<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 March 31, 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)
FLORIDA 59-3149403
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1751 S. Missouri Avenue, Clearwater, Florida 33756
-------------------------------------------- ----------
(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
----- -----
Common Stock, $.001 par value - 3,412,273 shares outstanding at April 30, 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 months ended
March 31, 1997 and March 31, 1998 (unaudited) 3
Condensed Balance Sheets--December 31, 1997 and
March 31, 1998 (unaudited) 4
Condensed Statements of Cash Flows--Three months ended
March 31, 1997 and March 31, 1998 (unaudited) 5
Notes to Condensed Financial Statements --March 31, 1998
(unaudited) 6-7
Item 2. Management's Discussion and Analysis or Plan of Operations 8-10
PART II. OTHER INFORMATION 10
SIGNATURES 10
</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
March 31,
-------------------------
1997 1998
---------- -----------
(unaudited)
<S> <C> <C>
Net sales $9,667,979 $10,644,605
Cost of goods sold 6,149,624 6,478,537
---------- -----------
Gross profit 3,518,355 4,166,068
Operating, selling, general and
administrative expenses 3,308,052 3,995,449
---------- -----------
Operating income 210,303 170,619
---------- -----------
Other income (expense)
Interest expense (135,057) (222,777)
Other, net 9,502 10,817
---------- -----------
(125,555) (211,960)
---------- -----------
Earnings (loss) before income taxes 84,748 (41,341)
Provision (benefit) for income taxes 33,500 (13,200)
---------- -----------
Net earnings (loss) $ 51,248 $ (28,141)
========== ===========
Basic earnings (loss) per common share $ .02 $ (.01)
========== ===========
Diluted earnings (loss) per common share $ .01 $ (.01)
========== ===========
Average common shares outstanding:
Basic 3,412,273 3,412,273
========== ===========
Diluted 3,547,680 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, March 31,
1997 1998
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 227,564 $ --
Accounts receivable
Trade, net 2,774,975 3,373,412
Other-primarily suppliers 1,203,292 1,427,286
Inventories 16,488,120 16,774,632
Refundable income taxes 130,812 84,227
Prepaid expenses 124,010 244,757
Deferred tax asset 190,700 305,400
----------- -----------
Total current assets 21,139,473 22,209,714
PROPERTY AND EQUIPMENT, NET 3,559,541 3,545,454
OTHER ASSETS
Excess of cost over net assets acquired, net 1,280,639 1,255,784
Non-compete agreement, net 151,587 124,672
Other 121,650 116,784
----------- -----------
$26,252,890 $27,252,408
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current installments of
Long-term obligations $ 50,754 $ 58,257
Notes payable, related parties 144,723 145,136
Accounts payable, trade 4,926,079 5,295,882
Accrued liabilities 879,608 809,872
----------- -----------
Total current liabilities 6,001,164 6,309,147
LONG-TERM OBLIGATIONS, less current portion 10,397,131 11,030,091
NOTES PAYABLE, RELATED PARTIES, less current portion 25,494 10,710
DEFERRED INCOME TAXES 138,200 239,700
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 3,412 3,412
Additional paid-in capital 9,825,158 9,825,158
Accumulated deficit (137,669) (165,810)
----------- -----------
9,690,901 9,662,760
----------- -----------
$26,252,890 $27,252,408
=========== ===========
</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>
Three Months Ended
March 31,
-------------------------
1997 1998
---------- -----------
(unaudited)
<S> <C> <C>
Increase (Decrease) in cash
Cash flows from operating activities:
Net earnings (loss) $ 51,248 $ (28,141)
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Depreciation and amortization 134,415 204,803
Deferred income taxes, net (7,000) (13,200)
Other (6,503) (9,890)
Changes in assets and liabilities, net of acquisitions of businesses:
(Increase) in accounts receivable (883,359) (822,431)
(Increase) in inventories (726,551) (286,512)
Decrease in refundable income taxes 40,500 46,585
(Increase) in prepaid expenses (150,813) (120,747)
(Increase) in other assets (36,114) (2,697)
Increase in accounts payable 1,083,654 369,803
Decrease in accrued liabilities (58,490) (65,326)
--------- ----------
Net cash used in operating activities (558,914) (727,753)
--------- ----------
Cash flows from investing activities:
Cash paid for acquisitions of businesses (222,904) --
Purchases of property and equipment (349,520) (92,984)
Proceeds from disposition of property and equipment 17,025 28,333
--------- ----------
Net cash used in investing activities (555,399) (64,651)
--------- ----------
Cash flows from financing activities:
Net borrowings under line of credit agreement 1,312,035 597,154
Repayments of long-term obligations (81,520) (32,314)
--------- ----------
Net cash provided by financing activities 1,230,515 564,840
--------- ----------
Increase (Decrease) in cash 116,202 (227,564)
Cash, January 1 20,508 227,564
--------- ----------
Cash, March 31 $ 136,710 $ --
========= ==========
</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
MARCH 31, 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 March
31, 1998 and for the three months ended March 31, 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 three months ended March 31, 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.
Certain reclassifications have been made to the prior year's statements to
conform with the 1998 presentation.
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 three months ended March
31, 1998.
6
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THE PARTS SOURCE, INC.
(d/b/a ACE AUTO PARTS)
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE C: STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1998
---------- ----------
(unaudited)
<S> <C> <C>
Cash paid during the period for interest $144,840 $221,690
======== ========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
In the three months ended March 31, 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 in
the three months ended March 31, 1997. In conjunction with the acquisitions,
assets acquired and liabilities assumed were as follows:
<TABLE>
<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
months ended March 31, 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
March 31,
----------------------
1997 1998
----------- ---------
(unaudited)
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 63.6 60.9
----- -----
Gross profit 36.4 39.1
Operating, selling, general and
administrative expenses 34.2 37.5
----- -----
Operating income 2.2 1.6
Other income (expense)
Interest expense (1.4) (2.1)
Other, net .1 .1
----- -----
Earnings (loss) before income taxes .9 (.4)
Provision (benefit) for income taxes .3 (.1)
----- -----
Net earnings (loss) .6% (.3)%
===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales. Product sales increased $1 million, or 10.1%, to $10.6 million for
the three months ending March 31, 1998. This increase was primarily due to $1.2
million in sales from nine new stores acquired or opened during 1997, which was
partially offset by a $.2 million, or 2.2% decrease in same store sales. The
same store sales decrease is calculated based on the change in net sales of only
those stores that were operational for the entire periods being compared. These
same store sales decreases were primarily attributable to certain stores that
were acquired in the fourth quarter of 1996 where stricter credit, pricing and
operating policies were instituted. These new policies also resulted in a
turnover of personnel which had a disruptive effect on customer relationships.
The Company anticipates sales to increase in these stores as they mature over
a period of time.
Cost of Goods Sold. Cost of goods sold increased $.3 million, to $6.5 million
(or 60.9% of net sales) for the three months ending March 31, 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, however,
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
the Company has begun negotiations with other suppliers. If the Company decides
to purchase product directly from its manufacturers, a larger warehouse
operation would be required. Under this arrangement, the acquisition cost of
parts would decrease and warehousing and distribution expenses would increase.
At this early stage, the Company has not determined if a new supplier or
multiple suppliers will replace APS.
Operating, Selling, General and Administrative ("OSG&A") Expenses. OSG&A
expenses increased from $3.3 million (or 34.2% of net sales) for the three
months ending March 31, 1997 to $4 million (or 37.5% of net sales) for the three
months ending March 31, 1998. This $.7 million increase resulted primarily from
additional store personnel and corporate overhead to support the anticipated
increase in sales volume and a one-time write-off of $80,000 in back
compensation to certain past and present employees. OSG&A expenses as a
percentage of sales increased primarily from certain new stores acquired in
1996 and nine new stores acquired or opened subsequent to March 31, 1997 that
are operating at a higher expense percentage. 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 from $135,057 for the three months
ending March 31, 1997 (or 1.4% of net sales) to $222,777 for the three months
ending March 31, 1998 (or 2.1% of net sales). This increase resulted primarily
from the increased level of debt incurred to expand operations, as well as for
working capital.
Provision (Benefit) for Income Taxes. For the three months ending March 31,
1998, the Company reported a loss before income taxes which resulted in an
income tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $.6 million and $.7 million, for the
three months ending March 31, 1997 and 1998, respectively, primarily as a result
of an increase in accounts receivable, inventories and accounts payable.
Net cash used in investing activities was $.6 million and $64,651 for the three
months ending March 31, 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 $1.2 million and $.6 million, for the three months ending March
31, 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 line of
credit agreement was modified due to the financial difficulties of its principal
supplier. The Company is in the process of modifying the terms of its credit
agreement. At April 30, 1998, the Company had approximately $.5 million
available under its revolving and non-revolving credit lines.
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
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 if the Company continues to use APS to
warehouse and distribute the majority of its product needs. If the Company
decides to purchase product directly from its manufacturers, a warehouse
operation would be needed which may require additional financing.
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.
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
Exhibits
27 - Financial Data Schedule (for SEC use only)
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)
May 14, 1998
- ------------------------
(Date)
/s/ Robert B. Morgan
--------------------------------
Robert B. Morgan
Chief Financial and Accounting Officer
(Principal Financial and Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PARTS SOURCE, INC. FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,546,450
<ALLOWANCES> 173,038
<INVENTORY> 16,774,632
<CURRENT-ASSETS> 22,209,714
<PP&E> 4,782,300
<DEPRECIATION> 1,236,846
<TOTAL-ASSETS> 27,252,408
<CURRENT-LIABILITIES> 6,309,147
<BONDS> 11,244,194
0
0
<COMMON> 3,412
<OTHER-SE> 9,659,348
<TOTAL-LIABILITY-AND-EQUITY> 27,252,408
<SALES> 10,644,605
<TOTAL-REVENUES> 10,644,605
<CGS> 6,478,537
<TOTAL-COSTS> 3,995,449
<OTHER-EXPENSES> (10,817)
<LOSS-PROVISION> 19,892
<INTEREST-EXPENSE> 222,777
<INCOME-PRETAX> (41,341)
<INCOME-TAX> (13,200)
<INCOME-CONTINUING> (28,141)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,141)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
