1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</Table>
COMMISSION FILE NUMBER 333-61713
HEAFNER TIRE GROUP, INC.
<Table>
A DELAWARE CORPORATION (IRS EMPLOYER IDENTIFICATION)
56-0754594
</Table>
12200 HERBERT WAYNE COURT
SUITE 150
HUNTERSVILLE, NORTH CAROLINA 28078
(704) 992-2000
Indicate by a 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 [ ]
Number of common shares outstanding at August 14, 2001: 5,336,917
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2
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 2001
(unaudited) and December 30, 2000......................... 1
Condensed Consolidated Statements of Operations
(unaudited) -- Quarters and Six Months Ended June 30, 2001
and July 1, 2000.......................................... 2
Condensed Consolidated Statements of Cash Flows
(unaudited) -- Six Months Ended June 30, 2001 and July 1,
2000...................................................... 3
Notes to Condensed Consolidated Financial Statements........ 4
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...... 15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 15
ITEM 6. Exhibits and Reports on Form 8-K................................ 15
Signatures...................................................... 16
</Table>
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS -- JUNE 30, 2001 AND DECEMBER 30, 2000
(in thousands, except share amounts)
<Table>
<Caption>
JUNE 30, 2001 DECEMBER 30, 2000
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,006 $ 3,327
Accounts receivable, net of allowances of $2,647 and
$1,877................................................. 126,017 101,828
Inventories............................................... 172,470 179,825
Other current assets...................................... 32,313 29,176
Net assets of discontinued operations..................... -- 17,866
-------- --------
Total current assets.............................. 336,806 332,022
-------- --------
Property and equipment, net................................. 31,572 32,504
Goodwill, net............................................... 97,113 101,070
Other intangible assets, net................................ 6,589 8,191
Other assets................................................ 26,933 28,992
-------- --------
Total assets............................ $499,013 $502,779
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable.......................................... $197,571 $191,915
Accrued expenses.......................................... 28,837 28,992
Current maturities of long-term debt...................... 2,844 1,471
-------- --------
Total current liabilities......................... 229,252 222,378
-------- --------
Revolving credit facility................................... 131,605 130,020
Long-term debt.............................................. 158,906 160,942
Other liabilities........................................... 8,428 9,393
Redeemable preferred stock Series A -- 4% cumulative; 7,000
shares authorized, issued and outstanding................. 7,000 7,000
Redeemable preferred stock Series B -- variable rate
cumulative; 4,500 shares authorized, issued and
outstanding............................................... 4,035 4,035
Redeemable preferred stock Series C-- 12% cumulative;
1,333,334 shares authorized; 1,333,334 and 0 shares issued
and outstanding........................................... 12,360 --
Commitments and contingencies
Stockholders' investment:
Common stock, par value $.01 per share; 15,000,000 shares
authorized; 5,336,917 and 5,286,917 shares issued and
outstanding............................................ 53 53
Additional paid-in capital................................ 24,352 23,981
Warrants.................................................. 1,137 1,137
Notes receivable from sale of stock....................... (1,390) (1,046)
Retained deficit.......................................... (76,725) (55,114)
-------- --------
Total stockholders' investment.................... (52,573) (30,989)
-------- --------
Total liabilities and stockholders'
investment............................ $499,013 $502,779
======== ========
</Table>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
1
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HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
<Table>
<Caption>
QUARTERS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, 2001 JULY 1, 2000 JUNE 30, 2001 JULY 1, 2000
------------- ------------ ------------- ------------
Net sales....................................... $301,840 $257,715 $569,632 $482,472
Cost of goods sold.............................. 243,443 211,808 459,834 397,008
-------- -------- -------- --------
Gross profit.................................. 58,397 45,907 109,798 85,464
Selling, general and administrative expenses.... 52,793 38,594 105,637 74,162
-------- -------- -------- --------
Operating income.............................. 5,604 7,313 4,161 11,302
-------- -------- -------- --------
Other income (expense):
Interest expense, net......................... (7,573) (6,062) (14,983) (11,846)
Other income.................................. 369 281 703 463
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes.................................. (1,600) 1,532 (10,119) (81)
Benefit (provision) for income taxes............ 154 (1,144) 803 (995)
-------- -------- -------- --------
Income (loss) from continuing operations........ (1,446) 388 (9,316) (1,076)
Loss from discontinued operations, net of income
tax benefits of $0, $2,190, $514 and $3,193... -- (3,343) (769) (4,790)
Loss on disposal of discontinued operations, net
of income tax benefit of $2,936............... (11,166) -- (11,166) --
-------- -------- -------- --------
Net loss........................................ $(12,612) $ (2,955) $(21,251) $ (5,866)
======== ======== ======== ========
</Table>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
2
5
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<Table>
<Caption>
SIX MONTHS ENDED
----------------------------
JUNE 30, 2001 JULY 1, 2000
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(21,251) $ (5,866)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on disposal of discontinued operations............ 11,166 --
Loss from discontinued operations...................... 769 4,790
Depreciation and amortization of goodwill and other
intangibles........................................... 8,745 6,262
Amortization of other assets........................... 595 573
Other, net............................................. (42) (97)
Change in operating assets and liabilities:
Accounts receivable, net............................... (24,175) (15,215)
Inventories............................................ 8,281 (7,354)
Other current assets................................... 1,855 (169)
Accounts payable and accrued expenses.................. 909 44,197
Other, net............................................. (290) (72)
-------- --------
Net cash provided by (used in) continuing operating
activities.......................................... (13,438) 27,049
-------- --------
Net cash provided by (used in) discontinued
operations.......................................... 63 (12,325)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of discontinued operations......... 9,285 --
Acquisitions, net of cash acquired........................ (885) (25,539)
Payments on deferred purchase price of acquired
businesses............................................. (2,495) (3,253)
Purchase of property and equipment........................ (4,155) (5,506)
Proceeds from sale of property and equipment.............. 1,365 849
Other, net................................................ 42 (2)
-------- --------
Net cash provided by (used in) investing
activities.......................................... 3,157 (33,451)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit facility............... 1,585 20,678
Proceeds received from issuance of preferred stock........ 12,000 --
Principal payments on long-term debt...................... (703) (866)
Other, net................................................ 15 (1,061)
-------- --------
Net cash provided by financing activities............ 12,897 18,751
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,679 24
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 3,327 6,497
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 6,006 $ 6,521
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash payments for interest................................ $ 14,125 $ 11,499
======== ========
Cash payments for taxes................................... $ 420 $ --
======== ========
</Table>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
3
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HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
1. NATURE OF BUSINESS:
Heafner Tire Group, Inc. and subsidiaries (the "Company") (formerly The J.
H. Heafner Company, Inc.), is a Delaware corporation primarily engaged in the
wholesale distribution of tires and tire accessories.
2. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements have been
prepared by the Company and have not been audited. In the opinion of management,
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the financial position of the Company, the results of its
operations and cash flows have been made. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's consolidated financial statements
reported on Form 10-K for the fiscal year ended December 30, 2000. The results
of operations for the quarter and six months ended June 30, 2001 are not
necessarily indicative of the operating results for the full fiscal year.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. NEW ACCOUNTING PRONOUNCEMENTS:
In the first quarter 2001, the Company adopted Statement No. 133, as
amended by Statement No. 137 and Statement No. 138, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments imbedded in other contracts) be recorded in the
balance sheet either as an asset or liability measured at its fair value. This
statement requires that changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The adoption of
this statement had no material impact on the Company's financial position and
results of operations.
In July 2001, the FASB issued Statement No. 141 "Business Combinations"
("SFAS 141") and Statement No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be used for all
business combinations completed after June 30, 2001. This statement also
specifies that intangible assets acquired in a purchase method business
combination must meet certain criteria to be recognized and reported apart from
goodwill. SFAS 142 revises the accounting for purchased goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized, but will be tested for impairment annually and in
the event of an impairment indicator. SFAS 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The provisions of SFAS 141
apply to all business combinations initiated after June 30, 2001. The Company
will adopt the provisions of SFAS 142 effective January 1, 2002. The Company
expects that adoption of SFAS 142 will increase annual operating income by
approximately $7.6 million due to the non-amortization of goodwill. The Company
is currently evaluating the impairment provisions of SFAS 142 and has not yet
determined the effects, if any, of these changes on the Company's financial
position or results of operations.
4
7
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SHIPPING AND HANDLING COSTS:
Outbound shipping and handling costs are classified as selling, general and
administrative expenses in the accompanying condensed consolidated statements of
operations. Such expenses totaled $16.3 million and $14.5 million for the three
months ended June 30, 2001 and July 1, 2000, respectively, and $32.5 million and
$27.7 million for the six months ended June 30, 2001 and July 1, 2000,
respectively.
5. REVOLVING CREDIT FACILITY:
Effective March 30, 2001, the Company amended its existing loan and
security agreement. The amended agreement provides for a senior secured
revolving credit facility (the "Revolver") which provides for borrowings in the
aggregate principal amount of up to the lesser of $180.0 million or the
Borrowing Base, as defined in the agreement, based on 85% of eligible accounts
receivable, the lesser of 65% of eligible tire inventory or $100 million and the
lesser of 50% of all other eligible inventory or $40 million (of which up to $10
million may be utilized in the form of letters of credit). At June 30, 2001, the
maximum loan amount available under the existing credit facility was $147.2
million of which $131.6 million was outstanding.
The Revolver term expires in March 2005, extendable by the Company and the
banks for an additional five years. Borrowings under the Revolver, following
these amendments, bear interest, at (i) the Base Rate, as defined, plus the
applicable margin or (ii) the Eurodollar Rate, as defined, plus the applicable
margin. The applicable margins were increased resulting in an applicable margin
of 2.0% for Base Rate loans, and an applicable margin of 3.25% for Eurodollar
Rate loans. The applicable margins are subject to performance based step-downs
resulting in rates ranging from 0.5% to 2.0% for Base Rate loans and 1.75% to
3.25% for Eurodollar Rate loans, respectively.
The Revolver, as amended, requires the Company to meet certain financial
requirements, including minimum EBITDA for continuing and discontinued
operations, fixed charge coverage and tangible capital funds, all as defined,
and minimum loan availability and certain covenants which, among other things,
restrict the ability of the Company to incur additional indebtedness; enter into
guarantees; make loans and investments; make capital expenditures; declare
dividends; engage in mergers, consolidations and asset sales; enter into
transactions with affiliates; create liens and encumbrances; enter into
sale/leaseback transactions; modify material agreements; and change the business
it conducts. The Company's obligations under the Revolver are secured by all
inventories and accounts receivable.
6. DISCONTINUED OPERATIONS:
Effective May 15, 2001, the Company completed a transaction pursuant to a
Stock Purchase Agreement to sell all the capital stock in Winston Tire Company
("Winston") to Performance Management, Inc. for a purchase price of
approximately $11.3 million, subject to adjustment. Upon closing, the Company
received $8.5 million in cash. The balance of $2.8 million is payable May 15,
2002. In addition, the Company has executed a Supply Contract with Winston as
secondary supplier, as well as a Limited License Agreement.
The Company has accounted for the financial results and net assets of
Winston as a discontinued operation. Accordingly, previously reported financial
results for the prior year have been restated to reflect this treatment. Winston
incurred operating losses subsequent to the measurement date through the date of
sale which were charged to the Company's existing reserve for discontinued
operations.
In the second quarter 2001, the Company recorded an $11.2 million loss on
disposal of discontinued operations, net of income tax benefits of $2.9 million,
in addition to the $1.2 million loss recorded in 2000. The additional loss
results primarily from changes in estimates made relative to the working capital
of Winston as of the sale date as well as additional liabilities assumed as part
of the transaction not contemplated prior to closing the transaction.
5
8
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net sales for discontinued operations were $12.8 million through the
January 26, 2001 measurement date and $89.2 million for the six months ended
July 1, 2000. Net sales from continuing operations for the three months ended
June 30, 2001 and July 1, 2000 include approximately $5.4 million and $15.9
million, respectively, of intersegment sales to Winston that have not been
eliminated in the accompanying statement of operations. For the six months ended
June 30, 2001 and July 1, 2000, such intersegment sales totaled $15.8 million
and $30.1 million, respectively.
7. STOCKHOLDERS' INVESTMENT:
On March 30, 2001, the Company amended and restated its articles of
incorporation to authorize 15,000,000 shares of a single class of $.01 par value
common stock and 1,344,834 shares of $.01 par value preferred stock. Of the
1,344,834 shares of preferred stock, 7,000 shares are initially designated
Series A preferred stock, 4,500 shares are initially designated Series B
preferred stock, and 1,333,334 shares are initially designated Series C
preferred stock.
On April 2, 2001, the Company issued 1,333,334 shares of Series C preferred
stock for $9.00 per share in exchange for $12.0 million in cash contributed by
certain of its principal shareholders. Shares of Series C preferred stock accrue
dividends at an annual rate of 12% and are redeemable beginning May 16, 2009 at
the initial price plus any cumulative unpaid dividends as of the redemption
date. However, as long as any shares of Series A preferred stock or Series B
preferred stock remain outstanding, no dividends may be paid, nor redemption
occur. In addition, shares of Series C preferred stock are convertible into
common stock at a conversion price of $9.00 per common share.
8. COMMITMENTS AND CONTINGENCIES:
See "PART II -- OTHER INFORMATION, Item 1. Legal Proceedings."
The Company is party to various lawsuits and claims, including purported
class actions, arising in the normal course of business. In the opinion of
management, these lawsuits and claims are not, singularly or in the aggregate,
material to the Company's financial position or results of operations.
9. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION:
The Company's Senior Notes are guaranteed on a full, unconditional and
joint and several basis by all of the Company's direct subsidiaries, each of
which is wholly owned. The condensed consolidating financial information for the
Company is as follows (in thousands):
6
9
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed consolidated balance sheets as of June 30, 2001 and December 30,
2000, are as follows:
<Table>
<Caption>
AS OF JUNE 30, 2001
---------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 4,602 $ 1,404 $ -- $ 6,006
Accounts receivable, net...................... 88,332 37,685 -- 126,017
Inventories................................... 95,237 77,233 -- 172,470
Other current assets.......................... 26,637 5,676 -- 32,313
Intercompany receivables...................... 292,568 69,766 (362,334) --
-------- -------- --------- --------
Total current assets..................... 507,376 191,764 (362,334) 336,806
-------- -------- --------- --------
Property and equipment, net........................ 20,388 11,184 -- 31,572
Goodwill and other intangible assets, net.......... 52,479 51,223 -- 103,702
Investment in subsidiaries......................... 71,949 -- (71,949) --
Other assets....................................... 24,630 2,303 -- 26,933
-------- -------- --------- --------
Total assets................... $676,822 $256,474 $(434,283) $499,013
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable.............................. $179,866 $ 17,705 $ -- $197,571
Accrued expenses.............................. 25,138 3,699 -- 28,837
Current maturities of long-term debt.......... 1,715 1,129 -- 2,844
Intercompany payables......................... 203,232 159,102 (362,334) --
-------- -------- --------- --------
Total current liabilities................ 409,951 181,635 (362,334) 229,252
-------- -------- --------- --------
Revolving credit facility.......................... 131,605 -- -- 131,605
Long-term debt..................................... 156,512 2,394 -- 158,906
Other liabilities.................................. 7,932 496 -- 8,428
Redeemable preferred stock Series A -- 4%
cumulative; 7,000 shares authorized, issued and
outstanding...................................... 7,000 -- -- 7,000
Redeemable preferred stock Series B -- variable
rate cumulative; 4,500 shares authorized, issued
and outstanding.................................. 4,035 -- -- 4,035
Redeemable preferred stock Series C -- 12%
cumulative; 1,333,334 shares authorized, issued
and outstanding.................................. 12,360 -- -- 12,360
Stockholders' investment:
Intercompany investment....................... -- 76,633 (76,633) --
Common stock, par value $.01 per share;
15,000,000 shares authorized; 5,336,917
shares issued and outstanding............... 53 -- -- 53
Additional paid-in capital.................... 24,352 -- -- 24,352
Warrants...................................... 1,137 -- -- 1,137
Notes receivable from sale of stock........... (1,390) -- -- (1,390)
Retained deficit.............................. (76,725) (4,684) 4,684 (76,725)
-------- -------- --------- --------
Total stockholders' investment........... (52,573) 71,949 (71,949) (52,573)
-------- -------- --------- --------
Total liabilities and
stockholders' investment..... $676,822 $256,474 $(434,283) $499,013
======== ======== ========= ========
</Table>
7
10
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
AS OF DECEMBER 30, 2000
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 3,518 $ (191) $ -- $ 3,327
Accounts receivable, net......................... 74,682 27,146 -- 101,828
Inventories...................................... 109,841 69,984 -- 179,825
Other current assets............................. 20,140 9,036 -- 29,176
Intercompany receivables......................... 197,848 -- (197,848) --
Net assets of discontinued operations............ -- 17,866 -- 17,866
-------- -------- --------- --------
Total current assets..................... 406,029 123,841 (197,848) 332,022
-------- -------- --------- --------
Property and equipment, net........................ 21,555 10,949 -- 32,504
Goodwill and other intangible assets, net.......... 54,523 54,738 -- 109,261
Investment in subsidiaries......................... 73,985 -- (73,985) --
Other assets....................................... 26,563 2,429 -- 28,992
-------- -------- --------- --------
Total assets................... $582,655 $191,957 $(271,833) $502,779
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable................................. $132,721 $ 59,194 $ -- $191,915
Accrued expenses................................. 25,019 3,973 -- 28,992
Current maturities of long-term debt............. 289 1,182 -- 1,471
Intercompany payables............................ 148,980 48,868 (197,848) --
-------- -------- --------- --------
Total current liabilities................ 307,009 113,217 (197,848) 222,378
-------- -------- --------- --------
Revolving credit facility.......................... 130,020 -- -- 130,020
Long-term debt..................................... 156,871 4,071 -- 160,942
Other liabilities.................................. 8,709 684 -- 9,393
Redeemable preferred stock series A -- 4%
cumulative; 7,000 shares authorized, issued and
outstanding...................................... 7,000 -- -- 7,000
Redeemable preferred stock series B -- variable
rate cumulative; 4,500 shares authorized, issued
and outstanding.................................. 4,035 -- -- 4,035
Stockholders' investment:
Intercompany investment.......................... -- 124,343 (124,343) --
Common stock, par value $.01 per share;
15,000,000 shares authorized; 5,286,917 shares
issued and outstanding........................ 53 -- -- 53
Additional paid-in capital....................... 23,981 -- -- 23,981
Warrants......................................... 1,137 -- -- 1,137
Notes receivable from sale of stock.............. (1,046) -- -- (1,046)
Retained deficit................................. (55,114) (50,358) 50,358 (55,114)
-------- -------- --------- --------
Total stockholders' investment........... (30,989) 73,985 (73,985) (30,989)
-------- -------- --------- --------
Total liabilities and
stockholders' investment..... $582,655 $191,957 $(271,833) $502,779
======== ======== ========= ========
</Table>
8
11
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed consolidated statements of operations for the six months ended
June 30, 2001 and July 1, 2000 are as follows:
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
JUNE 30, 2001
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
Net sales........................................... $390,244 $179,388 $ -- $569,632
Cost of goods sold.................................. 315,563 144,271 -- 459,834
-------- -------- ------- --------
Gross profit...................................... 74,681 35,117 -- 109,798
Selling, general and administrative expenses........ 66,059 39,578 -- 105,637
-------- -------- ------- --------
Operating income (loss)........................... 8,622 (4,461) -- 4,161
Other income (expense):
Interest expense.................................. (14,892) (91) -- (14,983)
Other income, net................................. 387 316 -- 703
Equity in loss of subsidiaries.................... (4,652) -- 4,652 --
-------- -------- ------- --------
Loss from continuing operations before income
taxes............................................. (10,535) (4,236) 4,652 (10,119)
Benefit for income taxes............................ 450 353 -- 803
-------- -------- ------- --------
Loss from continuing operations..................... (10,085) (3,883) 4,652 (9,316)
Loss from discontinued operations................... -- (769) -- (769)
Loss on disposal of discontinued operations......... (11,166) -- -- (11,166)
-------- -------- ------- --------
Net loss............................................ $(21,251) $ (4,652) $ 4,652 $(21,251)
======== ======== ======= ========
</Table>
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
JULY 1, 2000
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
Net sales........................................... $340,083 $142,389 $ -- $482,472
Cost of goods sold.................................. 280,630 116,378 -- 397,008
-------- -------- ------- --------
Gross profit...................................... 59,453 26,011 -- 85,464
Selling, general and administrative expenses........ 50,324 23,838 -- 74,162
-------- -------- ------- --------
Operating income.................................. 9,129 2,173 -- 11,302
Other income (expense):
Interest expense.................................. (11,762) (84) -- (11,846)
Other income, net................................. 411 52 -- 463
Equity in loss of subsidiaries.................... (3,483) -- 3,483 --
-------- -------- ------- --------
Income (loss) from continuing operations before
income taxes...................................... (5,705) 2,141 3,483 (81)
Provision for income taxes.......................... (161) (834) -- (995)
-------- -------- ------- --------
Income (loss) from continuing operations............ (5,866) 1,307 3,483 (1,076)
Loss from discontinued operations................... -- (4,790) -- (4,790)
-------- -------- ------- --------
Net loss............................................ $ (5,866) $ (3,483) $ 3,483 $ (5,866)
======== ======== ======= ========
</Table>
9
12
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed consolidated statements of cash flows for the six months ended
June 30, 2001 and July 1, 2000 are as follows:
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
JUNE 30, 2001
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(21,251) $ (4,652) $ 4,652 $(21,251)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss on disposal of discontinued operations....... 11,166 -- -- 11,166
Loss from discontinued operations................. -- 769 -- 769
Depreciation and amortization of goodwill, other
intangibles and other assets................... 5,105 4,235 -- 9,340
Other............................................. (97) 55 -- (42)
Equity in loss of subsidiaries.................... 4,652 -- (4,652) --
Changes in operating assets and liabilities:
Accounts receivable, net.......................... (13,648) (10,527) -- (24,175)
Inventories....................................... 14,723 (6,442) -- 8,281
Other current assets.............................. 1,022 833 -- 1,855
Accounts payable and accrued expense.............. (8,266) 9,175 -- 909
Other............................................. (78) (212) -- (290)
-------- -------- -------- --------
Net cash used in continuing operations......... (6,672) (6,766) -- (13,438)
-------- -------- -------- --------
Net cash provided by discontinued operations... -- 63 -- 63
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of discontinued
operations........................................ 9,285 -- -- 9,285
Acquisitions, net of cash acquired.................. (885) -- -- (885)
Payments on deferred purchase price of acquired
businesses........................................ (2,495) -- -- (2,495)
Purchase of property and equipment.................. (2,445) (1,710) -- (4,155)
Proceeds from sale of property and equipment........ 1,333 32 -- 1,365
Other, net.......................................... 42 -- -- 42
Intercompany........................................ (10,495) 10,495 -- --
-------- -------- -------- --------
Net cash provided by (used in) investing
activities................................... (5,660) 8,817 -- 3,157
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving credit facility......... 1,585 -- -- 1,585
Proceeds received from issuance of preferred
stock............................................. 12,000 -- -- 12,000
Principal payments on long-term debt................ (184) (519) -- (703)
Other............................................... 15 -- -- 15
-------- -------- -------- --------
Net cash provided by (used in) financing
activities................................... 13,416 (519) -- 12,897
-------- -------- -------- --------
Net increase in cash and cash equivalents........... 1,084 1,595 -- 2,679
Cash and cash equivalents, beginning of year........ 3,518 (191) -- 3,327
-------- -------- -------- --------
Cash and cash equivalents, end of year.............. $ 4,602 $ 1,404 $ -- $ 6,006
======== ======== ======== ========
</Table>
10
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HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
JULY 1, 2000
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (5,866) $ (3,483) $ 3,483 $ (5,866)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss from discontinued operations................. -- 4,790 -- 4,790
Depreciation and amortization of goodwill, other
intangibles and other assets................... 3,645 3,190 -- 6,835
Other............................................. (87) (10) -- (97)
Equity in loss of subsidiaries.................... 3,483 -- (3,483) --
Changes in operating assets and liabilities:
Accounts receivable, net.......................... (10,074) (5,141) -- (15,215)
Inventories....................................... (5,233) (2,121) -- (7,354)
Other current assets.............................. 1,505 (1,674) -- (169)
Accounts payable and accrued expense.............. 26,671 17,526 -- 44,197
Other............................................. (378) 306 -- (72)
-------- -------- ------- --------
Net cash provided by continuing operations..... 13,666 13,383 -- 27,049
-------- -------- ------- --------
Net cash used in discontinued operations....... -- (12,325) -- (12,325)
-------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.................. (25,421) (118) -- (25,539)
Payments on deferred purchase price of acquired
business.......................................... (3,050) (203) -- (3,253)
Purchase of property and equipment.................. (1,789) (3,717) -- (5,506)
Proceeds from sale of property and equipment........ 380 469 -- 849
Other, net.......................................... (55) 53 -- (2)
Intercompany........................................ (3,255) 3,255 -- --
-------- -------- ------- --------
Net cash used in investing activities.......... (33,190) (261) -- (33,451)
-------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of revolving credit facility......... 20,678 -- -- 20,678
Principal payments on long-term debt................ (167) (699) -- (866)
Other............................................... (827) (234) -- (1,061)
-------- -------- ------- --------
Net cash provided by (used in) financing
activities................................... 19,684 (933) -- 18,751
-------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 160 (136) -- 24
Cash and cash equivalents, beginning of year........ 3,822 2,675 -- 6,497
-------- -------- ------- --------
Cash and cash equivalents, end of year.............. $ 3,982 $ 2,539 $ -- $ 6,521
======== ======== ======= ========
</Table>
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the results of operations,
financial condition and liquidity of the Company should be read in conjunction
with the financial statements and related notes included in this report.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2001 COMPARED TO QUARTER ENDED JULY 1, 2000
Consolidated net sales in the second quarter 2001 increased by $44.1
million, or 17.1%, from the second quarter 2000, primarily due to the
acquisitions of American Tire Distributors ("ATD") and T.O. Haas Holding Co.
("Haas") in 2000. Of the increase, the inclusion of three months of sales for
Haas in the current quarter versus one month in second quarter 2000 accounted
for approximately $23.8 million. The majority of the remaining increase is
attributable to the inclusion of three months of sales for ATD in the current
quarter and no sales included in the second quarter 2000. However, the precise
effect cannot be determined due to the merger of these results into the
Company's existing operations. These increases are partially offset by a decline
in sales to Winston Tire Company ("Winston") of approximately $10.5 million due
to the sale of Winston as of May 15, 2001 and the closing of certain Winston
locations prior to the sale. Due to current economic conditions, competition was
strong across all segments in the second quarter 2001 and therefore, on a pro
forma basis, sales remained relatively flat compared to prior year.
Gross profit increased by $12.5 million or 27.2% from the second quarter
2000. Gross profit as a percentage of sales increased to 19.3% in the second
quarter 2001 compared to 17.8% in the second quarter 2000. Margin increases are
primarily a result of a decline in sales to Winston prior to the sale of the
subsidiary, which carry lower margins, as well as the negotiation of improved
marketing programs with vendors and price increases effected during the quarter.
Selling, general and administrative expenses increased by $14.2 million in
the second quarter 2001 representing 17.5% as a percentage of sales compared to
15.0% in the second quarter 2000. Increased operating expenses were principally
a result of the acquisitions of Haas and ATD in 2000. Operating expenses
increased as a percent of sales primarily due to increased wages relative to
sales dollars compared to prior year. This increase is primarily due to the
decline in sales to Winston for which corresponding labor savings have yet to be
realized as well as the acquisition of Haas, which due to its smaller
distribution centers, carries a higher labor to sales ratio than other divisions
of the Company where larger distribution centers are utilized.
Interest expense increased in the second quarter 2001 by $1.5 million to
$7.6 million due to higher borrowings on the revolving credit line resulting
from acquisitions of Haas and ATD during the second and third quarters 2000.
Interest rates have remained relatively constant.
The income tax benefit in the second quarter 2001 was $0.2 million compared
to a provision of $1.1 million for the same quarter in 2000. The difference
between the statutory tax rate and the effective tax rate is primarily due to
non-deductible goodwill amortization.
EBITDA from continuing operations remained relatively consistent with prior
year at $10.7 million in the second quarter 2001 compared to $10.8 million in
the second quarter 2000 due to increased gross profit margins offset by
increased operating expenses as a percentage of sales as discussed above.
Effective May 15, 2001, the Company completed a transaction pursuant to a
Stock Purchase Agreement to sell all the capital stock in Winston to Performance
Management, Inc. for a purchase price of approximately $11.3 million, subject to
adjustment. Upon closing, the Company received $8.5 million in cash. The balance
of $2.8 million is payable May 15, 2002. In addition, the Company has executed a
Supply Contract with Winston as secondary supplier, as well as a Limited License
Agreement. The Company has recorded an $11.2 million loss on disposal of
discontinued operations, net of income tax benefits of $2.9 million in the
second quarter 2001, in addition to the $1.2 million loss recorded in 2000. The
additional loss results primarily from changes in estimates made relative to the
working capital of Winston as of the sale date as well as additional liabilities
assumed as part of the transaction not contemplated prior to closing the
transaction.
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15
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JULY 1, 2000
Consolidated net sales increased by $87.2 million, or 18.1%, from the
six-month period 2000. Of the increase, the inclusion of six months of sales for
Haas in the current period versus one month in the prior year period accounted
for approximately $50.1 million. The majority of the remaining increase is
attributable to the inclusion of six months of sales for ATD included in the
current period and no sales included in the prior year period. However, the
precise effect cannot be determined due to the merger of these results into the
Company's existing operations. These increases are partially offset by a decline
in sales to Winston due to the sale of Winston as of May 15, 2001 and the
closing of certain Winston locations prior to the sale. Proforma sales remained
relatively flat, as competition was strong throughout the six-month period 2001.
Units of replacement passenger and light truck tires shipped for the industry
were down approximately 3% in the first six months of 2001 with shipments of
108.0 million units compared to shipments of 111.4 million units in the first
six months of 2000.
Gross profit increased by $24.3 million or 28.5% from the six-month period
of 2000. Gross profit as a percentage of sales increased to 19.3% in the
six-month period of 2001 compared to 17.7% in the six-month period of 2000.
Margin increases are primarily a result of a decline in intersegment sales to
Winston prior to the sale of the subsidiary, which carry lower margins, as well
as improved product mix, price increases effected in the second quarter and the
negotiation of improved marketing programs with vendors.
Selling, general and administrative expenses increased by $31.5 million in
the six-month period 2001 representing 18.5% as a percentage of sales compared
to 15.4% in 2000. Increased operating expenses were primarily a direct result of
the acquisitions in 2000, increased operating costs due to higher fuel and
energy costs and one-time severance payments of $1.8 million. Such expenses
increased as a percent of sales primarily due to increased wages relative to
sales dollars compared to prior year. This increase is primarily due to
severance payments, a decline in sales to Winston for which corresponding labor
savings have yet to be realized, as well as the acquisition of Haas, which due
to its smaller distribution centers, carries a higher labor to sales ratio than
other divisions of the Company where larger distribution centers are utilized.
Interest expense increased in the six-month period of 2001 by $3.1 million
to $15.0 million due to higher borrowings on the revolving credit line primarily
resulting from the acquisitions of Haas and ATD which occurred in the second and
third quarters of 2000. Interest rates have remained relatively constant.
The income tax benefit in the six-month period of 2001 was $0.8 million
compared to an income tax provision of $1.0 million for the same period in 2000.
The difference between the statutory tax rate and the effective tax rate is
primarily due to non-deductible goodwill amortization.
EBITDA from continuing operations decreased $4.4 million to $13.6 million
in the six-month period of 2001 compared to $18.0 million in the six-month
period 2000. This decrease is primarily due to higher selling, general and
administrative expenses, which include $1.8 million of one-time severance
payments to former executives of the Company, partially offset by an increase in
gross profit margins.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the combined net indebtedness (net of cash) of the
Company was $287.3 million compared to $289.1 million at December 30, 2000.
Total commitments by the lenders under the Company's revolving credit facility
were $180.0 million at June 30, 2001, of which $131.6 million was outstanding
and $15.6 million was available for additional borrowings.
In May 2001, the Company completed its sale of Winston for approximately
$11.3 million, of which $8.5 million was received in cash. In addition, during
the six-month period 2001, the Company received approximately $5.1 million in
proceeds from the sale of assets of Winston prior to the sale of the subsidiary.
In April 2001, the Company received $12.0 million in proceeds from the issuance
of 1,333,334 shares of Series C Preferred Stock to certain of its principal
stockholders. The Company utilized the net proceeds from these transactions to
pay down the outstanding portion of its revolving credit facility. The Company
is currently negotiating the sale and leaseback of its owned facilities, which
is expected to generate approximately $15.0 million in cash in fourth quarter.
The Company intends to use these proceeds to reduce its revolving credit
13
16
facility. Net working capital at June 30, 2001 totaled $107.6 million, compared
to $91.8 million (exclusive of net assets of discontinued operations) at
December 30, 2000, an increase of $15.8 million. The increase in working capital
from year-end is due to increased business activity during the period resulting
in higher receivable balances partially offset by a decrease in inventory levels
due to major inventory reduction efforts initiated in the second quarter 2001.
Effective March 30, 2001, the Company and its lenders amended the revolving
credit facility ("Revolver") to, among other things, reduce the aggregate amount
of the Revolver from $200.0 million to $180.0 million, amend the financial
covenants contained therein, change the rate at which borrowings thereunder bear
interest, and require the Company to comply with additional reporting
requirements. Borrowings under the Revolver, following these amendments, bear
interest, at (i) the Base Rate, as defined, plus the applicable margin or (ii)
the Eurodollar Rate, as defined, plus the applicable margin. The applicable
margins were increased resulting in an applicable margin of 2.0% for Base Rate
loans, and an applicable margin of 3.25% for Eurodollar Rate loans. The
applicable margins are subject to performance based step-downs resulting in
rates ranging from 0.5% to 2.0% for Base Rate loans and 1.75% to 3.25% for
Eurodollar Rate loans, respectively.
The Revolver, as amended, requires the Company to meet certain financial
requirements, including minimum EBITDA for continuing and discontinued
operations, fixed charge coverage and tangible capital funds, all as defined,
and minimum loan availability and certain covenants which, among other things,
restrict the ability of the Company to incur additional indebtedness; enter into
guarantees; make loans and investments; make capital expenditures; declare
dividends; engage in mergers, consolidations and asset sales; enter into
transactions with affiliates; create liens and encumbrances; enter into
sale/leaseback transactions; modify material agreements; and change the business
it conducts. The Company's obligations under the Revolver are secured by all
inventories and accounts receivable.
The Company anticipates that its principal use of cash going forward will
be to meet working capital and debt service requirements and to make capital
expenditures (expected to be approximately $2.5 million for the remainder of the
year). Based upon current and anticipated levels of operations, the Company
believes that its cash flow from operations, together with amounts available
under the credit facility, will be adequate to meet its anticipated
requirements. There can be no assurance, however, that the Company's business
will continue to generate sufficient cash flow from operations in the future to
meet these requirements or to service its debt, and the Company may be required
to refinance all or a portion of its existing debt, or to obtain additional
financing. These increased borrowings may result in higher interest payments. In
addition, there can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained. The inability to obtain
additional financing could have a material adverse effect on the Company.
CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This report contains "forward looking statements," which are statements
other than statements of historical facts. These forward-looking statements use
phrases such as "expects" or "anticipates". The forward-looking statements
include, among other things, the Company's expectations and estimates about its
business operations, strategy, and its expectations and estimates about its
future financial performance, including its financial position, cash flows from
operations, capital expenditures and ability to refinance indebtedness. The
forward-looking statements in this Form 10-Q are intended to be subject to the
safe harbor protection provided by the federal securities laws.
The forward-looking statements are subject to risks, uncertainties and
assumptions about the Company and about the future, and could prove not to be
correct. Cautionary statements describing factors that could cause actual
results to differ materially from the Company's expectations are discussed in
this report, including in conjunction with the forward-looking statements
included in this report. All subsequent written or oral forward-looking
statements attributable to the Company or to persons acting on behalf of Heafner
are expressly qualified in their entirety by those cautionary statements.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report may not occur.
14
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
For the period ended June 30, 2001, the Company did not experience any
material changes from the quantitative and qualitative disclosures about market
risk presented in the Company's Report on Form 10-K for the fiscal year ended
December 30, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material developments in legal proceedings involving the
Company since those reported in the Company's Report on Form 10-K for the fiscal
year ended December 30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended June 30,
2001.
15
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 14, 2001
HEAFNER TIRE GROUP, INC.
By: /s/ WILLIAM E. BERRY
------------------------------------
William E. Berry
Executive Vice President --
Finance and Administration
(On behalf of the Registrant and
as Principal Financial Officer)
16