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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 SEPTEMBER 29, 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 NO.)
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 November 13, 2001: 5,286,917
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 29, 2001
(unaudited) and December 30, 2000......................... 1
Condensed Consolidated Statements of Operations
(unaudited) -- Quarters and Nine Months Ended September
29, 2001 and September 30, 2000........................... 2
Condensed Consolidated Statements of Cash Flows
(unaudited) -- Nine Months Ended September 29, 2001 and
September 30, 2000........................................ 3
Notes to Condensed Consolidated Financial Statements........ 4
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...... 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................... 18
ITEM 6. Exhibits and Reports on Form 8-K................................ 18
Signatures...................................................... 19
</Table>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS -- SEPTEMBER 29, 2001 AND DECEMBER 30,
2000
(in thousands, except share amounts)
<Table>
<Caption>
SEPTEMBER 29, 2001 DECEMBER 30, 2000
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,843 $ 3,327
Accounts receivable, net of allowances of $4,237 and
$1,877................................................. 117,491 101,828
Inventories............................................... 153,461 179,825
Other current assets...................................... 26,016 29,176
Net assets of discontinued operations..................... -- 17,866
-------- --------
Total current assets................................... 302,811 332,022
-------- --------
Property and equipment, net................................. 30,641 32,504
Goodwill, net............................................... 95,187 101,070
Other intangible assets, net................................ 5,879 8,191
Other assets................................................ 37,111 28,992
-------- --------
Total assets......................................... $471,629 $502,779
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable.......................................... $175,778 $191,915
Accrued expenses.......................................... 31,458 28,992
Current maturities of long-term debt...................... 3,643 1,471
-------- --------
Total current liabilities.............................. 210,879 222,378
-------- --------
Revolving credit facility................................... 126,365 130,020
Long-term debt.............................................. 158,413 160,942
Other liabilities........................................... 9,902 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........................................... 12,720 --
Commitments and contingencies
Stockholders' investment:
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................................ 23,902 23,981
Warrants.................................................. 1,137 1,137
Notes receivable from sale of stock....................... (940) (1,046)
Retained deficit.......................................... (81,837) (55,114)
-------- --------
Total stockholders' investment......................... (57,685) (30,989)
-------- --------
Total liabilities and stockholders' investment....... $471,629 $502,779
======== ========
</Table>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
1
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
<Table>
<Caption>
QUARTERS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000 SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
------------------ ------------------ ------------------ ------------------
Net sales...................... $293,173 $327,607 $862,805 $810,079
Cost of goods sold............. 241,985 267,224 701,819 664,232
-------- -------- -------- --------
Gross profit................. 51,188 60,383 160,986 145,847
Selling, general and
administrative expenses...... 51,470 48,694 156,751 122,856
Special charges................ 1,223 -- 1,579 --
-------- -------- -------- --------
Operating income (loss)...... (1,505) 11,689 2,656 22,991
-------- -------- -------- --------
Other income (expense):
Interest expense, net........ (6,922) (6,977) (21,905) (18,823)
Other income................. 303 618 1,006 1,081
-------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes........................ (8,124) 5,330 (18,243) 5,249
Benefit (provision) for income
taxes........................ 4,633 (2,785) 5,436 (3,780)
-------- -------- -------- --------
Income (loss) from continuing
operations................... (3,491) 2,545 (12,807) 1,469
Loss from discontinued
operations, net of income tax
benefit of $2,127, $514 and
$5,320....................... -- (3,189) (769) (7,979)
Loss on disposal of
discontinued operations, net
of income tax benefit of $838
and $3,774................... (1,261) -- (12,427) --
-------- -------- -------- --------
Net loss....................... $ (4,752) $ (644) $(26,003) $ (6,510)
======== ======== ======== ========
</Table>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
2
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<Table>
<Caption>
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(26,003) $ (6,510)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on disposal of discontinued operations............ 12,427 --
Loss from discontinued operations...................... 769 7,979
Depreciation and amortization of goodwill and other
intangibles.......................................... 12,999 10,185
Amortization of other assets........................... 906 863
Special charges........................................ 1,579 --
Other, net............................................. (5,385) (310)
Change in operating assets and liabilities:
Accounts receivable, net............................... (15,550) (25,767)
Inventories............................................ 30,936 (6,452)
Other current assets................................... 3,067 (2,030)
Accounts payable and accrued expenses.................. (18,353) 80,056
Other, net............................................. (505) 194
-------- --------
Net cash provided by (used in) continuing operating
activities........................................ (3,113) 58,208
-------- --------
Net cash used in discontinued operations............. (4,920) (7,644)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of discontinued operations......... 9,285 --
Acquisitions, net of cash acquired........................ (885) (64,377)
Payments on deferred purchase price of acquired
business............................................... (2,495) (3,450)
Purchase of property and equipment........................ (5,029) (7,489)
Proceeds from sale of property and equipment.............. 1,939 1,885
Other, net................................................ 253 (64)
-------- --------
Net cash provided by (used in) investing
activities........................................ 3,068 (73,495)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from revolving credit
facility............................................... (3,655) 23,977
Proceeds received from issuance of preferred stock........ 12,000 --
Principal payments on long-term debt...................... (880) (1,794)
Other, net................................................ 16 (1,061)
-------- --------
Net cash provided by financing activities............ 7,481 21,122
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,516 (1,809)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 3,327 6,497
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 5,843 $ 4,688
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash payments for interest................................ $ 17,097 $ 13,812
======== ========
Cash payments for taxes................................... $ 437 $ --
======== ========
</Table>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
3
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 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 the operations for the quarter and nine months ended September 29, 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 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" ("SFAS 121"). 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.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This Statement
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement supersedes SFAS 121. However, this Statement
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of
4
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. This Statement supersedes the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30"), for the disposal of a segment of a business. However, this Statement
retains the requirement of APB 30 to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, by abandonment, or in a
distribution to owners) or is classified as held for sale. This Statement also
amends ARB No. 51, "Consolidated Financial Statements", to eliminate the
exception to consolidation for a temporarily controlled subsidiary. The
provisions of SFAS 144 are effective for financial statements issued for fiscal
years beginning after December 15, 2001, and interim periods within those fiscal
years. The Company will adopt the provisions effective January 1, 2002. The
Company is currently evaluating the provisions of SFAS 144 and has not yet
determined the effects, if any, of these changes on the Company's financial
position or its results of operations.
4. INVENTORIES:
Inventories consist primarily of automotive tires, wheels, parts and
accessories and are valued at the lower of cost, determined on the first-in,
first-out (FIFO) method or market. The Company performs periodic assessments to
determine the existence of obsolete, slow-moving and non-saleable inventories
and records necessary provisions to reduce such inventories to net realizable
value. Terms with a majority of the Company's tire vendors allow return of tire
products, within limitations, specified in their supply agreements.
During the third quarter 2001, the Company made the decision to exit a
majority of its parts product lines carried exclusively in the Western division
and held primarily for resale to the Winston retail chain. As a result, the
Company has taken a $5.0 million charge on these parts as of September 29, 2001
to reflect the inventory at net realizable value. This charge is included in
cost of sales in the accompanying statements of operations.
5. 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 $17.8 million and $18.0 million for the
quarters ended September 29, 2001 and September 30, 2000, respectively, and
$54.2 million and $45.5 million for the nine months ended September 29, 2001 and
September 30, 2000, respectively.
6. DEFERRED INCOME TAXES:
The Company has deferred tax assets of $43.8 million and $34.6 million at
September 29, 2001 and December 30, 2000, respectively. The increase in net
deferred tax assets is primarily attributable to net operating loss
carryforwards generated from the net loss from continuing operations through
September 29, 2001 as well as the loss recognized on the disposal of
discontinued operations. Management has evaluated the Company's deferred tax
assets and has concluded that the realizability of the deferred tax assets is
"more likely than not". Accordingly, no valuation allowance has been provided at
September 29, 2001. This evaluation considered the historical and long-term
expected profitability of the Company's continuing operations, the sale of the
Company's retail segment, which generated the Company's losses in 2000 and 1999,
and the expected efficiencies to be gained from efforts initiated in 2001 to
streamline operations. Due to current economic conditions and management's view
of the continuing economic outlook, current year performance is not expected to
result in taxable income and the Company is forecasting a minimal amount of
taxable income in 2002. However, given the timing of the reversal of its
temporary differences and the expiration date of its net operating loss
carryovers, the Company believes that taxable income generated in
5
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future years will be sufficient to utilize the remaining net deferred tax
assets. The Company's ability to generate future taxable income is dependent on
numerous factors including general economic conditions, the state of the
replacement tire market and other factors beyond management's control.
Therefore, there can be no assurance that the Company will meet its expectation
of future taxable income.
7. 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). On November 13, 2001,
the Company and its lenders amended the Revolver to revise, among other things,
certain financial covenants contained therein, including covenant minimums
required as of September 29, 2001. The amendment also revises certain components
of the definition of Borrowing Base, including reducing limitations on
availability for certain types of inventory. A nonrefundable fee of
approximately $0.5 million was charged in connection with this amendment. As of
November 13, 2001, the Company's financial measures were in excess of the
minimums required, as amended, and management expects that such amounts will
remain above the minimums for the foreseeable future.
The Revolver term expires in March 2005, extendable by the Company and the
banks for an additional five years. Borrowings under the Revolver bear interest,
at (i) the Base Rate, as defined, plus the applicable margin (2.0% as of
September 29, 2001) or (ii) the Eurodollar Rate, as defined, plus the applicable
margin (3.25% as of September 29, 2001). The applicable margins were increased
with the March 30, 2001 amendment, 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
margins ranging from 0.50% to 2.0% for Base Rate loans and 1.75% to 3.25% for
Eurodollar Rate loans, respectively. At September 29, 2001, the maximum loan
amount available under the existing credit facility was $144.3 million of which
$126.4 million was outstanding. The revision to the definition of Borrowing Base
at November 13, 2001, would not have impacted the maximum loan availability at
September 29, 2001.
The Revolver, as amended, requires the Company to meet certain financial
requirements, including minimum EBITDA, 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.
8. 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 $10.0 million, of which the remaining 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
6
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
treatment. Winston incurred operating losses subsequent to the January 26, 2001
measurement date through the date of sale which were charged to the Company's
existing reserve for discontinued operations.
In the third quarter 2001, the Company recorded an additional loss on
disposal of discontinued operations of approximately $1.3 million, net of income
tax benefit of $0.8 million, for a cumulative net loss on sale of $13.6 million,
of which $12.4 million was recognized in 2001. On August 15, 2001, all
outstanding claims relative to the sale were settled with the buyer. The
additional loss recorded in the third quarter results primarily from agreements
made as part of this settlement and revisions to earlier estimates of future
lease obligations in light of current economic conditions. The additional net
loss of $11.2 million recorded in second quarter 2001 results primarily from
differences in assumptions 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 at the time of the estimate made in the fourth
quarter 2000.
Net sales for discontinued operations were $12.8 million through the
January 26, 2001 measurement date and $136.8 million for the nine months ended
September 30, 2000. Net sales from continuing operations for the quarter ended
September 30, 2000 include approximately $17.3 million of intersegment sales to
Winston that have not been eliminated in the accompanying statement of
operations. For the nine months ended September 29, 2001 and September 30, 2000,
such intersegment sales totaled $15.8 million and $47.4 million, respectively.
9. 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 stockholders. 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.
10. 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.
11. SUBSEQUENT EVENT:
On October 12, 2001, the T.O. Haas Holding Co., Inc. and T.O. Haas Tire
Company, Inc. (collectively "Haas") (wholly-owned subsidiaries of the Company)
entered into an Asset Purchase Agreement with T.O. Haas, LLC ("Haas LLC") for
the sale of certain assets. The total purchase price is approximately $5.4
million, subject to adjustment, of which the Company received approximately $2.4
million in cash at closing. Haas LLC was formed by, among others, one of the
executives of Haas. A portion of the purchase price for the Company's
acquisition of Haas in second quarter 2000 is payable to this executive in the
form of noncompete and stayput payments. In connection with the sale, such
noncompete payments in the amount of
7
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$2.4 million ($1.2 million net of income taxes) were accelerated and such
liability was satisfied as a reduction of the purchase price. Approximately $1.0
million of the purchase price is payable in the form of a promissory note (the
"Note") due in two equal annual installments, with first such payment due
January 2, 2002. The Note bears interest at 6%. Stayput payments due to the
executive of $1.6 million were accelerated to coincide with the schedule of
payments due under the Note. Liabilities assumed by the buyer totaled $0.7
million, reflecting the remainder of the purchase price. Based on the terms of
this sale, the Company has analyzed the recoverability of these assets and the
related goodwill and has determined that no impairment exists as of September
29, 2001.
12. 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):
8
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed consolidated balance sheets as of September 29, 2001 and December
30, 2000, are as follows:
<Table>
<Caption>
AS OF SEPTEMBER 29, 2001
---------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 4,005 $ 1,838 $ -- $ 5,843
Accounts receivable, net...................... 80,827 36,664 -- 117,491
Inventories................................... 94,374 59,087 -- 153,461
Other current assets.......................... 20,294 5,722 -- 26,016
Intercompany receivables...................... 68,466 -- (68,466) --
-------- -------- --------- --------
Total current assets..................... 267,966 103,311 (68,466) 302,811
-------- -------- --------- --------
Property and equipment, net........................ 20,114 10,527 -- 30,641
Goodwill and other intangible assets, net.......... 51,411 49,655 -- 101,066
Investment in subsidiaries......................... 68,099 -- (68,099) --
Other assets....................................... 35,094 2,017 -- 37,111
-------- -------- --------- --------
Total assets............................. $442,684 $165,510 $(136,565) $471,629
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities:
Accounts payable.............................. $155,999 $ 19,779 $ -- $175,778
Accrued expenses.............................. 27,093 4,365 -- 31,458
Current maturities of long-term debt.......... 2,424 1,219 -- 3,643
Intercompany payables......................... -- 68,466 (68,466) --
-------- -------- --------- --------
Total current liabilities................ 185,516 93,829 (68,466) 210,879
-------- -------- --------- --------
Revolving credit facility.......................... 126,365 -- -- 126,365
Long-term debt..................................... 156,172 2,241 -- 158,413
Other liabilities.................................. 8,561 1,341 -- 9,902
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.................................. 12,720 -- -- 12,720
Stockholders' investment:
Intercompany investment....................... -- 76,633 (76,633) --
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.................... 23,902 -- -- 23,902
Warrants...................................... 1,137 -- -- 1,137
Notes receivable from sale of stock........... (940) -- -- (940)
Retained deficit.............................. (81,837) (8,534) 8,534 (81,837)
-------- -------- --------- --------
Total stockholders' investment........... (57,685) 68,099 (68,099) (57,685)
-------- -------- --------- --------
Total liabilities and
stockholder's investment..... $442,684 $165,510 $(136,565) $471,629
======== ======== ========= ========
</Table>
9
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
stockholder's investment..... $582,655 $191,957 $(271,833) $502,779
======== ======== ========= ========
</Table>
10
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed consolidated statements of operations for the nine months ended
September 29, 2001 and September 29, 2000 are as follows:
<Table>
<Caption>
FOR THE NINE MONTHS ENDED
SEPTEMBER 29, 2001
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
Net sales........................................ $592,657 $270,148 $ -- $862,805
Cost of goods sold............................... 480,394 221,425 -- 701,819
-------- -------- ------ --------
Gross profit................................... 112,263 48,723 -- 160,986
Selling, general and administrative expenses..... 98,148 60,182 -- 158,330
-------- -------- ------ --------
Operating income (loss)........................ 14,115 (11,459) -- 2,656
Other income (expense):
Interest expense, net.......................... (21,752) (153) -- (21,905)
Other income, net.............................. 409 597 -- 1,006
Equity in loss of subsidiaries................. (8,502) -- 8,502 --
-------- -------- ------ --------
Loss from continuing operations before income
taxes.......................................... (15,730) (11,015) 8,502 (18,243)
Benefit for income taxes......................... 2,154 3,282 -- 5,436
-------- -------- ------ --------
Loss from continuing operations.................. (13,576) (7,733) 8,502 (12,807)
Loss from discontinued operations................ -- (769) -- (769)
Loss on disposal of discontinued operations...... (12,427) -- -- (12,427)
-------- -------- ------ --------
Net loss......................................... $(26,003) $ (8,502) $8,502 $(26,003)
======== ======== ====== ========
</Table>
<Table>
<Caption>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
Net sales........................................ $557,672 $252,407 $ -- $810,079
Cost of goods sold............................... 458,167 206,065 -- 664,232
-------- -------- ------ --------
Gross profit................................... 99,505 46,342 -- 145,847
Selling, general and administrative expenses..... 80,187 42,669 -- 122,856
-------- -------- ------ --------
Operating income............................... 19,318 3,673 -- 22,991
Other income (expense):
Interest expense, net.......................... (18,557) (266) -- (18,823)
Other income, net.............................. 920 161 -- 1,081
Equity in loss of subsidiaries................. (5,800) -- 5,800 --
-------- -------- ------ --------
Income (loss) from continuing operations before
income taxes................................... (4,119) 3,568 5,800 5,249
Provision for income taxes....................... (2,391) (1,389) -- (3,780)
-------- -------- ------ --------
Income (loss) from continuing operations......... (6,510) 2,179 5,800 1,469
Loss from discontinued operations................ -- (7,979) -- (7,979)
-------- -------- ------ --------
Net loss......................................... $ (6,510) $ (5,800) $5,800 $ (6,510)
======== ======== ====== ========
</Table>
11
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed consolidated statements of cash flows for the nine months ended
September 29, 2001 and September 30, 2000 are as follows:
<Table>
<Caption>
FOR THE NINE MONTHS ENDED
SEPTEMBER 29, 2001
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(26,003) $(8,502) $ 8,502 $(26,003)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on disposal of discontinued operations....... 12,427 -- -- 12,427
Loss from discontinued operations................. -- 769 -- 769
Depreciation and amortization of goodwill, other
intangibles and other assets................... 7,434 6,471 -- 13,905
Special charges................................... 567 1,012 -- 1,579
Other............................................. (5,481) 96 -- (5,385)
Equity in loss of subsidiaries.................... 8,502 -- (8,502) --
Changes in operating assets and liabilities:
Accounts receivable, net.......................... (6,032) (9,518) -- (15,550)
Inventories....................................... 19,232 11,704 -- 30,936
Other current assets.............................. 2,268 799 -- 3,067
Accounts payable and accrued expense.............. (30,268) 11,915 -- (18,353)
Other............................................. (395) (110) -- (505)
-------- ------- ------- --------
Net cash provided by (used in) continuing
operations................................... (17,749) 14,636 -- (3,113)
-------- ------- ------- --------
Net cash used in discontinued operations....... -- (4,920) -- (4,920)
-------- ------- ------- --------
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
business.......................................... (2,495) -- -- (2,495)
Purchase of property and equipment.................. (3,229) (1,800) -- (5,029)
Proceeds from sale of property and equipment........ 1,805 134 -- 1,939
Other, net.......................................... 253 -- -- 253
Intercompany........................................ 5,392 (5,392) -- --
-------- ------- ------- --------
Net cash provided by (used in) investing
activities................................... 10,126 (7,058) -- 3,068
-------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of revolving credit facility......... (3,655) -- -- (3,655)
Proceeds received from issuance of preferred
stock............................................. 12,000 -- -- 12,000
Principal payments on long-term debt................ (250) (630) -- (880)
Other............................................... 15 1 -- 16
-------- ------- ------- --------
Net cash provided by (used in) financing
activities................................... 8,110 (629) -- 7,481
-------- ------- ------- --------
Net increase in cash and cash equivalents........... 487 2,029 -- 2,516
Cash and cash equivalents, beginning of period...... 3,518 (191) -- 3,327
-------- ------- ------- --------
Cash and cash equivalents, end of period............ $ 4,005 $ 1,838 $ -- $ 5,843
======== ======= ======= ========
</Table>
12
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
--------------------------------------------------
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATION CONSOLIDATED
-------- ---------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (6,510) $(5,800) $ 5,800 $ (6,510)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Loss from discontinued operations................. -- 7,979 -- 7,979
Depreciation and amortization of goodwill, other
intangibles and other assets................... 5,761 5,287 -- 11,048
Other............................................. (313) 3 -- (310)
Equity in loss of subsidiaries.................... 5,800 -- (5,800) --
Changes in operating assets and liabilities:
Accounts receivable, net.......................... (14,352) (11,415) -- (25,767)
Inventories....................................... (2,764) (3,688) -- (6,452)
Other current assets.............................. 136 (2,166) -- (2,030)
Accounts payable and accrued expense.............. 53,880 26,176 -- 80,056
Other............................................. 170 24 -- 194
-------- ------- ------- --------
Net cash provided by continuing operations..... 41,808 16,400 -- 58,208
-------- ------- ------- --------
Net cash used in discontinued operations....... -- (7,644) -- (7,644)
-------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.................. (64,259) (118) -- (64,377)
Payments on deferred purchase price of acquired
business.......................................... (3,247) (203) -- (3,450)
Purchase of property and equipment.................. (2,416) (5,073) -- (7,489)
Proceeds from sale of property and equipment........ 1,389 496 -- 1,885
Other, net.......................................... (117) 53 -- (64)
Intercompany........................................ 3,000 (3,000) -- --
-------- ------- ------- --------
Net cash used in investing activities.......... (65,650) (7,845) -- (73,495)
-------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of revolving credit facility........... 23,977 -- -- 23,977
Principal payments on long-term debt................ (213) (1,581) -- (1,794)
Other............................................... (827) (234) -- (1,061)
-------- ------- ------- --------
Net cash provided by (used in) financing
activities................................... 22,937 (1,815) -- 21,122
-------- ------- ------- --------
Net decrease in cash and cash equivalents........... (905) (904) -- (1,809)
Cash and cash equivalents, beginning of period...... 3,820 2,677 -- 6,497
-------- ------- ------- --------
Cash and cash equivalents, end of period............ $ 2,915 $ 1,773 $ -- $ 4,688
======== ======= ======= ========
</Table>
13
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 SEPTEMBER 29, 2001 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2000
Consolidated net sales in the third quarter 2001 decreased by $34.4
million, or 10.5%, from the third quarter 2000. The decrease is attributable
primarily to weaker consumer demand in 2001 versus 2000 as well as the sale of
Winston Tire Company ("Winston") in second quarter 2001, offset by an increase
due to the acquisition of American Tire Distributors ("ATD") in third quarter
2000. Weaker consumer demand in the current quarter is attributable to a slower
economy creating a more competitive environment. Additionally, business declined
significantly immediately following the events of September 11, 2001 and did not
return to expected levels by the end of the period. Third quarter 2000 results
were also aided by the effects of the recall of certain Firestone brand tires
which heightened consumer awareness of tire safety issues. Units of replacement
passenger and light truck tires shipped for the industry were down approximately
3% for the third quarter 2001 versus third quarter 2000. Sales for third quarter
2000 also included $17.3 million of sales to Winston. Due to the sale of Winston
as of May 15, 2001, no such sales are included in third quarter 2001, which
constitutes a 5.3% decrease in total sales from prior year.
Gross profit decreased by $9.2 million, or 15.2%, from the third quarter
2000 due to the decrease in sales discussed above, combined with a decrease in
gross profit as a percentage of sales to 17.5% in the third quarter 2001
compared to 18.4% in the third quarter 2000. Margin for the third quarter 2001
includes a $5.0 million charge for inventory impairments primarily resulting
from a management decision to exit the majority of it parts product lines in the
Western division. Excluding this charge, margin for the quarter increased to
19.2% from prior year quarter. Margin increases of approximately 0.6% are the
result of the inclusion of $17.3 million sales to Winston in the third quarter
2000, which carried lower margins, and no such sales included in the current
quarter.
Selling, general and administrative expenses increased by $2.8 million in
the third quarter 2001 representing 17.6% as a percentage of sales compared to
14.9% in the third quarter 2000. The increase in operating expenses is primarily
due to the inclusion of three months of ATD in the current quarter versus two
months in prior year as well as additional charges taken in the current quarter
related to certain doubtful accounts. Increased operating expenses as a percent
of sales were principally a result of a decline in sales supporting comparable
fixed costs as well as the additional charges referred to above.
During the current quarter the Company has recorded special charges of $1.2
million primarily relating to the closure of certain of its facilities in the
Western region as a result of warehouse consolidations initiated to streamline
operations. The majority of these charges relates to estimated future rentals on
the closed facilities.
Interest expense remained relatively flat from prior year at $6.9 million
in third quarter 2001 versus $7.0 million in 2000 due to higher borrowings on
the revolving credit facility resulting from the acquisition of ATD during the
third quarter 2000 offset entirely by a decline in average interest rates.
The income tax benefit in the third quarter 2001 was $4.6 million compared
to a provision of $2.8 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, excluding the special charges, decreased
from $16.2 million for the third quarter 2000 to $4.3 million for third quarter
2001. The decrease is primarily due to the parts-related charge of $5.0 million
and increased operating expenses as a percentage of sales offset by the effects
of increased gross profit margins (excluding the parts-related charge).
In the current quarter, the Company has recorded an additional loss on
disposal of discontinued operations of approximately $1.3 million, net of income
tax benefit of $0.8 million, for a cumulative net loss on sale of $13.6 million,
of which $12.4 million was recognized in 2001. On August 15, 2001, all
outstanding
14
claims relative to the sale were settled with the buyer. The additional loss
results primarily from agreements made as part of this settlement and revisions
to earlier estimates of future lease obligations in light of current economic
conditions.
NINE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Consolidated net sales increased by $52.7 million, or 6.5%, from the
nine-month period 2000. The inclusion of nine months of sales for T.O. Haas
Holding Co. ("Haas") in the current period versus four months in prior year
period accounted for approximately a $55.0 million increase. The increase
attributable to the inclusion of nine months of sales for ATD included in the
current period versus two months sales included in the prior year period 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. Sales for the nine-month period 2001
included $15.8 million of such sales versus $47.4 million included in the
nine-month period 2000 which constitutes a 3.9% decrease in total sales from
prior year. The remaining offsetting decrease is attributable to a decline in
sales in the third quarter as discussed above. Units of replacement passenger
and light truck tires shipped for the industry were down approximately 3% in the
nine-month period 2001 compared to the nine-month period 2000.
Gross profit increased by $15.1 million, or 10.4%, from the nine-month
period 2000. Excluding the impact of the $5.0 million charge taken in third
quarter 2001 as discussed above, gross profit as a percentage of sales increased
to 19.2% in the nine-month period 2001 compared to 18.0% in the nine-month
period of 2000. Margin increases are primarily the result of improved product
mix, price increases effected in the second quarter and the negotiation of
improved programs with vendors. Margin increases of 0.4% are a result of a
decline in intersegment sales to Winston prior to the sale of the subsidiary,
which carried lower margins.
Selling, general and administrative expenses increased by $33.9 million in
the nine-month period 2001 representing 18.2% as a percentage of sales compared
to 15.2% in 2000. Increased operating expenses were primarily a direct result of
the acquisitions in 2000, one-time severance payments of $1.8 million and
increased expense for certain doubtful accounts. Such expenses increased as a
percent of sales primarily due to severance payments, a decline in sales for
which corresponding fixed cost savings were not 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.
For the nine-month period 2001, the Company has recorded special charges of
$1.6 million primarily relating to the closure of certain of its facilities in
the Western region as a result of warehouse consolidations initiated to
streamline operations as well as the relocation of the Company's corporate
office. The majority of these charges relate to estimated future rentals on the
closed facilities.
Interest expense increased in the nine-month period 2001 by $3.1 million to
$21.9 million due to higher borrowings on the revolving credit facility
primarily resulting from the acquisitions of Haas and ATD which occurred in the
second and third quarters of 2000. Interest rates remained relatively constant
through the first six months of 2001 compared to prior year, with a decline
experienced in third quarter 2001.
The income tax benefit in the nine-month period 2001 was $5.4 million
compared to an income tax provision of $3.8 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.
In the third quarter 2001, the Company recorded an additional loss on
disposal of discontinued operations of approximately $1.3 million, net of income
tax benefit of $0.8 million, for a cumulative net loss on sale of $13.6 million,
of which $12.4 million was recognized in 2001. On August 15, 2001, all
outstanding claims relative to the sale were settled with the buyer. The
additional loss recorded in the third quarter results primarily from agreements
made as part of this settlement and revisions to earlier estimates of future
lease obligations in light of current economic conditions. The additional net
loss of $11.2 million recorded in second quarter 2001 results primarily from
differences from in assumptions made relative to the working capital of
15
Winston as of the sale date as well as additional liabilities assumed as part of
the transaction not contemplated at the time of the estimate made in the fourth
quarter 2000.
EBITDA from continuing operations, excluding the special charges, decreased
$16.0 million to $18.2 million in the nine-month period 2001 compared to $34.3
million in the nine-month period 2000. This decrease is primarily due to the
$5.0 million parts-related charge taken in the third quarter 2001, 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 (excluding the parts-related
charge).
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 2001, the combined net indebtedness (net of cash) of the
Company was $282.6 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 September 29, 2001, of which $126.4 million was
outstanding and $17.9 million was available for additional borrowings.
In May 2001, the Company completed its sale of Winston for approximately
$10.0 million, of which $8.5 million was received in cash. In addition, during
the nine-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.
The Company anticipates cash requirements of approximately $0.3 million for
fourth quarter 2001 and $2.5 million subsequent to 2001 for lease obligations on
discontinued operations. 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
certain of its owned facilities, which is expected to generate approximately
$15.4 million in cash in the fourth quarter 2001. The Company intends to use
these proceeds to reduce its revolving credit facility. Net working capital at
September 29, 2001 totaled $91.9 million, compared to $91.8 million (exclusive
of net assets of discontinued operations) at December 30, 2000. Higher
receivable balances due to increased business activity and lower payables
balances as a result of inventory reduction efforts initiated in second quarter
2001 are virtually offset by the substantial decrease in inventory levels.
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). On November 13, 2001,
the Company and its lenders amended the Revolver to revise, among other things,
certain financial covenants contained therein, including covenant minimums
required as of September 29, 2001. The amendment also revises certain components
of the definitions of Borrowing Base, including reducing limitations on
availability for certain types of inventory. A nonrefundable fee of
approximately $0.5 million was charged in connection with this amendment. As of
November 13, 2001, the Company's financial measures were in excess of the
minimums required, as amended, and management expects that such amounts will
remain above the minimums for the foreseeable future.
The Revolver term expires in March 2005, extendable by the Company and the
banks for an additional five years. Borrowings under the Revolver bear interest,
at (i) the Base Rate, as defined, plus the applicable margin (2.0% as of
September 29, 2001) or (ii) the Eurodollar Rate, as defined, plus the applicable
margin (3.25% as of September 29, 2001). The applicable margins were increased
with the March 30, 2001 amendment, 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
margins ranging from 0.50% to 2.0% for Base Rate loans and 1.75% to 3.25% for
Eurodollar Rate loans, respectively. At September 29, 2001, the maximum loan
amount available under the existing credit facility
16
was $144.3 million of which $126.4 million was outstanding. The revision to the
definition of the Borrowing Base at November 13, 2001, would not have impacted
the maximum loan availability at September 29, 2001.
The Revolver, as amended, requires the Company to meet certain financial
requirements, including minimum EBITDA, 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 $1.8 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.
INCOME TAXES
The Company has deferred tax assets of $43.8 million and $34.6 million at
September 29, 2001 and December 30, 2000, respectively. The increase in net
deferred tax assets is primarily attributable to net operating loss
carryforwards generated from the net loss from continuing operations through
September 29, 2001 as well as the loss recognized on the disposal of
discontinued operations. Management has evaluated the Company's deferred tax
assets and has concluded that the realizability of the deferred tax assets is
"more likely than not". Accordingly, no valuation allowance has been provided at
September 29, 2001. This evaluation considered the historical and long-term
expected profitability of the Company's continuing operations, the sale of the
Company's retail segment, which generated the Company's losses in 2000 and 1999,
and the expected efficiencies to be gained from efforts initiated in 2001 to
streamline operations. Due to current economic conditions and management's view
of the continuing economic outlook, current year performance is not expected to
result in taxable income and the Company is forecasting a minimal amount of
taxable income in 2002. However, given the timing of the reversal of its
temporary differences and the expiration date of its net operating loss
carryovers, the Company believes that taxable income generated in future years
will be sufficient to utilize the remaining net deferred tax assets. The
Company's ability to generate future taxable income is dependent on numerous
factors including general economic conditions, the state of the replacement tire
market and other factors beyond management's control. Therefore, there can be no
assurance that the Company will meet its expectation of future taxable income.
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
17
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 the Company 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
For the period ended September 29, 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
10.1 Amendment No. 6 to Second Amended and Restated Loan and Security
Agreement.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended September 29,
2001.
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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: November 13, 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)
19