<PAGE> 1
FORM 10-Q
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, 1998
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)
<TABLE>
<S> <C>
FLORIDA 59-3149403
- -------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
1751 S. Missouri Avenue, Clearwater, Florida 33756
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(727) 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
--------- -----------
Common Stock, $.001 par value - 3,412,273 shares outstanding at July 31, 1998
<PAGE> 2
THE PARTS SOURCE, INC.
(D/B/A ACE AUTO PARTS)
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION Number
------
<S> <C> <C>
Item 1. Financial Statements
Condensed Statements of Operations--Three and six months ended
June 30, 1997 and June 30, 1998 (unaudited) 3
Condensed Balance Sheets--December 31, 1997 and
June 30, 1998 (unaudited) 4
Condensed Statements of Cash Flows--Six months ended
June 30, 1997 and June 30, 1998 (unaudited) 5
Notes to Condensed Financial Statement --June 30, 1998
(unaudited) 6-7
Item 2. Management's Discussion and Analysis or Plan of Operations 8-10
PART II. OTHER INFORMATION 11
SIGNATURES 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE PARTS SOURCE, INC.
(D/B/A ACE AUTO PARTS)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 10,182,415 $ 11,444,781 $ 19,850,394 $ 22,089,386
Cost of goods sold 6,498,441 7,169,394 12,648,065 13,647,931
------------ ------------ ------------ ------------
Gross profit 3,683,974 4,275,387 7,202,329 8,441,455
Operating, selling, general and
administrative expenses 3,506,114 4,070,202 6,814,166 8,065,651
------------ ------------ ------------ ------------
Operating income 177,860 205,185 388,163 375,804
------------ ------------ ------------ ------------
Other income (expense)
Interest expense (142,903) (210,644) (277,960) (433,421)
Other, net 5,514 10,178 15,016 20,995
------------ ------------ ------------ ------------
(137,389) (200,466) (262,944) (412,426)
------------ ------------ ------------ ------------
Earnings (loss) before income taxes 40,471 4,719 125,219 (36,622)
Provision (benefit) for income taxes 17,200 1,500 50,700 (11,700)
------------ ------------ ------------ ------------
Net earnings (loss) $ 23,271 $ 3,219 $ 74,519 $ (24,922)
============ ============ ============ ============
Basic earnings (loss) per common share $ .01 $ -- $ .02 $ (.01)
============ ============ ============ ============
Diluted earnings (loss) per common share $ .01 $ -- $ .02 $ (.01)
============ ============ ============ ============
Average common shares outstanding:
Basic 3,412,273 3,412,273 3,412,273 3,412,273
============ ============ ============ ============
Diluted 3,511,815 3,412,273 3,529,747 3,412,273
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE> 4
THE PARTS SOURCE, INC.
(D/B/A ACE AUTO PARTS)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 227,564 $ 59,549
Accounts receivable
Trade, net 2,774,975 3,938,487
Other-primarily suppliers 1,203,292 1,424,917
Inventories 16,488,120 16,159,075
Refundable income taxes 130,812 84,227
Prepaid expenses 124,010 265,593
Deferred tax asset 190,700 312,800
------------ ------------
Total current assets 21,139,473 22,244,648
PROPERTY AND EQUIPMENT, NET 3,559,541 3,511,739
OTHER ASSETS
Excess of cost over net assets acquired, net 1,280,639 1,225,347
Non-compete agreement, net 151,587 116,173
Other 121,650 113,946
------------ ------------
$ 26,252,890 $ 27,211,853
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of
Long-term obligations $ 50,754 $ 34,527
Notes payable, related parties 144,723 34,140
Accounts payable, trade 4,926,079 5,574,932
Accrued liabilities 879,608 671,587
------------ ------------
Total current liabilities 6,001,164 6,315,186
LONG-TERM OBLIGATIONS, less current portion 10,397,131 10,980,201
NOTES PAYABLE, RELATED PARTIES, less current portion 25,494 1,887
DEFERRED INCOME TAXES 138,200 248,600
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 3,412 3,412
Additional paid-in capital 9,825,158 9,825,158
Accumulated deficit (137,669) (162,591)
------------ ------------
9,690,901 9,665,979
------------ ------------
$ 26,252,890 $ 27,211,853
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
4
<PAGE> 5
THE PARTS SOURCE, INC.
(D/B/A ACE AUTO PARTS)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
Increase (Decrease) in cash
Cash flows from operating activities:
Net earnings (loss) $ 74,519 $ (24,922)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Depreciation and amortization 300,873 405,269
Deferred income taxes, net (5,700) (11,700)
Other (8,062) (14,865)
Changes in assets and liabilities, net of acquisitions of businesses:
(Increase) in accounts receivable (796,168) (1,385,137)
(Increase) decrease in inventories (1,542,935) 329,045
Decrease in refundable income taxes 46,400 46,585
(Increase) in prepaid expenses (123,846) (141,583)
(Increase) in other assets (55,530) (7,422)
Increase in accounts payable 1,099,836 648,853
Increase in income taxes payable 5,000 --
(Decrease) in accrued liabilities (105,087) (202,141)
----------- -----------
Net cash used in operating activities (1,110,700) (358,018)
----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions of businesses (222,904) --
Purchases of property and equipment (684,334) (211,897)
Proceeds from disposition of property and equipment 27,886 30,499
----------- -----------
Net cash used in investing activities (879,352) (181,398)
----------- -----------
Cash flows from financing activities:
Net borrowings under line of credit agreement 2,323,644 571,059
Repayments of long-term obligations (118,516) (199,658)
Registration fees (3,160) --
----------- -----------
Net cash provided by financing activities 2,201,968 371,401
----------- -----------
Increase (Decrease) in cash 211,916 (168,015)
Cash, January 1 20,508 227,564
----------- -----------
Cash, June 30 $ 232,424 $ 59,549
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
5
<PAGE> 6
THE PARTS SOURCE, INC.
(D/B/A ACE AUTO PARTS)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE A: BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared in accordance
with the instructions to Form 10-Q 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,
1998 and for the three and six months ended June 30, 1997 and 1998 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, 1998 are not necessarily
indicative of results that may be expected for the year ending December 31,
1998. 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, 1997.
NOTE B: OTHER MATTERS
Purchase Commitment
Since 1993, the Company's principal supplier has been APS, a national
distributor of replacement auto parts. In January 1998, due to APS' financial
difficulties, the Company sent notice to APS asking for written assurance within
thirty days that APS has the ability to meet its obligation under the existing
purchase agreement. The Company has not received any written notice from APS. As
a result, the Company believes the agreement has been breached and therefore,
notified APS that this agreement has been terminated.
In February 1998, APS, along with its parent and affiliated companies, filed for
protection under Chapter 11 of the United States Bankruptcy Code. The Company
continues to purchase parts from APS, but has begun negotiations with other
suppliers.
As a result of APS bankruptcy proceedings, the percentage applied to the amount
of eligible inventory that is used in calculating the Company's borrowing
capacity under its revolving line of credit was reduced from 75% to 50%.
Management believes this modification will not have a material adverse effect on
its business. The Company is in the process of negotiating the terms of this
agreement.
United States Fair Labor Standards Act Investigation
In November 1997, as a result of an investigation by the Department of Labor,
the Company paid six previous employees approximately $4,000 related to overtime
violations. The Company believes it would not have been cost beneficial to
defend this action. After further review, the Company determined it was liable
for approximately $80,000 in back compensation to certain past and present
employees. The Company recorded this liability in the six months ended June 30,
1998.
6
<PAGE> 7
THE PARTS SOURCE, INC.
(D/B/A ACE AUTO PARTS)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE C: STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1997 1998
----------- -----------
Cash paid for: (unaudited)
<S> <C> <C>
Interest $ 290,493 $ 436,098
=========== ===========
Income taxes $ 5,000 $ --
=========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
During the six months ended June 30, 1998, the Company acquired computer
equipment under a capital lease obligation totaling $61,252.
The Company purchased substantially all of the assets of one auto parts store
during the six months ended June 30, 1997. In conjunction with the acquisition,
assets acquired and liabilities assumed were as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $ 233,104
Cash paid 222,904
---------
Liabilities assumed $ 10,200
=========
</TABLE>
7
<PAGE> 8
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, 1997 and 1998 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 Six Months Ended
June 30, June 30,
(unaudited) (unaudited)
----------------- -----------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 63.8 62.6 63.7 61.8
------ ------ ------ ------
Gross profit 36.2 37.4 36.3 38.2
Operating, selling, general and
administrative expenses 34.4 35.6 34.3 36.5
------ ------ ------ ------
Operating income 1.8 1.8 2.0 1.7
Other income (expense)
Interest expense (1.4) (1.8) (1.4) (2.0)
Other, net -- .1 .1 .1
------ ------ ------ ------
Earnings (loss) before
income taxes .4 .1 .7 (.2)
Provision (benefit) for
income taxes .2 -- .3 (.1)
------ ------ ------ ------
Net earnings (loss) .2% .1% .4% (.1)%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales. Product sales increased $1.3 million, or 12.4%, to $11.4 million for
the three months ending June 30, 1998. This increase was primarily due to $1
million in sales from seven new stores acquired or opened during 1997. The
remaining $.3 million or 2.6% increase in net sales resulted from same store
sales growth. The same store sales increase is calculated based on the change in
net sales of only those stores that were operational for the entire periods
being compared.
8
<PAGE> 9
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 $.7 million to $7.2 million (or
62.6% of net sales) for the three months ending June 30, 1998. This increase was
primarily attributable to sales increases. Cost of goods sold as a percentage of
sales decreased primarily from favorable pricing from vendors and was partially
offset by sales increases in lower gross margin wholesale sales. The Company
continues to purchase most of its product from APS. Currently, the Company is
negotiating for the acquisition of a warehouse operation in order to purchase
its inventory directly from the manufacturers. If the Company is successful in
acquiring the warehouse operation, it is expected that the acquisition cost of
parts would decrease and warehousing and distribution expenses would increase.
This acquisition is dependent upon the successful completion of the
negotiations and the closing of a new credit facility which is discussed below
in Liquidity and Capital Resources.
Operating, Selling, General and Administrative ("OSG&A") Expenses. OSG&A
expenses increased from $3.5 million (or 34.4% of net sales) for the three
months ending June 30, 1997 to $4.1 million (or 35.6% of net sales) for the
three months ending June 30, 1998. This $.6 million increase resulted primarily
from additional store personnel and corporate overhead to support the
anticipated increase in sales volume. OSG&A expenses as a percentage of sales
increased primarily from a reduction in reimbursements of promotional expenses
received from suppliers and was partially offset by an increase in sales.
Interest Expense. Interest expense increased from $142,903 (or 1.4% of net
sales) for the three months' ending June 30, 1997 to $210,644 (or 1.8% of net
sales) for the three months ending June 30, 1998. This increase resulted
primarily from the increased level of debt incurred to expand operations, as
well as for working capital.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net Sales. Product sales increased $2.2 million, or 11.3%, to $22.1 million for
the six months ending June 30, 1998. This increase was primarily due to sales
from seven new stores acquired or opened during 1997. Same store sales remained
relatively constant.
Cost of Goods Sold. Cost of goods sold increased $1 million to $13.6 million (or
61.8% of net sales) for the three months ending June 30, 1998. This increase was
primarily attributable to sales increases. Cost of goods sold as a percentage of
sales decreased primarily from favorable pricing from vendors and was partially
offset by sales increases in lower gross margin wholesale sales. The Company
continues to purchase most of its product from APS. Currently, the Company is
negotiating for the acquisition of a warehouse operation in order to purchase
its inventory directly from the manufacturers. If the Company is successful in
acquiring the warehouse operation, it is expected that the acquisition cost of
parts would decrease and warehousing and distribution expenses would increase.
This acquisition is dependent upon the successful completion of the negotiations
and the closing of a new credit facility which is discussed below in Liquidity
and Capital Resources.
Operating, Selling, General and Administrative ("OSG&A") Expenses. OSG&A
expenses increased from $6.8 million (or 34.3% of net sales) for the six months
ending June 30, 1997 to $8.1 million (or 36.5% of net sales) for the six months
ending June 30, 1998. This $1.3 million increase resulted primarily from
additional store personnel and corporate overhead to support the anticipated
increase in sales volume. OSG&A expenses as a percentage of sales increased
primarily from a reduction in reimbursements of promotional
9
<PAGE> 10
THE PARTS SOURCE, INC.
(D/B/A ACE AUTO PARTS)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
CONTINUED
expenses received from suppliers and a one-time charge of $80,000 in back
compensation to certain past and present employees.
Interest Expense. Interest expense increased from $277,960 (or 1.4% of net
sales) for the six months ending June 30, 1997 to $433,421 (or 2% of net sales)
for the six months ended June 30, 1998. This increase resulted primarily from
the increased level of debt incurred to expand operations and for working
capital.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.1 million for the six months ending
June 30, 1997 primarily as a result of an increase in accounts receivable,
inventory and accounts payable. For the six months ending June 30, 1998, net
cash used in operating activities was $.4 million primarily as a result of an
increase in accounts receivable and accounts payable.
Net cash used in investing activities was $.9 million and $.2 million for the
six months ending June 30, 1997 and 1998, respectively. In 1997, cash was used
primarily to fund the opening of new stores.
Net cash provided by financing activities, utilizing the Company's credit
facilities, was $2.2 million and $.4 million, for the six months ending June 30,
1997 and 1998, respectively. These borrowings were used primarily to fund the
opening of new stores and for general working capital purposes.
In February 1998, the Company's borrowing capacity under its existing $12
million revolving line of credit was modified due to the financial difficulties
of its principal supplier. This modification has resulted in no funds currently
being available under this line of credit. In August 1998, the Company obtained
a commitment for a $19 million revolving line of credit to acquire a warehouse
operation and to provide working capital. The closing of this commitment is
dependent upon the successful acquisition of a warehouse operation.
Management believes that the cash expected to be provided by operating
activities, existing cash, the new bank credit commitment 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. In the event that the new bank
credit commitment is not closed, Management believes it would be successful in
renegotiating the terms of the existing $12 million credit facility, however,
at this time, no assurances can be given.
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.
10
<PAGE> 11
THE PARTS SOURCE, INC.
(D/B/A ACE AUTO PARTS)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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
(a) Exhibits: 27 -- Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K: None
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 14, 1998
- --------------------------
(Date) /s/ Robert B. Morgan
-------------------------------------------
Robert B. Morgan
Chief Financial and Accounting Officer
(Principal Financial and Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PARTS SOURCE, INC. FOR THE SIX MONTHS ENDED JUNE 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 59,549
<SECURITIES> 0
<RECEIVABLES> 4,126,525
<ALLOWANCES> 188,038
<INVENTORY> 16,159,075
<CURRENT-ASSETS> 22,244,648
<PP&E> 4,894,010
<DEPRECIATION> 1,382,271
<TOTAL-ASSETS> 27,211,853
<CURRENT-LIABILITIES> 6,315,186
<BONDS> 10,982,088
0
0
<COMMON> 3,412
<OTHER-SE> 9,662,567
<TOTAL-LIABILITY-AND-EQUITY> 27,211,853
<SALES> 22,089,386
<TOTAL-REVENUES> 22,089,386
<CGS> 13,647,931
<TOTAL-COSTS> 8,065,651
<OTHER-EXPENSES> (20,995)
<LOSS-PROVISION> 36,290
<INTEREST-EXPENSE> 433,421
<INCOME-PRETAX> (36,622)
<INCOME-TAX> (11,700)
<INCOME-CONTINUING> (24,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,922)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
