10-Q 1 h80975e10-q.txt RANKIN AUTOMOTIVE GROUP, INC. - AUGUST 31, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q {Mark One} [X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. For quarterly period ended August 31, 2000 OR [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission File No: 0-28812 RANKIN AUTOMOTIVE GROUP, INC. (Exact name of registrant as specified in its charter) Louisiana 72-0838383 ---------------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 3838 N. Sam Houston Parkway E., #600 Houston, TX 77032 ---------------------------------------- ----- (Address of principal executive offices) (Zip code) (281) 618-4000 -------------------------------------------------- Registrant's telephone number, including Area Code Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of October 15, 2000, 5,186,613 shares of common stock were outstanding. 2 RANKIN AUTOMOTIVE GROUP, INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - August 31, 2000 (unaudited) and February 29, 2000 Condensed Statements of Income - Three months and six months ended August 31, 2000 and 1999 (unaudited) Condensed Statements of Cash Flows -Six months ended August 31, 2000 and 1999 (unaudited) Notes to Condensed Financial Statements -Six months ended August 31, 2000 and 1999 (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K SIGNATURES

2 3 RANKIN AUTOMOTIVE GROUP, INC. CONDENSED BALANCE SHEETS

See Notes to Condensed Financial Statements. 3 4 RANKIN AUTOMOTIVE GROUP, INC. CONDENSED STATEMENTS OF INCOME (UNAUDITED)

See Notes to Condensed Financial Statements. 4 5 RANKIN AUTOMOTIVE GROUP, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

See Notes to Condensed Financial Statements 5 6 RANKIN AUTOMOTIVE GROUP, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS ENDED AUGUST 31, 2000 (UNAUDITED) 1. Current Business Conditions Beginning in October, 1998 through April, 1999, Rankin Automotive Group, Inc. (the "Company") acquired four operations - a distribution center in Monroe, Louisiana, US Parts Corporation in Houston, Texas, Automotive and Industrial Supply Co in Shreveport, Louisiana and Allied Distributing Company in Houston, Texas. These acquisitions tripled the Company's annual sales and improved its competitive abilities. These acquisitions were financed entirely with debt. The newly combined Company involved distribution to three different customer bases including independent jobbers, retail customers and two-step installers. While significant synergies were anticipated, new competition in the Company's markets, the inability to raise margins in the jobber business, computer systems and inventory management integration issues and high debt levels all negatively impacted earnings and the Company's ability to finance its inventory replenishment programs. The Company significantly reduced its bank indebtedness as of August 31, 2000, primarily through inventory reductions. Subsequent to August 31, 2000, the Company further reduced its bank indebtedness as a result of the sale of operations as described in footnote 4, however, as a result of requirements of its lenders, most of the proceeds were used to pay down bank indebtedness. Accordingly, the Company has not had sufficient remaining funds to reduce its vendor payables. With reduced inventory replenishment from its vendors, the Company has experienced a significant reduction in sales during the first half of this fiscal year. Additionally, the Company is not and has not been in compliance with its bank covenants since June 30, 2000. The Company does not anticipate the current lender will restructure the senior credit facility and is currently seeking alternative sources of funding to finance its operations. There can be no assurance that such financing would be available on acceptable terms, if at all. As discussed further in footnote 4, the Company is in the final stages of exiting the low margin independent jobber distribution business and the highly competitive retailing market. While these dispositions should permit the Company to focus fully on its historically successful two-step installer business and are necessary to the long-term future of the Company, the dispositions have temporarily reduced the cash flow of the Company and its ability to purchase product. With the convergence of the above issues, the Company's options have become more limited. The Company plans to meet with its vendors to discuss methods to improve product flow and refresh its inventories with faster turn product. For such methods to be successful, the Company's vendors would need to agree to inventory returns as well as significant concessions in the form of reductions in the Company's payable balances or long-term pay-out terms. The Company is unable to predict the outcome of these discussions. The Company is also exploring new bank financing with less restrictive terms and lower financing costs. If the Company is able to secure the necessary concessions and assistance from its vendors, the Company believes that it could attract such financing based on its downsized operations (focused on the two-step installer business). There can be no assurance that the required vendor concessions and new bank financing will be available to the Company. In the event these strategies do not achieve the desired results, the Company may need to consider other options including additional plans of divestitures or other reorganization strategies. 6 7 2. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and 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 recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended August 31, 2000 are not necessarily indicative of the results that may be expected for the year ended February 28, 2001. 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 February 29, 2000. Additionally, refer to the Company's Form 8-K and 8-K/A filed on March 25, 1999 and May 24, 1999, respectively, concerning information on the Company's financing agreement and acquisitions finalized during the three months ended May 31, 1999. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. 3. Long-Term Debt Long-term debt consists of the following:

On March 10, 1999, the Company entered into a financing agreement with Heller Financial, Inc. ("Heller"). The agreement provides for term loans in the aggregate amount of $6.0 million and a revolving line of credit with a maximum amount of $39.0 million. Drawings under the line of credit are limited to a certain percentage of eligible trade accounts receivable and inventory. The term loans require minimum monthly principal payments totaling approximately $90,000. The term loans and the revolving line of credit expire in March 2004. The interest rate on the revolving line of credit is, at the Company's option, either LIBOR plus 3.00% or prime plus .75%. The interest rates on the term loans are .5% to .75% higher than on the revolving line of credit. During 2000, the interest rate ranged from 7.15% to 9.87% and the weighted-average interest rate was 8.3%, The line of credit and term loans are collateralized by the accounts receivable, inventory and fixed assets of the Company. The financing agreement contains certain financial covenants relating to, among other things, "tangible net worth", "ratio of indebtedness to tangible net worth", "fixed-charge coverage" and "capital expenditures", all of which are as defined in the financing agreement and were waived during fiscal 2000 by the lenders. Initial borrowings under this financing agreement were used to repay the Company's existing revolving line of credit and to fund the acquisitions referred to in Note 3. Effective May 26, 2000, the Company amended its financing agreement and received waivers of all continuing defaults prior to that date. The amendment changed all financial covenant tests to levels congruent with the Company's then existing financial performance, reduced the revolving portion of the credit facility to $30.0 million and increased pricing by 0.25% with additional increases of up to 0.50% depending upon the Company's leverage. The Company has not been in compliance with the loan covenants since June 30, 2000, was not in compliance at August 31, 2000, and does not anticipate being in compliance in the foreseeable 7 8 future. The Company does not anticipate the current lender will restructure the senior credit facility and is currently seeking alternative sources of funding to finance its operations. There can be no assurance that such financing would be available on acceptable terms, if at all. 4. Strategic Closures and Sales of Operations With the acquisitions completed in fiscal year 2000, the Company's customer bases included independent jobbers, retail customers and two-step installer. After evaluating the economic potential of each market and the Company's position in each market, the Company determined that its main focus should be on its two-step installer business. As a result of this decision, the Company began a series of strategic moves to dispose of its jobber and retail distribution operations. The first phase was accomplished with the sale of the independent jobber distribution business in Texas to Star Automotive in July 2000. The second phase was the sale of the Company's Monroe, Louisiana distribution center and most of its retail locations in Louisiana and Mississippi to Replacement Parts, Inc. of Little Rock, Arkansas effective September 18, 2000. Further, the Company signed a definitive agreement on October 13, 2000 to sell four retail stores in southeast Louisiana to O'Reilly's Auto Parts and is negotiating the sale of its paint and body warehouse in Houston. As a result of these actions, the Company's ongoing business will be focused on its historically profitable two-step installer business and will include a centralized distribution center in Houston Texas, 38 stores in Texas and 3 stores in Shreveport, Louisiana. In connection with these strategic moves, the Company recorded a loss on the sale and closure of operations of approximately $2.1 million during the quarter (including $1.2 million of goodwill) and will record approximately $2.0 million in the 3rd fiscal quarter as a result of completing the remaining dispositions. With the reduced operations, the Company has taken significant steps to reduce distribution center costs and corporate overhead to support the reduced operating structure of the Company. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its founding in 1968, the Company had grown from a single store in Alexandria, Louisiana, to 65 stores and five distribution centers which supply approximately 310 independent operators in Texas, Louisiana, Mississippi, Alabama and Arkansas. The most significant growth of the Company occurred during the period from October 1998 to April 1999 when it acquired a distribution center in Monroe, Louisiana, US Parts Corporation in Houston, Texas, Automotive Industrial Supply Co. in Shreveport, Louisiana and Allied Distributing Company in Houston, Texas. Since April 1999, the Company has focused on the integration of its various operations and taking advantage of the anticipated synergies of those operations. Those operations included three distinct customer bases - independent jobbers, retail customers and two-step installers. From the beginning, the two-step installer business was the most profitable and provided the most potential for growth by the Company. As part of the integration process, Company's management continually reviewed the Company's strategic position in each of these markets. Management also considered its limited cash resources and inventory availability and the most productive application of those resources. During 1999 and early 2000, a number of independent jobber customers were acquired by the Company's competition. Facing a shrinking market place and with the inability to raise margins to 8 9 acceptable levels, Company's management decided to exit the independent jobber business. This strategy was accomplished with the sale of the independent jobber business in Texas to Star Automotive in July, 2000 and the sale of the Company's Monroe, Louisiana distribution center to Parts Warehouse, Inc. effective September 18, 2000. These steps allowed the Company to consolidate its warehousing operations at its central warehouse in Houston, Texas and to significantly reduce warehouse operating costs. During the same period, competition in the retail business intensified in the Louisiana and Mississippi markets where the Company's retail distribution was focused. A number of major retail competitors entered the marketplace or intensified their concentration of stores in the Company's marketplace. With this increased competition and the Company's inventory replenishment abilities becoming more limited, sales at these locations decreased significantly. Because of the Company's decreasing competitiveness in these markets, Company management made a strategic decision to sell its retail distribution operations. Effective September 18, 2000, the Company sold 24 stores in Louisiana and Mississippi to Replacement Parts, Inc. On October 13, 2000, the Company signed a definitive agreement to sell four retail stores in southeast Louisiana to O'Reily's Auto Parts and is negotiating the sale of its paint and body warehouse in Houston. As a result of the above actions, the Company's ongoing business will be focused on its historically profitable two-step installer business and will include a centralized distribution center in Houston, Texas, 38 stores in Texas and 3 stores in Shreveport, Louisiana. With the downsizing of operations, the Company has been very aggressive in reducing its distribution and corporate costs to a level commensurate with its remaining operations. FORWARD-LOOKING STATEMENTS AND RISK FACTORS The statements contained in this report, in addition to historical information, are forward-looking statements based on the Company's current expectations, and actual results may vary materially. Forward-looking statements often include words like "believe", "plan", "expect", "intend", or "estimate". The Company's business and financial results are subject to various risks and uncertainties, including the Company's continued ability to expand its operations and to successfully integrate the recent acquisitions, the results of operations of the recently acquired businesses, competition, and other risks generally affecting the industry in which the Company operates. Many of these risks and uncertainties are beyond the Company's ability to control or predict. These forward-looking statements are provided as a framework for the Company's results of operations. The Company does not intend to provide updated information other than as otherwise required by applicable law. 9 10 RESULTS OF OPERATIONS The following table sets forth certain selected historical operating results for the Company as a percentage of net sales. Operating results of the acquisitions discussed above are included from the date of acquisition.

THREE MONTHS ENDED AUGUST 31, 2000 COMPARED TO THREE MONTHS ENDED AUGUST 31, 1999 Net sales of $24.9 million for the three months ended August 31, 2000, decreased approximately $12.8 million, or 33.9%, from approximately $37.7 million for the three months ended August 31, 1999. The decrease in net sales was attributable to a decrease in same store sales of $8.0 million, or 26.7%, and a decrease in closed store sales of $6.1 million offset by new store sales of $1.3 million. Costs of goods sold for the three months ended August 31, 2000, amounted to approximately $18.0 million, or 72.0% of net sales, compared to approximately $24.4 million, or 64.7% of net sales, for the three months ended August 31, 1999. The decrease in the dollar amount was primarily attributable to the decreased dollar amount of net sales. Cost of goods sold as a percentage of net sales decreased due to the Company's inability to fully take advantage of its vendor programs. Operating, selling, general and administrative expenses for the three months ended August 31, 2000, amounted to approximately $9.7 million, or 39.0% of net sales, compared to $11.6 million, or 30.9% of net sales, for the three months ended August 31, 1999. The decrease was primarily attributable to the reduced operating scope of the Company as a result of the sale and closure of operations and cost reduction programs instituted by the Company. Loss on sale and closure of operations for the three months ended August 31, 2000 amounted to $2.1 million, or 8.4% of net sales. These costs included the write-off of approximately $1.2 million of goodwill and $.9 million of closure costs. No such costs were incurred during the three months ended August 31, 1999. Interest expense for the three months ended August 31, 2000, was $0.9 million compared to $.7 million for the three months ended August 31, 1999. Interest expense increased as a result of fees incurred in connection with changes to the Company's financing agreement and increased pricing on the outstanding indebtedness. Income taxes - For the three months ended August 31, 2000, the Company did not recognize or record deferred tax assets related to its current loss. This resulted in the Company having an effective 10 11 federal tax rate of 0.0%. Had the Company recognized deferred tax assets, an income tax benefit of $2,020,000 would have been recorded. For the three months ended August 31, 1999, the Company recognized and recorded deferred tax assets related to the realized net operating losses from prior years. This resulted in the Company having an effective federal tax rate of 19.8%. Without the net operating loss carry forward, the Company would have recorded an income tax expense of $349,000. SIX MONTHS ENDED AUGUST 31, 2000 COMPARED TO SIX MONTHS ENDED AUGUST 31, 1999 Net sales of $54.1 million for the six months ended August 31, 2000, decreased approximately $11.9 million, or 18.0%, from approximately $66.0 million for the six months ended August 31, 1999. The decrease in net sales was attributable to a decrease in same store sales of $12.1 million, or 21.5%, and a decrease in closed store sales of $2.1 million ($8.4 million on a pro forma basis) offset by new store sales of $2.3 million. Costs of goods sold for the six months ended August 31, 2000, amounted to approximately $36.2 million, or 66.8% of net sales, compared to approximately $42.0 million, or 63.6% of net sales, for the six months ended August 31, 1999. The decrease in the dollar amount was primarily attributable to the decreased dollar amount of net sales. Cost of goods sold as a percentage of net sales decreased due to the Company's inability to fully take advantage of its vendor programs. Operating, selling, general and administrative expenses for the six months ended August 31, 2000, amounted to approximately $20.3 million, or 37.4% of net sales, compared to $21.0 million, or 31.7% of net sales, for the three months ended August 31, 1999. The decrease was primarily attributable to the reduced operating scope of the Company as a result of the sale and closure of operations and the cost reduction programs instituted by the Company. Loss on sale and closure of operations for the six months ended August 31, 2000 amounted to $2.1 million, or 3.9% of net sales. These costs included the write-off of approximately $1.2 million of goodwill and $.9 million of closure costs. No such costs were incurred during the six months ended August 31, 1999. Interest expense for the six months ended August 31, 2000, was $2.2 million compared to $1.3 million for the six months ended August 31, 1999. Interest expense increased as a result of fees incurred in connection with changes to the Company's financing agreement and increased pricing on the outstanding indebtedness. Income taxes - For the six months ended August 31, 2000, the Company did not recognize or record deferred tax assets related to its current loss. This resulted in the Company having an effective federal tax rate of 0.0%. Had the Company recognized deferred tax assets, an income tax benefit of $2,289,000 would have been recorded. For the six months ended August 31, 1999, the Company recognized and recorded deferred tax assets related to the realized net operating losses from prior years. This resulted in the Company having an effective federal tax rate of 11.1%. Without the net operating loss carry forward, the Company would have recorded an income tax expense of $623,000. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $4,825,439, primarily as a result of a decrease in inventory offset by net loss for the six months ended August 31, 2000 of $6,541,061. Net cash provided by operating activities was $4,554,937 for the six months ended August 31, 1999. Net cash used in investing activities was $134,228 and $17,121,289 for the six months ended August 31, 2000 and 1999, respectively. In 1999, cash was used primarily for purchasing assets of the previously discussed acquisitions, which were funded through the Company's new financing agreement with Heller. 11 12 Net cash used in financing activities was $4,924,521 for the six months ended August 31, 2000. Net cash provided by financing activities was $12,267,156 for the six months ended August 31, 1999. The borrowings in 1999 were used primarily for the acquisitions discussed above, repayment of indebtedness previously outstanding or acquired and working capital purposes. Additionally, the Company issued equity securities (common stock) aggregating 651,613 shares valued at $1,435,840 as a result of the acquisitions during the three months ended May 31, 1999. Of these shares, 600,000 were issued to the Company's then chief operating officer and are subject to a lock-up agreement and discounted by approximately 33% to reflect the impact of the lock-up. The Company also assumed indebtedness of $16,134,388 and paid a portion of the USP and Allied purchase price with unsecured obligations of the Company totaling $773,597. In connection with the acquisitions, the Company maintained a $45.0 million line of credit through syndicated financing led by Heller. The Company entered into this financing agreement on March 10, 1999. The agreement provides for term loans in the aggregate amount of $6.0 million and a revolving line of credit with a maximum amount of $39.0 million. The term loans require minimum monthly principal payments totaling approximately $90,000 and the revolving line of credit expires March 2004. The interest rate on the revolving line of credit was, at the Company's option, either LIBOR plus 3.00% or prime plus .75%. The interest rates on the term loans are .5% to .75% higher than on the revolving line of credit. The financing agreement contains certain financial covenants relating to, among other things, "tangible net worth", "ratio of indebtedness to tangible net worth", "fixed charge coverage" and "capital expenditures", all of which are as defined in the financing agreement. Initial borrowings under this financing agreement were used to repay the Company" prior lender and to fund the acquisitions referred to above. Effective May 26, 2000, the Company amended its financing agreement and received waivers of all continuing defaults prior to that date. The amendment changed all financial covenant tests to levels congruent with the Company's then existing financial performance, reduced the revolving portion of the credit facility to $30.0 million and increased pricing by 0.25% with additional increases of up to 0.50% depending upon the Company's leverage. The Company has not been in compliance with the loan covenants since June 30, 2000, was not in compliance at August 31, 2000, and does not anticipate being in compliance in the foreseeable future. The Company does not anticipate the current lender will restructure the senior credit facility and is currently seeking alternative sources of funding to finance its operations. There can be no assurance that such financing would be available on acceptable terms, if at all. Amounts outstanding at August 31, 2000 were $4.3 million under the term loan agreements and $22.3 million under the revolving credit agreement. Additionally, the Company had availability of $.2 million under the revolving line of credit at August 31, 2000. In addition to the above, the Company has initiated certain strategies and is evaluating other strategic options (see Footnote 1) to improve its liquidity and capital resources. In the event these strategies do not achieve the desired results, the Company may need to consider other strategies including additional plans of divestitures or other reorganization strategies. INFLATION AND SEASONALITY This Company does not believe its operations are materially affected by inflation. The Company has been successful in some cases, in reducing the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. Store sales have historically been somewhat higher in the first and second quarters (March through August) than in the third and fourth quarters (September through February). 12 13 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET AND RISK In the normal course of business, the Company is exposed to market risk, primarily from changes in interest rates. The Company continually monitors exposure to market risk and develops appropriate strategies to manage this risk. Accordingly, the Company may enter into certain derivative financial instruments such as interest rate swap agreements. The Company does not use derivative financial instruments for trading or to speculate on changes in interest rates. Interest Rate Exposure. The Company's exposure to market risk for changes in interest rates relate primarily to the Company's long-term debt. At August 31, 2000, approximately 92.6% ($26.7 million) of the long-term debt was subject to variable interest rates. The detrimental effect of a hypothetical 100 basis point increase in interest rates would be to reduce income before taxes by $.3 million. At August 31, 2000, the fair value of the Company's fixed rate debt is approximately $2.1 million based upon discounted future cash flows using current market prices. PART II. OTHER INFORMATION Other Information Item 1. Legal Proceedings. The Company is not a party to any litigation that management considers to be of a material nature. Item 4. Submission of Matters to a Vote of Security Holders The 2000 Annual Meeting of Shareholders of the Company was held on July 27, 2000, pursuant to notice given to shareholders of record on June 21, 2000 at which date there were 5,201,613 shares of Common Stock outstanding. At the Annual Meeting, the shareholders elected four directors to hold office until the 2001 Annual Meeting and until their successors have been duly elected and qualified. As to the following named individuals, the holders of 3,391,300 shares of the Company's Common Stock voted at the Annual Meeting with all votes cast in favor of the election of all four directors. Directors: Randall B. Rankin Ricky L. Sooter Gary D. Walther Thomas M. Hargrove Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K - On October 6, 2000, the Company filed a Current Report on Form 8-K, dated September 25, 2000, relating to the sale by the Company of assets including 24 stores in Mississippi and Louisiana and its Monroe Louisiana distribution center to Replacement Parts, Inc., effective September 18, 2000. 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RANKIN AUTOMOTIVE GROUP, INC. /s/ Randall B. Rankin ------------------------------------------ Randall B. Rankin, Chief Executive Officer /s/ Steven A. Saterbak ------------------------------------------ Steven A. Saterbak, Vice President Finance October 15, 2000 /s/ Daniel L. Henneke ------------------------------ ------------------------------------------ Daniel L. Henneke, Chief Accounting Officer 14 15 INDEX TO EXHIBITS

RANKIN AUTOMOTIVE GROUP INC 10-Q