<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission file number 0-19620
REDDI BRAKE SUPPLY CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 84-1152135
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1376 Walter Street
Ventura, California 93003
(Address of principal executive offices, Zip Code)
(805) 644 - 8355
(Registrant's telephone number, including area code)
Not Applicable
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
As of November 18, 1996, 34,247,656 shares of the registrant's common stock were
outstanding.
Page 1 of 15 pages
<PAGE> 2
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
FORM 10-Q
September 30, 1996
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
NUMBER
------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1996 and
June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 - 13
PART II: OTHER INFORMATION
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Results of Votes of Securities Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 5. Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS September 30, 1996 June 30, 1996
------------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 573,954 $ 571,156
Accounts receivable, net 5,274,517 6,064,675
Other receivables 50,880 428,126
Inventories 25,814,483 24,921,223
Prepaid expenses 1,603,195 141,216
Notes and advances due from stockholders 237,966 242,632
Notes receivable due from Hi/LO 645,610 662,256
------------ ------------
Total current assets 34,200,605 33,031,284
------------ ------------
Facilities and equipment 6,742,598 6,701,515
Less accumulated depreciation and amortization (3,319,107) (3,081,225)
------------ ------------
3,423,491 3,620,290
------------ ------------
Notes receivable due from Hi-Lo Automotive 1,435,726 1,548,599
Unamortized debt issuance costs 592,766 634,422
Deposits 300,088 302,266
Intangible assets, net of accumulated amortization 772,330 789,388
------------ ------------
$ 40,725,006 $ 39,926,249
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,693,955 $ 6,598,710
Short-term borrowings 8,568,544 6,955,467
Current portion of obligations under capital leases 1,113,985 1,124,810
Accrued expenses 2,706,813 2,214,446
Accrued costs related to discontinued operations 1,247,278 1,296,850
------------ ------------
Total current liabilities 21,330,575 18,190,283
------------ ------------
Obligations under capital leases, net of current portion 720,481 940,925
Deferred income tax liabilities 469,254 467,000
Subordinated convertible debt, 9% coupon 6,900,000 6,900,000
Stockholders' equity
Preferred stock 3,854,826 9,547,244
Common stock 2,624 1,786
Additional paid-in capital 36,273,035 30,564,260
Accumulated deficit (28,825,789) (26,685,249)
------------ ------------
Total stockholders' equity 11,304,696 13,428,041
------------ ------------
$ 40,725,006 $ 39,926,249
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
<PAGE> 4
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30
-----------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Net sales $16,714,848 $15,330,341
Cost of goods sold 10,537,658 8,846,291
----------- -----------
Gross profit 6,177,190 6,484,050
Expenses:
Warehouse operating and selling 6,253,283 4,714,526
General and administrative 1,491,783 1,529,973
Provision for warehouse closures 200,000 0
----------- -----------
7,945,066 6,244,499
----------- -----------
Income (loss) from operations (1,767,876) 239,551
Interest expense, net 355,469 327,643
----------- -----------
Loss before taxes (2,123,345) (88,092)
Income taxes 0 (15,000)
Net loss $(2,123,345) $ (103,092)
=========== ===========
Net loss per common share $ (0.10) $ (0.01)
=========== ===========
Weighted average number of common
Shares outstanding 22,069,845 16,528,710
=========== ===========
</TABLE>
4
<PAGE> 5
Reddi BRAKE SUPPLY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30
-----------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,123,345) $ (103,092)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 255,253 294,679
Provision for store closures 200,000 0
Amortization of debt issuance costs 41,343 11,204
Change in allowance for doubtful accounts 65,272 55,000
Changes in assets and liabilities associated with
operating activities:
Accounts receivable 724,886 (217,718)
Inventories (893,260) (437,437)
Other receivables 377,246 6,557
Prepaid expenses and deposits (1,459,801) (499,581)
Accounts payable 1,095,245 (1,193,519)
Accrued expenses 245,049 1,607,409
Deferred compensation 0 (53,568)
----------- -----------
Total Adjustments 48,880 (426,974)
----------- -----------
Net cash used in operating activities (1,472,112) (530,066)
----------- -----------
Cash flows from investing activities:
Increase in intangible assets 0 (25,000)
Proceeds from sale of equipment 0 0
Purchases of fixtures, equipment and leaseholds (41,083) (44,386)
Advances to officers 4,666 17,075
Notes receivable principal payments 129,519 160,108
----------- -----------
Net cash provided by investing activities 93,102 107,797
----------- -----------
Cash flows from financing activities:
Net increases in short-term borrowings 1,613,077 2,200
Proceeds from exercise of options and 0 47,500
Payments on capital lease obligations (231,269) (315,776)
----------- -----------
Net cash provided by financing activities 1,381,808 (266,076)
----------- -----------
Net increase (decrease) in cash 2,798 (688,345)
Cash and cash equivalents, beginning of period 571,156 1,701,955
----------- -----------
Cash and cash equivalents, end of period $ 573,954 $ 1,013,610
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
<PAGE> 6
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
A. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements of Reddi Brake Supply Corporation and subsidiary (the
"Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal and recurring accruals) considered for a fair
presentation have been included. Operating results for the three
months ended September 30, 1996, are not necessarily indicative of the
results that may be expected for the fiscal year ended June 30, 1997.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1996.
B. Summary of Significant Accounting Policies
Inventories
The Company's inventories, consisting primarily of finished
goods, are stated at lower of FIFO (first in, first out) cost or
market.
During fiscal year 1995 the Company received, from certain
suppliers of product, purchase discounts for the initial inventory
purchase of a new warehouse. These purchase discounts were recorded as
a reduction of cost of goods sold over the Company's estimated
aggregate inventory turn, which approximates twelve months. This
monthly reduction in the cost of goods sold produces a result which is
not materially different than the result which would be obtained if the
Company allocated the discount to each particular stock keeping unit
acquired in the initial inventory. Under the Company's method of
accounting for such discounts, inventory, net of the unamortized
discount, is stated at the lower of cost or market which would
approximate that computed in all material respects, by allocating the
discount to each item purchased. The Company reduced costs of goods
sold by such discounts in the amounts of approximately $0 and $520,000
during the three months ended September 30, 1996 and 1995,
respectively. At September 30, 1996 no unamortized discounts remained.
In addition, the Company receives, from certain suppliers of
product, purchase discounts and rebates related to volume purchasing.
These discounts and rebates are recognized as reductions in the cost
of goods sold to the extent the related inventory has been sold, based
on the Company's annualized aggregate inventory turn. Under the
Company's method of accounting for such discounts and rebates, to the
extent that the inventory for which the discounts and rebates relate
has not been sold, inventory net of the unamortized discounts and
rebates is stated at the lower of cost or market which would
approximate that computed in all material respects, by allocating the
discounts and rebates to each item purchased. The Company reduced
costs of goods sold by such discounts in the amounts of $104,000 and
$283,000 during the three months ended September 30, 1996 and 1995,
respectively. At September 30, 1996 no unamortized discounts
remained.
6
<PAGE> 7
Income Taxes
The Company has net operating loss carryforwards as of June
30, 1996 of approximately $12,160,420 which may be available, subject
to limitations, to offset future taxable income through fiscal year
2011.
During October 1996 the Internal Revenue Service completed
audits of the Company's Federal tax returns for the years ended June
30, 1995, 1994 and 1993. The Company paid $7,182 taxes and agreed to
a reduction in its loss carryforward. The reduction is reflected in
the preceding paragraph.
Net Income (loss) per Common Share
Net income (loss) per common share is based upon the weighted
average number of common shares outstanding in each period. As the
aggregate dilution of common stock equivalents is either less than
three percent of income per common share or antidultive, the Company
is not reporting both primary and fully diluted income (loss) per
share.
Reclassifications
Certain reclassifications have been made to the September 30,
1995 financial statements to conform with September 30, 1996.
C. Statements of Cash Flows
The Company prepares its consolidated statements of cash flows
using the indirect method as prescribed by Statement of Financial
Accounting Standards No. 95. For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Cash paid for interest was approximately $394,000 and $420,000
for the three months ended September 30, 1996 and 1995, respectively.
The Company did not pay any income taxes for the three months ended
September 30, 1996 and 1995.
The Company entered into capital lease obligations for
equipment totaling approximately $116,000 and $206,000 for the three
months ended September 30, 1996 and 1995.
D. Stockholders' Equity
For the three months ended September 30, 1996, the Company's
stockholders' equity decreased by $2,123,345. This decrease was
attributable to the net loss in the quarter. As of September 30,
1996, the Company had a total of 26,236,830 shares of common stock
outstanding.
E. Line of Credit
In November of 1995 the Company obtained a working capital line
of credit with the CIT Group. The maximum credit available under the
CIT Line is the lesser of (a) $13 million, or (b) the sum of 85% of
eligible accounts receivable and 55% of eligible inventory. Borrowings
under the CIT Line bear interest at a rate equal to the CIT's prime
lending rate (8.25% at September 30, 1996) plus 1.50%. Borrowings are
collateralized by the Company's accounts receivable, notes receivable,
inventory, fixtures and equipment. Under the terms of the CIT Line,
the Company must comply with certain reporting and financial
performance covenants. The line expires in November 1998.
7
<PAGE> 8
The Company's principal sources of funds are cash generated from
operations, borrowings on the CIT line, and additional subordinated debt
and equity capital as provided. In April and June 1996 the Company
raised approximately $8,300,000 from two offering of convertible
preferred stock. These funds were used to reduce accounts payable to
trade and other creditors and to offset operating losses. As of November
15, 1996, the Company owed approximately $7,900,000 on the CIT Line,
with additional borrowing availability of $120,000. (See also "Liquidity
and Capital Resources" on page 11.)
F. Warehouse Closing
As of December 31, 1995 the Company approved a plan to close
14 warehouses and accordingly recorded a provision for estimated costs
amounting to $721,794 during the three months ended December 31, 1995.
The provision consists principally of estimated losses on leases, the
write down of inventories to net realizable value, and the abandonment
of certain assets. During the first quarter of 1997 the Company
decided to close an additional 7 of its underperforming warehouses and
accordingly recorded a provision for estimated costs amounting to
$200,000.
G. Changes in Capital
On October 24, 1996 at a Special Shareholders Meeting, the
Company was authorized to increase its number of authorized shares of
common stock from 35,000,000 to 75,000,000.
During the quarter ended September 30, 1996, all 400,000 of the
Company's Class A Preferred Shares were converted and 165,000 of the
Company's Class B Preferred Shares were converted into 8,370,310
shares of common stock.
H. Adoption of Accounting Standards
Stock Compensation. Statement of Financial Account Standard
No. 123, "Accounting for Stock-Based Compensation" (FAS 123), issued
in October 1995 and effective for fiscal years beginning after
December 15, 1995, encourages, but does not require, a fair value
based method of accounting for employee stock options or similar
equity instruments. FAS 123 allows an entity to elect to continue to
measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), but
requires pro forma disclosures of net earnings and earnings per share
as if the fair value based method of accounting has been applied. The
Company has adopted FAS 123 effective July 1, 1996 and has elected
to continue to measure compensation cost under APBO No. 25.
Accordingly, FAS 123 has no impact on the Company's financial position
or results of operations.
8
<PAGE> 9
Impairment of Long-Lived Assets. Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of" (FAS 121), issued in
March 1995 and effective for fiscal years beginning after December 15,
1995, establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill either to be held or disposed of. The
Company has adopted FAS 121 effective July 1, 1996 and the adoption
has not had a material impact on the Company's financial position or
results of operations.
I. Informal Re-Organization
As of November 15, 1996, the Company owed approximately $9
million to its trade and other creditors, but is unable to make timely
payments to these creditors. Accordingly, the Company's major trade
creditors have placed the Company on COD status or credit hold, which
has adversely effected the Company's ability to fill customer orders.
Although the Company has excess inventories of certain items, it has
shortages of other fast-selling items. For these reasons the Company
called an October 31, 1996 meeting with 18 principal trade creditors.
These creditors have formed a working committee of six members and
granted the Company a moratorium of at least 30 days for the purpose of
presenting a proposed plan of reorganization for consideration by such
committee. These creditors have also agreed, on a company-by-company
basis, to provide terms allowing the Company to obtain critical goods
and services during this moratorium.
9
<PAGE> 10
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS ADDRESSED
IN THIS ITEM 2 CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS
ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED
BELOW UNDER THE HEADING "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND ELSEWHERE
IN THIS REPORT ON FORM 10-Q, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE ANTICPATED BY THE COMPANY'S MANAGEMENT.
INTRODUCTION
Since the end of its fiscal year ended June 30, 1996, the Company has
continued its restructuring of operations. In July 1996, the Company closed
seven underperforming warehouses and, in October 1996, closed one additional
warehouse. Management is continuing its heightened monitoring of certain other
underperforming warehouses. As of November 15, 1996, the Company operates 84
warehouses in 26 states.
On October 31, 1996, the Company held a meeting with eighteen of its
principal trade creditors for the purpose of enlisting their assistance in an
informal reorganization of the Company's fiscal affairs. These creditors formed
a working committee of six members and granted the Company a moratorium of at
least thirty days for the purpose of presenting a proposed plan of
reorganization for consideration by such committee. The Company has retained
the independent consulting firm of Hankin & Co. and special legal counsel to
advise it in this process.
As discussed below, the Company's proposed reorganization will require
not only gross margin improvement, expense reduction and improved inventory
systems and planning, but also an infusion of additional working capital. If
the Company is unable to raise additional capital (in conjunction with its plan
of reorganization) it is doubtful that the Company will be able to continue its
operations and likely that it will be required to file for reorganization or
liquidation under federal bankruptcy laws. See "-Liquidity and Capital
Resources" below.
RESULTS OF OPERATIONS
Net sales for the three months ended September 30, 1996 were
$16,714,848, an increase of $1,384,507 or 9%, over the same period for the
prior year. Sales at the Company's 85 comparable Reddi Brake (R) outlets
(based on outlets opened at least 12 full months as of September 30, 1995)
increased approximately 11.9% for the three months ended September 30, 1996, as
compared to the same period last year. However, sales in new outlets in
regions outside of the Western states were generally lower than the Company had
expected based on historical sales development of stores opened in the Western
region. In addition, due to its cash flow shortage, the Company has been
placed on COD status by a majority of its vendors. Accordingly, the Company's
ability to fill customer orders has been adversely affected. See "Part I -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital resources".
10
<PAGE> 11
As a percentage of revenues, gross profit decreased to 36.9% for the
three months ended September 30, 1996, as compared to 42.2% during the same
period of the prior year. Of this 5.3% decrease, approximately 4.6% was due to
the Company's recognizing less purchase discounts, as a percentage of sales,
for initial inventories as the Company began its hiatus in opening new Reddi
Brake outlets. During the three month periods ended September 30, 1996 and
1995, respectively, the Company amortized approximately $104,000 and $803,000
of purchase discounts. The Company has exhausted its monthly recognition of
such discounts. For this reason, the Company also expects decreases in its
gross margins for the quarter ending December 31, 1996 and for fiscal 1997, as
compared to its prior year. The remaining decrease in gross margin is
primarily attributable to the Company providing certain inventory reserves and
reducing prices on certain store items in order to stay competitive in its
markets.
As a percentage of revenues, store operating and selling expenses for
the three months ended September 30, 1996 increased to 37.4%, from 30.1% over
the same period of the prior year. This increase was primarily due to a
planned personnel buildup which was required to develop and support an
anticipated increase in same-warehouse sales. The anticipated sales growth was
not achieved primarily due to a lack of optimum inventory availability.
As a percentage of revenues, for the three months ended September 30,
1996, general and administrative expenses were 8.9%, as compared to 9.9% during
the same period of the prior year. This decrease primarily reflects higher
same-warehouse revenues for the 1996 period versus 1995, while general and
administrative expenses were held relatively consistent.
In July 1996, the Company closed 7 of its underperforming warehouses
and recorded a charge of $200,000. The charge primarily related to handling
and freight costs to return inventory to vendors or to other stores and a
provision for the settlement of future lease commitments. The Company has
distributed the related inventories to its other stores and is currently in
negotiations to settle the leases.
Due to the factors discussed above, the Company recorded a net loss of
$2,123,345 during the three months ended September 30, 1996, as compared to a
net loss of $103,092 during the same period last year.
The Company's business is seasonal in nature, with stores sales
historically running higher in the first and fourth quarters (April through
September).
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the three months ended
September 30, 1996 was approximately $1,500,000. These funds were mainly used
by the loss from operations.
Net cash provided by investing activities during the period of
approximately $93,000 consisted primarily of monies received from note
receivable payments from Hi/LO.
Net cash provided by financing activities during the three months
ended September 30, 1996 was approximately $1,380,000. These funds were
provided by increased borrowings on the Company's line of credit with The CIT
Group.
In November 1995 (as amended on March 18, 1996) the Company obtained a
new working capital line of credit (the "CIT Line") with the CIT Group. The
maximum credit available under the CIT Line is the lesser of (a) $13 million,
or (b) the sum of 85% of eligible accounts receivable and 55% of eligible
inventory. Borrowings under the CIT Line bear interest at a rate equal to the
CIT's prime lending rate (8.25% at March 31, 1996) plus 1.50%. Borrowings are
collateralized by the Company's accounts receivable, notes receivable,
inventory, fixtures and equipment. Under the terms of the CIT Line, the
Company must comply with certain reporting and financial performance. (See
also Part II, Item 3, Default Upon Senior Securities.)
11
<PAGE> 12
The Company's principal sources of funds are cash generated from
operations, borrowings on the CIT line, and additional subordinated debt and
equity capital as provided. In April and June 1996 the Company raised
approximately $8,300,000 from two offering of convertible preferred stock.
These funds were used to reduce accounts payable to trade and other creditors
and to offset operating losses. As of November 15, 1996, the Company owed
approximately $7,900,000 on the CIT Line, with additional borrowing
availability of $120,000.
As of November 15, 1996, the Company owed approximately $9 million to
its trade and other creditors, but is unable to make timely payments to these
creditors. Accordingly, the Company's major trade creditors have placed the
Company on COD status or credit hold, which has adversely effected the
Company's ability to fill customer orders. Although the Company has excess
inventories of certain items, it has shortages of other fast-selling items.
For these reasons the Company called an October 31, 1996 meeting with 18
principal trade creditors, as discussed above. These creditors have formed a
working committee of six members and granted the Company a moratorium of at
least 30 days for the purpose of presenting a proposed plan of reorganization
for consideration by such committee. These creditors have also agreed, on a
company-by-company basis, to provide terms allowing the Company to obtain
critical goods and services during this moratorium.
Any proposed plan of reorganization will require not only gross margin
improvement, expense deduction, and improved inventory planning and control,
but also an infusion of additional working capital. Although management is
engaged in discussions with several potential sources of capital, who are
awaiting the Company's plan for an informal reorganization with its creditors
and the Company's operational plans to follow such a reorganization, there can
be no assurance that the Company will be able to raise the additional requited
capital. If the Company is unable to raise additional working capital in the
near future (in conjunction with its plan of reorganization) it is doubtful
that the Company will be able to continue its operations and likely that it
will be required to file for reorganization or liquidation under federal
bankruptcy laws.
FACTORS THAT MAY AFFECT FUTURE RESULTS
All forward-looking statements contained in this Item 2 and in Part II
of this report on Form 10-Q are subject to, in addition to the other matters
described in this Report on Form 10-Q, a variety of significant risks and
uncertainties. The following discussion highlights some of these risks and
uncertainties. Further, from time to time, information provided by the Company
or statements made by its employees may contain "forward-looking" information.
The Company cautions investors that there can be no assurance that actual
results or business conditions will not differ materially from those projected
or suggested in such forward-looking statements as a result of various factors,
including those discussed below.
Recent Operating Losses. For its three months ended September 30,
1996, and its fiscal year ended June 30, 1996, the Company reported losses of,
respectively, $2,123,345 and $8,557,836 primarily due to the factors discussed
earlier. Although the Company's management has responded to this loss with
measures intended to reorganize operations, there can be no assurance that
these or any other measures will lead to profitability for the Company.
Management Strategy. As discussed above, the Company's management has
undertaken a restructuring of operations in response to the Company's recent
losses. These measures are based upon management's current understanding and
assumptions concerning the Company's operations and, accordingly, management
may modify its approach on these measures, or take additional measures, as it
deems appropriate. Further, there can be no assurance that management's
strategy in responding to the Company's losses will prove successful. In
addition, the restructuring may involve additional warehouse closures, in which
event the Company would experience further charges associated with such future
closures.
12
<PAGE> 13
Informal Reorganization; Need for Additional Capital. As described
above, the Company is working with its principal trade creditors to reorganize
its fiscal affairs, including its obligations to all creditors. Any proposed
plan of reorganization will require an infusion of additional capital. As
discussed above, there can be no assurance that the Company will be able to
raise the additional capital, and if the Company is not able to raise such
capital it is doubtful that the Company will be able to continue its
operations.
Decrease in Gross Margins. As discussed above, the Company's gross
margin for the first quarter of fiscal 1997 was 36.9%, down from 42.2% for the
first quarter of fiscal 1996. This decrease was primarily due to the
exhaustion of amortization of past purchase discounts. For this reason, the
Company also expects decreases in its gross margins for the quarter ending
December 31, 1996 and for fiscal 1997, as compared to its prior year.
Defaults in Loan Covenants. The Company reported a loss of $2,123,345
for its first quarter, and expects to report a loss for fiscal 1997. If the
Company does report a loss for fiscal 1997, it will seek CIT's waiver of such
default. There can be no assurance that CIT would waive such a default should
it occur.
Competition. The Company operates in a highly competitive environment
in the commercial segment of the automotive parts and accessories aftermarket.
The Company's primary competitors include traditional three-step aftermarket
channels, consisting primarily of independent and national warehouse
distributors and associations, such as NAPA and Carquest, and the associated
jobbers to whom they sell; traditional two-step distribution channels,
including original equipment channels through vehicle dealerships, retail parts
stores, specialty distributors and local and regional manufactures; and APS
Holding Corporation, a national operator of "installer service warehouses".
Many of the Company's current and potential competitors are larger and have
greater financial resources.
Dependence Upon Key Executives. The Company's success will be, to a
large extent, dependent upon the continued services of Richard McGorrian, its
Chief Executive Officer, and Sandford T. Waddell, its Chief Financial Officer.
The loss of the services of either executive for any reason, without an orderly
transition to a qualified successor, would likely have a material adverse
effect on the Company's operations and results.
Other Factors Affecting Market Price. The market price of the
Company's Common Stock may be adversely affected by a number of other factors,
including future sales of shares covered by a Registration Statement on Form
S-3 (which presently covers approximately 5 million shares), the possible
exercise of various warrants and options which could result in the issuance of
up to approximately 3.5 million additional shares, the conversion of up to $6.9
million of 9.0% Adjustable Convertible Subordinate Notes into a maximum
(subject to anti-dilution adjustments) of approximately 3.2 million shares, the
issuance of additional shares of Common and Preferred Stock, (including the
issuance of additional shares of Common Stock upon conversion of outstanding
shares of Class B preferred stock), and fluctuations in response to periodic
variations in operating results, market conditions and general economic
conditions and factors external to the Company.
13
<PAGE> 14
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company was not in default for the quarter ended September 30,
1996 under the terms and conditions of its Loan and Security Agreement (the
"Agreement") dated November 29, 1995 with The CIT Group ("CIT") which requires
the Company must comply with certain financial reporting and financial
performance covenants. In October 1996 the Company called a meeting of its
principal trade creditors. Such a meeting is an event of default under the
terms of the Agreement. CIT has agreed to waive this default.
The Agreement, as amended, includes provisions that the Company will
complete installation of a new Management Information System on or before
November 30, 1996. In November 1996 the Company entered into an agreement with
MacDonald Corporation to supply and install MacDonald's operating system for
distribution companies linked to MAS90 financial software from State of the
Art, Inc. Implementation of the MacDonald/MAS90 installation has begun and the
Company presently believes installation will be completed by March 1997. CIT
has agreed to provide an amendment to the Agreement extending its amendment to
April 1997.
The Agreement provides that if the Company records a net loss for the
fiscal year ended June 30, 1997, the Company would default on the CIT Line.
The Company reported a loss of $2,123,345 for its first quarter, and expects to
report a loss for fiscal 1997. If the Company does report a loss for fiscal
1997, it will seek CIT's waiver of such default. There can be no assurance
that CIT would waive such a default should it occur.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
On October 24, 1996 at a Special Shareholders Meeting, the Company was
authorized to amend its Certificate of Incorporation to increase its number of
authorized shares of common stock from 35,000,000 to 75,000,000. The results
of ballots cast on this proposal, which was the only proposal considered at the
meeting, were as follows: 16,010,571 shares voted "For", 1,692,013 shares
voted "Against", and 69,814 share voted "Abstain".
ITEM 5. SUBSEQUENT EVENTS
As previously reported, S. Gerald Birin resigned, effective October
23, 1996, as Executive Vice President, Chief Financial Officer, Secretary and
Director. Sandford T. Waddell joined the Company October 15, 1996 and was
elected Executive Vice President, Chief Financial Officer, Secretary and
Director effective October 24, 1996. Most recently Mr. Waddell was President
and Chief Executive Officer of Clamshell Buildings, Inc. Earlier he was Chief
Financial Officer of Clif Designs, Inc. (automobile sound systems) and Vice
President, Finance of Thrifty Corporation (drug store and sporting goods retail
distribution).
On October 31, 1996 the Company held a meeting with eighteen of its
principal trade creditors for the purpose of enlisting their assistance in an
informal reorganization of the Company's fiscal affairs. These creditors
organized a working committee of six members and granted the Company a
thirty day moratorium for the purpose of presenting a proposed plan of
reorganization. The Company has retained the consulting firm of Hankin & Co.
and special counsel to advise it during this process.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
REDDI BRAKE SUPPLY CORPORATION
Date: November 19, 1996 /s/Richard J. McGorrian
-----------------------------------
Richard J. McGorrian
Chief Executive Officer
President
Director
Date: November 19, 1996 /s/Sandford T. Waddell
-----------------------------------
Sandford T. Waddell
Executive Vice President
Chief Financial Officer
Director
Date: November 19, 1996 /s/Gary A. Van Wagner
-----------------------------------
Gary A. Van Wagner
Principal Accounting Officer
15
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<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 573,954
<SECURITIES> 0
<RECEIVABLES> 5,899,788
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<CURRENT-ASSETS> 34,200,605
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<CURRENT-LIABILITIES> 21,330,575
<BONDS> 6,900,000
0
3,854,826
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<OTHER-SE> 7,447,246
<TOTAL-LIABILITY-AND-EQUITY> 40,725,006
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<INCOME-PRETAX> (2,123,345)
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