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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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<C> <S>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
</TABLE>
COMMISSION FILE NUMBER 333-61713
HEAFNER TIRE GROUP, INC.
<TABLE>
<S> <C>
DELAWARE 56-0754594
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2105 WATER RIDGE PARKWAY, SUITE 500 28217
CHARLOTTE, NORTH CAROLINA (Zip Code)
(Address of principal executive offices)
(704) 423-8989
(Registrant's telephone number, including area code)
</TABLE>
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 [ ]
Number of common shares outstanding at May 10, 2000: 5,286,917
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TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets -- July 1, 2000 1
(unaudited) and December 31, 1999.........................
Condensed Consolidated Statements of Operations 2
(unaudited) -- Quarters and Six Months Ended July 1, 2000
and June 30, 1999.........................................
Condensed Consolidated Statements of Cash Flows 3
(unaudited) -- Quarters and Six Months Ended July 1, 2000
and June 30, 1999.........................................
Notes to Condensed Consolidated Financial Statements........ 4
ITEM 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations.................................
ITEM 3. Quantitative and Qualitative Disclosures about Market 12
Risk......................................................
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 13
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
(in thousands, except share amounts)
<TABLE>
<CAPTION>
JULY 1, 2000 DECEMBER 31, 1999
------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,521 $ 6,497
Accounts receivable, net of allowances of $3,551 and
$2,385................................................. 115,343 88,207
Inventories, net.......................................... 176,678 148,865
Other current assets...................................... 39,020 39,932
-------- --------
Total current assets.............................. 337,562 283,501
-------- --------
Property and equipment, net................................. 61,545 47,624
Goodwill, net............................................... 112,740 107,112
Other intangible assets, net................................ 11,994 7,968
Other assets................................................ 15,055 13,041
-------- --------
$538,896 $459,246
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $213,924 $160,861
Accrued expenses.......................................... 31,521 29,437
Current maturities of long-term debt...................... 3,186 1,792
-------- --------
Total current liabilities......................... 248,631 192,090
-------- --------
Revolving credit borrowings................................. 95,366 74,688
Long-term debt.............................................. 164,190 160,112
Other liabilities........................................... 13,777 9,604
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................. 4,094 4,094
Warrants.................................................... 1,137 1,137
Commitments and contingencies
Stockholders' equity:
Class A Common stock, par value $.01 per share; authorized
10,000,000 shares; 5,286,917 shares issued and
outstanding............................................ 53 53
Class B Common stock, par value $.01 per share; authorized
20,000,0000 shares..................................... -- --
Additional paid-in capital................................ 23,981 23,981
Notes receivable from sale of stock....................... (1,046) (1,092)
Retained deficit.......................................... (18,287) (12,421)
-------- --------
Total stockholders' equity........................ 4,701 10,521
-------- --------
$538,896 $459,246
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
1
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HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
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<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 1, 2000 JUNE 30, 1999 JULY 1, 2000 JUNE 30, 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales....................................... $287,681 $266,453 $542,109 $505,845
Cost of goods sold.............................. 223,564 206,151 419,943 393,600
-------- -------- -------- --------
Gross profit.................................. 64,117 60,302 122,166 112,245
Selling, general and administrative expenses.... 62,166 53,263 119,026 102,545
-------- -------- -------- --------
Income from operations........................ 1,951 7,039 3,140 9,700
-------- -------- -------- --------
Other income (expense):
Interest expense, net......................... (6,147) (5,575) (11,976) (10,687)
Other income.................................. 195 588 772 986
-------- -------- -------- --------
Income (loss) from operations before provision
(benefit) for income taxes.................... (4,001) 2,052 (8,064) (1)
Provision (benefit) for income taxes............ (1,046) 1,849 (2,198) 989
-------- -------- -------- --------
Net income (loss)............................... $ (2,955) $ 203 $ (5,866) $ (990)
======== ======== ======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
2
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HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 1, 2000 JUNE 30, 1999 JULY 1, 2000 JUNE 30, 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ (2,955) $ 203 $ (5,866) $ (990)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities, net of acquisitions --
Depreciation and amortization of goodwill and
other intangibles.......................... 5,339 4,200 10,206 8,440
Amortization of other assets.................. 292 216 573 432
Other, net.................................... (12) 94 (54) 180
Change in assets and liabilities:
Accounts receivable, net...................... (7,711) (12,144) (16,428) (27,377)
Inventories, net.............................. (6,979) (14,049) (8,514) (22,141)
Other current assets.......................... (8,291) (9,573) 2,359 8,204
Accounts payable and accrued expenses......... 17,167 10,419 32,674 1,640
Other, net.................................... (190) (264) (226) (386)
-------- -------- -------- --------
Net cash provided by (used in)
operating activities................ (3,340) (20,898) 14,724 (31,998)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of California Tire, net of cash
acquired...................................... -- (118) -- (4,068)
Acquisition of Tires Centers, Inc............... (2,020) -- (2,020) --
Acquisition of T.O. Haas, net of cash
acquired...................................... (23,519) -- (23,519) --
Payments on deferred purchase price of acquired
business...................................... (1,132) -- (3,253) --
Purchase of property and equipment.............. (2,761) (3,367) (5,506) (6,577)
Proceeds from sale of property and equipment.... 251 106 849 106
Other, net...................................... 140 (1,918) (2) (2,468)
-------- -------- -------- --------
Net cash used in investing
activities.......................... (29,041) (5,297) (33,451) (13,007)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in revolving credit borrowings......... 28,296 24,026 20,678 44,245
Principal payments on long-term debt............ (167) (1,629) (866) (3,065)
Other, net...................................... (234) (2,070) (1,061) (2,442)
-------- -------- -------- --------
Net cash provided by financing
activities.......................... 27,895 20,327 18,751 38,738
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (4,486) (5,868) 24 (6,267)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD........................................ 11,007 6,249 6,497 6,648
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........ $ 6,521 $ 381 $ 6,521 $ 381
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION --
Cash payments for interest...................... $ 9,638 $ 8,685 $ 11,499 $ 9,543
======== ======== ======== ========
Cash payments for taxes......................... $ -- $ 69 $ -- $ 145
======== ======== ======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
3
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HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
Heafner Tire Group, Inc. and subsidiaries (the "Company") (formerly The J.
H. Heafner Company, Inc.), is a Delaware corporation primarily engaged in the
wholesale distribution of tires and tire accessories and the operation of retail
tire and automotive service stores.
2. BASIS OF PRESENTATION:
The unaudited condensed consolidated balance sheet as of July 1, 2000, and
the condensed consolidated statements of operations and cash flows for the
quarters and six months ended July 1, 2000 and June 30, 1999, have been prepared
by the Company and have not been audited. In the opinion of management, all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial position of the Company, the results of its
operations and cash flows have been made. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's consolidated financial statements
reported on Form 10-K for the fiscal year ended December 31, 1999. The results
of the operations for the quarter and the six months ended July 1, 2000 are not
necessarily indicative of the operating results for the full fiscal year.
Effective January 1, 2000, the Company changed its fiscal year end to the
Saturday closest to December 31. Prior to 2000, the fiscal year ended on
December 31. Certain prior period amounts have been reclassified to conform with
current period presentation.
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2000, the Emerging Issues Task Force ("EITF") of the FASB announced
that it had reached a conclusion on Issue 00-14, "Accounting for Certain Sales
Incentives". Issue 00-14 establishes requirements for the recognition and
display of sales incentives such as discounts, coupons and rebates within the
financial statements. The EITF conclusions on this issue will become effective
during the third quarter of fiscal 2000. Because of the timing of the release of
these conclusions, the Company has yet to fully assess their effect on the
results of operations and financial position. However, the adoption of this
statement may result in the reclassification of various costs within the
captions of the income statement. At this time, the Company does not believe
that the adoption of this statement would modify the pretax earnings or net
income presented in these statements.
4. ACQUISITIONS:
On May 25, 2000, the Company purchased all of the outstanding common stock
of T.O. Haas Holding Co. ("Haas"), a tire wholesaler, retreader and retailer,
located in Lincoln, Nebraska. In connection with the acquisition, the Company
sold certain parcels of real estate owned by Haas and leased them back in a
transaction which closed on August 8, 2000. The net purchase price of the Haas
acquisition, giving effect to the real estate transaction and subject to
adjustment as provided in the agreement, was approximately $28.6 million
(including $1.6 million of assumed debt), of which approximately $1.5 million
was withheld at closing pending adjustment as provided in the agreement and $5.2
million is payable in the form of noncompete and stayput payments over a period
of 6 years. The excess of the purchase price over the net tangible assets
acquired was allocated to goodwill ($9.6 million) and other intangibles ($4.1
million) and is being amortized over 15 years and 6 years, respectively.
On April 28, 2000, the Company purchased certain assets of Tire Centers,
LLC ("TCI"), a wholly owned subsidiary of Michelin North America, Inc. The total
purchase price was approximately $4.1 million, consisting of $2.0 million in
cash and approximately $2.1 million payable within 15 days of final
determination
4
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HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the purchase price. The excess of the purchase price over the net tangible
assets acquired was allocated primarily to other intangibles ($1.1 million) and
is being amortized over 5 years.
These transactions have been accounted for as purchases and accordingly,
results of operations for the acquired businesses have been included in the
unaudited condensed consolidated statements of operations from the acquisition
dates. Preliminary allocations of the purchase prices have been recorded in the
accompanying unaudited condensed consolidated financial statements as of July 1,
2000, based on management's best estimate of assets acquired and liabilities
assumed.
5. REVOLVING CREDIT FACILITY:
On March 6, 2000, the Company revised its revolver by amending the credit
facility (the "New Revolver"). The New Revolver provides for borrowings in the
aggregate principal amount of up to the lesser of $200.0 million or the
Borrowing Base, as defined in the agreement, based on 85% of eligible accounts
receivable, 65% of eligible tire inventory and 50% of all other eligible
inventory (of which up to $10.0 million may be utilized in the form of letters
of credit).
The New Revolver has a five-year term expiring in March 2005, extendable by
the Company and the banks for an additional five years. Indebtedness under the
New Revolver bears interest, at the Company's option, (i) at the Base Rate, as
defined, plus the applicable margin or (ii) at the Eurodollar Rate, as defined,
plus the applicable margin. In July 2000, the New Revolver was amended to, among
other things, permit the acquisition of the assets of American Tire Distributors
("ATD") on July 21, 2000 (see Note 9) and amend certain covenants contained
therein. In connection with these amendments, the applicable margins for
Eurodollar Rate Loans in the pricing grid were increased by 0.25%, resulting in
an applicable margin of 0.5% for Base Rate Loans and an applicable margin of
2.25% for Eurodollar Rate Loans through December 31, 2000.
The New Revolver requires the Company to meet certain financial
requirements, including minimum net worth and minimum loan availability and
contains certain covenants which, among other things, restrict the ability of
the Company to incur additional indebtedness; enter into guarantees; make loans
and investments; make capital expenditures; declare dividends; engage in
mergers, consolidations and asset sales; enter into transactions with
affiliates; create liens and encumbrances; enter into sale/leaseback
transactions; modify material agreements; and change the business it conducts.
The Company's obligations under the New Revolver are secured by all inventories
and accounts receivable.
5
<PAGE> 8
HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SEGMENT INFORMATION:
The Company classifies its business interests into four fundamental
segments: southeastern wholesale distribution of tires and products, western
wholesale distribution of tires and products, western retail sales of tires,
products and services and corporate. The Company evaluates performance based on
several factors, of which the primary financial measure is income (loss) before
interest expense, income taxes, noncash amortization of intangible assets and
depreciation ("EBITDA"). For the quarter and six months ended July 1, 2000, the
results of Haas since the May 25, 2000 acquisition date are included in the
western wholesale segment (in 000's):
<TABLE>
<CAPTION>
SOUTHEASTERN WESTERN WESTERN
WHOLESALE WHOLESALE RETAIL CORPORATE ELIMINATIONS TOTALS
------------ --------- ------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Quarter ended July 1, 2000 --
Revenues........................ $177,235 $ 64,827 $45,513 $ 106 $ -- $287,681
EBITDA(1)....................... 9,287 2,770 (3,308) (1,264) -- 7,485
Segment assets.................. 262,991 185,194 94,267 326,695 (330,251) 538,896
Expenditures for segment
assets....................... 896 155 1,652 58 -- 2,761
Six months ended July 1, 2000 --
Revenues........................ $339,903 $112,876 $89,150 $ 180 $ -- $542,109
EBITDA(1)....................... 15,412 5,414 (3,908) (2,800) -- 14,118
Segment assets.................. 262,991 185,194 94,267 326,695 (330,251) 538,896
Expenditures for segment
assets....................... 1,451 854 2,863 338 -- 5,506
Quarter ended June 30, 1999 --
Revenues........................ $175,815 $ 47,771 $42,867 $ -- $ -- $266,453
EBITDA(1)....................... 8,707 3,915 1,443 (2,238) -- 11,827
Segment assets.................. 291,985 167,044 82,617 261,783 (321,519) 481,910
Expenditures for segment
assets....................... 1,200 483 1,684 -- -- 3,367
Six months ended June 30, 1999 --
Revenues........................ $334,068 $ 92,258 $79,519 $ -- $ -- $505,845
EBITDA(1)....................... 14,316 7,065 1,123 (3,378) -- 19,126
Segment assets.................. 291,985 167,044 82,617 261,783 (321,519) 481,910
Expenditures for segment
assets....................... 1,839 1,110 3,578 50 -- 6,577
</TABLE>
---------------
(1) EBITDA represents income (loss) before interest expense, income taxes,
noncash amortization of intangible assets and depreciation. For the quarters
ended July 1, 2000 and June 30, 1999, interest expense in the condensed
consolidated statement of operations includes $0.3 million and $0.2 million,
respectively, of amortization expense related to deferred transaction fees. For
the six months ended July 1, 2000 and June 30, 1999, interest expense in the
condensed consolidated statement of operations includes $0.6 million and $0.4
million, respectively, of amortization expense related to deferred transaction
fees.
6
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HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSIDIARY GUARANTOR FINANCIAL INFORMATION:
The Series D 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 (000's):
<TABLE>
<CAPTION>
AS OF AND FOR AS OF AND FOR
THE SIX THE SIX
MONTHS MONTHS
ENDED ENDED
JULY 1, 2000 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
Current assets............................................. $149,931 $100,645
Noncurrent assets.......................................... 129,530 147,953
Current liabilities........................................ 94,933 59,022
Noncurrent liabilities..................................... 13,208 7,285
Net sales.................................................. 202,026 171,777
Gross profit............................................... 64,651 58,660
Net loss................................................... (3,483) (1,383)
</TABLE>
The above information excludes $55.7 and $45.0 million of net intercompany
payable and $30.1 and $29.1 million of intercompany sales of the Company's
subsidiary guarantors as of and for the quarters ended July 1, 2000 and June 30,
1999, respectively. In the preparation of the Company's condensed consolidated
financial statements, all intercompany accounts are eliminated.
8. COMMITMENTS AND CONTINGENCIES:
See "PART II -- OTHER INFORMATION, Item 1. Legal Proceedings."
The Company is party to various lawsuits and claims, including purported
class actions, arising in the normal course of business. In the opinion of
management, these lawsuits and claims are not, singularly or in the aggregate,
material to the Company's financial position or results of operations.
9. SUBSEQUENT EVENTS:
On July 21, 2000, the Company purchased the assets of ATD, the wholesale
division of Merchant's, Inc. The aggregate purchase price, subject to
adjustment, was approximately $39.0 million, of which $1.9 million is held in
escrow. After giving effect to estimated normal working capital requirements,
the Company's investment in ATD is expected to be approximately $24 million.
On July 26, 2000, the Company settled all outstanding claims with the
previous shareholders of Winston as described in the Company's Report on Form
10-K for the fiscal year ended December 31, 1999. In connection with the
settlement, the Company received $1.0 million in cash on July 28, 2000.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the results of operations,
financial condition and liquidity of the Company should be read in conjunction
with the financial statements and the related notes included in this report.
OVERVIEW
The Company sells its products to a variety of markets, both in terms of
end-users and geography. The Company's distribution channels consist of
Southeastern Wholesale, Western Wholesale, and Western Retail tires and
automotive service. For the quarter ended July 1, 2000, net sales through such
channels accounted for approximately 61.6%, 22.5% and 15.9%, respectively, of
consolidated net sales. For the six months ended July 1, 2000, net sales through
such channels accounted for approximately 62.7%, 20.8% and 16.5%, respectively,
of consolidated net sales. The Company believes that the diversity of its
markets helps stabilize its sales and earnings.
The Company acquired certain assets and operations from TCI on April 28,
2000, and acquired all the outstanding stock of Haas on May 25, 2000. Therefore,
the results of operations for the quarter and six months ended July 1, 2000
include the operations acquired from TCI subsequent to April 28, 2000 and
include the operations of Haas subsequent to May 25, 2000.
RESULTS OF OPERATIONS
QUARTERS ENDED JULY 1, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
The following table sets forth certain selected information regarding the
Company's segments (in millions):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------
JULY 1, JUNE 30,
2000 1999
------- --------
<S> <C> <C>
Net sales
Southeastern Wholesale.................................... $177.2 $175.8
Western Wholesale......................................... 64.8 47.8
------ ------
Total Wholesale................................... 242.1 223.6
Western Retail............................................ 45.5 42.9
Corporate................................................. 0.1 0.0
------ ------
Consolidated.............................................. $287.7 $266.5
====== ======
EBITDA
Southeastern Wholesale.................................... $ 9.3 $ 8.7
Western Wholesale......................................... 2.8 3.9
------ ------
Total Wholesale................................... 12.1 12.6
Western Retail............................................ (3.3) 1.4
Corporate................................................. (1.3) (2.2)
------ ------
Consolidated.............................................. $ 7.5 $ 11.8
====== ======
</TABLE>
Consolidated net sales increased by $21.2 million, or 8.0%, to $287.7
million in the second quarter 2000 compared to $266.5 million in the second
quarter 1999. Of the increase, Haas contributed $9.9 million, accounting for a
3.7% increase over prior year. Excluding the Haas operations, sales increased
$11.4 million or 4.3% over the same quarter last year. The precise effect on
sales of the TCI assets purchased cannot be determined due to the merger of
these assets into various segments of the business. Market demand for all
products was moderate to low in the second quarter 2000 compared to high demand
in the second quarter 1999. Sales growth was driven by the entry into new
markets, either through acquisition or expansion, combined with the effects of
the Company's marketing programs. Competition was strong across all segments in
the second quarter as competitors fought for limited sales dollars.
8
<PAGE> 11
Gross profit increased from $60.3 million in the second quarter 1999 to
$64.1 million in the second quarter 2000. Gross profit as a percentage of sales
decreased from 22.6% to 22.3%, as a result of slightly lower retail gross
margins, combined with the effects of wholesale sales comprising a greater
percentage of consolidated sales in 2000 than in 1999.
Selling, general, and administrative expenses increased by $8.9 million in
the second quarter 2000 representing 21.6% as a percentage of sales compared to
20.0% in 1999. Increased operating expenses were primarily wage, occupancy and
vehicle costs, a direct result of expanding operations in 2000. Interest and
other expenses increased in the second quarter 2000 by $1.0 million to $6.0
million due to higher borrowings on the revolving credit line for acquisitions
and capital additions.
The income tax benefit in the second quarter 2000 was $1.0 million compared
to an income tax provision of $1.8 million for the same quarter in 1999. The net
loss for the second quarter 2000 was $3.0 million or (1.0)% of net sales
compared to net income of $0.2 million or 0.1% of net sales in the second
quarter 1999.
Southeastern Wholesale Distribution
Net sales in the Southeastern Wholesale Distribution segment increased $1.4
million, or 0.8% from net sales of $175.8 million in the second quarter 1999
compared to $177.2 million in the second quarter 2000. Sales growth in the
Southeast was slower than anticipated in the second quarter 2000 due to some of
the same factors present in the first quarter, including a softer replacement
market, increased competition, and lower wheel sales. Sales of tires, supplies,
and equipment increased from prior year levels, but sales of custom wheels were
$2.7 million lower in the second quarter 2000 compared to the same period in
1999. The Company's wheel program in the Southeast has been hampered by changes
in suppliers and limited supply of some wheel lines. The Company expects that
the introduction of new and more effective marketing programs will improve sales
growth in future quarters.
EBITDA increased $0.6 million from $8.7 million in the second quarter 1999
to $9.3 million in the second quarter 2000 primarily as a result of improved
gross profit margin. The increase in gross profit margin is largely attributable
to an improved sales mix in 2000. Selling, general, and administrative expenses
increased by $1.1 over the second quarter 1999 primarily due to rising fuel
costs and higher wages.
Western Wholesale Distribution
Net sales in the Western Wholesale Distribution segment increased by $17.1
million or 35.7% from $47.8 million net sales in the second quarter 1999 to
$64.8 million in the second quarter 2000. Of the increase, Haas contributed $9.9
million, accounting for a 20.7% increase over prior year. Excluding the Haas
operations, sales increased $7.2 million or 15.0% over the same quarter last
year. The sales increase can be attributed to expanded operations with one new
distribution warehouse in Southern California as well as the TCI acquired
operations and assets merged into the Western Wholesale operations.
EBITDA decreased from $3.9 million in the second quarter 1999 to $2.8
million in the second quarter 2000. Gross profit margins were down in the second
quarter due primarily to competitive pressure in expansion markets. Operating
expenses were up primarily due to the expansion into Southern California with
the Carson, California warehouse facility and the acquired operations of TCI and
Haas.
Western Retail
The Western Retail segment experienced an increase in net sales in the
second quarter of $2.6 million or 6.2%, up from $42.9 million in the second
quarter 1999 to $45.5 million in the second quarter 2000. Western Retail
operated 198 retail stores as of July 1, 2000 compared to 195 stores as of June
30, 1999. While sales per store increased 2.6%, same store sales were flat
compared to the second quarter of 1999. EBITDA fell in the second quarter from
$1.4 million in 1999 to $(3.3) in 2000. Lower gross margins and significantly
higher operating expenses than the second quarter of 1999 gave rise to the loss
in the quarter. The Company's rollout and installation of its new point-of-sale
computer system in all of its stores during 2000 have given rise to a number of
problems. These problems relate primarily to communication, summarization and
control.
9
<PAGE> 12
Significant expenses associated with these problems and their correction were
incurred during the second quarter of 2000. Management has taken a number of
actions to reduce costs and improve profits which are expected to reverse the
EBITDA losses experienced in the Western Retail segment during 2000. These
actions include headcount reductions, additional vendor discounts, controlled
management of parts pricing and a return to selected price-based print
advertising. While these actions are aimed at improving profitability during the
second half of 2000, there can be no assurance that they will be successful or
that the division will be profitable.
SIX MONTHS ENDED JULY 1, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
The following table sets forth certain selected information regarding the
Company's segments (in millions):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------
JULY 1, JUNE 30,
2000 1999
------- --------
<S> <C> <C>
Net sales
Southeastern Wholesale.................................... $339.9 $334.1
Western Wholesale......................................... 112.9 92.3
------ ------
Total Wholesale................................... 452.8 426.3
Western Retail............................................ 89.2 79.5
Corporate................................................. 0.2 0.0
------ ------
Consolidated.............................................. $542.1 $505.8
====== ======
EBITDA
Southeastern Wholesale.................................... $ 15.4 $ 14.3
Western Wholesale......................................... 5.4 7.1
------ ------
Total Wholesale................................... 20.8 21.4
Western Retail............................................ (3.9) 1.1
Corporate................................................. (2.8) (3.4)
------ ------
Consolidated.............................................. $ 14.1 $ 19.1
====== ======
</TABLE>
Consolidated net sales increased by $36.3 million, or 7.2% to $542.1
million in the six month period 2000 compared to $505.8 million in the six month
period 1999. Of the increase, Haas contributed $9.9 million, accounting for a
2.0% increase over prior year. Excluding the Haas operations, sales increased
$26.4 million or 5.2% over the same period last year. The precise effect on
sales of the TCI operations acquired cannot be determined due to the merger of
these assets and operations into various segments of the business. Market demand
for all products was moderate in the six month period 2000 compared to high
demand in the six month period 1999. The Company believes that its sales
increase outpaced the industry rate of growth for the six month period. The
sales increase in 2000 was due primarily to the effect of acquisitions and
better product line offerings and more focus on marketing programs. Competition
was strong across all segments in the period as competitors fought for limited
sales dollars.
Gross profit increased from $112.2 million in the six month period 1999 to
$122.2 million in the six month period 2000. Gross profit as a percentage of
sales increased from 22.2% to 22.5%, as a result of improved product mix and
price.
Selling, general, and administrative expenses increased by $16.5 million in
the six month period 2000 representing 22.0% as a percentage of sales compared
to 20.3% in the six month period 1999. Increased operating expenses were
primarily wage, occupancy and vehicle cost, a direct result of expanding
operations in 2000 and higher fuel cost. Interest and other expenses increased
in the six month period 2000 by $1.5 million to $11.2 million due to higher
borrowings on the revolving credit line for acquisitions and capital additions.
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<PAGE> 13
The income tax benefit in the six month period 2000 was $2.2 million
compared to an income tax provision of $1.0 million for the six month period
1999. The net loss for the six month period 2000 was $5.9 million or (1.1)% of
net sales compared to a net loss of $1.0 million or (0.2)% of net sales in the
six month period 1999.
Southeastern Wholesale Distribution
Net sales in the Southeastern Wholesale Distribution segment increased $5.8
million, or 1.7% from net sales of $334.1 million in the six month period 1999
compared to $339.9 million in the six month period 2000. The precise effect of
the TCI operations acquired during the period cannot be determined as the assets
were merged into existing facilities.
EBITDA increased $1.1 million from $14.3 million in the six month period
1999 to $15.4 million in the six month period 2000. Gross profit margins
increased from 16.5% to 17.4% as a percent of sales for the six month period
1999 and 2000, respectively. Sales volume and higher gross profit margins
accounted for the EBITDA increase. However, selling, general, and administrative
expenses increased from 13.4% to 13.9% as a percent of sales for the six month
period 1999 and 2000, respectively. Higher wages and occupancy were the direct
result of expanded operations and sales volume.
Western Wholesale Distribution
Net sales in the Western Wholesale Distribution segment increased by $20.6
million or 22.3% from $92.3 million in the six month period 1999 to $112.9
million in the six month period 2000. The acquired Haas operations contributed
$9.9 million, accounting for a 10.7% increase over prior year. Excluding the
Haas operations, sales increased $10.8 million or 11.6% over the same period
last year. The sales increase can be attributed to expanded operations with one
new distribution warehouse in Southern California, as well as TCI acquired
operations merged into the Western Wholesale operations.
EBITDA decreased from $7.1 million in the six month period 1999 to $5.4
million in the six month period 2000. Gross profit margins were 18.6% in the six
month period 2000 versus 19.7% for the six month period 1999. Margins were down
primarily due to competitive pressure in expansion markets. Operating expenses
were up from $20.0 million in the six month period 1999 to $24.4 million for the
six month period 2000 primarily due to the expansion into Southern California
and the acquired operations of TCI and Haas. However, as a percentage of sales,
operating expenses increased slightly at 17.1% and 16.5% for the six month
period 2000 and 1999, respectively. Substantially all of the EBITDA decline in
Western Wholesale Distribution can be attributed to margin pressures associated
with expansion and acquisitions. Some margin pressure will continue in future
quarters as the Company attracts new customers and builds its distribution
business in Southern California.
Western Retail
The Western Retail segment experienced an increase in net sales in the six
month period 2000 of $9.6 million or 12.1%, up from $79.5 million in the six
month period 1999 to $89.2 million. Western Retail operated 198 retail stores as
of July 1, 2000 compared to 195 stores as of June 30, 1999. Sales per store
improved by 6.6% in the six month period 2000 compared to 1999. EBITDA fell from
$1.1 million in the six month period 1999 to $(3.9) million in six month period
2000. Problems associated with the new point-of-sale software rollout affected
operating results in the six month period 2000. Management has taken a number of
corrective actions to reduce costs and improve profitability to the extent of
reversing EBITDA losses experienced at Western Retail in the six month period
2000. These actions include headcount reductions, additional vendor discounts,
controlled management of parts pricing, and a return to selected price-based
print advertising. While these actions are aimed at improving profitability over
the next six months of 2000, there can be no assurance that they will be
successful or that the division will be profitable.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
At July 1, 2000 the combined net indebtedness (net of cash) of the Company
was $256.2 million compared to $230.1 million (net of cash) at December 31,
1999. On March 6, 2000 the revolving credit facility was amended to provide,
among other things, maximum borrowings thereunder up to $200 million or a
borrowing base comprised of specified percentages of accounts receivable and
inventory, whichever is less. As of July 1, 2000, $42.6 million was available
for additional borrowings under the credit facility.
On July 20, 2000, the revolving credit facility was amended to permit,
among other things, the acquisition of the assets of ATD on July 21, 2000, and
also to amend certain covenants contained therein. In connection with these
amendments and covenants, the applicable margins in the pricing grid for
Eurodollar Rate Loans were increased by 0.25%, resulting in an applicable margin
of 0.5% for Base Rate Loans and an applicable margin of 2.25% for Eurodollar
Rate Loans through December 31, 2000. At the same time, the banks waived the
effects of a failure to meet the minimum Net Worth covenant, as defined in the
credit agreement, as of May 27, 2000. As of July 1, 2000, the Company's Net
Worth, as defined, is in excess of the minimum required, which was not amended,
and management expects that such amount will remain above the minimum for the
foreseeable future.
The Company's principal sources of cash during the second quarters ended
2000 and 1999 came from operations and borrowings under the revolving credit
facility. Cash used in operating activities totaled $3.3 million and $20.9
million respectively, during each of those periods. Trade accounts receivable
increased by $7.7 million in the second quarter 2000 compared to $12.1 million
in the second quarter 1999 due primarily to increased sales levels. Increases in
inventories due to seasonal stocking total $7.0 million in the second quarter
2000 compared to $14.0 million in the second quarter 1999. Trade accounts
payable and accrued expenses increased by $17.2 million in the second quarter
2000 compared to $10.4 million in the same period 1999. Accounts payable
increases in 2000 are the result of seasonal inventory stocking and the absence
of anticipation discounts from major vendors.
Capital expenditures during the second quarter 2000 and 1999 amounted to
$2.8 million and $3.4 million, respectively. Capital expenditures in 2000
included $1.7 million in Western Retail for new retail stores, existing retail
store refurbishment and relocations, and information systems. Southeastern
Wholesale also had expenditures of $0.9 million primarily for warehouse racking.
The Company anticipates that its principal use of cash going forward will
be to meet working capital and debt service requirements and to make capital
expenditures which are expected to total approximately $10 million for fiscal
2000. Based upon current and anticipated levels of operations, the Company
believes that its cash flow from operations, together with amounts available
under the credit facility, will be adequate to meet its anticipated
requirements. There can be no assurance, however, that the Company's business
will continue to generate sufficient cash flow from operations in the future to
be applied to meet these requirements or to service its debt, and the Company
may be required to refinance all or a portion of its existing debt, or to obtain
additional financing. These increased borrowings may result in higher interest
payments. In addition, there can be no assurance that any such refinancing would
be possible or that any additional financing could be obtained. The inability to
obtain additional financing could have a material adverse effect on the Company.
Certain minority stockholders of the Company have been granted redemption
rights commencing in 2004, subject to certain conditions, which if exercised
would obligate the Company to redeem the shares of capital stock held by such
stockholders at agreed valuations (based upon a multiple of EBITDA formula).
There can be no assurance that sufficient funds will be available to redeem the
shares of capital stock held by such stockholders if the Company is required to
do so or whether the terms of its outstanding indebtedness at such time will
permit such redemption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not consider its exposure to market risk to be material.
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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On July 26, 2000, the Company settled all outstanding claims with the
previous shareholders of Winston as described in the Company's Report on Form
10-K for the fiscal year ended December 31, 1999. In connection with the
settlement, the Company received $1.0 million in cash on July 28, 2000.
There have been no other material developments in legal proceedings
involving the Company since those reported in the Company's Report on Form 10-K
for the fiscal year ended December 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits --
<TABLE>
<C> <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 (for SEC use only)
</TABLE>
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended July 1, 2000.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 15, 2000
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
