<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 December 31, 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 February 13, 1997, 45,770,973 shares of the registrant's common stock were
outstanding.
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REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
FORM 10-Q
December 31, 1996
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
NUMBER
------
Item 1. Financial Statements (Unaudited)
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1996
and June 30, 1996...................................................3
Condensed Consolidated Statements of Operations for
the three and six month periods ended
December 31, 1996 and 1995..........................................4
Condensed Consolidated Statements of Cash Flows for
the six month periods ended December 31, 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 1. Legal Proceedings................................................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
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>
December 31, June 30,
ASSETS 1996 1996
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 319,775 $ 571,156
Accounts receivable, net 3,571,462 6,064,675
Other receivables 70,145 428,126
Inventories 20,736,990 24,921,223
Prepaid expenses 1,384,858 141,216
Notes and advances due from stockholders 244,014 242,632
Notes receivable due from Hi/LO 660,071 662,256
------------ ------------
Total current assets 26,987,315 33,031,284
------------ ------------
Facilities and equipment 6,776,345 6,701,515
Less accumulated depreciation and amortization (3,593,662) (3,081,225)
------------ ------------
3,182,683 3,620,290
------------ ------------
Notes receivable due from Hi-Lo Automotive 1,263,347 1,548,599
Unamortized debt issuance costs 536,198 634,422
Deposits 299,544 302,266
Intangible assets, net of accumulated amortization 754,914 789,388
------------ ------------
$ 33,024,001 $ 39,926,249
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,435,407 $ 6,598,710
Short-term borrowings 5,470,416 6,955,467
Current portion of obligations under capital
leases 1,126,423 1,124,810
Accrued expenses 1,825,431 2,214,446
Accrued costs related to discontinued operations 1,224,911 1,296,850
Subordinated convertible debt, 9% coupon 6,900,000 --
------------ ------------
Total current liabilities 24,982,588 18,190,283
------------ ------------
Obligations under capital leases, net of current portion 393,366 940,925
Deferred income tax liabilities 467,000 467,000
Subordinated convertible debt, 9% coupon 6,900,000
Stockholders' equity
Preferred stock 1,953,340 9,547,244
Common stock 4,023 1,786
Additional paid-in capital 38,173,122 30,564,260
Accumulated deficit (32,949,438) (26,685,249)
------------ ------------
Total stockholders' equity 7,181,047 13,428,041
------------ ------------
$ 33,024,001 $ 39,926,249
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
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REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, Six months ended December 31,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales $ 10,681,388 $ 14,573,273 $ 27,396,236 $ 29,903,614
Cost of goods sold 6,766,198 8,671,207 17,303,856 17,517,498
-------------- -------------- -------------- --------------
Gross profit 3,915,190 5,902,066 10,092,380 12,386,116
Expenses:
Warehouse operating and selling 5,782,731 5,221,911 12,036,014 9,936,437
Special charges 298,153 -- 298,153 --
General and administrative 1,650,728 2,333,330 3,142,511 3,863,303
Provision for warehouse closures 0 721,794 200,000 721,794
Interest expense, net 307,227 276,803 662,696 604,446
-------------- -------------- -------------- --------------
8,038,839 8,553,838 16,339,374 15,125,980
-------------- -------------- -------------- --------------
Loss from operations (4,123,649) (2,651,772) (6,246,994) (2,739,864)
Income taxes -- -- -- (15,000)
-------------- -------------- -------------- --------------
Net loss $ (4,123,649) $ (2,651,772) $ (6,246,994) $ (2,754,864)
============== ============== ============== ==============
Net loss per common share $ (0.13) $ (0.16) $ (0.22) $ (0.17)
============== ============== ============== ==============
Weighted average number of common
Shares outstanding 31,906,343 16,537,494 28,459,921 16,533,873
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE> 5
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended December 31
--------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,246,994) $ (2,754,864)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 599,276 518,825
Provision for store closures 200,000 721,794
Amortization of debt issuance costs 98,224 22,408
Provision for bad debts 105,372 119,725
Write off employee note receivable 73,073
Loss on sale of equipment 8,351 --
Changes in assets and liabilities associated with operating
activities:
Accounts receivable 2,387,841 582,547
Inventories 4,184,233 290,870
Other receivables 357,981 (480,052)
Prepaid expenses and deposits (1,240,920) (304,975)
Accounts payable 1,836,697 (1,952,490)
Accrued expenses (660,954) 1,165,278
Deferred compensation -- (108,304)
-------------- --------------
Total Adjustments 7,876,101 648,699
-------------- --------------
Net cash provided by operating activities 1,629,107 2,106,165
-------------- --------------
Cash flows from investing activities:
Increase in intangible assets -- (90,000)
Proceeds from sale of equipment 63,493
Purchases of fixtures, equipment and leaseholds (199,039) (603,171)
Advances to officers (1,382) 34,717
Notes receivable principal payments 287,437 355,265
-------------- --------------
Net cash provided (used) by investing activities 150,509 (303,189)
-------------- --------------
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings (1,485,051) 1,321,007
Proceeds from the issuance of common stock -- 47,500
Net activity on capital lease obligations (545,946) (208,254)
-------------- --------------
Net cash provided by financing activities (2,030,997) 1,160,253
-------------- --------------
Net increase (decrease) in cash (251,381) (1,249,101)
Cash and cash equivalents, beginning of period 571,156 1,701,955
-------------- --------------
Cash and cash equivalents, end of period $ 319,775 $ 452,854
============== ==============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 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.
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 had fully amortized all
such discounts as of June 30, 1996, and accordingly did not reduce cost
of goods sold during the three and six month periods ended December 31,
1996. During the three and six month periods ended December 31, 1995,
respectively, the Company reduced costs of goods sold by such discounts
in the amounts of approximately $190,000 and $848,000, respectively. At
December 31, 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. During the three and six month periods ended December
31, 1996, respectively, the Company reduced costs of goods sold by such
discounts in the amounts of approximately $0, and $104,000 as compared
to $238,000 and $566,000 for the same periods last year. At December
31, 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 anti-dilutive, the
Company is not reporting both primary and fully diluted income (loss)
per share.
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 $752,635 for the six
months ended December 31, 1996, as compared to $710,167 for the same
period last year. The Company did not pay any income taxes during the
six months ended December 31, 1996 and 1995.
The Company entered into capital lease obligations for
equipment totaling approximately $42,495 and $187,058 for the three and
six month periods ended December 31, 1996, respectively, as compared to
$456,880 and $662,880 for the same periods last year.
D. Stockholders' Equity
For the three and six month periods ended December 31, 1996,
the Company's stockholders' equity decreased by $4,123,649 and
$6,246,994, respectively. These decreases were attributable to the net
losses in the quarters. As of December 31, 1996, the Company had a
total of 40,229,137 shares of common stock outstanding.
E. Line of Credit
In November 1995, as amended, 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. Under
the terms of the CIT Line, the Company must comply with certain
reporting covenants. The Company would have been in default under
certain financial covenants as of December 31, 1996, but CIT has
agreed, for consideration, to amend the agreement to remove all
financial 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 February 10, 1997, the Company owed approximately $4,900,000 on the
CIT Line, with no additional borrowing availability. (See also
"Liquidity and Capital Resources" on page 11.)
F. 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 fiscal 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 common shares from
35,000,000 to 75,000,000
During the six months ended December 31, 1996, the company
converted 400,000 shares of the Company's Class A preferred shares.
During the six months ended December 31, 1996, the Company converted
356,600 shares of it's Class B preferred shares. These shares were
converted into 22,362,617 shares of common stock. As of December 31,
1996 all Class A preferred shares had been converted and 193,400 of
Class B shares remained outstanding.
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.
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.
8
<PAGE> 9
I. Informal Re-Organization
As of February 15, 1997, the Company owed approximately $9.5
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 15 principal trade creditors.
These creditors have formed a working committee ("Creditors Committee")
of six members and granted the Company a 30 day moratorium (extended
thereafter at the discretion of the Creditors Committee) 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.
On January 13, 1997, the Company announced it had reached an
agreement with the Creditors Committee which will allow it to return
certain slow moving inventory in exchange for fast moving inventory and
a reduction in accounts payable. The agreement is contingent upon a
third party investment of cash and real estate. Management had entered
into a definitive agreement with an investor which required the
investor to close by January 27, 1997. As of February 20, 1997 the
investor has not completed the requirements of the agreement and the
Company does not anticipate going forward with this investor. The
Company is currently reviewing proposals by other investors and
investor groups that would satisfy the Company's agreement with its
major trade creditors and allow it to complete its informal
reorganization. As of this date the Company has not entered into a
definitive agreement and there can be no assurance that such an
agreement will be reached.
In connection with the informal reorganization the Company has
provided $298,153 for certain professional and legal costs in the
Condensed Consolidated Statements of Operations as Special Charges.
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 February 19, 1997, the Company operates 84
warehouses in 26 states.
On October 31, 1996, the Company held a meeting with fifteen 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 an indefinite
moratorium 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 December 31, 1996 were
$10,681,388, a decrease of $3,891,885, or 26.7% from the same period for the
prior year. Net sales for the six months ended December 31, 1996 were
$27,396,236, a decrease of $2,507,378 or 8.3 % from the same period for the
prior year. The decreases were primarily due to operating 15 fewer warehouses
during the periods and to a lack of fast moving inventory in the Company's
warehouses which was brought about by financial constraints. Sales at the
Company's 77 comparable Reddi Brake warehouses (based on warehouses opened at
least 12 full months as of December 31, 1996) decrease approximately 4.3% for
the six months ended December 31, 1996, as compared to the same period last
year.
As a percentage of revenues, gross profit decreased to 36.7% and 36.8%,
respectively, for the three and six month periods ended December 31, 1996, as
compared to 40.5% and 41.4% during the same periods of the prior year. These
decreases are primarily due to the Company having exhausted its amortization of
purchase discounts for initial inventories. For further explanation of such
purchase discounts see Note B to the Condensed Consolidated Financial Statements
in Item 1. During the three and six month periods ended December 31, 1996, the
Company did not amortize any purchase discounts as compared to $473,000 and
$1,414,000 for the same periods last year.
10
<PAGE> 11
As a percentage of revenues, store operating and selling expenses for
the three and six month periods ended December 31, 1996 were 54.1% and 43.9%,
respectively, as compared to 35.8% and 33.2% over the same periods of the prior
year. The Company attributes these increases to a buildup of personnel and
delivery vehicles in anticipation of unrealized growth, and the inability to
effect reductions proportionate to the actual sales results.
As a percentage of revenues, general and administrative expenses for
the three and six month periods ended December 31, 1996 were 15.5% and 11.5%,
respectively, as compared to 16.0% and 12.9% over the same periods of the prior
year. The decrease in expenses for the three and six month periods in the
current year is a result of certain one-time charges of approximately $460,000
being incurred during the same periods in the prior year. These charges included
(a) a reserve of $310,000 for settlements on lawsuits and (b) approximately
$150,000 in charges related to the departure of three officers.
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.
Interest expenses, net, increased to $307,227 and $662,696,
respectively, for the three and six month periods ended December 31, 1996, as
compared to $276,803 and $604,446 for the same periods last year. The increases
were primarily due to increased borrowings to finance insurance premiums in the
current year, and reduced interest income on notes receivable and cash balances.
The Company's business is seasonal in nature, with stores sales
historically running higher in the first and fourth quarters of the fiscal year
(April through September).
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital has decreased by $12,836,275 during the
six month period ended December 31, 1996. This decrease is primarily a result of
the Company's continuing losses and the reclassification of the Subordinated
Convertible Debt to current liabilities. (Also see Part II, Item 3. Defaults
Upon Senior Securities. As discussed above, the Company will require an
infusion of additional working capital if it is to continue its operations.
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 December 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 The Company would have been in default under
certain financial covenants as of December 31, 1996, but CIT has agreed, for
consideration, to amend the agreement to remove all financial covenants. (Also
see Part II, Item 3. Defaults Upon Senior Securities.)
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 February 10, 1997, the Company owed approximately
$4,900,000 on the CIT Line, with no additional borrowing availability.
11
<PAGE> 12
As of February 10, 1997, the Company owed approximately $9.5 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 an indefinite moratorium 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.
On January 13, 1997, the Company announced it has reached an agreement
with the Creditors Committee which will allow it to return certain slow moving
inventory in exchange for fast moving inventory and a reduction in accounts
payable. The agreement is contingent upon a third party investment of cash and
real estate. Management had entered into a definitive agreement with an investor
which required the investor to close by January 27, 1997. As of February 20,
1997 the investor has not completed the requirements of the agreement and the
Company does not anticipate going forward with this investor. The Company is
currently reviewing proposals by other investors and investor groups that would
satisfy the Company's agreement with its major trade creditors and allow it to
complete its informal reorganization. As of this date the Company has not
entered into a new definitive agreement and there can be no assurance that
such an agreement will now be reached.
In connection with the informal reorganization the Company has provided
$298,153 for legal and professional fees in the Condensed Consolidated
Statements of Operations as Special Charges.
Any proposed plan of reorganization will require not only gross margin
improvement, expense reduction, 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, there can be no
assurance that the Company will be able to raise the additional capital
required. 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 the three and six month periods ended
December 31, 1996, and its fiscal year ended June 30, 1996, the Company reported
losses of, respectively, $4,123,649, $6,246,994 and $8,557,836, primarily due to
the factors discussed earlier. Although the Company's management has responded
to these losses 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 three and six month periods ended December 31, 1996 was 36.7% and
36.8%, respectively, down from 40.5% and 41.4% during the same periods in the
previous year. These decreases were 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 March 30, 1997 and
for fiscal 1997, as compared to its prior year.
Defaults in Loan Covenants. The Company is presently engaged in
restructuring its $6.9 million subordinated convertible notes and did not pay
the $155,000 interest payment due note holders January 31, 1997. As of February
20, 1997 no note holder has made demands on the Company in accordance with the
default provisions of the note purchase agreement. The $6.9 million has been
reclassified as a short term liability until such time as the restructuring is
complete and the Company is no longer in default.
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 restricted shares (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
Subordinated 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.
In addition, under the proposed settlement with its vendors, the Company may
issue a substantial amount of additional shares of Common Stock in satisfaction
of amounts owed.
13
<PAGE> 14
REDDI BRAKE SUPPLY CORPORATION AND SUBSIDIARY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 19, 1996, the United States District Court for the Central
District of California approved the settlement agreement on the class action
lawsuit filed October 31, 1995. The cash portion of the settlement is to be
paid by an insurance company. In addition to the cash, plaintiffs will receive
500,000 warrants for Company Common Stock, exercisable over a three year period
at $2.625 per share. As previously reported, the Company believes this
settlement will not have a material adverse impact on its results of operations
or financial condition.
ITEM 2. CHANGES IN THE RIGHTS OF SECURITY HOLDERS.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Under the terms and conditions of its Loan and Security Agreement (the
"Agreement") dated November 29, 1995, as amended, with The CIT Group ("CIT") the
Company must comply with certain financial reporting and 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 Company would have been in default under certain
financial covenants as of December 31, 1996, but CIT has agreed, for
consideration, to amend the agreement to remove all financial covenants.
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.
On January 31, 1997, the Company failed to make quarterly interest
payments of $155,000 due on its Subordinated Convertible Debt. The Company is in
negotiations with the note holders through the Placement Agent to restructure
the notes. While the note holders have agreed in principle to restructuring of
their notes or a conversion of the notes to equity, no definitive agreement has
been reached at this time. As of February 20, 1997 no note holder has made
demands on the Company in accordance with the default provisions of the note
purchase agreement.
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 shares voted "Abstain".
ITEM 5. OTHER INFORMATION
Not applicable
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: February 21, 1997 /s/Richard J. McGorrian
-----------------------
Richard J. McGorrian
Chief Executive Officer
President
Director
Date: February 21, 1997 /s/Sandford T. Waddell
----------------------
Sandford T. Waddell
Executive Vice President
Chief Financial Officer
Director
Date: February 21, 1997 /s/Gary A. Van Wagner
---------------------
Gary A. Van Wagner
Principal Accounting Officer
15
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 319,775
<SECURITIES> 0
<RECEIVABLES> 4,216,733
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<CURRENT-LIABILITIES> 24,982,588
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1,953,340
<COMMON> 4,203
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