================================================================================
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, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 022318
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 13,790,110 shares of the Registrant's Class A Common Stock
outstanding as of the close of business on September 1,1998. There were no
shares outstanding of the Registrant's Class B Common Stock.
================================================================================
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
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 12
Item 3. Defaults Upon Senior Securities 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
--------
(IN THOUSANDS)
JANUARY 31,
JULY 25, 1998 1998
------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 11,832 $ 4,574
Accounts and notes receivable, less allowance
of $18,383 and $18,155 .......................... 98,792 99,223
Inventories ...................................... 243,715 253,394
Prepaid expenses and other current assets ........ 36,334 20,071
--------- ---------
Total current assets ....................... 390,673 377,262
Property and equipment, less accumulated
depreciation of $36,150 and $35,701 ............... 41,723 41,054
Notes receivable, less current portion ............. 19,966 21,497
Intangible assets, net ............................. 31,611 32,499
Deferred costs and other assets .................... 11,402 14,599
--------- ---------
$ 495,375 $ 486,911
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Book overdrafts .................................. $ 10,682 $ --
Current maturities of long-term debt ............. 263,034 328,034
Accounts payable ................................. 3,408 87,964
Accrued liabilities .............................. 47,740 48,255
--------- ---------
Total current liabilities .................. 324,864 464,253
--------- ---------
Long-term debt, less current maturities ............ 1,043 1,207
Deferred income and other liabilities .............. 2,843 2,837
--------- ---------
Total long-term liabilities ................ 324,864 4,044
--------- ---------
Liabilities subject to settlement under the
reorganization case ............................... 195,179 --
--------- ---------
Commitments and contingencies (Note 6) ............. -- --
Redeemable preferred stock ......................... -- --
Stockholders' equity (deficit):
Class A common stock ............................. 138 138
Class B common stock ............................. -- --
Additional paid-in capital ....................... 155,601 155,601
Accumulated deficit .............................. (184,027) (137,005)
Treasury stock, at cost .......................... (120) (120)
Unrealized loss on available-for-sale securities . (146) --
--------- ---------
Total stockholders' equity (deficit) ....... (28,554) 18,614
--------- ---------
$ 495,375 $ 486,911
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE SIX SIX
MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED
JULY 25, JULY 25, JULY 25, JULY 25,
1998 1997 1998 1997
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales .................................. $ 175,578 $ 220,391 $ 337,332 $ 432,134
Cost of goods sold ......................... 126,905 150,755 240,689 290,755
--------- --------- --------- ---------
Gross profit ............................... 48,673 69,636 96,643 141,379
Selling, general and
administrative expenses ................... 59,228 68,618 118,470 135,893
Reorganization expenses .................... 3,038 -- 6,358 --
Asset impairment and restructuring charge .. 7,015 8,726 9,435 8,726
--------- --------- --------- ---------
Operating loss ............................. (20,608) (7,708) (37,620) (3,240)
Interest income ............................ 922 1,258 1,838 2,523
Other income ............................... 50 50 100 100
--------- --------- --------- ---------
Loss before interest expense and
income taxes .............................. (19,636) (6,400) (35,682) (617)
Interest expense ........................... 5,813 7,747 11,270 15,064
--------- --------- --------- ---------
Loss before income taxes ................... (25,449) (14,147) (46,952) (15,681)
Income tax provision (benefit) ............. 35 (4,497) 70 (5,095)
--------- --------- --------- ---------
Net loss ................................... $ (25,484) $ (9,650) $ (47,022) $ (10,586)
========= ========= ========= =========
Basic and Diluted loss per share ........... $ (1.85) $ (0.70) $ (3.41) $ (0.77)
Basic weighted average shares outstanding .. 13,790 13,780 13,790 13,775
Dilutive impact of stock options ........... -- -- -- --
Dilutive weighted average shares outstanding 13,790 13,780 13,790 13,775
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JULY 25, 1998
---------------
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CLASS A ADDITIONAL TREASURY STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED STOCK, UNREALIZED EQUITY
SHARES AMOUNT CAPITAL DEFICIT AT COST LOSS (DEFICIT)
---------- --------- ---------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period........................ 13,790 $ 138 $ 155,601 $(137,005) $ (120) -- $ 18,614
Unrealized loss on
available-for-sale
securities.................... -- -- -- -- -- (146) (146)
Net loss for the period ....... -- -- -- (47,022) -- -- (47,022)
--------- --------- --------- --------- --------- --------- ---------
Balance at July 25, 1998 ...... 13,790 $ 138 $ 155,601 $(184,027) $ (120) $ (146) $ (28,554)
========= ========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 25, 1998 JULY 25, 1997
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $ (47,022) $ (10,586)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for asset impairment and restructuring charges ..... 9,435 8,726
Inventory writedown .......................................... 4,666 1,268
Depreciation and amortization ................................ 6,389 6,342
Amortization of debt issuance costs .......................... 394 591
Provision for bad debts ...................................... 5,596 3,670
Income from supply agreement ................................. (100) (100)
Deferred income taxes ........................................ -- (5,227)
Changes in working capital, net of
liabilities subject to settlement under the
reorganization case ......................................... (17,229) (10,557)
--------- ---------
Net cash used in operating activities ........................ (37,871) (5,873)
--------- ---------
Cash flows from investing activities:
Investment in notes receivable ............................... (795) (8,504)
Proceeds from repayment of notes receivable .................. 1,825 7,229
Proceeds from disposition of assets .......................... 181 --
Business acquisitions, net of cash acquired .................. -- (1,839)
Capital expenditures ......................................... (1,600) (4,435)
--------- ---------
Net cash used in investing activities .................. (389) (7,549)
--------- ---------
Cash flows from financing activities:
Change in book overdrafts .................................... 10,682 670
Borrowings under revolving credit agreement .................. 177,400 25,420
Repayments under revolving credit agreement .................. (142,400) (6,180)
Retirement of long-term debt ................................. (164) (7,637)
Exercise of stock options .................................... -- 240
--------- ---------
Net cash provided by financing activities .............. 45,518 12,513
--------- ---------
Net increase (decrease) in cash and cash equivalents ............ 7,258 (909)
Cash and cash equivalents at beginning of period ................ 4,574 13,370
--------- ---------
Cash and cash equivalents at end of period ...................... $ 11,832 $ 12,461
========= =========
Supplemental disclosures:
Cash paid for interest .................................... $ 9,768 $ 14,128
Cash refunded for income taxes ............................ $ (406) $ (4,104)
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. PETITION FOR REORGANIZATION UNDER CHAPTER 11:
On February 2, 1998, APS Holding Corporation ("APS Holding") and its
direct and indirect subsidiaries (collectively referred to as "the Company")
filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code
("Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware ("Bankruptcy Court"). Since February 2, 1998, the Company has been
operating as a debtor in possession ("DIP").
As a debtor in possession, the Company is authorized to operate its
business, but may not engage in transactions outside of the normal course of
business without approval, after notice and hearing, of the Bankruptcy Court. A
creditors' committee was formed on February 13, 1998, which has the right to
review and object to business transactions outside the ordinary course and
participate in any plan or plans of reorganization.
The consolidated financial statements do not purport to show (a) the
realizable value of assets on a liquidation basis or their availability to
satisfy liabilities; (b) ultimate pre-petition liability amounts that may be
allowed for claims or contingencies or the status and priority thereof; (c) the
effect of any changes that may be made to the capitalization of the Company; or
(d) the effect of any changes that may be made in the Company's business
operations. The outcome of these matters is not presently determinable. The
continued viability of the Company under Chapter 11 and subsequent to Chapter 11
is dependent upon, among other factors, the outcome of proposed sales of assets
of the Company now under consideration, which will be subject to Bankruptcy
Court approval. If significant asset sales are completed, the Company would not
have the ability to emerge as an independent entity and might have to sell all
its assets in the Chapter 11 Proceedings. If the Company is unable to complete
the asset sales, it may not be able to emerge from the Chapter 11
reorganization. See Note 8 below.
As of February 2, 1998, actions to collect pre-petition indebtedness were
stayed and other contractual obligations could not be enforced against the
Company. Certain pre-petition liabilities are subject to approval by the
Bankruptcy Court for payment in the ordinary course of business.
The Bankruptcy Code allows the debtor to either assume or reject certain
executory contracts, subject to Bankruptcy Court approval. Parties to contracts,
which are rejected, are entitled to file claims for losses or damages sustained
as a result of the rejection.
The principal categories of claims classified as "Liabilities subject to
settlement under the reorganization case" are identified below (in thousands):
Subordinated notes and interest ......... $106,267
Accounts Payable ........................ 88,912
--------
$195,179
========
Reorganization expenses, which primarily represent professional fees,
incurred during the three months and six months ended July 25, 1998 totaled
approximately $3.0 million and $6.4 million, respectively. Cash paid for these
professional fees during the three months and six months ended July 25, 1998 was
approximately $3.5 million and $4.5 million, respectively.
7
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. BASIS OF PRESENTATION:
The consolidated balance sheet of the Company at January 31, 1998 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at July 25, 1998, the consolidated
statements of operations for the three months and six months ended July 25, 1998
and 1997, the consolidated statement of changes in stockholders' equity
(deficit) for the six months ended July 25, 1998 and the consolidated statements
of cash flows for the six months ended July 25, 1998 and 1997 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 of the
Company have been made. The results of operations for the three months and six
months ended July 25, 1998 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
31, 1998.
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation. Such reclassifications
did not affect net income, stockholders' equity (deficit) or cash flows for any
period.
3. NEW ACCOUNTING PRINCIPLES:
The Company will adopt SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," no later than the fourth quarter of Fiscal
Year 1999. SFAS No. 131 establishes standards for the manner in which public
business enterprises report selected information about operating segments.
The Company will adopt the disclosure requirements of SFAS No. 132,
"EMPLOYER'S DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS", in
the fourth quarter of Fiscal Year 1999. SFAS No. 132 revises disclosure
requirements for pension and postretirement benefit plans so as to standardize
certain disclosures and eliminate certain other disclosures no longer deemed
useful. SFAS No. 132 does not change the measurement or recognition criteria for
such plans.
The Company will adopt SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES," no later than the first quarter of Fiscal
Year 2001. SFAS No. 133 establishes accounting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS No. 133, all derivatives will
be recognized as either assets or liabilities and measured at fair value. The
Company is currently studying this newly-issued accounting rule, and the impact
of adopting SFAS No. 133, if any, has not yet been determined.
8
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
4. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES:
During the six months ended July 25, 1998, the Company developed a
business plan as required by the covenants of its Debtor-in-Possession (DIP)
Financing Facility. In conjunction with such plan, the Company has closed 4
Distribution Centers (two of which have been converted to redistribution
centers) and 145 Big-A and Big-A Express Company-owned stores during the six
months ended July 25, 1998. Aggregate revenue from such facilities was
approximately $37.2 million during the six months ended July 25, 1998, compared
to approximately $74.8 million in the corresponding period of the prior fiscal
year. Aggregate losses before income taxes and after overhead allocations from
such facilities were approximately $6.8 million for the six months ended July
25, 1998, compared to approximately $1.0 million in the corresponding period of
the prior fiscal year. As a result of such program, during the six months ended
July 25, 1998, the Company recorded restructuring charges of approximately $10.9
million. Such charges consisted of approximately $1.8 million of employee
severance benefits related to personnel reductions of approximately 870
employees (primarily field staff employees), approximately $6.1 million for
future lease and related obligations and approximately $3.0 million for costs to
close the facilities. In addition, in connection with such restructuring
program, approximately $4.7 million was charged to cost of goods sold during the
six months ended July 25, 1998 for inventory write-offs expected in connection
with such facility closures and approximately $2.7 million was charged to
selling, general, and administrative expenses for incremental bad debt and asset
write offs expected with such closures.
In conjunction with the above mentioned charges, the Company's financial
statements at July 25, 1998 include liabilities and reserves in the aggregate
amount of $16.5 million for costs related to the closure of such facilities
during the quarters ended April 25, 1998 and July 25, 1998. During the six
months ended July 25, 1998, approximately $1.8 million of costs were charged to
the liabilities and reserves.
The Company's financial statements at July 25, 1998 also include
liabilities and reserves in the aggregate amount of $2.2 million for costs
related to the closure and consolidation of certain facilities during the
quarter ended July 25, 1997. During the six months ended July 25, 1998,
approximately $.5 million was charged to the liabilities and reserves.
The Company's financial statements at July 25, 1998 also include
liabilities and reserves in the aggregate amount of $1.7 million for costs
related to the closure and consolidation of certain facilities and
administrative functions pursuant to programs of rationalization implemented by
the Company during the fiscal year ended January 27, 1996 in connection with the
PI Acquisition. The Company attained a majority of the program's objectives
during the year ended January 25, 1997 and expects final completion of such
programs during the Fiscal Year 1999. During the six months ended July 25, 1998,
the Company charged approximately $.1 million against such liability and
reserves and reduced the reserve by $1.1 million due to a change in estimated
closure costs.
The $1.1 million reduction in the reserve mentioned above, along with
approximately $.4 million of reductions in other prior period reserves, reduced
the current period restructuring charge of $10.9 million to $9.4 million.
5. DEBTOR IN POSSESSION FINANCING AND SENIOR SUBORDINATED NOTES:
On February 2, 1998, the Bankruptcy Court gave approval on an interim
basis for $45 million of a $100 million DIP financing facility ("DIP Financing")
with a syndicate of bank lenders led by The Chase Manhattan Bank ("Senior
Lenders"). On February 26, 1998, the Bankruptcy Court gave final approval to the
facility. The amount of new loans that may be outstanding at any time may not
exceed a maximum that varies from month to month ranging from $40 million to $65
million (exclusive of letters of credit).
9
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
The DIP financing approved by the Bankruptcy Court is provided for in a
new Revolving Credit, Term Loan, Guarantee Agreement ("DIP Financing Facility").
The DIP Financing Facility includes the new DIP financing referred to above
("Tranche A") and approximately $227.6 million of borrowings that were
outstanding under the previous revolving credit facility and term loan
facilities ("Previous Bank Credit Agreement"), which were refinanced in the
amount of $227.6 million ("Tranche B") and combined with the new DIP Financing
Facility into a single post-filing date facility. Unused borrowing availability
under the DIP Financing Facility at July 25, 1998 was approximately $30.0
million. At July 25, 1998, $262.6 million of outstanding borrowings under the
DIP Financing Facility are classified as a current liability. The Tranche A
loans are available on a revolving loan basis, and the Tranche A facility
includes a $20 million sub-facility for letters of credit, subject to certain
restrictions. The DIP Financing Facility has a superpriority administrative
claim as well as a first priority security interest in and lien upon all of the
Company's assets. The Tranche A and B borrowings bear interest at the Company's
option of either the bank agent's stated base rate plus a margin of 1.5% or at
LIBOR plus a margin of 2.5% for Tranche A borrowings or 2.75% for Tranche B
borrowings. The weighted average interest rate borne by the DIP Financing
Facility was 8.54% as of July 25, 1998. The DIP Financing Facility has a final
maturity date of January 31, 1999 and includes various covenants and
restrictions on the Company and its business. While the Company believes that it
has been in compliance with its covenants through the date of this filing, as a
result of the continuation of unfavorable operational conditions, the Company
sought and was granted, in August 1998, a waiver of any potential violations of
its EBITDA covenants for July and August of 1998. There were also other
modifications to existing covenants, including further limitations on peak
borrowing amounts and permitted indebtedness and capital expenditures. There
continues to be a probability that without further covenant modifications, the
Company would violate certain covenant requirements in the current fiscal year,
which would put the Company in default of the DIP Financing Facility.
While operating during the Chapter 11 Proceedings, the Company is stayed
from paying interest except on certain debts as authorized by the Bankruptcy
Court. During such time as the Company is operating under Chapter 11, it will
only report interest expense to the extent that such interest will be paid
during the Chapter 11 Proceedings at the direction of the Bankruptcy Court. The
amount of interest in conjunction with its $100 million Senior Subordinated
Notes which has not been accrued as a result of the Chapter 11 Proceedings
amounted to approximately $5.9 million for the six months ended July 25,
1998.
6. LITIGATION:
The Company is involved in various claims and disputes arising in the
normal course of business, including the matter of BARRY S. LAMM AND LAMM AUTO
STORES, INC. V. PARTS, INC., PARTS PLUS, ET AL, which was filed in The Circuit
Court of Mobile County, Alabama on June 21, 1996. The plaintiff in such case
seeks both compensatory and punitive damages in making a number of claims,
including both willful and reckless misrepresentation, suppression of material
fact, promissory fraud (all in violation of the Code of Alabama), and
conspiracy, breach of contract and intentional interference with contractual or
business relationships, all in connection with the operation of an automotive
parts business by the plaintiff while a customer of Parts, Inc. The Company
entered into an agreement with the plaintiff's counsel to settle this action for
a payment of $2.35 million. As a result of the Company's bankruptcy proceeding,
no payment was paid and this action, as to the Company, is now stayed. The
Company believes that the costs of defending such action as well as the
settlement, are the subject of a contractual indemnification by GKN Parts. The
Company has made a claim for indemnity to GKN Parts, which has been denied.
10
<PAGE>
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Upon the commencement of the Chapter 11 Proceedings, an automatic stay
went into effect which enjoins most forms of civil litigation (including those
by private parties) which either were pending on the filing date or which have
yet to be commenced but relate to liabilities incurred prior to the filing date.
7. COMPREHENSIVE INCOME:
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", in the first
quarter of the year ended January 30, 1999 ("Fiscal Year 1999"). SFAS No. 130
requires companies to disclose comprehensive income separately of net income
from operations. Comprehensive income is defined as the change in equity during
a period from transactions and other events and circumstances from non-ownership
sources. It includes all changes in equity during a period, except those
resulting from investments by owners and distributions to owners.
Comprehensive income for the three months and six months ended July 25,
1998 and 1997 consists of the following (in thousands):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JULY 25, ENDED JULY 25,
---------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net loss .................. $(25,484) $ (9,650) $(47,022) $(10,586)
Unrealized losses on
investments .............. (128) (1,656) (146) (1,585)
-------- -------- -------- --------
Comprehensive loss ........ $(25,612) $(11,306) $(47,168) $(12,171)
======== ======== ======== ========
8. SUBSEQUENT EVENTS:
On August 21, 1998, the Company filed with the Bankrupcy Court a motion to
approve the proposed sale of its Ocala, Florida distribution center to The Parts
Source, Inc.
On September 10, 1998, the Company entered into agreements for the sale of
nine distribution centers and related company-owned stores to General Parts,
Inc. ("GPI") and BWP Distributors, Inc. ("BWP"), which operate under the brand
name "Carquest". GPI will acquire the Company's distribution centers in
Albuquerque, New Mexico, Phoenix, Arizona, Salt Lake City, Utah, Denver,
Colorado, Great Bend, Kansas, Omaha, Nebraska, Indianapolis, Indiana and
Winchester, Virginia. BWP will acquire the Company's distribution center in
Philidelphia, Pennsylvania.
The proposed sales described in the two preceding paragraphs are expected
to realize in the aggregate in excess of $100 million. The funds will be used to
reduce the Company's bank debt. The sales are subject to Bankruptcy Court
approval and certain other conditions. Amounts realized by the Company on these
asset sales will be less than the carrying value of the tangible and related
allocated intangible assets being sold, resulting in a loss for financial
reporting purposes.
The Company may also submit to the Bankrupcy Court after the date of this
filing offers to purchase other assets.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Since its initial public offering in 1993, the Company pursued aggressive
acquisition and Installers Service Warehouses ("ISW") expansion programs in
order to obtain increased market share. These programs consumed significant
financial resources and resulted in the Company becoming highly leveraged. The
Company had attempted to address these problems, early during fiscal 1998, by
closing unprofitable locations, reducing headcount and reducing inventory.
Notwithstanding these initiatives, however, these problems, in conjunction with
competitive pressures in the industry, shrinking cash flow, and large debt
payments, led the Company to file a voluntary petition under Chapter 11 of the
United States Bankruptcy Code in the United States District Court for the
District of Delaware on February 2, 1998. The Company is presently operating its
business as a debtor in possession in such proceedings (the "Chapter 11
Proceedings").
RESULTS OF OPERATIONS
Presented below is a summary of unaudited financial operating information
for the three months and six months ended July 25, 1998 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 25, SIX MONTHS ENDED JULY 25,
------------------------------------------------ -------------------------------------------
1998 % 1997 % 1998 % 1997 %
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .............. $ 175,578 100.0 $ 220,391 100.0 $ 337,332 100.0 $ 432,134 100.0
Cost of goods sold ..... 126,905 72.3 150,755 68.4 240,689 71.4 290,755 67.3
Gross profit ........... 48,673 27.7 69,636 31.6 96,643 28.6 141,379 32.7
Selling, general and
administrative
expenses .............. 59,228 33.7 68,618 31.1 118,470 35.1 135,893 31.5
Reorganization
expenses .............. 3,038 1.7 -- -- 6,358 1.9 -- --
Asset impairment and
restructuring charge .. 7,015 4.0 8,726 4.0 9,435 2.8 8,726 2.0
Operating loss ......... (20,608) (11.7) (7,708) (3.5) (37,620) (11.2) (3,240) (0.8)
Net loss ............... (25,484) (14.5) (9,650) (4.4) (47,022) (13.9) (10,586) (2.5)
</TABLE>
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Net sales for the three months and six months ended July 25, 1998
decreased $44.8 million or 20.3% and $94.8 million or 21.9%, respectively, from
the corresponding periods of the prior fiscal year. Such decrease was primarily
attributable to facility closures and one less week included in Fiscal Year 1999
operating results as well as a decrease in sales from the Company's traditional
businesses (i.e. distribution centers and Big-A Company-owned stores). The
Company's Big-A and Big-A Express same store sales for the three months and six
months ended July 25, 1998 decreased 7.4% and 8.0%, respectively, due to
increasing competitive pressures and to the effects of the Chapter 11
Proceedings.
Cost of goods sold consists primarily of the purchase cost of products
sold. Cost of goods sold for the three months and six months ended July 25,
1998, decreased $23.9 million or 15.8% and $50.1 million or 17.2%, respectively,
from the corresponding periods of the prior fiscal year. The dollar decrease in
cost of goods sold principally resulted from the decrease in sales discussed
above. In addition, as a result of the Chapter 11 Proceedings, a number of
vendors reduced the amounts of cash discounts offered to the Company in
conjunction with purchases made during the three months and six months ended
July 25, 1998. Cost of goods sold as a percentage of net sales for the three
months and six months ended July 25, 1998 increased compared to that of the
corresponding periods of the prior year due to the reduction in cash discounts
offered to the Company by a number
12
<PAGE>
of vendors, a change in the Company's sales mix between stores and the
distribution centers and a lower gross margin in all of the Company's businesses
due to the effects of the Chapter 11 Proceedings and increasing competitive
pressures. In addition, cost of goods sold for the three months and six months
ended July 25, 1998, includes charges of approximately $3.6 million and $4.7
million, respectively, for inventory write-offs expected in connection with
facility closures.
Selling, general and administrative expenses, which include depreciation
and amortization, for the three months and six months ended July 25, 1998
decreased $9.4 million or 13.7% and $17.4 million or 12.8%, respectively,
compared to the corresponding periods of the prior year. The dollar decrease in
selling, general and administrative expenses resulted from the decline in sales
discussed above offset by an increase in both bad debt expense and Year 2000
system expenses. Selling, general and administrative expenses for the three
months and six months ended July 25, 1998 as a percentage of sales increased
over the corresponding periods of the prior year due to Year 2000 system
expenses, increased bad debt expense, and the impact of fixed costs that were
not reduced in proportion to the reduction in sales. In addition, selling,
general and administrative expenses for the three months and six months ended
July 25, 1998 includes charges of approximately $2.2 million and $2.7 million,
respectively, in connection with facility closures.
During the six months ended July 25, 1998, the Company developed a
business plan as required by the covenants of the DIP Financing Facility. In
conjunction with such plan, the Company closed 4 Distribution Centers (two of
which have been converted to redistribuiton centers) and 145 Big-A and Big-A
Express Company-owned stores during the six months ended July 25, 1998.
Aggregate revenue from such facilities was approximately $37.2 million during
the six months ended July 25, 1998, compared to approximately $74.8 million in
the corresponding period of the prior fiscal year. Aggregate losses before
income taxes and after overhead allocations from such facilities were
approximately $6.8 million for the six months ended July 25, 1998, compared to
approximately $1.0 million in the corresponding period of the prior fiscal year.
As a result of such program, during the three months and six months ended July
25, 1998, the Company recorded restructuring charges of approximately $8.5
million and $10.9 million, respectively. Such charges consisted of approximately
$1.5 million and $1.8 million, respectively, of employee severance benefits
related to personnel reductions of approximately 680 and 870 employees
(primarily field staff employees), respectively, approximately $4.8 million and
$6.1 million, respectively, for future lease and related obligations and
approximately $2.2 million and $3.0 million, respectively, for costs to close
the facilities. These changes were netted with credits totaling approximately
$1.5 million resulting from changes in estimated closure costs associated with
reserves recorded in prior periods. Consequently, restructuring charges
reflected in the accompanying consolidated statements of operations for the
three and six months ended July 25, 1998 totaled approximately $7.0 million and
$9.4 million, respectively. In addition, in connection with such restructuring
program, approximately $3.6 million and $4.7 million was charged to cost of
goods sold during the three months and six months ended July 25, 1998,
respectively, for inventory write-offs expected in connection with facility
closures and approximately $2.2 million and $2.7 million, respectively, was
charged to selling, general, and administrative expenses for incremental bad
debt and asset write offs expected with such closures.
Operating loss for the three months and six months ended July 25,1998 is
approximately $20.6 million (11.7% of net sales) and $37.6 million (11.2% of net
sales), respectively, compared to operating loss of $7.7 million (3.5% of net
sales) and $3.2 million (.8% of net sales), respectively, in the corresponding
periods of the prior year. The decrease is primarily due to the factors
discussed above.
Interest expense for the three months and six months ended July 25, 1998
was $5.8 million (3.3% of net sales) and $11.3 million (3.3% of net sales),
respectively, compared to $7.7 million (3.5% of net sales) and $15.1 million
(3.5% of net sales), respectively, for the corresponding periods of the prior
year. The decrease is primarily due to the Company's stay from paying interest
on $100 million in subordinated debt during the Chapter 11 Proceedings. The
amount of interest which has not been accrued as a result of the Chapter 11
Proceedings is approximately $3.0 million and $5.9 million for the three
month and six month periods ended July 25, 1998, respectively.
No income tax benefit has been recorded during the three months and six months
ended July 25, 1998 as the Company's losses provided no current tax benefit and
the Company's net deferred tax asset is fully reserved in accordance with the
provisions of SFAS No. 109.
Net loss for the three months and six months ended July 25, 1998 was $25.5
million and $47.0 million, respectively, compared to a net loss of $9.7 million
and $10.6 million, respectively, for the corresponding periods of the prior
year. The increase in net loss was primarily a result of the factors discussed
above.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CHAPTER 11 PROCEEDINGS. The matters described under this caption
"Liquidity and Capital Resources", to the extent that they relate to future
events or expectations, may be significantly affected by the Chapter 11
Proceedings. Those proceedings will involve, or result in, various restrictions
on the Company's activities, limitations on financing, the need to obtain
Bankruptcy Court approval for various matters and uncertainty as to
relationships with vendors, suppliers, customers and others with whom the
Company may conduct or seek to conduct business. In particular, many vendors are
providing less favorable terms than those existing prior to the Chapter 11
Proceedings and the Company's key vendors, representing a majority of the
Company's annual purchases, are requiring cash payments. These less favorable
terms include shortening, and in some cases, especially with those vendors with
whom the Company purchases the most product, elimination of payment terms and
reduction in various other purchasing conditions and support. While the Company
will seek to obtain more advantageous terms as the proceedings progress, there
can be no assurance that it will be successful in this regard.
CASH FLOWS. For the six months ended July 25, 1998, operating activities
utilized net cash of approximately $37.9 million, resulting from a $47.0 million
net loss and a working capital adjustment of $17.2 million, offset by
adjustments for non cash items of $26.3 million. Investing activities utilized
$.4 million of cash, principally consisting of capital expenditures offset by
the net proceeds from notes receivable. Financing activities provided $45.5
million of cash, primarily from borrowings under the DIP Financing Facility.
For the six months ended July 25, 1997, operating activities utilized net
cash of approximately $5.9 million, due primarily to seasonal increases in
accounts receivable and decreases in accounts payable resulting from payments to
the Company's suppliers pursuant to deferred payment terms obtained in
connection with the PI acquisition. Such increases in accounts receivable and
decreases in accounts payable were partially offset by decreases in inventory
resulting from facility closures and the Company's working capital management
initiatives. Investing activities utilized $7.5 million of cash, principally
consisting of capital expenditures and investments in customer notes receivable.
Financing activities provided $12.5 million of cash, primarily from increased
long-term borrowings.
WORKING CAPITAL. Working capital, (which excludes liabilities subject to
settlement under the reorganization case) at July 25, 1998, was $65.8 million,
including $11.8 million in cash and cash equivalents, compared to a working
capital deficit of $87.0 million at January 31, 1998, including $4.6 million of
cash and cash equivalents. The increase in working capital is due primarily to
the reclassification of current pre-petition liabilities to "Liabilities subject
to settlement under reorganization case".
DEBTOR IN POSSESSION FINANCING. On February 2, 1998, the Bankruptcy Court
gave approval on an interim basis for $45 million of a $100 million DIP
financing facility ("DIP Financing") with a syndicate of bank lenders led by The
Chase Manhattan Bank ("Senior Lenders"). On February 26, 1998, the Bankruptcy
Court gave final approval to the facility. The amount of new loans that may be
outstanding at any time may not exceed a maximum that varies from month to
month, ranging from $40 million to $65 million (exclusive of letters of credit).
The DIP financing approved by the Bankruptcy Court is provided for in a
new Revolving Credit, Term Loan and Guarantee Agreement ("DIP Financing
Facility"). The DIP Financing Facility includes the new DIP financing referred
to above ("Tranche A") and approximately $227.6 million of borrowings that were
outstanding under the previous revolving credit facility and term loan
facilities ("Previous Bank Credit Agreement") which were refinanced in the
amount of $227.6 million ("Tranche B") and combined with the new DIP Financing
Facility into a single post-filing date facility. At July 25, 1998, $262.6
million of outstanding borrowings under the DIP Financing Facility are
classified as a current liability. Unused borrowing availability under the DIP
Financing Facility at July 25, 1998 was approximately $30.0 million. The Tranche
A loans are available on a revolving loan basis, and the Tranche A facility
includes a $20 million sub-facility for letters of credit, subject to certain
restrictions. The DIP
14
<PAGE>
Financing Facility has a superpriority administrative claim as well as first
priority security interest in and lien upon all of the Company's assets. The
Tranche A and B borrowings bear interest at the Company's option of either the
bank agent's stated base rate plus a margin of 1.5% or at LIBOR plus a margin of
2.5% for Tranche A borrowings or 2.75% for Tranche B borrowings. The weighted
average interest rate borne by the DIP Financing Facility was 8.54% as of July
25, 1998. The DIP Financing Facility has a final maturity date of January 31,
1999 and includes various covenants and restrictions on the Company and its
business. While the Company believes that it has been in compliance with its
covenants through the date of this filing, as a result of the continuation of
unfavorable operational conditions the Company sought and was granted, in August
1998, a waiver of any potential violations of its EBITDA covenants for July and
August of 1998. There were also other modifications to existing covenants,
including further limitations on peak borrowing amounts and permitted
indebtedness and capital expenditures. There continues to be a probability that
without further covenant modifications, the Company would violate certain
covenant requirements in the current fiscal year, which would put the Company in
default of the DIP Financing Facility.
CAPITAL EXPENDITURES AND ACQUISITIONS. Capital expenditures, excluding new
business acquisitions, for both the six months ended July 25, 1998 and July 25,
1997 were approximately $1.6 million and $4.4 million, respectively. Permitted
capital expenditures for Fiscal Year 1999 are limited by the modified covenant
requirements of the DIP Financing Facility. As a result, the Company currently
has limited planned capital expenditures for the remainder of the year. The
Company has prepared a plan of action to modify its internally developed
software over the next two years to accommodate the "Year 2000" dating changes
necessary to permit correct recording of year dates for 2000 and later years.
The Company had proposed to incur approximately $7.0 million of costs to develop
and implement such plan, the costs of which would be expensed in later periods,
but the timing and magnitude of such expenditures is likely to change as the
Company continues to explore the sale of assets. The Company has incurred $3.0
million of expenses to date in conjunction with its Year 2000 project. If the
Company or any of its significant suppliers or customers does not successfully
and timely complete such changes, the Company's business could be materially
affected. For the six months ended July 25, 1998, the Company has not made any
cash expenditures for business acquisitions. The Company has not made and does
not intend to make any significant acquisitions during Fiscal Year 1999.
SOURCES OF LIQUIDITY. The principal sources of liquidity for the Company's
operating requirements have been borrowings under the DIP Financing Facility. In
the future, sources of liquidity will result from both borrowings under the DIP
Financing Facility and from proceeds from asset sales. While the Company expects
that such sources will provide sufficient working capital to operate its
business, there can be no assurance that such sources will prove to be
sufficient. While the Company believes that it has been in compliance with its
covenants through the date of this filing, as a result of the continuation of
unfavorable operational conditions the Company sought and was granted, in August
1998, a waiver of any potential violations of its EBITDA covenants for July and
August of 1998. There were also other modifications to existing covenants,
including further limitations on peak borrowing amounts and permitted
indebtedness and capital expenditures. There continues to be a probability that
without further covenant modifications, the Company would violate certain
covenant requirements in the current fiscal year, which would put the
Company in default of the DIP Financing Facility.
BUSINESS INITIATIVES
As indicated above, the Company has pursued aggressive acquisition and ISW
expansion programs since its initial public offering in 1993. Such programs and,
particularly with regard to Fiscal Year 1997, integrating PI into the Company's
business, consumed significant financial and operating resources and
demanded extensive managerial focus and attention. During Fiscal Year 1998, as a
result of the Chapter 11 Proceedings, the Company has re-focused its efforts and
resources towards cost reductions, closing facilities and disposing of
certain assets to achieve the goals of the Chapter 11 Proceedings.
15
<PAGE>
On August 21, 1998, the Company filed with the Bankruptcy Court a motion
to approve the proposed sale of its Ocala, Florida distribution center to The
Parts Source, Inc.
On September 10, 1998, the Company entered into agreements for the sale of
nine distribution centers and related company-owned stores to General Parts,
Inc. ("GPI") and BWP Distributors, Inc. ("BWP"), which operate under the brand
name "Carquest". GPI will acquire the Company's distribution centers in
Albuquerque, New Mexico, Phoenix, Arizona, Salt Lake City, Utah, Denver,
Colorado, Great Bend, Kansas, Omaha, Nebraska, Indianapolis, Indiana and
Winchester, Virginia. BWP will acquire the Company's distribution center in
Philidelphia, Pennsylvania.
The proposed sales described in the two preceding paragraphs are expected
to realize in the aggregate in excess of $100 million. The funds will be used to
reduce the Company's bank debt. The sales are subject to Bankruptcy Court
approval and certain other conditions. Amounts realized by the Company on these
asset sales will be less than the carrying value of the tangible and related
allocated intangible assets being sold, resulting in a loss for financial
reporting purposes.
The Company may also submit to the Bankruptcy Court after the date of this
filing offers to purchase other assets.
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. 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 STANDARDS
The Company will adopt SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," no later than the fourth quarter of Fiscal
Year 1999. SFAS No. 131 establishes standards for the manner in which public
business enterprises report selected information about operating segments.
The Company will adopt the disclosure requirements of SFAS No. 132,
"EMPLOYER'S DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS", in
the fourth quarter of Fiscal Year 1999. SFAS No. 132 revises disclosure
requirements for pension and postretirement benefit plans as to standardize
certain disclosures and eliminate certain other disclosures no longer deemed
useful. SFAS No. 132 does not change the measurement or recognition criteria for
such plans.
The Company will adopt SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES," no later than the first quarter of Fiscal
Year 2001. SFAS No. 133 establishes accounting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS No. 133, all derivatives will
be recognized as either assets or liabilities and measured at fair value. The
Company is currently studying this newly-issued accounting rule, and the impact
of adopting SFAS No. 133, if any, has not yet been determined.
FORWARD LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts are forward-looking statements that
involve a number of risks and uncertainties. These forward-looking statements
include, without limitation, the statements as to management's or the Company's
expectations or beliefs found under the captions "Results of Operations,"
"Liquidity and Capital Resources" and "Business
16
<PAGE>
Initiatives" in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations". 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,
particularly as a result of the Chapter 11 Proceedings. Forward-looking
statements are made based upon management's current expectations and beliefs
concerning future developments and their potential effects upon the Company.
There can be no assurance that future developments will be in accordance with
management's expectations or that the effect of future developments on the
Company will be those anticipated by management. The following important
factors, and those important factors described elsewhere in this Quarterly
Report (including, without limitation, those discussed under the captions
"Liquidity and Capital Resources--Sources of Liquidity" and "Business
Initiatives" in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations") or in other Securities and Exchange
Commission filings of the Company, as well as the effects of the Chapter 11
Proceedings, could affect (and in some cases have affected) the Company's actual
results and could cause such results to differ materially from estimates or
expectations reflected in such forward-looking statements made by, or on behalf
of, the Company.
o The Company is highly leveraged, with substantial existing indebtedness
and, consequently, is subject to significant principal and interest payment
obligations. The Company's ability to make scheduled payments of principal
or interest on, or to refinance, its indebtedness will depend on its future
operating performance and cash flow, which are subject to prevailing
economic conditions, prevailing interest rate levels and financial,
competitive, business and other factors beyond its control. The degree to
which the Company is leveraged could have important consequences,
including: (i) the Company's future ability to obtain additional financing
for working capital or other purposes may be limited; (ii) certain of the
Company's borrowings are at variable rates of interest, which could cause
the Company to be vulnerable to increases in interest rates; and, (iii) the
Company may be more vulnerable to economic downturns and may be limited in
its ability to respond to competitive pressures.
o The Company filed for Chapter 11 reorganization on February 2, 1998. The
Company is uncertain, at this time, about its ability to effect sales of
assets in such proceedings or its ability to effect a plan of
reorganization and the impact of such matters on various parties. The
continued viability of the Company under Chapter 11 and subsequent to
Chapter 11 is dependent upon, among other factors, the outcome of proposed
sales of assets, which will be subject to Bankruptcy Court approval. If
significant asset sales are completed, the Company would not have the
ability to emerge as an independent entity and might have to sell its
assets in the Chapter 11 Proceedings. If the Company is unable to complete
the asset sales it may not be able to eemrge from the Chapter 11
reorganization. See "Business Initiatives" above.
o The DIP Financing Facility contains numerous operating covenants that
limit the discretion of the Company's management with respect to certain
business matters. These covenants place significant restrictions on, among
other things, the ability of the Company to incur additional indebtedness,
to create liens or other encumbrances, to make certain dividends and other
payments, to make certain investments, loans and guarantees, or to sell or
otherwise dispose of assets or merge or consolidate with another entity.
The DIP Financing Facility also contains covenant requirements which
require the Company to meet certain financial ratios and tests. While the
Company believes that it has been in compliance with its covenants through
the date of this filing, as a result of the continuation of unfavorable
operational conditions, the Company sought and was granted modification of
certain of its bank covenants. See "Debtor in Possession Financing" above.
If the Company is not granted further covenant modifications, it is
probable that the Company would violate certain covenants during the
second half of the current fiscal year.
o Failure to comply with the Company's payment, covenant or other obligations
under the DIP Financing Facility could result in a default thereunder that,
if not cured or waived, could result in acceleration of the relevant
17
<PAGE>
indebtedness thereunder and a forced sale of assets of the Company, subject
to proceedings in the Bankruptcy Court.
o The Company operates in a highly competitive environment. It competes
directly and indirectly with numerous distributors, retailers and
manufacturers of automotive aftermarket products, some of which distribute
in channels that may be expanding in terms of market share relative to the
channels in which the Company distributes its products. In addition, some
of the Company's current and potential competitors are larger, may have
greater financial resources and may be less leveraged than the Company.
Furthermore, particularly in light of the trend in the automotive parts
industry toward increasing consolidation at the warehouse and jobber
levels, the Company's financial performance may be significantly affected
by the Company's ability to compete successfully for associate jobber
customers, and otherwise take advantage of consolidation opportunities and
other industry trends. Competitors of the Company, in efforts to expand or
enhance their business, may seek to take advantage of the Company's
financial condition and difficulties arising as a result of the Chapter 11
Proceedings.
o The demand for automotive products is affected by a number of factors
beyond the Company's control, including economic conditions, vehicle
quality and maintenance, vehicle scrappage rates and weather conditions.
Weather conditions cause seasonal variations in the Company's results of
operations, and the occurrence of extreme weather or mild weather may
result in significant fluctuations in such results. 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. In addition, in recent years there have been, and in the
future there are likely to continue to be, significant improvements in the
quality of new vehicles and vehicle parts and extensions of manufacturers'
warranties that may reduce demand for the Company's products.
o The Company has prepared a plan of action to modify its internally
developed software over the next two years to accommodate the "Year 2000"
dating changes necessary to permit correct recording of year dates for
2000 and later years. The Company had proposed to incur approximately $7.0
million of costs to develop and implement such plan, the costs of which
will be expensed in later periods, but the timing and magnitude of such
expenditures is likely to change as the Company continues to explore the
sale of assets. If the Company or any of its significant suppliers or
customers does not successfully and timely complete such changes, the
Company's business could be materially affected.
While the Company periodically reassesses the material trends and
uncertainties affecting its operations and financial condition in connection
with its preparation of management's discussion and analysis of results of
operations and financial condition contained in its quarterly and annual
reports, the Company does not intend to review or revise any particular
forward-looking statement referenced in this report in light of future events.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company did not make its scheduled interest payment on January 15,
1998 on its $100 million senior subordinated notes (the "Notes"). The Chapter 11
Proceedings and missed interest payment constituted events of default under the
indenture relating to the Notes. As a result of the Chapter 11 Proceedings, the
Notes have been accelerated, but payments are stayed and are not currently being
made. The entire amount outstanding under the Notes has been classified as a
"Liabilities subject to settlement under the reorganization case" at July 25,
1998.
The Chapter 11 filing also constituted an event of default under the
Previous Bank Credit Agreement. Amounts outstanding under such Agreement have
been refinanced under the DIP Financing Facility.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS.
A. EXHIBITS
LOCATION OF EXHIBIT
EXHIBIT IN SEQUENTIAL NUMBERING SYSTEM
- ------- ------------------------------
10.1 Second Amendment and First Waiver
dated as of July 31, 1998 to
Revolving Credit, Term Loan and
Guarantee Agreement dated as of
February 2, 1998.
11.1 Statement re Computation of Income
Per Share
12.0 Statement re Computation of Earnings
to Fixed Charges
B. REPORTS OF FORM 8-K
None.
19
<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 10, 1998 By: /s/ BETTINA M. WHYTE
Bettina M. Whyte, President
and Chief Executive Officer
Date: September 10, 1998 By: /s/ PETER D. FITZSIMMONS
Peter D. Fitzsimmons,
Chief Financial Officer
EXHIBIT 10.1
APS HOLDING CORPORATION - CREDIT AGREEMENT
SECOND AMENDMENT AND FIRST WAIVER, dated as of July 31, 1998 (this
"AMENDMENT") to the Revolving Credit, Term Loan and Guarantee Agreement, dated
as of February 2, 1998 (as heretofore amended, supplemented or otherwise
modified, the "CREDIT AGREEMENT"), among A.P.S., Inc., a Delaware corporation
and debtor-in-possession (the "COMPANY"), APS Holding Corporation, a Delaware
corporation ("HOLDING"), each of the direct and indirect Subsidiaries of the
Company party thereto (together with Holding, the "GUARANTORS"), each of which
Guarantors is a debtor-in-possession (the Company and the Guarantors,
collectively, the "DEBTORS"), the several banks and other financial institutions
from time to time party thereto (collectively, the "LENDERS"), and The Chase
Manhattan Bank, as agent for the Lenders (in such capacity, the "AGENT").
W I T N E S S E T H:
WHEREAS, the Debtors, the Lenders and the Agent are parties to the
Credit Agreement;
WHEREAS, the Debtors have requested that the Lenders agree to waive
compliance by the Debtors with certain covenants contained in the Credit
Agreement and, in connection therewith, amend certain provisions of the Credit
Agreement; and
WHEREAS, the Lenders are willing to agree to such requested waivers and
amendments, but only upon the terms and conditions of this Amendment;
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt of which is hereby acknowledged, the Company,
the Guarantors, the Lenders and the Agent hereby agree as follows:
1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined
shall have their respective meanings set forth in the Credit Agreement.
2. WAIVERS UNDER SECTION 8 (NEGATIVE COVENANTS). (a) The Lenders hereby
waive, until September 30, 1998, any Default or Event of Default arising by
reason of any failure by the Borrower to comply with subsection 8.1(a) (EBITDA)
of the Credit Agreement for the periods ending on the last day of the July, 1998
and August, 1998 fiscal months of the Borrower.
(b) The Lenders hereby waive any Default or Event of Default arising by
reason of any failure by the Borrower to comply with subsection 8.19 (Business
Plan) of the Credit Agreement, PROVIDED that the Borrower delivers on or before
August 28, 1998 to the Agent and each Lender a Chapter 11 operating plan/budget
covering at least the one-year period commencing on August 26, 1998 in form and
substance reasonably satisfactory to the Required Tranche A Lenders.
1
<PAGE>
3. AMENDMENTS TO SUBSECTION 4.8 (MANDATORY PREPAYMENT; COMMITMENT
TERMINATION; USE OF CASH). (a) Subsection 4.8(c) of the Credit Agreement is
hereby amended by deleting the phrase "on the first day of a month" contained in
such subsection and by substituting in lieu thereof the phrase "on the first day
of a calendar month or the last day of a fiscal month".
(b) Subsection 4.8(d) of the Credit Agreement is hereby amended by
deleting the references to the term "Maximum Outstanding Amount" contained in
such subsection and by substituting in lieu thereof references to "Maximum
Outstanding Amount(s)".
4. AMENDMENTS TO SUBSECTION 8.2 (LIMITATION ON INDEBTEDNESS). Subsections
8.2(c) and (d) of the Credit Agreement are hereby amended by deleting the
reference to "$5,000,000" contained in each such subsection and by substituting
in lieu thereof a reference to "$1,000,000".
5. AMENDMENT TO SUBSECTION 8.7 (LIMITATION ON LEASES). Subsection 8.7 of
the Credit Agreement is hereby amended by deleting the reference to "$3,000,000"
contained in such subsection and by substituting in lieu thereof a reference to
"$1,000,000".
6. AMENDMENT TO SUBSECTION 8.9 (LIMITATION ON CAPITAL EXPENDITURES).
Subsection 8.9 of the Credit Agreement is hereby amended by deleting the
references to "$3,900,000" and "$5,850,000" contained in such subsection and by
substituting in lieu thereof references to "$1,700,000" and "$2,000,000",
respectively.
7. AMENDMENT TO SUBSECTION 8.11 (LOANS AND OTHER INVESTMENTS BY AFCO).
Subsection 8.11 of the Credit Agreement is hereby amended by deleting the
references to "$3,500,000" and "$5,250,000" contained in such subsection and by
substituting in lieu thereof references to "$2,000,000" and "$2,250,000",
respectively.
8. AMENDMENT AND AGREEMENT WITH RESPECT TO SCHEDULE 2.1 (MAXIMUM
OUTSTANDING AMOUNT OF TRANCHE A LOANS). (a) Schedule 2.1 of the Credit Agreement
is hereby amended by deleting the information contained in such Schedule for the
months of July, August, September and October of 1998 and by substituting in
lieu thereof the following:
"MAXIMUM OUTSTANDING AMOUNTS
MONTH PEAK FISCAL MONTH END
July $65,000,000 $39,000,000
August $45,000,000 $35,000,000
September $45,000,000 $34,000,000
October $40,000,000 $30,000,000".
2
<PAGE>
(b) If the aggregate outstanding amount of the Tranche A Loans as of the
last day of any fiscal month set forth in Section 8(a) above exceeds the Maximum
Outstanding Amount for the end of such fiscal month, the Maximum Outstanding
Amount shall not be increased to the "Peak" amount unless and until (and without
prejudice to the Agent's and the Lenders' other rights and remedies) the
Borrower makes the mandatory prepayment required pursuant to subsection 4.8(c).
9. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. After giving effect to this
Amendment, the Debtors hereby represent and warrant that all representations and
warranties contained in the Credit Agreement are true and correct as of the date
hereof (unless stated to relate to a specific earlier date, in which case, such
representations and warranties shall be true and correct in all material
respects as of such earlier date) and that no Default or Event of Default shall
have occurred and be continuing or would result from the execution and delivery
of this Amendment.
10. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall
become effective as of the date hereof upon receipt by the Agent of counterparts
of this Amendment duly executed by the Company, the Guarantors and Supermajority
Tranche A Lenders.
11. CONTINUING EFFECT; NO OTHER AMENDMENTS OR WAIVERS. Except as expressly
amended or waived pursuant to this Amendment, the Credit Agreement is and shall
continue to be in full force and effect in accordance with its terms, and this
Amendment shall not constitute the Lenders' consent or indicate their
willingness to consent to any other amendment, modification or waiver of the
Credit Agreement or the other Loan Documents, including without limitation, any
amendment, modification or waiver of any subsection amended or waived pursuant
to this Amendment for any other date or time period.
12. MISCELLANEOUS.
(a) This Amendment may be executed by the parties hereto on one or more
counterparts, and all of such counterparts shall be deemed to constitute one and
the same instrument. This Amendment may be delivered by facsimile transmission
of the relevant signature pages hereof.
(b) This Amendment shall be governed by, and construed and interpreted in
accordance with, the law of the State of New York.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their respective duly authorized officers as of the
date first above written.
A.P.S., INC.
By: /s/ PETER FITZSIMMONS
Title: Chief Financial Officer
GUARANTORS:
APS HOLDING CORPORATION
BIG A AUTO PARTS, INC.
AUTOPARTS FINANCE COMPANY, INC.
APS SUPPLY, INC.
AMERICAN PARTS SYSTEM, INC.
A.P.S. MANAGEMENT SERVICES, INC.
INSTALLERS' SERVICE WAREHOUSE, INC.,
PARTS, INC., PRESATT, INC.
By: /s/ PETER FITZSIMMONS
Title: Chief Financial Officer
THE CHASE MANHATTAN BANK, as Lender,
Issuing Bank and Agent
By: /s/ CATHRYN A. GREENE
Title: Vice President
4
<PAGE>
BANK ONE, N.A.
By: /s/ MICHAEL A. REEVES
Title: Vice President
BEAR, STEARNS & CO. INC.
By: __________________________
Title:
D. K. ACQUISITION PARTNERS, L.P.
By: M. H. Davidson & Co., its General
Partner
By: /s/ MICHAEL J. LEFFELL
Title: General Partner
FOOTHILL CAPITAL CORPORATION
By: ______________________
Title:
5
<PAGE>
GOLDMAN SACHS CREDIT PARTNERS, L.P.
By: __________________________
Title:
NATIONAL BANK OF CANADA
By: /s/ E. LYNN FORGOSH
Title: Group Vice President
By: __________________________
Title: Group Vice President
QUANTUM PARTNERS, LDC
By: /s/ MARK D. SONNINO
Title: Attorney-in-Fact
SOCIETE GENERALE
By: __________________________
Title:
6
<PAGE>
UBS AG, LONDON BRANCH
By: __________________________
Title:
By: __________________________
Title:
WAYLAND INVESTMENT FUND, LLC
By: __________________________
Title:
WELLS FARGO BANK (Texas), NATIONAL
ASSOCIATION
By: /s/ ROGER FRUENDT
Title: Vice President
7
EXHIBIT 11.1
APS HOLDING CORPORATION
(Operating as Debtor-In-Possession)
COMPUTATION OF INCOME (LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 25, July 25,
-------------------------- ----------------------------
1998 1997 1998 1997
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Shares for basic and diluted computations:
Basic weighted average shares outstanding .................. 13,790 13,780 13,790 13,775
Dilutive impact stock options .............................. -- * -- * -- --
-------- ---------- ---------- ----------
Dilutive weighted average shares outstanding ............... 13,790 13,780 13,790 13,775
======== ========== ========== ==========
Net loss for basic and diluted computations:
Loss before extraordinary item ............................. $(25,484) $(9,650) $ (47,022) $ (10,586)
Extraordinary item - charges resulting from
extinguishment of debt, net of income taxes ............... -- -- -- --
-------- ---------- ---------- ----------
Net loss .............................................. $(25,484) $(9,650) $ (47,022) $ (10,586)
======== ========== ========== ==========
Basic net loss per share:
Loss before extraordinary item ............................. $ (1.85) $ (0.70) $ (3.41) $ (0.77)
Extraordinary item - charges resulting from
extinguishment of debt, net of income taxes ............... -- -- -- --
-------- ---------- ---------- ----------
Basic net loss per share .............................. $ (1.85) $ (0.70) $ (3.41) $ (0.77)
======== ========== ========== ==========
Diluted net loss per share:
Loss before extraordinary item ............................. $ (1.85) $ (0.70) $ (3.41) $ (0.77)
Extraordinary item - charges resulting from
extinguishment of debt, net of income taxes ............... -- -- -- --
-------- ---------- ---------- ----------
Diluted net loss per share ............................ $ (1.85) $ (0.70) $ (3.41) $ (0.77)
======== ========== ========== ==========
</TABLE>
* Due to the anti-dilutive effect of the stock options on loss per share
("LPS"), such amounts have been excluded from the diluted LPS computation.
EXHIBIT 12.0
APS HOLDING CORPORATION
(Operating as Debtor-In-Possession)
COMPUTATION OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 25, July 25,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loss before
interest expense and income taxes ......... $(19,636) $ (6,400) $(35,682) $ (617)
Portion of operating rents deemed
representative of an interest factor ...... 1,932 2,263 3,913 4,491
-------- -------- -------- --------
Earnings (loss) before fixed charges ......... $(17,704) $ (4,137) $(31,769) $ 3,874
======== ======== ======== ========
Interest expense ............................. $ 5,813 $ 7,747 $ 11,270 $ 15,064
Portion of operating rents deemed
representative of an interest factor ...... 1,932 2,263 3,913 4,491
-------- -------- -------- --------
Fixed charges ................................ $ 7,745 $ 10,010 $ 15,183 $ 19,555
======== ======== ======== ========
Earnings to fixed charges .................... -- * -- * -- * -- *
======== ======== ======== ========
</TABLE>
* Earnings for the three months and six months ended July 25, 1998 and 1997
are not adequate to cover fixed charges. The coverage deficit for the three
months and six months ended July 25, 1998 and 1997 was $25,449, $14,147, $46,
952 and $15,681, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JUL-25-1998
<CASH> 11,832
<SECURITIES> 0
<RECEIVABLES> 117,175
<ALLOWANCES> 18,383
<INVENTORY> 243,715
<CURRENT-ASSETS> 390,673
<PP&E> 77,873
<DEPRECIATION> 36,150
<TOTAL-ASSETS> 495,375
<CURRENT-LIABILITIES> 326,109
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> (28,692)
<TOTAL-LIABILITY-AND-EQUITY> 495,375
<SALES> 337,332
<TOTAL-REVENUES> 337,332
<CGS> 240,689
<TOTAL-COSTS> 240,689
<OTHER-EXPENSES> 134,263
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,270
<INCOME-PRETAX> (46,952)
<INCOME-TAX> 70
<INCOME-CONTINUING> (47,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,022)
<EPS-PRIMARY> (3.41)
<EPS-DILUTED> (3.41)
</TABLE>
