-----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, LNK0iiSJlhSggagcwgb1VFKmqXjjRq4Lq+bUQjwn9P5mhEmglclKTTb8Eb9fT6zj n4pPh0p4u4CxV3vCxoVoGQ== 0000950144-99-013198.txt : 19991117 0000950144-99-013198.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950144-99-013198 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 333-61713 FILM NUMBER: 99753834 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 HEAFNER TIRE GROUP, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 30, 1999 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. (Exact name of registrant as specified in its charter) DELAWARE 56-0754594 (State or other jurisdiction of incorporation (IRS Employer Identification No.) or organization) 2105 WATER RIDGE PARKWAY, SUITE 500 28217 CHARLOTTE, NORTH CAROLINA (Zip Code) (Address of principal executive offices)
(Registrant's telephone number, including area code) (704) 423-8989 THE J.H. HEAFNER COMPANY, INC. (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 5,286,917 shares of common stock outstanding as of November 10, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 HEAFNER TIRE GROUP, INC. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets -- September 30, 1999 (unaudited) and December 31, 1998................ 1 Condensed Consolidated Statements of Operations (unaudited) -- Three and Nine Months Ended September 30, 1999 and 1998..................................... 2 Condensed Consolidated Statements of Cash Flows (unaudited) -- Three and Nine Months Ended September 30, 1999 and 1998..................................... 3 Notes to Condensed Consolidated Financial Statements (unaudited) -- Three and Nine Months Ended September 30, 1999 and 1998..................................... 4 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 9 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 12 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings................................. 12 ITEM 6. Exhibits and Reports on Form 8-K.................. 13 Signatures.................................................. 14
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HEAFNER TIRE GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 10,868 $ 6,648 Accounts receivable, net of allowances of $4,980 and $2,220................................................. 127,795 109,471 Inventories, net.......................................... 154,046 133,221 Other current assets...................................... 14,007 13,319 -------- -------- Total current assets.............................. 306,716 262,659 -------- -------- Property and equipment, net................................. 45,412 42,802 Goodwill, net............................................... 106,462 104,405 Other assets................................................ 13,854 12,579 Other intangible assets, net................................ 6,289 8,376 -------- -------- $478,733 $430,821 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $192,432 $169,847 Accrued expenses.......................................... 33,208 33,239 Current maturities of long-term debt...................... 497 3,011 -------- -------- Total current liabilities......................... 226,137 206,097 Long-term debt.............................................. 161,693 160,400 Revolving credit facility................................... 55,000 21,925 Other liabilities........................................... 9,338 11,785 Preferred stock series A -- 4% cumulative, 7,000 shares authorized, issued and outstanding........................ 7,000 7,000 Preferred stock series B -- variable rate cumulative, 4,500 shares authorized, issued and outstanding................. 4,353 4,353 Warrants.................................................... 1,137 1,137 Commitments and contingencies Stockholders' equity: Class A Common Stock, par value of $.01 per share; authorized 10,000,000 shares; 3,886,250 and 3,697,000 shares issued and outstanding.......................... 39 37 Class B Common Stock, par value of $.01 per share; 20,000,000 authorized, 1,400,667 shares issued and outstanding............................................ 14 14 Additional paid-in capital................................ 23,981 22,360 Notes receivable from stock sales......................... (1,117) (177) Retained deficit.......................................... (8,842) (4,110) -------- -------- 14,075 18,124 -------- -------- $478,733 $430,821 ======== ========
See notes to unaudited condensed consolidated financial statements. 1 4 HEAFNER TIRE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Net sales............................................. $267,360 $248,266 $773,205 $491,522 Cost of goods sold.................................... 209,060 194,444 600,759 377,296 -------- -------- -------- -------- Gross profit................................... 58,300 53,822 172,446 114,226 Selling, general and administrative expenses.......... 52,459 49,378 156,906 106,397 Special and nonrecurring charges...................... 3,500 0 3,500 1,409 -------- -------- -------- -------- Income from operations......................... 2,341 4,444 12,040 6,420 -------- -------- -------- -------- Other income (expense): Interest expense.................................... (5,622) (4,248) (16,310) (8,745) Other income, net................................... 437 282 1,424 528 -------- -------- -------- -------- Net income (loss) from operations before income taxes and extraordinary charge............................ (2,844) 478 (2,846) (1,797) Provision (benefit) for income taxes............. (811) 267 178 (570) -------- -------- -------- -------- Net income (loss) from operations before extraordinary charge.............................................. (2,033) 211 (3,024) (1,227) Extraordinary charge from early extinguishment of debt, net of income tax benefits of $1,466.......... 0 0 0 2,198 -------- -------- -------- -------- Net income (loss)..................................... $ (2,033) $ 211 $ (3,024) $ (3,425) ======== ======== ======== ========
See notes to unaudited condensed consolidated financial statements. 2 5 HEAFNER TIRE GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................ $ (2,033) $ 211 $ (3,024) $ (3,425) Adjustments to reconcile net income (loss) to net cash used in operating activities, net of the ITCO merger, CPW acquisition and the California Tire acquisition -- Depreciation and amortization............... 4,572 4,330 13,444 8,714 Extraordinary charge........................ 0 0 0 3,664 Special and nonrecurring charges............ 3,500 0 3,500 1,409 Other....................................... 87 35 267 (1,300) Change in assets and liabilities: Accounts receivable, net............... 3,064 (6,754) (14,772) (15,787) Other current assets................... 1,202 696 (135) 501 Inventories, net....................... 4,524 (1,889) (17,617) (1,088) Accounts payable and accrued expenses............................. 9,784 7,670 11,425 5,835 Other, net............................. 19 (37) (367) (37) -------- -------- -------- -------- Net cash provided by (used in) operating activities................. 24,719 4,262 (7,279) (1,514) -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of CPW, net of cash acquired......... 0 0 0 (36,086) Acquisition of ITCO, net of cash acquired........ 0 0 0 (17,125) Acquisition of California Tire, net of cash acquired....................................... 0 0 (4,068) 0 Purchase of property and equipment............... (1,702) (3,957) (8,279) (6,421) Proceeds from sale of property and equipment..... 856 14 962 3,667 Other, net....................................... 614 0 (1,854) (219) -------- -------- -------- -------- Net cash used in investing activities........................... (232) (3,943) (13,239) (56,184) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt......... 0 0 0 100,036 Principal payments on long-term debt............. (157) (477) (3,222) (29,768) Cash paid for financing costs.................... (592) (306) (3,635) (6,691) Net proceeds (payments) from revolving credit facility and other notes....................... (13,251) 837 30,994 (4,854) Other, net....................................... 0 0 601 725 -------- -------- -------- -------- Net cash provided by (used in) financing activities................. (14,000) 54 24,738 59,448 -------- -------- -------- -------- NET INCREASE IN CASH.................................. 10,487 373 4,220 1,750 CASH, beginning of period............................. 381 3,879 6,648 2,502 -------- -------- -------- -------- CASH, end of period................................... $ 10,868 $ 4,252 $ 10,868 $ 4,252 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest....................... $ 1,361 $ 926 $ 10,904 $ 4,443 Cash payments for income taxes................... 750 79 895 692 ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: In May 1998, the Company issued 1,400,667 shares of Class B Common Stock with an estimated value of $14,960 in connection with the ITCO merger. In connection with the CPW acquisition, the Company entered into noncompete agreements in the amount of $7,400 and stay put agreements in the amount of $2,600. See notes to unaudited condensed consolidated financial statements. 3 6 HEAFNER TIRE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS) 1. ORGANIZATION: 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 and the operation of retail tire and auto service stores. In May 1997, the Company acquired all outstanding shares of common stock of Winston Tire Company (Winston) (formerly Oliver and Winston, Inc.), a California-based operation of retail tire and automotive service centers in California and Arizona. In May 1998, the Company merged with ITCO Logistics Corporation and Subsidiaries (ITCO), a wholesaler of tires and related accessories in the eastern part of the United States. Following the merger, ITCO's subsidiaries were merged into ITCO and ITCO was merged into the Company. Concurrent with the ITCO merger, the Company acquired all outstanding shares of common stock of The Speed Merchant, Inc. (CPW), a wholesaler and retailer of tires, parts and accessories located in California and Arizona. In January 1999, the Company acquired all outstanding shares of California Tire LLC (California Tire), a wholesaler and retailer of tires, parts and accessories located in California. On August 20, 1999, the Company reincorporated in Delaware (previously incorporated in North Carolina) and simultaneously changed its name from The J. H. Heafner Company, Inc. to Heafner Tire Group, Inc. 2. BASIS OF PRESENTATION: The condensed consolidated balance sheet as of September 30, 1999, and the condensed consolidated statements of operations and cash flows for the three months and nine months ended September 30, 1999 and 1998, 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 for the fiscal year ended December 31, 1998. The results of the operations for the three months ended and the nine months ended September 30, 1999 are not necessarily indicative of the operating results for the full fiscal year. Certain prior period amounts have been reclassified to conform with current period presentation. 3. ACQUISITION: On January 12, 1999, Company entered into a Stock Purchase Agreement with the stockholders of California Tire, a wholesaler and retailer of tires, parts and accessories located in California. The total consideration paid to the stockholders was $3,950 in cash and an additional $118 in direct acquisition costs. The transaction has been accounted for under the purchase method. Accordingly, results of operations for the acquired business have been included in the unaudited condensed consolidated statement of operations from the January 12, 1999 acquisition date. A preliminary allocation of the purchase price has been recorded in the accompanying unaudited condensed consolidated financial statements as of September 30, 1999, based on management's best estimate of assets acquired and liabilities assumed. The excess of the purchase price over the net tangible assets acquired was allocated to goodwill and is being amortized over 15 years. 4. EXIT COSTS: In connection with the ITCO merger, the CPW acquisition and the Winston acquisition, the Company recorded a $2,491, $1,013 and $2,927 liability, respectively, for estimated costs related to employee severance, facilities closing expense and other related exit costs in accordance with EITF 95-3, "Recognition of 4 7 HEAFNER TIRE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Liabilities in Connection with a Purchase Business Combination." Charges of approximately $232, $83 and $100, respectively were made against these reserves in the third quarter 1999. 5. SPECIAL AND NONRECURRING CHARGES: In the third quarter 1999, the Company, without admitting any fault, entered into a settlement agreement with plaintiffs in a class action lawsuit filed in 1998 on behalf of Winston store managers. The settlement will require judicial approval. The lawsuit alleged that Winston violated certain California wage and business practices regulations. Winston denied these allegations. As a result of this agreement, the Company has recorded a pre-tax non-recurring charge of $3,500 in the third quarter 1999. The non-recurring charge includes expected payments of $3,000 to the plaintiff class members and their attorneys. The Company has filed a claim of indemnification against the previous Winston shareholders pursuant to the original purchase agreement under which the Company acquired Winston. The indemnification provisions of the purchase agreement provide that recoveries are limited to 72% of such costs and related fees. The sellers have disputed the Company's right to indemnification. Approximately $4,400 is held in escrow to secure all of the sellers' indemnification obligations to the Company. The Company is not able at this time to predict the outcome of this claim for indemnification and has not recorded any recovery in its financial statements. In the second quarter of 1998, the Company recorded special charges of $1,409 related to the restructuring of its southeastern wholesale business, which includes the closing of selected distribution centers commencing in the third quarter 1998. The charges include lease commitments for certain distribution centers, asset writedowns, severance and employee related costs and costs to shut down certain facilities. In the third quarter of 1999, the Company charged approximately $98 against these reserves. 6. EXTRAORDINARY CHARGE: The Company recorded an extraordinary charge in the second quarter of 1998 related to the early extinguishment of debt resulting in noncash write-off of deferred financing fees and unamortized discounts of subordinated debt of $1,691, net of applicable income tax benefits of $1,128. The Company also had pre-payment penalties associated with the extinguishment of debt that resulted in a cash charge of $507, net of applicable income tax benefits of $338. 7. SEGMENT INFORMATION: The Company classifies its business interests into three fundamental areas: southeastern wholesale distribution of tires and products, western wholesale distribution of tires and products and western retail sales of tires, products and services. The Company evaluates performance based on several factors, of which the primary financial measure is income (loss) before interest expense, income taxes, depreciation and noncash amortization of intangible assets (EBITDA). 5 8 HEAFNER TIRE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The operating results of the Company reflect the acquisitions of CPW and ITCO effective as of May 20, 1998 and California Tire effective as of January 12, 1999:
SOUTHEASTERN WESTERN WESTERN WHOLESALE RETAIL WHOLESALE ELIMINATIONS TOTALS ------------ -------- --------- ------------ -------- Three months ended September 30, 1999 -- Revenues from external customers..... $172,669 $ 43,894 $ 50,797 $ $267,360 EBITDA (1)........................... 8,088 (2,738) 1,787 7,137 Segment assets....................... 526,502 80,879 186,142 (314,790) 478,733 Expenditures for segment assets...... 522 605 575 1,702 Nine months ended September 30, 1999 -- Revenues from external customers..... $506,737 $123,413 $143,055 $ $773,205 EBITDA (1)........................... 19,026 (1,615) 8,852 26,263 Segment assets....................... 526,502 80,879 186,142 (314,790) 478,733 Expenditures for segment assets...... 2,411 4,183 1,685 8,279 Three months ended September 30, 1998 -- Revenues from external customers..... $165,080 $ 41,579 $ 41,607 $ $248,266 EBITDA (1)........................... 3,825 2,333 2,773 8,931 Segment assets....................... 447,151 75,513 106,929 (210,547) 419,046 Expenditures for segment assets...... 781 1,918 1,258 3,957 Nine months ended September 30, 1998 -- Revenues from external customers..... $324,154 $112,734 $ 54,634 $ $491,522 EBITDA (1)........................... 3,035 4,955 3,577 11,567 Segment assets....................... 447,151 75,513 106,929 (210,547) 419,046 Expenditures for segment assets...... 1,305 3,670 1,446 6,421
- --------------- (1) EBITDA represents income (loss) before interest expense, income taxes, depreciation and noncash amortization of intangible assets. Depreciation and amortization for the three and nine months ended September 30, 1999, as noted in the unaudited condensed consolidated statement of cash flows, includes $213 and $645, respectively of amortization expense related to deferred financing fees that is included in interest expense in the unaudited condensed consolidated statement of operations. Depreciation and amortization for the three and nine months ended September 30, 1998, as noted in the unaudited condensed consolidated statement of cash flows, includes $0 and $66 of amortization expense related to debt discount and $125 and $365, respectively of amortization expense related to deferred financing fees that is included in interest expense in the unaudited condensed consolidated statement of operations. EBITDA for the 1999 third quarter and nine-month period in the Western Retail segment has been reduced by a special and nonrecurring charge of $3,500 related to the settlement of certain litigation (see Note 5). EBITDA for the 1998 nine-month period in the Southeastern Wholesale segment has been reduced by a special and nonrecurring charge of $1,409 related to the restructuring of the wholesale business and by an extraordinary charge of $3,664 related to the early extinguishment of debt. 6 9 HEAFNER TIRE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION: The 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 combined summarized information of these subsidiaries is as follows:
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 ------------------ Current assets.............................................. $103,567 Noncurrent assets........................................... 99,001 Current liabilities......................................... 67,300 Noncurrent liabilities...................................... 7,292 Net sales................................................... 266,468 Gross profit................................................ 87,906 Net loss.................................................... (5,445)
The above information excludes $44,516 of net intercompany payable and $43,321 of intercompany sales of the Company's subsidiary guarantors. In preparation of the Company's unaudited condensed consolidated financial statements, all intercompany accounts were eliminated. 9. STOCKHOLDERS EQUITY: Change of Control On May 24, 1999, Charlesbank Equity Fund IV, Limited Partnership, a Massachussetts limited partnership, purchased approximately 95.2% of the Company's issued and outstanding shares of Class A common stock and approximately 96.8% of its issued and outstanding shares of Class B common stock for a purchase price of approximately $44,000. In addition, in connection with this transaction, the Company issued 150,000 shares of common stock to certain members of management. Approximately $1,679 in fees related to this transaction is reflected as a charge to retained earnings in the accompanying balance sheet. Offer of Stock Exchange In August 1999, the Board of Directors resolved that the Company is authorized to offer all holders of Class B common stock the opportunity to exchange their shares for a like number of shares of Class A common stock. As of September 30, 1999, no Class B shares had been exchanged for Class A shares. 10. STOCK OPTION PLAN In the second quarter of 1999, the Company adopted the 1999 Stock Option Plan (the 1999 Plan). The purpose of the 1999 Plan is to attract and retain employees (including officers), directors and independent contractors of the Company. The 1999 Plan authorizes the issuance of up to 1,050,000 shares of voting common stock to be issued to employees (including officers), directors and independent contractors of the Company under terms and conditions to be set by the Company's Board of Directors. In May 1999, the Company granted 500,000 options to various members of management at a fair value price of $9.00 per share. During the third quarter 1999, an additional 85,000 options were granted to management. The options are divided into three tiers that vest over varying periods of time. All options expire 10 years from the date of grant. Under the 1999 Plan, no options vested and accordingly, no options were exercised as of September 30, 1999. 7 10 HEAFNER TIRE GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES In the third quarter 1999, the Company, without admitting any fault, entered into a settlement agreement with plaintiffs in a class action lawsuit filed in 1998 on behalf of Winston store managers. See Note 5 for further discussion. The agreements related to the acquisition of CPW, including employment agreements, contained various provisions which required the Company to make certain calculations regarding results of operations (as defined therein) and make payments based on certain formulas. The Company has presented calculations of the amounts it believes are due the majority stockholder pursuant to these agreements, which amounts are not significant to the financial condition of the Company. The majority stockholder disagrees with these amounts and is actively pursuing the dispute resolution avenues defined in the agreements. The Company is actively pursuing its positions in these dispute resolution procedures, but cannot make an estimate of the additional amounts, if any, which may ultimately be determined to be due relative to these matters. The Company is involved in various lawsuits arising out of the ordinary conduct of its business. Although no assurances can be given, management does not expect that any of these matters will have a material adverse effect on the financial position or results of operations of the Company. 12. SUBSEQUENT EVENT On October 28, 1999, the Company acquired the assets and business of Tri-Valley, Inc./Dorman's Tire, Inc., a tire retail chain in Southern California. The purchase price totaled $3,750 in cash and the assumption of operating leases for 17 retail tire stores in the Los Angeles and San Diego areas. 8 11 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 ("Heafner") should be read in conjunction with the unaudited financial statements and related notes thereto. The Company acquired Speed Merchant, Inc. ("CPW") on May 20, 1998 and California Tire LLC ("California Tire") on January 12, 1999, and merged with ITCO logistics Corporation and Subsidiaries ("ITCO") on May 20, 1998. Therefore, results for 1998 exclude the operations of California Tire, and include the operations of CPW and ITCO subsequent to May 20, 1998. RESULTS OF OPERATIONS The following table sets forth for each category of statements of operations data as a percentage of net sales:
QUARTER ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- ------------------ 1999 1998 1999 1998 ----- ----- ------ ------ Net sales............................................. 100.0% 100.0% 100.0% 100.0% Cost of goods sold.................................... 78.2 78.3 77.7 76.8 Gross profit.......................................... 21.8 21.7 22.3 23.2 Selling, general and administrative expenses.......... 19.6 19.9 20.3 21.6 Special and nonrecurring charges...................... 1.3 -- 0.5 0.3 Income from operations................................ 0.9 1.8 1.6 1.3 Interest and other expense............................ (1.9) (1.6) (1.9) (1.7) Income (loss) from operations before income taxes and extraordinary charge................................ (1.1) 0.2 (0.4) (0.4) Income taxes.......................................... (0.3) 0.1 -- (0.1) Net income (loss) before extraordinary charge......... (0.8) 0.1 (0.4) (0.2) Extraordinary charge, net of income tax............... -- -- -- (0.4) Net income (loss)..................................... (0.8) -- (0.4) (0.7)
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998 Net sales for the quarter ended September 30, 1999 totaled $267.4 million, an increase of $19.1 million, or 7.7%, from sales in the third quarter of 1998 of $248.3 million. All segments of the Company's business reported increases in net sales ranging from 4.6% to 22.1%. The inclusion of sales from California Tire accounted for 56.5% of the increase in net sales. On a pro forma basis, net sales increased 3.6% from the third quarter of 1998. Gross profit was $58.3 million in the third quarter of 1999, an increase of $4.5 million, or 8.3% from $53.8 million in the third quarter of 1998. As a percentage of sales, gross profit was 21.8% and 21.7%, respectively. The increase in gross profit dollars was attributable to both the inclusion of results from California Tire and to cost savings resulting from the merger of acquired operations. Selling, general and administrative expenses were $52.5 million in the quarter ended September 30, 1999, an increase of $3.1 million, or 6.2% from $49.4 million in the prior year third quarter. As a percentage of sales, these expenses were 19.6% and 19.9% of sales, respectively. Included in the results of operations for the quarter ended September 30, 1999 is a charge of $3.5 million representing the cost of settlement of the class action lawsuit filed in 1998 on behalf of Winston store managers alleging certain violations of California wage and business practice regulations by Winston Tire Company. The Company settled this matter without any admission of fault in order to avoid the effects of protracted litigation. The settlement requires judicial approval. The Company has filed a claim for indemnification of this cost against the previous Winston shareholders pursuant to the Winston purchase agreement. 9 12 The previous Winston shareholders have disputed Heafner's right to indemnification. The indemnification provisions of the purchase agreement provide that recoveries are limited to 72% of such costs and related fees. Approximately $4.4 million is held in escrow to secure all of the sellers' indemnification obligations to the Company. The Company is not able at this time to predict the outcome of this claim for indemnification and has not recorded any recovery in its financial statements. Interest and other expense increased from $4.0 million in the third quarter of 1998 to $5.2 million in the third quarter of 1999. Interest expense increased by $1.4 million due to increased borrowings resulting primarily from the acquisition of California Tire and increased levels of working capital. Income taxes of ($0.8) million in the third quarter represent the effects of the net loss for tax purposes, which includes the aforementioned litigation settlement. The income tax provisions in both years give effect to the non-deductible goodwill amortization expense for tax purposes. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Net sales for the nine months ended September 30, 1999 totaled $773.2 million, an increase of $281.7 million, or 57.3%, from sales in the comparable nine months of 1998 of $491.5 million. The inclusion of sales from ITCO, CPW, and California Tire accounted for substantially all of the increase in net sales. The integration of operations of Heafner and ITCO divisions in the Southeast prevents the calculation of the precise amount of this effect. On a pro forma basis, net sales increased 6.3% from the comparable prior year period. Gross profit was $172.4 million in the nine months ended September 30, 1999, an increase of $58.2 million, or 51.0% from $114.2 million in the comparable nine months of 1998. As a percentage of sales, gross profit was 22.3% and 23.2%, respectively. The increase in gross profit dollars was primarily due to the inclusion of the acquired operations. The decrease in overall gross margin percentages in 1999 was due to a significantly higher proportion of distribution sales in the current year, which carry lower gross margins than retail sales. The percentage of distribution sales to total sales was in excess of 84% in the first nine months of 1999, versus just over 77% in the first nine months last year. Selling, general and administrative expenses were $156.9 million in the nine months ended September 30, 1999, an increase of $50.5 million, or 47.5%, from $106.4 million in the comparable nine month period of 1998. As a percentage of net sales, these expenses were 20.3% and 21.6%, respectively. The increase in selling, general and administrative expenses in 1999 was primarily due to the inclusion of the acquired operations. The decrease in selling, general and administrative costs as a percent of sales was due to the significantly higher proportion of distribution sales, which have lower expense percentages than retail operations. Offsetting this business mix change somewhat was slightly higher selling and administrative costs in the Company's distribution operations as a percent of sales. Included in selling, general and administrative expenses in the nine months ended September 30, 1998 was a non-recurring restructuring charge of $1.4 million related to costs to be incurred by Heafner in the consolidation of distribution and corporate office facilities and integration of management information systems. Interest and other expense increased from $8.2 million in the nine months ended September 30, 1998 to $14.9 million in the nine months ended September 30,1999. Interest expense increased by $7.6 million in the first nine months of 1999 as a result of increased borrowings incurred in connection with the acquisitions of ITCO, CPW, and California Tire and increased levels of working capital. Income taxes on pre-tax income were $0.2 million in the nine months ended September 30, 1999 compared to $(0.6) million in the corresponding nine months last year. The income tax provisions in both years give effect to the non-deductible goodwill amortization expense for tax purposes. LIQUIDITY AND CAPITAL RESOURCES Financing committed by the lenders under the Company's revolving line of credit is $100.0 million, approximately $55.0 million of which was outstanding as of September 30, 1999. 10 13 The Company's principal sources of cash during the periods ended September 30, 1999 were from operating activities and borrowings under revolving credit facilities. Cash provided by operating activities totaled $24.7 million and $4.3 million in the third quarter of 1999 and 1998, respectively. Working capital reductions in the third quarter of 1999 totaled $18.6 million, reversing a portion of prior quarters' increases. The Company anticipates that its principal use of cash going forward will be working capital requirements, debt service requirements, and capital expenditures. Capital expenditures during the quarters ended September 30, 1999 and 1998 amounted to $1.7 million and $4.0 million, respectively. Capital spending during the third quarter of 1999 was primarily for new equipment in retail operations, acquisition of new retail locations, and expansion of distribution warehouses. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the revolving 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 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. On October 28, 1999, the Company acquired the assets and business of Tri-Valley, Inc./Dorman's Tire, Inc., a tire retail chain in Southern California. The purchase price totaled $3.75 million in cash and the assumption of operating leases for 17 retail tire stores in the Los Angeles and San Diego areas. YEAR 2000 COMPLIANCE Portions of some of the accounting and operational systems and software used by Heafner in its business identify years with two digits instead of four. If not corrected, these information technology systems may recognize the year 2000 as the year 1900, which might cause system failures or inaccurate reporting of data that disrupts operations. Heafner has completed an internal assessment of all of the business applications and related software used in its information technology systems in order to identify where "Year 2000" problems exist. As a result of this review, Heafner believes that all of its information technology systems and software are either Year 2000 compliant or can be brought into compliance by the end of 1999, although there can be no assurance that any required remediation will be completed in a timely manner. In addition, Heafner has contacted non-information technology vendors to ensure that any of their products currently used in Heafner's business adequately address Year 2000 issues. Areas being reviewed include warehouse equipment, telephone and voice mail systems, security systems and other office and site support systems. Though there can be no assurance, Heafner believes based on its review that Year 2000 problems in its non-information technology systems will not cause a material disruption in Heafner's business. Heafner also may be vulnerable to business interruptions caused by unremedied Year 2000 problems of its significant suppliers of products or services. Heafner has initiated formal communications with significant suppliers, including the country's major tire manufacturers, to determine the extent to which Heafner's operations may be affected by such third parties' Year 2000 non-compliance. Each of the major tire manufacturers has informed Heafner that it anticipates no disruption of tire supply or provision of significant business information as a result of Year 2000 problems. Heafner's wholesale and retail customer base is highly fragmented, with no single customer accounting for a significant portion of Heafner's business. Accordingly, although it has not attempted to survey its customers, Heafner believes that no significant risk exists in connection with Year 2000 problems on the part of any of its customers. Heafner does not expect the historical and estimated costs associated with bringing its information technology and non-information technology systems into Year 2000 compliance, including software modification, equipment replacement and payments to outside solution providers, to be material. However, if Year 2000 issues in Heafner's information technology and non-information technology systems are not remedied in a timely manner, or if Year 2000 problems on the part of Heafner's customers and suppliers exist and are not 11 14 remedied in a timely manner, there can be no assurance that significant business interruptions or increased costs having a material adverse effect on the business, financial condition or results of operations of Heafner will not occur in connection with the change in century. Risks of Year 2000 non-compliance on the part of Heafner or any of its significant suppliers could include interruptions in supply from tire manufacturers, disruption of Heafner's internal and external distribution network, reduced customer service capabilities, breakdown of inventory control and fulfillment systems and impairment of essential information technology systems used by management. Heafner has not established nor does it plan to establish a contingency plan for Year 2000 compliance issues. FACTORS AFFECTING FUTURE RESULTS The preceding Management's Discussion and Analysis of Financial Conditions and Results of Operations contains forward-looking statements that relate to the Company's future plans, objectives, estimates, and goals. These statements are subject to numerous risks and uncertainties, including, among others, the ability of the Company to maintain existing relationships with long standing vendors; successfully implement its business strategy; integrate the new divisions; and market and sell new products. These risks and uncertainties could cause actual results and developments to be materially different from those expressed or implied by any of the forward-looking statements included herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not consider its exposure to market risk to be material. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the third quarter 1999, the Company, without admitting any fault, entered into a settlement agreement with plaintiffs in a class action lawsuit filed in 1998 on behalf of Winston store managers. The settlement will require judicial approval. The lawsuit alleged that Winston violated certain California wage and business practices regulations. Winston denied these allegations. As a result of this agreement, the Company has recorded a pre-tax nonrecurring charge of $3,500 in the third quarter 1999. The nonrecurring charge includes expected payments of $3,000 to the plaintiff class members and their attorneys. The Company has filed a claim of indemnification against the previous Winston shareholders pursuant to the original purchase agreement under which the Company acquired Winston. The indemnification provisions of the purchase agreement provide that recoveries are limited to 72% of such costs and related fees. The sellers have disputed the Company's right to indemnification. Approximately $4,400 is held in escrow to secure all of the sellers' indemnification obligations to the Company. The Company is not able at this time to predict the outcome of this claim for indemnification and has not recorded any recovery in its financial statements. The agreements related to the acquisition of CPW, including employment agreements, contained various provisions which required the Company to make certain calculations regarding results of operations (as defined therein) and make payments based on certain formulas. The Company has presented calculations of the amounts it believes are due the majority stockholder pursuant to these agreements, which amounts are not significant to the financial condition of the Company. The majority stockholder disagrees with these amounts and is actively pursuing the dispute resolution avenues defined in the agreements. The Company is actively pursuing its positions in these dispute resolution procedures, but cannot make an estimate of the additional amounts, if any, which may ultimately be determined to be due relative to these matters. In addition to the aforementioned contingencies, the Company is involved in various lawsuits arising out of the ordinary conduct of its business. Although no assurances can be given, management does not expect that any of these matters will have a material adverse effect on the financial position or results of operations of the Company. 12 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 11 Computation of Earnings per Share Exhibit 12.1 Statement Regarding Computation of Earnings to Fixed Charges and Preferred Stock Dividends Exhibit 27.1-.2 Financial Data Schedules
(b) Reports on Form 8-K Report on Form 8-K was filed on August 30, 1999 related to the name change and reincorporation of the Company in Delaware. 13 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: November 15, 1999 HEAFNER TIRE GROUP, INC. By: /s/ DAVID H. TAYLOR ------------------------------------ David H. Taylor Senior Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer) 14 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 Heafner Tire Group, Inc. Computation of Earnings Per Share (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------------------- --------------------------------------- SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------ ------------------ ------------------ ------------------ Average shares outstanding during the period 5,286,917 5,091,667 5,177,962 4,358,731 Incremental shares under stock options and warrants computed under the treasury stock method using the average market price of issuer's stock during the period -- 1,238,176 -- -- -------------- -------------- -------------- ------------- Total shares for diluted EPS 5,286,917 6,329,843 5,177,962 4,358,731 ============== ============== ============== ============= Income applicable to common shareholders: Loss from operations before extraordinary charge (1,227,000) Net income (loss) (2,033,000) 211,000 (3,024,000) (3,425,000) (Loss) income per basic common share: Loss from operations before extraordinary charge $ -- $ -- $ -- $ (0.28) ============== ============== ============== ============= Net income (loss) $ (0.38) $ 0.04 $ (0.58) $ (0.79) ============== ============== ============== ============= Income (loss) per diluted share: Loss from operations before extraordinary charge $ -- $ -- $ -- $ (0.28) ============== ============== ============== ============= Net income (loss) $ (0.38) $ 0.03 $ (0.58) $ (0.79) ============== ============== ============== =============
EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12.1 HEAFNER TIRE GROUP, INC. Statement Regarding: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends (Amounts in thousands, except ratio amounts)
Three months Three months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 1999 1998 1999 1998 (unaudited) (unaudited) (unaudited) (unaudited) ------------- ------------- ------------- ------------- Consolidated pretax income (loss) from continuing operations (2,844) 478 (2,846) (1,797) Interest 5,622 4,248 16,310 8,745 Interest portion of rent expense 2,267 2,151 6,770 4,461 Preferred stock dividend requirements of majority-owned subsidiaries -- -- -- -- ------ ----- ------- ------- EARNINGS 5,045 6,877 20,234 11,409 ====== ===== ======= ======= Interest 5,622 4,248 16,310 8,745 Interest portion of rent expense 2,267 2,151 6,770 4,461 Preferred stock dividend requirements of majority-owned subsidiaries -- -- -- -- ------ ----- ------- ------- FIXED CHARGES 7,889 6,399 23,080 13,206 ====== ===== ======= ======= RATIO OF EARNINGS TO FIXED CHARGES -- 1.07 -- -- ====== ===== ======= =======
EX-27.1 4 1999 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HEAFNER TIRE GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 10,868 0 132,775 4,980 154,046 306,716 64,919 19,507 478,733 226,137 161,693 11,353 0 53 14,022 478,733 773,205 773,205 584,319 761,165 (1,424) 0 16,310 (2,846) 178 (3,024) 0 0 0 (3,024) (0.58) (0.58)
EX-27.2 5 1998 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HEAFNER TIRE GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 4,252 0 112,690 1,701 124,536 251,609 59,060 17,212 419,046 208,105 110,666 11,500 0 51 19,364 419,046 491,522 491,522 362,330 485,102 (528) 0 8,745 (1,797) (570) (1,227) 0 2,198 0 (3,425) (0.79) (0.79)
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