Cardis Struggling to Survive Effects of Rapid Growth
Call it a case of indigestion.
In 1983, a group of Beverly Hills investors began a shopping spree for auto-parts warehouses. They figured that with new cars getting so expensive, people would have to fix their old clunkers more often, so the smart money should be in auto repair.
Now, the investor group, since reorganized into Cardis Corp., is California’s largest auto-parts distributor and the third largest nationwide. It buys parts such as fan belts and carburetors at wholesale and resells them to repair shops. Sales for its last fiscal year topped $228 million.
But Cardis is also suffering from heavy debt and losses. The Beverly Hills-based firm has yet to file its October, 1986, financial results with the Securities and Exchange Commission because its auditor, Touche Ross & Co., won’t certify them. Touche Ross said it is concerned about the company’s ability to continue operating.
Because it has not filed its results, Cardis has been unable to complete its public offering of 40% of the stock of its latest acquisition, Woodland Hills-based Tuneup Masters. And without the offering, Cardis has fallen behind on the bank loans that have subsidized its purchases.
Moreover, the American Stock Exchange said, Cardis may be de-listed because it has fallen below the exchange’s requirement of a $2-million net worth. Unaudited results show Cardis had a $17.7-million loss on continuing operations and a loss of $1.1 million on discontinued operations for the fiscal year ended last October. Moody’s Investors Service rates Cardis’ subordinated debentures as B-3, one of its lowest classifications.
“I’d be the first to admit our business has grown substantially faster than management could absorb,” said Jack I. Salzberg, Cardis chairman and chief executive. “But we were hampered by conditions beyond our control.”
The financial community said it has heard that line before. “Salzberg’s a good salesman, but hasn’t been able to put it all together,” said one analyst who follows the company. “He can talk banks into going along with just about anything.”
Most of Cardis’ problems, said Salzberg, 63, do not stem from the Tuneup Masters deal. Instead, he blames the previous owners of San Diego-Pacific--a distributor of wholesale car parts that Cardis bought in September, 1985--for exaggerating income.
In a suit filed last month in Federal District Court in Los Angeles, Cardis charges that the former owners and their auditors, Price Waterhouse, overstated cash flow and inventory to make the company a more appealing buy. The defendants have not yet answered the complaint.
In any case, Bob Garland, director of audit operations for Touche Ross’ Los Angeles office, said Cardis has “severe internal control problems that go beyond the San Diego unit.” He declined to comment further.
Blake Childs, an analyst for Bateman Eichler Hill Richards in Los Angeles, said another problem is that Cardis mistakenly thought it had a monopoly in California, then began to raise prices. He said many customers turned to alternate sources.
Childs said Cardis’ best move was its acquisition of Tuneup Masters. Last September Cardis acquired the garage chain controlled by former race-car driver Andy Granatelli in a cash-and-stock deal then valued at $53.4 million.
For Cardis, the idea was to get a steady customer to buy its supplies. Tuneup Masters, which has 232 garages performing engine maintenance in eight states, is one of the nation’s biggest buyers of spark plugs, air and oil filters.
During the nine months ended June 30, Tuneup Masters earned $3.3 million on $39.7 million in sales.
Cardis financed the deal with a $43.5-million loan from Dresdner Bank AG, a West German bank. The loan, at 2 percentage points over the bank’s prime rate, was due last Dec. 31. It has not been repaid and is due on demand.
Cardis secured the loan with its Tuneup Masters stock, and wrote $40.5 million in checks to its new subsidiary’s shareholders. Granatelli held 82% of the Tuneup Masters stock and received the lion’s share of the payment.
Granatelli, 63, who remains chief executive of Tuneup Masters, is now Cardis’ largest stockholder, with a 16.7% stake.
But the 960,000 shares of stock Granatelli received have dropped 52% in value since the deal was announced June 30. Cardis’ stock closed Monday at $4. As part of the deal, Cardis promised that if the price of its stock is below $5 a share in September, 1989, it will pay the difference to Granatelli in cash or stock, assuming, of course, that Cardis is still in business.
Granatelli will not comment on Cardis’ performance or on whether he regrets getting involved with the company.
“At my stage in life, I don’t worry about these things. I take the bad with the good. I learn from the past and steer my future accordingly,” he said.
Where does Cardis go from here?
Company officials vigorously deny that they are considering bankruptcy proceedings. They say that they are on the verge of renegotiating their loans and that the bad times will soon be behind them. They also say the Tuneup Masters offering will be on track within a month.
Stay tuned.
CARDIS CORP. AT A GLANCE
Cardis, based in Beverly Hills, has grown to be one of the nation’s largest distributors of auto parts. Cardis owns Tuneup Masters, based in Woodland Hills. Cardis has 2,400 employees and 5.8 million shares of common stock outstanding.
