<PAGE> 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 June 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
The J.H. Heafner Company, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-0754594
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2105 Water Ridge Parkway, Suite 500
Charlotte, North Carolina 28217
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (704) 423-8989
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 [ ]
5,261,917 shares of common stock outstanding as of August 10, 1999.
<PAGE> 2
THE J.H. HEAFNER COMPANY, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1999 (unaudited) and December 31, 1998.........
Condensed Consolidated Statements of Operations (unaudited) - Three and Six Months
Ended June 30, 1999 and 1998 .................................................................
Condensed Consolidated Statements of Cash Flows (unaudited) - Three and Six Months Ended
June 30, 1999 and 1998........................................................................
Notes to Condensed Consolidated Financial Statements (unaudited) - Three and Six Months Ended
June 30, 1999 and 1998........................................................................
ITEM 2. Management's Discussion and Analyses of Financial Condition and Results of Operations.............
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........................................
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................................
ITEM 6. Exhibits and Reports on Form 8-K..................................................................
Signatures..................................................................................................
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE J. H. HEAFNER COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
------ ----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 381 $ 6,648
Accounts receivable, net of allowances of
$3,796 and $2,220 131,689 109,471
Inventories, net 160,101 133,221
Other current assets 15,208 13,319
-------- --------
Total current assets 307,379 262,659
-------- --------
PROPERTY AND EQUIPMENT, NET 46,364 42,802
GOODWILL, NET 105,905 104,405
OTHER ASSETS 15,278 12,579
OTHER INTANGIBLE ASSETS, NET 6,984 8,376
-------- --------
$481,910 $430,821
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $180,694 $169,847
Accrued expenses 32,179 33,239
Current maturities of long-term debt 496 3,011
-------- --------
Total current liabilities 213,369 206,097
LONG-TERM DEBT 161,851 160,400
REVOLVING CREDIT FACILITY 68,251 21,925
OTHER LIABILITIES 9,250 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;
3,861,250 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 23,755 22,360
Notes receivable from stock sales (892) (177)
Retained deficit (6,217) (4,110)
-------- --------
16,699 18,124
-------- --------
$481,910 $430,821
======== =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 4
THE J. H. HEAFNER COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
---------------------------- -------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 266,453 $ 154,709 $ 505,845 $ 243,444
COST OF GOODS SOLD 205,293 119,384 391,986 183,078
--------- --------- --------- ---------
Gross profit 61,160 35,325 113,859 60,366
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES 54,121 32,598 104,159 56,763
SPECIAL CHARGES 0 1,409 0 1,409
--------- --------- --------- ---------
Income from operations 7,039 1,318 9,700 2,194
OTHER INCOME (EXPENSE):
Interest expense (5,575) (2,828) (10,687) (4,497)
Other income (expense), net 588 (8) 986 28
--------- --------- --------- ---------
NET INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY CHARGE 2,052 (1,518) (1) (2,275)
Provision (benefit) for income taxes 1,849 (543) 989 (837)
--------- --------- --------- ---------
NET INCOME (LOSS) FROM OPERATIONS BEFORE EXTRAORDINARY CHARGE 203 (975) (990) (1,438)
Extraordinary charge from early extinguishment of debt, net of income
tax benefits of $1,466 0 (2,198) 0 (2,198)
------- --------- --------- ---------
NET INCOME (LOSS) $ 203 $ (3,173) $ (990) $ (3,636)
======= ========= ========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE> 5
2
THE J. H. HEAFNER COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
--------------------------- -------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 203 $ (3,173) $ (990) $ (3,636)
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 4,416 2,657 8,872 4,384
Extraordinary charge 0 3,664 0 3,664
Special charge 0 1,409 0 1,409
Deferred taxes 0 (1,617) 0 (1,617)
Other 94 193 180 282
Change in assets and liabilities:
Accounts receivable, net (20,091) (9,134) (17,836) (9,033)
Prepaid expenses and other current assets (1,626) 831 (1,337) 801
Inventories, net (14,049) 3,264 (22,141) (195)
Accounts payable and accrued expenses 10,419 (1,725) 1,640 (1,835)
Other, net (264) 0 (386) 0
-------- --------- -------- ---------
Net cash used in operating activities (20,898) (3,631) (31,998) (5,776)
-------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of CPW, net of cash acquired 0 (36,086) 0 (36,086)
Acquisition of ITCO, net of cash acquired 0 (17,125) 0 (17,125)
Acquisition of California Tire, net of cash acquired (118) 0 (4,068) 0
Purchase of property and equipment (3,367) (1,435) (6,577) (2,464)
Proceeds from sale of property and equipment 106 3,361 106 3,653
Other, net (1,918) 465 (2,468) (219)
-------- --------- -------- ---------
Net cash used in investing activities (5,297) (50,820) (13,007) (52,241)
-------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 0 100,000 0 100,000
Principal payments on long-term debt (1,629) (28,309) (3,065) (29,255)
Cash paid for financing costs (2,698) (6,385) (3,043) (6,385)
Net proceeds (payments) from revolving credit facility and other
notes 24,026 (9,229) 44,245 (5,691)
Other, net 628 726 601 726
-------- --------- -------- ---------
Net cash provided by financing activities 20,327 56,803 38,738 59,395
-------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH (5,868) 2,352 (6,267) 1,378
CASH, beginning of period 6,249 1,528 6,648 2,502
-------- --------- -------- ---------
CASH, end of period $ 381 $ 3,880 $ 381 $ 3,880
======== ========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest $ 8,685 $ 1,689 $ 9,543 $ 3,517
Cash payments for income taxes 69 171 145 612
======== ========= ======== =========
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.
</TABLE>
<PAGE> 6
THE J. H. HEAFNER COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
1. ORGANIZATION:
The J. H. Heafner Company, Inc. (the Company), a North Carolina corporation, is
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 Oliver and Winston, Inc.
(Winston), 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.
2. BASIS OF PRESENTATION:
The condensed consolidated balance sheet as of June 30, 1999, and the condensed
consolidated statements of operations and cash flows for the three months and
six months ended June 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 six months
ended June 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.
<PAGE> 7
2
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 June 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 $3,516, $1,726 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 Liabilities in Connection with a Purchase Business Combination."
Charges of approximately $256, $152 and $149, respectively were made against
these reserves in the second quarter 1999.
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 of 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 second quarter of 1999, the Company charged
approximately $112 against these reserves.
5. 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.
<PAGE> 8
3
6. 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 profit (loss) before interest expense,
income taxes, noncash amortization of intangible assets and depreciation
(EBITDA).
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:
<TABLE>
<CAPTION>
SOUTHEASTERN WESTERN WESTERN
WHOLESALE RETAIL WHOLESALE ELIMINATIONS TOTALS
------------ --------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C>
Three months ended
June 30, 1999 -
Revenues from external
customers $175,815 $42,867 $47,771 $ $266,453
EBITDA (1) 6,469 1,443 3,915 11,827
Segment assets 553,768 82,617 167,044 (321,519) 481,910
Expenditures for segment
assets 1,200 1,684 483 3,367
Six months ended
June 30, 1999-
Revenues from external
customers $334,068 $79,519 $92,258 $ $505,845
EBITDA (1) 10,938 1,123 7,065 19,126
Segment assets 553,768 82,617 167,044 (321,519) 481,910
Expenditures for segment 1,889 3,578 1,110 6,577
assets
Three months ended
June 30, 1998-
Revenues from external
customers $104,657 $36,837 $13,215 $ $154,709
EBITDA (1) (2,088) 1,414 805 131
Segment assets 386,067 71,000 94,096 (140,148) 411,015
Expenditures for segment
assets 250 997 188 1,435
Six months ended
June 30, 1998-
Revenues from external
customers $159,074 $71,155 $13,215 $ $243,444
EBITDA (1) (809) 2,640 805 2,636
Segment assets 386,067 71,000 94,096 (140,148) 411,015
Expenditures for segment
assets 524 1,752 188 2,464
</TABLE>
(1) EBITDA represents income (loss) before interest expense, income taxes,
noncash amortization of intangible assets and depreciation. Depreciation
and amortization for the three and six months ended June 30, 1999, as noted
in the unaudited condensed consolidated statement of cash flows, includes
$216 and $432, 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 six months ended June 30, 1998, as noted in
the unaudited condensed consolidated statement of cash flows, includes $24
and $66, respectively, of amortization expense related to debt discount and
$148 and $240, respectively of amortization expense related to deferred
financing fees that is included in interest expense in the unaudited
condensed consolidated statement of operations.
<PAGE> 9
4
7. 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:
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED
JUNE 30, 1999
-----------------
<S> <C>
Current assets $ 100,645
Noncurrent assets 147,953
Current liabilities 59,022
Noncurrent liabilities 7,285
Net sales 171,777
Gross profit 58,660
Net loss (1,383)
</TABLE>
The above information excludes $45,010 of net intercompany payable and $29,071
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.
8. STOCKHOLDERS EQUITY:
On May 24, 1999, Charlesbank Equity Fund IV, Limited Partnership, a
Massachusetts 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 Class A common stock to
certain members of management.
Approximately $1,087 in fees related to this transaction is reflected as a
charge to retained earnings in the accompanying balance sheet.
<PAGE> 10
5
9. 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 Class A 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. 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 at the end of
the second quarter.
10. COMMITMENTS AND CONTINGENCIES
Winston was named as a defendant in a class action lawsuit filed on June 10,
1998 in Los Angeles County Superior Court on behalf of Winston store managers.
The lawsuit alleges that Winston violated certain California wage regulations
and unfair business practices. The Company believes that Winston's operations,
including its wage practices, fully comply with applicable California and
federal legal requirements and that the plaintiffs' claims are without merit.
The Company is vigorously defending the matter.
Additionally, 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.
<PAGE> 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 should be read in conjunction
with the unaudited financial statements and related notes thereto.
The Company acquired Competition Parts Warehouse ("CPW") on May 20,
1998 and California Tire on January 12, 1999, and merged with ITCO on May 20,
1998. Therefore, results for 1998 exclude the operations of California Tire, and
include the operations for CPW and ITCO after May 20, 1998.
Results of Operations
The following table sets forth each category of statements of
operations data as a percentage of net sales:
<TABLE>
<CAPTION>
QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30
------------------ ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of good sold ............................... 77.0 77.2 77.5 75.2
Gross profit .................................... 23.0 22.8 22.5 24.8
Selling, general and administrative expenses .... 20.3 22.0 20.6 23.9
Income from operations .......................... 2.6 0.9 1.9 0.9
Interest and other expense ...................... (1.9) (1.8) (1.9) (1.8)
Income (loss) from operations before income taxes 0.8 (1.0) (0.0) (0.9)
Income taxes .................................... 0.7 (0.4) 0.2 (0.3)
Net income (loss) before extraordinary charge ... 0.1 (0.6) (0.2) (0.6)
Extraordinary charge net of income tax .......... -- (1.4) -- (0.9)
Net income (loss) ............................... 0.1 (2.1) (0.2) (1.5)
</TABLE>
QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED JUNE 30, 1998
Net sales for the quarter ended June 30, 1999 totaled $266.5 million,
an increase of $111.7 million, or 72.2%, from sales in the second quarter of
1998 of $154.7 million. The inclusion of sales for ITCO, CPW, and California
Tire accounted for over 90% of the increase in the second quarter of 1999.
However, with the integration of operations between Heafner and ITCO in the
Southeast, the exact effect cannot be determined. Each of the Company's
divisions reported sales increases ranging from 5.4% upward, with an overall
increase in net sales totaling 5.5% on a pro-forma basis.
Gross profit was $61.2 million in the second quarter of 1999, an
increase of $25.8 million, or 73.1%, from $35.3 million in the corresponding
quarter in 1998. As a percentage of net sales, gross profit was 23.0% and 22.8%,
respectively. The increase in gross profit dollars was primarily due to the
inclusion of the acquired operations.
<PAGE> 12
Selling, general and administrative expenses were $54.1 million in the
quarter ended June 30, 1999, an increase of $20.1 million, or 59.1%, from $34.0
million in second quarter of 1998. As a percentage of net sales, these expenses
were 20.3% and 22.0%, 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 a 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 quarter
ended June 30, 1998 was a 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 $2.8 million in the second
quarter of 1998 to $5.0 million in the second quarter this year. Interest
expense increased by $2.7 million in the second quarter of 1999 as a result of
increased borrowings incurred in connection with the acquisitions of ITCO, CPW,
and California Tire, increased utilization of anticipation discounts on
inventory purchases, and special inventory programs offered by vendors.
Income taxes on pre-tax income were $1.8 million in the quarter ended
June 30, 1999 compared to $(0.5) in the corresponding quarter last year. The
effective income tax rates were 90.1% and 38.8% in the second quarter of 1999
and 1998, respectively. The tax provision for the second quarter 1999 takes into
account non-deductible goodwill amortization expense for income tax purposes.
Net income for the second quarter of 1999 was $0.2 million, or 0.1% of
net sales compared to a net loss of $(3.2) million, or (2.1)% of net sales in
the corresponding quarter in 1998. The net loss for 1998 includes an
extraordinary charge of $3.7 million ($2.2 million net of taxes) for the
write-off of unamortized financing expenses and discounts and the payment of
prepayment penalties related to the early extinguishment of debt.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net sales for the six months ended June 30, 1999 totaled $505.8
million, an increase of $262.4 million, or 107.8%, from sales for the same
period of 1998 of $243.4 million. The inclusion of sales for ITCO, CPW, and
California Tire accounted for over 90% of the increase in the six months of
1999. However, with the integration of
<PAGE> 13
operations between Heafner and ITCO in the Southeast, the exact effect cannot be
determined. The overall increase in net sales totaled 7.7% on a pro-forma basis.
Gross profit was $113.9 million in the six months of 1999, an increase
of $53.5 million, or 88.6%, from $60.4 million in the corresponding six months
in 1998. As a percentage of net sales, gross profit was 22.5% and 24.8%,
respectively. The increase in gross profit dollars was primarily due to the
inclusion of the acquired operations. The decrease in overall gross margins 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 80% in the first six
months of 1999, versus just over 71% in the first six months of 1998.
Selling, general and administrative expenses were $104.2 million in the
six months ended June 30, 1999, an increase of $46.0 million, or 79.1%, from
$58.2 million in six months of 1998. As a percentage of net sales, these
expenses were 20.6% and 23.9%, 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 a significant 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 six months ended June 30,
1998 was a 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 $4.5 million in the six
months of 1998 to $9.7 million in the six months this year. Interest expense
increased by $6.2 million in the six months of 1999 as a result of increased
borrowings incurred in connection with the acquisitions of ITCO, CPW, and
California Tire, increased utilization of anticipation discounts on inventory
purchases, and special inventory programs offered by vendors.
Income taxes on pre-tax income were $1.0 million in the six months
ended June 30, 1999 compared to $(0.8) in the corresponding six months last
year. The effective income tax rates were 989.0% and 36.8% in the six months of
1999 and 1998, respectively after taking into account non-deductible goodwill
amortization expense for income tax purposes for the first six months of 1999.
The net loss for the six months of 1999 was $(1.0) million, or (0.2)%
of net sales compared to a net loss of $(3.6) million, or (1.5)% of net sales in
the corresponding period in 1998. The net loss for 1998 includes an
extraordinary charge of $3.7 million ($2.2 million net of taxes) for the
write-off of unamortized financing expenses and discounts and the payment of
prepayment penalties related to the early extinguishment of debt.
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Financing committed by the lenders under the Company's revolving line of
credit is $100.0 million, approximately $68.3 million of which was drawn as of
June 30, 1999.
The Company's principal source of cash during the quarter ended June 30,
1999 was from borrowings under the revolving credit facility. The Company's
principal source of cash during the quarter ended June 30, 1998 was the $100
million senior notes issue. Cash used in operating activities totaled $20.9
million and $3.6 million in the second quarter of 1999 and 1998, respectively.
Increases in inventories due to expanded product lines, special vendor programs,
and seasonal stocking totaled $14.0 million in 1999. In the second quarter of
1999, accounts receivable increased by $20.1 million due primarily to increased
sales volumes and to a lesser extent to restructured credit accounts as Heafner
and Itco continue merging the Southeast operations.
Capital expenditures during the quarters ended June 30, 1999 and 1998
amounted to $3.4 million and $1.4 million, respectively. Capital spending during
the second quarter of 1999 was primarily for new equipment in retail operations,
acquisition of new retail locations, and expansion of distribution warehouses.
During the second quarter, Charlesbank Capital purchased substantially all
of the stock of the Company held by members of the Gaither family and former
stockholders of Itco. As a result, they own in excess of 90% of the outstanding
Class A and B common stock. This transaction with Charlesbank provides the
Company with sources of additional equity for future acquisitions.
The Company anticipates that its principal use of cash going forward will
be working capital requirements, debt service requirements, and capital
expenditures. In addition, the Company expects to pay $5.0 million relating to
consolidation of warehouse and office facilities, severance obligations, and
other exit costs over the next twelve months.
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.
<PAGE> 15
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, including those of ITCO, CPW and California Tire, 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
either are Year 2000 compliant or can be brought into compliance by October of
1999, although there can be no assurance that any required remediation will be
completed in a timely manner.
In addition, Heafner is contacting 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 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
<PAGE> 16
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
The Company's Winston subsidiary was named as a defendant in a class action
lawsuit filed on June 10, 1998 in Los Angeles Superior Court on behalf on
Winston store managers. The lawsuit alleges that Winston violated certain
California wage regulation and unfair business practices. The Company believes
that Winston's operations, including its wage practices, fully comply with
applicable California and federal legal requirements and that the plaintiff's
claims are without merit. The Company is vigorously defending the matter. In
addition 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.
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
Reports on Form 8-K filed on May 7 and June 7, 1999 related to
change of control.
<PAGE> 17
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: August 13, 1999 The J.H. Heafner Company, Inc.
By: /s/ Donald C. Roof
-----------------------------------
Donald C. Roof
Chief Financial Officer
<PAGE> 1
Exhibit 11
The J.H. Heafner Company, Inc.
Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Average shares outstanding during the period 5,163,414 4,310,631 5,125,541 3,995,816
Incremental shares under stock options and warrants computed
under the treasury stock method using the average market 1,211,649 1,210,795 1,211,649 1,210,795
price of issuer's stock during the period ---------- ----------- ----------- -----------
Total shares for diluted EPS 6,375,063 5,521,426 6,337,189 5,206,610
========== =========== ========== ===========
Income applicable to common shareholders:
Loss from operations before extraordinary charge (975,000) (1,438,000)
Net income (loss) 203,000 (3,173,000) (990,000) (3,636,000)
(Loss) income per basic common share:
Loss from operations before extraordinary charge $ -- $ (0.23) $ -- $ (0.36)
========== =========== ========== ===========
Net income (loss) $ 0.04 $ (0.74) $ (0.19) $ (0.91)
========== =========== ========== ===========
Income (loss) per diluted share:
Loss from operations before extraordinary charge $ -- $ (0.18) $ -- $ (0.28)
========== =========== ========== ===========
Net income (loss) $ 0.03 $ (0.57) $ (0.16) $ (0.70)
========== =========== ========== ===========
</TABLE>
<PAGE> 1
Exhibit 12.1
THE J.H. HEAFNER COMPANY, INC.
Statement Regarding: Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends
(Amounts in thousands, except ratio amounts)
<TABLE>
<CAPTION>
Three months Three months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Consolidated pretax income (loss) from
continuing operations 2,052 (1,518) (1) (2,275)
Interest 5,575 2,828 10,687 4,497
Interest portion of rent expense 2,201 1,318 4,387 2,309
Preferred stock dividend requirements of
majority-owned subsidiaries -- -- -- --
------- ------- ------- -------
EARNINGS 9,828 2,628 15,073 4,531
======= ======= ======= =======
Interest 5,575 2,828 10,687 4,497
Interest portion of rent expense 2,201 1,318 4,387 2,309
Preferred stock dividend requirements of
majority-owned subsidiaries -- -- -- --
------- ------- ------- -------
FIXED CHARGES 7,776 4,146 15,074 6,806
======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 1.26 -- -- --
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE J.H.
HEAFNER COMPANY, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 381
<SECURITIES> 0
<RECEIVABLES> 135,485
<ALLOWANCES> 3,796
<INVENTORY> 160,101
<CURRENT-ASSETS> 307,379
<PP&E> 61,430
<DEPRECIATION> 15,066
<TOTAL-ASSETS> 481,910
<CURRENT-LIABILITIES> 213,369
<BONDS> 161,851
11,353
0
<COMMON> 53
<OTHER-SE> 16,646
<TOTAL-LIABILITY-AND-EQUITY> 481,910
<SALES> 505,845
<TOTAL-REVENUES> 505,845
<CGS> 381,387
<TOTAL-COSTS> 496,145
<OTHER-EXPENSES> (986)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,687
<INCOME-PRETAX> (1)
<INCOME-TAX> 989
<INCOME-CONTINUING> (990)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (990)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.16)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE J.H.
HEAFNER COMPANY, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,880
<SECURITIES> 0
<RECEIVABLES> 107,339
<ALLOWANCES> 3,104
<INVENTORY> 122,647
<CURRENT-ASSETS> 243,320
<PP&E> 49,978
<DEPRECIATION> 10,405
<TOTAL-ASSETS> 411,015
<CURRENT-LIABILITIES> 201,297
<BONDS> 110,889
11,500
0
<COMMON> 51
<OTHER-SE> 18,861
<TOTAL-LIABILITY-AND-EQUITY> 411,015
<SALES> 243,444
<TOTAL-REVENUES> 243,444
<CGS> 172,616
<TOTAL-COSTS> 241,250
<OTHER-EXPENSES> (28)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,497
<INCOME-PRETAX> (2,275)
<INCOME-TAX> (837)
<INCOME-CONTINUING> (1,438)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,198)
<CHANGES> 0
<NET-INCOME> (3,636)
<EPS-BASIC> (0.91)
<EPS-DILUTED> (0.70)
</TABLE>
