<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 March 31, 1997
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 04-1152135
------ ----------
(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 May 14, 1997, 56,307,140 shares of the registrant's common stock were
outstanding.
1
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REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
FORM 10-Q
March 31, 1997
INDEX
PART I: FINANCIAL INFORMATION PAGE
NUMBER
------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1997
and June 30, 1996................................................3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1997 and March 31, 1996
and the nine months ended March 31, 1997 and
March 31, 1996...................................................4
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 1997 and 1996........................5
Notes to Condensed Consolidated Financial Statements............6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................9-12
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................13-14
Item 2. Changes in the Rights of Security Holders........................14
Item 3. Defaults Upon Senior Securities..................................14
Item 4. Results of Votes of Securities Holders...........................14
Item 5. Other Information................................................14
Item 6. Exhibits and Reports on Form 8-K.................................14
Signatures...............................................................14
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
A S S E T S
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 81,299 $ 571,156
Assets held for sale 20,399,674 --
Less allowance to net realizable value (14,200,000) --
Accounts receivable, net -- 6,064,675
Other receivables -- 428,126
Inventories -- 24,921,223
Supplies and prepaid expenses 171,898 141,216
Notes and advances due from stockholders -- 242,632
Notes receivable due from Hi/Lo 498,330 662,256
----------- -----------
Total current assets 6,951,201 33,031,284
----------- -----------
FACILITIES AND EQUIPMENT 3,264,402 6,701,515
Less-Accumulated depreciation and amortization 1,526,571 (3,081,225)
----------- -----------
1,737,831 3,620,290
----------- -----------
NOTES RECEIVABLE DUE FROM HI-LO AUTOMOTIVE 1,263,347 1,548,599
UNAMORTIZED DEBT ISSUANCE COSTS -- 634,422
DEPOSITS 299,814 302,266
INTANGIBLE ASSETS, net of accumulated amortization 737,677 789,388
----------- -----------
10,989,870 39,926,249
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Liabilities not subject to compromise
Accounts payable 205,236 6,598,710
Short-term borrowings 3,937,250 6,955,467
Current portion of obligations under capital leases -- 1,124,810
Accrued expenses -- 2,214,446
Accrued costs related to discontinued operations -- 1,296,850
----------- -----------
Total current liabilities 4,142,486 18,190,283
----------- -----------
Liabilities subject to compromise 19,099,691 --
OBLIGATIONS UNDER CAPITAL LEASES,
net of current portion -- 940,925
DEFERRED INCOME TAX 467,000 467,000
SUBORDINATED CONVERTIBLE DEBT, 9-3/4 COUPON -- 6,900,000
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock 1,341,400 9,547,294
Common stock 4,827 1,786
Additional paid-in capital 38,837,953 30,564,260
Accumulated deficit (52,903,487) (26,685,249)
----------- -----------
Total stockholders' equity (deficit) (12,719,307) 13,428,041
----------- -----------
$10,989,870 $39,926,249
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
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REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES 4,454,377 $15,417,692 $31,850,613 $ 45,321,306
COST OF GOODS SOLD 2,830,030 9,546,321 20,133,886 27,063,819
----------- ----------- ----------- ------------
Gross profits 1,624,347 5,871,371 11,716,727 18,257,487
EXPENSES
Warehouse operating and selling 4,546,778 5,742,938 16,582,792 15,679,375
Special charges - - 298,153 -
General and administrative 1,699,037 1,563,590 4,841,548 5,426,893
Provision for warehouse closure - 200,000 721,794
Loss on sale of certain assets 14,200,000 - 14,200,000 -
Write off debt issuance costs 519,700 - 519,700 -
----------- ----------- ----------- ------------
20,965,515 7,306,528 36,642,193 21,828,062
----------- ----------- ----------- ------------
Income (loss) from operations (19,341,168) (1,435,157) (24,925,466) (3,570,575)
INTEREST EXPENSE, net 353,522 359,936 1,016,218 964,382
----------- ----------- ----------- ------------
Loss before provision for income taxes (19,694,690) (1,795,093) (25,941,684) (4,534,957)
Reorganization items 205,714 - 205,714 -
PROVISION FOR INCOME TAXES - - - (15,000)
----------- ----------- ----------- ------------
NET LOSS (19,900,404) $(1,795,093) (26,147,398) $ (4,549,957)
=========== =========== =========== ============
NET LOSS PER COMMON SHARE $ (0.45) $ (0.11) $ (0.79) (0.28)
=========== =========== =========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 44,668,274 16,530,908 32,899,058 16,521,737
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
4
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REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(26,147,398) $(4,549,957)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,083,896 1,031,865
Amortization of debt issuance costs 114,722 33,612
Provision for bad debts 268,881 141,647
Write off of employee note receivable - 73,073
Write off debt issuance costs 519,700 -
Loss on sale of equipment 8,351 -
Reserve for note receivable from shareholder 244,014 -
Loss on sale of certain assets 14,200,000 -
Changes in assets and liabilities
associated with operating activities:
Accounts receivable 4,887,341 (878,365)
Inventories 6,712,549 5,443,009
Other receivables 345,579 140,376
Prepaid expenses & deposits (28,230) (582,642)
Accounts payable (6,393,474) (5,213,830)
Accrued expense (3,511,296) 359,936
Accounts payable and accrued expenses
subject to compromise 10,834,994 -
------------ -----------
Total adjustments 29,287,027 539,681
------------ -----------
Net cash provided by (used in) operating activities 3,139,629 (4,010,576)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 63,493 -
Increase in intangible assets - (359,877)
Purchases of fixtures, equipment and
leaseholds (311,355) (655,882)
Advances to officers (1,382) 52,927
Notes receivable principal payments 449,175 513,183
------------ -----------
Net cash provided by (used in)
investing activities 199,931 (449,649)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings (3,018,217) (3,295,532)
Proceeds from the issuance of
common stock 47,500
Net activity on capital lease obligations (811,200) (585,062)
------------ -----------
Net cash (used in) provided by financing
activities (3,829,417) 2,757,970
------------ -----------
NET DECREASE IN CASH (489,857) (1,701,955)
CASH AND CASH EQUIVALENTS,
beginning of period 571,156 1,701,955
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 81,299 $ 0
============ ===========
</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
MARCH 31, 1997
(Unaudited)
A. Chapter 11 Reorganization
-------------------------
On March 17, 1997, an involuntary petition for reorganization
under Chapter 11 of the Federal Bankruptcy Code was filed against Reddi
Brake Supply Company, Inc. ("Subsidiary"), the wholly-owned subsidiary
of Reddi Brake Supply Company ("Parent"), (collectively "Company"). The
involuntary petition was filed by a group of four unsecured creditors of
the Subsidiary in the United States Bankruptcy Court ("Court") for the
Central District of California in Santa Barbara, California (Case No.
ND97-11349-RP). On March 16, 1997, the Subsidiary closed and secured all
of its 64 warehouses and laid off all of its field employees and most of
its administrative personnel. The immediate closure and layoff was
necessary due to the lack of sufficient capital on the part of the
Company or the Subsidiary to continue operations.
On or about March 27, 1997, the Subsidiary reached a
preliminary non-binding agreement in principle with its secured lender
and certain of its unsecured trade creditors, including the four
unsecured creditors who filed the involuntary petition. Pursuant to
that agreement in principle, the Subsidiary was allowed to convert to a
voluntary Chapter 11 proceeding for purposes of reorganizing. As part
of the agreement in principle, the Subsidiary's secured lender agreed to
provide limited debtor-in-possession funding ("DIP Funding") for
purposes of financing the reorganization.
On March 27, 1997, the Subsidiary filed a petition for
conversion to a voluntary Chapter 11 proceeding with the Court. At the
same time, the Subsidiary's secured lender submitted its own motion for
a stay or further proceedings in order for it to arrange for the
provision of the DIP Funding. Both motions were approved by the Court on
April 4, 1997. In consideration of the senior lender's agreement to
provide the DIP Funding, the Subsidiary stipulated that unless a
definitive commitment for the capitalization or purchase of the
Subsidiary or its assets was obtained by April 18, 1997, the Subsidiary
would commence the orderly liquidation of all assets. A commitment,
satisfactory to the secured lender, was received by that date.
On April 29, 1997, the Subsidiary reached a definitive agreement
with Express Parts Warehouse Inc., a privately owned company based in
Raleigh, N.C., to sell substantially all of its assets. A motion has
been filed with the Court requesting approval of the sale and a hearing
has been set for May 21. The sale is subject to approval by the Court.
Express Parts Warehouse has agreed to pay approximately $6.2
million in cash at closing for warehouse and headquarters assets,
including inventory, accounts receivables, company owned vehicles,
fixtures and equipment, and the name "Reddi Brake." Pursuant to the
asset purchase agreement, the Subsidiary will sell substantially all of
its assets except for two notes with current face values of approxi-
mately $1.6 million which will remain with the Subsidiary. The
agreement, if completed, will leave the Subsidiary with cash and notes
totaling approximately $8 million, but with no operating assets.
Liabilities of the Subsidiary consist of a total of approximately $15
million owed to the secured lender, former employees for unpaid wages,
and to unsecured creditors.
If the sale is approved by the Court and consummated, the
Subsidiary expects to submit a plan of reorganization to the Court
providing for the distribution of all available cash and the notes to
creditors of the company, at which time the Subsidiary would liquidate.
The Parent's assets consist only of the stock of the
Subsidiary. The liabilities of the Parent consist primarily of $6.9
million of subordinated convertible notes. If the asset sale closes,
and if the proceeds of the sale are distributed to creditors as part of
the bankruptcy proceedings, then the Company will have no operations or
significant assets other than its net operating loss of approximately
$12 million (as of June 30, 1996) and its current status as a publicly
traded operation.
In connection with its proposed sale of certain assets, a loss
of $14,200,000 has been recorded in the accompanying March 31, 1997
condensed consolidated financial statements.
B. 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 and six
months ended December 31, 1996, are not necessarily indicative of the
results that may be expected for the fiscal year ending 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.
The accompanying March 31, 1997 condensed financial statements
were prepared consistent with the provisions of AICPA Statement of
Position 90-7: Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code (SOP 90-7). Under SOP 90-7 an entity distinguishes
prepetition liabilities subject to compromise from those that are not
and from postpetition liabilities.
C. Summary of Significant Accounting Policies
------------------------------------------
Assets held for sale
--------------------
Assets held for sale at March 31, 1997 consists of the following assets
which have been written down to their net realizable value of $6.2
million as contemplated by the proposed sale of certain assets to
Express Parts Warehouse as described above (see Note A)
Inventory $18,208,674
Accounts receivable (net) 991,000
Facilities and Equipment (net) 1,200,000
-----------
Total 20,399,674
Allowance to net realizable value 14,200,000
-----------
Net realizable value $ 6,199,674
===========
Liabilities subject to compromise
---------------------------------
Liabilities subject to compromise consisted of the following at
March 31, 1997:
Accounts payable $ 9,735,407
Accrued liabilities 1,209,749
Obligations under capital leases 1,254,535
Subordinated debt 6,900,000
-----------
$19,099,691
===========
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 years 1994 and 1995, the Company received, from certain
suppliers of product, purchase discounts for the initial inventory
purchase of a new warehouse. These purchase discounts have been 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 approxi-
mate that computed in all material respects, by allocating the discount
to each item purchased. The Company had fully amortized all such
discounts as of June 30, 1996, and accordingly, did not reduce costs of
goods sold in the three and nine month periods ended March 31, 1997.
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. During the three and nine month periods ended March 31,
1997, the Company reduced costs of goods sold by such discounts in the
amounts of approximately $0 and $104,000, respectively.
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 anti-dilutive, the
Company is not reporting both primary and fully diluted income (loss)
per share.
D. 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 $750,000 for the nine
months ended March 31, 1997, as compared to $1,257,000 for the same
period last year. The Company did not pay any income taxes during the
nine months ended March 31, 1997 and 1996.
E. Stockholders' Equity
--------------------
For the three and nine month periods ended March 31, 1997, the
Company's stockholders' equity decreased by $19,320,908 and $26,147,398,
respectively. These decreases were attributable to the net losses in the
quarters. As of March 31, 1997, the Company had a total of 48,266,196
shares of common stock outstanding.
F. Line of Credit
--------------
In November 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 December 31, 1996) plus 1.50%. Borrowings are collateralized
by the Company's cash, accounts receivable, notes receivable, inventory,
fixtures and equipment.
In April of 1997, CIT received approval from the Court on a
motion which provided for debtor-in-possession-funding through May 16,
1997. In consideration of CIT's agreement to provide the funding, the
Company stipulated that unless a definitive commitment for the
capitalization or purchase of the Subsidiary or its assets was obtained
by April 18, 1997 the Subsidiary would commence the orderly liquidation
of all assets. The Company reached a definitive agreement with Express
Parts Warehouse Inc., which satisfied the stipulation with CIT. On May
16, 1997 CIT agreed to effectively extend the stipulation through the
date of the closing.
7
<PAGE> 8
G. Warehouse Closings
------------------
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 six 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.
H. Changes in Capital
------------------
On October 24, 1996 at a Special Shareholders Meeting, the
Company was authorized to increase its number of common shares from 35,000,000
to 75,000,000
During the nine months ended March 31, 1997, the company
converted 400,000 shares of the Company's Class A preferred shares. During the
nine months ended March 31, 1997, the Company converted 420,000 shares of its
Class B preferred shares. These shares were converted into 22,362,617 shares of
common stock. As of March 31, 1997, all Class A preferred shares had been
converted and 130,000 of Class B shares remained outstanding.
I. 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.
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.
J. Note due from Stockholder
-------------------------
The note due from stockholder at June 30, 1996 consists of
advances to Mr. Allen J. Sheerin, former Chairman of the Board, and is
evidenced by a promissory note dated April 7, 1994. The balance of the note is
due in June of 1997 and is currently in default. Due to the uncertainties
surrounding the collection of the note the company has recorded a reserve equal
to the full amount of principal and interest at March 31, 1997.
K. Reorganization Costs
--------------------
Included in reorganization costs are legal and professional fees
directly related to the Chapter 11 filing. $205,714 of such fees have been
expensed as incurred.
8
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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 ANTICIPATED BY THE COMPANY'S MANAGEMENT.
INTRODUCTION
- ------------
On March 17, 1997, an involuntary petition for reorganization under
Chapter 11 of the Federal Bankruptcy Code was filed against Reddi Brake Supply
Company, Inc. ("Subsidiary"), the wholly-owned subsidiary of Reddi Brake Supply
Corporation ("Parent"), (collectively "Company"). The involuntary petition was
filed by a group of four unsecured creditors of the Subsidiary in the United
States Bankruptcy Court ("Court") for the Central District of California in
Santa Barbara, California (Case No. ND97-11349-RR). On March 16, 1997, the
Subsidiary closed and secured all of its 84 warehouses and laid off all of its
field employees and most of its administrative personnel. The immediate closure
and layoff was necessary due to the lack of sufficient capital on the part of
the Company or the Subsidiary to continue operations.
On or about March 27, 1997, the Subsidiary reached a preliminary
non-binding agreement in principle with its secured lender and certain of its
unsecured trade creditors, including the four unsecured creditors who filed the
involuntary petition. Pursuant to that agreement in principle, the Subsidiary
was allowed to convert to a voluntary Chapter 11 proceeding for purposes of
reorganizing. As part of the agreement in principle, the Subsidiary's secured
lender agreed to provide limited debtor-in-possession funding ("DIP Funding")
for purposes of financing the reorganization.
On March 27, 1997, the Subsidiary filed a petition for conversion to a
voluntary Chapter 11 proceeding with the Court. At the same time, the
Subsidiary's secured lender submitted its own motion for a stay or further
proceedings in order for it to arrange for the provision of the DIP Funding.
Both motions were approved by the Court on April 4, 1997. In consideration of
the senior lender's agreement to provide the DIP funding, the Subsidiary
stipulated that unless a definitive commitment for the capitalization or
purchase of the Subsidiary or its assets was obtained by April 18, 1997, the
Subsidiary would commence the orderly liquidation of all assets. A commitment,
satisfactory to the secured lender, was received by that date.
On April 29, 1997, the Subsidiary reached a definitive agreement with
Express Parts Warehouse Inc., a privately owned company based in Raleigh, N.C.,
to sell substantially all of its assets. A motion has been filed with the Court
requesting approval of the sale and a hearing has been set for May 21. The sale
is subject to approval by the Court.
Express Parts Warehouse has agreed to pay approximately $6.2 million in
cash at closing for warehouse and headquarters assets, including inventory,
accounts receivables, company owned vehicles, fixtures and equipment, and the
name "Reddi Brake." Pursuant to the asset purchase agreement, the Subsidiary
will sell substantially all of its assets except for two notes with current face
value of approximately $1.6 million which will remain with the Subsidiary. The
agreement announced, if completed, will leave the Subsidiary with cash and notes
totaling approximately $8 million, but with no operating assets. Liabilities of
the Subsidiary consist of a total of approximately $15 million owed to the
secured lender, former employees for unpaid wages, and to unsecured creditors.
If the sale is approved by the Court and consummated, the Subsidiary
expects to submit a plan of reorganization to the Court providing for the
distribution of all available cash and the notes to creditors of the company, at
which time the Subsidiary would liquidate.
The Parent's assets consist only of the stock of the Subsidiary. The
liabilities of the Parent consist primarily of $6.9 million of subordinated
convertible notes. If the asset sale closes, and if the proceeds of the sale
are distributed to creditors as part of the bankruptcy proceedings, then the
Company will have no operations or significant assets other than its net
operating loss of approximately $12 million (as of June 30, 1996) and its
current status as a publicly traded corporation.
RESULTS OF OPERATIONS
- ---------------------
Net sales for the three months ended March 31, 1997 were $4,454,377, a
decrease of $10,963,315, or 71.1%, from the same period for the prior year. Net
sales for the nine months ended March 31, 1997 were $31,850,613, a decrease of
$13,470,693, or 29.7%, from the same period for the prior year. These decreases
are primarily due to the shortage of fast moving merchandise brought about by
the Company's financial situation.
9
<PAGE> 10
As a percentage of revenues, gross profit decreased to 36.4% and 36.7%,
respectively, for the three months and nine months ended March 31, 1997, as
compared to 38.1% and 40.3% during the same periods of the prior year. These
decreases are primarily due to the Company recognizing less purchase discounts,
as a percentage of sales, and reducing prices on certain items to meet
competitive conditions. For further explanation of such purchase discounts, see
Note B to the Condensed Consolidated Financial Statements in Item 1 above.
As a percentage of revenues, warehouse operating and selling expenses
for the three and nine months ended March 31, 1997 were 102% and 52.1%,
respectively, as compared to 37.3% and 34.6% over the same periods of the prior
year. The Company attributes these increases to the significantly decreased
sales levels and the Company's inability to effect reductions proportionate to
the decreased sales levels.
As a percentage of revenues, for the three and nine months ended March
31, 1997, general and administrative expenses were 38.1% and 15.2%,
respectively, as compared to 10.1% and 12.0% during the same periods of the
prior year. These increases primarily reflect the impact of a fixed overhead
cost structure in relation to declining sales.
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 six 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.
The income tax provisions as of March 31, 1996 represents alternative
minimum tax for federal purposes, and the minimum tax due for certain states.
Prior to the filing of Chapter 11 in March of 1997 the Company had
formed an informal working committee of creditors and was endeavoring to raise
additional capital and effect an informal plan or reorganization. In connection
with these activities the Company provided for $298,153 for certain professional
and legal costs in the Condensed Consolidated Statement of Operations as Special
Charges. The Company has classified professional fees of $205,714 directly
related to the Chapter 11 filing as reorganization costs and expenses as
incurred.
The Company's business is seasonal in nature, with warehouse sales
historically running higher in the first and fourth quarters (April through
September) of the fiscal year.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Immediately following the March 17, 1997 Chapter 11 bankruptcy filing
the Company had cash of approximately $80,000. The Company's secured working
capital line of credit with the CIT Group was suspended as of the filing date.
Shortly after the filing the Company and the CIT Group reached agreement for the
CIT Group to provide up to $500,000 of debtor-in-possession funding ("DIP
Funding") for the purpose of financing the Chapter 11 reorganization. As of May
18, 1997, the Company has used approximately $440,000 of the DIP Funding. It is
anticipated that the Company will use all $500,000 of the DIP Funding as of the
close of the sale of the Company's operating assets to Express Part Warehouse,
Inc.
The Company's subsidiary expects to receive approximately $6,200,000 in
cash from the sale of assets owned by the Company's operating subsidiary. Most
of these funds will be used to repay balances owned the subsidiary's secured
lender. Some amounts of the remaining cash will be used by the subsidiary, as a
debtor-in-possession, to finance the subsidiary's plan of reorganization or
liquidation. Such expenditures are subject to approval of the bankruptcy court.
Amounts remaining, including certain notes held by the subsidiary, are expected
to be used for payment of wages owed former employees and administrative costs
of the bankruptcy. It is also expected that any remainder amount will be
distributed to the unsecured creditors according to the plan to be approved by
the bankruptcy court.
11
<PAGE> 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
On March 17, 1997, an involuntary petition for reorganization under
Chapter 11 of the Federal Bankruptcy Code was filed against Reddi Brake Supply
Company ("Subsidiary"), the wholly-owned subsidiary of the Parent. The
involuntary petition was filed by a group of four unsecured creditors of the
Subsidiary in the United States Bankruptcy Court ("Court") for the Central
District of California in Santa Barbara, California (Case No. ND97-11349-RR).
On March 18, 1997, the Subsidiary closed and secured all of its 84 warehouses
and laid off all of its field employees and most of its administrative
personnel. The immediate closure and layoff was necessary due to the lack of
sufficient capital on the part of the Company or the Subsidiary to continue
operations.
On or about March 27, 1997, the Subsidiary reached a preliminary
non-binding agreement in principle with its secured lender and certain of its
unsecured trade creditors, including the four unsecured creditors who filed the
involuntary petition. Pursuant to that agreement in principle, the Subsidiary
was allowed to convert to a voluntary Chapter 11 proceeding for purposes of
reorganizing. As part of the agreement in principle, the Subsidiary's secured
lender agreed to provide limited debtor-in-possession funding ("DIP Funding")
for purposes of financing the reorganization. A commitment, satisfactory to
the secured lender was received by that date.
On March 27, 1997, the Subsidiary filed a petition for conversion to a
voluntary Chapter 11 proceeding with the Court. At the same time, the
Subsidiary's secured lender submitted its own motion for a stay of further
proceedings in order for it to arrange for the provision of the DIP Funding.
Both motions were approved by the Court on April 4, 1997. In consideration of
the senior lender's agreement to provide the DIP Funding, the Subsidiary
stipulated that unless a definitive commitment for the capitalization or
purchase of the Subsidiary or its assets was obtained by April 18, 1997, the
Subsidiary would commence the orderly liquidation of all assets.
On April 29, 1997, the Subsidiary reached a definitive agreement with
Express Parts Warehouse Inc., a privately owned company based in Raleigh, N.C.,
to sell substantially all of its assets. A motion has been filed with the Court
requesting approval of the sale and a hearing has been set for May 21. The sale
is subject to approval by the Court.
Express Parts Warehouse has agreed to pay approximately $6.2 million in
cash at closing for warehouse and headquarters assets, including inventory,
accounts receivables, company owned vehicles, fixtures and equipment, and the
name "Reddi Brake." Pursuant to the asset purchase agreement, the Subsidiary
will sell substantially all of its assets except for two notes with current
face values of approximately $1.6 million which will remain with the
Subsidiary. The agreement announced, if completed, will leave the Subsidiary
with cash and notes totaling approximately $8 million, but with no operating
assets. Liabilities of the Subsidiary consist of a total of approximately $15
million owed to the secured lender, former employees for unpaid wages, and to
unsecured creditors.
12
<PAGE> 13
If the sale is approved by the Court and consummated, the Subsidiary
expects to submit a plan of reorganization to the Court providing for the
distribution of all available cash and the notes to creditors of the company,
at which time the Subsidiary would liquidate.
The Parent's assets consist only of the stock of the Subsidiary. The
liabilities of the Parent's consist primarily of $6.9 million of subordinated
convertible notes. If the asset sale closes, and if the proceeds of the sale are
distributed to creditors as part of the bankruptcy proceedings, then the Company
will have no operations or significant assets other than it's net operating loss
of approximately $12 million and its current status as a publicly traded
corporation.
Item 2. Changes in Securities.
Inapplicable.
Item 3. Defaults Upon Senior Securities.
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
Item 5. Other Information.
The Company's wholly-owned subsidiary, Reddi Brake Supply Company, Inc.
has entered into a definitive agreement to sell substantially all of its assets.
See Item 1 above.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Inapplicable.
(b) Reports on Form 8-K
During the quarter ended March 31, 1997, the Company filed a Current
Report on Form 8-K dated March 17, 1997 for purposes of reporting the filing of
an involuntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code was filed against Reddi Brake Supply Company ("Subsidiary"),
the wholly-owned subsidiary of the Company.
13
<PAGE> 14
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: May 20, 1997 /s/ SANDFORD T. WADDELL
------------------------------
Sandford T. Waddell
Chief Executive Officer
Chief Financial Officer
Director
Date: May 20, 1997 /s/ GARY A. VAN WAGNER
------------------------------
Gary A. Van Wagner
Principal Accounting Officer
14
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<PERIOD-START> JAN-01-1997
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