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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 November 30, 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 of incorporation) (I.R.S. Employer 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 January 16, 2001, 5,186,613 shares of common stock were outstanding.
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RANKIN AUTOMOTIVE GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - November 30, 2000 (unaudited) and
February 29, 2000
Condensed Statements of Income - Three months and nine months
ended November 30, 2000 and 1999 (unaudited)
Condensed Statements of Cash Flows -Nine months ended November 30,
2000 and 1999 (unaudited)
Notes to Condensed Financial Statements
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
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RANKIN AUTOMOTIVE GROUP, INC.
CONDENSED BALANCE SHEETS
NOVEMBER 30, FEBRUARY 29,
ASSETS 2000 2000
------------ ------------
(Unaudited) (Audited)
Current assets:
Cash $ 361,423 $ 957,119
Accounts receivable, net of allowance for
doubtful accounts of $1,562,410 and
$1,380,000, respectively 3,763,053 9,458,057
Related party receivable -- 22,205
Amounts receivable from vendors 3,467,634 4,989,484
Inventories 25,379,618 47,395,741
Prepaid expenses and other current assets 1,872,061 785,968
------------ ------------
Total current assets 34,843,789 63,608,574
Property and equipment, net 2,916,833 4,469,750
Goodwill, net 6,359,406 8,249,920
Deferred financing costs, net 352,110 433,111
------------ ------------
Total assets $ 44,472,138 $ 76,761,355
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,739,472 $ 26,131,010
Accrued expenses 1,331,713 2,447,813
Current portion of long-term debt 17,476,318 2,146,448
------------ ------------
Total current liabilities 41,547,503 30,725,271
Long-term debt, less current portion 152,203 31,641,605
------------ ------------
Total Liabilities 41,699,706 62,366,876
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 2,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 5,201,613 issued, 5,186,613
outstanding 52,016 52,016
Additional paid-in capital 14,513,154 14,513,154
Retained earnings (deficit) (11,597,738) 24,309
Less: Treasury stock 15,000 shares at cost (195,000) (195,000)
------------ ------------
Total stockholders' equity 2,772,432 14,394,479
------------ ------------
Total liabilities and stockholders' equity $ 44,472,138 $ 76,761,355
------------ ------------
See Notes to Condensed Financial Statements.
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RANKIN AUTOMOTIVE GROUP, INC.
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nov. 30, Nine Months Ended Nov. 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
Net sales $ 12,275,317 $29,224,502 $ 66,397,222 $95,255,164
Cost of goods sold 7,378,354 18,235,506 43,531,099 60,254,797
------------ ----------- ------------ -----------
Gross Profit 4,896,963 10,988,996 22,866,123 35,000,367
Operating, selling, general and
administrative expenses 7,096,091 9,915,221 27,364,953 30,867,531
Loss on sale and closure
of operations 2,261,392 -- 4,346,790 --
------------ ----------- ------------ -----------
Income (loss) from operations (4,460,520) 1,073,775 (8,845,620) 4,132,836
Interest expense 620,466 711,939 2,776,427 1,992,191
------------ ----------- ------------ -----------
Net income (loss) before income taxes (5,080,986) 361,836 (11,622,047) 2,140,645
Income taxes (benefit) -- 126,643 -- 323,739
------------ ----------- ------------ -----------
Net income (loss) $ (5,080,986) $ 235,193 $(11,622,047) $ 1,816,906
------------ ----------- ------------ -----------
Earnings (loss) per share $ (0.98) $ 0.05 $ (2.24) $ 0.35
------------ ----------- ------------ -----------
Earnings (loss) per share -
assuming dilution $ (0.98) $ 0.05 $ (2.24) $ 0.35
------------ ----------- ------------ -----------
Average common shares outstanding 5,186,613 5,186,613 5,186,613 5,157,071
Dilutive effective of stock options -- -- -- 500
------------ ----------- ------------ -----------
Average common shares outstanding -
assuming dilution 5,186,613 5,186,613 5,186,613 5,157,571
------------ ----------- ------------ -----------
See Notes to Condensed Financial Statements.
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RANKIN AUTOMOTIVE GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED NOVEMBER 30,
------------------------------
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(11,622,047) $ 1,816,906
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 776,732 942,961
Provisions for bad debts 182,410 283,136
Loss on sale of operations 4,346,790 --
Changes in assets and liabilities:
Decrease in accounts receivable 4,320,014 1,993,265
Decrease in amounts receivable from vendors 1,521,850 --
Decrease (increase) in inventories 9,649,894 (5,306,234)
(Decrease) increase in accounts payable
and accrued expenses (4,242,893) 5,226,857
(Increase) decrease in prepaids and other (1,120,552) 442,598
Decrease in income tax payable -- 305,786
------------ ------------
Net cash provided by operating activities 3,812,198 5,705,275
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (126,226) (872,272)
Purchase of businesses, net of cash acquired -- (17,517,267)
Sale of businesses, net of cash acquired 11,877,864 --
------------ ------------
Net cash provided by (used in) investing activities 11,751,638 (18,389,539)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from (repayments on) revolving line of credit (12,948,474) 22,602,082
Proceeds from (repayments on) other long-term obligations (3,211,058) (11,436,789)
Issuance of common stock, net of discount -- 1,435,840
Issuance of debt -- 773,597
Deferred financing costs incurred -- (532,151)
------------ ------------
Net cash (used in) provided by financing activities (16,159,532) 12,842,579
------------ ------------
Net decrease in cash (595,696) (158,315)
Cash, beginning of period 957,119 346,913
------------ ------------
Cash, end of period $ 361,423 $ 505,228
------------ ------------
See Notes to Condensed Financial Statements
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RANKIN AUTOMOTIVE GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
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 with the intent to improve 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 and the sale of certain
operations. From August 31, 2000 to November 30, 2000, the Company further
reduced its bank indebtedness as a result of additional sales of
operations; however, as a result of requirements of its lenders, most of
the proceeds were used to pay down bank indebtedness. See footnote 4 for a
description of sales of operations. 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 nine months 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 has now exited the
low margin independent jobber distribution business and the highly
competitive retail market. While these dispositions should permit the
Company to focus fully on its historically successful two-step installer
business and are necessary for the long-term future of the Company, the
dispositions have 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 met with its major vendors in October
2000 to discuss methods to improve product flow and refresh its
inventories with faster turn product. As a result of this meeting, most of
the Company's major vendors agreed to refresh the Company's inventory by
exchanging the Company's slower moving inventory for faster turning
inventory. This process began in December 2000 and is expected to
significantly improve the quality of the Company's inventory and its sales
potential.
The Company is also exploring new bank financing as well as
additional investment capital and further downsizing possibilities. In the
event these strategies do not achieve the desired results, the Company may
need to consider other options, including reorganization strategies.
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.
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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 nine months
ended November 30, 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, for information on the Company's financing agreement and
acquisitions finalized during the three months ended May 31, 1999 and in
Form 8-K filed on October 6, 2000 for information on the Company's sale of
certain operations.
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:
November 30, 2000 February 29, 2000
----------------- -----------------
Borrowings under revolving
line of credit $ 14,418,222 $27,366,696
Bank term loans 1,438,522 5,014,882
Other notes payable 1,771,777 1,406,475
------------ -----------
17,628,521 33,788,053
Less current maturities (17,476,318) (2,146,448)
------------ -----------
$ 152,203 $31,641,605
------------ -----------
On March 10, 1999, the Company entered into a financing agreement
with Heller Financial, Inc. ("Heller"). The agreement provided 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 required minimum monthly
principal payments totaling approximately $90,000. Current monthly
principal payments total approximately $24,000. The term loans and the
revolving line of credit expire in March 2004 unless accelerated. 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 were .5% to .75% higher than on the revolving line of
credit. During Fiscal 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 that
occurred in the first quarter of Fiscal 2000.
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 November 30, 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
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operations. There can be no assurance that such financing will 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
installers. 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 completed the sale on November 30, 2000 of four
retail stores in southeast Louisiana to O'Reilly's Auto Parts and
completed the sale of its paint and body warehouse in Houston on January
3, 2001.
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, 32 stores
in Texas and 3 stores in Shreveport, Louisiana. Further strategic
dispositions may occur as the Company reviews its operations in its
remaining markets.
In connection with these strategic moves, the Company recorded a
loss on the sale and closure of operations of approximately $2.2 million
for the three months ended November 30, 2000 (including $0.5 million of
goodwill) and recorded a loss of approximately $4.3 million for the nine
months ended November 30, 2000 (including $1.7 million of goodwill).
Additionally, included in operating losses for the three months ended
November 30, 2000 are operating losses related to sold or closed
operations of $0.8 million.
With the reduced operations, the Company has taken significant steps
to reduce distribution center costs, store operating 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
Subsequent to its founding in 1968, the Company grew from a single store
in Alexandria, Louisiana, to 65 stores and five distribution centers supplying
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.
After April 1999, the Company 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.
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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 acceptable levels, the 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
Replacement Parts, 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
increased their concentration of stores in the Company's marketplace. With this
intensified 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, management made a
strategic decision to sell the Company's retail distribution operations.
Effective September 18, 2000, the Company sold 24 stores in Louisiana and
Mississippi to Replacement Parts, Inc. On November 30, 2000, the Company
completed its sale of four retail stores in southeast Louisiana to O'Reilly's
Auto Parts. In addition, the Company completed the sale of its paint and body
warehouse in Houston on January 3, 2001.
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, 32 stores in Texas
and 3 stores in Shreveport, Louisiana. Further strategic dispositions may occur
as the Company reviews its operations in its remaining markets. With the
downsizing of operations, the Company has been very aggressive in seeking to
reduce its distribution, store and corporate costs to attain 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 fund its operations,
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.
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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 Nine Months Ended
Nov. 30, Nov. 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
NET SALES 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 60.1 % 62.4 % 65.6 % 63.3 %
------- ------- ------- -------
Gross Profit 39.9 % 37.6 % 34.4 % 36.7 %
Operating, SG&A expenses 57.7 % 33.9 % 41.1 % 32.4 %
Loss on Sale & Closure of Operations 18.5 % - % 6.5 % - %
------- ------- ------- -------
Income (Loss) from Operations (36.3)% 3.7 % (13.2)% 4.3 %
Interest Expense 5.1 % 2.4 % 4.2 % 2.1 %
------- ------- ------- -------
Income (Loss) before Income Taxes (41.4)% 1.3 % (17.4)% 2.2 %
------- ------- ------- -------
THREE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1999
Net sales of $12.3 million for the three months ended November 30, 2000,
represented a decrease of approximately $16.9 million, or 58.0%, from
approximately $29.2 million for the three months ended November 30, 1999. The
decrease in net sales was attributable to a decrease in same store sales of $5.4
million, or 34.9%, and closed or sold store sales of $12.0 million, offset by
new store sales of $0.5 million.
Cost of goods sold for the three months ended November 30, 2000, was
approximately $7.4 million, or 60.1% of net sales, compared to approximately
$18.2 million, or 62.4% of net sales, for the three months ended November 30,
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 closing and disposition of certain low
margin businesses.
Operating, selling, general and administrative expenses for the three
months ended November 30, 2000, were approximately $7.1 million, or 57.7% of net
sales, compared to $9.9 million, or 33.9% of net sales, for the three months
ended November 30, 1999. The decrease was primarily attributable to the reduced
operating scope of the Company as a result of the sale or closure of operations.
Loss on sale and closure of operations for the three months ended November
30, 2000 aggregated $2.2 million, or 18.5% of net sales. These costs included
the write-off of approximately $0.5 million of goodwill and $0.6 million of
closure costs. No such costs were incurred during the three months ended
November 30, 1999. Additionally, included in operating losses for the three
months ended November 30, 2000 are operating losses related to sold or closed
operations of $0.8 million.
Interest expense for the three months ended November 30, 2000, was $0.6
million compared to $0.7 million for the three months ended November 30, 1999.
Interest expense decreased as a result of lower borrowings but the decrease was
offset by increased pricing on the outstanding indebtedness.
Income taxes - For the three months ended November 30, 2000, the Company
did not recognize or record deferred tax assets related to its current loss.
This resulted in the Company having an effective
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federal tax rate of 0.0%. Had the Company recognized deferred tax assets, an
income tax benefit of $1.8 million would have been recorded. For the three
months ended November 30, 1999, the Company recorded tax expense of $0.1 million
at an effective rate of 35%.
NINE MONTHS ENDED NOVEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
NOVEMBER 30, 1999
Net sales of $66.4 million for the nine months ended November 30, 2000,
represented a decrease of approximately $28.9 million, or 30.3%, from
approximately $95.3 million for the nine months ended November 30, 1999. The
decrease in net sales was attributable to a decrease in same store sales of
$11.4 million, or 22.7%, and closed or sold store sales of $20.0 million, offset
by new store sales of $2.5 million.
Cost of goods sold for the nine months ended November 30, 2000, was
approximately $43.5 million, or 65.6% of net sales, compared to approximately
$60.3 million, or 63.3% of net sales, for the nine months ended November 30,
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 increased due to the Company's inability to fully take advantage of its
vendor programs.
Operating, selling, general and administrative expenses for the nine
months ended November 30, 2000, were approximately $27.4 million, or 41.1% of
net sales, compared to $30.9 million, or 32.4% of net sales, for the nine months
ended November 30, 1999. The decrease was primarily attributable to the reduced
operating scope of the Company as a result of the sale and closure of
operations.
Loss on sale and closure of operations for the nine months ended November
30, 2000 aggregated $4.3 million, or 6.5% of net sales. These costs included the
write-off of approximately $1.7 million of goodwill and $1.5 million of closure
costs. No such costs were incurred during the nine months ended November 30,
1999. Additionally, included in operating losses for the nine months ended
November 30, 2000 are operating losses related to sold or closed stores of $0.8
million.
Interest expense for the nine months ended November 30, 2000, was $2.8
million compared to $2.0 million for the nine months ended November 30, 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 nine months ended November 30, 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 $4.1
million would have been recorded.
For the nine months ended November 30, 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 15.1%. Without the net operating loss carry forward, the Company would have
recorded an income tax expense of $749,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3,812,198 for the nine
months ended November 30, 2000, primarily as a result of a decrease in inventory
and receivables. Net cash provided by operating activities was $5,705,275 for
the nine months ended November 30, 1999.
Net cash provided by (used in) investing activities was $11,751,638 and
($18,389,539) for the nine months ended November 30, 2000 and 1999,
respectively. During 2000, cash was provided by the sale of assets as previously
described. In 1999, cash was used primarily in connection with the acquisitions
described above and for working capital requirements which was funded through
the Company's financing agreement with Heller.
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Net cash (used in) provided by financing activities was ($16,159,532) and
$12,842,579 for the nine months ended November 30, 2000 and 1999. During 2000,
the proceeds from the sale of assets were used to pay down existing debt while
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 in connection with 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 US Parts and Allied purchase price with unsecured
notes of the Company totaling $773,597.
In connection with the acquisitions, the Company arranged 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 currently require minimum
monthly principal payments of approximately $24,000 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's prior lender and to fund
the acquisitions that occurred in the first quarter of Fiscal 2000.
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 November 30, 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 November 30, 2000 were $1.4 million under the term
loan agreements and $14.4 million under the revolving credit agreement.
Additionally, the Company had availability of $0.1 million under the revolving
line of credit at November 30, 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.
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).
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk,
primarily from changes
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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 November 30,
2000, approximately 89.9% ($15.9 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 $0.2
million. At November 30, 2000, the fair value of the Company's fixed rate debt
was approximately $1.7 million based upon discounted future cash flows using
current market prices.
PART II. OTHER INFORMATION
Other Information
Item 1. Legal Proceedings.
The Company is a party to certain legal proceedings related to product
returns and vendor past due balances. Although the Company cannot
predict the outcome of these matters, management does not consider these
legal proceedings to be of a material nature.
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.
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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
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Randall B. Rankin, Chief Executive Officer
/s/ Steven A. Saterbak
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Steven A. Saterbak, Vice President Finance
January 16, 2001 /s/ Daniel L. Henneke
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Daniel L. Henneke, Chief Accounting Officer
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EXHIBIT INDEX
Exhibit 27 - Financial Data Schedule (for SEC use only)