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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, 1997
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.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 11-2254654
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(State of Incorporation) (IRS Employer Identification Number)
275 Grand Boulevard, Westbury, New York 11590
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(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
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Title of Class
Redeemable Common Stock Purchase Warrants
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Title of Class
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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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, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendement to this Form 10-K. [X]
As of March 27, 1998, the aggregate market value of voting stock held
by nonaffiliates of the registrant was $3,137,750.
As of March 27, 1998, there were 3,957,596 shares of Common Stock (par
value $.001 per share) outstanding.
Documents Incorporated by Reference
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Not Applicable
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<PAGE>
PART 1
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, 1997, there were 22 Company-owned and 26 franchisee-owned Aid
Auto Stores. In 1997, the Company derived approximately 72% of its operating
revenues from its Company-owned retail automotive stores, as compared to 62%
in 1996. The Company derives the remaining portion 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. 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 focus of the Company's growth strategy is a Company-owned 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, 1997, the Company operated fifteen Company-owned Superstores
and seven Company-owned non-Superstores which have 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. Subject to the availability of substantial debt or equity
financing, 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 number of stores to be opened, if any, is subject to
significant variation depending upon, among other factors, the availability of
substantial debt or equity financing for which there can be no assurance of
obtaining.
Industry Overview
According to industry estimates, the size of the domestic automotive
after-market for replacement parts, maintenance items and accessories is
believed to have been approximately $107 billion in 1997. The Company believes
that the automobile after-market 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 models 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, 1997, the Company operated 22 Aid
Auto Stores, fifteen of which are Superstores and seven of which have
implemented the Superstore advertising, inventory and merchandising program.
These 22 Aid Auto Stores are located in Long Island (11), Brooklyn (3), Queens
(3), Staten Island (2), Bronx (1), White Plains (1) and Jersey City (1). The
number of Company-owned stores, as of the last day of each of the last three
years, is as follows:
COMPANY-OWNED STORES
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December 31, 1995 December 31, 1996 December 31, 1997
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Non-Superstore 13(1) 10 7(2)
Superstore 1 10 15
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Total 14 20 22
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(1) During the year ended December 31, 1995, the Company closed a
Company-owned non-Superstore, in Brooklyn, New York.
(2) Of these seven stores, five are currently intended to be
converted to Superstores. All seven stores have already
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, 1995, 1996 and 1997, the Company-owned stores generated
net sales of $3,969,815, $16,690,722, and $17,524,723 respectively, which
constituted approximately 19.6%, 62.1% and 71.8%, respectively, of the Company's
overall operating revenues for such periods. For the years ended December 31,
1995, 1996 and 1997, the Company-owned stores reported income from operations
before depreciation of($173,992), $1,601,921, and $731,988, respectively. The
Company does not believe that the results of operations of its Company-owned
stores is necessarily indicative of future operating results. 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, 1997, the Company had franchise
agreements with seven franchisees who independently own and operate a total of
26 Aid Auto Stores in New York. 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 standards set for franchisees
and for other reasons.
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 into a Company franchise) as well as continuing monthly
franchise fees of $400. In addition to franchise fees, the Company's current
form of franchise agreement provides that franchisees are required to contribute
$900 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. The Company, in anticipation of opening
Company-owned Superstores, sold only one new franchise in 1995, which was sold
to an existing franchisee opening an additional store, and none in 1996 and
1997, and currently intends to continue to restrict the number of franchises
granted in the future so as to preserve desirable locations for its proposed
new Superstores. During the entire twelve months of 1995, 1996 and 1997, seven,
eight and fourteen franchises, respectively, were terminated by the Company due
to their failure to meet standards set for franchisees and for other reasons.
The Company has selected and, subject to obtaining substantial capital
resources, 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.
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 portion of the other merchandise sold in their stores.
While franchise fees accounted for only approximately 1.5%, 0.7% and 0.4% of the
Company's operating revenues for the years ended December 31, 1995, 1996 and
1997, respectively, and sales of products to franchisees accounted for 41.7%,
19.2% and 11.4% 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 brand name program, which is marketed under
the name Perfect ChoiceTM. The Company currently has developed 32 such private
label products, primarily maintenance items, and is seeking to develop
additional products. The Perfect Choice trademark is registered 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. It also provides management with real-time inventory tracking
enabling for better inventory management and 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 after-market. Ames seeks to provide its retail operations customers
with high profit margins, high sales per square foot, excellent inventory
turnover, and an extremely high in-stock position (preventing lost sales).
Ames accounted for approximately 35.1%, 18.0% and 16.4% of the Company's net
sales for the years ended December 31, 1995, 1996 and 1997, 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
pack-out, price ticketing, order writing and replenishment, plano-gramming,
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. The Company
ships 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. 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 1997, 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. During 1997, the Company's ten largest suppliers accounted for
approximately 49% of the Company's purchases and one supplier accounted
for 13% of total purchases. 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 adverse
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
In 1995, the Company instituted a Company-owned Superstore growth
program. The Superstores are designed to make it possible for consumers
and commercial entities to buy top quality automotive after-market
products from a large inventory at the lowest possible prices. The
number of stores to be opened in connection with the Superstore growth
program is subject to substantial variation depending upon, among other
factors, the availability of adequate financing to fund the cost of
adding the additional stores. In this regard, the Company does not have
the capital resources to open additional stores, and as a result, will
need to seek substantial 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 and currently has fifteen Superstores and seven non-Superstores
which have implemented the Superstore advertising, inventory and
merchandising program.
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, and subject to obtaining adequate financing, 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 new
Superstores has been in this general range, there can be no assurance
that such cost levels can be maintained in the future. There can be no
assurance that the Company will have adequate financing to continue 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 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 Superstore design 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. 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 provide 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 after-market 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 Strauss Discount Auto, 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 part 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 after-market chains based in
other areas of the country, in the event that 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, 1997, the Company employed approximately 227
persons (excluding franchisees and their employees), of whom 164 were
employed at its existing Company-owned Aid Auto Stores, and 63 were
employed at the Company's Westbury, New York executive offices and
distribution center (including four executive officers, 26 warehouse
personnel, four sales representatives, one advertising personnel and 28
corporate and administrative personnel). Currently 77% 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's agreement with
the union representing the warehouse employees, which agreement has been
ratified by the union membership, expires January 31, 1999.
Trademarks
The Company's "Aid" trademark used in connection with certain of the
Company's automotive products and its "Perfect Choice" trademark
utilized in connection with its private label merchandise program
currently in effect and under continued development are 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 marks. 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. 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.
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.
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 21 Company-owned Aid
Auto Stores for which the Company leases space. Leases on these stores
expire from January 31, 1999 to November 15, 2008 and have annual rental
rates ranging from $19,040 to $196,625.
For any new Superstores which the Company may open, 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, 1997, 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, 1997.
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") are 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, and all corresponding prices
represent high and low closing sales prices for the Common Stock on
NASDAQ for the periods indicated. The NASDAQ quotations, which
represent prices between dealers, do not include retail mark ups, mark
downs or commissions.
Price Range
--------------------------------
High Low
------------ -----------
Common Stock
- ------------
Year Ended December 31, 1997
- ----------------------------
1st Quarter 4-1/8 2-3/16
2nd Quarter 4-1/8 2-3/4
3rd Quarter 3-3/8 2-1/8
4th Quarter 3 1-17/32
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
Warrants
- --------
Year Ended December 31, 1997
- ----------------------------
1st Quarter 3/4 1/4
2nd Quarter 5/8 1/4
3rd Quarter 7/16 1/4
4th Quarter 5/16 1/8
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
Holders
As of December 31, 1997, there were 18 holders of record of the Common
Stock, and 21 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 operations, capital requirements, 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, 1997,
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,
----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------
<S>
<C> <C> <C> <C> <C> <C>
Operating
revenues(1) $24,595,789 $27,393,678 $20,263,833 $24,182,096 $24,901,794
Cost of sales 15,147,158 16,133,042 13,594,260 16,980,220 17,346,107
Selling and
shipping 7,779,907 7,331,271 3,411,456 3,477,350 3,490,136
General and
administrative 4,469,736 3,260,918 3,476,824 3,180,210 3,049,526
Income (loss)
from continuing
operations before
income taxes (3,922,772) 30,364 (539,881) 91,763 668,613
----------- ---------- ---------- --------- ----------
Income (loss) from
continuing
operations(2) (3,922,772) 30,364 (703,881) 19,763 350,613
Net income (loss) (4,290,772) 30,364 (703,881) 19,763 51,153
---------- ---------- ---------- --------- ---------
Income (loss) from
continuing operations
per share ($1.08) $ .01 ($ .22) $ .01 $ .18
Net income (loss)
per share ($1.08) $ .01 ($ .22) $ .01 $ .03
Weighted average
number of shares
outstanding 3,957,596 3,957,596 3,269,374 2,000,000 2,000,000
</TABLE>
Consolidated Balance Sheet Data(3):
[CAPTION]
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994
--------- ---------- ---------- ----------
[C] [C] [C] [C] [C]
Working capital...... $ 372,072 $ 5,213,339 $ 6,552,699 $ 2,051,508
Total assets......... 23,400,650 25,525,128 25,301,722 12,860,115
Long-term debt....... 3,662,578 3,305,695 3,613,623 2,777,239
Stockholders'equity 4,778,293 9,069,065 9,038,701 1,695,705
(1) Includes both net wholesale and retail sales, and franchise fees.
(2) 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.
(3) The Company completed its Initial Public Offering in April, 1995 as
a "Small Business Issuer" and, accordingly, does not have available
selected consolidated balance sheet data available for a five-year period.
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, 1997, the Company supplied products to 48 Aid Auto
Stores, including 22 Company-owned stores and 26 franchised 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. The Aid
Auto Stores sell an extensive variety of name-brand automotive parts,
accessories and chemicals, as well as an assortment of products marketed
under the "Aid" and "Perfect Choice" TM brands, to both do-it-yourself
and commercial customers. Pursuant to a growth strategy initiated in
1995, the Company commenced the opening of Company-owned Superstores and
de-emphasized its franchise operations. As of December 31, 1997, the
Company opened eight new Superstores and had acquired (in December 1995)
ten franchised Aid Auto Stores in Long Island, New York, of which seven
of these stores had been converted and reopened as Superstores and two
of the three remaining stores are intended to be converted to
Superstores. Through termination and non-renewal of franchise
agreements, the number of franchised stores has decreased since the end
of 1996 from 40 to 26. Subject to the availability of substantial debt
or equity financing, the Company intends to open additional Superstores,
which may be accomplished in part by acquisition. In addition,
consistent with its retail Superstore growth strategy, the Company
further de-emphasized its wholesale operations by reducing the number of
its Ames customers by 33% from December 31, 1996 to December 31, 1997.
The number of stores to be opened is subject to significant variation
depending upon, among other factors, the availability of substantial
financing to fund the cost of adding the additional stores, the level of
success of the current Superstores, the availability of suitable store
sites or acquisition candidates, and the timely development and
construction of new stores. The financial performance of the Company is
tied, to a large extent, to the transition of the Company to the
Superstore program and the future potential of that program. In the
event the program is continued, the Company's operating expenses are
expected to continue to increase and, accordingly, the Company's future
profitability will depend upon increases in revenues from its Superstore
operations, of which there can be no assurance.
Loss from operations for the year ended December 31, 1997 as
compared to income from operations for the year ended December 31, 1996
was primarily due to the decrease in revenues attributed to the
unseasonable weather in the Northeast in the first and fourth quarters
of 1997, and approximately $1,400,000 in one time charges associated
with the refinancing of its credit facility, the change in the
accounting for pre-opening costs, and the write-off of inventory and
deferred taxes. In addition, due to the less than anticipated sales in
the fourth quarter, the Company was unable to take advantage of a
significant amount of volume discounts/bonuses. Furthermore, the Company
was adversely affected by the reduced revenues as a result of its de-
emphasis of its franchises and other wholesale operations which was not
being offset by a decrease in infrastructure costs. In the first quarter
of 1998, the Company reduced corporate payroll by 26% and began the
negotiation to reduce the space requirements of the distribution center
by 60%.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
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 22 existed at
December 31, 1997 and 20 at December 31, 1996. Wholesale sales include
sales to the Company's franchised Aid Auto Stores, of which 26 existed
at December 31, 1997 and 40 at December 31, 1996, and through Ames, to
hundreds of other customers. Revenues decreased by $2,797,889 (or
10.2%) from $27,393,678 for the year ended December 31, 1996 to
$24,595,789 for the year ended December 31, 1997. The decrease in
revenues in 1997 was due primarily to the decrease of $2,493,412 in
franchise sales from $5,275,943 for the year ended December 31, 1996 to
$2,782,531 for the year ended December 31, 1997, and through a decrease
in sales of $799,887 from Ames from $4,892,658 for the year ended
December 31, 1996 to $4,092,771 for the rear ended December 31, 1997,
partially offset by the increase in retail sales from Company-owned
stores of $834,001 from $16,690,722 for the year ended December 31, 1996
to $17,524,723 for the year ended December 31, 1997. This reduction in
net sales to franchisees and through Ames for the year ended December
31, 1997 is consistent with the Company's strategy to de-emphasize its
wholesale business and continue the growth of its retail business. The
exceptionally mild, auto-friendly winter weather in the first and fourth
quarters of 1997 resulted in a decrease in the sale of certain items
(e.g., anti-freeze and other winter chemicals) and the reduced need for
other winter maintenance items (especially when compared to the seasonal
cold and wet winter of 1995-1996 which resulted in an increase in the
sale winter items. In addition, the unseasonably cool spring in the
second quarter of 1997 resulted in the reduced sales of car care and car
maintenance products. Furthermore, ten franchised stores were terminated
by the Company in 1996, and an additional fourteen franchised stores
were terminated in 1997.
Cost of sales decreased by $985,884 (or 6.1%) from $16,133,042 for
the year ended December 31, 1996 to $15,147,158 for 1997. The decrease
in cost of sales in absolute dollars was attributable to the decreased
volume of sales in 1997. As a percentage of net sales, cost of sales
increased from 58.9% for the year ended December 31, 1996 to 61.6% for
the year ended December 31, 1997, reflecting the significantly lower
margins on promotional items, more aggressive retail pricing and higher
product costs. In addition, during the fourth quarter of 1997 the Company
wrote off approximately $275,000 in inventory adjustments associated with
the full implementation of its perpetual inventory monitoring system at
its retail locations. These factors were offset in part by the generally
greater margins achieved from retail sales, as opposed to wholesale
sales.
Selling and shipping expenses increased by $448,636 (or 6.1%) from
$7,331,271 (26.8% of net sales) for the year ended December 31, 1996 to
$7,779,907 (31.6% of net sales) for the year ended December 31, 1997.
The increase in absolute dollars and as a percentage of net sales for
the year was due primarily to an increase of selling expenses reflecting
an increase in the Company's retail operations associated with the opening
of two new Company-owned stores in 1997 and the full year of operations
of those stores opened throughout 1996. Selling expenses are
higher for a retail operation than for a wholesale operation, reflecting
the nature of those operations. As a result of the Company's strong
efforts to control costs, the shipping expense dollars remained
essentially constant despite the increase in the retail sales volume.
General and administrative expenses increased by $1,208,818 (or
37.1%) from $3,260,918 (11.9% of net sales) for the year ended December
31, 1996 to $4,469,736 (18.2% of net sales) for the year ended December
31, 1997. The increase in absolute dollars and a percentage of net sales
was due to the Company's charge to operations of $275,000 for financing
costs associated with the refinancing of the Company's secured
indebtedness and $385,000 for the acceleration of the amortization of
pre-opening costs associated with the opening of Superstores from a two
year amortization period to expense as incurred in accordance with
current accounting practices.
Interest expense increased $282,505 from $861,515 for the year
ended December 31, 1996 to $1,144,020 for the first year December 31,
1997. This increase was due to an increase in the average outstanding
debt balance during 1997 as compared to the same period in the prior
year.
Income tax expense for the year ended December 31, 1997 was
$368,000. The expense is attributed to the write-off of deferred tax
assets in the amount of $450,000, partially offset by tax refunds due
the Company in connection with its net operating losses.
For the foregoing reasons, the net loss for 1997 was approximately
$4,290,772 as compared to net income of $30,364 for the year ended
December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
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 31, 1995, the Company acquired ten franchised Aid Auto Stores
located in Long Island, New York, and in 1996 opened six new
Superstores. In addition, the seasonal cold and wet winter 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 increase 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 (or 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.
Liquidity and Capital Resources
The Company had a working capital of $372,072 at December 31, 1997,
as compared to $5,213,339 at December 31, 1996. The decrease of
$4,841,267 was primarily caused by its 1997 operating loss and by
decreases in accounts receivable-trade and inventory. In addition,
the Company incurred additional
indebtedness to a bank in the form of an unsecured demand note that
resulted from the conversion of overdraft balances in the Company's
operating accounts. Management has taken steps to improve its working capital
position by implementing several cost cutting steps which include the
reduction of 26% of the corporate payroll and have reduced inventory by
7% in the first quarter of 1998. In addition, the Company has begun the
process to seek to reduce 60% of space at the Company's distribution
center. The Company has also, begun to negotiate with its
vendors for assistance throughout 1998. In connection, with the development
and implementation of this financial strategy, the Company has retained a
financial advisor to assist therewith. Furthermore, the Company has retained
Josephthal & Co., Inc. to assist it in exploring strategic alternatives, which
include , among other things, a significant acquisition by, or the acquisition
of, the Company. These steps, among others, will enable the Company to improve
its cash flow from operations and working capital position. However,
cash generated from operations alone would not be sufficient to pay the
demand note if the bank were to demand immediate payment thereof.The bank
has indicated to the Company that it will not pursue such action provided the
Company is successful in its pursuit of strategic alternatives. There can be
no assurance that the Company will be successful in its attempt to consumate
one of the strategic alternatives or that the bank will otherwise continue to
defer seeking payment. In addition, the Company will continue to pursue
substantial sources of debt or equity financing to improve the working capital
position and continue the growth of the Company, for which there can be no
assurance of obtaining.
Net cash provided by operating activities was $262,910 for the year
ended December 31,1997 compared to net cash used in operating activities
of $3,256,314 for the year ended December 31, 1996. The increase in
1997 was attributable primarily to decreases in accounts receivable and
in inventory at the warehouse level, as a result of the de-emphasizing
of the wholesale operations, as well as decrease in prepaid expense
compared to the prior comparable period, offset in part by an increase
in other assets, and the substantial loss in 1997 compared to net income
in 1996. Net cash utilized in investing activities was $1,164,305 and
$2,223,579 for the years ending December 31, 1996 and 1997,
respectively, the increase reflecting increased unfunded capital
expenditures in connection with the Superstore growth program. Net cash
provided by financing activities was $1,917,591 for the year ended
December 31, 1997 compared to net cash used by financing activities of
$15,255 for the year ended December 31, 1996. Financing activities in
1997 reflect the unsecured demand note the Company has in connection
with the conversion of overdraft balances inthe Company's operating accounts.
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 initial 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.
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 September 29, 1997, the Company entered into a $10,000,000
revolving credit facility with a financial institution ("lender"), which
at the Company's option, can be increased to $15,000,000. The agreement
expires September 30, 2000. This facility replaced the existing
facility which provided for maximum borrowings of $10,000,000. This new
facility allows the Company to borrow at the prime rate plus 1%.
Maximum borrowings under the revolving credit facility are based upon
the sum of 62% of eligible inventory and 85% of eligible accounts
receivable. The advance rate for inventory gradually declines over the
first year of the agreement to, the lower of 60%, or 80% of the
appraised value of the inventory. Additionally, substantially all of the
Company's assets are pledged as collateral under the new credit
agreement. The terms of the revolving credit facility contain, among
other provisions, financial covenants for maintaining defined levels of
net worth, net earnings before interest, taxes, depreciation and
amortization and annual capital expenditures. Because of the operating
loss reported by the Company for the year ended December 31, 1997, the
Company would not have been in compliance with such covenants had the
lender not granted waivers of such defaults as of December 31, 1997. The
lender also has amended those covenants in 1998. There can be no assurance
that the Company will be able to comply with future covenants and/or obtain
future waivers or amendments that would prevent the entire amount of the
credit facility from becoming due and payable. At December 31, 1997,
outstanding borrowings under this facility were $7,866,772 which reflects
the maximum available under the credit facility, and the interest rate was 9.5%.
In connection with this new facility, the Company was required to
pay an early termination fee of $175,000 to its previous lender. The fee
was paid from the proceeds of a loan to the Company by the lender in the
form of a one year term loan with principal and interest payable
monthly. The term loan interest rate is at the prime rate plus 1%.
At September 30, 1997, the Company was indebted to the Chief
Executive Officer, President and majority shareholder in the form of a
promissory note aggregating $2,187,500. The note bears interest monthly
at the same rate as the revolving credit facility with principal payable
in quarterly installments 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 occurred and is continuing
or would occur on the Foothill indebtedness as a result thereof. The
holder of the note has deferred all principal payments due to April 15,
1999. 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 Foothill of payment in
full of outstanding Foothill indebtedness.
As of the date hereof, other than in connection with the possible
continuation of the Superstore growth program, the Company has no
material commitments for capital expenditures.
The Company has used net proceeds ($7,300,000) of its 1995 Initial
Public Offering as well as funds from borrowings, to finance the
implementation of its Superstore growth program. The Company will need
to seek substantial debt or equity financing, as the Company's current
resources and cash flow from operations are not sufficient to fund the
continuing cost of its growth program. 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 Foothill, 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.
In December 31, 1997, the Company engaged Josephthal & Co., Inc.,
an investment banking and securities brokerage firm, to work closely
with the Company to develop and implement its strategic plan including
evaluating appropriate sources of capital and assisting with selected
strategic acquisitions and other corporate and financial matters. In
March 1998, the Company further retained Josephthal & Co., Inc. to
assist the Company in connection with a possible transaction, which may
include among other things, a significant acquisition by, or the
acquisition of, the Company.
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.
<PAGE>
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-28
Supplementary Information
Schedule II - Valuation and Qualyfying Accounts F-30
<PAGE>
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, 1997 and 1996 and the
related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996
and the consolidated results of their operations and their consolidated
cash flows for the years ended December 31, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $4,290,772 for the year
ended December 31, 1997. This factor, among others, as described in
Note B, raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We have also audited the financial statement Schedule II included as
supplementary information to the accompanying financial statements for
the years ended December 31, 1997, 1996 and 1995. 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 15, 1998
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
[CAPTION]
ASSETS 1997 1996
------------- ------------
[S]
[C] [C] [C]
CURRENT ASSETS
Cash and cash equivalents $ 287,941 $ 331,019
Accounts receivable - trade, net of
allowances for doubtful accounts of
$195,478 and $440,798 in
1997 and 1996, respectively 659,667 1,755,904
Notes receivable, net of allowances
for doubtful accounts of $190,000
in 1997 and 1996 358,549 305,424
Inventories 12,649,691 13,348,534
Prepaid expenses and other current assets 955,303 2,105,198
Deferred income taxes 275,000
------------- -------------
Total current assets 14,911,151 18,121,079
FIXED ASSETS - AT COST, net 4,651,488 3,266,855
COSTS IN EXCESS OF NET ASSETS ACQUIRED, net 3,441,335 3,690,214
DEFERRED INCOME TAXES 175,000
OTHER ASSETS 396,676 271,980
------------ ------------
$23,400,650 $25,525,128
============ ============
The accompanying notes are an integral part of these statements.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
[CAPTION]
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
--------------- -------------
[S]
[C] [C] [C]
CURRENT LIABILITIES
Revolving credit line $ 7,866,772 $ 7,649,951
Demand note 2,161,401
Accounts payable 3,464,766 3,599,561
Accrued expenses 453,085 448,331
Current portion of long-term debt 447,222 428,647
Term note 145,833
Note payable - officer 781,250
--------------- --------------
Total current liabilities 14,539,079 12,907,740
LONG-TERM DEBT, net of current portion 1,475,078 1,899,445
DEFERRED OCCUPANCY COSTS 420,700 242,628
NOTE PAYABLE - OFFICER 2,187,500 1,406,250
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
outstandingin 1997 and 1996 3,958 3,958
Additional paid-in capital 9,006,809 9,006,809
Retained earnings (4,232,474) 58,298
------------ -----------
4,778,293 9,069,065
------------ -----------
$ 23,400,650 $ 25,525,128
============ ===========
The accompanying notes are an integral part of these statements.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1997 1996 1995
------------ ----------- -----------
[C] [C] [C] [C]
Net sales $24,595,789 $27,393,678 $20,263,833
Costs and expenses
Cost of sales 15,147,158 16,133,042 13,594,260
Selling and shipping 7,779,907 7,331,271 3,411,456
General and administrative 4,469,736 3,260,918 3,476,824
----------- ----------- -----------
27,396,801 26,725,231 20,482,540
(Loss) income from operations (2,801,012) 668,447 (218,707)
Interest expense (1,144,020) (861,515) (705,244)
Interest and other income 22,260 223,432 384,070
----------- ----------- ----------
(Loss) income from continuing
operations before income taxes (3,922,772) 30,364 (539,881)
Provision for income taxes 368,000 164,000
----------- ----------- -----------
NET (LOSS) INCOME $ (4,290,772) $ 30,364 $ (703,881)
(Loss) income per common share
(Loss) income from continuing
operations $(1.08) $.01 $(.22)
====== ==== =====
Net (loss) income per common
share - basic $(1.08) $.01 $(.22)
Weighted average common shares
outstanding 3,957,596 3,957,596 3,269,374
The accompanying notes are an integral part of these statements.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
Common Stock Additional Total
Preferred --------------- paid-in Retained stockholders'
Stock Shares Amount Capital earnings equity
------ ------ ------- ------- --------- -------
[C] [C] [C] [C] [C] [C] [C]
Balance at
January 1, 1996 $ 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
Net income (4,290,772) (4,290,772)
----- -------- --------- --------- --------- ----------
Balance at
December
31, 1997 $ - 3,957,596 $3,958 $9,006,809 $(4,232,474) $ 4,778,293
====== ========= ========= ========== =========== ==========
The accompanying notes are an integral part of this statement.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1997 1996 1995
---------- ---------- ----------
[S]
[C] [C] [C] [C]
Cash flows from operating activities
Net (loss) income $ (4,290,772) $ 30,364 $ (703,881)
Adjustments to reconcile net
(loss) income to net cash
provided by (used in) operating
activities
Depreciation and amortization 1,971,761 917,743 429,164
Provision for losses on
accounts receivable 80,000 237,000
Provision for losses on
notes receivable 140,000
Deferred occupancy costs 178,072 84,633 (164,176)
(Increase) decrease in
operating assets
Accounts receivable 1,096,237 1,155,108 61,554
Notes receivable 4,247 71,425 (132,288)
Inventories 698,843 (3,976,054) (2,763,989)
Prepaid expenses and other
current assets 291,625 (857,197) (272,943)
Security deposits (3,959)
Other assets (3,109)
Deferred income taxes 450,000 (7,000) 126,000
Increase (decrease) in
operating liabilities
Accounts payable (134,789) (716,281) 891,841
Accrued expenses 4,754 (39,055) 276,326
Income taxes payable (118,000)
----------- ---------- -----------
Net cash provided by (used in)
operating activities 262,910 (3,256,314) (1,993,392)
----------- ---------- -----------
Cash flows from investing activities
Capital expenditures (2,223,579) (1,164,305) (479,209)
Acquisition of Nuby's, net (122,191)
----------- ----------- -----------
Net cash used in investing activities (2,223,579) (1,164,305) (601,400)
============ =========== ===========
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31,
1997 1996 1995
Cash flows from financing activities ---------- ---------- -----------
Net borrowings under revolving
credit line $ 216,821 $2,638,751 $ 614,156
Principal repayment of long-term
debt (186,740) (2,170,370) (356,977)
Demand note 2,161,401
Term note (29,167)
Repayment of notes payable under
capital lease obligations (244,724) (171,136)
Repayment of officers' loans (312,500) (551,951)
Net proceeds from issuance of
common stock 7,296,873
---------- ---------- -----------
Net cash provided by (used in)
financing activities 1,917,591 (15,255) 7,002,101
---------- ---------- -----------
Net (decrease) increase in cash
and cash equivalents (43,078) (4,435,874) 4,407,309
Cash and cash equivalents, at
beginning of year 331,019 4,766,893 359,584
--------- ----------- -----------
Cash and cash equivalents, at end
of year $ 287,941 $ 331,019 $ 4,766,893
========= ============ ===========
Supplemental disclosures of cash
flow information:
Cash paid during the year for
Interest 1,144,000 $ 799,000 $ 660,000
Income taxes 120,000 190,000
Capital lease obligations
incurred for equipment 26,000 879,000
Cash received during the year for
Income taxes 146,000
The accompanying notes are an integral part of these statements.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
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 - REALIZATION OF ASSETS AND LIQUIDITY MATTERS
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate continuation of the Company as a going concern.
However, the Company has sustained a substantial loss from
operations for the year ended December 31, 1997. In addition, the
Company is obligated to repay a $2,160,000 demand note to a bank
that resulted from the conversion of overdraft balances. Further,
the Company's ability to repay this obligation while continuing to
fund its ongoing operations is predicated on cash flow projections
that assume, among other things, an increase in retail store sales
that has not yet occurred as of March 31, 1998. The Company was
also in default of certain of its loan covenants with a lender for
which it has received a waiver as of December 31, 1997. However,
there is uncertainty regarding the Company's ability to comply with
future covenants and/or obtain necessary future waivers or
amendments that would prevent the entire amount of its credit
facility becoming due and payable, although management has proposed
alternatives to remedy the condition and believes it will be
satisfactorily resolved.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts
shown in the accompanying balance sheet is dependent upon continued
operation of the Company, which in turn is dependent upon the
Company's ability to meet its financing requirements on a
continuing basis and the forbearance of its lender, cooperation of
its suppliers, to maintain present financing, and to succeed in its
future operations. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
Management has engaged in continuous efforts to formulate a plan
which would assist the Company in improving its cash flow from
operations and working capital position. Such efforts include the
retention of a financial advisor to assist in the development of a
new business plan and strategy to
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE B (continued)
address the Company's current financial situation and disappointing
recent financial performance. The Company has instituted several
steps to improve its cash flow from operations and working capital.
These steps include, but are not limited to, the reduction of
corporate payroll, the reduction of inventory which would improve
turns and the restructuring and reduction of its warehouse
operations to reflect the Company's current business. In addition,
the Company has begun the process of negotiating with
its vendors for assistance throughout 1998. Furthermore, the
Company has retained the investment banking firm of Josephthal &
Co., Inc. to assist it in exploring strategic alternatives which
may include, among other things, a significant acquisition by, or
the acquisition of, the Company.
Management believes these steps are sufficient to provide the
Company with the ability to continue in existence.
NOTE C - 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
Earnings (Loss) Per Share
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which
requires public companies to present basic earnings per share
and, if applicable, diluted earnings per share. All comparative
periods must be restated as of December 31, 1997 in accordance
with SFAS No. 128. Basic earnings per share is based on the
weighted average number of common shares outstanding without
consideration of common
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE C (continued)
stock equivalents. Diluted earnings per share is based on the
weighted average number of common and common equivalent shares
outstanding. The calculation takes into account the shares that
may be issued upon exercise of stock options, reduced by the
shares that may be repurchased with the funds received from the
exercise, based on the average price during the year. At
December 31, 1997, the Company had 274,500 outstanding stock
options which could potentially dilute basic earnings per share
but have not been considered as they would have had an
antidilutive impact for all periods presented (see Note O).
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130 ("SFAS
No. 130"), "Reporting Comprehensive Income," which is effective
for the Company's year ending December 31, 1998. SFAS No. 130
addresses the reporting and displaying of comprehensive income
and its components. Earnings per share will only be reported for
net income and not for comprehensive income. Adoption of SFAS No.
130 relates to disclosure within the financial statements and is
not expected to have a material effect on the Company's financial
statements.
Segment Information
In June 1997, the FASB also issued Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosure About
Segments of an Enterprise and Related Information," which is
effective for the Company's year ending December 31, 1998. SFAS
No. 131 changes the way public companies report information about
segments of their business in their financial statements and
requires them to report selected segment information in their
quarterly reports. Adoption of SFAS No. 131 relates to disclosure
within the financial statements and is not expected to have a
material effect on the Company's financial statements.
3. Cash and Cash Equivalents
Cash equivalents include all highly liquid investments purchased
with an original maturity of three months or less.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE C (continued)
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. Impairment of Long-Lived Assets
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 its 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.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE C (continued)
7. Stock-Based Compensation
In 1996, the Company adopted 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.
8. 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.
9. 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.
10. 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.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE C (continued)
11. 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.
12. Reclassifications
Certain reclassifications have been made to the 1996 presentation
to conform to the 1997 presentation.
NOTE D - 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 values of cash and cash
equivalents, accounts receivable and accounts payable reasonably
approximates fair value because of the short maturity of those
instruments.
The fair values of the Company's long-term debt and note payable -
officer are 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,
-----------------------------------------
1997 1996
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- --------- -------
[C] [C] [C] [C] [C]
Cash and cash equivalent $287,940 $287,940 $331,019 $331,019
Long-term debt 1,922,300 1,922,300 2,328,092 2,328,092
Note payable -officer 2,187,500 2,187,500 2,187,500 2,187,500
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE E - 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. Costs in
excess of net assets acquired, excluding inventory, were $3,090,855
and are being amortized over fifteen years. As described in Note C-
6, 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)
NOTE F - NOTES RECEIVABLE
At December 31, 1997 and 1996, notes receivable consist of amounts
due from franchisees primarily for merchandise purchases and
amounted to $578,266 and $582,413, respectively, net of a
valuations reserve of $190,000 in 1997 and 1996. At December 31,
1997 and 1996, $30,000 and $87,000 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.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE G - FIXED ASSETS
Fixed assets consist of the following:
December 31,
-------------------------
1997 1996
------------ ------------
Building $ 215,000 $ 215,000
Furniture and fixtures 3,139,099 2,196,480
Computer equipment 2,327,898 1,578,695
Transportation equipment 35,600 35,600
Machinery and equipment 978,046 853,695
Leasehold improvements 1,891,726 1,484,320
Assets held under capitalized leases 1,166,361 1,140,696
----------- ------------
9,753,730 7,504,486
Less accumulated depreciation and
amortization 5,102,242 4,237,631
---------- -----------
$4,651,488 $3,266,855
========== ===========
Depreciation and amortization expense relating to fixed assets was
$864,612, $530,572 and $321,929 for the years ended December 31,
1997, 1996 and 1995, respectively.
NOTE H - DEBT
1. Revolving Credit Agreement
On September 29, 1997, the Company entered into a $10,000,000
revolving credit facility with a financial institution
("lender"), which, at the Company's option, can be increased to
$15,000,000. The agreement expires September 30, 2000. This
facility replaced the existing facility which provided for
maximum borrowings of $10,000,000. This new facility allows the
Company to borrow at the prime rate plus 1%. Maximum borrowings
under the revolving credit facility are
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE H (continued)
based upon the sum of 62% of eligible inventory and 85% of
eligible accounts receivable. The advance rate for inventory
gradually declines over the first year of the agreement to the
lower of 60% or 80% of appraised value of the inventory.
Additionally, substantially all of the Company's assets are
pledged as collateral under the new credit agreement. The terms
of the revolving credit facility contain, among other provisions,
financial covenants for maintaining defined levels of net worth,
net earnings before interest, taxes, depreciation and
amortization and annual capital expenditures. Because of the
operating loss reported by the Company for the year ended
December 31, 1997, the Company would not have been in compliance
with such covenants had the lender not granted waivers of such
defaults as of December 31, 1997. The lender also has amended
those covenants through June 30, 1998. At December 31, 1997,
outstanding borrowings under this facility were $7,866,772, which
represents the maximum borrowings, and the interest rate was
9.5%.
In connection with this new facility, the Company was required to
pay an early termination fee of $175,000 to its previous lender.
The fee was paid from the proceeds of a loan to the Company by
the lender in the form of a one-year term loan with principal and
interest payable monthly. The term loan interest rate is at the
prime rate plus 1%.
2. Capitalized Lease Obligations
The Company leases furniture and fixtures, machinery and
equipment, and computer equipment under long-term leases and has
the option to purchase such assets for a nominal cost at the
termination of the lease. In 1996, the Company sold to a leasing
company $270,000 of furniture and fixtures which the Company
leased back under terms which required no gain or loss to be
recognized on the transaction and allows for the Company to
repurchase such assets for a nominal cost.
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, 1997, 1996 and 1995 was $175,000, $86,000 and $8,000,
respectively.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE H (continued)
Minimum future lease payments under capital leases as of December
31, 1997 are as follows:
1998 $252,000
1999 199,000
2000 66,000
2001 13,000
2002 5,000
--------
Total minimum lease payments 535,000
Less amount representing interest 51,000
--------
$484,000
========
The interest rates on the capitalized leases range from 9% to 16%
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.
3. Demand Note
In 1997, the Company incurred additional indebtedness in
connection with cash advances made by a bank to the Company's
operating accounts. These cash advances were converted to an
unsecured demand note which bears interest at the bank's prime
rate plus 2%. Such interest is payable upon the maturity of the
demand note. At December 31, 1997, the outstanding balance of
the demand note was $2,161,401 and the interest rate was 10.5%.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE H (continued)
The Company's term notes payable consisted of the following at
December 31:
1997 1996
------------- -------------
Subordinated promissory notes -
officer, in connection with
acquisition of Nuby's (i) $ 1,218,000 $ 1,369,000
10% note payable in connection with
the acquisition of White Plains Aid,
Inc. (ii) 168,000 204,000
Notes payable under capital lease
obligations (iii) 536,000 755,000
------------ ------------
1,922,000 2,328,000
Less current maturities 447,000 429,000
----------- ------------
$ 1,475,000 $ 1,899,000
(i) 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).
(ii) This note requires interest only payments during the
first year. Monthly principal payments commenced in May
1993 and the note matures in April 2001.
(iii) Notes recorded in connection with various capital lease
obligations having an average interest rate of 11.2% and
maturing at various dates through 2002.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE H (continued)
Aggregate maturities of long-term debt as of December 31, 1997
are as follows:
1998 $ 447,000
1999 398,000
2000 273,000
2001 184,000
2002 156,000
Thereafter 464,000
---------
$ 1,922,000
=========
NOTE I - NOTE PAYABLE - OFFICER
At December 31, 1997, the Company was indebted to the President of
the Company in the aggregate amount of $2,187,500. The note bears
interest monthly at the same rate as the revolving credit facility
with principal payable in quarterly installments through February
1, 2000. The new revolving credit facility allows the Company to
make quarterly principal payments so long as prior to and after
giving effect to such payments no default has occurred and is
continuing or would occur under the credit facility as a result
thereof. The holder of the note has deferred all principal
payments due to April 15, 1999. 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,
1997 are as follows:
1999 $2,031,250
2000 156,250
----------
$2,187,500
==========
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE J - INCOME TAXES
The income tax expense (benefit) is comprised of the following:
Year ended December 31,
--------------------------------
1997 1996 1995
--------- --------- -----------
Current
Federal $(111,000)
State and local 29,000 $ 7,000 $ 38,000
Deferred - Federal,
state and local 450,000 (7,000) 126,000
---------- --------- -----------
$ 368,000 $ - $ 164,000
The components of the Company's deferred tax assets are summarized
as follows:
1997 1996
------------ --------------
Deferred tax assets
Net operating loss carryforward $1,349,000 $ 80,000
Allowance for doubtful accounts 152,000 252,000
Deferred occupancy costs 168,000 97,000
Inventory 100,000 110,000
Depreciation 85,000 210,000
Other 76,000
------------ --------------
Total deferred tax assets 1,930,000 749,000
Deferred tax liabilities
Deferred opening costs 30,000 158,000
------------ --------------
1,900,000 591,000
Valuation allowance 1,900,000 141,000
------------ -------------
$ - $ 450,000
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE J (continued)
The Company has net operating loss carryforwards of approximately
$3,370,000 for regular tax purposes which expire through 2012.
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,
---------------------------------
1997 1996 1995
--------- ---------- ---------
Federal statutory rate (34.0)% 34.0% (34.0)%
Loss for which no tax benefit
was provided 27.5 75.7 34.0
State and local income
taxes, net of Federal
income tax benefit .5 12.4 4.6
Meals and entertainment .5 50.4
Goodwill amortization .4 75.1
Change in valuation allowance 17.3 (250.2) 20.2
Other (2.4) (2.6) 5.6
------ ------- -------
9.4 % - % 30.4%
====== ======= =======
NOTE K - 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, 1997, 1996 and 1995, no single customer
or group of customers accounted for sales in excess of 10% of the
total sales of the Company.
NOTE L - RELATED PARTY TRANSACTIONS
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, 1997, 1996 and
1995, respectively.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE M - 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, 1997 and 1996 is as follows:
1997 1996 1995
----------- ---------- ----------
Net sales
Retail $17,524,723 $16,690,722 $ 3,803,709
Wholesale distribution 16,906,572 22,006,081 19,050,175
Eliminations (9,835,506) (11,303,125) (2,590,051)
----------- ---------- ----------
Total net sales $24,595,789 $27,393,678 $20,263,833
=========== =========== ===========
Operating profit (loss)
Retail $ (609,874) $ 909,479 $ (307,071)
Wholesale distribution (2,191,128) (241,032) 525,778
----------- ---------- ----------
Total operating profit(loss) $(2,801,002) $ 668,447 $ 218,707
=========== ========== ===========
Identifiable assets
Retail $12,978,737 $10,757,320 $ 2,119,502
Wholesale distribution 234,592 563,384 874,945
Corporate 10,884,087 16,460,389 23,502,397
Eliminations (696,766) (2,255,965) (1,195,122)
----------- ----------- -----------
Total identifiable assets $23,400,650 $25,525,128 $25,301,722
=========== =========== ============
Depreciation and amortization
Retail $ 1,344,862 $ 692,442 $ 133,079
Wholesale distribution 94,227 84,405 123,924
Corporate 532,673 182,520 172,161
----------- ----------- ------------
Total depreciation and
amortization $ 1,971,762 $ 959,367 $ 429,164
=========== =========== ============
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE M (continued)
1997 1996 1995
------------ ----------- ---------
Capital expenditures
Retail $ 1,808,734 $ 1,040,410 $ 375,325
Wholesale distribution 102,203 32,756 28,777
Corporate 312,642 91,138 75,107
---------- ---------- ---------
Total capital expenditures $ 2,223,579 $ 1,164,304 $ 479,209
========== ============ ==========
NOTE N - 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,
1998 $ 2,308,000
1999 2,156,000
2000 2,044,000
2001 1,573,000
2002 1,401,000
Thereafter 5,007,000
------------
$ 14,489,000
============
Rental expense including real estate taxes for the years ended
December 31, 1997, 1996 and 1995 aggregated approximately
$2,871,000, $2,246,000 and $615,000, respectively.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE N (continued)
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 O - STOCKHOLDERS' EQUITY
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.
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. On March 23, 1998, the Company
extended the expiration date of the warrants to April 10, 1999.
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.
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE P - 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 C-7, 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 1997 and 1996 in
accordance with the provisions of SFAS No. 123, the Company's net
loss and net loss per share for 1997 would have been increased by
approximately $65,000 or $.02, respectively, and the Company's net
income and earnings per share for 1996 would have decreased by
approximately $226,000 or $.05 per share, respectively. During the
initial phase-in period of SFAS No. 123, such compensation mat not be
representative of the future effects of applying this statement.
The weighted average fair value at date of grant for options granted
during 1997 and 1996 was $1.87 per option. 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:
1997 1996
----------- ------------
Dividend yield 0% 0%
Risk-free interest rate 6.68 6.68
Expected life after
vesting period
Employees 3 years 3 years
Officers/directors 3 years 3 years
Expected volatility 45% 45%
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE P (continued)
The following table summarizes option activity for the years ended
December 31, 1997 and 1996:
----Incentive Options--- ----Non-Incentive Options---
Number Weighted Number Weighted
of average of average
options exercise price options exercise price
----------- -------------- ----------- ----------------
(in thousands) (in thousands)
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
--------- --- -------- ------
Balance, December 31,
1996 and 1997 200,168 3.77 74,332 3.77
======== ==== ======== ======
The following table summarizes information about stock options as of
December 31, 1997:
Options outstanding Options exercisable
-------------------------------- -------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Ranges of outstanding contractual exercise exercisable exercise
exercise prices at 12/31/97 life price at 12/31/97 price
- ---------------- ----------- ----------- --------- ----------- ---------
$2.38 to $3.69 75,000 3.54 $2.50 75,000 $2.50
3.70 to 5.00 199,500 2.75 4.24 126,166 4.34
------- -------
274,500 201,166
======= =======
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996 and 1995
NOTE P (continued)
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 vested in September 1997.
NOTE Q - FOURTH QUARTER ADJUSTMENTS
Results for the year ended December 31, 1997 were negatively
impacted by the following fourth quarter adjustments: (a) $450,000
write-off of deferred tax assets, (b) $275,000 for financing costs
associated with the refinancing of the Company's indebtedness, (c)
$385,000 for the acceleration of pre-opening costs associated with
the opening of Company-owned stores from a two-year amortization
period to expense as incurred, and (d) the write-off of
approximately $275,000 in inventory associated with the full
integration of the Company's perpetual inventory monitoring system
at its Company-owned stores.
<PAGE>
SUPPLEMENTARY INFORMATION
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Charged to
Balance Charged to other Balance at
beginning costs and accounts- Deductions- end
Description of period expense describe describe(a) of period
- ---------------- ---------- ----------- --------- ------------ ----------
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
Year ended December 31, 1997
Allowance for doubtful
accounts 630,000 295,000 385,000
(a) Amounts written off as uncollectible and recoveries.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The current directors and executive officers of the Company are as follows:
Name Age Position
-------------------- ----- ---------------------------
Philip L. Stephen 62 Chairman of the Board, Chief
Executive Officer, President
& Treasurer
Bruce Allen Ziskin 51 Vice President of Merchandising
Greg M. Stephen 32 Vice President of Sales, Secretary
and Director
Frank Mangano 31 Chief Financial Officer
Lewis R. Cowan 67 Director
Ira Scott Greenspan 39 Director
Leonard Genovese 63 Director
Werner S. Neuburger 62 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, the National Association of Chain Drug
Stores, the Kellwood Company and the Stephan Company.
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 of the copies of reports furnished to the Company pursuant
to the Exchange Act, the Company believes that during the year
ended December 31, 1997, all filing requirements applicable to
Reporting Persons were complied with.
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 derivative litigation against directors
and may discourage or deter stockholders or management from suing
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, 1997, 1996 and 1995 to
its Chief Executive Officer and President and three other executive
officers. No other executive officer of the Company received
compensation in excess of $100,000 during the year ended December
31, 1997.
Annual Long-Term Compensation
Compensation ----------------------
-------------
Salary Securities Underlying
Name and Principal Position Year ($)(1) Options (#)
- --------------------------- ---- ------------- ----------------------
Philip L. Stephen, Chief
Executive Officer and
President 1997 $205,548 0
1996 $204,334 75,000
1995 $181,836 0
Bruce Allen Ziskin,
Vice President of
Merchandising 1997 $111,625 0
1996 $107,809 0
1995 $101,923 50,000
Greg M. Stephen,
Vice President 1997 $101,135 0
1996 $ 81,538 0
1995 $ 77,360 50,000
Frank Mangano,
Chief Financial Officer 1997 $109,337 0
1996 $ 63,464 50,000
1995 0 0
(1) The columns for "Bonus," "Other Annual Compensation"
"Restricted Stock Award(s)," "LTIP Payouts", 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 1997
There were no grants of options to purchase Common Stock made during the
year ended December 31, 1997 to each of the named executive officers.
Aggregated Option Exercises During 1997 and Year End Option Values
The following table provides information related to options
exercised by each of the named executive officers during 1997 and
the number and value of options held at December 31, 1997. The
Company does not have any outstanding stock appreciation rights.
Value of Unexercised In-the
Share Value Number of Unexercised Money Options
Acquire on Realized Options at Year End(#) at Year End ($)(1)
Name Exercise $ Exercisable Unexercisable Exercisable Unexercisable
- -------- -------- ------- ---------- ------------- ---------- ------------
Philip L.
Stephen -- -- 75,000 0 0 0
Bruce Allen
Ziskin -- -- 50,000 0 0 0
Greg M.
Stephen -- -- 50,000 0 0 0
Frank
Mangano -- -- 16,667 33,333 0 0
1) The closing price for the Company's Common stock as reported on the NASDAQ
Small-Cap Market on December 31, 1997 was $1.81. The exercise price of
Mr. P.L. Stephen's, Mr. Ziskin's, Mr. G. Stephen's and Mr. Mangano'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 of 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, 1998, 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, (iii) the persons named in the Summary
Compensation Table above and (iv) all of the Company's current
officers and directors as a group.
Amount and Nature Percenage 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 52,000(3) 1.3%
Lewis R. Cowan 12,500(4) *
Ira Scott Greenspan 12,500(4) *
Leonard Genovese 22,500(5) *
Werner S. Neuburger 157,596 4.0%
Bruce Allen Ziskin 50,000(4) 1.3%
Frank Mangano 16,667(4) *
Whale Securities
Co., L.P.
650 Fifth Ave.
New York, NY 10019 360,000(6) 8.3%
All officers and
directors as a
group (8 persons) 2,398,763(7) 57.2%
_________________
* 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 50,000 shares of Common Stock underlying currently
exercisable options.
(4) Represents shares of Common Stock underlying currently
exercisable stock options.
(5) Includes 12,500 shares of Common Stock underlying currently
exercisable options and 5,000 shares of Common Stock underlying
currently exercisable warrants.
(6) 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.
(7) Includes options to purchase an aggregate of 229,167 shares of
Common Stock and warrants to purchase 5,000 shares of Common
Stock. Does not include options to purchase an aggregate of
33,333 shares of Common Stock granted to an executive officer of
the Company, which options were not exercisable within 60 days of
February 28, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1997, 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 is evidenced by a
promissory note. The 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, 1997 was 9.5%. The new
revolving credit facility with Foothill Capital Corp. allows the
Company to make quarterly principal payments and scheduled monthly
interest payments to Mr. Stephen so long as prior to and after
giving affect to such payments no default has occurred and is
continuing or would occur on the Foothill Capital Corp.
indebtedness as a result thereof. Mr. Stephen has deferred all principal
payments due to April 15, 1999. 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 Foothill Capital Corp. of payment in
full of outstanding Foothill Capital Corp. indebtedness.
As of December 31, 1997, the Company leases space for one of
its Company-owned Aid Auto Stores from Mr. Werner S. Neuburger,
Director of the Company. The lease expires December 15, 2000 and
has an annual rental of $19,008 with annual increases based upon
the consumer price index or 4%, whichever is higher. A second
location was leased from Mr. Neuburger for the first ten months in
1997, whereby the Company then moved to a larger square footage
location to accommodate its Superstore program. Rents paid to Mr.
Neuburger in 1997 aggregated approximately $77,000. In addition,
at December 31, 1997, the Company was indebted to Mr. Neuburger in
the amount of $1,218,000 in connection with the acquisition by the
Company of certain franchise Aid Auto Stores from Mr. Neuburger in
December 1995. 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 Foothill
Capital indebtedness.
For the year ended December 31, 1997, the Company incurred
approximately $281,000 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 Transportation Agreement between the Company and Ryder
Dedicated Logistics, Inc., dated December 2, 1994.(1)
10.4 1995 Company Stock Option Plan.(1)
10.5 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)
10.6 Agreement between the Company and Local 239 of the
International Brotherhood of Teamsters, dated February 1,
1996.(3)
10.7 Promissory Note by the Company in favor of Philip L. Stephen,
dated October 22, 1996. (4)
10.8 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)
10.9 Loan and Security Agreement between the Company and Foothill
Capital Corporation, dated as of September 29, 1997(5)
10.10 Agreement, dated March 26, 1998, between the Company and
Josephthal & Co., Inc.
21.1 List of the Company's subsidiaries(4).
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 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.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996
(5) Incorporated by reference to the Company's Amendment No. 1 to
Form S-3 (No. 333-33181) declared effective by the Commission
on October 22, 1997.
(b) Reports on Form 8-K:
-------------------
No reports on Form 8-K were filed during the quarter ended
December 31, 1997. The Company filed Form 8-K, date of report
being March 24, 1998, which Form 8-K related to the extension
of the expiration date of the Company's publicly traded
warrants from April 10, 1998 to April 10,1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
AID AUTO STORES, INC.
April 15, 1998 By: /s/ Philip L. Stephen
-------------------------------------------
Philip L. Stephen
Chairman, Chief Executive Officer,
And President (Principal Executive Officer)
April 15, 1998 By: /s/ Frank Mangano
-------------------------------------------
Frank Mangano
Chief Financial Officer,
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
April 15, 1998 /s/ Philip L. Stephen
---------------------------------
Philip L. Stephen, Director
April 15, 1998 /s/ Lewis R. Cowan
---------------------------------
Lewis R. Cowan, Director
April 15, 1998 /s/ Leonard Genovese
---------------------------------
Leonard Genovese, Director
April 15, 1998 ----------------------------------
Ira Scott Greenspan,Director
April 15, 1998 /s/ Greg M. Stephen
----------------------------------
Greg M. Stephen, Director
April 15, 1998 /s/ Werner S. Neuburger
----------------------------------
Werner S. Neuburger, Director
<PAGE>
Exhibit 10.10
March 26, 1998
Philip L. Stephen
Aid Auto Stores, Inc.
275 Grand Boulevard
Westbury, NY 11590-0281
Dear Mr. Stephen:
This will confirm the understanding and agreement between
Josephthal & Co. Inc. ("Josephthal") and Aid Auto Stores, Inc. (the
"Company") as follows:
1. The Company hereby engages Josephthal as the Company's exclusive
agent for the purpose of (a) identifying opportunities for a
transaction involving the Company, including, without limitation,
the sale of the Company, (b) advising the Company concerning
opportunities for such a transaction, whether or not identified by
Josephthal and (c) as requested by the Company, participating on
the Company's behalf in negotiations concerning such a transaction
or assisting the Company in structuring such transaction.
2. Josephthal hereby accepts the engagement described in paragraph
1 and, in that connection, agrees to:
(a) undertake, in consultation with the Company, a study and
analysis of the business, operations, financial condition and
prospects of the Company; including an analysis of industry
competitors and current industry valuation parameters. The results
of such a study and analysis shall be presented to the Company's
Board of Directors.
(b) if appropriate and if requested by the Company, prepare, in
consultation with the Company, an offering memorandum describing
the Company and its business (including its strengths and strategic
value), which memorandum shall not be made available to, or used
in discussions with, prospective parties to a transaction until
such memorandum and its use for that purpose have been approved by
the Company;
(c) develop a strategy to effectuate a transaction;
(d) develop, update and review with the Company on an ongoing
basis a list of potential transactions and of parties which might
participate in a transaction and contact only parties on the lists
as approved in writing by the Company;
(e) consult with and advise the Company concerning opportunities
for a transaction involving the Company which have been identified
by Josephthal or others, assist the Company in evaluating proposals
received from potential parties to a transaction; and, if so
requested by the Company, participate on the Company's behalf in
structuring and negotiating a transaction;
(f) be available on request to meet with the Company's Board of
Directors to discuss strategic alternatives and their financial
implications and to meet with lenders, as necessary; and
(g) if requested and if appropriate, render an opinion (including
updates and reissuances) as to the fairness from a financial point
of view to stockholders of the Company of the consideration to be
received in a proposed transaction involving the Company.
3. For the purposes of this Agreement:
(a) A "transaction" shall mean any transaction or series or
combination of transactions, other than in the ordinary course of
trade or business, whereby, directly or indirectly, control of, or
a material interest in, the Company or any of its businesses,
assets or properties, is sold, leased or otherwise transferred,
including, without limitation, a sale or exchange of capital stock
or assets, a lease of assets with or without a purchase option, a
merger or consolidation, a tender or exchange offer, a leveraged
buy-out, a restructuring, a recapitalization, a repurchase of
capital stock, an extraordinary dividend or distribution (whether
cash, property, securities or a combination thereof), a
liquidation, the formation of a joint venture or partnership, a
minority investment or any other similar transaction. In the case
of a tender or exchange offer or a multi-step transaction which
contemplates the acquisition of more than 50% of the Company's
outstanding voting stock, a transaction shall be deemed to have
been consummated upon the acquisition of more than 50% of the
Company's outstanding voting power or the ability to elect a
majority of the Company's Board of Directors.
(b) "Consideration" shall mean the total value of all cash,
securities, other property and any other consideration, including,
without limitation, any contingent, earned or other consideration
paid or payable, directly or indirectly, to the Company or holders
of its securities in connection with a transaction. The value of
any such securities (whether debt or equity) or other property
shall be determined as follows: (1) the value of securities that
are freely tradeable in an established public market shall be the
last closing market price of such securities the day prior to the
closing of the transaction; and (2) the value of securities which
are not freely tradeable or which have no established public
market, or if the consideration consists of property other than
securities, the value of such securities or other property shall be
the fair market value thereof as mutually agreed by the Company and
Josephthal. Consideration shall also be deemed to include any
indebtedness, including, without limitation, pension liabilities,
guarantees and other obligations assumed, directly or indirectly,
in connection with, or which survives the closing of, a
transaction. If the consideration to be paid is computed or
payable in any foreign currency, the value of such foreign currency
shall, for purposes hereof, be converted into U.S. Dollars at the
prevailing exchange rate on the dates on which such consideration
is payable.
(c) If the transaction is structured in such a way so as to provide
for the transfer of only a portion of the assets or business of the
Company and the retention of other assets, including, but not
limited to, cash, cash equivalents, securities, investments,
inventories or receivables, such retained assets, in so far as they
relate to the transferred assets or business, shall be deemed to be
part of the consideration received in connection with such a
transaction and the value of such consideration shall be determined
as follows: (1) the value of investments and securities that are
freely tradeable in an established public market shall be
determined as set forth in subparagraph (b) above; (2) the value of
inventories and receivables shall be equal to the book value
thereof; and (3) the value of any other assets shall be an amount
to be mutually determined by the parties.
4. The term of Josephthal's engagement hereunder shall extend from the
date hereof through September 30, 1998. Either party may terminate
Josephthal's engagement hereunder at any time, with or without cause,
by giving the other party at least 10 days' prior written notice,
subject to the provisions of paragraphs 5 through 10, 12 through
14 and the second and third sentences of paragraph 11, which shall
survive any termination of this Agreement.
5. As compensation for the services rendered by Josephthal
hereunder, the Company shall pay Josephthal as follows:
(a) If the Company announces or enters into an agreement with
respect to a transaction either during the term of Josephthal's
engagement hereunder or at any time during a period of 18 months
following the effective date of termination of Josephthal's
engagement hereunder, regardless of whether the party or parties to
the transaction were identified by Josephthal or whether Josephthal
rendered advice concerning the transaction, and such transaction is
thereafter consummated, and the parties were on a list approved by
the Company as provided for in paragraph 2 (d) or were in
discussions regarding a transaction with the Company during the
engagement period tthen the Company shall pay to Josephthal the
following percentages of the total consideration paid in each of
such transactions:
Total Consideration Percentage
------------------- ----------
Amounts from $0.0 to $20 million 1.75%
Amounts from $20 to $25 million 2.5%
On the amounts over $25 million 3%
In no event will the transaction fee be less than $300,000
(b) Compensation which is payable to Josephthal pursuant to
subparagraphs 5(a) shall be paid by the Company to Josephthal at
the closing of any transaction, provided that compensation due to
Josephthal as a result of consideration which is contingent upon
the occurrence of some future event (e.g., the realization of
earnings projections) or pursuant to the agreement relating to the
transaction is to be paid following the closing of such transaction
shall be paid by the Company to Josephthal upon the receipt of such
consideration.
(c) In the event that Josephthal assists the Company in obtaining
financing, which shall be on a non-exclusive basis, Josephthal will
be entitled to a reasonable and customary fee to be separately
agreed to by the Company and Josephthal.
6. The Company shall reimburse Josephthal for its out-of-pocket
and incidental expenses, incurred in connection with its engagement
hereunder, promptly as requested, including the reasonable fees
and expenses of its legal counsel.
7. The Company hereby agrees that the letter of intent, if
any, and the definitive agreement setting forth the terms and
conditions of a transaction shall include a clause stating that if,
at any time during the term of the engagement hereunder or at any
time during a period of 24 months following the effective date of
termination of Josephthal's engagement hereunder, the Company's
Franchisees (the "Franchisees") enter into a transaction with the
purchaser of the Company, Josephthal shall be paid by the purchaser
of the Company an amount equal to two percent of the Consideration
received by the Franchisee(s) as part of such transaction.
8. Because Josephthal will be acting on behalf of the Company in
connection with this engagement, the Company agrees to indemnify
Josephthal as set forth in a separate letter agreement dated the
date hereof between Josephthal and the Company.
9. Josephthal shall have the right to place advertisements in
financial and other newspapers and journals at its own expense
describing its services to the Company hereunder, subject to the
Company's prior approval, which may not be unreasonably withheld.
10. Any advice, either oral or written, provided to the Company
by Josephthal hereunder shall not be publicly disclosed or made
available to third parties without the prior written consent of
Josephthal, and Josephthal may not be otherwise
publicly referred to without its prior consent; provided, however
the entry into this agreement by the Company may be publicly
announced and the Company may make such other announcements or
disclosures as required by law. It is understood that if
Josephthal is requested to render an opinion as referred to in
paragraph 2(g) above, the opinion may be included in its entirety
in any communication by the Company or the Board of Directors to
the stockholders of the Company. The opinion may not, however, be
summarized, excerpted from or otherwise publicly disclosed and/or
referred to in any manner without the prior consent of Josephthal.
11. In connection with Josephthal's engagement, the Company will
furnish Josephthal with all information concerning the Company
which Josephthal reasonably deems appropriate and will provide
Josephthal with access to the Company's officers, directors,
accountants, counsel and other advisors. The Company represents
and warrants to Josephthal that all such information concerning the
Company will be true and accurate in all material respects and will
not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements
therein not misleading in light of the circumstances under which
such statements are made. The Company acknowledges and agrees that
Josephthal will be using and relying upon such information supplied
by the Company and its officers, agents and others and any other
publicly available information concerning the Company without any
independent investigation or verification thereof or independent
appraisal by Josephthal of the Company or its business or assets.
12. The Company represents and warrants to Josephthal that there
are no brokers, representatives or other persons which have an
interest in compensation due to Josephthal from any transaction
contemplated herein.
13. The benefits of this agreement, together with the separate
indemnity letter, shall inure to the respective successors and
assigns of the parties hereto and of the indemnified parties
hereunder and their successors, assigns and representatives, and
the obligations and liabilities assumed in this agreement by the
parties hereto shall be binding upon their respective successors
and assigns.
14. This agreement may not be amended or modified except in
writing and shall be governed by and construed in accordance with
the laws of the State of New York, without regard to principles of
conflicts of laws.
Josephthal is delighted to accept this engagement and looks forward
to working with you on this assignment. Please confirm that the
foregoing correctly sets forth our agreement by signing the
enclosed duplicate of this letter in the space provided and
returning it, whereupon this letter shall constitute a binding
agreement as of the date first above written.
JOSEPHTHAL & CO. INC.
/s/ Michael J. Kollender
-----------------------------
By: Michael J. Kollender
Managing Director
Investment Banking
AGREED:
AID AUTO STORES, INC.
/s/ Philip L. Stephen
- ----------------------
By: Philip L. Stephen
Chairman & Chief Executive Officer
<PAGE>
Schedule A
Josephthal & Co. Inc.
200 Park Avenue.
New York, New York 10166
Gentlemen:
In connection with our engagement of Josephthal & Co., Inc.
("Josephthal") as our investment banker, we hereby agree to
indemnify and hold harmless Josephthal and its affiliates, and the
respective directors, officers, shareholders, agents and employees
of Josephthal (collectively the "Indemnified Persons"), from and
against any and all claims, actions, suits, proceedings (including
those of shareholders), damages, liabilities and reasonable
expenses as incurred by any of them (including the fees and
expenses of counsel) which are (A) related to or arise out of (i)
any actions taken or omitted to be taken (including any untrue
statements made or any statements omitted to be made) by the
Company, or (ii) any actions taken or omitted to be taken by any
Indemnified Person in connection with our engagement of Josephthal,
or (B) otherwise relate to or arise out of Josephthal's activities
on our behalf under Josephthal's engagement, and we shall reimburse
any Indemnified Person for all reasonable expenses (including the
fees and expenses of counsel) as incurred by such Indemnified
Person in connection with investigating, preparing or defending any
such claim, action, suit or proceeding (collectively a "Claim"),
whether or not in connection with pending or threatened litigation
in which any Indemnified Person is a party. We will not, however,
be responsible for any Claim which is finally judicially determined
to have resulted primarily from the gross negligence or willful
misconduct of any person seeking indemnification hereunder. We
further agree that no Indemnified Person shall have any liability
to us for or in connection with our engagement of Josephthal except
for any Claim incurred by us primarily as a direct result of any
Indemnified Person's gross negligence or willful misconduct.
We further agree that we will not, without the prior written
consent of Josephthal, settle, compromise or consent to the entry
of any judgment in any pending or threatened Claim in respect of
which indemnification may be sought hereunder (whether or not any
Indemnified Person is an actual or potential party to such Claim),
unless such settlement, compromise or consent includes an
unconditional, irrevocable release of each Indemnified Person
hereunder from any and all liability arising out of such Claim.
Promptly upon receipt by an Indemnified Person of notice of
any complaint or the assertion or institution of any Claim with
respect to which indemnification is being sought hereunder, such
Indemnified Person shall notify us in writing of such complaint or
of such assertion or institution but failure to so notify us shall
not relieve us from any obligation we may have hereunder, unless
and only to the extent such failure results in the forfeiture by us
of substantial rights and defenses, and will not in any event
relieve us from any other obligation or liability we may have to
any Indemnified Person otherwise than under this Agreement. If we
so elect or are requested by such Indemnified Person, we will
assume the defense of such Claim, including the employment of
counsel reasonably satisfactory to such Indemnified Person and the
payment of the fees and expenses of such counsel. In the event,
however, that such Indemnified Person reasonably determines in its
sole judgment that having common counsel would present such counsel
with a conflict of interest or if the defendant in, or target of,
any such Claim, includes an Indemnified Person and us, and such
Indemnified Person reasonably concludes that there may be legal
defenses available to it or other Indemnified Persons different
from or in addition to those available to us, then such Indemnified
Person may employ its own separate counsel to represent or defend
it in any such Claim and we shall pay the reasonable fees and
expenses of such counsel; provided however the Company shall pay
for only one such separate counsel. Notwithstanding anything herein
to the contrary, if we fail timely or diligently to defend,
contest, or otherwise protect against any Claim, the relevant
Indemnified Person shall have the right, but not the obligation, to
defend, contest, compromise, settle, assert crossclaims, or
counterclaims or otherwise protect against the same, and shall be
fully indemnified by us therefor, including without limitation, for
the fees and expenses of its counsel and all amounts paid as a
result of such Claim or the compromise or settlement thereof. In
any Claim in which we assume the defense, the Indemnified Person
shall have the right to participate in such Claim and to retain its
own counsel therefor at its own expense.
We agree that if any indemnity sought by an Indemnified Person
hereunder is held by a court to be unavailable for any reason, then
(whether or not Josephthal is the Indemnified Person), we and
Josephthal shall contribute to the Claim for which such indemnity
is held unavailable in such proportion as is appropriate to reflect
the relative benefits to us, on the one hand, and Josephthal on the
other, in connection with Josephthal's engagement referred to
above, subject to the limitation that in no event shall the amount
of Josephthal's contribution to such Claim exceed the amount of
fees actually received by Josephthal from us pursuant to
Josephthal's engagement. We hereby agree that the relative
benefits to us, on the one hand, and Josephthal on the other, with
respect to Josephthal's engagement shall be deemed to be in the
same proportion as (a) the total value paid or proposed to be paid
or received by us or our stockholders as the case may be, pursuant
to the transaction (whether or not consummated) for which you are
engaged to render services bears to (b) the fee actually paid, and,
to the extent not yet due, the fee proposed to be paid to
Josephthal in connection with such engagement.
Our indemnity, reimbursement and contribution obligations
under this Agreement shall be in addition to, and shall in no way
limit or otherwise adversely affect any rights that any Indemnified
Party may have at law or at equity.
We hereby consent to personal jurisdiction and service of
process and venue in any court in the State of New York in which
any claim for indemnity is brought by any Indemnified Person.
It is understood that, in connection with Josephthal's
engagement, Josephthal may be engaged to act in one or more
additional capacities and that the terms of the original engagement
or any such additional engagement may be embodied in one or more
separate written agreements. The provisions of this Agreement
shall apply to the original engagement, any such additional
engagement and any modification of the original engagement or such
additional engagement and shall remain in full force and effect
following the completion or termination of Josephthal's
engagement(s).
Very truly yours,
Aid Auto Stores, Inc.
By: /s/ Philip Stephen
-------------------------------------
Name: Philip Stephen
Title: Chairman, Chief Executive Officer
and President (Principal Executive
Officer)
Confirmed and agreed to:
JOSEPHTHAL & CO. INC.
By: /s/ Michael J. Kollender
-------------------------------
Name: Michael J. Kollender
Title: Managing Director
Investment Banking
<PAGE>
Exhibit 24.1
CONSENT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We have issued our report dated April 15, 1998, 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, 1997. 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-3 (File No.
333-33181) and Form S-8 (File No. 333-06675).
GRANT THORNTON LLP
/s/ Grant Thornton LLP
- -----------------------
New York, New York
April 15, 1998
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 287,941
<SECURITIES> 0
<RECEIVABLES> 659,667
<ALLOWANCES> 0
<INVENTORY> 12,649,691
<CURRENT-ASSETS> 14,911,151
<PP&E> 4,651,488
<DEPRECIATION> 0
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<CURRENT-LIABILITIES> 14,539,079
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0
0
<COMMON> 3,958
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<TOTAL-LIABILITY-AND-EQUITY> 23,400,650
<SALES> 24,595,789
<TOTAL-REVENUES> 24,595,789
<CGS> 15,147,158
<TOTAL-COSTS> 12,249,643
<OTHER-EXPENSES> 1,144,020
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<INCOME-PRETAX> (3,922,772)
<INCOME-TAX> 368,000
<INCOME-CONTINUING> (4,290,772)
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<EPS-PRIMARY> (1.08)
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