773,718) (918,548)
Proceeds from disposition of property and equipment 26,175 41,320
----------- -----------
Net cash used in investing activities (1,349,966) (1,100,132)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit agreement 3,920,000 3,185,984
Repayments of long-term obligations (5,659,751) (164,244)
Net proceeds from initial public offering 7,942,855 --
Payment of registration fees -- (3,160)
----------- -----------
Net cash provided by financing activities 6,203,104 3,018,580
----------- -----------
Increase in cash 383,325 49,016
Cash, January 1 192,026 20,508
----------- -----------
Cash, September 30 $ 575,351 $ 69,524
=========== ===========
</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
September 30, 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
September 30, 1997 and for the three and nine months ended September 30, 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 nine months ended September
30, 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 or plan 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 to 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 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 and nine months ended September 30, 1996 and 1997.
NOTE C: ACQUISITIONS
During the first nine months of 1997, the Company acquired substantially all the
assets of three auto parts stores. These acquisitions were accounted for as
purchases and accordingly, the purchase price was allocated to the assets and
liabilities based upon estimated fair value as of the date of acquisition. The
total purchase price was approximately $479,000 and liabilities of approximately
$59,000 were assumed in exchange for approximately $515,000 in tangible assets.
Approximately $23,000 in goodwill relating to these acquisitions was recorded.
The results of operations of these acquisitions are included in the accompanying
statements of earnings from the dates of acquisition. Had the acquisitions
occurred at the beginning of the periods ended September 30, 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
September 30, 1997
(unaudited)
NOTE C: ACQUISITIONS (continued)
In the fourth quarter of 1996, the Company acquired certain net assets from APS
and Central Motor Supply. 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) had occurred at the beginning of
the three and nine months ended September 30, 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
periods indicated or which may result in the future.
Three Months Ended Nine months Ended
September 30, 1996 September 30, 1996
------------------------- ----------------------
Net sales $ 9,161,027 $ 27,254,374
Net earnings $ 105,088 $ 287,802
Net earnings per common share $ .03 $ .10
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 was 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
September 30, 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. Also, the maturity date on the line of credit
was extended to September 30, 1999. The Company also has available a $500,000
non-revolving line of credit. At September 30, 1997, the Company had borrowings
of $8,729,529 outstanding under these lines of credit. These borrowings are
classified in long term obligations and carry a 7.7% interest rate at September
30, 1997. At September 30, 1997, the Company had approximately $3,770,000
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 $.03 and $.11 for the three and nine months ended September 30, 1996,
respectively (assuming 2,693,947 weighted average common shares outstanding).
NOTE H: INCOME TAXES
The Company was taxed as an S Corporation prior to the completion of its initial
public offering on April 8, 1996. Upon completion of its initial public
offering, the Company terminated its S Corporation election and became subject
to federal and state income taxes as a C Corporation. As a result, on April 8,
1996, the Company recorded a net deferred tax liability of $44,400 which
represents the tax effect of the cumulative temporary differences existing on
this date with a corresponding charge to the provision for income taxes. For the
nine months ended September 30, 1996, the provision for income taxes includes
this one-time charge and the income taxes recorded related to net earnings
subsequent to April 8, 1996.
9
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 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 Plaintiff alleges 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 Plaintiff is seeking damages in excess of $400,000. The Company
denies the allegations and intends to vigorously defend this action. Management
believes that the resolution of this matter will not have a material effect on
the Company's financial position or results of operations.
NOTE J: STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
Nine months Ended
September 30,
(unaudited)
---------------------
Cash paid for: 1996 1997
--------- ---------
Interest $ 269,000 $ 464,000
========= =========
Income taxes $ - $ 10,000
========= =========
Supplemental schedule of non-cash investing and financing activities:
The Company purchased substantially all the assets of two and three auto parts
stores during the nine months ended September 30, 1996 and 1997, respectively.
In conjunction with the acquisitions, assets acquired and liabilities assumed
were as follows:
Nine months Ended
September 30,
(unaudited)
---------------------
1996 1997
--------- --------
Fair value of assets acquired $ 626,763 $ 538,574
Cash paid 602,423 222,904
Acquisition indebtedness - 256,168
--------- --------
Liabilities assumed $ 24,340 $ 59,502
========= ========
10
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis of the results of operations for the three
and nine months ended September 30, 1996 and 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited) (unaudited)
---------------------- ----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 62.9 63.1 63.6 63.5
---------- ---------- ---------- ----------
Gross profit 37.1 36.9 36.4 36.5
Operating, selling, general and
administrative expenses 35.4 34.7 34.0 34.5
---------- ---------- ---------- ----------
Earnings from operations 1.7 2.2 2.4 2.0
Other income (expense)
Interest expense (.3) (1.7) (1.3) (1.5)
Other, net .1 .1 .2 .1
---------- ---------- ---------- ----------
Earnings before income taxes 1.5 .6 1.3 .6
Provision for income taxes .6 .1 .6 .2
---------- ---------- ---------- ----------
Net earnings .9% .5% .7% .4%
========== ========== ========== ==========
Pro forma information
Historical earnings before income taxes 1.3%
Proforma provision for income taxes .5
----------
Proforma net earnings .8%
==========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997.
NET SALES. Product sales increased by approximately $3.9 million or 61.0% from
$6.5 million for the three months ended September 30, 1996 to $10.4 million for
the three months ended September 30, 1997. $2.6 million of this increase in
sales related to the opening of five stores and the acquisition of fourteen
stores of which four of these new stores acquired were either closed or
consolidated into another store by September 30, 1997. There was no goodwill
associated with the acquisition of these stores that were closed or
consolidated. The remaining $1.3 million or 20.2% increase in net sales resulted
from same store sales growth.
11
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
continued
COST OF GOODS SOLD. Cost of goods sold increased from $4.1 million for the three
months ended September 30, 1996 to $6.6 million for the three months ended
September 30, 1997. This $2.5 million increase was primarily attributable to
sales increases. Although cost of goods sold as a percentage of sales remained
relatively constant, cost of goods sold as a percentage of sales increased as a
result of an increase in wholesale sales that typically have lower gross
margins. These increases were partially offset by favorable pricing from
vendors.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE ("OSG&A") EXPENSES. OSG&A
expenses increased from $2.3 million for the three months ended September 30,
1996 to $3.6 million for the three months ended September 30, 1997. This $1.3
million increase resulted primarily from additional store personnel and
corporate overhead to support the increased sales volume. The decrease in OSG&A
expenses as a percentage of sales resulted primarily from sales increases and
reimbursements of promotional expenses received from suppliers.
INTEREST EXPENSE. Interest expense increased $160,624 from $17,813 for the three
months ended September 30, 1996 to $178,437 for the three months ended September
30, 1997. The increased interest expense resulted primarily from the increased
level of debt incurred to expand operations.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997.
NET SALES. Product sales increased by approximately $11.1 million or 57.9% from
$19.2 million for the nine months ended September 30, 1996 to $30.3 million for
the nine months ended September 30, 1997. $7.6 million of this increase in sales
related to the opening of five new stores and the acquisition of fourteen stores
of which four of these new stores acquired were either closed or consolidated
into another store by September 30, 1997. There was no goodwill associated with
the acquisition of these stores that were closed or consolidated. The remaining
$3.5 million or 18.5% increase in net sales resulted from same store sales
growth.
COST OF GOODS SOLD. Cost of goods sold increased from $12.2 million for the nine
months ended September 30, 1996 to $19.2 million for the nine months ended
September 30, 1997. This $7 million increase was primarily attributable to sales
increases. Although cost of goods sold as a percentage of sales remained
relatively constant, cost of goods sold as a percentage of sales decreased as a
result of favorable pricing from vendors. This decrease was partially offset by
an increase in wholesale sales that typically have lower gross margins.
12
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
continued
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE ("OSG&A") EXPENSES. OSG&A
expenses increased from $6.5 million for the nine months ended September 30,
1996 to $10.4 million for the nine months ended September 30, 1997. This $3.9
million increase resulted primarily from additional store personnel and
corporate overhead to support the increased sales volume. The increase in OSG&A
expenses as a percentage of sales resulted primarily from certain new stores
that initially operate at a higher expense percentage. This increase was
partially offset by reimbursements of promotional expenses received from
suppliers. Fifteen of the Company's forty-two store locations operated less than
one year under the current corporate management. These new stores' expenses as a
percentage of net sales should gradually decrease as these new stores mature and
sales volumes increase.
INTEREST EXPENSE. Interest expense increased $213,154 from $243,243 for the nine
months ended September 30, 1996 to $456,397 for the nine months ended September
30, 1997. The increased interest expense resulted primarily from the increased
level of debt incurred to expand operations. This increase was partially offset
by an interest rate reduction of almost 2.5 percentage points from the
comparable 1996 period.
PROVISION FOR INCOME TAXES. The Company was taxed as an S Corporation prior to
the completion of its initial public offering on April 8, 1996. In conjunction
with the completion of the initial public offering, the Company was required to
record the cumulative tax effect of its net deferred income taxes of $44,400 on
this date. As a result, the provision for income taxes for the nine months ended
September 30, 1996 includes this one-time charge and the income taxes related to
the net earnings recorded subsequent to April 8, 1996.
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 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 and nine months ended September 30, 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.
13
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
continued
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $4.5 million for the nine months ended
September 30, 1996 as a result of an increase in accounts receivable and
inventories and a decrease in accounts payable. For the nine months ended
September 30, 1997, net cash used in operating activities was $1.9 million,
primarily as a result of an increase in accounts receivable and inventories and
an increase in accounts payable.
Net cash provided by financing activities was $6.2 million for the nine months
ended September 30, 1996 as compared to $3.0 million for the nine months ended
September 30, 1997. In the nine months ended September 30, 1996, the Company
received $7.9 million of net proceeds from its initial public offering which was
used to pay $5.6 million of debt and utilized $3.9 million of its credit
facilities to pay down trade payables. In the first nine months of 1997, the
Company had net borrowings of $3.2 million under its credit facilities. These
borrowings were used to fund the acquisitions, finance the opening of five new
stores and for general working capital purposes.
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 was extended to September 30, 1999 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 2 to 1, 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 September 30, 1997, the Company had approximately $3.8 million
available under these lines.
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.
Management's Discussion and Analysis or Plan of Operations 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 Plaintiff alleges 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 Plaintiff is seeking damages in excess of $400,000. The Company
denies the allegations and intends to vigorously defend this action. Management
believes that the resolution of this matter will not have a material effect on
the Company's financial position or results of operations.
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
None
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)
November 12, 1997
- -----------------------
(Date)
/s/ Robert B. Morgan
--------------------------------------------
Robert B. Morgan
Chief Financial and Accounting Officer
(Principal Financial and Accounting Officer)
16
<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
NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 69,524
<SECURITIES> 0
<RECEIVABLES> 3,158,820
<ALLOWANCES> 133,000
<INVENTORY> 15,258,558
<CURRENT-ASSETS> 19,871,622
<PP&E> 4,184,932
<DEPRECIATION> 987,601
<TOTAL-ASSETS> 24,599,232
<CURRENT-LIABILITIES> 5,314,571
<BONDS> 9,160,509
0
0
<COMMON> 3,412
<OTHER-SE> 10,073,798
<TOTAL-LIABILITY-AND-EQUITY> 24,599,232
<SALES> 30,251,531
<TOTAL-REVENUES> 30,251,531
<CGS> 19,210,035
<TOTAL-COSTS> 10,423,004
<OTHER-EXPENSES> (24,612)
<LOSS-PROVISION> 54,469
<INTEREST-EXPENSE> 456,397
<INCOME-PRETAX> 186,707
<INCOME-TAX> 59,788
<INCOME-CONTINUING> 126,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126,919
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
