SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-13710
AID AUTO STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 11-22546564
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
275 Grand Boulevard, Westbury, New York 11590
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 338-7889
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Stock, Par Value $.001 Per Share
Title of Class
Redeemable Common Stock Purchase Warrants
Title of Class
Indicate by check mark if 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, if definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendemnt to this Form 10-K. [ ]
As of March 14, 1997, the aggregate market value of voting stock hold by
nonaffiliates of the registrant was $6,723,750.
As of March 14, 1997, there were 3,957,596 shares of Common Stock (par value
$.001 per share) outstanding.
Documents Incorporated by Reference
Not Applicable
ITEM 1. BUSINESS
General
Aid Auto Stores, Inc. (the "Company") owns and operates, and franchises, retail
automotive parts and accessories stores under the name Aid Auto Stores. These
stores sell an extensive variety of name-brand automotive parts, accessories
and chemicals, as well as an assortment of products marketed under the "Aid"
brand (the "Aid Mark"), and also under the "Perfect Choice" brand (the
"Perfect Choice Mark"), to both do-it-yourself ("DIY") and commercial
customers. At December 31, 1996, there were 20 Company-owned and 40
franchisee-owned Aid Auto Stores. Through 1995, the Company had derived the
majority of its revenues from the wholesale sale of automotive products to its
franchisees and, through its wholly-owned subsidiary, Ames Automotive
Warehouse, Inc. ("Ames"), to hundreds of non-automotive chain stores and
independent jobbers and installers in New York, New Jersey and Connecticut.
However, in 1996, the Company derived approximately 62% of its operating
revenues from its Company-owned retail automotive stores, in contrast to
only 20% in 1995. Aid Auto Stores have operated for more than 40 years and
the Company believes that the Aid Auto name is widely recognized by
consumers in the New York metropolitan area. The Company is seeking to
capitalize on such name recognition, as well as its expertise and operating
history, warehouse distribution channels and vendor relationships, to
become the dominant automotive aftermarket parts distributor and retailer in
the Northeast.
The focus of the Company's growth strategy is a Company-owned mini warehouse
Superstore program, which program was instituted in 1995 following the
completion of the Company's initial public offering in April 1995 (the
"Initial Public Offering"). As of December 31, 1996, the Company has opened
six new Company-owned Superstores. In addition, on December 15, 1995, the
Company acquired ten franchised Aid Auto Stores located in Long Island, New
York. Following the acquisition, the Company commenced converting up to nine
of the ten stores into Aid Auto Superstores. Four of these stores have been
converted and reopened as Superstores, five of the six remaining stores have,
to date, implemented the Superstore advertising, inventory and merchandising
program. Each Superstore enables consumers and businesses to buy quality
automotive products from a large inventory at the lowest possible prices and
to do so in a convenient and informed manner. The Company intends to continue
such growth by means of opening additional Company-owned Superstores and/or by
acquiring other companies, including Aid Auto Stores franchises, having
automotive parts and accessories retail stores. The Company currently
contemplates having in operation up to 48 to 60 Superstores, including the
current Superstores, within the next three years. The Company will need to
seek additional debt or equity financing to fund the continuing cost of this
program.
Industry Overview
According to industry estimates, the size of the domestic automotive
aftermarket for replacement parts, maintenance items and accessories is
believed to have been approximately $95 billion in 1995. The Company believes
that the automobile aftermarket will grow in the future because of, among
other things, increases in the size and age of the United States' automotive
fleet, the increasing number of miles driven annually per vehicle, the higher
cost of new cars compared to historic costs and the higher cost of replacement
parts as a result of technological changes in more recent modesl of vehicles.
Moreover, the industry is experiencing a trend toward consolidation, with
regional automotive specialty chains gaining market share at the expense of
smaller independent operators and less specialized mass merchandisers.
Compared to most small independent retailers, automotive specialty retail chains
with multiple locations in given market areas generally enjoy competitive
advantages in purchasing, distribution, advertising and marketing. Significant
increases in the number of automotive replacement parts in recent years due to
the greater number of domestic and imported vehicle makes and models has made
it difficult for smaller, independent retailers and less specialized mass
merchandise chains to maintain inventory selection broad enough to meet
consumer demands. In view of the foregoing, the Company believes that
considerable growth opportunities exist in the New York metropolitan area and
throughout the Northeast because the region contains one of the largest
vehicle populations in the country.
Current Business Operations
Aid Auto Stores
Aid Auto Stores are generally situated in high-visibility locations, such as
strip shopping malls, and provide an expansive merchandise selection in an
attractive store environment. The Company attempts to keep the distinctive
signage and color scheme of the Aid Auto Stores consistent among both its
Company-owned and franchised locations to increase its name recognition. Aid
Auto Stores, which are not Superstores, typically range in size from
approximately 3,000 to 5,000 square feet of space. Aid Auto Superstores
are designed for an average of 5,000 to 8,000 square feet, although they will
be larger on occasion depending on the particular locations. All stores are
open daily, including weekends.
Company-Owned Stores. At December 31, 1996, the Company operated 20 Aid
Auto Stores, ten of which are Superstores and eight are in the process of
being converted to Superstores. These 20 Aid Auto Stores are located in
Long Island (11), Brooklyn (3), Queens (3), Staten Island (1), White
Plains (1) and Jersey City (1). In addition, the Company opened a
Superstore located in the Bronx in February 1997. The number of
Company-owned stores, as of the last day of each of the last three years, is
as follows:
COMPANY-OWNED STORES
December 31, 1994 December 31, 1995 December 31, 1996
Non-Superstore 3 13 (1) 10 (2)
Superstore 0 1 10
Total 3 14 20
(1) During the year ended December 31, 1995, the Company closed a
Company-owned non-Superstore, in Brooklyn, New York.
(2) Of these ten stores, eight are expected to be converted to Superstores
and have, to date, implemented the Superstore advertising, inventory and
merchandising programs.
The Company selects name brand merchandise and merchandise sold under the Aid
and Perfect Choice Marks for all of its Company-owned stores, which merchandise
is provided from the Company's wholesale distribution center. The Company's
stores sell their merchandise for cash and through third-party credit cards.
The Company's policy is to refund the purchase price for, or exchange, returned
merchandise. The Company believes that, to date, the amount of refunds and
exchanges to and for its retail customers has not been material. For the
years ended December 31, 1994, 1995 and 1996, the Company's stores generated
net sales of $2,613,685, $3,969,815 and $16,690,722, respectively, which
constituted approximately 10.8%, 19.6% and 62.1%, respectively, of the
Company's overall operating revenues for such periods. For the year ended
December 31, 1996, the Company-owned stores reported net income of $146,000
as compared to net losses of $184,000 and $204,000 for the years ended
December 31, 1994 and 1995, respectively. The Company does not believe that
the results of operations of its Company-owned stores is necessarily indicative
of future operating results. In view of its Superstore growth program, the
Company anticipates a continued increase in revenues from Company-owned stores,
although there can be no assurance of profitable operations. In addition,
the Company-owned stores provide the Company the opportunity to supply all
of these stores' inventory needs, increasing the Company's purchasing power
and adding to the Company's profitability.
Aid Auto Franchises. At December 31, 1996, the Company had franchise
agreements with 19 franchises who independently own and operate a total of
40 Aid Auto Stores in New York and New Jersey. The Company's standard
franchise agreement, which grants to the franchisee the license to use the
Company's Aid Auto Stores service mark in connection with the franchisee's
store, is for an initial term of ten years, which term is subject to automatic
five-year renewals thereafter unless terminated by either party prior to six
months before the end of the initial term or renewal period, as the case may
be. The Company may terminate these franchise agreements due to failure to
meet standars set for franchisees and for other reaons.
Franchisees typically pay a one-time initial franchise fee (currently $22,500
for new franchisees and $6,000 for existing franchisees opening additional
stores and for independent automotive parts stores who desire to convert their
store to a Company franchise) as well as continuing monthly franchise fees of
$400. In additiona to franchise fees, the Company's current form of
franchise agreement provides that franchisees are required to contribute $775
per month to the Company's advertising and promotion costs. The payment
obligations of most of the Company's franchisees are secured by their
inventory and equipment and all proceeds from their sale of the foregoing, and
by the personal guaranty of the franchisee. The Company provides the
franchisee with, among other things, site location assistance, mandatory
training, store layout and design assistance, and promotional and advertising
services. The franchise agreements require that the store be operated in
accordance with operating procedures established by the Company relating to,
among other things, signage, advertising (including carrying the products
advertised), store hours, cleanliness and compliance with laws. The Company
is permitted to regularly inspect the stores to regulate compliance with the
foregoing and to check inventories and books and records. In addition, the
Company's current form of franchise agreement provides that the Company shall
have the right to approve the lease of any franchisee.
More recent franchise agreements, with respect to 15 franchised stores,
contain a provision granting the franchisee an exclusive territory of a
radius of 1.5 miles from the franchisee's Aid Auto Store location, in
consideration of the franchisee purchasing annually at least 75% of its
inventory from the Company. In 1995 and 1996, none of the subject stores
purchased that level of inventory from the Company. Thus, the Company
believes that, upon notice and failure by the franchisee to cure within the
appropriate time period, it will be able to terminate such territorial
exclusivity. Such provision is expected to be eliminated from future
franchise agreements, if any. Notwithstanding the foregoing, the Company
has selected and intends to continue to select sites for its Superstores in
areas not served by existing Aid Auto Stores and believes that adequate
potential sites are available. The Company, in anticipation of opening
Company-owned mini warehouse Superstores, sold only one new franchise in 1995,
which was sold to an existing franchisee opening an additional store, and none
in 1996, and currently intends to continue to restrict the number of franchises
granted in the future so as to preservce desirable locations for its proposed
new Superstores. The Company sold two franchises in 1994 to existing
franchisees opening additional stores, one franchise in 1993 and 13 in 1992.
During the entire twelve months of 1994, 1995 and 1996, ten, seven and eight
franchises, respectively, were terminated by the Company due to their failure
to meet standards set for franchisees and for other reasons.
Although the Company receives franchise fees from its franchisees as
described above, the Company derives the principal portion of its franchise-
related revenues from the sale of automotive products to its franchisees in
connection with its wholesale operations. Currently all of the products
marketed on a wholesale basis under the Aid Mark are purchased by the
franchisees from the Company, as well as a substantial portion of the other
merchandise sold in their stores. While franchise fees accounted for only
approximately 1.3%, 1.5% and 0.7% of the Company's operating revenues for
the years ended December 31, 1994, 1995 and 1996, respectively, and sales
of products to franchisees accounted for 46.4%, 41.7% and 19.2% of net sales,
respectively, for these same periods.
Product Line and Pricing. The Aid Auto Stores (Company-owned and franchised)
carry an extensive product line which includes new and remanufactured
automotive hard parts such as shock absorbers, front end chassis parts,
exhaust systems, brakes, alternators, starters, ignitions, automotive
batteries, belts and hoses. Product assortment includes parts for both
domestic and import cars, light trucks and vans. Aid Auto Stores also carry a
complete line of maintenance items such as oil, antifreeze, transmission,
brake and power steering fluids, engine additives, protectants and waxes
and accessories. The average Company-owned non-Superstore carries about
8,000 stock-keeping units ("SKU's") on premises, although they have, through
the Company's wholesale distribution center, access to more than 22,000
additional SKU's within 24 hours. In addition to a wide assortment of
national brands, each of the Aid Auto Stores also carry a number of products
(such as fan belts, hoses, alternators, starters, brake shoes and water
pumps) marketed under the Aid Mark. Furthermore, the Company has developed
a new private label brank name program, which is marketed under the name
Perfect Choice. The Company currently has developed 32 such private label
products, primarily maintenance items, and is seeking to develop approximately
14 additional products over the next six months. The Company has applied for
registration of the Perfect Choice trademark with the United States Patent
and Trademark Office.
The Aid Auto Stores employ strategic pricing policies to maximize sales and
profits; overall prices compare favorably to those of their competitors'
retail stores. Such pricing strategy is supported by advertising in
newspapers, circulars, radio and television and through in-store promotional
signage and displays.
Store Operations. Aid Auto Stores are typically staffed with a manager/owner,
assistant manager and several full-time and part-time sales associates, the
number of which varies depending on store volume. Store managers are
responsible for day-to-day operations, including in-store merchandise
presentation, customer relations, store maintenance and sales personnel
relations as well as selecting and training new employees. The store
management of Company-owned stores receive compensation in the form of
salaries and performance-based bonuses and its sales associates for such
stores are paid on an hourly basis plus performance incentives. Although the
Company relies on on-the-job training to assure that employees are
knowledgeable with respect to store merchandise, both the Company-owned and
franchised stores generally hire personnel with prior automotive experience.
The Company also provides formal training programs for both its franchisees
and its own employees, which include regular store meetings on specific sales
and product issues, training manuals and special programs under which store
personnel can obtain expertise in several technical areas. The Company
supplements training with frequent store visits by management.
In 1996, the Company completed the installation of point-of-sale computer
terminals at all of its Company-owned stores. These point-of-sale terminals
utilize bar code scanning technology to price merchandise in sales
transactions. The use of this technology speeds transaction times, reduces
register lines and eliminates labor time previously spent in price labeling
merchandise. Substantially all of the sales are currently being scanned.
The point-of-sale terminals capture sales information at the time of the
transaction to enable the generation of sales reports which assist in store
and Company-wide planning.
Customer Service. The Company believes that do-it-yourself ("DIY") and
commercial customers place a significant value on customer service.
Accordingly, the Company emphasizes customer service and knowledgeable and
courteous service. Through its training programs, the Company provides its
personnel and its franchisees with technical parts expertise, enabling them
to advise customers regarding the correct part type and application. Customer
service is enhanced by a variety of programs including in-store computerized
catalogs which assist in the selection of proper replacement of hard parts;
testing of starters, alternators and batteries; free battery charging as well
as installation assistance for batteries, windshield wipers and selected other
products.
Wholesale Operations
From its centralized purchasing and distribution center located in Westbury,
New York, the Company supplies national brand-name products such as Champion,
Moog, Wagner, Monroe, Prestone, STP, Armorall and Turtle Wax (as well as a
number of products marketed under the Aid and Perfect Choice Marks
specifically for the Aid Auto Stores) to its franchised Aid Auto Stores and,
through Ames, to other wholesalers, jobbers and non-automotive retail chains,
on a wholesale basis.
Aid Auto Wholesale Operations. The Company sells and distributes automotive
products from its distribution center's inventory directly to its franchised
Aid Auto Stores. The Company supplies substantially all of the merchandise
sold by Company-owned stores. It also provides its franchisees with wholesale
discounts and other pricing incentives.
Ames Wholesale Operations. The Company's Ames subsidiary sells and
distributes national name-brand automotive products from the Company's
inventory directly to other wholesalers, retailers, installers and prominent
non-automotive retail chains, including supermarkets, home centers and drug
store chains. By purchasing products from Ames, non-automotive retail chains
are provided a convenient, cost-effective means of participating in the
automotive aftermarket. Ames seeks to provide its retail operations cus
rofit margins, high sales per square foot, excellent inventory turnover, and
an extremely high in-stock position (preventing lost sales). Ames accounted
for approximately 40.6%, 35.1% and 18.0% of the Company's net sales for the
years ended December 31, 1994, 1995 and 1996, respectively.
As a major automotive warehouse feeder for non-automotive retail
merchandisers in the Northeast, Ames is capable of selling and distributing
thousands of different name brand products to its customers. In addition,
Ames offers a full menu of support services such a strategic planning,
merchandise packout, price ticketing, order writing and replenishment,
planogramming, advertising support and new store set-ups. Orders are
expedited through the Company's Electronic Data Interchange ("EDI") computer
link directly from the field to the Company's distribution center, which
helps keep lead time to a minimum.
Inventory Management and Distribution
The Company's Westbury distribution center contains 1,636,000 cubic feet of
warehouse space and in excess of 30,000 SKU's. It is equipped with an
automated conveyor system which expedites the movement of automotive products
to the loading area for shipment to its customers on a daily basis. Prior to
1995, the Company shipped all orders in trucks leased and operated by the
Company. Effective January 1995, the Company began shipping all of its orders
for both the Aid Auto Stores and its Ames customers via Ryder Commercial
Leasing & Services ("Ryder") dedicated carrier program pursuant to an
agreement entered into in December 1994. The agreement provides that Ryder
will, among other things, ship the Company's orders in a fleet of its trucks
(the number of which may be adjusted to accommodate changed conditions),
maintain all such trucks, provide licensed drivers, handle shipping
documents, and provide managerial information system services to the
Company, in consideration of a fee schedule (which fees may change in the event
the assumptions upon which they were established change). The agreement is
subject to termination by Ryder in the event the Company is in substantial
default of its obligations thereunder or in the event the parties are unable
to agree upon a negotiated rate increase prior to each anniversary date. By
contracting its shipping to Ryder and utilizing their expertise and customized
services, the Company has achieved operational efficiencies; however, there
can be no assurance that such efficiencies will continue.
The Company utilizes an IBM AS/400 computer system at the distribution center
and continually modernizes and upgrades its computer capabilities to provide
more efficient distribution and inventory control. The Company believes that
its inventory management and distribution system results in lower inventory
carrying costs for the Company and improved in-stock positions for its
customers. The Company is currently enhancing and expanding its
electronically linked ordering system with the Aid Auto Stores and its Ames
customers, which is intended to imprive inventory control management.
Inventory levels are monitored regularly based on sales movement and on
management's assessment of the changes and trends in the marketplace.
Manufacturing and Supply
Purchases are made by the Company for both the Aid Auto Stores and Ames
wholesale operations directly from automotive parts and accessories
manufacturers, and are based upon several criteria, including product
quality, price and brand recognition. Most of the merchandise purchased is
shipped by vendors to the Company's distribution center. Some of the
Company's suppliers provide the Company with prime purchase incentives such
as discounts, cooperative advertising and market development funds.
The manufacturers of automotive parts and products typically provide
replacement warranties, which the Company, the Aid Auto Stores and Ames, in
turn, extend to their customers. In general, the Company is able to return to
its suppliers slower moving, obsolete or overstocked items for full credit.
In 1996, the Company purchased products from over 300 suppliers. The Company
is dependent on close relationships with its suppliers of automotive parts
and equipment, and its ability to purchase products directly from these
manufacturers at favorable prices and on favorable terms. No supplier
accounted for over 10% of the Company's purchases in 1994, 1995 and 1996. The
Company views its relationships with its suppliers as excellent, and believes
that alternative sources exist for most of the products it purchases. However,
the Company does not maintain supply contracts with any of its suppliers, and
it is possible that the loss of any significant supplier could have a material
adverse effect on the Company if not replaced in a timely manner and upon
suitable terms. The Company's principal suppliers currently provide the
Company with certain incentives such as volume purchasing discounts and
cooperative advertising and market development funds. A reduction or
discontinuance of these incentives could also have a material advers effect
on the Company and its operations.
Advertising, Promotion and Marketing
The Company employs strategic pricing policies to maximize sales and profits
and, as a result, believes that its overall prices compare favorably to those
of its competitors. Such pricing strategy is supported through the extensive
use of advertising and promotional activities including newspapers,
circulars, direct mail, radio and television, as well as in-store banners,
signs, displays and promotions. The Company believes that it's advertising
and promotional activities have resulted in significant name recognition in
its marketing area. Advertising expenses are substantially offset through
franchisee advertising fees and cooperative advertising programs with the
Company's vendors. Cooperative advertising involves the sharing of costs for
advertising materials that promote both the product and the retail outlet.
The Company views its suppliers as having close and cooperative relationships
involving benefits to the Company including volume discounts, rebates, credits,
return allowances, cooperative advertising, packaging improvements, signage
assistance programs and distribution management.
Superstore Growth Program
General
The Company's objective is to become the dominant automotive aftermarket
parts retailer in the Northeast. To accomplish this, in 1995, the Company
instituted a Company-owned mini warehouse Superstore growth program. The
Superstores are designed to make it possible for consumers and commercial
entities to buy top quality automotive aftermarket products from a large
inventory at the lowest possible prices. The Superstore growth program
currently contemplates having up to 48 to 60 Superstore outlets in operation,
including current Superstores, within the next three years. The Company will
need to seek additional debt or equity financing to fund the continuing cost
of this program. The Superstores target both DIY and commercial customers.
The Company evaluates the results of this growth strategy on an ongoing
basis and may make such modifications thereto as it deems prudent. The
company opened its first Superstore in July 1995 in Queens, New York. In
December 1995, the Company acquired 10 stores located in Long Island, New
York, which were controlled by a single individual. Nine of the 10 acquired
stores are large enough to be converted into Superstores and have already
implemented the Superstore advertising, inventory and merchandising program.
In 1996, four of these stores have been converted and reopened as Superstores
and the Company currently intends to continue to convert these stores into
Superstores in 1997. In 1996, the Company opened five additional Superstores,
one in Brooklyn, New York, one in Staten Island, New York, one in Queens,
New York, one in Long Island, New York and one in Jersey City, New Jersey.
Site Selection and Future Expansion
The Company believes that substantial growth opportunities exist in its
current marketing area (the New York metropolitan area, including New Jersey
and Connecticut), as well as throughout the Northeast. Current plans are for
future Superstores to be located in heavily populated urban areas, including
Long Island, Queens, Brooklyn, Bronx, Westchester and Putnam in New York,
north and central New Jersey and the southern tier of Connecticut.
Management believes that it will not experience any significant difficulties
in continuing to locate suitable sites for additional new stores or
identifying suitable acquisition candidates for conversion to Superstores.
Although the outlay to acquire a business that is operating as an
independently owned parts store or a franchised Aid Auto Store will vary
depending upon the amount of inventory and the amount of space being
acquired, the Company believes the average cost to acquire and expand an
existing parts store would be the same as the average cost required for the
opening of a new store.
The Company is seeking to strategically locate store sites in clusters within
the geographic area, which complements the Company's distribution system to
potentially achieve maximum distribution economies, advertising and marketing
costs and other economies of scale. Other factors considered in the selection
of sites for new stores include population density; growth patterns; age and
per capita income; vehicle traffic counts; and the number and type of
existing automotive facilities, such as auto parts stores, repair facilities
and other competitors within a pre-determined radius of the potential new
location.
The expenditures associated with the opening of a new mini warehouse
Superstore, including the cost of location acquisition, improvements,
fixtures, inventory, computer equipment and other pre-opening expenses
(including initial salaries, training, promotion and advertising), are
currently estimated to average approximately $450,000 per store, depending
upon variables such as size of location, extent of improvements, and amount
of inventory. While the cost of the six new Superstores has been in this
general range, there can be no assurance that such cost levels can be
maintained in the future. To the extent actual costs for the establishment
of future Superstores are in excess of current estimated costs, the Company
may adjust the number of stores it proposes to open and/or may seek to
increase the amount of additional financing it may require. There can be no
assurance that the Company will have adequate financing to expand the
Superstore program or, if it does, that such expansion will be successful.
Superstore Design and Operations
The design for the Company-owned mini warehouse Superstore calls for an
average of 5,000 to 8,000 square feet, which will carry between 12,000 to
15,000 SKU's (as opposed to the existing non-Superstore, Aid Auto Stores,
which carry an average of only 8,000 SKU's) plus an additional 200,000 SKU's
available by special order. The description contained in this section is
subject to change as circumstances dictate.
The Superstore includes an improved merchandise presentation with overhead
storage for high volume items, automatic restocking battery displays, and
warehouse style racks and shelving, permitting self-service selection of
automotive replacement parts that are usually stored behind a parts counter
in standard format stores.
Given their needs, the Superstores are designed to accommodate the DIY
customer. The current Superstores contain a Customer Information Section and
future Superstores are expected to do so as well. Customers are able to
utilize modern information and diagram computers within the stores to
diagnose repairs and supply answers to even the most difficult automotive
problems. Repair solutions and instructions are provided free of charge to
all customers through the Company's comprehensive Complete Car Care Manual
Library. All Superstores have an electronic parts catalog that provides
parts information based on vehicle make, model and year. Catalog display
screens are available in various locations throughout the store so that
employees and customers can take advantage of the electronic catalogs.
An easy access, open-ended Customer Service Station enables customers to
interact with the Company's automotive specialists on the open selling floor.
This technique differs from the traditional auto parts store that usually has
a parts counter separating employees from customers. All Superstores have
bold signage with the Aid Auto Stores logo and brightly lit store interiors.
Each Superstore is staffed with a Store Manager, an Assistant Manager, and
additional counter salespersons and support staff as required to meet the
specific needs of each store. The Company provides financial incentives to
its Superstore management team through an incentive compensation program.
Cost control efforts are being emphasized, including improved stock
turnaround and suggested order generation at the retail level, bar code
scanning, electronic price changes, promotions and updates, full electronic
data interchange capabilities between all locations and headquarters, and the
use of Telxon hand-held scanning computers for inventory control and
replenishment to the distribution center.
Competition
The Company competes both in the DIY and the commercial portions of the
automotive aftermarket business. The Company believes the largest share of
the DIY market is held by independently owned stores which, while principally
selling to wholesale accounts, have significant DIY sales. The Company also
competes with other automotive specialty retailing chains, such as R&S
Strauss, and in certain of its product categories (such as oil and certain
car care products) with discount and general merchandise stores. The
Company's major competitors in supplying the commercial market include
independent warehouse distributors, independently owned parts stores,
automobile dealers and national warehouse distributors and associations
such as National Automotive Parts Association (NAPA). The Company may also
face competition from large regional automotive aftermarket chains based in
other areas of the country, in the event they enter the Company's market, such
as Pep Boys which has recently entered the New York market.
The principal competitive factors which effect the Company's business are
store location, customer service, product selection, quality and price. The
Company believes that it currently competes favorably with its competition
with respect to these factors. The Company has well-developed warehouse
distribution channels and vendor relationships. Because of volume purchases,
the Company is able to offer its products at competitive prices. As a result
of its advertising program, the Company believes that products at the store
level are able to sell at a faster rate than those of its competitors which
do not utilize such an ad campaign. In addition, "Aid Auto Stores" is a
highly recognized name in the Company's market.
Employees
As of December 31, 1996, the Company employed approximately 252 persons
(excluding franchisees and their employees), of whom 176 were employed at its
existing Company-owned Aid Auto Stores, and 76 were employed at the Company's
Westbury, New York executive offices and distribution center (including four
executive officers, 38 warehouse personnel, four sales representatives, two
advertising personnel and 28 corporate and administrative personnel).
Currently 37% of the Company's warehouse employees are subject to a collective
bargaining arrangement with International Brotherhood of Teamsters Local 239.
The Company believes that its labor relations are good. The Company has
recently signed a new three-year agreement extending through January 31, 1999
with the union representing the warehouse employees, which agreement has been
ratified by the union membership.
Trademarks
The Company's "Aid" trademark used in connection with certain of the
Company's automotive products is registered in the United States Patent and
Trademark Office, as well as in the states of New York and New Jersey. There
are no infringing uses known by the Company which could materially affect the
use of such mark. In addition, the Company's "Aid Auto Stores" service mark
used in connection with retail store services is registered with the states
of New York and New Jersey, and a service mark application has been filed
with the United States Patent and Trademark Office. With regard to such
application, the Company has been notified that the service mark will be
published and that if there is no opposition filed by third parties during
the prescribed time period, such service mark will be registered. The
Company believes that its trademark and service mark have significant value
and are important to its marketing and expansion efforts. In addition, the
Company has applied for trademark registration for the Perfect Choice name
and mark utilized in connection with its private label merchandise program
currently in effect and under continued development. There can be no
assurance that the Company will be able to register such other names or
service marks or any other name or mark it may consider important, or that
the Company's current or future trademarks do not or will not violate the
proprietary rights of others, that the Company's marks could be upheld if
challenged, or that the Company may not be prevented from using its marks,
any of which could have an adverse effect on the Company. Enforcement of
one's own proprietary rights or the defense against the proprietary claims
of another can be extremely costly and there can be no assurance that the
Company will have the financial resources necessary to enforce or defend its
marks.
Government Regulation
Although the Company is subject to various laws and governmental regulations
relating to its business, the Company does not believe that compliance with
such laws and regulations has a material impact on its operations. The
Company is subject to federal and state laws, rules and regulations that
govern the offer and sale of franchises. To offer and sell franchises, the
Company is required by the United States Federal Trade Commission to furnish
to prospective franchisees a current franchise offering disclosure document.
The Company uses a Uniform Franchise Offering Circular ("UFOC") to satisfy
this disclosure obligation. In addition, the Company is required to register
and file a UFOC with the appropriate New York State authority. The Company
periodically updates its UFOC to include information about new officers and
directors, recent financial information and other material events. In
addition to New York, other states require registration, special prescribed
disclosure or other compliance before the Company could offer franchises in
those jurisdictions. However, the Company has no current plans to offer
franchises in any states other than New York and New Jersey, if at all.
ITEM 2. PROPERTIES
The Company's executive offices and distribution center are located at 275
Grand Boulevard, Westbury, New York. Such premises include approximately
1,636,000 cubic feet of warehouse space and are the subject of a lease
expiring September 13, 2000 (subject to a possible five-year extension). The
annual base rental through the period ending September 13, 2000 was
re-negotiated in 1995 so that it will remain constant at $297,505. In
addition, the Company pays applicable real estate taxes. The Company believes
that its space in Westbury is sufficient to accommodate the increased inventory
and distribution demands resulting from the initial stages of the mini-
warehouse Superstore growth program.
The Company owns the building for its store located in Williamsburg,
Brooklyn, New York, which opened in January 1996. The Company took control of
the building and converted the franchised store to a Company-owned store as a
result of the franchisee's failure to pay its outstanding indebtedness to the
Company.
In addition to the above facilities, there are 19 Company-owned Aid Auto
Stores for which the Company leases space. Leases on these stores expire from
August 22, 1998 to March 31, 2008 and have annual rental rates ranging from
$19,040 to $221,425.
For the Company's new Superstores, it will lease empty space or assume the
leases of existing tenants, as required. The Company believes that adequate
facilities can be located for additional Superstores on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of, nor is it a party to, any material legal
proceedings at December 31, 1996, or in subsequent periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Common Stock, par value $.001 per share, of the Company, and the
publicly-traded redeemable warrants to purchase Common Stock of the Company
("Warrants") have been traded on the over-the-counter market with quotations
reported on the National Association of Securities Dealers, Automatic
Quotation System (NASDAQ) - Small Cap Market, under the symbol "AIDA" and
"AIDAW," respectively, and on the Boston Stock Exchange under the symbols
"AID" and "AIDW," respectively, since April 11, 1995, and all corresponding
prices represent high and low closing sales prices for the Common Stock on
NASDAQ for the periods indicated. The NASDAQ qoutations, which represent
prices between dealers, do not include retail mark ups, mark downs or
commissions, and may not necessarily represent actual transactions.
Common Stock Price Range
High Low
Year Ended December 31, 1996
1st Quarter 4-7/8 2-2/8
2nd Quarter 4-11/32 3-1/2
3rd Quarter 3-7/8 2-3/8
4th Quarter 3-7/8 2
Year Ended December 31, 1995
2nd Quarter (from April 11, 1996) 5-1/4 4-1/8
3rd Quarter 5-1/2 4-3/4
4th Quarter 4-7/8 3-3/4
Warrants
Year Ended December 31, 1996
1st Quarter 13/16 5/16
2nd Quarter 5/8 3/8
3rd Quarter 29/64 7/32
4th Quarter 23/32 1/4
Year Ended December 31, 1995
2nd Quarter (from April 11, 1995) 1-1/8 23/32
3rd Quarter 1-3/8 21/32
4th Quarter 15/16 3/8
Holders
As of December 31, 1996, there were 44 holders of record of the Common Stock,
and 47 holders of record of Warrants. Such numbers do not include shares held
in "street name."
Dividend History and Policy
The Company has never paid cash dividends on its Common Stock. Holders of
Common Stock are entitled to receive such dividends as may be declared and
paid from time to time by the Board of Directors out of funds legally
available therefor. The Company intends to retain any earnings for the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future. Any future determination as to the
payment of cash dividends will depend upon future earnings, results of op
ements, the Company's financial condition and such other factors as the Board
of Directors may consider.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the years ended December 31, 1996, 1995 and
1994 is derived from the Company's consolidated financial statements which
have been audited by Grant Thornton LLP, the Company's independent certified
public accountants for such period, and the selected financial data for the
year ended December 31, 1993 is derived from the Company's consolidated
financial statements which have been audited by Lazar, Levine & Company LLP,
the Company's independent public accountants for such period.
<TABLE>
Consolidated Statement of Operations Data:
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Operating revenues (2) $27,393,678 $20,263,833 $24,182,096 $24,901,794
Cost of sales 16,133,042 13,594,260 16,980,220 17,346,107
Selling and shipping 7,331,271 3,411,456 3,477,350 3,490,136
General and administrative 3,260,918 3,476,824 3,180,210 3,049,526
Income (loss) from continuing
operations before income taxes 30,364 (539,881) 91,763 668,613
Income (loss) from continuing
operations(3) 30,364 (703,881) 19,763 350,613
Net income (loss) 30,364 (703,881) 19,763 51,153
Income (loss) from continuing
operations per share $ .01 ($.22) $.01 $.18
Net income (loss) per share $ .01 ($.22) $.01 $.03
Weighted average number of
shares outstanding 3,957,596 3,269,374 2,000,000 2,000,000
</TABLE>
Consolidated Balance Sheet Data:
Year Ended December 31,
1996 1995 1994
Working capital $ 5,213,339 $ 6,552,699 $ 6,552,699
Total assets 25,525,128 25,301,722 12,860,115
Long-term debt 3,305,695 3,613,623 2,777,239
Stockholders' equity 9,069,065 9,038,701 1,695,705
(1) The Company completed its Initial Public Offering in April, 1995 as a
"Small Business Issuer" and, accordingly, does not have available selected
financial data available for a five-year period.
(2) Includes both net wholesale and retail sales, and franchise fees.
(3) Reflects income from continuing operations net of income taxes. In
December 1993, the Company ceased operation of a subsidiary conducting a
service bay operation, which subsidiary had been generating losses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Aid Auto Stores, Inc. (the "Company"), formed in 1953, is a retailer,
wholesaler and franchiser of automotive parts and accessories. As of December
31, 1996, the Company supplied products to 60 Aid Auto Stores, including 40
franchised stores and 20 Company-owned stores, and, through its wholly-owned
subsidiary, Ames Automotive Warehouse, Inc. ("Ames"), to hundreds of non-
automotive chain stores and independent jobbers and installers in New York,
New Jersey and Connecticut. During the periods 1993 to 1995, the vast majority
of Aid Auto Stores were owned by franchisees of the Company. In 1994, in
anticipation of the commencement of its Company-owned mini-warehouse Superstore
growth strategy, the Company curtailed the granting of new franchises, so as
to preserve favorable locations for Company-owned Superstores. In April 1995,
the Company consummated its Initial Public Offering, the net proceeds of which
were approximately $7,300,000. As of December 31, 1996, the Company had
opened 6 new Superstores and had acquired (in December 1995) ten franchised
Aid Auto Stores located in Locng Island, New York, of which four of these
stores have been converted and reopened as Superstores and five of the six
remaining stores will be converted to Superstores. It is currently anticipated
that the Company will have in operation up to 48 to 60 Superstores, including
current Superstores, within the next three years. The number of stores
opened during this period is subject to substantial variation depending upon,
among other factors, the availability of adequate financing to fund the cost
of adding the additional stores, the level of success of the intial Superstores,
the availability of suitable store sites or acquisition candidates, and the
timely development and construction of new stores. The anticipated favorable
financial performance of the Company is tied, to a large extent, to the
transition of the Company to the Superstore program and the strong future
potential of that program. The Company's operating expenses are expected to
increase significantly in connection with the Superstore growth program and,
accordingly, the Company's future profitability will depend upon corresponding
increases in revenue from Superstore operations, of which there can be no
assurance.
Income from operations during the year ended December 31, 1996 compared to
the loss from operations during the year ended December 31, 1995 is primarily
due to the increased volume of high profit margin retail sales as a result of
the increased number of Company-owned stores. These increased retail sales
more than offset the reduction in sales to franchises which is attributable
to the termination of 25 franchises over the last 36 months due to their
failure to meet the standards set for franchisees and for other reasons.
Except for two additional francheses granted to existing franchisees, the
Company has not granted any new franchises over the last 36 months, consistent
with its Superstore growth strategy.
December 1995 Acquisition
On December 15, 1995, the Company completed the acquisition (the
"Acquisition") of 10 stores owned by Bethpage Aid, Inc., Copiague Aid, Inc.,
Nuby's Auto, Inc., Ken-Jen Auto, Inc., Middletown Aid, Inc., Glen Cove Aid,
Inc., and North Babylon Aid, Inc. (collectively, the "Sellers"), all of which
corporations were owned by one individual, Mr. Werner Neuburger. The
Acquisition involved the purchase of substantially all of the assets and
operating businesses of the Sellers. The Sellers operated an aggregate of 10
Aid Auto Stores, in Long Island, New York pursuant to franchise agreements
with the Company. After completion of the Acquisition, the Company commenced
conversion of nine of the ten stores into Aid Auto Superstores. The conversion
to the Superstore program is being done in two stages. The first stage involves
the almost immediate implementation of the advertising, inventory and
merchandising aspects of the program. The second stage involves the gradual
change over of store signs and elimination of the parts counters and storage
rooms. As of December 31, 1996, the first stage has been completed and four
stores have completed the second stage.
The Acquisition purchase price (excluding inventory) was $3,500,000 (the
"Business Purchase Price"). The purchase price for inventory was valued at
such inventory's net acquisition cost and was $1,757,396, prior to reduction
for assumed payables (the "Inventory Purchase Price"). The Company assumed
$1,000,000 of trade payables, which amount reduced on a dollar-for-dollar
basis the Inventory Purchase Price. The Business Purchase Price was paid as
follows: $2,000,000 in a short term promissory note paid January 2, 1996,
$750,000 in the form of a ten-year note (the "Note") and $750,000 in
restricted Common Stock of the Company. The balance of the Inventory Purchase
Price in excess of the trade payables being assumed ($757,396) was paid by an
increase in the amount of the Note, bringing the total principal amount of the
Note up to $1,507,396. During the first year, the Note had an interest rate
equal to one percentage point below the prime rate charged by the Company's
primary lender at the prime rate thereafter. The Note is payable in 120
equal monthly installments of principal plus accrued interest, commencing
February 1, 1996. The Note provides for immediate payment thereof upon,
among other things, the failure to pay any installment when due, the
insolvency of the Company, the filing of a bankruptcy petition by the Company,
the sale of substantially all of the assets or stock of the Company or a
reduction in the stock ownership of the current majority shareholder
(Philip L. Stephen) to below 10%. The Note is subsordinate to the Company's
bank loan. The $2,000,000 cash portion of the Business Purchase Price was
paid from the working capital of the Company.
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
The Company's operating revenues are primarily derived from net sales
consisting of both retail and wholesale sales. Retail sales are made from
the Company-owned Aid Auto Stores of which 20 existed at December 31, 1996
and 14 at December 31, 1995. Wholesale sales include sales to the Company's
franchised Aid Auto Stores, of which 40 existed at December 31, 1996 and 50
at December 31, 1995, and through Ames, to hundreds of other customers.
Revenues increased by $7,129,845 (or 35.2%) from $20,263,833 for the year
ended December 31, 1995 to $27,393,678 for the year ended December 31, 1996.
The increase in revenues in 1996 was due primarily to the increase of
$12,887,013 in sales from Company-owned stores from $3,803,709 for the year
ended December 31, 1995 to $16,690,722 for the year ended December 31, 1996,
partially offset by the reduction in sales to franchisees and through Ames
from $8,646,240 and $7,002,814, respectively, for the year ended December
31, 1995 to $5,275,943 and $4,892,658, respectively, for the year ended
December 31, 1996. In December 1995, the Company acquired ten franchised
Aid Auto Stores located in Long Island, New York, and the 1996 opened six new
Superstores. In addition, the seasonal cold and wet winder of 1995-1996
resulted in an increase in the sale of certain items (e.g., anti-freeze and
other winter chemicals) and an increased need for other winter maintenance
items (especially when compared to the exceptionally mild, auto-friendly winter
weather in 1994-1995 which resulted in a decrease in the sale of winter items).
Revenue increases were offset in part by a decrease in sales to franchisees,
reflecting the Company's decision consistent with its Superstore growth
strategy to generally not grant new franchises (which results in a loss of
sales to new franchisees). Furthermore, seven franchised stores were
terminated by the Company in 1995, and an additional ten franchised stores
were terminated in 1996. In addition, there was a slight decrease in the
Ames sales in 1996 as compared to 1995.
Cost of sales increased by $2,538,782 (18.7%) from $13,594,260 for the year
ended December 31, 1995 to $16,133,042 for 1996. The increase in cost of
sales in absolute dollars was attributable to the increased volume of sales
in 1996. As a percentage of net sales, cost of sales declined from 68.1% for
the year ended December 31, 1995 to 59.3% for the year ended December 31,
1996, reflecting the significantly higher margins on retail sales from the
new Superstores (as compared to lower margin on wholesale sales) and the
additional number of Company-owned stores.
Selling and shipping expenses increased by $3,919,815 (or 115.0%) from
$3,411,456 (17.1% of net sales) for the year ended December 31, 1995 to
$7,331,271 (26.9% of net sales) for the year ended December 31, 1996.
The increase as an absolute amount and as a percentage of net sales for the
year was due primarily to a substantial increase of selling expenses,
reflecting a significant increase in the Company's retail operations.
Selling expenses are higher for a retail operation than for a wholesale
operation, reflecting the nature of these operations. As a result of the
Company's strong efforts to control costs, the shipping expense dollars
remained essentially constant despite the large increase in sales volume.
General and administrative expenses decreased by $215,906 (or 6.6%) from
$3,476,824 (17.4% of net sales) for the year ended December 31, 1995 to
$3,260,918 (11.9% of net sales) for the year ended December 31, 1996. The
decrease in absolute dollars was due to the Company's concentration on
controlling costs. The significant decrease as a percentage of sales for the
year December 31, 1996 was due to the increase in sales volume as well as the
Company's concentration on controlling costs.
Interest expense increased $156,271 from $705,244 for the year ended December
31, 1995 to $861,515 for the first year ended December 31, 1996. This
increase was due to an increase in the average outstanding bank debt balance
during 1996 as compared to the same period in the prior year.
For the foregoing reasons, the net income for 1996 was approximately $30,000
as compared to a net loss of approximately $704,000 for the year ended
December 31, 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues decreased by $3,918,263, or 16.2%, from $24,182,096 in the year
ended December 31, 1994 to $20,263,833 for the year ended December 31, 1995.
For 1995, net sales consisted of $8,646,240 of sales to franchisees,
$7,002,814 sales through Ames, and $3,803,709 of retail sales, as compared to
$10,929,263, $9,707,078, and $2,558,194, respectively in 1994.
The decrease in revenues was due primarily to decreased sales as a result of
exceptionally mild, auto-friendly weather during the winter of 1994-1995
(especially when compared to the cold and wet winter of 1993-1994) which
resulted in the reduction of the sale of certain low-margin items (e.g.,
anti-freeze and other winter chemicals), and a reduced need for other winter
maintenance items (see "Seasonality" below). In addition, the Company's short
term revenue growth was negatively impacted, as expected, by that part of the
planned Superstore expansion strategy, which included a decision to generally
not grant new franchises, which results in a loss of sales to new franchisees.
It was in anticipation of the Initial Public Offering, as well as implementation
of the Company's Superstore expansion program, that the Company decided to
limit the granting of new franchises. Furthermore, seven franchised stores
were terminated by the Company in 1995, and were not replaced by new
franchises (except for one franchise granted to an existing franchisee)
consistent with the Superstore growth strategy described herein. The
terminations have resulted in the loss of monthly fees and monthly sales as
discussed above. The decline in 1995 was offset in part by the sales
generated by the Company's first Superstore, which opened in July 1995.
There has also been a decrease in the Ames sales due to the same general
factors previously mentioned.
Cost of sales decreased by $3,385,960, from $16,980,220 in 1994 to
$13,594,260 in 1995. The decrease in cost of sales in absolute dollars was
attributable primarily to the reduced volume of orders during 1995 as a
result of the above-noted business conditions during the year. As a
percentage of net sales, cost of sales decreased from 1994 (71.1%) to 1995
(68.1%). The decrease in the cost of sales percentage is due to the increase
in the retail sales as a percent of total sales, which sales have a higher
gross margin.
Selling and shipping expenses decreased by $65,894, or 1.9%, from $3,477,350
(14.6% of net sales) in 1994 to $3,411,456 (17.1% of net sales) in 1995. The
increase as a percentage of net sales was due primarily to the decrease in
orders during 1995, as these expenses did not decrease proportionally to
sales decreases.
General and administrative expenses increased by $296,614, or 9.3%, in 1995
from $3,180,210 in 1994 to $3,476,824 in 1995. As a percentage of net sales,
general and administrative expenses increased to 17.4% in 1995 from 13.3% in
1994. The increase was due primarily to an increase in personnel in
connection with the Superstore expansion program and in bad debt expense.
Interest expense increased by $23,809, or 3.5%, from $681,435 in 1994 to
$705,244 in 1995, as a result of increased borrowings from the Israel
Discount Bank of New York (the "Bank") under the Company's Bank line of
credit, which was increased in 1995. The increased borrowings offset the
lower interest rate that was in effect during most of 1995 as compared to 1994.
Income from continuing operations (before provision for income taxes)
decreased by $631,644, from a profit of $91,763 in 1994 to a loss of $539,881
in 1995. The Company incurred a net loss of $703,881 in 1995 as compared to
net income of $19,763 in 1994. The decreases were due primarily to the
decreases in revenues, and increases in general and administrative expenses
and interest expense in 1995.
Effective tax rates for 1995 and 1994 were 30.4% and 78.5%, respectively. The
variance is due primarily to the effects of the Company filing its federal
income tax return on a consolidated basis and its state tax return on a
separate basis, resulting in higher income for state tax purposes. The
effective rate for 1996 will depend largely on the profitability of the
Company for such year as well as the impact on the federal tax rate in 1995
from the net loss.
Liquidity and Capital Resources
The Company had working capital of $5,213,339 at December 31, 1996, as
compared to $6,553,000 at December 31, 1995, reflecting primarily the
increase in capital expenditures in connection with the implementation of its
Superstore growth program. Through December 31, 1996, the Company had
financed its capital requirements predominantly through a revolving loan and
credit facility, through loans from one of its officers, and through the
Company's Initial Public Offering, the net proceeds of which were approximately
$7,300,000.
Net cash used in operating activities was $1,993,392 for the year ended
December 31, 1995 and $3,256,314 for the year ended December 31, 1996. The
increase in 1996 was attributable primarily to increases in inventories as a
result of the increase in the number of retail stores, as well as an increase
in prepaid expenses and other current assets compared to the prior comparable
period, offset in part by a decrease in accounts receivable, and increase in
accounts payable, and the generation of net income in 1996 as compared to a
loss in the prior year. Net cash utilized in investing activities was
$601,400 and $1,164,305 for the years ending December 31, 1995 and 1996,
respectively, the increase reflecting increased capital expenditures in
connection with the Superstore expansion program. Net cash provided by
financing activities was $7,002,101 for the year ending December 31, 1995 and
net cash used by financing activities was $15,225 for the year ending
December 31, 1996. The decrease was primarily attributable to the receipt of
the net proceeds of the intial public offering in 1995 and repayment in 1996
of debt, in connection with the acquisition of the ten franchised Aid Auto
Stores locations and repayment of its officers loan.
Net cash used in operating activities was $279,817 for the year ended
December 31, 1994 and $1,993,392 for the year ended December 31, 1995. The
increase in 1995 was attributable primarily to the net loss and the build up
in inventories. Net cash utilized in investing activities was $164,732 and
$601,400 in the years ended December 31, 1994 and 1995, respectively, the
increase reflecting increased expenditures on fixed assets in 1995 in
connection with the Superstore expansion program. Net cash provided by
s $522,843 and $7,002,101 in the years ended December 31, 1994 and 1995,
respectively, the increase being attributable primarily to the net proceeds
received from the Initial Public Offering partially offset by the net
repayment in 1995 of officer's loans.
The Company receives volume purchasing discounts and cooperative advertising
and development funds from certain of its suppliers. The amounts of these
incentives generally range from 5% to 10% of the listed purchase prices.
On October 22, 1996, the Company entered into a revolving credit facility
with GE Capital Corp. ("GE Capital") providing for maximum borrowings of
$10,000,000. This facility replaces the existing bank facility which
provided for maximum borrowings of $6,000,000. This new facility allows the
Company to borrow at the index rate plus 3% (the index rate is the latest
rate for 30-day dealer placed commercial paper published in the "Money Rates"
section of the Wall Street Journal). At December 31, 1996 the index rate
was 5.45%. Maximum borrowing under the revolving credit facility are based
upon the sume of 65% of eligible inventory and 70% of eligible accounts
receivable. The agreement expires on September 30, 1999.
Substantially all of the Company's assets are pledged under this new facility
as collateral, and the Company is prohibited from granting a security
interest to any party other than GE Capital, which could limit the Company's
ability to obtain debt financing to implement its proposed expansion. In
addition, the Company's agreement with GE Capital limits or prohibits the
Company, subject to certain exceptions, from merging or consolidating with
another corporation or selling all or substantially all of its assets. In
the event that the Company is unable to make payment on its line of credit
when due on September 30, 1999, GE Capital could foreclose on the collateral,
which would have a material adverse effect on the Company.
At December 31, 1996, the Company was indebted to the Chief Executive
Officer, President and majority shareholder in the aggregate amount of
$2,187,500. The $2,187,500 loan was evidenced by two promissory notes. In
connection with the new facility with GE Capital, these notes were
consolidated into one promissory note. The new note bears interest monthly
at the same rate as the revolving credit facility with principal payable in
quarterly installments commencing November 1, 1996 through February 1, 2000.
The new revolving credit facility allows the Company to make quarterly
principal payments and scheduled monthly interest payments so long as prior
to and after giving affect to such payments no default has coccurred and is
continuing or would occur on the GE Capital indebtedness as a result thereof.
The note provides for immediate payment thereof upon, among other things,
a change in a majority of the continuing directors of the Company (as
defined in the note) or a demand by GE Capital of payment in full of
outstanding GE Capital indebtedness.
The Company's accounts receivable, less allowances for doubtful accounts, at
December 31, 1996, were $1,756,000, as compared to $2,991,000 at December 31,
1995. The decrease was due to a decrease in the amount of wholesale sales on
credit terms in 1996 as compared to 1995 combined with the increased
collection efforts. At December 31, 1996, the Company's allowance for
doubtful accounts was $441,000 which the Company believes is currently
adequate for the size and nature of its receivables. At December 31, 1996,
notes receivable, less allowances for doubtful accounts, were $392,000, as
compared to $464,000 at December 31, 1995. The decrease in notes receivable
primarily reflects collections on the promissory notes. Currently, eight
franchisees are obligated under notes. Their inability to pay for purchases
under standard payment terms is due primarily to a downturn in their business
during the recessionary economy of 1991 to 1993 (in some cases exacerbated by
road construction making access to the stores difficult). It is the
Company's policy to convert accounts receivable to a note when a franchisee
has demonstrated an inability to pay its account on a timely basis. Delays
in collection or uncollectability of accounts and notes receivable could
have an adverse effect on the Company's liquidity and working capital position
and could require the Company to increas its allowances for doubtful accounts.
At December 31, 1996, the Company had deferred tax assets of $450,000. The
Company, after considering its previous pattern of profitability and its
anticipated future taxable income, believes that it is more likely than not
that the deferred tax assets will be realized. In this respect, the Company
estimates that $1,100,000 of future taxable income will be required to
realize the deferred tax assets, with the majority of such assets anticipated
to be recovered over the next five years.
As of the date hereof, other than in connection with the implementation of
the Superstore growth program, the Company has no material commitments for
capital expenditures. In connection with the Acquisition described above, the
Company was obligated to expend $2,000,000 in cash on January 2, 1996. In
addition, as part of the purchase price of the Acquisition and at the time of
the Acquisition, the Company assumed $1,000,000 of trade payables and issued
157,596 shares of Common Stock and the Note in the amount of $1,507,396.
The Company has used a substantial portion of the net proceeds of the Initial
Public Offering to implement its proposed Superstore growth program. The
Company anticipates, based on currently proposed plans and assumptions
relating to its operations (including the costs associated with, and the
timetable for, its proposed expansion), the Company's working capital and
current loan facility, together with projected cash flow from operations,
will be sufficient to satisfy its contemplated cash requirements for at
least twelve months (including the contemplated conversion of an additional
five of the stores acquired in the Acquisition into Superstores, and the
opening of at least three Superstore outlets during that period). In the
event that the Company's cash flow proves to be insufficient (due to
unanticipated expenses, difficulties, problems or otherwise), the Company
may be required to seek additional financing for the initial phase of its
Superstore growth program or curtail such expansion activities. The Company
will need to seek additional debt or equity financing, as the Company does
not anticipate that its current resources and cash flow from operations are
likely to be sufficient to fund the continuing cost of its growth program
to having in operation up to 48 to 60 Superstores, including current
Superstores, within three years. To the extent that the Company seeks
financing through the issuance of equity securities, any such issuance of
equity securities would result in dilution to the interests of the Company's
stockholders. Additionally, to the extent that the Company incurs
indebtedness to fund increased levels of inventory or to finance
the acquisition of capital equipment or issues debt securities to fund the
Superstore growth program, the Company will be subject to risks associated
with incurring substantial indebtedness, including the risks that interest
rates may fluctuate and cash flow may be insufficient to pay principal and
interest on any such indebtedness. Other than the Company's existing line of
credit with the Bank, the Company has no current arrangements with respect
to, or sources of, additional financing and it is not anticipated that the
existing majority stockholder will provide any portion of the Company's
future financing requirements or additional personal guarantees. There can
be no assurance that additional financing will be available to the Company
on acceptable terms, or at all.
Seasonality
The Company's business is seasonal to some extent primarily as a result of
the impact of weather conditions on store sales. Store sales and profits have
historically been higher in the second and third quarters (April through
September) of each year than in the first and fourth quarters, for which the
Company generally achieves only nominal profits or incurs net losses. Weather
extremes tend to enhance sales by causing a higher incidence of parts failure
and increasing sales of seasonal products. However, extremely severe winter
weather or rainy conditions tend to reduce sales by causing deferral of
elective maintenance.
Impact of Inflation
Inflation has not had a material effect on the Company's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statement of Changes in
Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9 - F-27
Supplementary Information
Schedule II - Valuation and Qualifying Accounts F-29
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Aid Auto Stores, Inc.
We have audited the accompanying consolidated balance sheets of Aid Auto
Stores, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1996, 1995 and 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Aid Auto
Stores, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
consolidated results of their operations and their consolidated cash flows
for the years ended December 31, 1996, 1995 and 1994 in conformity with
generally accepted accounting principles.
We have also audited the financial statement schedule II included as
supplementary information to the accompanying financial statements for the
years ended December 31, 1996, 1995 and 1994. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
GRANT THORNTON LLP
/s/Grant Thornton LLP
New York, New York
April 4, 1997
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1996 1995
CURRENT ASSETS
Cash and cash equivalents $ 331,019 $ 4,766,893
Accounts receivable - trade, net of
allowances for doubtful accounts
of $440,798 and $612,000 in 1996
and 1995, respectively 1,755,904 2,991,012
Notes receivable, net of allowances
for doubtful accounts of $190,000
in 1996 and 1995 305,424 245,014
Inventories 13,348,534 9,372,480
Prepaid expenses and other current assets 2,105,198 1,400,703
Deferred income taxes 275,000 268,000
Total current assets 18,121,079 19,044,102
FIXED ASSETS - AT COST, net 3,266,855 1,754,124
COSTS IN EXCESS OF NET ASSETS ACQUIRED,
net 3,690,214 3,929,376
DEFERRED INCOME TAXES 175,000 175,000
OTHER ASSETS 271,980 399,120
$25,525,128 $25,301,722
The accompanying notes are an integral part of these statements.
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
CURRENT LIABILITIES
Revolving credit line $ 7,649,951 $ 5,011,200
Accounts payable 3,599,561 4,315,842
Accrued expenses 448,331 487,386
Current portion of long-term debt 428,647 2,208,225
Note payable - officer 781,250 468,750
Total current liabilities 12,907,740 12,491,403
LONG-TERM DEBT, net of current portion 1,899,445 1,582,373
DEFERRED OCCUPANCY COSTS 242,628 157,995
NOTE PAYABLE - OFFICER 1,406,250 2,031,250
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
authorized, 2,000,000 shares; none issued
Common stock, $.001 par value; authorized,
15,000,000 shares; 3,957,596 shares issued
and outstanding in 1996 and 1995 3,958 3,958
Additional paid-in capital 9,006,809 9,006,809
Retained earnings 58,298 27,934
9,069,065 9,038,701
$25,525,128 $25,301,722
The accompanying notes are an integral part of these statements.
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1996 1995 1994
Net sales $27,393,678 $20,263,833 $24,182,096
Costs and expenses
Cost of sales 16,133,042 13,594,260 16,980,220
Selling and shipping 7,331,271 3,411,456 3,477,350
General and administrative 3,260,918 3,476,824 3,180,210
26,725,231 20,482,540 23,637,780
Income (loss) from operations 668,447 (218,707) 544,316
Interest expense (861,515) (705,244) (681,435)
Interest and other income 223,432 384,070 228,882
Income (loss) from continuing
operations before income taxes 30,364 (539,881) 91,763
Provision for income taxes 164,000 72,000
NET INCOME (LOSS) $ 30,364 $ (703,881) 19,763
Income (loss) per common share
Income (loss) from continuing
operations $ .01 $ (.22) $ .01
Net income (loss) per common share $ .01 $ (.22) $ .01
Weighted average common shares
outstanding 3,957,596 3,269,374 2,000,000
The accompanying notes are an integral part of these statements.
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Total
Preferred Common stock paid-in Retained stockholders'
stock Shares Amount capital earnings equity
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 $ - 2,000,000 $2,000 $ 961,894 $ 712,052 $1,675,946
Net income 19,763 19,763
Balance at
December 31, 1994 - 2,000,000 2,000 961,894 731,815 1,695,709
Issuance of
common stock 1,800,000 1,800 7,295,073 7,296,873
Issuance of common
stock in connection
with acquisition 157,596 158 749,842 750,000
Net loss (703,881) (703,881)
Balance at
December 31, 1995 - 3,957,596 3,958 9,006,809 27,934 9,038,701
Net income 30,364 30,364
Balance at
December 31, 1996 $ - 3,957,596 $3,958 $9,006,809 $ 58,298 $9,069,065
</TABLE>
The accompanying notes are an integral part of this statement.
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1996 1995 1994
Cash flows from operating activities
Net income (loss) $ 30,364 $ (703,881) $ 19,763
Adjustments to reconcile net income
(loss) to net cash used in operating
activities
Depreciation and amortization 917,743 429,164 495,744
Provision for losses on accounts
receivable 80,000 237,000 132,000
Provision for losses on notes
receivable 140,000 50,000
Deferred occupancy costs 84,633 (164,176) 88,881
(Increase) decrease in operating
assets
Accounts receivable 1,155,108 61,554 138,809
Notes receivable 71,425 (132,288) (370,801)
Inventories (3,976,054) (2,763,989) 1,057,281
Prepaid expenses and other
current assets (857,197) (272,943) (197,671)
Security deposits
Deferred income taxes (7,000) 126,000 (141,000)
Increase (decrease) in operating
liabilities
Accounts payable (716,281) 891,841 (1,461,115)
Accrued expenses (39,055) 276,326 (49,699)
Income taxes payable (118,000) (42,009)
Net cash used in operating activities (3,256,314) (1,993,392) (279,817)
Cash flows from investing activities
Purchases of fixed assets (1,164,305) (479,209) (164,732)
Acquisition of Nuby's, net (122,191)
Net cash used in investing
activities (1,164,305) (601,400) (164,732)
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31,
1996 1995 1994
Cash flows from financing activities
Net borrowings under revolving
credit line $2,638,751 $ 614,156 $ 949,730
Principal repayment of long-term
debt (2,170,370) (356,977) (161,502)
Proceeds from loans from officers 640,000
Repayment of notes payable under
capital lease obligations (171,136)
Repayment of officers' loans (312,500) (551,951) (905,385)
Net proceeds from issuance of
common stock 7,296,873
Net cash (used in) provided by
financing activities (15,255) 7,002,101 522,843
Net (decrease) increase in cash
and cash equivalents (4,435,874) 4,407,309 78,294
Cash and cash equivalents, at
beginning of year 4,766,893 359,584 281,290
Cash and cash equivalents, at end
of year $ 331,019 $ 4,766,893 $ 359,584
Supplemental disclosures of
cash flow information:
Cash paid during the year for
Interest $ 799,000 $ 660,000 $ 672,000
Income taxes 120,000 190,000 119,000
Capital lease obligations incurred
for equipment $ 879,000
The accompanying notes are an integral part of these statements.
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - GENERAL
Aid Auto Stores, Inc. and subsidiaries are engaged in the sale of automotive
parts, accessories, chemicals and tools to the retail market and
independently owned auto parts stores, as well as automotive centers,
jobbers, and franchised stores.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
1. Basis of Consolidation
The consolidated financial statements include the accounts of Aid Auto
Stores, Inc. and its wholly-owned subsidiaries (the "Company"). All material
intercompany balances and transactions have been eliminated.
2. New Pronouncements
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that the
Company recognize and measure impairment losses of long-lived assets and
certain identifiable intangibles and value long-lived assets to be disposed
of. The primary objectives under SFAS No. 121 are to: (a) recognize an
impairment loss of an asset whenever events or changes in circumstances
indicate that is carrying amount may not be recoverable and (b) if planning
to dispose of long-lived assets or certain identifiable intangibles, such
assets have been reflected in the Company's consolidated balance sheet at the
net asset value less cost to sell. The Company has determined that no
impairment losses need to be recognized for the applicable assets under the
provisions of SFAS No. 121 for the year ended December 31, 1996.
In 1996, the Company adopted of Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation," and
continues to account for stock option grants in accordance with Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees." The Company grants stock options for a fixed number of shares
to employees and officer/directors of the Company with an exercise price
equal to or greater than the fair value of the shares at the date of grant.
Accordingly, the Company recognizes no compensation expense for stock option
grants to employees and officer/directors.
3. Cash and Cash Equivalents
Cash equivalents include all highly liquid investments purchased with an
original maturity of three months or less.
4. Inventory
Inventory, consisting primarily of merchandise purchased for resale, has been
valued at the lower of cost or market, using the first-in, first-out method.
Market is considered as net realizable value.
5. Fixed Assets and Depreciation
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives
of the assets. Depreciation lives generally range from three to five years
for furniture and fixtures, computer equipment, transportation equipment and
machinery and equipment. Leasehold improvements are amortized over the
useful life of the asset or the term of the lease, whichever is shorter.
Capital leases are amortized over the term of the respective leases or the
useful lives of the related assets, whichever is shorter.
6. Revenue Recognition
The Company recognizes revenues from wholesale sales of automotive parts when
shipments are made from the warehouse. Retail sales of automotive parts are
recognized at the point of sale.
7. Deferred Occupancy Costs
The Company's leasing arrangements for its warehouse, office and Company-
owned franchise outlets include scheduled base rent increases over the terms
of each respective lease. The total amount of the base rent payments is
being charged to operations using the straight-line method over the term of
the lease. The Company has recorded a deferred credit to reflect the excess
of rent expenses over cash payments since inception of each respective lease.
8. Income Taxes
The Company accounts for income taxes utilizing an asset and liability method
for financial accounting and reporting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
9. Earnings Per Share
Earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding during each period. 1996 and
1995 stock options were not considered in the computation of earnings per
share since their inclusion would be antidilutive.
10. Use of Estimates in Consolidated Financial Statements
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
11. Reclassifications
Certain reclassifications have been made to the 1995 presentation to conform
to the 1996 presentation.
NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Fair
Value of Financial Instruments," requires disclosure of the estimated fair
value of an entity's financial instrument assets and liabilities. For the
Company, financial instruments consist principally of cash and cash
equivalents, accounts receivable and accounts payable and subordinated
promissory notes and long-term debt. The carrying value of cash and cash
equivalents, accounts receivable and accounts payable reasonably approximates
fair value because of the short maturity of those instruments.
The fair value of the Company's long-term debt and note payable - officer is
estimated based upon the quoted market prices for the same or similar issues
or on the current rates offered to the Company for similar debt of the same
remaining maturities.
Year ended December 31,
1996 1995
Carrying Fair Carrying Fair
amount value amount value
Cash and cash equivalents $ 331,019 $ 331,019 $4,767,000 $4,767,000
Long-term debt 2,328,092 2,328,092 3,790,000 3,790,000
Note payable - officer 2,187,500 2,187,500 2,500,000 2,500,000
NOTE D - COSTS IN EXCESS OF NET ASSETS ACQUIRED
In June 1985, 100% of the outstanding common stock of Aid Auto Stores, Inc.
was acquired by an officer of the Company. The acquisition was accounted for
by the purchase method and, accordingly, the purchase price was allocated to
assets acquired and liabilities assumed based upon the fair market value at
the date of acquisition. Costs in excess of net assets acquired are being
amortized over forty years.
In April 1991, the Company, through a newly formed subsidiary, White Plains
Aid, Inc., acquired certain assets and assumed certain liabilities of a
previously franchised store. The purchase price exceeded the basis of these
net assets by $285,361 and is being amortized over fifteen years.
On December 15, 1995, the Company consummated the acquisition of
substantially all of the assets and operating business of Nuby's Auto, Inc.
and Affiliates ("Nuby's"), pursuant to an Asset Purchase Agreement (the
"Agreement") dated November 9, 1995. These ten operating businesses were
franchises of the Company. The asset purchase price, excluding inventory,
was $3,500,000 and the purchase price for the inventory was $757,000, net of
$1,000,000 of assumed trade payables relating to such inventory. The combined
purchase price was paid with (i) a $2,000,000 promissory note with principal
and interest at 5-1/2% per annum, which was fully paid on January 2, 1996,
(ii) $1,507,000 in the form of ten-year subordinated promissory notes bearing
interest at one percentage point below the prime rate charged by the
Company's bank in the first year and at the prime rate thereafter, and (iii)
157,596 shares of the Company's common stock valued at $750,000 on the date
of issuance. Costs in excess of net assets acquired, excluding inventory,
were $3,090,855 and are being amortized over fifteen years. As described
in Note B-2, the Company has determined that no impairment losses need to be
recognized for the applicable assets under the provisions of SFAS No. 121 for
the year ended December 31, 1996.
The operations of Nuby's are included in the accompanying financial
statements from the date of acquisition. For the year ended December 31,
1995 unaudited pro forma consolidated results of operations, assuming the
acquisition took place at the beginning of the period, are presented below:
Net sales $28,950,808
Net loss (258,008)
Loss per share $(.08)
In connection with the acquisition, the sole shareholder of Nuby's has become
an officer and director of the Company.
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995 and 1994
NOTE E - NOTES RECEIVABLE
At December 31, 1996 and 1995, notes receivable consist of amounts due from
franchisees primarily for merchandise purchases and amounted to $582,413 and
$653,838, respectively, net of a valuations reserve of $190,000 in 1996 and
1995. At December 31, 1996 and 1995, $87,000 and $219,000 of these notes
receivable were included in "Other Assets" in the accompanying financial
statements. The notes receivable are to be repaid in monthly principal
installments with interest charged at rates ranging from 6% to 11% per annum.
Substantially all of these notes are collateralized by real property and
inventory and personally guaranteed by the respective owners of the franchises.
NOTE F - FIXED ASSETS
Fixed assets consist of the following:
December 31,
1996 1995
Building $ 215,000 $ 215,000
Furniture and fixtures 2,196,480 1,681,464
Computer equipment 1,578,695 1,431,456
Transportation equipment 35,600 35,601
Machinery and equipment 853,695 822,252
Leasehold improvements 1,484,320 1,007,343
Assets held under capitalized leases 1,140,696 264,374
7,504,486 5,457,490
Less accumulated depreciation and
amortization 4,237,631 3,703,366
$3,266,855 $1,754,124
Depreciation and amortization expense relating to fixed assets was $530,572,
$321,929 and $358,673 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995 and 1994
NOTE G - DEBT
1. Revolving Credit Agreement
On October 22, 1996, the Company entered into a new revolving credit facility
with a financial institution providing for maximum borrowings of $10,000,000,
which expires on September 30, 1999. This facility replaced the existing
facility with another bank which provided for maximum borrowings of
$6,000,000 in accordance with the terms of that credit agreement. The new
credit agreement provides for borrowings at an "index rate" (the latest rate
for 30-day, dealer-placed commercial paper published in the Wall Street Journal
- - 5.35% at December 31, 1996) plus 3% and maximum borrowings under the
revolving creditfacility are based upon the sum of 65% of eligible inventory
and 70% of eligible accounts receivable. At December 31, 1996, outstanding
borrowings under this facility were $7,649,951 at an average rate of 8.35%.
Additionally, substantially all of the Company's assets are pledged as
collateral under the new credit agreement, which also provides for, among
other things, (i) the Company being prohibited from granting a security
interest to any party and (ii) limiting or prohibiting the Company, subject
to certain exceptions, from merging or consolidating with another corporation
or selling all or substantially all of its assets.
2. Long-term Debt
During 1996, the Company recorded term notes payable with an original
principal totalling $879,000 in connection with new capital lease obligations
(as described in Note G-3 below). At December 31, 1996, outstanding principal
amounts of approximately $755,000 relating to these new capital leases were
included in long-term debt.
The Company's term notes payable consisted of the following at December 31,:
1996 1995
Promissory note in connection with
acquisition of Nuby's (i) $2,000,000
Subordinated promissory notes - officer,
in connection with acquisition of Nuby's (ii) $1,369,000 1,507,000
10% note payable in connection with the
acquisition of White Plains Aid, Inc. (iii) 204,000 236,000
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995 and 1994
NOTE G (continued)
1996 1995
Notes payable under capital lease obligations (iv) $ 755,000 $ 47,000
2,328,000 3,790,000
Less current maturities 429,000 2,208,000
$1,899,000 $1,582,000
(i) The note bears interest at 5-1/2% per annum and was fully paid on
January 2, 1996 (see Note D).
(ii) The notes bear interest at one percentage point below the prime rate
in the first year and at the prime rate thereafter. Monthly principal
payments commenced February 1996 and the notes mature January 2006.
The notes are subordinated to the revolving credit agreement (see
Note D).
(iii) This note requires interest only payments during the first year.
Monthly principal payments commenced in May 1993 and the note matures
in April 2001.
(iv) Notes recorded in connection with various capital lease obligations
having an average interest rate of 11.2% and maturing at various dates
through 2001.
Aggregate maturities of long-term debt as of December 31, 1996 are as follows:
1997 $ 429,000
1998 445,000
1999 393,000
2000 267,000
2001 178,000
Thereafter 616,000
$ 2,328,000
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995 and 1994
NOTE G (continued)
3. Capitalized Lease Obligations
During 1996, the Company entered into several lease agreements for furniture
and fixtures and computer equipment which are accounted for as capital
leases. Accordingly, the Company recorded total assets and capital lease
obligations of $879,000, of which $270,000 related to furniture and fixtures
which the Company sold to a leasing company and leased back under terms which
required no gain or loss to be recognized on the transaction.
As of December 31, 1996, the Company's capital leases expire in various
years through 2001. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or
the fair market value of the asset. The assets are depreciated over their
estimated useful lives. Depreciation of assets under capital leases for each
of the years ended December 31, 1996, 1995 and 1994 was $86,000, $8,000 and
$19,000, respectively.
Minimum future lease payments under capital leases as of December 31, 1996
are as follows:
1997 $242,000
1998 248,000
1999 195,000
2000 61,000
2001 9,000
Total minimum lease payments 755,000
Less amount representing interest 84,000
$671,000
The interest rates on the capitalized leases range from 9% to 15% and were
based upon the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return. The capital
leases provide for a bargain purchase option at the end of each lease.
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995 and 1994
NOTE H - NOTE PAYABLE - OFFICER
At December 31, 1994, the Company was indebted to the President of the
Company in the aggregate amount of $3,051,951. On February 1, 1995, the
Company signed a promissory note for $2,500,000, the remaining outstanding
balance. This note bears interest, payable monthly, at 7% per annum through
January 31, 1996, and thereafter the interest rate shall be equal to the
interest rate charged by the Company's bank with principal payable in
quarterly installments of $156,250, commencing May 1, 1996 through February
1, 2000. The note provides for immediate payment upon a change in a majority
of the continuing directors of the Company, as defined, or a demand for
payment in full of the outstanding indebtedness under the revolving credit
facility.
Aggregate maturities of note payable - officer as of December 31, 1996 are
as follows:
1997 $ 781,250
1998 625,000
1999 625,000
2000 156,250
$2,187,500
NOTE I - INCOME TAXES
The income tax expense (benefit) is comprised of the following:
Year ended December 31,
1996 1995 1994
Current
Federal $ 130,000
State and local $ 7,000 $ 38,000 82,000
Deferred - Federal, state and local (7,000) 126,000 (140,000)
$ $164,000 $ 72,000
The components of the Company's deferred tax assets are summarized as follows:
1996 1995
Deferred tax assets
Depreciation $210,000 $235,000
Allowance for doubtful accounts 176,000 321,000
Deferred occupancy costs 97,000 63,000
Net operating loss carryforward 80,000 -
Inventory 110,000 68,000
Other 76,000 73,000
Total deferred tax assets 749,000 760,000
Deferred tax liabilities
Deferred opening costs 158,000 -
591,000 760,000
Valuation allowance 141,000 317,000
$450,000 $443,000
The valuation allowance at December 31, 1996 is provided due to the uncertainty
to future utilization of net operating loss carryforwards.
The Company's effective income tax rate differs from the Federal statutory
income tax rate as a result of the following:
Year ended December 31,
1996 1995 1994
Federal statutory rate 34.0% (34.0)% 34.0%
Loss for which no tax benefit
was provided 75.7 34.0
State and local income taxes, net
of Federal income tax benefit 12.4 4.6 36.0
Meals and entertainment 50.4
Goodwill amortization 75.1
Change in valuation allowance (250.2) 20.2
Other (2.6) 5.6 8.5
- % 30.4% 78.5%
NOTE J - SIGNIFICANT CUSTOMERS
Most of the Company's business activity is primarily with customers located
within the New York metropolitan area. For the years ended December 31,
1996, 1995 and 1994, no single customer or group of customers accounted for
sales in excess of 10% of the total sales of the Company.
NOTE K - RELATED PARTY TRANSACTIONS
Approximately $23,000 of the Company's printed advertising space is purchased
by an affiliated entity which is owned by the sole shareholder of the
Company. This affiliate purchases advertising space on the Company's behalf,
at discounted rates, and then invoices the Company at such rates, without any
further charge.
One of the Company-owned outlets pays rent to an affiliated company which is
also owned by the majority shareholder of the Company. This affiliate holds
the lease and remits the rent to the ultimate owner of the property. Rent
expense paid to this affiliated company was $70,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE L - BUSINESS SEGMENTS
The Company is engaged in the sale of its products in primarily two business
segments which include retail and wholesale distribution. Significant
operations in the Company's retail segment commenced in the year ended
December 31, 1995. Accordingly, summarized financial information for these
business segments for the years ended December 31, 1996 and 1995 is as follows:
1996 1995
Net sales
Retail $ 16,690,722 $ 3,803,709
Wholesale distribution 22,006,081 19,050,175
Eliminations (11,303,125) (2,590,051)
Total net sales $ 27,393,678 $20,263,833
Operating profit (loss)
Retail 549,480 $ (307,071)
Wholesale distribution 118,967 525,778
Total operating profit (loss) $ 668,447 $ (218,707)
Identifiable assets
Retail $ 5,626,106 $ 2,119,502
Wholesale distribution 563,384 874,945
Corporate 21,591,603 23,502,397
Eliminations (2,255,965) (1,195,122)
Total identifiable assets $ 25,525,128 $25,301,722
1996 1995
Depreciation and amortization
Retail $ 642,722 $ 133,079
Wholesale distribution 104,129 123,924
Corporate 151,743 172,161
Total depreciation and amortization $ 793,594 $ 429,164
Capital expenditures
Retail $ 1,040,410 $ 375,325
Wholesale distribution 59,823 28,777
Corporate 64,071 75,107
Total capital expenditures $ 1,164,304 $ 479,209
NOTE M - COMMITMENTS AND CONTINGENCIES
1. The Company is obligated under operating lease agreements for the rental
of certain office, warehouse and store facilities and other equipment
which expire at various dates through September 2008.
Future minimum base annual lease payments for such operating leases are
as follows:
Year ending December 31,
1997 $ 2,239,000
1998 2,109,000
1999 1,918,000
2000 1,813,000
2001 1,343,000
Thereafter 5,160,000
$ 14,582,000
Rental expense including real estate taxes for the years ended December
31, 1996, 1995 and 1994 aggregated approximately $2,000,000, $615,469
and $601,231, respectively.
2. The President of the Company entered into a three-year employment
agreement effective April 1995. The agreement provides for annual base
compensation of $200,000, a cost of living increase in the second and
third years, and a bonus or salary increase in the third year at the
discretion of the Board of Directors. In the event of a takeover or other
acquisition, change in ownership of the Company, the President shall
receive a severance payment equal to six months of his base salary.
NOTE N - STOCKHOLDERS' EQUITY
On February 9, 1995, the Company's Board of Directors declared a 22,000-for-1
stock split, effective February 14, 1995. The consolidated financial
statements have been retroactively restated for all periods presented to give
effect to the stock split.
Effective February 14, 1995, the Company amended its Certificate of
Incorporation to: (a) increase the authorized shares of common stock to
15,000,000 and (b) authorize 2,000,000 shares of preferred stock at $.001
par value, the terms of which may be fixed by the Board of Directors at the
time of issuance of such shares.
On April 6, 1995, the Company's then sole shareholder contributed back to the
Company 200,000 of his shares of common stock. The consolidated financial
statements have been retroactively restated for all periods presented to give
effect to this contribution.
In April 1995, the Company completed a public offering of 1,800,000 shares of
common stock at $5 per share and warrants to purchase 1,800,000 shares of
common stock at $.10 per warrant. Also in April 1995, pursuant to the
underwriters' overallotment option, the Company sold an additional 270,000
warrants to purchase 270,000 shares of common stock. The net proceeds
received by the Company after deducting applicable issuance costs and
expenses aggregated $7,296,873. The net proceeds are being used for the
opening of superstores, the repayment of bank indebtedness, marketing and
advertising and for working capital purposes.
Each warrant is exercisable for a period of two and one-half years commencing
October 10, 1995, each to purchase one share of common stock at a price of
$4.00 per share, subject to the antidilution provisions of the warrants.
In December 1995, the Company issued 157,596 shares of its common stock,
valued at $750,000 on date of issuance, in connection with its acquisition of
substantially all of the assets and operating businesses of Nuby's.
NOTE O - STOCK COMPENSATION
Stock Options
In February 1995, the Company adopted the 1995 Stock Option Plan (the
"Plan"). The Plan provides for the granting of both: (i) incentive stock
options to employees and/or officers of the Company and (ii) non-incentive
stock options to consultants, directors, advisors, employees or officers of
the Company. The total number of shares which may be sold pursuant to
options granted under the Plan is 400,000. Options granted under the Plan
may not be granted at a price less than the fair market value of the
Common Stock on the date of the grant. Options granted under the Plan will
expire not more than ten years from the date of Grant.As described in Note
B-2, the Company has adopted the disclosure-only provisions of SFAS No. 123
and, accordingly, no compensation cost has been recognized for grants made
under its stock option plan. Had compensation cost been determined based on
the fair value at the grant date for stock option awards in 1996 and 1995 in
accordance with the provisions of SFAS No. 123, the Company's net income and
earnings per share for 1996 would have decreased by approximately $226,000
or $.05 per share, respectively, and the Company's net loss and net loss per
share for 1995 would have been increased by approximately $51,000 or $.16,
respectively. During the initial phase-in period of SFAS No. 123, such
compensation may not be representative of the future effects of applying
this statement.
The weighted average fair value at date of grant for options granted during
1996 and 1995 was $1.87 and $1.37 per option, respectively. The fair value
of each option at date of grant was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for grants in:
1996 1995
Dividend yield 0% 0%
Risk-free interest rate 6.68 6.98
Expected life after vesting period
Employees 3 years 3 years
Officers/directors 3 years 3 years
Expected volatility 45% 45%
The following table summarizes option activity for the years ended
December 31, 1996 and 1995:
Incentive Options Non-Incentive Options
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
(in thousands) (in thousands)
Balance, January 1, 1995
Granted 150,000 $4.15 22,500 $4.15
Exercised
Forfeited (8,250) 4.15
Expired (16,750) 4.15
Balance, December 31, 1995 125,000 4.15 22,500 4.15
Granted 104,168 3.42 51,832 3.42
Exercised
Forfeited (8,250) 4.07
Expired (20,750) 4.07 4.07
Balance, December 31, 1996 200,168 3.77 74,332 3.77
The following table summarizes information about stock options as of
December 31, 1996:
Options Outstanding Options Exercisable
Weighted-
Number average Weighted Number Weighted
Outstanding remaining average exercisable average
Range of at contractual exercise at exercise
Exercise Prices 12/31/96 life price 12/31/96 price
$2.38 to $3.69 75,000 4.54 $2.50 75,000 $2.50
3.70 to 5.00 199,500 3.75 4.24 87,500 4.34
274,500 162,500
Stock Warrants
On December 12, 1996, the Company issued 250,000 warrants (with an estimated
fair value of $.25 per warrant, using the Black-Scholes option pricing model)
to a non-employee for services to be rendered primarily in 1997, allowing the
purchase of 250,000 shares of the Company's common stock at $2.31 per share.
In accordance with the terms of the warrants, 125,000 warrants were vested at
December 12, 1996 and 125,000 warrants will vest in September 1997. The
Company will recognize related compensation expense during 1997 when such
services are rendered.
SUPPLEMENTARY INFORMATION
Aid Auto Stores, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Charged to Balance
beginning to costs accounts - Dedeuctions at end
Description of period and expense describe describe (a) of period
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1994
Allowance for
doubtful accounts $442,000 $442,000
Year ended
December 31, 1995
Allowance for
doubtful accounts 442,000 $348,000 $19,000 771,000
Year ended
December 31, 1996
Allowance for
doubtful accounts 771,000 87,000 228,000 630,000
(a) Amounts written off as uncollectible and recoveries.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
MANAGEMENT
The current directors and executive officers of the Company are as follows:
Name Age Position
Philip L. Stephen 61 Chairman of the Board,
Chief Executive Officer,
President & Treasurer
Bruce Allen Ziskin 50 Vice President of Merchandising
Greg M. Stephen 31 Vice President of Sales,
Secretary and Director
Frank Mangano 30 Chief Financial Officer
Lewis R. Cowan 66 Director
Ira Scott Greenspan 38 Director
Leonard Genovese 62 Director
Werner S. Neuburger 61 Director
Philip L. Stephen has been the Chief Executive Officer, President, Treasurer
and a director (Chairman of the Board) of the Company since 1985 (when he
acquired control of the Company). Prior to his acquisition of the Company and
through 1988 and 1989, respectively, Mr. Stephen was the owner and President
of Export Agencies International, an automotive export management company,
and Minthorne International Co., Inc., a company engaged in the marketing and
exporting of medical communications equipment and other electronic industrial
products.
Bruce Allen Ziskin has been Vice President of Merchandising of the Company
since January 1991. From 1981 to 1990, Mr. Ziskin was employed by Trak Auto,
a Maryland based automotive parts retail chain, including as Vice President
of Merchandising from 1988 to 1990, and from 1975 to 1980 he was employed by
E. J. Korvettes, a New York department store, including as Vice President of
Merchandising from 1978 to 1980.
Greg M. Stephen has been Vice President of the Company since 1991, Secretary
and a director of the Company since February 1995, and was General Manager of
one of the Company-owned stores during 1990. From 1988 to 1989, he held
various other positions with the Company, primarily at Company-owned stores.
Mr. Stephen worked at the Retirement System for Savings Institutions, a
pension fund management firm, from 1987 to 1988.
Frank Mangano has been the Chief Financial Officer of the Company since
June 1996. From 1988 through 1996, Mr. Mangano was employed by Grant
Thornton LLP, the independent certified public accountants for the Company,
and, while there, held the position of Audit Manager.
Lewis R. Cowan has been a director of the Company since February 1995. Since
1994, Mr. Cowan has been Senior Counsel of the law firm Cowan, Liebowitz &
Latman, P.C., of which he was a founding member. Mr. Cowan held the position
of Partner of such law firm for over 30 years prior to 1994.
Ira Scott Greenspan has been a director of the Company since February 1995.
From October 1994 to the present, Mr. Greenspan has been a Managing Director
of Harmonie Capital Group L.P., a private banking firm. From September 1993
to October 1994, Mr. Greenspan was a Managing Director of Brenner Securities
Corporation, an investment banking firm. From June 1992 to September 1993,
Mr. Greenspan was Executive Vice President and Head of Investment Banking of
GKN Securities Corp., an investment banking and brokerage firm. For more
than five years prior thereto, Mr. Greenspan was a corporate and securities
lawyer at Tenzer, Greenblatt LLP, a New York law firm, and most recently
was a Partner of that firm.
Leonard Genovese has been a director of the Company since December 1995.
Mr. Genovese has been President of Genovese Drug Stores, Inc. ("Genovese
Stores"), a major drug store chain, since 1974 and has also served as
Chairman of the Board of Genovese Stores since 1978. He served as Executive
Vice President of Genovese Stores from 1968 to 1974 and as Vice President,
Director of Operations from 1966 to 1968. Mr. Genovese is a member of the
Board of Directors of TR Financial, Inc., the parent company of Roosevelt
Savings Bank, and of the National Association of Chain Drug Stores.
Werner S. Neuburger has been a director of the Company since January 1996
and was a Vice President of the Company from December 1995 to April 1996.
From 1967 to December 1995, Mr. Neuburger was Chief Executive Officer and
President of Nuby's Auto, Inc., and affiliated companies, which operated ten
Aid Auto Stores franchises until they were acquired by the Company in
December 1995. Mr. Neuburger serves as a member of the Board of Directors of
the Long Island Commercial Bank, a commercial bank located exclusively on
Long Island.
The Company has agreed, for a period of three years from April 10, 1995, if
so requested by Whale Securities Co., L.P., the underwriter of the Company's
Initial Public Offering ("Whale"), to nominate and use its best efforts to
elect a designee of Whale as a director of the Company or, at Whale's option,
as a non-voting adviser to the Company's Board of Directors. The Company's
officers and directors have agreed to vote their shares of Common Stock in
favor of such designee. Whale has not yet exercised its right to designate
such a person.
All directors of the Company hold office until the next annual meeting of
stockholders of the Company or until their successors are elected and
qualified. Executive officers hold office until their successors are elected
and qualified, subject to earlier removal by the Board of Directors.
No family relationship exists between any director or executive officer and
any other director or executive officer of the Company except that Greg M.
Stephen, who is a Vice President and director, is the son of Philip L.
Stephen, Chairman, Chief Executive Officer and President.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The Company's officers, directors and beneficial owners of more than 10% of
any class of its equity securities registered, pursuant to Section 12 of the
Securities Exchange Act of 1934 (the "Exchange Act") ("Reporting Persons")
are required under the Exchange Act to file reports of ownership and changes
in beneficial ownership of the Company's equity securities with the
Securities and Exchange Commission (the "SEC"). Copies of these reports must
also be furnished to the Company. Based solely on a review o
during the year ended December 31, 1996, all filing requirements applicable
to Reporting Persons were complied with, except that each of Mr. Philip
Stephen and Mr. Ira Greenspan failed to file a timely Form 4 with respect to
the grant of options to purchase shares of Common Stock and Mr. Gene
Neuburger failed to file a timely Form 3.
Indemnification of Directors
The Company's Certificate of Incorporation eliminates the liability of a
director of the Company for monetary damages for breach of duty as a
director, subject to certain exceptions. In addition, the Certificate of
Incorporation provides for the Company to indemnify, under certain
conditions, directors, officers, employees and agents of the Company against
all expenses, liabilities and losses reasonably incurred by such persons in
connection therewith. The foregoing provisions may reduce the likelihood of
directors for breaches of their duty of care, even though such an action, if
successful, might otherwise benefit the Company and its stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation paid by the Company during
the years ended December 31, 1996, 1995 and 1994 to its Chief Executive
Officer and President and another executive officer. No other executive
officer of the Company received compensation in excess of $100,000 during the
year ended December 31, 1996.
Annual Long-Term
Compensation Compensation
Name and Principal Position Year Salary Securities Underlying
($)(1) Options (#)
Philip L. Stephen, 1996 $204,334 75,000
Chief Executive Officer 1995 $181,836 0
and President 1994 $132,000 0
Bruce Allen Ziskin, 1996 $107,809 0
Vice President of 1995 $101,923 50,000
Merchandising 1994 $ 97,403 0
(1) The columns for "Bonus," Restricted Stock Award(s)," "LTIP Payouts",
"Other" and "All Other Compensation" have been omitted because there is no
compensation of the type required to be reported in such columns.
Option Grants in 1996
The following table sets forth certain information for each of the named
executive officers with respect to grants of options to purchase Common
Stock made during the year ended December 31, 1996.
</TABLE>
<TABLE>
Individual Grants
<CAPTION>
Potential
Realizable
No. of % of Total Value at Assumed
Securities Options Annual Rates of
Underlying Granted to Exercise Stock Price
Options Employees Price Expiration Appreciation for
Name Granted (#) in Year ($/Sh) Date Option Term (1)
<S> <C> <C> <C> <C> <C> <C>
5% 10%
Philip L. Stephen 36,832 24.2% $2.38 07/15/2001 $24,219 $53,517
38,168 25.1% $2.62 07/15/2001 $27,628 $61,051
Bruce Allen Ziskin -- -- -- -- -- --
</TABLE>
(1) In accordance with the rules of the SEC, shown are gains or "option
spreads" that would exist for the respective options granted. These gains
are based on the assumed rates of annually compounded stock price
appreciation of 5% and 10% from the date the option was granted over the full
option term. These assumed annually compounded rates of stock price
appreciation are mandated by the rules of the SEC and do not represent the
Company's estimates or projections of future Common Stock prices.
Aggregated Option Exercised During 1996 and Year End Option Values
The following table provides information related to options exercised by
each of the named executive officers during 1996 and the number and value of
options held at December 31, 1996. The Company does not have any outstanding
stock appreciation rights.
<TABLE>
Value of Unexercised In-the-
Shares Value Number of Unexercised Money Options at Year
Acquired on Realized Options at Year End (#) End ($) (1)
Name Exercise (#) ($) Exercisable Unexercisable Exercisalbe Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Philip L. Stephen -- -- 75,000 0 0 0
Bruce Allen Ziskin -- -- 33,333 16,667 0 0
</TABLE>
(1) The closing price for the Company's Common stock as reported on the
NASDAQ Small-Cap Market on December 31, 1996 was $2.25. The exercise price
of Mr. Stephen's and Mr. Ziskin's options exceed such price, and,
accordingly, no value is set forth in the above table.
Employment Agreements
The Company has entered into a three-year employment agreement with Philip L.
Stephen effective April 19, 1995. The agreement provides for annual base
compensation of $200,000, a cost-of-living increase in the second and third
years, and, based upon the Company's performance in the first two years, a
bonus or salary increase in the third year at the discretion of the Board of
Directors. In the event of a takeover or other acquisition of the Company,
the agreement provides that Mr. Stephen shall receive a severance payment
equal to six months his base salary. The employment agreement requires that
Mr. Stephen devote his full time to the Company and contains a provision that
Mr. Stephen shall not compete or engage in a business competitive with the
current or anticipated business of the Company for the term of the Agreement
and for two years thereafter.
Compensation of Directors
The Company's directors are elected at the annual meeting of stockholders to
hold office until the annual meeting of stockholders for the ensuing year or
until their successors have been duly elected and qualified. The Company pays
directors who are not employees of the Company a fee of $500 per Board
meeting, and will reimburse all directors for their expenses in connection
with their activities as directors of the Company. In February 1995, two of
the Company's outside directors (Messrs. Cowan and Greenspan) were granted a
non-incentive options to purchase 7,500 shares of Common Stock at $5.00 per
share pursuant to the Company's Stock Option Plan and in December 1995
another outside director, Mr. Genovese, was similarly granted a non-incentive
option to purchase 7,500 shares of Common Stock at $5.00 per share. In June
1996, each of these three outside directors were granted a non-incentive
option to purchase 5,000 shares of Common Stock at $4.50 per share pursuant
to the Company's Stock Option Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1997, based on information
obtained from the persons named below, certain information with respect to the
beneficial ownership of shares of Common Stock by (i) each person who is known
by the Company to own more than 5% of the outstanding shares of Common Stock,
(ii) each director of the Company (including the person named in the Summary
Compensation Table above) and (iii) all of the Company's current officers and
directors as a group.
Amount and Nature Percentage of
Name and Address of of Beneficial Outstanding
Beneficial Holder Ownership(1) Shares Owned
Philip L. Stephen
275 Grand Boulevard
Westbury, NY 11590 2,075,000 (2) 51.5%
Greg M. Stephen 35,333 (3) *
Lewis R. Cowan 12,500 (4) *
Ira Scott Greenspan 22,500 (5) *
Leonard Genovese 22,500 (6) *
Werner S. Neuburger 157,596 4.0%
Bruce Allen Ziskin 33,333 (4) *
Whale Securities Co., L.P.
650 Fifth Ave.
New York, NY 10019 360,000 (7) 8.3%
All officers and directors
as a group (8 persons) 2,358,762 (8) 56.8%
_________________
* less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person upon the exercise of options or warrants. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person (but not those held by any
other person) have been exercised. Unless otherwise noted, the Company
believes that all persons named in the table have sole voting and investment
power with respect to all shares of Common Stock beneficially owned by them.
(2) Includes 75,000 shares of Common Stock underlying currently exercisable
options.
(3) Includes 33,333 shares of Common Stock underlying currently exercisable
options but does not include options to purchase 16,667 shares of Common
Stock, which options were not exercisable within 60 days of February 28, 1997.
(4) Represents shares of Common Stock underlying currently exercisable stock
options.
(5) Includes 12,500 shares of Common Stock underlying currently exercisable
options and 10,000 shares of Common Stock underlying currently exercisable
warrants.
(6) Includes 12,500 shares of Common Stock underlying currently exercisable
options and 5,000 shares of Common Stock underlying currently exercisable
warrants.
(7) Represents 360,000 shares underlying currently exercisable warrants and
other securities held in Whale's name for the account of certain employees,
former employees and equity owners of Whale.
(8) Includes options to purchase an aggregate of 179,166 shares of Common
Stock and warrants to purchase 15,000 shares of Common Stock. Does not
include options to purchase an aggregate of 83,334 shares of Common Stock
granted to executive officers of the Company, which options were not
exercisable within 60 days of February 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1996, the Company was indebted to Mr. Philip L. Stephen,
Chairman of the Board, Chief Executive Officer, President and majority
stockholder of the Company in the aggregate amount of $2,187,500. The
$2,187,500 loan was evidenced by two promissory notes. In connection with
the new revolving credit facility with GE Capital Corp., these notes were
consolidated into one promissory note. The new note bears interest monthly
at the same rate as the revolving credit facility with principal payable in
quarterly installments commencing November 1, 1996 through February 1, 2000.
The interest rate at December 31, 1996 was 8.45%. The new revolving credit
facility with GE Capital Corp. allows the Company to make quarterly
principal payments and scheduled monthly interest payments to Mr. Stephen so
long as prior to an after giving affect to such payments no default has
occurred and is continuing or would occur on the GE Capital Corp. indebtedness
as a result thereof. The note provides for immediate payment thereof upon,
among other things, a change in a majority of the continuing directors of the
Company (as defined in the note) or a demand by GE Capital Corp. of payment in
full of outstanding GE Capital Corp. indebtedness.
As of December 31, 1996, the Company leases space for two of its Company-
owned Aid Auto Stores from Mr. Werner S. Neuburger, Director of the Company.
The leases on both of these stores expire December 15, 2000 and have annual
rentals of $19,008 and $37,500 with annual increases based upon the consumer
price index or 4%, whichever is higher. A third location was leased from
Mr. Neuburger for the first ten months in 1996, whereby the Company then
moved to a larger square footage location to accommodate its Superstore
program. Rents paid to Mr. Neuburger in 1996 aggregated approximately
$136,000. In addition, at December 31, 1996, the Company was indebted to
Mr. Neuburger in the amount of $1,369,218 in connection with the Acquisition.
the original face value of the note was 1,507,396. The note had an interest
rate equal to one percentage point below the prime rate in 1996 and at the
prime rate thereafter. The note is payable in 120 equal monthly installments
of principal plus accrued interest commencing February 1, 1996. The Note
provides for immediate payment thereof upon, among other things, the failure
to pay an installment when due, the insolvency of the Company, the filing of
a bankruptcy petition by the Company, the sale of substantially all of the
assets of the Company or a reduction in the stock ownership of the current
majority shareholder (Mr. Philip L. Stephen) to below 10%. The Note is
subordinate to the GE Capital indebtedness. Also in connection with the
Acquisition, a repayment of $2,000,000 short term promissory note was made on
January 2, 1996 to Mr. Neuburger.
For the year ended December 31, 1996, the Company paid $275,000 for
professional services to the law firm of Cowan, Liebowitz & Latman, P.C.
Mr. Lewis R. Cowan, Director of the Company, has been Senior Council of the
law firm since 1994.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The financial statements filed as part of this report are listed in the Index
to Consolidated Financial Statements on Page F-1.
(2) Schedules
No schedules are furnished as the information is presented elsewhere in this
document or is inapplicable.
(3) Exhibits
Exhibit
Number Documents
3.1 Amended and Restated Articles of Incorporation of the Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 Form of Public Warrant Agreement between the Company, American Stock
Transfer & Trust Company and Whale Securities Co., L.P.(1)
4.3 Specimen Form of Public Warrant Certificate (contained in Exhibit
4.4).(1)
4.4 Form of Underwriter's Warrant Agreement (including form of Warrant
Certificate) between the Company and Whale Securities Co., L.P.(1)
10.1 Agreement between the Company and Philip L. Stephen, dated as of
December 15, 1995.(1)
10.2 Forms of Franchise Agreements.(1)
10.3 Form of Consulting Agreement between the Company and Whale Securities
Co., L.P.(1)
10.4 Transportation Agreement between the Company and Ryder Dedicated
Logistics, Inc., dated December 2, 1994.(1)
10.5 1995 Company Stock Option Plan.(1)
10.6 Lease Agreement between the Company and International Cigar Company,
dated October 15, 1989(1), as amended by First Amendment of Lease
dated August 1, 1995.(2)
10.7 Bank Loan Agreement, between the Company and Israel Discount Bank of
New York dated as of September 1, 1995(3), as amended October 27,
1995 and November 1, 1995.(4)
10.8 Agreement between the Company and Local 239 of the International
Brotherhood of Teamsters, dated February 1, 1996.(4)
10.9 Promissory Note by the Company in favor of Philip L. Stephen, dated
October 22, 1996.
10.10 Asset Purchase Agreement, dated November 9, 1995, among the Company,
various sellers, and Werner S. Neuburger, relating to the agreement
of the Company to acquire 10 franchised stores in Long Island,
New York.(2)
10.11 General Electric Capital Corporation revolving loan and credit
agreement with Exhibits, dated as of October 1, 1996.(5)
21.1 List of the Company's subsidiaries.
24.1 Consent of Independent Certified Public Accountants
(1) Incorporated by reference to the Company's Registration Statement
on Form SB-2 (No. 33-89190) declared effective by the Commission on
April 10, 1995.
(2) Incorporated by reference to the Company's current Report on Form 8-K
dated November 9, 1995.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
(4) Incorporated by reference to the Company's Post-Effective Amendment No.
1 to the Registration Statement on Form SB-2 (No. 33-89190) declared
effective by the Commission on August 13, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AID AUTO STORES, INC.
March 28, 1997 By: /s/ Philip L. Stephen
Philip L. Stephen
Chairman, Chief Executive Officer,
And President (Principal Executive Officer)
March 28, 1997 By: /s/ Frank Mangano
Frank Mangano
Chief Financial Officer,
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and
in the capacities and one the dates indicated.
March 28, 1997 /s/ Philip L. Stephen
Philip L. Stephen, Director
March 28, 1997 /s/ Lewis R. Cowan
Lewis R. Cowan, Director
March 28, 1997 /s/ Leonard Genovese
Leonard Genovese, Director
March 28, 1997 /s/ Ira Scott Greenspan
Ira Scott Greenspan, Director
March 28, 1997 /s/ Greg M. Stephen
Greg M. Stephen, Director
March 28, 1997 /s/ Werner S. Neuburger
Werner S. Neuburger, Director
Exhibit 10.9
Promissory Note
$2,187,500.00 October 22, 1996
For value received, Aid Auto Stores, Inc., a Delaware corporation with its
principal place of business located at 275 Grand Boulevard, Westbury, New
York 11590 (the "Obligor"), promises to pay to the order of Philip L.
Stephen, an individual, residing at 983 Dartmouth Lane, Woodmere, New York
11598, (the "Holder") the principal sum of Two Million One Hundred Eighty
Seven Thousand Five Hundred ($2,187,500.00) Dollars together with interest on
the unpaid principal balance at the rate equal to the interest
event Obligor does not have any bank financing, the interest rate shall be
equal to the prime rate of interest printed in the Wall Street Journal, from
time to time, such rate to change when and as such prime rate changes.
Interest on the unpaid principal amount shall be payable monthly on the
first day of each month commencing on November 1, 1996 and continuing until
the entire balance of principal and interest due on this note is paid. The
entire unpaid principal balance shall be paid in fourteen (14) e
quarterly commencing on November 1, 1996 and continuing on the first day of
each February, May and November thereafter until February 1, 2000 when the
entire remaining balance shall be due and payable.
Payments of principal and interest shall be made to the Holder at 983
Dartmouth Lane, Woodmere, New York, or at such other place as the Holder may
designate by written notice to the Obligor.
The terms of this Note are subject to the terms and conditions of the
Subordination Agreement dated the date hereof between General Electric
Capital Corporation, Philip L. Stephen, and Aid Auto Stores, Inc., (the "PS
Subordination Agreement"). In the event Obligor is prohibited from making
any principal and/or interest payments owed under this Note due to the terms
of the PS Subordination Agreement, then such principal and/or interest
amounts owed shall accrue and shall be paid to Holder when permitted by
ents under this Note be extended beyond February 1, 2000.
Obligor agrees that upon the happening of any of the following events and at
the option of the Holder, the obligation of the Obligor to Holder shall
become immediately due and payable without presentment, notice, demand,
protest or notice of any kind, all of which are expressly waived: (1) the
failure to pay any installment of principal or interest when due which
default continues for a period of fifteen (15) days after written notice;
(2) the insolvency, or the execution of an assignment for the benefit
tion in bankruptcy by or against the Obligor; (4) the sale of or assignment
of substantially all of the assets of the Obligor; (5) the demand by
Obligor's Bank of payment in full by Obligor or any loan or loans which are
outstanding; or (6) a change in a majority of the Continuing Directors (as
hereinafter defined) serving on the Board of Directors of the Obligor. The
term "Continuing Directors" for purposes of this sub paragraph shall mean
directors serving on the Board of Directors of the Obligor as o
mber's nomination or election is approved by a majority of the Original
Directors.
This Promissory Note is in replacement of the two promissory notes each dated
March 29, 1996 payable to the order of Philip L. Stephen in the principal
amounts of Four Hundred Twenty Five Thousand ($425,000.00) Dollars and Two
Million Seventy Five Thousand ($2,075,000.00) Dollars, respectively.
No delay or failure on the part of the Holder to execute any power or right
shall operate as a waiver thereof and such rights and powers shall be deemed
continuous.
This Note may be transferred to any other person, firm or corporation who
shall thereafter become vested with all the powers and rights given to the
Holder.
In the event that this Note is not paid when due, whether by acceleration or
otherwise, the Obligor agrees to pay, in addition to the principal and
accrued interest, all costs and expenses of collection incurred by the
Holder including reasonable attorney' fees.
This Note may be prepaid at any time without penalty.
This Note shall be governed by and interpreted and construed under the laws
of the State of New York.
AID AUTO STORES, INC.
By /s/ Greg M. Stephen
Greg M. Stephen
Title: Vice President
Exhibit 21.1
Subsidiaries of Aid Auto Stores, Inc.
Corporate Name State of Incorporation
Aid Flatlands Avenue, Inc. New York
Ames Automotive Warehouse, Inc. New York
White Plains Aid, Inc. New York
Bellmore Aid Inc. New York
Bethpage Superstore Aid Auto, Inc. New York
North Babylon Superstore Aid Auto, Inc. New York
Glen Cove Superstore Aid Auto, Inc. New York
Oceanside Superstore Aid Auto, Inc. New York
Jersey City Aid Auto, Inc. New Jersey
Hillside Avenue Aid, Inc. New York
Perfect Choice Automotive Products, Inc. New York
Exhibit 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 4, 1997, accompanying the consolidated
financial statements included in the Annual Report of Aid Auto Stores, Inc.
and Subsidiaries on Form 10-K for the year ended December 31, 1996. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of Aid Auto Stores, Inc. and Subsidiaries on Form S-8 (File No.
333-06675).
GRANT THORNTON LLP
/s/Grant Thornton LLP
New York, New York
April 4, 1997
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 331,019
<SECURITIES> 0
<RECEIVABLES> 1,755,904
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<COMMON> 3,958
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<TOTAL-LIABILITY-AND-EQUITY> 25,525,128
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<CGS> 16,133,042
<TOTAL-COSTS> 10,592,189
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