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 April 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 June 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 11
Item 3. Defaults Upon Senior Securities 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
<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)
APRIL 25, 1998 JANUARY 31,1998
-------------- ---------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents .................... $ 7,098 $ 4,574
Accounts and notes receivable, less allowance
of $18,178 and $18,155 ...................... 104,188 99,223
Inventories .................................. 251,408 253,394
Prepaid expenses and other current assets .... 33,222 20,071
--------- ---------
Total current assets ................... 395,916 377,262
Property and equipment, less accumulated
depreciation of $37,298 and $35,701 ............ 41,738 41,054
Notes receivable, less current portion ......... 21,240 21,497
Intangible assets, net ......................... 32,003 32,499
Deferred costs and other assets ................ 12,404 14,599
--------- ---------
$ 503,301 $ 486,911
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Book overdrafts .............................. $ 9,442 $ --
Current maturities of long-term debt ......... 250,134 328,034
Accounts payable ............................. 3,752 87,964
Accrued liabilities .......................... 39,309 48,255
--------- ---------
Total current liabilities .............. 302,637 464,253
----------- ----------
Long-term debt, less current maturities ........ 1,163 1,207
Deferred income and other liabilities .......... 2,752 2,837
--------- ---------
Total long-term liabilities ............ 3,915 4,044
--------- ---------
Liabilities subject to settlement under the
reorganization case ............................ 199,691 --
----------- ----------
Commitments and contingencies (Note 6) ......... -- --
Redeemable preferred stock ..................... -- --
Stockholders' equity:
Class A common stock ......................... 138 138
Class B common stock ......................... -- --
Additional paid-in capital ................... 155,601 155,601
Accumulated deficit .......................... (158,543) (137,005)
Treasury stock, at cost ...................... (120) (120)
Unrealized loss on available-for-sale
securities .................................. (18) --
--------- ---------
Total stockholders' equity (deficit) ... (2,942) 18,614
--------- ---------
$ 503,301 $ 486,911
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
3
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APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 25, 1998 APRIL 25, 1997
-------------- --------------
Net sales ....................................... $ 161,754 $ 211,743
Cost of goods sold .............................. 113,784 140,000
--------- ---------
Gross profit ............................... 47,970 71,743
Selling, general and administrative expenses .... 59,242 67,275
Reorganization expenses ......................... 3,320 --
Asset impairment and restructuring charge ....... 2,420 --
--------- ---------
Operating income (loss) .................... (17,012) 4,468
Interest income ................................. 916 1,265
Other income .................................... 50 50
--------- ---------
Income (loss) before interest expense and
income taxes .............................. (16,046) 5,783
Interest expense ................................ 5,457 7,317
--------- ---------
Income (loss) before income taxes .......... (21,503) (1,534)
Income tax provision (benefit) .................. 35 (598)
--------- ---------
Net loss .................................... $ (21,538) $ (936)
========= =========
Basic and Diluted loss per share ................ $ (1.56) $ (0.07)
Basic weighted average shares outstanding ....... 13,790 13,769
Dilutive impact of stock options ................ -- --
--------- ---------
Dilutive weighted average shares outstanding .... 13,790 13,769
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
4
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APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED APRIL 25, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CLASS A ADDITIONAL ACCUM- TREASURY STOCKHOLDERS'
COMMON STOCK PAID-IN ULATED STOCK, UNREALIZED EQUITY
SHARES AMOUNT CAPITAL DEFICIT AT COST GAIN (LOSS) (DEFICIT)
------ ------ ------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period ................ 13,790 $138 $155,601 $(137,005) ($120) $ 0 $ 18,614
Unrealized gain
(loss) on
available-for-sale
securities ............... -- -- -- -- -- (18) (18)
Net loss for the
period ................... -- -- -- (21,538) -- -- (21,538)
------ ---- -------- --------- ----- ---- --------
Balance at April 25, 1998 .. 13,790 $138 $155,601 $(158,543) $(120) $(18) $ (2,942)
====== ==== ======== ========= ===== ==== ========
</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)
THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 25, 1998 APRIL 25, 1997
-------------- --------------
Cash flows from operating activities:
Net loss ....................................... $(21,538) $ (936)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Reorganization cost ............................ 3,320 --
Provision for asset impairment and
restructuring charges ........................ 2,420 --
Inventory writedown ............................ 1,122 --
Depreciation and amortization .................. 3,241 3,142
Amortization of debt issuance costs ............ 197 295
Provision for bad debts ........................ 2,390 318
Income from supply agreement ................... (50) (50)
Deferred income taxes .......................... -- (585)
Changes in working capital, net of liabilities
subject to settlement under the
reorganization case .......................... (19,363) (431)
-------- --------
Net cash (used in) provided by operating
activities ................................... (28,261) 1,753
-------- --------
Cash flows from investing activities:
Investment in notes receivable ................. (437) (2,275)
Proceeds from repayment of notes receivable .... 719 1,676
Business acquisitions, net of cash acquired .... -- (543)
Capital expenditures ........................... (995) (1,961)
-------- --------
Net cash used in investing activities ..... (713) (3,103)
-------- --------
Cash flows from financing activities:
Change in book overdrafts ...................... 9,442 (1,000)
Borrowings under revolving credit agreement .... 59,200 9,500
Repayments under revolving credit agreement .... (37,100) (4,300)
Retirement of long-term debt ................... (44) (3,818)
Exercise of stock options ...................... -- 156
-------- --------
Net cash provided by financing
activities .............................. 31,498 538
-------- --------
Net increase (decrease) in cash and cash
equivalents ..................................... 2,524 (812)
Cash and cash equivalents at beginning of
period .......................................... 4,574 13,370
-------- --------
Cash and cash equivalents at end of period ........ $ 7,098 $ 12,558
======== ========
Supplemental disclosures:
Cash paid for interest ....................... $ 4,152 $ 3,842
======== ========
Cash (refunded) paid for income taxes ........ $ (439) $ 30
======== ========
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, confirmation of a plan of reorganization
and the ability to generate sufficient cash from operations and financing
sources to meet obligations.
As of February 2, 1998, actions to collect prepetition indebtedness were
stayed and other contractual obligations could not be enforced against the
Company. Certain prepetition 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................................... 93,424
--------
$199,691
========
Reorganization expenses, which primarily represent professional fees,
incurred during the quarter ended April 25, 1998 totaled approximately $3.3
million. Cash paid for these professional fees during the quarter ended April
25, 1998 was approximately $1.0 million.
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 April 25, 1998, the consolidated
7
<PAGE>
statements of operations for the three months ended April 25, 1998 and 1997, the
consolidated statement of changes in stockholders' equity for the three months
ended April 25, 1998 and the consolidated statements of cash flows for the three
months ended April 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 have been made. The results of
operations for the three months ended April 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 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.
4. ASSET IMPAIRMENT AND RESTRUCTURING CHARGES:
During the quarter ended April 25, 1998, the Company began to develop a
multi-year business plan as required by the covenants of its
Debtor-in-Possession (DIP) Financing Facility. In conjunction with such plan,
the Company closed 2 Distribution Centers, 12 ISWs and 20 Big-A Company-owned
stores during the quarter ended April 25, 1998. Aggregate revenue from such
facilities was approximately $6.2 million during the quarter ended April 25,
1998, compared to approximately $9.6 million in the corresponding period of the
prior fiscal year. Aggregate losses before income taxes and after overhead
allocations from such facilities were approximately $1.0 million for the quarter
ended April 25, 1998, compared to approximately $.5 million in the corresponding
period of the prior fiscal year. As a result of such program, during the quarter
ended April 25, 1998, the Company recorded a restructuring charge of
approximately $2.4 million. Such charge consisted of approximately $.3 million
of employee severance benefits related to personnel reductions of approximately
190 employees (primarily field staff employees), approximately $1.3 million for
future lease and related obligations and approximately $.8 million for costs to
close the facilities. In addition, in connection with such restructuring
program, approximately $1.1 million was charged to cost of goods sold during the
quarter ended April 25, 1998 for inventory write-offs expected in connection
with such facility closures and approximately $.5 million was charged to
selling, general, and administrative expenses for incremental bad debt expected
with such closures.
The Company plans to close a minimum of 100 Big-A Company-owned stores and
ISWs during the second quarter ending July 25, 1998. The Company expects to
incur charges between $11.0 and $16.0 million in relation to these closures
during the quarter ending July 25, 1998.
8
<PAGE>
The Company's financial statements at April 25, 1998 also include
liabilities and reserves in the aggregate amount of $.8 million for costs
related to the closure and consolidation of certain facilities during the
quarter ended July 25, 1997. During the quarter ended April 25, 1998,
approximately $1.9 million of costs were charged to the liabilities and
reserves.
The Company's financial statements at April 25, 1998 also include
liabilities and reserves in the aggregate amount of $2.9 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 quarter ended April 25, 1998,
the Company charged approximately $.1 million against such liability and
reserves.
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).
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. Borrowing availability under
the DIP Financing Facility at April 25, 1998 was approximately $29.5 million. At
April 25, 1998, $249.7 million is 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 9.09% as of April 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 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 is currently
seeking modification or waiver of certain of its bank covenants. If the banks
should not agree to any such modifications or waiver, the Company would be in
default under the DIP Financing Facility. If such modifications were not made or
if any such default were not waived, the Company might have to pursue a sale or
orderly liquidation of its business.
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
9
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approximately $2.9 million for the three month period ending April 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.
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 ended April 25, 1998 and 1997
consists of the following (in thousands):
FOR THE THREE
MONTHS
ENDED APRIL 25,
---------------
1998 1997
---- ----
(Unaudited)
Net Loss......................... $(21,538) $(936)
Unrealized (losses) gains on
investments.................... (18) 71
--------- ------
Comprehensive loss .............. $(21,556) $(865)
========= ======
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Since its initial public offering in 1993, the Company pursued aggressive
acquisition and Installers Service Warehouses ("ISW") expansion programs in
order to obtain increased market share. These programs consumed significant
financial resources and resulted in the Company becoming highly leveraged. The
Company had attempted to address these problems, particularly early during
fiscal 1998, by closing unprofitable locations, reducing headcount and reducing
inventory. Notwithstanding these initiatives, however, these problems, in
conjunction with competitive pressures in the industry, shrinking cash flow, and
large debt payments, led the Company to file a voluntary petition under Chapter
11 of the United States Bankruptcy Code in the United States District Court for
the District of Delaware on February 2, 1998. The Company is presently operating
its business as a debtor in possession in such proceedings (the "Chapter 11
Proceedings").
RESULTS OF OPERATIONS
Presented below is a summary of unaudited financial operating information
for the three months ended April 25, 1998 and 1997 (dollars in thousands):
THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 25,1998 % APRIL 25, 1997 %
------------- - -------------- -
Net sales ............................$ 161,754 100.0 $ 211,743 100.0
Cost of goods sold ................... 113,784 70.3 140,000 66.1
Gross profit ......................... 47,970 29.7 71,743 33.9
Selling, general and
administrative expenses .............. 59,242 36.6 67,275 31.8
Reorganization expenses .............. 3,320 2.0 -- --
Asset impairment and restructuring
charge ............................... 2,420 1.5 -- --
Operating (loss) income ............. (17,012) (10.5) 4,468 2.1
Net loss ............................. (21,538) (13.3) (936) (0.4)
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
Net sales for the three months ended April 25, 1998 decreased $50.0
million or 23.6% from the corresponding period 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 store divisions same store sales decreased
19.2% due to continuing general softness in demand for the Company's products,
increasing competitive pressures, and 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 ended April 25, 1998, decreased
$26.2 million or 18.7% from the corresponding period 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 quarter ended April
25, 1998. Cost of goods sold as a percentage of net sales for the three months
ended April 25, 1998 increased compared to that of the corresponding period of
the prior year due to the reduction in cash discounts offered to the Company by
a number 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, general softness in demand for
the Company's products and increasing competitive pressures. In addition, cost
of goods sold for the
11
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three months ended April 25, 1998, includes a charge of approximately $1.1
million for inventory write-offs expected in connection with facility closures.
Selling, general and administrative expenses, which include depreciation
and amortization, for the three months ended April 25, 1998 decreased $8.0
million or 11.9% compared to the corresponding period 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 ended April 25, 1998 as a percentage of sales
increased over the corresponding period of the prior year due to Year 2000
system expenses, increased bad debt expense, and the impact that fixed costs
were not reduced in proportion to the reduction in sales. In addition, selling,
general and administrative expenses for the three months ended April 25, 1998
includes a charge of approximately $.5 million in connection with facility
closures.
During the quarter ended April 25, 1998, the Company began to develop a
multi-year business plan as required by the covenants of the DIP Financing
Facility. In conjunction with such plan, the Company closed 2 Distribution
Centers, 12 ISW's and 20 Big-A Company-owned stores during the quarter ended
April 25, 1998. As a result of such program, during the quarter ended April 25,
1998, the Company recorded a restructuring charge of approximately $2.4 million.
Such charge consisted of approximately $.3 million of employee severance
benefits related to personnel reductions of approximately 190 employees
(primarily field staff employees), approximately $1.3 million for future lease
and related obligations and approximately $.8 million for costs to close the
facilities. In addition, in connection with such restructuring program,
approximately $1.1 million was charged to cost of goods sold during the quarter
ended April 25, 1998 for inventory write-offs expected in connection with
facility closures and approximately $.5 million was charged to selling, general,
and administrative expenses for incremental bad debt expected with such
closures.
Operating loss for the three months ended April 25,1998 is approximately
$17.0 million (10.5% of net sales) compared to operating income of $4.5 million
(2.1% of net sales) in the corresponding period of the prior year. The decrease
is primarily due to the factors discussed above.
Interest expense for the three months ended April 25, 1998 was $5.5
million (3.4% of net sales) compared to $7.3 million (3.5% of net sales) for the
corresponding period 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 $2.9 million for the
three months period ending April 25, 1998.
Income taxes for the three months ended April 25, 1998 were a provision of
$35,000, compared to an income tax benefit of $0.6 million for the corresponding
period of the prior year.
Net loss for the three months ended April 25, 1998 was $21.5 million
compared to a net loss of $0.9 million for the corresponding period of the prior
year. The increase in net loss was primarily a result of the factors discussed
above.
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
12
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purchases, are requiring cash payments. These less favorable terms include
shortening, and in some cases, 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 three months ended April 25, 1998, operating
activities utilized net cash of approximately $28.3 million, resulting from an
$8.8 million net loss as adjusted for non-cash items. Investing activities
utilized $.7 million of cash, principally consisting of capital expenditures.
Financing activities provided $31.5 million of cash, primarily from borrowings
under revolving credit agreement.
For three months ended April 25, 1997, operating activities provided net
cash of approximately $1.8 million, due primarily to increases in accounts
payable and decreases in prepaid expenses, offset in part by increases in
accounts receivable and decreases in accrued liabilities. Investing activities
utilized $3.1 million of cash, principally consisting of capital expenditures
and investments of customer notes receivable. Financing activities provided $0.5
million of cash, primarily from increased long-term borrowings.
WORKING CAPITAL. Working capital, (which excludes liabilities subject to
settlement under the reorganization case) at April 25, 1998, was $93.3 million,
including $7.1 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 $180.3 million increase in working capital is due
to $199.7 million being reclassified from pre-petition liabilities to
"Liabilities subject to settlement under the reorganization case" offset by
$19.4 million of changes in working capital. In addition, the $19.4 million
change in working capital is principally due to prepayments required by vendors
in association with inventory purchases made during the Chapter 11 Proceedings.
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 April 25, 1998, $249.7
million is classified as a current liability. Borrowing availability under the
DIP Financing Facility at April 25, 1998 was approximately $29.5 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 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 9.09% as of April 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
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 is
currently seeking modification or waiver of certain of its bank covenants. If
the banks should not agree to any such modifications or waiver the Company would
be in default under the DIP Financing Facility. If such modifications were not
made or if any such default were not waived, the Company might have to pursue a
sale or orderly liquidation of its business.
CAPITAL EXPENDITURES AND ACQUISITIONS. Capital expenditures, excluding new
business acquisitions, for both the three months ended April 25, 1998 and April
25, 1997 were approximately $1.0 million and $2.0 million, respectively. Capital
expenditures for Fiscal Year 1999 are limited to $7.8 million by the covenant
requirements of
13
<PAGE>
the DIP Financing Facility. The Company currently has limited planned capital
expenditures except for continued management information system enhancements.
The Company is preparing 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 expects to incur approximately $7.0 million of costs to develop and
implement such plan, the majority of which will be expensed in Fiscal Year 1999.
The actual amount of such costs could vary materially from such estimate. The
Company has incurred $1.8 million of expenses through the quarter ended April
25, 1998 in conjunction with its Year 2000 project. The Company expects that
such costs will be financed through additional borrowings. 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 three months ended April 25, 1997, the Company's cash expenditures for
business acquisitions totaled $.5 million. 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 cash flows from operations and borrowings under
the DIP Financing Facility. 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 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 is
currently seeking modification or waiver of certain of its bank covenants. If
the banks should not agree to any such modifications or waiver the Company would
be in default under 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 have consumed significant financial and operating resources and
demanded extensive managerial focus and attention. During Fiscal Year 1998, the
Company re-focused its efforts and resources from such aggressive growth
programs to improving both the execution of its business strategy and its
management information systems. In addition, the Company commenced
implementation of a restructuring program focused on the goals of reducing
costs, improving cash flow and achieving profitability.
During the quarter ended April 25, 1998, the Company began to develop a
multi-year plan as part of its covenant compliance. As part of such plan, the
Company closed 2 Distribution Centers, 20 Big-A Company-owned stores and 12 ISWs
during the quarter ended April 25, 1998. In conjunction with such plan, during
the three months ended April 25, 1998, the Company recorded a charge of
approximately $2.4 million for restructuring costs associated with such program.
In addition, $1.1 million was charged to cost of goods sold during the quarter
ended April 25, 1998 for inventory write-offs expected in connection with
facility closures and approximately $.5 million was charged to selling, general
and administrative expenses for incremental bad debt associated with such
closures. The Company plans to close a minimum of 100 Big-A Company-owned stores
and ISWs during the second quarter ending July 25, 1998. The Company expects to
incur charges between $11.0 and $16.0 million in relation to these closures. The
Company will also review its distribution network and overhead structure and may
also consider sales of certain assets or parts of the business. In this context,
Chapter 11 typically entails an evaluation of strategic alternatives to a
reorganization. It is possible, therefore, that the Company's restructuring may
involve a sale of all or substantially all of its assets in one or more
transactions. With regard to inventory, the Company will seek to reinforce a
structure under which both the Big-A Company-owned stores and the ISW stores
will source product primarily through the distribution centers.
14
<PAGE>
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.
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 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.
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) a substantial portion of the Company's
cash flow
15
<PAGE>
from operations will be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing funds available for operation; (iii)
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,
(iv) the Company may be more vulnerable to economic downturns and may be
limited in its ability to respond to competitive pressures.
The Company filed for Chapter 11 reorganization on February 2, 1998. The
Company is uncertain, at this time, about the outcome of its reorganization
and its impact on various parties.
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 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
is currently seeking modification or waiver of certain of its bank covenants.
See "Debtor in Possession Financing" above.
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
indebtedness thereunder, subject to proceedings in the Bankruptcy Court.
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.
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.
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 expects to incur approximately $7.0 million of costs
to develop and implement such plan, substantially all of which will be
expensed in Fiscal Year 1999. The actual amount of such costs could vary
materially from such estimate. The Company expects that such costs will be
financed through additional borrowings. 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.
16
<PAGE>
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 April 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.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS
LOCATION OF EXHIBIT
EXHIBIT IN SEQUENTIAL NUMBERING SYSTEM
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
The Company filed a Report on Form 8-K on February 2, 1998, reporting
under Item 3 the filing of the February 1998 Chapter 11 Proceeding. The Company
also filed a Report on Form 8-K on February 26, 1998, reporting under Item 5 the
final approval of the debtor in possession financing.
18
<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: June 8, 1998 By: /s/ BETTINA WHYTE
----------------------
Bettina Whyte, President
and Chief Executive Officer
Date: June 8, 1998 By: /s/ JOHN L. HENDRIX
------------------------
John L. Hendrix, Senior Vice
President and Chief Financial
Officer
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 THREE MONTHS
ENDED ENDED
APRIL 25, 1998 APRIL 25, 1997
-------------- --------------
<S> <C> <C>
SHARES FOR BASIC AND DILUTED COMPUTATIONS:
Basic weighted average shares outstanding ................ 13,790 13,769
Dilutive impact stock options ............................ -- * -- *
-------------- --------------
Dilutive weighted average shares outstanding ............. 13,790 13,769
============== ==============
NET LOSS FOR BASIC AND DILUTED COMPUTATIONS:
Loss before extraordinary item ........................... $ (21,538) $ (936)
Extraordinary item - charges resulting from extinguishment
of debt, net of income taxes ........................... -- --
-------------- --------------
Net loss ............................................ $ (21,538) $ (936)
============== ==============
BASIC NET LOSS PER SHARE:
Loss before extraordinary item ........................... $ (1.56) $ (0.07)
Extraordinary item - charges resulting from extinguishment
of debt, net of income taxes ........................... -- --
-------------- --------------
Basic net loss per share ............................ $ (1.56) $ (0.07)
============== ==============
DILUTED NET LOSS PER SHARE:
Loss before extraordinary item ........................... $ (1.56) $ (0.07)
Extraordinary item - charges resulting from extinguishment
of debt, net of income taxes ........................... -- --
-------------- --------------
Diluted net loss per share .......................... $ (1.56) $ (0.07)
============== ==============
</TABLE>
* Due to the anti-dilutive effect of the stock options on both basic and
diluted loss per share ("LPS"), such amounts have been excluded from LPS.
EXHIBIT 12.0
APS HOLDING CORPORATION
(OPERATING AS DEBTOR-IN-POSSESSION)
COMPUTATION OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
APRIL 25, 1998 APRIL 25, 1997
-------------- --------------
<S> <C> <C>
Earnings (loss) before writedown on
interest expense and income taxes .............. $ (16,046) $ 5,783
Portion of operating rents deemed
representative of an interest factor ........... 1,981 2,228
-------------- --------------
Earnings (loss) before fixed charges .............. $ (14,065) $ 8,011
============== ==============
Interest expense .................................. $ 5,457 $ 7,317
Portion of operating rents deemed
representative of an interest factor ........... 1,981 2,228
-------------- --------------
Fixed charges ..................................... $ 7,438 $ 9,545
============== ==============
Earnings to fixed charges ......................... -- * 0.8
============== ==============
</TABLE>
*Earnings for the three months ended April 25, 1998 are not adequate to cover
fixed charges. The coverage deficit for the three months ended April 25, 1998
was $21,503.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BALANCE SHEET, INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> APR-25-1998
<CASH> 7,098
<SECURITIES> 0
<RECEIVABLES> 122,366
<ALLOWANCES> 18,178
<INVENTORY> 251,408
<CURRENT-ASSETS> 395,916
<PP&E> 79,036
<DEPRECIATION> 37,298
<TOTAL-ASSETS> 503,301
<CURRENT-LIABILITIES> 302,637
<BONDS> 0
0
0
<COMMON> 138
<OTHER-SE> (3,080)
<TOTAL-LIABILITY-AND-EQUITY> 503,301
<SALES> 161,754
<TOTAL-REVENUES> 161,754
<CGS> 113,784
<TOTAL-COSTS> 113,784
<OTHER-EXPENSES> 64,982
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,457
<INCOME-PRETAX> (21,503)
<INCOME-TAX> 35
<INCOME-CONTINUING> (21,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,538)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
