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 June 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 July 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 six months ended
June 30, 1996 and June 30, 1997 (unaudited) 3
Condensed Balance Sheets--December 31, 1996 and
June 30, 1997 (unaudited) 4
Condensed Statement of Stockholders' Equity (Deficit)--
Year ended December 31, 1996 and six months ended
June 30, 1997 (unaudited) 5
Condensed Statements of Cash Flows--Six months ended
June 30, 1996 and June 30, 1997 (unaudited) 6
Notes to Condensed Financial Statements --June 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>
<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 Six Months Ended
June 30, June 30,
(unaudited) (unaudited)
---------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 6,455,098 $ 10,182,415 $ 12,695,816 $ 19,850,394
Cost of goods sold 4,141,294 6,498,441 8,131,409 12,648,065
------------ ------------ ------------ ------------
Gross profit 2,313,804 3,683,974 4,564,407 7,202,329
Operating, selling, general and
administrative expenses 2,180,916 3,506,114 4,219,511 6,814,166
------------ ------------ ------------ ------------
Earnings from operations 132,888 177,860 344,896 388,163
------------ ------------ ------------ ------------
Other income (expense)
Interest expense (63,058) (142,903) (225,430) (277,960)
Other, net 27,968 5,514 34,101 15,016
------------ ------------ ------------ ------------
(35,090) (137,389) (191,329) (262,944)
------------ ------------ ------------ ------------
Earnings before income taxes 97,798 40,471 153,567 125,219
Provision for income taxes 81,177 17,200 81,177 50,700
------------ ------------ ------------ ------------
Net earnings $ 16,621 $ 23,271 $ 72,390 $ 74,519
============ ============ ============ ============
Net earnings per common share $ .01 $ .02
============ ============
Weighted average common shares outstanding 3,412,273 3,412,273
============ ============
Pro forma information
Historical earnings before income taxes $ 97,798 $ 153,567
Provision for income taxes 36,801 57,787
----------- -----------
Pro forma net earnings $ 60,997 $ 95,780
=========== ===========
Pro forma net earnings per common share $ .02 $ .04
=========== ===========
Weighted average common shares outstanding 3,087,307 2,543,653
=========== ===========
</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, June 30,
1996 1997
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 20,508 $ 232,424
Accounts receivable
Trade, net of allowance for doubtful accounts of $116,000
and $155,000, respectively 2,144,752 2,777,336
Other-primarily suppliers 703,800 867,384
Inventories 12,864,797 14,602,561
Refundable income taxes 46,400 --
Prepaid expenses 67,287 191,133
Deferred tax benefit 69,475 84,000
----------- -----------
Total current assets 15,917,019 18,754,838
PROPERTY AND EQUIPMENT, NET 2,604,594 3,068,224
OTHER ASSETS
Excess of cost over net assets acquired, net of accumulated
amortization of $46,600 and $93,500, respectively 1,274,903 1,247,987
Non-compete agreement, net of accumulated
amortization of $1,400 and $9,900, respectively 168,583 160,083
Other 96,903 137,311
----------- -----------
1,540,389 1,545,381
----------- -----------
$20,062,002 $23,368,443
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of
Long-term obligations $ 105,484 $ 79,524
Notes payable, related parties 179,823 143,492
Accounts payable, trade 2,661,063 3,760,899
Income taxes payable -- 5,000
Accrued liabilities 1,141,325 1,066,438
----------- -----------
Total current liabilities 4,087,695 5,055,353
LONG-TERM OBLIGATIONS, less current portion 5,756,011 8,061,264
NOTES PAYABLE, RELATED PARTIES, less current portion 97,450 59,616
OTHER LIABILITIES 23,520 14,700
DEFERRED INCOME TAXES 143,875 152,700
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 3,412 3,412
Additional paid-in capital 9,828,318 9,825,158
Retained earnings 121,721 196,240
----------- -----------
9,953,451 10,024,810
----------- -----------
$20,062,002 $23,368,443
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
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
Registration fees related to sale of restricted
stock (unaudited) -- (3,160) -- (3,160)
Net earnings (unaudited) -- -- 74,519 74,519
------ ----------- --------- ------------
Balance at June 30, 1997 (unaudited) $3,412 $ 9,825,158 $ 196,240 $ 10,024,810
====== =========== ========= ============
</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>
Six Months Ended
June 30,
(unaudited)
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash Cash flows from operating activities:
Net earnings $ 72,390 $ 74,519
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 128,991 300,873
Deferred income taxes, net 60,577 (5,700)
Other (9,153) (8,062)
Changes in assets and liabilities, net of acquisitions
of businesses:
(Increase) in accounts receivable (115,138) (796,168)
(Increase) in inventories (616,843) (1,542,935)
Decrease in refundable income taxes -- 46,400
(Increase) in prepaid expenses (82,027) (123,846)
(Increase) decrease in other assets 101,114 (55,530)
Increase in accounts payable 200,811 1,099,836
Increase in income taxes payable -- 5,000
(Decrease) in accrued liabilities (91,581) (105,087)
(Decrease) in other liabilities (10,000) --
----------- -----------
Net cash used in operating activities (360,859) (1,110,700)
----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions of businesses (602,423) (222,904)
Purchases of property and equipment (533,578) (684,334)
Proceeds from disposition of property and equipment 17,864 27,886
----------- -----------
Net cash used in investing activities (1,118,137) (879,352)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit agreement -- 2,323,644
Repayments of long-term obligations (5,611,754) (118,516)
Net proceeds from initial public offering 7,949,405 --
Registration fees -- (3,160)
----------- -----------
Net cash provided by financing activities 2,337,651 2,201,968
----------- -----------
Increase in cash 858,655 211,916
Cash, January 1 192,026 20,508
----------- -----------
Cash, June 30 $ 1,050,681 $ 232,424
=========== ===========
</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
June 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 June 30,
1997 and for the three and six months ended June 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 six months ended June 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 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 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 six months ended June 30, 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 are included in the accompanying
7
<PAGE>
THE PARTS SOURCE, INC.
(d/b/a Ace Auto Parts)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1997
(unaudited)
NOTE C: ACQUISITIONS (continued)
statements of earnings from the acquisition date. Had the acquisition occurred
at the beginning of the periods ended June 30, 1996 or 1997, the results would
not have been materially different from those reported.
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 three and six months ended June 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 Six Months Ended
June 30, 1996 June 30, 1996
------------------ ----------------
Net sales $9,153,864 $18,093,347
Net earnings $ 104,464 $ 182,714
Net earnings per common share $ .03 $ .07
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
June 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. The Company also has available a $500,000
non-revolving line of credit. At June 30, 1997, the Company had borrowings of
$7,867,188 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 June 30, 1997. At June 30, 1997, the Company had
approximately $4,633,000 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 $.08 for the three and six months ended June 30, 1996,
respectively (assuming 2,693,947 weighted average common shares outstanding).
NOTE H: INCOME TAXES
The Company was taxed as a 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
three and six months ended June 30, 1996, the provision for income taxes
includes the 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
June 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 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 FLOWS
Supplemental disclosures of cash flow information:
Six Months Ended
June 30,
(unaudited)
----------------------
Cash paid for: 1996 1997
---------- ----------
Interest $ 250,000 $ 290,493
========== ==========
Income taxes $ - $ 5,000
========== ==========
Supplemental schedule of non-cash investing and financing activities:
The Company purchased substantially all the assets of two and one auto parts
store during the six months ended June 30, 1996 and 1997, respectively. In
conjunction with the acquisitions, assets acquired and liabilities assumed were
as follows:
Six Months Ended
June 30,
(unaudited)
----------------------
1996 1997
---------- ----------
Fair value of assets acquired $626,763 $233,104
Cash paid 602,423 222,904
-------- --------
Liabilities assumed $ 24,340 $ 10,200
======== ========
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 six months ended June 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.
Three Months Ended Six Months Ended
June 30, June 30,
(unaudited) (unaudited)
---------------- -----------------
1996 1997 1996 1997
----- ----- ----- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 64.2 63.8 64.0 63.7
----- ----- ----- ----
Gross profit 35.8 36.2 36.0 36.3
Operating, selling, general and
administrative expenses 33.8 34.4 33.3 34.3
----- ----- ----- ------
Earnings from operations 2.0 1.8 2.7 2.0
Other income (expense)
Interest expense (1.0) (1.4) (1.8) (1.4)
Other, net .5 - .3 .1
----- ----- ----- ------
Earnings before income taxes 1.5 .4 1.2 .7
Provision for income taxes 1.2 .2 .6 .3
----- ----- ----- ------
Net earnings .3% .2% .6% .4%
===== ===== ===== ======
Pro forma information
Historical earnings
before income taxes 1.5 1.2
Proforma provision for
income taxes .6 .5
----- -----
Proforma net earnings .9% .7%
===== =====
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997.
NET SALES. Product sales increased by approximately $3.7 million or 57.7% from
$6.5 million for the three months ended June 30, 1996 to $10.2 million for the
three months ended June 30, 1997. $2.8 million of this increase in sales related
to the opening of six stores and the acquisition of eleven stores of which three
of these new stores acquired were either closed or consolidated into another
store by June 30, 1997. There was no goodwill associated with the acquisition of
these stores. The remaining $943,000 or 14.6% 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 June 30, 1996 to $6.5 million for the three months ended June 30,
1997. This increase was primarily attributable to sales increases. Cost of goods
sold as a percentage of sales decreased .4%, as a result of favorable pricing
from vendors.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE ("OSG&A") EXPENSES. OSG&A
expenses increased $1.3 million from $2.2 million for the three months ended
June 30, 1996 to $3.5 million for the three months ended June 30, 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 that initially operate at a higher expense percentage. This
increase was partially offset by reimbursements of promotional expenses received
from suppliers. Fourteen of the Company's forty 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 $79,845 from $63,058 for the three
months ended June 30, 1996 to $142,903 for the three months ended June 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 a 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 three months
ended June 30, 1996 includes this one-time charge and the income taxes related
to the net earnings recorded subsequent to April 8, 1996.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997.
NET SALES. Product sales increased by approximately $7.2 million or 56.4% from
$12.7 million for the six months ended June 30, 1996 to $19.9 million for the
six months ended June 30, 1997. $5.3 million of this increase in sales related
to the opening of six new stores and the acquisition of eleven stores of which
three of these new stores acquired were either closed or consolidated into
another store by June 30, 1997. There was no goodwill associated with the
acquisition of these stores. The remaining $1.9 million or 14.9% increase in net
sales resulted from same store sales growth.
COST OF GOODS SOLD. Cost of goods sold increased from $8.1 million for the six
months ended June 30, 1996 to $12.6 million for the six months ended June 30,
1997. This increase was primarily attributable to sales increases. Cost of goods
sold as a percentage of sales decreased .3%, as a result of favorable pricing
from vendors.
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 $2.6 million from $4.2 million for the six months ended June
30, 1996 to $6.8 million for the six months ended June 30, 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 that initially operate at a higher expense percentage. This increase
was partially offset by reimbursements of promotional expenses received from
suppliers. Fourteen of the Company's forty 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 $52,530 from $225,430 for the six
months ended June 30, 1996 to $277,960 for the six months ended June 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 a 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 six months ended
June 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 six months ended June 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 of $1,110,700 was used in operating activities for the six months
ended June 30, 1997 as compared to $360,859 for the six months ended June 30,
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, four
new stores opened in the first six months of 1997 and the increased sales levels
in existing stores.
Net cash used in investing activities decreased from $1,118,137 in the six
months ended June 30, 1996 to $879,352 in the six months ended June 30, 1997.
This decrease is primarily from fewer store acquisitions and was partially
offset by an increase in purchases of delivery vehicles, computer equipment and
shelving at four new stores opened in the first six months of 1997.
Net cash of $2.2 million was provided by financing activities for the six
months ended June 30, 1997 as compared to $2.3 million of for the six months
ended June 30, 1996. In the six months ended June 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. The Company had net borrowings of $2.4 million under
the Company's credit facilities which occurred in the first six months of 1997.
These borrowings were used to fund the acquisition, finance the opening of four
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 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 June 30, 1997 the Company had approximately
$4.6 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 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.
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)
August 5, 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
SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 232,424
<SECURITIES> 0
<RECEIVABLES> 2,932,336
<ALLOWANCES> 155,000
<INVENTORY> 14,602,561
<CURRENT-ASSETS> 18,754,838
<PP&E> 3,924,521
<DEPRECIATION> 856,297
<TOTAL-ASSETS> 23,368,443
<CURRENT-LIABILITIES> 5,055,353
<BONDS> 7,867,188
0
0
<COMMON> 3,412
<OTHER-SE> 10,021,398
<TOTAL-LIABILITY-AND-EQUITY> 23,368,443
<SALES> 19,850,394
<TOTAL-REVENUES> 19,850,394
<CGS> 12,648,065
<TOTAL-COSTS> 12,648,065
<OTHER-EXPENSES> 6,814,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 277,960
<INCOME-PRETAX> 125,219
<INCOME-TAX> 50,700
<INCOME-CONTINUING> 74,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,519
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
