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
JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-10823
HI-LO AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0232254
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2575 W. BELLFORT
HOUSTON, TEXAS
77054
(Address of principal executive offices)
(Zip Code)
(713) 663-6700
(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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 10,775,109 shares outstanding of the issuer's only class of
common stock as of August 14, 1997.
<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
FORM 10-Q TABLE OF CONTENTS
JUNE 30, 1997
PAGE
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....................... 10
Part II - OTHER INFORMATION
Item 1.Legal Proceedings............................................ 14
Item 2.Not Applicable
Item 3.Not Applicable
Item 4.Submission of Matters to a Vote of Security Holders.......... 14
Item 5.Not Applicable
Item 6.Exhibits and Reports on Form 8-K............................. 14
SIGNATURE PAGE............................................................. 15
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash ...................................................................... $ 604 $ 1,180
Accounts receivable -
Trade, net of allowance for doubtful accounts of $573 and $929 .......... 7,539 5,651
Other ................................................................... 5,134 6,878
Inventories ............................................................... 93,819 91,401
Prepaids and other assets ................................................. 1,844 1,628
--------- ---------
Total current assets ............................................... 108,940 106,738
PROPERTY AND EQUIPMENT, net ................................................ 31,275 31,980
DEFERRED INCOME TAXES AND OTHER ............................................ 3,339 3,620
--------- ---------
$ 143,554 $ 142,338
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ...................................... 580 750
Accounts payable and accrued liabilities .................................. 30,979 32,600
--------- ---------
Total current liabilities ........................................ 31,559 33,350
LONG-TERM DEBT, net of current maturities ................................. 48,138 45,612
OTHER LIABILITIES .......................................................... 3,944 4,082
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued ............................................................ -- --
Common stock, $.01 par value, 30,000,000 shares authorized, 10,775,109
and 10,775,109 shares issued and outstanding ........................... 108 108
Additional paid-in capital ............................................... 68,316 68,316
Retained earnings (deficit) .............................................. (8,511) (9,130)
--------- ---------
Total stockholders' equity .......................................... 59,913 59,294
--------- ---------
$ 143,554 $ 142,338
</TABLE>
See Notes to Consolidated Financial Statements
-3-
<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Sales........................................ $ 63,760 $ 67,092 $119,265 $127,927
Costs and expenses:
Cost of goods sold, buying and
distribution................................ 38,635 41,084 71,765 78,157
Operating, selling,
general and administrative.................. 22,302 24,293 44,293 47,284
--------- --------- ------- --------
Operating income.............................. 2,823 1,715 3,207 2,486
Interest expense............................. 1,108 1,054 2,230 2,076
Other (income) expense, net.................. 11 249 (8) 530
--------- --------- ------- --------
Income (loss) before taxes on income.......... 1,704 412 985 (120)
Taxes on income.............................. 606 227 366 126
--------- --------- -------- --------
Net income (loss)............................. $ 1,098 $ 185 $ 619 $ (246)
========= ========= ======== ========
Net income (loss) per common and common
equivalent share............................. $ .10 $ 0.02 $ .06 $ (0.02)
========= ========= ======== ========
Weighted average common and common
equivalent shares outstanding................ 10,775,000 10,756,000 10,775,000 10,756,000
</TABLE>
See Notes to Consolidated Financial Statements
-4-
<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
------ ------ ------- ---------
Balance, December 31, 1995 10,756,350 $ 108 $68,277 $44,593
Issuance of common stock 18,759 0 39
Net (loss) (53,723)
---------- ----- ------- --------
Balance, December 31, 1996 10,775,109 $ 108 $68,316 $(9,130)
Net income 619
---------- ----- ------- --------
Balance, June 30, 1997 10,775,109 $ 108 $68,316 $(8,511)
========== ===== ======= ========
See Notes to Consolidated Financial Statements
-5-
<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1997 1996
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 619 $ (246)
------- -------
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities -
Depreciation and amortization .................................. 1,982 3,547
Assets written off closed stores ............................... 36
Deferred tax provision ......................................... -- --
Gain on sale of fixed assets ................................... (62) (15)
Changes in assets and liabilities -
Accounts receivable, net of allowances for doubtful accounts . (493) (833)
Inventories .................................................. (2,418) (3,044)
Prepaids and other assets .................................... (216) 97
Accounts payable and accrued liabilities ..................... (1,621) 3,741
Income taxes payable/(receivable) ............................ 349 (313)
------- -------
Total adjustments .......................................... (2,443) 3,180
------- -------
Net cash provided by (used in) operating activities ...... (1,824) 2,934
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (1,670) (2,461)
Proceeds from the sale of assets ................................... 594 18
------- -------
Net cash used in investing activities .................... (1,076) (2,443)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from indebtedness, net .................................... 2,324 1,583
------- -------
Net cash provided by financing activities ................ 2,324 1,583
------- -------
INCREASE (DECREASE) IN CASH .......................................... (576) 2,074
CASH AT BEGINNING OF PERIOD .......................................... 1,180 1,800
------- -------
CASH AT END OF PERIOD ................................................ $ 604 $ 3,874
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
-6-
<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
periods presented have been included. Operating results for the current quarter
and year to date periods ended June 30, 1997, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997. For
further information, reference should be made to the annual consolidated
financial statements and notes thereto for the year ended December 31, 1996.
Balance sheet information for December 31, 1996, has been derived from
the 1996 annual audited financial statements.
The Company costs its inventory on the last-in, first-out (LIFO) method.
Had the first in, first out (FIFO) inventory costing method been used,
inventories would have been equal to the LIFO balance at December 31, 1996 and
1995; and March 31, 1997 and 1996; and June 30, 1997 and 1996.
B. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on the
weighted average number of common shares outstanding and assumes exercise of
outstanding options for Common Stock which are dilutive, using the treasury
stock method.
In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share."
SFAS No. 128 revises the standards for computing earnings per share previously
prescribed by APB Opinion No. 15. SFAS No. 128 will be effective for the Company
for the year ending December 31, 1997. The earnings per share in the
accompanying financial statements were computed pursuant to APB Opinion No. 15
and is the same that would be required for basic earnings per share under SFAS
No. 128, which is determined using only the weighted average shares outstanding.
The Company also has potentially dilutive outstanding options that would not be
included in the computation of diluted earnings per share under SFAS No. 128
because to do so would be anti-dilutive.
C. DEBT
BORROWINGS
Debt consisted of the following (in thousands):
JUNE 30,
1997
------
Note payable to a bank............................ $46,961
Long-term debt.................................... 1,579
Capital lease obligations......................... 178
------
48,718
Less - Current maturities......................... 580
------
$48,138
======
At June 30, 1997, the weighted average interest rate on the note payable to a
bank was 8.0%.
-7-
<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On October 23, 1996, the Company entered into a financing agreement with
a new lender. Initial funding under this financing agreement was used to repay
amounts outstanding under the Company's prior credit facility. The new financing
agreement provides for up to $60.0 million of borrowings under a revolving
credit facility, which matures October 22, 1999, with annual renewals at the
option of the Company and the lender. Credit availability is limited to 60% of
the value of saleable inventory and 85% of accounts receivable, subject to
certain adjustments and reserves which may be made at the discretion of the
lender. The facility is secured by all inventories, receivables and fixed assets
of the Company and its subsidiaries. The borrowings may be priced, at the
Company's option, at the lenders' prime rate, plus 1/4 of 1% or London Interbank
Offered Rates (LIBOR) plus 2.25%. The Company pays a commitment fee of 3/8 of 1%
per annum on all unused portions of the credit facility. Loan covenants relate
to the Company's net worth, cash flow, liquidity and acquisitions, and restrict
capital expenditures to $5.9 million for 1997, and $5.0 million for 1998 and
1999; and restrict operating lease payments to $16.0 million per annum through
1999. The Company was in compliance with this financing agreement as of June 30,
1997.
At June 30, 1997, the Company had $47.0 million outstanding under the
credit facility and total unutilized credit facilities of approximately $5.8
million.
The Company has established irrevocable letters of credit totaling $1.2
million as security for various insurance contracts.
The book values of cash, trade accounts receivables and accounts payable
approximate their fair values principally because of the short-term maturities
of these instruments. The estimated fair value of long-term debt approximates
the book value as the debt is priced based upon a floating rate.
D. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
------ ------
Cash paid during the period for:
Interest........................... $2,393 $2,050
Income taxes....................... $ 0 $ 0
E. STOCKHOLDERS' EQUITY
The Board of Directors and the Company's stockholders approved the Hi-Lo
Automotive, Inc. 1990 Stock Option and 1991 Associate Stock Purchase Plans, as
amended. The Stock Option Plan reserves 1,400,000 shares of the Company's Common
Stock for issuance to directors, officers and employees. At June 30, 1997,
options for 1,180,066 shares were outstanding, 39,723 shares had been exercised,
972,777 shares had been canceled and 180,211 shares were available for issuance.
Under the Stock Purchase Plan, each eligible employee has the right to
purchase shares as determined by the Plan formula. As of June 30, 1997, of the
175,000 shares of the Company's Common Stock reserved for issuance under this
Plan, 113,511 shares had been issued and 61,489 shares of the Company's Common
Stock remained reserved for issuance.
PREFERRED SHARE PURCHASE RIGHTS
On August 23, 1996, the Company's Board of Directors adopted a
Stockholder Rights Plan to help assure that all of the Company's stockholders
receive fair and equal treatment in the event of a proposed take over of the
Company. The Rights Plan was effected by issuing one preferred share purchase
right for each outstanding share of Common Stock.
-8-
<PAGE>
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
These rights are not currently exercisable and will become exercisable only upon
the occurrence of specified events related to a change in control of the
Company. When exercisable, each right will entitle the holder to purchase 1/1000
of a share of the Company's Series A Junior Participating Preferred Stock at an
initial exercise price of $14.00 per right.
The rights expire on September 2, 2006, unless extended or redeemed.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Certain statements contained in this section which are not historical
facts are forward-looking statements that involve risks, uncertainties, and
assumptions including, but not limited to, customer demand and trends in the
auto parts, products and accessories industry, related inventory risks due to
shifts in customer demand, the effect of economic conditions, the impact of
competitors' locations and pricing, difficulties with respect to new
technologies such as point-of-sale systems, parts catalogs, supply constraints
or difficulties, and the results of financing efforts. Should one or more of
these or other risks or uncertainties materialize or should the underlying
assumptions prove incorrect, actual outcomes could vary materially.
The Company sells automotive aftermarket parts, products and accessories
to retail and commercial customers through retail stores in Texas, Louisiana and
California.
The Company's store openings prior to 1997 were generally in markets
where existing national competitors already have and/or are opening stores.
Certain national competitors have also continued to open new stores in Hi/LO's
existing markets. Management believes that the markets in which it operates will
continue to see increasing competition for the foreseeable future. New store
competition has a significant short-term impact on retail sales of the Company's
nearby stores. Future successful financial results are dependent upon the
Company's ability to compete effectively with these national competitors.
To respond to increased competition, the Company is remodeling older
stores located near recently opened competitor stores, improving customer
service, reducing operating, selling, and general and administrative costs when
appropriate, and continuing to improve distribution efficiencies. These
initiatives are being supported by changes in product assortment, including more
high quality product offerings and increased sales and marketing efforts in the
commercial markets. Additionally, the Company has plans to open three to five
new stores during 1997, and is focusing on the performance of its existing
stores to improve profitability. The Company identified up to 11 under
performing stores during 1996 which it plans to close by year end 1997, three of
which were closed in 1996 and three of which have already been closed in 1997.
The commercial program is also being streamlined and consolidated including the
centralization of receiving commercial orders.
Management believes the Company is regaining its momentum and as a
result of the initiatives begun in response to the increased competition, as
well as expected seasonal increases in sales and profitability, the Company's
financial results began to improve in the Second Quarter of 1997. Historically,
the Company's second and third quarters are strongest because of seasonal sales
volume increases. The Company can not, however, provide any assurance that its
results will continue to improve or even remain at current levels.
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included in Part I, Item 1.
-10-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the income statement data of the Company
expressed as a percentage of sales and the percentage change in such income
statement data from period to period.
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED PERCENTAGE CHANGE
JUNE 30, JUNE 30, QUARTER SIX MONTHS
----------------- ---------------- ------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Sales..................... 100.0% 100.0% 100.0% 100.0% (5.0)% (6.8)%
Cost of sales............. 60.6 61.2 60.2 61.1 (6.0) (8.2)
---- ---- ----- ----
Gross profit.............. 39.4 38.8 39.8 38.9 (3.4) (4.6)
Operating, selling, general
and administrative expenses 35.0 36.2 37.1 37.0 (8.1) (6.3)
------------ ----- ---- ----
Operating income.......... 4.4 2.6 2.7 1.9 64.8 29.1
Interest expense.......... 1.7 1.6 1.9 1.6 4.9 7.4
Other expense, net........ 0.0 0.4 0.0 0.4 (95.6) (101.5)
---- ---- ----- ----
Income (loss) before taxes 2.7 0.6 .8 (.1) 313.6 (920.8)
Taxes on income........... 1.0 0.3 .3 .1 167.0 190.5
---- ---- ----- ----
Net income (loss)......... 1.7% 0.3% .5% (0.2)% 493.5% (351.6)%
==== ==== ===== ====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 (SECOND QUARTER) COMPARED TO THREE MONTHS ENDED
JUNE 30, 1996
Sales for the second quarter of 1997 decreased by $3.3 million, or 5.0%,
over the comparable 1996 quarter. The decrease was due primarily to same store
sales decreases of $2.4 million, or 3.6% of sales, as well as the closing of six
stores since the second quarter of 1996. Same store sales represent a comparison
of store sales between corresponding full periods. At the end of the second
quarter of 1997, the Company had 188 stores in operation compared to 194 at the
end of the second quarter of 1996.
Gross profit for the second quarter of 1997 was $25.1 million, or 39.4%
of sales, compared with $26.0 million, or 38.8% of sales, for the second quarter
of 1996. The increase in gross profit as a percent of sales was attributable to
improved product margins together with a shift in the mix of sales to the higher
margin retail business.
Operating, selling, general and administrative expenses for the second
quarter of 1997 were $22.3 million, or 35.0% of sales, compared to $24.3
million, or 36.2% of sales, for the second quarter of 1996. This decrease of
8.1% was the result of more effective operating cost control. Operating costs
were also favorably impacted by lower insurance costs as a result of favorable
experience in certain employee health and welfare benefit programs.
Operating income for the second quarter of 1997 was $2.8 million, or 4.4%
of sales, compared to $1.7 million, or 2.6% of sales, in the second quarter of
1996, due to the factors discussed above.
Interest expense for the second quarter of 1997 was $1.1 million, or 1.7%
of sales, compared to $1.1 million, or 1.6% of sales, for the second quarter of
1996.
The Company's effective income tax rate for the second quarter of 1997
decreased to 35.5% of pre-tax income compared to 55.1% for the second quarter of
1996, primarily as a result of an increase in pre-tax income and the write off
of cost in excess of net assets acquired in the third quarter of 1996, which is
a permanent book-tax difference.
Net income of $1.1 million for the second quarter of 1997, or 1.7% of
sales, increased $.9 million, or 493.5%, from $0.2 million, or 0.3% of sales, in
the second quarter of 1996, due primarily to the reduction in operating,
selling, general and administrative expenses.
-11-
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 (THE 1997 PERIOD) COMPARED TO SIX MONTHS ENDED
JUNE 30, 1996
Sales for the 1997 Period decreased by $8.7 million, or 6.8%, from the
comparable period in 1996. The decrease resulted from same store sales decreases
of $7.1 million, or 5.6% of sales, as well as the closing of six stores between
the end of the two periods. Same store sales represent a comparison of store
sales between corresponding full periods.
Gross profit for the 1997 Period was $47.5 million, or 39.8% of sales,
compared with $49.8 million, or 38.9% of sales, for the comparable 1996 period.
The increase in gross profit as a percent of sales was attributable primarily to
improved product margins at the point of sale, together with a shift in the mix
of sales to the higher margin retail business. The Company's continued emphasis
on higher margin branded products also contributed to the increased margins.
Operating, selling, general and administrative expenses for the 1997
Period decreased by $3.0 million, or 6.3% over the comparable 1996 period,
primarily due to lower sales volumes and better cost control.
Operating income in the 1997 Period of $3.2 million, or 2.7% of sales,
increased by $.7 million, or 29.1%, from the prior year's comparable period
levels of $2.5 million, or 1.9% of sales, due to the factors discussed
previously.
Interest expense for the 1997 Period was $2.2 million, or 1.9% of sales,
compared to $2.1 million, or 1.6% of sales, for 1996 because of higher debt
levels during the period.
The Company's effective income tax rate for the 1997 Period changed to
37.1% of the pre-tax income, as compared to 105% of 1996 net loss. The decrease
resulted from an increase in pre-tax income and the write off of cost in excess
of net assets acquired in the third quarter of 1996, which is a permanent
book-tax difference.
Net income for the 1997 Period was $0.6 million, or 0.5% of sales,
compared to the 1996 net loss of $0.2 million, or 0.2% of sales due primarily to
the reduction in operating, selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities during the first six months of 1997
utilized net cash of $1.8 million primarily for increased inventories and as a
result of paying vendors more quickly than in 1996. Investing activities
utilized $1.1 million of net cash, principally related to the Company's capital
expenditures. Financing activities provided $2.3 million of cash, resulting from
net borrowings under the Company's credit facility.
The Company has historically financed its growth and operations through a
combination of internally generated funds, bank borrowings, sale and lease back
transactions, and issuance of common stock. Capital expenditures were $1.7
million during the first six months of 1997 compared to $2.5 million for the
same period of 1996.
The Company plans to open three to five stores during 1997. The Company
also plans to remodel or relocate approximately seven additional stores prior to
the end of 1997. Planned capital expenditures for the remainder of 1997,
including those associated with remodels, relocations and conversions, will be
approximately $3.5 to $4.2 million before sale and lease back and direct lease
transactions.
Inventories have increased $2.4 million since December 31, 1996. This is
primarily related to the increase in store and distribution center inventories
in preparation for the seasonal increase in sales in the second and third
quarters. Average Company inventories per store, including distribution center
inventories, at the end of June 30, 1997, were approximately $499,000 compared
to approximately $479,000 at December 31, 1996, and $515,000 at June 30, 1996.
This increase over December 1996 was funded through borrowings under the
Company's credit facility.
The Company's existing credit facility contains covenants relating to the
Company's working capital, net worth, leverage, liquidity and certain
acquisitions. For a more detailed description of the Company's credit
facilities, see the Notes to Consolidated Financial Statements. The Company
funds its capital and liquidity needs through existing working capital, cash
flows from operations, bank borrowings and sale and lease back of retail
properties.
-12-
<PAGE>
On October 23, 1996, the Company entered into a financing agreement with
a new lender. Initial funding under this financing agreement was used to repay
amounts outstanding under the Company's prior credit facility. The new financing
agreement provides for up to $60.0 million of borrowings under a revolving
credit facility, which matures October 22, 1999, with annual renewals at the
option of the Company and the lender. Credit availability is limited to 60% of
the value of saleable inventory and 85% of accounts receivable, subject to
certain adjustments and reserves which may be made at the discretion of the
lender. The facility is secured by all inventories, receivables and fixed assets
of the Company and its subsidiaries. The borrowings may be priced, at the
Company's option, at the lenders' prime rate, plus 1/4 of 1% or London Interbank
Offered Rates (LIBOR) plus 2.25%. The Company pays a commitment fee of 3/8 of 1%
per annum on all unused portions of the credit facility. Loan covenants relate
to the Company's net worth, cash flow, and restrict capital expenditures.
Capital expenditures are limited to $5.9 million for 1997, $5.0 million for 1998
and 1999. Additionally, operating lease payments are restricted to $16.0 million
per annum through 1999. The Company was in compliance with this financing
agreement as of June 30, 1997.
Future compliance with the financial covenants of the Company's financing
agreement is dependent on its ability to generate sufficient earnings and cash
flow to meet such covenants. In the event the Company is not able to remain in
compliance with the provisions of the financing agreement, it will attempt to
renegotiate the terms of the financing agreement so as to remain in compliance
or to refinance amounts outstanding under the credit facility. However, there
can be no assurance that the Company would be successful in such negotiations,
in which case the Company's funds available for its operating needs would be
limited to internally generated funds.
At June 30, 1997, the Company had $47.0 million outstanding under the
credit facility and total unutilized credit facilities of approximately $5.8
million.
Although the Company believes that existing working capital, cash flows
from operations, bank borrowings, sale- leasebacks of retail properties and
sales of excess real estate will be sufficient to fund both capital and
liquidity needs of the Company for the next year, the Company's ability to
access capital due to its operating results in recent periods could have an
adverse impact on the Company's ability to compete effectively in its markets.
The book values of cash, trade accounts receivables and accounts payable
approximate their fair values principally because of the short-term maturities
of these instruments. The estimated fair value of long-term debt approximates
the book value as the note payable to a bank is priced based upon a floating
rate.
The Company accepts payment for sales by cash, including checks and major
credit cards, and offers accounts to commercial customers.
SEASONALITY
The Company's business is seasonal in nature, with store sales and
profits historically running higher in the second and third quarters (April
through September) of each year than in the Company's first and fourth quarters.
Sales for the combined second and third quarters of 1996 were 52.9% of annual
sales. The Company's business is also influenced by weather conditions. Weather
extremes tend to enhance sales by causing a higher incidence of parts failure,
and thus increasing sales of seasonal products. Rainy weather, however, tends to
reduce sales by causing deferral of elective maintenance.
INSURANCE
The Company maintains insurance for on the job injuries to its associates
and other coverages for normal business risks. A substantial portion of the
Company's current and prior year insurance coverages are "high deductible"
policies in which the Company, in many cases, is responsible for the payment of
incurred claims up to specified individual and aggregate limits, over which a
third party insurer is contractually liable for any additional payment of such
claims. Accordingly, the Company bears certain economic risks related to these
coverages. On a continual basis, and as of each balance sheet date, the Company
records an accrual equal to the estimated costs expected to result from incurred
claims plus an estimate of claims incurred but not reported as of such date
based on the best available information at such date. However, the nature of
these claims is such that actual development of the claims may vary from the
estimated accruals. All changes in the accrual estimates are accounted for on a
prospective basis and can have a significant impact on the Company's financial
position or results of operations.
-13-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1997, the Company's operating subsidiary, Hi-Lo Auto Supply, L.P.
("Hi/LO") was served with a purported class action petition styled "Charles
Beresky vs. Hi-Lo Auto Supply, L.P.," Cause No. B-157-070 in the District Court
of Jefferson County, Texas, 60th Judicial District. The petition alleges that
Hi/LO developed a scheme to promote, offer and sell "old," "used" and "out of
warranty" batteries as if the batteries were new and seeks certification as a
class action on behalf of all persons and entities in the United States that
have purchased a battery from Hi/LO during the period May 5, 1990 to the
present. In the petition, the plaintiffs purport to state causes of action for
deceptive trade practices violations, breach of contract, negligence, fraud,
negligent misrepresentation and breach of warranty, and the plaintiffs seek
actual damages, treble damages, punitive damages, attorneys' fees and pre- and
post-judgement interest.
This lawsuit is similar to class action litigation brought against a
number of retail auto parts chains and other retailers of aftermarket automotive
batteries. While it is too early to predict the impact of this litigation, Hi/LO
believes the claims are without merit and intends to vigorously defend this
action.
The Company and/or its subsidiaries is also party to various routine
claims and lawsuits arising in the normal course of the Company's business. The
Company does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's results of
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1997 Annual Meeting of Stockholders of the Company was held on May
20, 1997. At such meeting, each of the following persons listed below, all of
whom were incumbent directors, were re-elected to the Board of Directors of the
Company for a term ending at the Company's 1998 Annual Meeting of Stockholders.
The number of votes cast with respect to the election of each such person is set
forth opposite such person's name:
NAME OF DIRECTOR NUMBER OF VOTES CAST
BROKER
FOR WITHHELD NON-VOTE ABSTAIN
Richard C. Adkerson 8,963,232 1,025,350 0 0
Richard Q. Armstrong 8,959,432 1,029,150 0 0
Charles P. Durkin, Jr. 8,958,832 1,029,750 0 0
E. James Lowrey 8,975,732 1,012,850 0 0
Edward T. Story, Jr. 8,962,832 1,025,750 0 0
T. Michael Young 8,975,803 1,012,779 0 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11.1 Schedule of Computation of Earnings Per Share
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hi-Lo Automotive, Inc.
Date: August 14, 1997
/s/ T. Michael Young
T. Michael Young
Chairman of the Board,
President and
Chief Executive Officer
Date: August 14, 1997
/s/ Gary D. Walther
Gary D. Walther
Vice President-Finance and
Chief Financial Officer
-15-
EXHIBIT 11.1
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================
COLUMN A COLUMN B
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- -------
<S> <C> <C> <C> <C>
AVERAGE COMMON SHARES OUTSTANDING........... 10,775,109 10,756,350 10,775,109 10,756,350
COMMON EQUIVALENT SHARES RESULTING FROM
STOCK OPTIONS ISSUED...................... 0 0 0 0
--------- --------- --------- -------
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING........................ 10,775,109 10,756,350 10,775,109 10,756,350
========== ========== ========== ==========
NET INCOME (LOSS)........................... $ 1,098 $ 185 $ 619 $ (246)
========= ========= ========= =======
EARNINGS PER COMMON SHARE:
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE.......................... $ .10 $ 0.02 $ .06 $ (0.02)
========= ========= ========= =======
</TABLE>
- ----------------
Earnings per share have been computed by dividing net income by the average
number of common and common equivalent shares outstanding. Common equivalent
shares outstanding were computed using the treasury stock method. The difference
between shares for primary and fully diluted earnings per share was not
significant in any period. On November 1, 1994, a note was issued that is
convertible, effective November 1, 1996, into 93,859 shares of the Company's
Common Stock. As of June 30, 1997, this note had no significant effect on
earnings per share.
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S 2ND QUARTER FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 604
<SECURITIES> 0
<RECEIVABLES> 13,246
<ALLOWANCES> (573)
<INVENTORY> 93,819
<CURRENT-ASSETS> 108,940
<PP&E> 77,582
<DEPRECIATION> (46,307)
<TOTAL-ASSETS> 143,554
<CURRENT-LIABILITIES> 31,559
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 59,805
<TOTAL-LIABILITY-AND-EQUITY> 143,554
<SALES> 63,760
<TOTAL-REVENUES> 63,760
<CGS> 38,635
<TOTAL-COSTS> 60,929
<OTHER-EXPENSES> 11
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 1,108
<INCOME-PRETAX> 1,704
<INCOME-TAX> 606
<INCOME-CONTINUING> 1,098
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,098
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
