SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
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
-------------------- --------------------------------
(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
Indicate by check mark if whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
-------- ---------
Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the latest practical date.
Common Stock (par value $.001 per share) 3,957,596 shares outstanding as of
August 1, 1998.
<PAGE>
AID AUTO STORES, INC.
CONTENTS
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PART I FINANCIAL INFORMATION PAGE
----
Item 1 Consolidated Condensed Financial Statements:
- -------
Balance Sheets as of June 30, 1998 and
December 31, 1997................................ 3 - 4
Statement of Operations for the Six Months
Ended June 30, 1998 and 1997 .................... 5
Statements of Operations for the Three Months
Ended June 30, 1998 and 1997 .................... 6
Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 .................... 7 - 8
Notes to Financial Statements ................... 9
Item 2 Management's Discussion and Analysis of Financial
- ------ Condition and Results of Operations ............. 10 - 15
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K ................ 16
SIGNATURES .................................................. 17
2
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 1998 Dec. 31,1997
-------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 141,051 $ 287,941
Accounts receivable - trade, net 398,866 659,667
Notes receivable, net 354,449 358,549
Inventories 11,237,914 12,649,691
Prepaid expenses and other current assets 1,489,577 955,303
------------ ------------
Total current assets 13,621,857 14,911,151
FIXED ASSETS - AT COST, net 4,190,187 4,651,488
COSTS IN EXCESS OF NET ASSETS ACQUIRED, net 3,304,930 3,441,335
OTHER ASSETS 326,907 396,676
----------- -----------
$ 21,443,881 $ 23,400,650
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, 1998 Dec. 31, 1997
-------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Revolving credit line $ 6,790,112 $ 7,866,772
Demand note 3,473,681 2,161,401
Accounts payable 3,507,973 3,464,766
Accrued expenses 342,197 453,085
Current portion of long-term debt 457,474 447,222
Term note 19,444 145,833
------------ ------------
Total current liabilities 14,590,818 14,539,079
LONG-TERM DEBT, net of current portion 1,193,950 1,475,078
DEFERRED OCCUPANCY COSTS 439,265 420,700
NOTE PAYABLE - OFFICER 2,187,500 2,187,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value;
authorized, 2,000,000 shares;
none issued
Common stock, $.001 par value; authorized,
15,000,000 shares; 3,957,596 shares issued
and outstanding in 1998 and 1997 3,958 3,958
Additional paid-in capital 9,006,809 9,006,809
Retained earnings (5,978,419) (4,232,474)
----------- -----------
3,032,348 4,778,293
----------- -----------
$ 21,443,881 $ 23,400,650
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 8,673,032 $ 12,313,990
Costs and expenses
Cost of sales 4,811,110 6,854,435
Selling and shipping 3,784,929 3,754,401
General and administrative 1,126,419 1,156,936
---------- -----------
$ 9,722,458 $ 11,765,772
---------- -----------
(Loss) income from operations (1,049,426) 548,218
Interest expense (711,433) (551,622)
Interest and other income 14,914 13,733
---------- ----------
(Loss)income before income taxes (1,745,945) 10,329
Provision for income taxes - -
---------- ----------
NET (LOSS)INCOME $ (1,745,945) $ 10,329
========== ==========
Loss per common share
Net loss per common share-basic
and diluted $(.44) $ -
====== ======
Weighted average common shares
outstanding 3,957,596 3,957,596
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended June 30, 1998
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net Sales $ 4,160,593 $ 6,221,392
Costs and expenses
Cost of sales 2,330,777 3,311,616
Selling and shipping 1,687,751 1,985,662
General and administrative 560,330 580,834
---------- ----------
$ 4,578,858 $ 5,878,112
---------- ----------
(Loss) income from operations (418,265) 343,280
Interest expense (354,624) (282,214)
Interest and other income 13,352 7,249
---------- ----------
(Loss) income before income taxes (759,537) 68,315
Provision for income taxes - -
---------- ----------
NET (LOSS)INCOME $ (759,537) $ 68,315
========== ==========
Loss per common share
Net loss per common share-basic
and diluted $(.19) $.02
====== ====
Weighted average common shares
outstanding 3,957,596 3,957,596
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1998 1997
------------ -------------
<S> <S> <S>
Cash flows from operating activities
Net loss(income) $ (1,745,945) $ 10,329
Adjustments to reconcile net (loss)income
to net cash used in operating
activities
Depreciation and amortization 782,337 651,276
Deferred occupancy costs 18,565 65,904
(Increase) decrease in operating assets
Accounts receivable 260,801 463,436
Notes receivable 26,456 20,441
Inventories 1,411,777 467,619
Prepaid expenses and other
current assets (647,989) (1,147,817)
Security deposits (2,465) (6,270)
Other assets 49,878 (25,968)
Increase(decrease) in operating liabilities
Accounts payable 43,207 67,092
Accrued expenses (110,888) (96,738)
---------- ----------
Net cash provided by operating activities 85,734 469,304
---------- ----------
Cash flows from investing activities
Capital expenditures (70,916) (355,917)
---------- ----------
Net cash used in investing activities (70,916) (355,917)
---------- ----------
</TABLE>
7
<PAGE>
Aid Auto Stores, Inc. and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities
Net borrowings under revolving
credit line $ (1,076,660) $ 304,418
Principal repayment of long-term debt (211,208) (230,481)
Demand note 1,312,217 -0-
Term note (126,389) -0-
Repayment of notes payable under
capital lease obligations (59,668) -0-
---------- -----------
Net cash (used in) provided by
financing activities (161,708) 73,937
---------- -----------
Net (decrease) increase in cash and
cash equivalents (146,890) 187,324
Cash and cash equivalents, at
beginning of period 287,941 331,019
---------- -----------
Cash and cash equivalents, at
end of period $ 141,051 $ 518,343
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 603,924 $ 517,455
</TABLE>
The accompanying notes are an integral part of these statements<PAGE>
8
<PAGE>
AID AUTO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of June 30, 1998 and the consolidated
statements of operations for the three and six month periods ended June 30,
1998 and the consolidated statement of cash flows for the six month period
ended June 30, 1998 have been prepared by the Company without audit. In
the opinion of management, all adjustments (which include only recurring
adjustments) necessary to present fairly the financial position at June 30,
1998, and the results of operations and cash flows for the periods
presented, have been made. Results of operations for the three and six
month periods ended June 30, 1998 are not necessarily indicative of the
operating results to be expected for the full year.
For information concerning the Company's significant accounting policies,
reference is made to the Company's audited financial statements for the
year ended December 31, 1997 contained in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission. While the
Company believes that the disclosures presented are adequate to make the
information contained herein not misleading, it is suggested that these
statements be read in conjunction with the consolidated financial
statements and the notes included in the Form 10-K.
B. INVENTORIES
Inventories consists primarily of merchandise purchased for resale.
C. NEW PRONOUNCEMENT
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income, in the first
quarter of 1998, which requires companies to disclose comprehensive income
separately of net income from operations. Comprehensive income is defined
as the change in equity during a period from transactions and other events
and circumstances from non-ownership sources. It includes all changes in
equity during a period, except those resulting from investments by owners
and distributions to owners. The adoption of this statement had no effect
on the Company for the three and six month periods ended June 30, 1998
and 1997, respectively.
D. RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 presentation to
conform to the 1998 presentation.
9
<PAGE>
AID AUTO STORES, INC.
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 June 30,
1998, the Company supplied products to 42 Aid Auto Stores, including 22
Company-owned stores and 20 franchised stores, and, through its wholly-owned
subsidiary, Ames Automotive Warehouse, Inc. ("Ames"), to non-automotive chain
stores. 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 June 30, 1998, the Company opened eight new
Superstores and had acquired (in December 1995) ten franchised Aid Auto Stores
in Long Island, New York, of which nine have been converted and reopened as
Superstores. Through termination and non-renewal of franchise agreements, the
number of franchised stores has decreased since the end of the second quarter
of 1997 from 32 to 20. 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 55% from inception of the Superstore growth
program in 1995 to June 30, 1998. Due to the Company's limited cash resources
at June 30, 1998, the Company has not recently pursued its growth program. The
Company has retained Josephthal & Co. Inc. to assist it in exploring strategic
alternatives, which may include, among other things, a significant merger/
acquisition of the Company.
10
<PAGE>
Results of Operations
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997.
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 June 30, 1998 and 21 at
June 30, 1997. Wholesale sales include sales to the Company's franchised Aid
Auto Stores, of which 20 existed at June 30, 1998 and 32 at June 30, 1997, and
through Ames, to other customers. Revenues decreased by $3,640,958 (or 29.6%)
from $12,313,990 for the six months ended June 30, 1997 to $8,673,032 for the
six months ended June 30, 1998 and by $2,060,799 (or 33.1%) from $6,221,392
for the three months ended June 30, 1997 to $4,160,593 for the three months
ended June 30, 1998. The decrease in revenues in 1998 was due primarily
to the decrease in wholesale sales to franchisees and through Ames, by
$2,310,076 from $3,682,181 to $1,372,105 for the six months ended June 30, 1997
and 1998, respectively, and by $1,026,319 from $1,642,226 to $615,187 for the
three months ended June 30, 1997 and 1998, respectively. The reduction in
wholesale sales for the six and three month periods ended June 30, 1998 is
consistent with the Company's strategy to de-emphasize its wholesale business.
Retail sales decreased by $1,330,882 from $8,631,809 to $7,300,927 for the six
months ended June 30, 1997 and 1998, respectively, and by $1,034,480 from
$4,579,886 to $3,545,406 for the three months ended June 30, 1997 and 1998,
respectively. The decline in retail sales can be attributed to several factors
which include the reduction in advertising expenditures and inventory purchase
levels due to working capital constraints. In addition, the recent industry-wide
softness and the warmest winter since records have been kept also contributed
to the decline in retail revenues. The Company has initiated a program in 1998
to substantially increase its commercial sales. In addition, despite the decline
in retail revenues, earnings before interest, depreciation and amortization and
corporate allocation at the store level was $415,807 for the six months ended
June 30, 1998 as compared to $416,694 for the comparable period in 1997. For
the six months ended June 30, 1998, retail sales represented 84.2% of total
net sales as compared to 70.1% for the comparable prior year period.
Cost of sales decreased by $2,043,325 (29.8%) and $980,839 (29.6%), from
$6,854,435 to $4,811,110 for the six months ended June 30, 1997 and 1998,
respectively, and from $3,311,616 to $2,330,777 for the three months ended
June 30, 1997 and 1998, respectively. As a percentage of net sales, cost of
sales decreased from 55.7% to 55.5% for the six month period ended June 30,
1997 and 1998, respectively, reflecting the significantly higher margins on
retail sales (as compared to wholesale sales). Cost of sales increased from
53.2% to 56.0% for the three months ended June 30, 1997 and 1998, respectively,
which can be attributed to the Company's working capital constraints causing
inventory out-of-stock position which negatively impacted sales.
Selling and shipping expenses increased by $30,528 (or 0.8%) from
$3,754,401 (30.5% of net sales) for the six months ended June 30, 1997 to
$3,784,929 (43.6% of net sales) for the six months ended June 30, 1998. Selling
and shipping expenses decreased by $297,911 (or 15.0%) from $1,985,662 (31.9% of
net sales) for the three months ended June 30, 1997 to $1,687,751 (40.6% of net
sales) for the three months ended June 30, 1998. The increase in absolute
dollars and as percentage of net sales for the six months was due primarily to
selling expenses associated with the opening of two new Company-owned stores in
1997 which were fully operational in the first half of 1998. Selling expenses
11
<PAGE>
are higher for a retail operation than for a wholesale operation, reflecting the
nature of those operations. The decrease in absolute dollars for the quarter
ended June 30, 1998 was the direct result of the Company's efforts to reduce
expenses to reflect the decline in sales and its transition from a wholesaler
to a retailer.
General and administrative expenses decreased by $30,517 (or 2.6%) from
$1,156,936 (9.4% of net sales) for the six months ended June 30, 1997 to
$1,126,419 (13.0% of net sales) for the six months ended June 30, 1998. General
and administrative expenses decreased by $20,504 (or 3.5%) from $580,834 (9.3%
of net sales) for the three months ended June 30, 1997 to $560,330 (13.5% of
net sales) for the three months ended June 30, 1998. The decrease in absolute
dollars for the latest six and three month periods was due to the Company's
concentration on reducing its corporate overhead as it continues to de-emphasize
its wholesale operations. The increase of this expense as a percentage of
revenues was due to the significant decline in revenues, as the Company
continues to leverage its corporate overhead. At the end of the second quarter
of 1998, the Company reduced its corporate workforce by 33% and restructured its
warehouse operations. Additional cost reductions are planned for the balance of
1998.
Interest expense increased by $159,811 from $551,622 for the six months
ended June 30, 1997 to $711,433 for the six months ended June 30, 1998. Interest
expense increased by $72,410 from $282,214 for the three months ended June 30,
1997 to $354,624 for the three months ended June 30, 1998. These increases were
due to an increase in the average outstanding debt balance during the first six
months of 1998 as compared to the same period in the prior year.
For the foregoing reasons, the net loss for the six and three month
periods ending June 30, 1998 was approximately $1,745,945 and $759,537,
respectively, as compared to a net income of approximately $10,329 and $68,315
for the six and three month periods ended June 30, 1997, respectively.
Liquidity and Capital Resources
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company had a deficit working capital
of $968,961 at June 30, 1998, compared to a positive working capital of
$372,072 at December 31, 1997. The decrease of $1,341,033 was primarily caused
by the operating loss incurred during the six months ended June 30, 1998 and a
decrease in inventory. In addition, the Company incurred additional indebtedness
to a bank in the form of an unsecured demand note ($3,473,618 at June 30, 1998)
that resulted from the conversion of overdraft balances in the Company's
operating accounts. Management has taken steps during 1998 to improve its
working capital position by implementing several cost cutting steps which
include the reduction of corporate payroll and the reduction of inventory by
11% as of June 30, 1998. The effect of the reduction in costs will continue to
be realized in future periods. In addition, the Company is continuing the
process to reduce 60% of space at the Company's distribution center, which
space the Company believes is not necessary for its operations, which will
result in major cost reductions. The Company has successfully negotiated with
its vendors for their assistance throughout 1998. In connection with the
development and implementation of this financial strategy, the Company has
retained a financial advisor, Josephthal & Co. Inc., to assist therewith.
Furthermore, the Company has retained Josephthal & Co., Inc. to assist it in
exploring strategic alternatives, which may include, among other things, a
significant merger/acquisition of the Company. The Company is currently involved
in discussion with several interested parties with respect to a significant
transaction. These steps, among others, are intended to enable the Company to
improve its cash flow from operations and working capital position. However,
cash generated from operations alone would
12
<PAGE>
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 consummate 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 resume the growth strategy of the
Company, for which there can be no assurance of obtaining. 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 believes that the steps outlined above are sufficient
to provide the Company with the ability to continue in existence and will
ultimately enhance the Company's performance, balance sheet and returns.
Net cash provided by operating activities was $85,734 for the six months
ended June 30, 1998 as compared to $469,304 for the six months ended June 30,
1997. The decline in 1998 was attributable primarily to the loss incurred in
the six month period ended June 30, 1998 as compared to the prior comparable
period offset by reductions in inventory and accounts receivable combined with
increases in depreciation and amortization due to the capital expenditures made
in connection with the Superstore growth program in 1996 and 1997. Net cash
utilized in investing activities was $70,916 and $355,917 for the six month
period ending June 30, 1998 and 1997, respectively. The decrease reflects
decreases in capital expenditures due to a decrease in the funds available to
fund the Superstore growth strategy. Net cash used in financing activities
was $161,708 as compared to net cash provided by financing activities of
$73,937 for the six months ended June 30, 1998 and 1997, respectively.
Financing activities in 1998, reflect the repayment of debt under the revolving
credit facility offset in part by the unsecured demand note the Company
currently has.
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"). The agreement expires
September 30, 2000. This facility replaced the existing facility which provided
for maximum borrowings of $10,000,000. This new facility initially allowed 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. Pursuant to a First Amendment, dated April 24,
1998, the lender amended the financial covenants and increased the interest rate
to the prime rate plus 2%. Pursuant to a Second Amendment, dated July 31, 1998,
the Lender further amended the financial covenants and granted waivers of
default of the financial covenants
13
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of the First Amendment. In addition, the Second Amendment reduced the advance
rate for inventory to, the lower of 55%, or 100% of the appraised value of
the inventory, and provided the Company with an overadvance of $750,000. A
scheduled reduction of the overadvance for $50,000 took place on August 17,
1998. The remainder of the overadvance shall be continued or reduced subject
to the Company entering into a significant transaction. 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 June 30, 1998, outstanding
borrowings under this facility were $6,790,112, and the interest rate was 10.5%.
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%. Pursuant to the First Amendment of
the credit facility, the term loan was fully paid on July 15, 1998.
At June 30, 1998, 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 revolving credit indebtedness
as a result thereof. As of April 14, 1998, the holder of the note has deferred
all principal and interest 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 the lender of payment in full of outstanding indebtedness to it.
As of the date hereof, other than in the event tha the Company resumes
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 additional
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. 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.
14
<PAGE>
In December 1997, the Company engaged Josephthal Lyon & Ross, 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 merger/acquisition of the Company. The Company is currently
involved in discussions with several interested parties with respect to a
significant transaction.
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.
15
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AID AUTO STORES, INC.
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following document is filed as part of this report:
(i) Second Amendment to Loan and Security Agreement
dated July 31, 1998, by and between Aid Auto Stores,
Inc. and Ames Automotive Warehouse, Inc. and
Foothill Capital Corporation.
(b) Reports on Form 8-K
NONE
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AID AUTO STORES, INC.
---------------------------------
(Registrant)
August 19, 1998 By: /s/Philip L. Stephen
---------------------------------------
Philip L. Stephen
Chairman, Chief Executive Officer,
And President (Principal Executive
Officer)
August 19, 1998 By: /s/ Frank Mangano
--------------------------------------
Frank Mangano
Chief Financial Officer,
(Principal Financial and Accounting
Officer)
17
<PAGE>
EXHIBIT 10.1
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
WHEREAS, AID AUTO STORES, INC., a Delaware corporation,
and AMES AUTOMOTIVE WAREHOUSE, INC., a New York corporation,
jointly and severally, (collectively referred to herein as
"Borrower"), having a chief executive office located at 275
Grand Boulevard, Westbury, New York 11590 entered into a
Loan and Security Agreement with FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), with a
place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333 (referred to
herein as "Lender") dated as of September 29, 1997 (the Loan
and Security Agreement being herein referred to as the "Loan
Agreement"); and
WHEREAS, Borrower and Lender have entered into an
amendment of the terms and provisions of the Loan Agreement
as of April 24, 1998 by the execution of a First Amendment
to Loan and Security Agreement (the Loan Agreement as
amended by the First Amendment shall be referred to herein
as the "Amended Loan Agreement");
WHEREAS, Borrower and Lender have agreed to further
amend the terms and provisions of the Amended Loan Agreement
effective as of the date stated herein by the provision set
forth below;
NOW, THEREFORE, Borrower and Lender hereby agree that
effective as of July 31, 1998, the Amended Loan Agreement
shall be further amended to contain the provision set forth
below and the applicable provisions of the Amended Loan
Agreement shall be superseded to the extent necessary to
give effect to the provisions set forth below:
1. Section 2.1 (a) of the Amended Loan Agreement
shall be deleted in its entirety and the following
inserted in lieu thereof:
2.1 Revolving Advances.
Subject to the terms and conditions of this
Agreement,
Foothill agrees to make advances ("Advances") to Borrower in
an amount outstanding not to exceed at any one time the
lesser of (i) the Maximum Revolving Amount, or (ii) the
Borrowing Base less the aggregate amount of the Inventory
Reserves. For purposes of this Agreement, "Borrowing Base"
shall mean the result of.
(x) the lesser of (i) one million five
hundred thousand ($1,500,000) Dollars, or (ii) eighty five
(85%) percent of Eligible Accounts, less the amount, if any,
of the Dilution Reserve, or (iii) an amount equal to
Borrower's Collections with respect to Accounts for the
immediately preceding forty-five (45) day period, plus
(a) the lowest of (i) fifty five (55%)
percent of the
value of Eligible Inventory at cost, or (ii) up to one
hundred (100%) percent of the liquidation value (as
determined by an appraiser acceptable to Foothill in the
exercise of Foothill's reasonable commercial judgement,
minus
(z) the aggregate amount of reserves,
if any, established by Foothill under Section 2.1 (b).
<PAGE>
Notwithstanding anything to the contrary contained in this
Section 2.1(a), on or after the Closing Date, Foothill, in
its sole discretion, may consider, upon Borrower's written
request, modifications to the above-referenced Borrowing
Base calculation terms as to Eligible Inventory only,
utilizing Foothill's experience with such factors as
Foothill shall deem appropriate, Borrower's financial
performance and the performance of the Collateral.
Notwithstanding anything to the contrary contained above in
this Section 2.1(a), Foothill, in its sole discretion, may
consider, upon Borrower's written request, temporary
seasonal modification in the nature of increases to the
above-referenced Borrowing Base calculation terms as to
Eligible Inventory only, utilizing Foothill's experience
during the term of this Agreement to the date of such
request with such factors as Foothill shall deem
appropriate, Borrower's financial performance and results
during the terms of this Agreement to the date of such
request and the performance of the Collateral; provided
however that advances against Eligible Inventory shall not
at any time exceed one hundred percent (100%) of the
liquidation value (as determined by an appraiser acceptable
to Foothill in the exercise of Foothill's reasonable
commercial judgement having performed an Inventory
liquidation value appraisal) and provided further that the
charges and costs of any temporary or seasonal modification
are to be established by Foothill in connection with such
request. Notwithstanding the foregoing, at no time shall
Foothill be obligated, upon Borrower's written request, to
modify the Borrowing Base calculation terms.
2. Section 2.5 of the Amended Loan Agreement shall be
deleted in its entirety and the following inserted
in lieu thereof:
2.5 Overadvances. If, at any time or for any
reason, the amount of
Obligation owed by Borrower to Foothill pursuant to Section
2.1 is greater than either the Dollar or percentage
limitations set forth in Sections 2.1 (an "Overadvance"),
Borrower immediately shall, unless otherwise agreed to by
Foothill, pay to Foothill in cash, the amount of such excess
to be used by Foothill to repay Advances outstanding under
Section 2.1. Foothill will allow an Overadvance up to the
amount of $250,000 to exist through July 31, 1998 and will
further allow an Overadvance up to $750,000 under the
execution of this Second Amendment to Loan and Security
Agreement, provided however, that Borrower must on or before
August 16, 1998 reduce such Overadvance to an amount not
greater than $700,000. The continuation of, or reduction
program for, the Overadvance beyond August 31, 1998 shall be
determined by Foothill based upon Borrower's progress in
identifying and entering into a preliminary or final
agreement, acceptable to Foothill, for the sale of Borrower.
3. The first paragraph of Section 6.3(a) of the
Amended Loan Agreement shall be deleted in its
entirety and the following inserted in lieu thereof:
2
<PAGE>
6.3 Financial Statements, Reports, Certificates.
Deliver to Foothill:
(a) as soon as available, but in any event within 45 days
after the end of each month during each of Borrower's fiscal
years, a Borrower prepared balance sheet, income statement,
and statement of cash flow covering Borrower's operations
during such period; and (b) (i) on or before August 1, 1998
for the period August 1, 1998 through September 30, 1998,
and on or before each 15th day of September and each month
thereafter, for each eight week period after September 30,
1998,a budget projection ("Budget") covering a period of
eight (8) weeks ("8 Week Period") created by Borrower and
reviewed and confirmed by Argus Management or the financial
and management consultant engaged by Borrower who shall be
acceptable to Foothill, showing by week during each week of
the 8 Week Period, the projected weekly receipts and
projected weekly expenditures as of the end of each such
week for the 8 Week Period for which the report is prepared
and showing for the cash flow statement only, the weekly
cumulative total of the prior four (4) week projected weekly
receipts and projected weekly expenditures; and (ii) for
each week for the immediately preceding four (4) weeks
period the actual receipts and actual disbursements as of
the first day of each week during the immediately preceding
four (4) week period; and (c) as soon as available, but in
any event within 90 days after the end of each of Borrower's
fiscal years, Financial Statements of Borrower for each such
fiscal year audited by independent certified public
accountants reasonable acceptable to Foothill in the
exercise of Foothill's reasonable commercial judgement and
certified without any qualification, by such accountants to
have been prepared in accordance with GAAP, together with a
certificate of such accountants addressed to Foothill
stating that such accountants do not have knowledge of the
existence of any Default or Event of Default; and (d) on
each Monday, a report created by Borrower and reviewed and
confirmed by Argus Management or the financial and
management consultant engaged by Borrower who shall be
acceptable to Foothill, showing the actual receipts and
expenditures, on a cumulative basis to the cumulative weekly
projection of receipts and expenses referenced in (b) above
for the immediately ended four (4) week period together with
an explanation of any variances between the actual and
budgeted numbers. Such audited financial statements shall
include a balance sheet, profit and loss statement, and
statement of cash flow and, if prepared, such accountants'
letter to management. If Borrower is a parent company of
one or more Subsidiaries, or Affiliates, or is a Subsidiary
or Affiliate of another company, then, in addition to the
financial statements referred to above, Borrower agrees to
deliver financial statements prepared on a consolidating
basis so as to present Borrower and each such related entity
separately, and on a consolidated basis.
4. Section 7.20 (a) of the Amended Loan Agreement
shall be deleted in its entirety.
3
<PAGE>
5. Borrower acknowledges that it is in violation of
Section 6.3 (a) of the Loan
Agreement as a result of its failure to provide full
Inventory physical counts by RGIS on or before July 31,
1998, and as a result of its failure to provide its monthly
financial statements and information through the month of
May, 1998 on or before July 31, 1998 and that it has further
violated Section 6.3 (a) of the Loan Agreement during the
weeks of May 15, 1998, June 5, 1998, June 12, 1998, June 19,
1998, June 26, 1998, July 3, 1998, July 10, 1998 and July
17, 1998 as a result of Borrower's failure to maintain
compliance with the provision of Section 6.3 (a) of the
First Amendment to Loan and Security Agreement which
required that Borrower's actual cash disbursements and
receipts not exceed a variance of ten (10%) percent from the
budgeted numbers when reviewed on a four week rolling
average. In connection with the above violations, Foothill
and Borrower agree that Foothill will waive the failure of
Borrower to comply with the maintenance of the variance
between actual receipts and expenses and budgeted receipts
and expenses for the weeks specified above. Foothill and
Borrower further agree that an Event of Default will not be
deemed to exist if:
(a) Borrower provides a full physical count of
its Inventory performed
by RGIS on or before August 31, 1998; and
(b) Borrower provides the financial statements
and information
through May, 1998 on or before August 7, 1998.
6. Borrower agrees to contract with an appraiser,
satisfactory to Foothill, and
to have performed and delivered to Foothill on or before
August 31, 1998 an updated desktop Inventory appraisal
utilizing the assumptions contained in the plan of
liquidation to be furnished under Section 7 of this Second
Amendment to Loan and Security Agreement.
7. Borrower agrees to prepare and deliver to Foothill
on or before August
24, 1998 a plan of liquidation and budget therefore in form,
scope and content satisfactory to Foothill, including but
not limited to an updated desktop Inventory appraisal, for a
liquidate period acceptable to Foothill and including the
assumptions utilized in the updated Inventory appraisal
which liquidation budget will be for a period commencing on
September 1, 1998.
8. Borrower acknowledges that it had advised Foothill
that Borrower is
attempting to effectuate a sale, transfer or exchange of the
stock of Borrower or substantially all of Borrower's assets
or, in the alternative, effectuate a merger or consolidation
of the Borrower with another company. Borrower agrees to
keep Foothill advised as to the parties with whom it is
holding such discussions and the status of such discussions.
Borrower agrees to meet with Foothill on August 31, 1998 to
allow Foothill to assess the progress towards the sale of
Borrower or the progress towards the merger or consolidation
of Borrower with another entity and to discuss with Foothill
the continuation of or reduction program for the
Overadvance.
9. Borrower acknowledges that Foothill has requested
a fee for the
continued extension of the Overadvance in the amount of
$25,000, which fee Borrower admits is reasonable under the
circumstances and agrees to pay by consenting to Foothill's
debiting its loan account for the amount of $12,500 on
August 10, 1998 and for the amount of $12,500 on August 25,
1998.
4
<PAGE>
10. Except as herein amended, all of the terms and
provisions of the
Amended Loan Agreement shall remain in full force and
effect.
11. Borrower and Lender agree that this Second
Amendment to Loan and
Security Agreement has been prepared by the mutual effort of
both parties and that in the event of a conflict or
interpretive question with respect to any term, provision or
section contained in this Second Amendment to Loan and
Security Agreement or the Amended Loan Agreement, that this
Second Amendment to Loan and Security Agreement and the
Amended Loan Agreement, shall not be construed more strictly
against any one party than any other party; it being agreed
that both Borrower and Lender have equally negotiated the
terms thereof and hereof.
The date of execution of this Second Amendment to Loan and
Security Agreement by Borrower is as of July 31, 1998.
LENDER: BORROWER:
FOOTHILL CAPITAL CORPORATION AID AUTO STORES, INC.
By: /s/ Renee Lefebvre By: /s/ Philip L. Stephen
--------------------------- --------------------------
Title: Assistant Vice President Title: President
AMES AUTOMOTIVE WAREHOUSE,INC.
By: /s/ Philip L. Stephen
-----------------------------
Title: President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 141,051
<SECURITIES> 0
<RECEIVABLES> 398,866
<ALLOWANCES> 0
<INVENTORY> 11,237,914
<CURRENT-ASSETS> 13,621,857
<PP&E> 4,190,187
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<TOTAL-ASSETS> 21,443,881
<CURRENT-LIABILITIES> 14,590,818
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0
0
<COMMON> 3,958
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<TOTAL-LIABILITY-AND-EQUITY> 3,032,348
<SALES> 8,673,032
<TOTAL-REVENUES> 8,673,032
<CGS> 4,811,110
<TOTAL-COSTS> 9,722,458
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 711,433
<INCOME-PRETAX> (1,745,945)
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (1,745,945)
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