<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<TABLE>
<C> <S>
[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 ____________
</TABLE>
COMMISSION FILE NUMBER 333-61713
HEAFNER TIRE GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(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.
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<PAGE> 2
HEAFNER TIRE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
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
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
1
<PAGE> 4
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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)
======== ======== ======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
2
<PAGE> 5
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
SOUTHEASTERN WESTERN WESTERN
WHOLESALE RETAIL WHOLESALE ELIMINATIONS TOTALS
------------ -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(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
<PAGE> 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:
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30, 1999
------------------
<S> <C>
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)
</TABLE>
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
<PAGE> 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
<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 ("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:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ------------------
1999 1998 1999 1998
----- ----- ------ ------
<S> <C> <C> <C> <C>
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)
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
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
</TABLE>
(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
<PAGE> 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
<PAGE> 1
Exhibit 11
Heafner Tire Group, Inc.
Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
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)
============== ============== ============== =============
</TABLE>
<PAGE> 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)
<TABLE>
<CAPTION>
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)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
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 -- --
====== ===== ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,868
<SECURITIES> 0
<RECEIVABLES> 132,775
<ALLOWANCES> 4,980
<INVENTORY> 154,046
<CURRENT-ASSETS> 306,716
<PP&E> 64,919
<DEPRECIATION> 19,507
<TOTAL-ASSETS> 478,733
<CURRENT-LIABILITIES> 226,137
<BONDS> 161,693
11,353
0
<COMMON> 53
<OTHER-SE> 14,022
<TOTAL-LIABILITY-AND-EQUITY> 478,733
<SALES> 773,205
<TOTAL-REVENUES> 773,205
<CGS> 584,319
<TOTAL-COSTS> 761,165
<OTHER-EXPENSES> (1,424)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,310
<INCOME-PRETAX> (2,846)
<INCOME-TAX> 178
<INCOME-CONTINUING> (3,024)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,024)
<EPS-BASIC> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,252
<SECURITIES> 0
<RECEIVABLES> 112,690
<ALLOWANCES> 1,701
<INVENTORY> 124,536
<CURRENT-ASSETS> 251,609
<PP&E> 59,060
<DEPRECIATION> 17,212
<TOTAL-ASSETS> 419,046
<CURRENT-LIABILITIES> 208,105
<BONDS> 110,666
11,500
0
<COMMON> 51
<OTHER-SE> 19,364
<TOTAL-LIABILITY-AND-EQUITY> 419,046
<SALES> 491,522
<TOTAL-REVENUES> 491,522
<CGS> 362,330
<TOTAL-COSTS> 485,102
<OTHER-EXPENSES> (528)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,745
<INCOME-PRETAX> (1,797)
<INCOME-TAX> (570)
<INCOME-CONTINUING> (1,227)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,198
<CHANGES> 0
<NET-INCOME> (3,425)
<EPS-BASIC> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
