<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended July 25, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33-66412
APS HOLDING CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 76-0306940
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15710 JOHN F. KENNEDY BLVD., SUITE 700
HOUSTON, TEXAS 77032-2347
(Address of Principal Executive Offices)
(713) 507-1100
(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 or 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
--- ---
There were 13,731,222 shares of the Registrant's Class A Common Stock
outstanding as of the close of business on September 3, 1996. There were no
shares outstanding of the Registrant's Class B Common Stock.
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<PAGE>
APS HOLDING CORPORATION
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements and Notes 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
APS HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
-----------
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS JULY 25, 1996 JANUARY 27, 1996
------------- ----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,481 $ 7,886
Accounts and notes receivable, less allowance of $7,411 and $5,048 . . . . . 133,377 120,848
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304,216 295,379
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,755 13,390
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . 22,082 30,817
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . 487,911 468,320
Property and equipment, less accumulated depreciation of $22,958 and $20,463 . 41,797 40,777
Notes receivable, less current portion . . . . . . . . . . . . . . . . . . . . 20,939 26,235
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,192 50,627
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498 681
Deferred costs and other assets. . . . . . . . . . . . . . . . . . . . . . . . 15,430 13,519
--------- ---------
$ 614,767 $ 600,159
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Book overdrafts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,603 $ 8,314
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . 16,468 13,453
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,862 103,214
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,661 40,655
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . 189,594 165,636
Long-term debt, less current maturities. . . . . . . . . . . . . . . . . . . . 288,290 302,512
Deferred income and other liabilities. . . . . . . . . . . . . . . . . . . . . 5,520 7,981
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . 483,404 476,129
--------- ---------
Commitments and contingencies (Note 4) . . . . . . . . . . . . . . . . . . . . - -
Stockholders' equity:
Class A common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 137
Class B common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 154,904 154,889
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,558) (30,876)
Treasury stock, at cost. . . . . . . . . . . . . . . . . . . . . . . . . . . (120) (120)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 131,363 124,030
--------- ---------
$ 614,767 $ 600,159
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
APS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 25, JULY 25,
----------------------- ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 234,305 $ 154,980 $ 451,871 $ 292,929
Cost of goods sold . . . . . . . . . . . . . . . . . . 152,645 101,452 294,380 191,332
--------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . . . . . . 81,660 53,528 157,491 101,597
Selling, general and administrative expenses . . . . . 67,033 41,476 135,313 81,453
--------- --------- --------- ---------
Operating income. . . . . . . . . . . . . . . . . 14,627 12,052 22,178 20,144
Interest income. . . . . . . . . . . . . . . . . . . . 1,449 1,326 2,812 2,587
Other income . . . . . . . . . . . . . . . . . . . . . 50 384 323 767
--------- --------- --------- ---------
Income before interest expense and
income taxes . . . . . . . . . . . . . . . 16,126 13,762 25,313 23,498
Interest expense . . . . . . . . . . . . . . . . . . . 6,682 4,018 13,683 7,702
--------- --------- --------- ---------
Income before income taxes. . . . . . . . . . . . 9,444 9,744 11,630 15,796
Provision for income taxes . . . . . . . . . . . . . . 3,481 3,683 4,312 5,977
--------- --------- --------- ---------
Net income. . . . . . . . . . . . . . . . . . . . $ 5,963 $ 6,061 $ 7,318 $ 9,819
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per share . . . . . . . . . . . . . . . . . $ 0.43 $ 0.44 $ 0.53 $ 0.71
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares outstanding . . . . . . 13,920 13,911 13,902 13,912
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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APS HOLDING CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 25, 1996
--------------
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK ADDITIONAL TREASURY TOTAL
----------------------- PAID-IN ACCUMULATED STOCK, STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT AT COST EQUITY
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period . . 13,728 $ 137 $ 154,889 $ (30,876) $ (120) $ 124,030
Exercise of stock options. . . . . 2 - 15 - - 15
Net income for the period. . . . . - - - 7,318 - 7,318
--------- --------- --------- --------- --------- ---------
Balance at July 25, 1996 . . . . . 13,730 $ 137 $ 154,904 $ (23,558) $ (120) $ 131,363
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
APS HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 25, 1996 JULY 25, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,318 $ 9,819
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 5,630 3,991
Amortization of debt issue costs. . . . . . . . . . . . . . . . . 393 469
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . 2,319 1,561
Income from supply agreement. . . . . . . . . . . . . . . . . . . (323) (767)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (182) 5,375
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . (14,819) (19,837)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (5,753) (22,104)
Prepaid expenses and other current assets . . . . . . . . . . . 8,742 (9,308)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 17,648 18,104
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 1,977 (6,043)
Other assets and liabilities. . . . . . . . . . . . . . . . . . (6,695) (1,637)
--------- --------
Net cash provided by (used in) operating activities. . . 16,255 (20,377)
--------- --------
Cash flows from investing activities:
Investment in notes receivable . . . . . . . . . . . . . . . . . . . . (3,933) (2,327)
Proceeds from repayment of notes receivable. . . . . . . . . . . . . . 8,781 2,449
Business acquisitions, net of cash acquired. . . . . . . . . . . . . . (3,367) (7,975)
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (4,738) (4,436)
Proceeds from sale of intangible assets. . . . . . . . . . . . . . . . 3,500 -
--------- --------
Net cash provided by (used in) investing activities . . . . . 243 (12,289)
--------- --------
Cash flows from financing activities:
Change in book overdrafts. . . . . . . . . . . . . . . . . . . . . . . 1,289 -
Net borrowings under revolving credit agreement. . . . . . . . . . . . (4,500) 43,600
Retirement of long-term debt . . . . . . . . . . . . . . . . . . . . . (6,707) (5,728)
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . 15 16
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . - (500)
--------- --------
Net cash (used in) provided by financing activities . . . . . (9,903) 37,388
--------- --------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . 6,595 4,722
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 7,886 15
--------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 14,481 $ 4,737
--------- --------
--------- --------
Supplemental disclosures:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . $ 11,706 $ 7,620
--------- --------
--------- --------
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . $ 841 $ 4,930
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
APS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
1. BASIS OF PRESENTATION:
The consolidated balance sheet of APS Holding Corporation and subsidiaries
(the "Company") at January 27, 1996 has been condensed from the Company's
audited consolidated financial statements at that date. The consolidated
balance sheet at July 25, 1996, the consolidated statements of operations for
the three and six months ended July 25, 1996 and 1995, the consolidated
statement of changes in stockholders' equity for the six months ended July 25,
1996 and the consolidated statements of cash flows for the six months ended July
25, 1996 and 1995 have been prepared by the Company, without audit. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows have been made. The results of operations
for the three months or six months ended July 25, 1996 are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been omitted. The accompanying consolidated financial statements should be
read in conjunction with the financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the year ended January 27, 1996.
2. NEW ACCOUNTING STANDARD:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 125, entitled "ACCOUNTING FOR TRANSFERS AND SERVICING
OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES" ("SFAS No. 125"), in
August 1996. The Company is required to adopt the accounting rules of SFAS No.
125 for certain transactions occurring after December 31, 1996. The adoption
of SFAS No. 125 is not expected to have a significant impact on the Company's
financial position or results of operations.
3. COST TO EXIT ACTIVITIES:
On January 25, 1996, the Company acquired all of the outstanding stock of
Parts, Inc. ("PI") from GKN Parts Industries Corporation (the "PI Acquisition").
Since the PI Acquisition, the Company has implemented a comprehensive plan for
integrating PI's operations and administrative functions with those of the
Company. Such plan entails the closure of certain PI distribution centers and
stores and consolidation of these operations into the Company's remaining
facilities, as well as the consolidation of certain administrative functions.
The Company's financial statements at January 27, 1996 included a liability
and reserves of $9.2 million for costs related to such plan. During the six
months ended July 25, 1996, the Company charged approximately $2.5 million
against such liability. Such charge consisted of approximately $2.1 million
to close facilities (including approximately $1.3 million of employee
termination and relocation costs) and approximately $0.4 million for lease
and related obligations.
In connection with the PI Acquisition, the Company also embarked upon a
program during the fourth quarter of the fiscal year ended January 27, 1996 to
review and rationalize its facilities. In conjunction with such program, and in
order to achieve its operating performance objectives, the Company has begun to
consolidate redundant operating and administrative facilities, owned by the
Company prior to the PI Acquisition, into existing facilities and to close other
nonperforming facilities. The Company expects to attain a majority of the
program's objectives during the fiscal year ending January 25, 1997 with
completion of the program during the fiscal year ending January 31, 1998. The
Company's financial statements at January 27, 1996 included a liability in the
amount of $5.5 million for costs related to such program, including
approximately $0.5 million of employee severance benefits related to personnel
reductions of
7
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APS HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
approximately 300 employees, primarily warehouse and store personnel. During
the six months ended July 25, 1996, the Company charged approximately $2.1
million of consolidation costs against such liability. Such costs included
approximately $1.0 million to close facilities (including approximately $0.1
million of employee severance benefits for 129 terminated employees) and
approximately $1.1million for lease and related obligations.
4. LITIGATION:
The Company is involved in various claims and disputes arising in the normal
course of business. One such case involved the matter of JO M. SMITH ET AL V.
A.P.S., INC. ET AL, which was filed in July 1994 in the District Court of Harris
County, Texas. The plaintiffs (four former and one existing employee) claimed
to have been the recipients of acts of intimidation and/or retaliatory conduct
as a result of their filing of workers' compensation claims and filed this suit
against the Company and one of its officers under various sections of Texas
state statutes prohibiting such actions claiming aggregate specified actual
damages of $3.2 million, punitive damages of $6.3 million and damages for
emotional distress in the amount of $5.0 million. Such suit was settled during
the quarter ended July 25, 1996 for an aggregate $350,000 payment to the
plaintiffs and is reflected in the Company's net income for the three and six
months ended July 25, 1996.
In addition, as a result of the PI Acquisition, the Company has become a
party to a number of other existing litigation matters and claims. Among those
cases is the matter of KARON S. ADKISSON V. GKN PARTS INDUSTRIES CORPORATION, a
suit pending in the United States District Court for the Western District of
Oklahoma. The plaintiff, a former employee of PI, alleges several claims
against PI, including violation of Title VII of the Civil Rights Act of 1964 and
the negligent retention and supervision of its employees as a result of being
raped by a fellow employee, who has been convicted of that crime. While the
outcome of this litigation is inherently uncertain, management believes that the
Company has meritorious defenses to such suit, as well as to other pending
litigation matters. In any event, the Company has been contractually
indemnified by the seller of PI for the costs of defense and any adverse outcome
(generally, subject to a $500,000 basket) relating to various PI matters,
including all PI litigation matters pending on the date of the PI Acquisition.
In addition, the Company has insurance or indemnity coverage against various
other pending claims and disputes.
5. RETIREMENT PLAN:
Effective September 1, 1996, the Company implemented the A.P.S., Inc.
Executive 401(k) Deferral Plan (the "Deferral Plan"), a defined contribution
plan covering a group of key management employees who also participate at the
maximum contribution level of 3% in the Company's previously existing defined
contribution plan, the A.P.S., Inc. Partnership Plan (the "Partnership Plan").
Participants in the Deferral Plan may contribute up to 28% of their annual
compensation, in addition to their contribution to the Partnership Plan. Such
contributions will be matched 50% by the Company up to 6% of the participants'
combined contributions to both plans. Participants' vesting rates in the
Partnership Plan carry over to the Deferral Plan and participants become fully
vested in the Company's contributions to both plans after five years.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Presented below is a summary of unaudited financial operating information
for the three and six months ended July 25, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 25, SIX MONTHS ENDED JULY 25,
-------------------------------- -------------------------------
1996 % 1995 % 1996 % 1995 %
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 234,305 100.0 $ 154,980 100.0 $ 451,871 100.0 $ 292,929 100.0
Cost of goods sold 152,645 65.1 101,452 65.5 294,380 65.1 191,332 65.3
Gross profit 81,660 34.9 53,528 34.5 157,491 34.9 101,597 34.7
Selling, general and administrative expenses 67,033 28.6 41,476 26.8 135,313 29.9 81,453 27.8
Operating income 14,627 6.2 12,052 7.8 22,178 4.9 20,144 6.9
Net income 5,963 2.5 6,061 3.9 7,318 1.6 9,819 3.4
</TABLE>
THE PI ACQUISITION
On January 25, 1996, the Company purchased all of the outstanding stock of
Parts, Inc. ("PI"), an automotive parts distributor, for a net purchase price of
$74.9 million (the "PI Acquisition").
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net sales for the three months and six months ended July 25, 1996 increased
$79.3 million (51.2%) and $158.9 million (54.3%), respectively, from the
corresponding periods of the prior year. Such increase was primarily
attributable to the impact of the PI Acquisition and, to a lesser extent, to
increased sales generated by new Installers' Service Warehouse ("ISW") location
and increasing sales at less mature ISWs. The Company experienced a decrease in
demand for its products at the end of July 1996 and during the month of August
1996 due in part to the unseasonably cool weather experienced in many parts of
the United States this summer.
Cost of goods sold or the three months and six months ended July 25, 1996
increased $51.2 million (50.5%) and $103.0 million (53.9%), respectively,
compared to the corresponding periods of the prior year. The dollar increase in
cost of goods sold principally resulted from increased sales volume generated by
the PI Acquisition and the growth of the ISW business. Cost of goods sold for
the three months and six months ended July 25, 1996 (as a percentage of net
sales) decreased slightly compared to that of the corresponding periods of the
prior year principally due to the sales mix containing more ISW sales, which
have higher gross profit margins than the Company's traditional businesses
(i.e., distribution centers and Company-owned stores), offset by lower gross
profit margins at the Company's traditional businesses. Such decrease in gross
profit margins at the Company's traditional businesses primarily result from a
reduction in selling prices to high volume jobbers. The Company intends to
continue adding high volume jobbers and, consequently, gross profit margins at
its traditional businesses could decrease in future periods.
Selling, general and administrative expenses for the three months and six
months ended July 25, 1996 increased $25.6 million (61.6%) and $53.9 million
(66.1%), respectively, compared to the corresponding periods of the prior year.
The dollar increases in selling, general and administrative expenses for both
the three and six month periods ended July 25, 1996 principally resulted from
increased sales volume generated by the PI Acquisition and the growth of the ISW
business. Selling, general and administrative expenses (as a percentage of net
sales) for the three months and six months ended July 25, 1996 increased 1.8%
and 2.1%, respectively, compared to the respective prior year periods. Such
increases (as a percentage of net sales) principally resulted from both the
Company's operation of the PI business (which currently has higher distribution
center operating costs than those of the Company's other traditional business
operations) and, to a lesser extent, its operation of more ISWs (which have
higher operating costs (as a percentage of net sales) than the Company's
traditional businesses). The Company plans to continue adding new ISWs as part
of its overall business plan and expects future operating expenses of its ISWs
to continue to be higher (as a percentage of net sales) than the related
9
<PAGE>
operating expenses of its traditional businesses. However, the Company believes
that, as certain PI distribution centers are consolidated into the Company's
other facilities, selling, general and administrative expenses (as a percentage
of net sales) for the Company's traditional businesses should decline in
corresponding future periods, although no assurance can be given in this regard.
Operating income for the three months and six months ended July 25, 1996
increased $2.6 million (21.4%) and $2.0 million (10.1%), respectively, compared
to the corresponding periods of the prior year, primarily due to the reasons
discussed above.
Interest income for the three months and six months ended July 25, 1996 was
$1.4 million (0.6% of net sales) and $2.8 million (0.6% of net sales),
respectively, compared to $1.3 million (0.9% of net sales) and $2.6 million
(0.9% of net sales), respectively, for the corresponding periods of the prior
year. Such increases are due primarily to interest income from PI"s accounts
receivable.
Other income for the three months and six months ended July 25, 1996 was
approximately $0.1 million (0.0% of net sales) and $0.3 million (0.1% of net
sales) compared to $0.4 million (0.2% of net sales) and $0.8 million (0.3% of
net sales), respectively, for the corresponding periods of the prior year. Such
amounts represent the portion allocable to such periods of a $6.0 million
payment received from a supplier for entering into a ten year supply agreement
in April 1993. Such payment was deferred and is being recognized as income on
an accelerated basis over the term of the agreement; thus the amount of revenue
recognized from such payment is declining.
Interest expense for the three months and six months ended July 25, 1996
was $6.7 million (2.9% of net sales) and $13.7 million (3.0% of net sales),
respectively, compared to $4.0 million (2.6% of net sales) and $7.7 million
(2.6% of net sales), respectively, for the corresponding periods of the prior
year. The increase in interest expense for such periods is principally due to
higher borrowing levels resulting from the Company's investment in acquisitions
(primarily the PI Acquisition) and the expansion of its ISW business. The
extent of future increases in interest expense will depend on a number of
factors, including the magnitude of increases in borrowing levels, changes in
interest rates and the Company's continued access to sufficient sources of
funding for its expansion efforts. The PI Acquisition was financed through the
private placement on January 25, 1996 of $100.0 million principal amount of the
Company's 11.875% senior subordinated notes due 2006 (the "Notes"). Also,
concurrently with the PI Acquisition, the Company entered into an amended and
restated senior bank credit agreement (the "New Credit Agreement") which
replaced the credit facilities previously made available to the Company under a
credit agreement entered into in September 1993 (as amended, the "Previous
Credit Agreement") and increased, to $235.0 million, the amount that may be
borrowed (subject to a borrowing base limitation) under the revolving credit
facility of the New Credit Agreement. At July 25, 1996, the Company had $202.4
million outstanding under such agreement, consisting of $143.9 million and $58.5
million in borrowings under the revolving credit facility and term loan
facility, respectively. The Company expects to utilize the additional borrowing
availability under the New Credit Agreement, to the extent necessary, to fund
the integration of PI with the Company's operations and to fund the Company's
further expansion efforts. The Company expects that, as a result of such
financing and increased borrowings, interest expense for future periods may
continue to increase significantly compared to the same periods of the prior
year.
Income taxes for the three months and six months ended July 25, 1996 were
$3.5 million (an effective tax rate of 36.9%) and $4.3 million (an effective tax
rate of 37.1%), respectively, compared to $3.7 million and $6.0 million (an
effective tax rate of 37.8% for both periods), respectively, for the
corresponding periods of the prior year. The combined applicable federal and
state statutory tax rate is expected to approximate 37-38% during the fiscal
year ending January 25, 1997 ("fiscal 1997").
Net income for the three months and six months ended July 25, 1996 was $6.0
million (2.5% of net sales) and $7.3 million (1.6% of net sales), respectively,
compared to a net income of $6.1 million (3.9% of net sales) and $9.8 million
(3.4% of net sales), respectively, for the corresponding periods of the prior
year. Such decrease in net income is primarily a result of the factors
discussed above.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. For the six months ended July 25, 1996, operating activities
provided net cash of approximately $16.3 million, resulting primarily from
increases in accounts payable offset by increases in accounts receivable and
inventories. Investing activities provided $0.2 million of cash, primarily from
the repayment of notes receivable and from proceeds from the sale of the
Company's interest in the "Parts Plus" group of marks which had been acquired by
the Company in the PI Acquisition. See "Other Matters" below. Such cash
proceeds were partially offset by capital expenditures, investments in notes
receivable and business acquisitions. Financing activities utilized $9.9
million of cash, principally resulting from net repayments under the Company's
revolving credit facility and retirement of long-term debt.
For the six months ended July 25, 1995, operating activities utilized net
cash of approximately $20.4 million resulting primarily from increases in
accounts receivable, inventories and other current assets in connection with the
expansion of the Company's ISW business. Such increases were offset in part by
the Company's net earnings and increases in accounts payable. Investing
activities utilized $12.3 million of cash, principally consisting of the
Company's investment in business acquisitions and capital expenditures.
Financing activities provided $37.4 million of cash, principally resulting from
net borrowings under the Company's credit agreement to finance its ISW expansion
and business acquisitions.
WORKING CAPITAL. At July 25, 1996, the Company had $298.3 million of
working capital, including $14.5 million in cash and cash equivalents, compared
to $302.7 million of working capital at January 27, 1996, including $7.9 million
of cash and cash equivalents. During the six months ended July 25, 1996,
current assets and current liabilities increased by $19.6 million and $24.0
million, respectively. Such increases are primarily attributable to increases
in accounts receivable, inventories and accounts payable resulting from seasonal
increases in business and the expansion of its ISW business. A significant
portion of the increase in accounts payable was attributable to deferred payment
terms negotiated with the Company's suppliers in order to offset the costs of
integrating PI and to improve liquidity during such integration. Such deferred
payment terms generally expire over a twelve to thirty-six month period. The
Company expects to continue adding ISWs and to continue making strategic
acquisitions from time to time. As a result, the Company expects its working
capital to increase in future periods.
INTEREST RATE SWAP AGREEMENTS During the year ended January 27, 1996, the
Company entered into interest rate swap agreements to hedge interest costs and
risks associated with variable interest rates. Such agreements, which cover a
portion of the borrowings under the New Credit Agreement, effectively convert
variable-rate debt to fixed-rate debt with an effective per annum interest rate
of approximately 7.1%. The aggregate notional principal amount of these
agreements is $100.0 million, $75.0 million of which became effective in June
1995 and matures in June 1997 and $25.0 million of which became effective in
January 1996 and matures in January 1998. The counterparties to such agreements
are major financial institutions and, therefore, credit losses from counterparty
nonperformance is not anticipated.
CAPITAL EXPENDITURES AND ACQUISITIONS. Capital expenditures for the six
months ended July 25, 1996, excluding new business acquisitions, were
approximately $4.7 million compared to $4.4 million for the corresponding period
of the prior year. The increase in capital expenditures was due primarily to
continued management information system enhancements. In connection with the
Company's ongoing growth strategy and to facilitate other business needs, the
Company expects capital expenditures to increase in the remaining quarters of
fiscal 1997 as a result of the PI Acquisition and management information system
enhancements.
In order to expand its business, the Company expects to continue to make
strategic acquisitions from time to time for cash and other consideration and to
continue adding new ISWs, in each case to the extent that its debt service
requirements, financing agreement covenants, financial performance and funding
availability permit. To meet the cash funding requirements for the Company's
continuing expansion efforts, the Company expects to draw on internally
generated funds, borrowings under the New Credit Agreement, proceeds from the
disposition of non-strategic assets and other sources of liquidity, to the
extent available, as discussed below.
SOURCES OF LIQUIDITY. Since the completion of the Company's initial public
offering and debt refinancing in 1993, the Company has pursued more aggressive
acquisition and ISW expansion programs, resulting in increased funding
requirements. The principal sources of liquidity for the Company's business
expansion and operating requirements in prior years have been internally
generated funds from the operation of its traditional business, borrowings under
the
11
<PAGE>
Previous Credit Agreement and the proceeds from issuance of the Notes. The
Company expects that the principal sources of liquidity for its future operating
requirements and business expansion will be cash flows from the operation of its
traditional businesses and borrowings under the New Credit Agreement. In
addition, the Company has negotiated deferred payment terms and other changeover
and acquisition incentives with its major suppliers in order to offset the costs
of integrating PI and to improve its liquidity during such integration. While
the Company expects that such sources will provide sufficient working capital to
operate its business and finance the integration of the PI business into the
Company's distribution network and its currently planned expansion efforts,
there can be no assurance that such sources will prove to be sufficient or that
such additional vendor incentives will be fully attained. Further, the Company
expects such sources will provide sufficient funds to meet its regularly
scheduled debt service obligations (which have been significantly increased as a
result of the PI Acquisition and related financing) prior to maturity of the
revolving credit facility under the New Credit Agreement. The Company currently
does not expect, however, to generate cash flow sufficient to fund the repayment
of borrowings due under such revolving credit facility upon its maturity on
December 31, 2000 and, accordingly, expects that it will seek to refinance such
amounts prior to such maturity. No assurance can be given that such refinancing
can be successfully accomplished.
GROWTH STRATEGY AND INTEGRATION OF PI
As indicated above, the Company plans to continue growing by adding ISWs
and making strategic acquisitions, in each case to the extent that its debt
service requirements, financing agreement covenants, financial performance and
availability of funding permit.
During the six months ended July 25, 1996, the Company increased the total
number of ISW locations from 252 to 266. The Company plans to add approximately
18 new ISWs during the remainder of fiscal 1997. Looking forward, the Company
remains convinced of the viability of the ISW concept and is continuing to
refine and improve the execution of this division's business strategy. However,
operating results have experienced and are expected to continue to experience
earnings and cash flow pressure due to the large number of less mature ISWs and
the rapid growth of the ISW base, the costs of opening additional ISWs and the
expiration, generally after a period of six to fifteen months, of deferred
payment terms extended to the Company by vendors in connection with the opening
of new ISW locations. Operating margins for the ISWs are currently below those
of the Company's traditional businesses.
Full realization of the potential benefits of the PI Acquisition will be
dependent upon a variety of factors, including (i) retention of a substantial
portion of PI's sales, particularly sales to higher volume associated jobbers;
(ii) obtaining significant reductions in cost of goods sold resulting from
purchasing economies extended to the Company by suppliers; (iii) achieving
significant reductions in selling, general and administrative expenses through
the consolidation or closure of certain operating and administrative facilities
and functions; and (iv) obtaining deferred payment terms and other one-time
changeover incentives from suppliers that will be sufficient to offset certain
significant one-time cash costs and expenses that the Company expects to incur
in connection with the PI Acquisition and will provide additional liquidity
during the integration of PI's business into that of the Company. The Company
has made substantial progress in its integration of PI's operations into the
operations of the Company; however, there can be no assurance as to the extent
to which the Company will be able to realize the potential benefits of the PI
Acquisition or the timing of such realization. While certain of these benefits
have been realized to date, failure to achieve a substantial portion of the
remaining benefits within the time frame expected by the Company could
materially and adversely affect the Company's future results of operations and
financial position.
SEASONALITY; INFLATION
Historically, the Company's net sales have been higher during April through
September of each year than during the other months of the year. In addition,
the demand for automotive products is somewhat affected by weather conditions
and, consequently, the Company's results of operations from period to period may
be affected by such conditions. Temperature extremes tend to enhance sales by
causing a higher incidence of parts failure and increasing sales of seasonal
products, while milder weather tends to depress sales. As discussed in "FISCAL
YEAR 1997 COMPARED TO FISCAL YEAR 1996" above, the Company experienced a
decrease in demand for its products at the end of July 1996 and during the month
of August 1996 due in part to the unseasonably cool weather experienced in many
parts of the United States this summer.
12
<PAGE>
The Company's management does not believe that its operations have been
materially affected by inflation. In general, the Company has been able to pass
on to its customers any increases in the cost of its inventory.
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 125, entitled "ACCOUNTING FOR TRANSFERS AND SERVICING
OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES" ("SFAS No. 125"), in
August 1996. The Company is required to adopt the accounting rules of SFAS No.
125 for certain transactions occurring after December 31, 1996. The adoption of
SFAS No. 125 is not expected to have a significant impact on the Company's
financial position or results of operations.
FORWARD LOOKING INFORMATION
The statements contained in this Report on Form 10-Q ("Quarterly Report")
which are not historical facts, including, but not limited to, statements found
under the captions "Results of Operations"," Liquidity and Capital Resources"
and "Growth Strategy and Integration of PI" above, are forward-looking
statements that involve a number of risks and uncertainties. The actual results
of the future events described in such forward-looking statements in this
Quarterly Report could differ materially from those contemplated by such
forward-looking statements. Among the factors that could cause actual results
to differ materially are the risks and uncertainties discussed in the Quarterly
Report and in the Company's Annual Report on Form 10-K for the year ended
January 27, 1996, including without limitation, the portions of such reports
under the captions referenced above, and the uncertainties set forth from time
to time in the Company's other public reports and filings and public statements.
OTHER MATTERS
In February 1996, the Company sold its interest in the "Parts Plus" group
of marks, which had been acquired by the Company in the PI Acquisition, to the
Association of Automotive Aftermarket Distributors ("AAAD") for cash
consideration of $3.5 million. PI had previously licensed the same marks to
AAAD for a small yearly license fee.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
None.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS
LOCATION OF EXHIBIT
EXHIBIT IN SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT NUMBERING SYSTEM
------ ----------------------- ----------------
10.18 A.P.S., Inc. Executive 401(k) Deferral
Plan (Incorporated by reference to the
exhibits filed with APS Holding
Corporation's Registration Statement on
Form S-8, Registration No. 333-10217)
11.1 Statement re Computation of Income Per Share
12.0 Statement re Computation of Earnings to
Fixed Charges
B. REPORTS ON FORM 8-K
None.
14
<PAGE>
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.
APS HOLDING CORPORATION
Date: September 6, 1996 By: /S/ Mark S. Hoffman
-------------------------------
Mark S. Hoffman
Director, President and Chief
Executive Officer
Date: September 6, 1996 By: /S/ Thomas T. McEntire
-------------------------------
Thomas T. McEntire
Controller
<PAGE>
EXHIBIT 11.1
APS HOLDING CORPORATION
COMPUTATION OF INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 25, JULY 25,
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares of common
stock outstanding 13,730 13,724 13,729 13,723
Shares issuable on assumed exercise
of stock options 190 187 173 189
---------- ---------- ---------- ----------
Weighted average shares for primary
net income per share 13,920 13,911 13,902 13,912
Incremental shares issuable on assumed
exercise of stock options to reflect
maximum dilutive effect 1 1 19 1
---------- ---------- ---------- ----------
Weighted average shares for fully diluted
net income per share 13,921 13,912 13,921 13,913
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income $5,963 $6,061 $7,318 $9,819
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Primary net income per share $0.43 $0.44 $0.53 $0.71
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully diluted net income per share $0.43 $0.44 $0.53 $0.71
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<PAGE>
EXHIBIT 12.0
APS HOLDING CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 25, July 25,
------------------------- -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings before income taxes and interest $16,126 $13,762 $25,313 $23,498
Portion of operating rents deemed
representative of an interest factor 2,329 1,438 4,668 2,714
---------- ---------- ---------- ----------
Earnings before fixed charges $18,455 $15,200 $29,981 $26,212
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Interest expense $6,682 $4,018 $13,683 $7,702
Portion of operating rents deemed
representative of an interest factor 2,329 1,438 4,668 2,714
---------- ---------- ---------- ----------
Fixed charges $9,011 $5,456 $18,351 $10,416
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings to fixed charges 2.0 2.8 1.6 2.5
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FOLLOWING FINANCIAL STATEMENTS OF APS HOLDING CORPORATION: CONSOLIDATED BALANCE
SHEET AS OF JULY 25, 1996 (UNAUDITED) AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JULY 25, 1996 (UNAUDITED) AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-25-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> JUL-25-1996
<CASH> 14,481
<SECURITIES> 0
<RECEIVABLES> 133,377
<ALLOWANCES> 0
<INVENTORY> 304,216
<CURRENT-ASSETS> 487,911
<PP&E> 41,797
<DEPRECIATION> 0
<TOTAL-ASSETS> 614,767
<CURRENT-LIABILITIES> 189,594
<BONDS> 288,290
0
0
<COMMON> 137
<OTHER-SE> 131,226
<TOTAL-LIABILITY-AND-EQUITY> 614,767
<SALES> 451,871
<TOTAL-REVENUES> 451,871
<CGS> 294,380
<TOTAL-COSTS> 294,380
<OTHER-EXPENSES> 135,313
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,683
<INCOME-PRETAX> 11,630
<INCOME-TAX> 4,312
<INCOME-CONTINUING> 7,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,318
<EPS-PRIMARY> .53
<EPS-DILUTED> 0
</TABLE>
