-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Md0PTu1vypvOjlRVRsLeTR3Kws8NOehnW7JsoC7HdeuDdzjpuV8+29JxNqe7dXoQ Mr4peRs4RW3A5mzp+mIwTg== 0000950144-01-508923.txt : 20020410 0000950144-01-508923.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950144-01-508923 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEAFNER TIRE GROUP INC CENTRAL INDEX KEY: 0001068152 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MOTOR VEHICLE SUPPLIES & NEW PARTS [5013] IRS NUMBER: 560754594 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-61713 FILM NUMBER: 1784693 BUSINESS ADDRESS: STREET 1: 2105 WATER RIDGE PARKWAY STREET 2: SUITE 500 CITY: CHARLOTTE STATE: NC ZIP: 28217 BUSINESS PHONE: 7044238989 MAIL ADDRESS: STREET 1: 2105 WATER RIDGE PARKWAY STREET 2: SUITE 500 CITY: CHARLOTTE STATE: NC ZIP: 28217 FORMER COMPANY: FORMER CONFORMED NAME: J H HEAFNER CO INC DATE OF NAME CHANGE: 19980817 10-Q 1 g72664e10-q.txt HEAFNER TIRE GROUP, INC. FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q [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 ____________
COMMISSION FILE NUMBER 333-61713 HEAFNER TIRE GROUP, INC. A DELAWARE CORPORATION (IRS EMPLOYER IDENTIFICATION NO.) 56-0754594
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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
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
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)
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 ======== ========
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)
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) ======== ======== ======== ========
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)
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 $ -- ======== ========
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:
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 ======== ======== ========= ========
9 HEAFNER TIRE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ======== ======== ========= ========
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:
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) ======== ======== ====== ========
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) ======== ======== ====== ========
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:
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 ======== ======= ======= ========
12 HEAFNER TIRE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ======== ======= ======= ========
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. 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: 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 EX-10.1 3 g72664ex10-1.txt AMENDMENT NO. 6 TO 2ND AMENDMENT AND RESTATED LOAN EXECUTION COPY AMENDMENT NO. 6 to SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 6 is entered into as of November 13, 2001 by and among HEAFNER TIRE GROUP, INC., a Delaware corporation, THE SPEED MERCHANT, INC., a California corporation, CALIFORNIA TIRE COMPANY, a California corporation (the "Borrowers"), the financial institutions party from time to time to the Loan Agreement (as hereinafter defined) (the "Lenders"), and FLEET CAPITAL CORPORATION, a Rhode Island corporation, as administrative agent (the "Administrative Agent") for the Lenders. Preliminary Statement The Borrowers, the Lenders and the Administrative Agent are parties to the Second Amended and Restated Loan and Security Agreement dated as of March 6, 2000, as amended by Amendment No. 1 dated as of July 20, 2000, Amendment No. 2 dated as of February 2, 2001, Amendment No. 3 dated as of February 14, 2001, Amendment No. 4 dated as of March 30, 2001 and Amendment No. 5 dated as of August 10, 2001 (the "Loan Agreement"; terms defined therein, unless otherwise defined herein, being used herein as therein defined). The Borrowers have requested that the Lenders adjust the financial covenants set forth in the Loan Agreement and make certain other modifications thereto and the Lenders have agreed so to amend the Loan Agreement, upon and subject to the terms and conditions of the Loan Agreement as amended by this Amendment. Statement of Agreement NOW, THEREFORE, in consideration of the Loan Agreement, the Loans outstanding thereunder, the mutual covenants set forth therein and herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. Amendment to Loan Agreement. Subject to the provisions of SECTION 2, the Loan Agreement is hereby amended by: (a) amending Section 1.1 Definitions by amending: (i) the definition "Applicable Margin" by inserting before the period at the end thereof, the phrase "; PROVIDED FURTHER, that after the earliest to occur of (x) the Minimum Availability Reserve shall have been reduced to an amount less than $15,000,000 or (y) a standby Letter of Credit shall have been issued by the Bank for the account of a Loan Party and for the benefit of any vendor or Affiliate thereof or (z) the Amendment No. 7 Effective Date, the Applicable Margin on Eurodollar Rate Loans shall permanently increase by 0.25% (or 25 basis points) in Tiers I, II and III of the attached pricing matrix, and Tier VI thereof shall be eliminated" (ii) the definition "Borrowing Base" in its entirety to read as follows: "Borrowing Base" means at any time an amount equal to the lesser of: (a) the aggregate Commitments, MINUS the sum of (i) the Letter of Credit Reserve, PLUS (ii) the Rent Reserve, PLUS (iii) any Additional Reserves, and (b) an amount equal to (i) 85% (or such lesser percentage as the Administrative Agent may in its reasonable credit judgment determine from time to time) of the face value of Eligible Receivables due and owing at such time, PLUS (ii) the lesser of (A) the sum of (1) 65% (or such lesser percentage as the Administrative Agent may in its reasonable credit judgment determine from time to time) of the lesser of cost determined on a FIFO (or first-in-first-out) accounting basis and fair market value of Eligible Inventory consisting of tires at such time, PLUS (2) the lesser of (x) 65% (or such lesser percentage as the Administrative Agent may in its reasonable credit judgment determine from time to time) of the lesser of cost determined on a FIFO (or first-in-first-out) accounting basis and fair market value of Eligible B/F Inventory consisting of tires at such time, and (y) $8,000,000, and (B) $90,000,000, PLUS (iii) the lesser of (A) 50% (or such lesser percentage as the Administrative Agent may in its reasonable credit judgment determine from time to time) of the lesser of cost determined on a FIFO (or first-in-first-out) accounting basis and fair market value of Eligible Inventory other than tires, at such time, and 2 (B) $35,000,000, MINUS (iv) the sum of (A) the Letter of Credit Reserve, PLUS (B) the Rent Reserve, PLUS (C) the Dilution Reserve, PLUS (D) the Minimum Availability Reserve, PLUS (E) any Additional Reserves. (iii) the definition "Dilution Reserve" in its entirety to read as follows: "Dilution Reserve" means an amount equal to the EXCESS of (i) non-cash reductions to the Loan Parties' Receivables (on a combined basis) during a 12-month period prior to the date of determination as established by the Loan Parties' records or by a field examination conducted by the Administrative Agent's, the Syndication Agent's or the Documentation Agent's employees or representatives, expressed as a percentage of the Loan Parties' Receivables (on a combined basis) outstanding during the same period, as the same may be adjusted by the Administrative Agent in the exercise of its reasonable credit judgment, OVER (ii) 5%, MULTIPLIED by an amount equal to Eligible Receivables as of the date of determination. (iv) the definition "EBITDA - Heafner Group" in its entirety to read as follows: "EBITDA - Heafner Group" means for any specified accounting period, EBITDA of Heafner and its Consolidated Subsidiaries (other than Winston) on a consolidated basis for such period, as reported in accordance with GAAP, PLUS, for any specified accounting period ending on or before the last day of June, 2002, the amount of that certain parts inventory reserve established by Heafner in September, 2001, up to $5,000,000. (b) further amending Section 1.1 Definitions by adding thereto in the appropriate alphabetical order the following new definitions: "Amendment No. 7" means the proposed Amendment No. 7 to the Agreement, a draft term sheet for which has previously been delivered to the Lenders and the Borrowers by the Administrative Agent. "Amendment No. 7 Effective Date" means the date on which Amendment No. 7 shall have become effective in accordance with its terms. 3 (c) amending Section 4.6(b) Termination of Agreement by substituting for the date "March 30, 2001" each time it appears in clause (iv) thereof, the date "March 30, 2002" and for the phrase "Amendment No. 4 Effective Date" each time it appears in clause (iv) thereof, the phrase "Amendment No. 7 Effective Date"; (d) amending Section 10.3 Officer's Certificate in its entirety to read as follows: SECTION 10.3 Officers' Certificates. At the time that the Borrowers furnish the financial statements pursuant to SECTION 10.1(B), a certificate of the President of Heafner or of a Financial Officer, in substantially the form attached hereto as EXHIBIT D, (a) setting forth as of the end of each Fiscal Month that is not the last month in a Fiscal Quarter or Fiscal Year, the calculation required to establish whether or not the Borrowers were in compliance with the requirements of SECTION 11.1(C) as at the end of such Fiscal Month, (b) setting forth as of the end of each Fiscal Quarter or Fiscal Year, as the case may be, the calculations required to establish whether or not the Borrowers were in compliance with the requirements of SECTIONS 11.1, 11.2 and 11.5 as at the end of each respective period and the calculations necessary to determine the Leverage Ratio as at the end of each respective period, and (c) stating that, based on a reasonably diligent examination, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrowers with respect to such Default or Event of Default. (e) amending subsection (a) of Section 11.1 Financial Covenants in its entirety to read as follows: (a) Minimum EBITDA. Permit EBITDA - Heafner Group, for any period specified on SCHEDULE 11.1(A) attached hereto, to be less (or more negative) than the amount set forth opposite such period on SCHEDULE 11.1(A). (f) amending Section 11.5 Capital Expenditures in its entirety to read as follows: SECTION 11.5 Capital Expenditures. Make or incur any Capital Expenditures (excluding Financed Capex) in the aggregate in excess of (i) $6,750,000 for Fiscal Year 2001 and (ii) $2,000,000 for any Fiscal Year thereafter, PROVIDED that any amount of such allowance not used in a Fiscal Year may be carried forward, but only to the succeeding Fiscal Year. (g) further amending the Loan Agreement by deleting Exhibit D and substituting therefor new Exhibit D in the form attached hereto as ANNEX 1 and deleting Schedules 11.1(a), 11.1(b) and 11.1(c) and substituting therefor new Schedules 11.1(a), 11.1(b) and 11.1(c) in the respective forms attached hereto as ANNEXES 2, 3 and 4, respectively. 4 Section 2. Effectiveness of Amendment. The provisions of SECTION 1 of this Amendment shall become effective as of September 29, 2001 on the date (the "Amendment No. 6 Effective Date") on which the Administrative Agent shall have received (1) for the Ratable account of the Lenders, the first installment payable in the amount of $225,000 in respect of the agreed amendment fee referred to in SECTION 3 hereof and (2) the following documents, each of which shall be satisfactory in form and substance to the Administrative Agent and in sufficient copies for each Lender: (a) this Amendment duly executed by the Borrowers, the Subsidiary Guarantors and the Lenders; (b) a certificate of the president or chief financial officer of Heafner stating that, to the best of his knowledge and based on an examination sufficient to enable him to make an informed statement, after giving effect to the Amendment, (i) all of the representations and warranties made or deemed to be made under the Loan Agreement are true and correct in all material respects on and as of the Amendment No. 6 Effective Date, and (ii) no Default or Event of Default exists; and the Administrative Agent shall be satisfied as to the truth and accuracy thereof; (c) such other documents and instruments as the Administrative Agent may reasonably request. Section 3. Fees. The Borrowers shall pay to the Agent, for the account of the Lenders as specified below, an amendment fee in the amount of $450,000, which fee shall be payable in two installments: (a) the first installment payable in the amount of $225,000, for the Ratable account of the Lenders, shall be paid on the Amendment No. 6 Effective Date and (b) the second installment payable in the amount of $225,000, for the account of the Lenders that execute and deliver the proposed Amendment No. 7 to the Loan Agreement, a draft term sheet for which has previously been delivered to the Lenders and the Borrowers by the Administrative Agent ("Amendment No. 7"), ratably according to each such Lender's Commitment expressed as a percentage of the Commitments of all Lenders that execute and deliver Amendment No. 7, shall be paid on or prior to the earlier of (i) December 31, 2001 and (ii) the date on which Amendment No. 7 shall have become effective in accordance with its terms. Both installments shall be fully earned as of the Amendment No. 6 Effective Date and shall not be subject to refund, rebate or offset of any kind. Section 4. Representations and Warranties. Each Loan Party hereby makes the following representations and warranties to the Administrative Agent and the Lenders, which representations and warranties shall survive the delivery of this Amendment and the making of additional Loans under the Loan Agreement as amended hereby: 5 (a) Authorization of Agreements. Each Loan Party has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform this Amendment and each other agreement contemplated hereby to which it is a party in accordance with their respective terms. This Amendment and each other agreement contemplated hereby to which it is a party has been duly executed and delivered by the duly authorized officers of such Loan Party and each is, or each when executed and delivered in accordance with this Amendment will be, a legal, valid and binding obligation of such Borrower, enforceable in accordance with its terms. (b) Compliance of Agreements with Laws. The execution, delivery and performance of this Amendment and each other agreement contemplated hereby to which such Loan Party is a party in accordance with their respective terms do not and will not, by the passage of time, the giving of notice or otherwise, (i) require any Governmental Approval or violate any Applicable Law relating to such Loan Party or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute a default under the articles or certificate of incorporation or by-laws or any shareholders' agreement of such Loan Party or any of its Subsidiaries, any material provisions of any indenture, agreement or other instrument to which such Loan Party, any of its Subsidiaries or any of such Loan Party's or such Subsidiaries' property may be bound or any Governmental Approval relating to such Loan Party or any of its Subsidiaries, or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Loan Party other than the Security Interest. Section 5. Effect of Amendment. From and after the Amendment No. 6 Effective Date, all references in the Loan Agreement and in any other Loan Document to "this Agreement," "the Loan Agreement," "hereunder," "hereof" and words of like import referring to the Loan Agreement, shall mean and be references to the Loan Agreement as amended by this Amendment. Except as expressly amended hereby, the Loan Agreement and all terms, conditions and provisions thereof remain in full force and effect and are hereby ratified and confirmed. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Administrative Agent and the Lenders under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. Section 6. Counterpart Execution; Governing Law. (a) Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed signature page of any party hereto by facsimile transmission shall be as effective as delivery of a manually delivered counterpart thereof. 6 (b) Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without giving effect to conflicts of law principles thereof. 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. BORROWERS: HEAFNER TIRE GROUP, INC. [CORPORATE SEAL] Attest: By: /s/ Richard P. Johnson -------------------------------------- Name: Richard P. Johnson Title: President and CEO ___________________________ [Assistant] Secretary THE SPEED MERCHANT, INC. [CORPORATE SEAL] Attest: By: /s/ Richard P. Johnson --------------------------------------- Name: Richard P. Johnson Title: President and CEO ___________________________ [Assistant] Secretary By: /s/ William E. Berry --------------------------------------- Name: William E. Berry Title: Vice President and Assistant Treasurer CALIFORNIA TIRE COMPANY [CORPORATE SEAL] Attest: By: /s/ Richard P. Johnson --------------------------------------- Name: Richard P. Johnson Title: President and CEO ____________________________ [Assistant] Secretary By: /s/ William E. Berry --------------------------------------- Name: William E. Berry Title: Vice President and Assistant Treasurer 8 FLEET CAPITAL CORPORATION, as Administrative Agent and as a Lender By: /s/ Stephen Y. McGehee ---------------------------------------- Stephen Y. McGehee Senior Vice President 9 BANK OF AMERICA, N.A., as Syndication Agent and as a Lender By: /s/ Perri H. LOve ---------------------------------------- Name: Perri H. Love Title: Assistant Vice President 10 FIRST UNION NATIONAL BANK, as Documentation Agent and as a Lender By: /s/ John T. Trainor ------------------------------- Name: John T. Trainor Title: Vice President 11 STANDARD FEDERAL BANK NATIONAL ASSOCIATION, formerly known as MICHIGAN NATIONAL BANK, as successor in interest to Mellon Bank, N.A. By: LaSALLE BUSINESS CREDIT, INC., its agent By: /s/ Roger D. Attix ------------------------------------- Name: Roger D. Attix Title: Vice President 12 PNC BANK, NATIONAL ASSOCIATION, as a Lender By: /s/ Susanne Raschner --------------------------------------- Name: Susanne Raschner Title: Vice President 13 SUBSIDIARY GUARANTORS: Acknowledged and consented to this ___ day of November 2001: T.O. HAAS TIRE COMPANY, INC. By: /s/ Richard P. Johnson --------------------------------------- Name: Richard P. Johnson Title: Chairman T.O. HAAS HOLDING CO., INC. By: /s/ Richard P. Johnson Name: Richard P. Johnson Title: Chairman 14 ANNEX 1 EXHIBIT D FORM OF COMPLIANCE CERTIFICATE The undersigned, ____________________, the ___________________ of Heafner Tire Group, Inc., a Delaware corporation (the "Corporation"), hereby certifies to the Administrative Agent under and as defined in the Second Amended and Restated Loan and Security Agreement dated as of March 6, 2000 (as amended and in effect from time to time, the "Loan Agreement"), in accordance with the provisions of SECTION 10.3 of the Loan Agreement, that: 1. As of ____________________ [date of last day of Fiscal Month that is not the last month in a Fiscal Quarter or Fiscal Year], the Borrowers were/were not in compliance with the covenant set forth in SECTION 11.1(C) of the Loan Agreement, as detailed on the worksheet attached hereto as EXHIBIT A. or As of _____________________ [date of last day of Fiscal Quarter or Fiscal Year], the Borrowers were/were not in compliance with the covenants set forth in SECTIONS 11.1, 11.2 and 11.5 of the Loan Agreement, as detailed on the worksheet attached hereto as EXHIBIT A. The calculations necessary to determine the Leverage Ratio as of such date are also set forth on EXHIBIT A. 2. All Schedules to the Loan Agreement are correct and accurate as of the date hereof after taking into account the revised and/or supplemental information reflected on the Schedules attached hereto as EXHIBIT B. 3. Based on an examination sufficient to enable me to make an informed statement, no Default or Event of Default exists as of the date hereof [other than:1]. IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate as of ___________, 200_. _________________________________ Title:___________________________ - -------- 1 Specify such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrowers with respect to such Default or Event of Default. ANNEX 2 SCHEDULE 11.1(a) EBITDA - Heafner Group The period of four consecutive Fiscal Quarters ending with: EBITDA - Heafner Group The last day of the first Fiscal Quarter of Fiscal Year 2001 $37,000,000 The last day of the second Fiscal Quarter of Fiscal Year 2001 $37,000,000 The last day of the third Fiscal Quarter of Fiscal Year 2001 $29,000,000 The last day of the fourth Fiscal Quarter of Fiscal Year 2001 $25,000,000 The last day of the first Fiscal Quarter of Fiscal Year 2002 $27,000,000 The last day of the second Fiscal Quarter of Fiscal Year 2002 $27,000,000 The last day of the third Fiscal Quarter of Fiscal Year 2002 $31,500,000 The last day of the fourth Fiscal Quarter of Fiscal Year 2002 $38,000,000 The last day of each Fiscal Quarter thereafter $38,000,000, as increased by $2,000,000 on the last day of the second and fourth Fiscal Quarters of each Fiscal Year beginning with the last day of the second Fiscal Quarter of Fiscal Year 2003 ANNEX 3 SCHEDULE 11.1(b) Period Ratio The second Fiscal Quarter of Fiscal Year 2001 1.70 to 1 The second and third Fiscal Quarters of Fiscal Year 2001 1.65 to 1 The second, third and fourth Fiscal Quarters of Fiscal Year 2001 1.20 to 1 The period of four consecutive Fiscal Quarters ending on the last day of the first Fiscal Quarter of Fiscal Year 2002 1.10 to 1 The periods of four consecutive Fiscal Quarters ending on the last day of the second Fiscal Quarter of Fiscal Year 2002 0.85 to 1 The periods of four consecutive Fiscal Quarters ending on the last day of the third Fiscal Quarter of Fiscal Year 2002 1.00 to 1 The periods of four consecutive Fiscal Quarters ending on the last day of the fourth Fiscal Quarter of Fiscal Year 2002 and the last day of each Fiscal Quarter thereafter 1.20 to 1 2 ANNEX 4 SCHEDULE 11.1(c) Fiscal Month Tangible Capital Funds ------------ ---------------------- April, 2001 $28,000,000 May, 2001 $28,000,000 June, 2001 $30,000,000 July, 2001 $30,000,000 August, 2001 $30,000,000 September, 2001 $28,500,000 October, 2001 $28,500,000 November, 2001 $28,500,000 December, 2001 $24,000,000 January, 2002 $24,000,000 February, 2002 $24,000,000 March, 2002 $25,000,000 April, 2002 $25,000,000 May, 2002 $25,000,000 June, 2002 $27,000,000 July, 2002 $27,000,000 August, 2002 $27,000,000 September, 2002 $29,000,000 October, 2002 $29,000,000 November, 2002 $29,000,000 December, 2002 $30,000,000 Each Fiscal Month thereafter $30,000,000, as increased by $2,000,000 on the last day of the Fiscal Months of June and December of each Fiscal Year commencing on the last day of the Fiscal Month of June, 2003 -----END PRIVACY-ENHANCED MESSAGE-----