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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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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER 333-61713
HEAFNER TIRE GROUP, INC.
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<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)
</TABLE>
(704) 423-8989
(Registrant's telephone number, including area code)
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 November 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 -- September 30, 2000
(unaudited) and December 31, 1999......................... 1
Condensed Consolidated Statements of Operations
(unaudited) -- Quarters and Nine Months Ended September
30, 2000 and 1999......................................... 2
Condensed Consolidated Statements of Cash Flows
(unaudited) -- Quarters and Nine Months Ended September
30, 2000 and 1999......................................... 3
Notes to Condensed Consolidated Financial Statements........ 4
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
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............................ 12
Signatures.................................................. 13
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEAFNER TIRE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
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<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,688 $ 6,497
Accounts receivable, net of allowances of $4,398 and
$2,385................................................. 138,524 88,207
Inventories, net.......................................... 184,448 148,865
Other current assets...................................... 39,921 39,932
-------- --------
Total current assets.............................. 367,581 283,501
-------- --------
Property and equipment, net................................. 53,143 47,624
Goodwill, net............................................... 129,095 107,112
Other intangible assets, net................................ 10,986 7,968
Other assets................................................ 13,492 13,041
-------- --------
$574,297 $459,246
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $241,967 $160,861
Accrued expenses.......................................... 42,861 29,437
Current maturities of long-term debt...................... 2,642 1,792
-------- --------
Total current liabilities......................... 287,470 192,090
-------- --------
Revolving credit borrowings................................. 98,665 74,688
Long-term debt.............................................. 158,743 160,112
Other liabilities........................................... 13,131 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.......................................... (18,931) (12,421)
-------- --------
Total stockholders' equity........................ 4,057 10,521
-------- --------
$574,297 $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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QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales............................................. $358,282 $267,360 $900,391 $773,205
Cost of goods sold.................................... 281,183 210,355 701,714 604,170
-------- -------- -------- --------
Gross profit........................................ 77,099 57,005 198,677 169,035
Selling, general and administrative expenses.......... 71,396 51,164 189,834 153,495
Special and nonrecurring charge (recovery)............ (697) 3,500 (697) 3,500
-------- -------- -------- --------
Income from operations.............................. 6,400 2,341 9,540 12,040
-------- -------- -------- --------
Other income (expense):
Interest expense, net............................... (7,003) (5,622) (18,979) (16,310)
Other income........................................ 617 437 1,389 1,424
-------- -------- -------- --------
Income (loss) from operations before provision
(benefit) for income taxes.......................... 14 (2,844) (8,050) (2,846)
Provision (benefit) for income taxes.................. 658 (811) (1,540) 178
-------- -------- -------- --------
Net loss.............................................. $ (644) $ (2,033) $ (6,510) $ (3,024)
======== ======== ======== ========
</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)
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QUARTERS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (644) $ (2,033) $ (6,510) $ (3,024)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities, net
of acquisitions --
Depreciation and amortization of goodwill and
other intangibles.............................. 6,068 4,359 16,274 12,799
Amortization of other assets..................... 290 213 863 645
Special and nonrecurring charges................. -- 3,500 -- 3,500
Other, net....................................... (199) 87 (253) 267
Change in assets and liabilities:
Accounts receivable, net......................... (11,175) 3,064 (28,075) (14,772)
Inventories, net................................. 1,021 1,202 (7,493) (135)
Other current assets............................. 760 4,524 3,591 (17,617)
Accounts payable and accrued expenses............ 39,385 9,784 72,058 11,425
Other, net....................................... 334 19 109 (367)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities.................................. 35,840 24,719 50,564 (7,279)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of ATD, net of cash acquired............ (38,976) -- (38,976) --
Acquisition of California Tire, net of cash
acquired......................................... -- -- -- (4,068)
Acquisition of Tires Centers, Inc................... (2,134) -- (4,154) --
Acquisition of T.O. Haas, net of cash acquired...... 2,272 -- (21,247) --
Payments on deferred purchase price of acquired
business......................................... (197) -- (3,450) --
Purchase of property and equipment.................. (1,983) (1,702) (7,489) (8,279)
Proceeds from sale of property and equipment........ 1,036 856 1,885 962
Other, net.......................................... (62) 614 (64) (1,854)
-------- -------- -------- --------
Net cash used in investing activities.......... (40,044) (232) (73,495) (13,239)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in revolving credit
borrowings....................................... 3,299 (13,251) 23,977 30,994
Principal payments on long-term debt................ (928) (157) (1,794) (3,222)
Other, net.......................................... -- (592) (1,061) (3,034)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. 2,371 (14,000) 21,122 24,738
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (1,833) 10,487 (1,809) 4,220
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........ 6,521 381 6,497 6,648
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............. $ 4,688 $ 10,868 $ 4,688 $ 10,868
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash payments for interest.......................... $ 2,313 $ 1,361 $ 13,812 $ 10,904
======== ======== ======== ========
Cash payments for taxes............................. $ -- $ 750 $ -- $ 895
======== ======== ======== ========
</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 September 30,
2000, and the condensed consolidated statements of operations and cash flows for
the quarters and nine months ended September 30, 2000 and 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 nine months ended September 30, 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 fourth 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, we do not believe that the
adoption of this statement would modify the pretax earnings or net income
presented in these statements.
4. ACQUISITIONS:
On July 21, 2000, the Company purchased the net assets of American Tire
Distributors ("ATD"), the wholesale operations of Merchants, Inc. The total
purchase price was approximately $39.0 million, of which approximately $1.9
million is held in escrow. The excess of the purchase price over the net
tangible assets acquired was allocated to goodwill (approximately $16.7 million)
and is being amortized over 15 years.
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 as well as all of the outstanding common stock of
Haas Investment Company ("Haas Investment"). In connection with the acquisition,
the Company sold certain parcels of real estate, including substantially all of
the assets of Haas Investment, 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 $28.4 million (including $1.6 million of
assumed debt). Of that amount 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
4
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HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase price over the net tangible assets acquired was allocated to goodwill
($10.6 million) and other intangibles ($4.1 million) and is being amortized over
15 years and 6 years, respectively. Pro forma sales and net loss for the nine
months ended September 30, 2000 and 1999, as if Haas had been acquired January
1, 1999, are $941.2 million and $7.8 million and $852.1 million and $4.5
million, 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 $4.2 million. 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
September 30, 2000, based on management's best estimate of assets acquired and
liabilities assumed.
5. SPECIAL AND OTHER 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 lawsuit alleged that
Winston violated certain California wage and business practices regulations.
Winston denied these allegations. As a result of this agreement, the Company
recorded a pre-tax non-recurring charge of $3.5 million in the third quarter
1999. The nonrecurring charge includes payments of approximately $3.5 million to
the plaintiff class members and their attorneys. On July 26, 2000, the Company
settled all outstanding claims with the previous shareholders of Winston. In
connection with the settlement, the Company received $1.0 million in cash on
July 28, 2000.
6. 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 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
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HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SEGMENT INFORMATION:
The Company classifies its business interests into two fundamental
segments: wholesale distribution of tires and products and retail sales of
tires, products and services. The Company includes the retail activity for Haas
in the Wholesale Distribution segment. Management does not separately analyze
this component of the segment due to its immateriality. 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").
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<CAPTION>
WHOLESALE CORPORATE AND
DISTRIBUTION RETAIL ELIMINATIONS TOTALS
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<S> <C> <C> <C> <C>
Quarter ended September 30, 2000 --
Revenues................................. $310,563 $ 47,603 $ 116 $358,282
EBITDA(1)................................ 17,657 (3,842) (1,427) 12,388
Segment assets........................... 506,816 88,482 (21,001) 574,297
Expenditures for segment assets.......... 1,214 744 25 1,983
Nine months ended September 30, 2000 --
Revenues................................. $763,342 $136,753 $ 296 $900,391
EBITDA(1)................................ 38,483 (7,750) (4,227) 26,506
Segment assets........................... 506,816 88,482 (21,001) 574,297
Expenditures for segment assets.......... 3,519 3,607 363 7,489
Quarter ended September 30, 1999 --
Revenues................................. $223,439 $ 43,894 $ 27 $267,360
EBITDA(1)................................ 10,411 762 (536) 10,637
Segment assets........................... 464,315 80,879 (66,461) 478,733
Expenditures for segment assets.......... 1,066 605 31 1,702
Nine months ended September 30, 1999 --
Revenues................................. $649,765 $123,413 $ 27 $773,205
EBITDA(1)................................ 31,792 1,885 (3,914) 29,763
Segment assets........................... 464,315 80,879 (66,461) 478,733
Expenditures for segment assets.......... 4,015 4,183 81 8,279
</TABLE>
---------------
(1) EBITDA represents income (loss) before interest expense, income taxes,
noncash amortization of intangible assets and depreciation. For the quarters
ended September 30, 2000 and September 30, 1999, interest expense in the
condensed consolidated statements of operations includes $0.3 million and
$0.2 million, respectively, of amortization expense related to deferred
transaction fees. For the nine months ended September 30, 2000 and September
30, 1999, interest expense in the condensed consolidated statements of
operations includes $0.9 million and $0.6 million, respectively, of
amortization expense related to deferred transaction fees. For the quarters
and nine months ended September 30, 2000 and 1999, EBITDA excludes the
impact of the nonrecurring charge (recovery) of $(0.7) million and $3.5
million, respectively.
6
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HEAFNER TIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. 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):
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<CAPTION>
AS OF AND FOR AS OF AND FOR
THE NINE MONTHS THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
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Current assets....................................... $153,614 $103,567
Noncurrent assets.................................... 119,756 99,001
Current liabilities.................................. 105,196 67,300
Noncurrent liabilities............................... 7,692 7,292
Net sales............................................ 342,719 266,468
Gross profit......................................... 102,327 87,523
Net loss............................................. (5,800) (5,445)
</TABLE>
The above information excludes $49.4 and $44.5 million of net intercompany
payable and $47.4 and $43.3 million of intercompany sales of the Company's
subsidiary guarantors as of and for the quarters ended September 30, 2000 and
September 30, 1999, respectively. In the preparation of the Company's condensed
consolidated financial statements, all intercompany accounts are eliminated.
9. 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.
On July 26, 2000, the Company settled all outstanding claims with the
previous shareholders of Winston as described note 5. In connection with the
settlement, the Company received $1.0 million in cash on July 28, 2000.
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. Previously, the parties mediated the
various issues involved in these matters and resolved all issues except for one.
By Settlement Agreement dated September 18, 2000 the parties resolved the
outstanding issues remaining.
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. In its Wholesale Distribution segment, it operates in
the following regions of the United States: Southeast, Northeast, Plains and in
California and Arizona. Its Retail segment operates in California and Arizona.
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, acquired all the outstanding stock of Haas on May 25, 2000, and the assets
of ATD on July 21, 2000. Therefore, the results of operations for the quarter
and nine months ended September 30, 2000 include the acquired operations
subsequent to those dates.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
The following table sets forth certain selected information regarding the
Company's segments (in millions):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
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Net sales
Wholesale distribution............................. $310.6 $223.4
Retail............................................. 47.6 43.9
Corporate.......................................... 0.1 0.0
------ ------
Consolidated....................................... $358.3 $267.4
EBITDA
Wholesale.......................................... $ 17.7 $ 10.4
Retail............................................. (3.8) 0.8
Corporate.......................................... (1.4) (0.5)
------ ------
Consolidated....................................... $ 12.4 $ 10.6
</TABLE>
Consolidated net sales increased by $90.9 million, or 34.0%, to $358.3
million in the third quarter 2000 compared to $267.4 million in the third
quarter 1999. Of the increase, the operations acquired from Haas and ATD
accounted for $47.2 million, or a 17.7% increase over prior year. Excluding the
Haas and ATD operations, sales increased $43.7 million or 16.3% over the same
quarter last year. The precise effect on sales of the TCI assets acquired cannot
be determined due to the merger of these operations into various of the
Company's existing warehouse operations. Market demand for tire products was
very high during the quarter due primarily to heightened consumer awareness of
tire safety issues arising from the publicity surrounding the recall of certain
Firestone brand tires. In addition to the very strong consumer market for
replacement tires, 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.
Gross profit increased from $57.0 million in the third quarter 1999 to
$77.1 million in the third quarter 2000. Gross profit as a percentage of sales
increased from 21.3% to 21.5%, as a result of this very strong replacement tire
market, offset by lower retail gross margins and the effects of wholesale sales
comprising a greater percentage of consolidated sales in 2000 than in 1999.
Selling, general, and administrative expenses increased by $20.2 million in
the third quarter 2000 representing 19.9% as a percentage of sales compared to
19.1% in 1999. Increased operating expenses were
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primarily wage, occupancy and vehicle costs, a direct result of expanding
operations in 2000. Interest and other expense increased in the third quarter
2000 by $1.2 million to $6.4 million due to higher borrowings on the revolving
credit line for acquisitions and capital additions.
The income tax provision in the third quarter 2000 was $0.7 million
compared to an income tax benefit of $0.8 million for the same quarter in 1999.
The net loss for the third quarter 2000 was $0.6 million compared to a net loss
of $2.0 million in the third quarter 1999.
Wholesale Distribution
Net sales in the Wholesale Distribution segment increased $87.1 million, or
39.0% from net sales of $223.4 million in the third quarter 1999 to $310.6
million in the third quarter 2000. Sales growth in the segment was fueled by the
strong market for replacement passenger and light truck tires and the effects of
acquired operations. Acquired operations accounted for approximately $47.2
million of the sales increase for the third quarter 2000. Excluding the effects
of the acquired operations, sales increased $39.9 million, or 17.9% from the
prior year. The sales increase over prior year levels was experienced in all
geographic regions served by the Company. The Company's aggressive marketing and
promotions activities also contributed to the increase in sales levels. Third
quarter sales increased over prior year in all product areas, including sales of
custom wheels, although such increase was most evident in sales of replacement
tires. The Company continues to evaluate opportunities for expansion in
geographic territories that it does not currently serve. These opportunities may
involve future acquisitions or expansion into new markets through "greenfield"
operations. The Company's recent expansions of its wholesale distribution
operations in Southern California have contributed to sales growth during the
quarter.
EBITDA increased $7.2 million from $10.4 million in the third quarter 1999
to $17.7 million in the third quarter 2000 primarily as a result of
significantly higher sales levels, combined with improved gross profit margins.
Gross profit margins increased from 17.8% to 19.4% as a percent of sales for the
third quarter 1999 and 2000, respectively. The increase in gross profit margin
is largely attributable to an improved sales mix in 2000. Selling, general, and
administrative expenses increased by $14.5 million over the third quarter 1999
primarily due to expanded operations, including acquired operations.
Retail
The Retail segment (Winston Tire Company) experienced an increase in net
sales in the third quarter of $3.7 million or 8.5%, up from $43.9 million in the
third quarter 1999 to $47.6 million in the third quarter 2000. Retail operated
197 retail stores as of September 30, 2000 compared to 196 stores as of
September 30, 1999. EBITDA fell in the third quarter from $0.8 million in 1999
to $(3.8) million in 2000. Lower gross margins and significantly higher
operating expenses than the third 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, and significant expenses associated with these problems and their
correction were incurred during 2000. Management took a number of actions during
the third quarter 2000 to reduce costs and improve profits which were expected
to reverse the EBITDA losses experienced in the Retail segment during 2000.
These actions included headcount reductions, additional vendor discounts,
controlled management of parts pricing and a return to selected price-based
print advertising. While many of these actions were successful in reducing
costs, the issues to be corrected and problems in the systems capabilities have
made the management of store activities very difficult and therefore earnings in
the third quarter were significantly less than expected. The point-of-sale
system is not yet fully operational, and as a result, the ability of the
management team to measure and control the effects of intended changes has been
hampered. This, among other things, has further delayed the expected improvement
in operating results in Retail. The Company is evaluating a number of options
for improving earnings in retail, and therefore improving enterprise value and
other measures of financial strength.
9
<PAGE> 12
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
The following table sets forth certain selected information regarding the
Company's segments (in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Net sales
Wholesale distribution............................. $763.3 $649.8
Retail............................................. 136.8 123.4
Corporate.......................................... 0.3 0.0
------ ------
Consolidated....................................... $900.4 $773.2
EBITDA
Wholesale.......................................... $ 38.5 $ 31.8
Retail............................................. (7.8) 1.9
Corporate.......................................... (4.2) (3.9)
------ ------
Consolidated....................................... $ 26.5 $ 29.8
</TABLE>
Consolidated net sales increased by $127.2 million, or 16.4%, to $900.4
million in the nine-month period 2000 compared to $773.2 million in the
nine-month period 1999. Of the increase, the operations acquired from the Haas
and ATD acquisitions accounted for $57.1 million, or a 7.4% increase over prior
year. Excluding the Haas and ATD operations, sales increased $70.1 million or
9.1% over the same period last year. The precise effect on sales of the TCI
assets acquired cannot be determined due to the merger of these operations into
various of the Company's existing warehouse operations. Market demand for all
products was moderate in the first half of 2000, and was extremely strong during
the third quarter 2000 compared to reasonably strong demand throughout the
nine-month period 1999. The Company believes that its sales increase outpaced
the industry rate of growth for the nine-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 continues to be
strong in the Company's various geographic service areas.
Gross profit increased from $169.0 million in the nine-month period 1999 to
$198.7 million in the nine-month period 2000. Gross profit as a percentage of
sales increased from 21.9% to 22.1%, despite 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 $36.3 million in
the nine-month period 2000 representing 21.1% as a percentage of sales compared
to 19.9% in the nine-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 expense increased in the
nine-month period 2000 by $2.7 million to $19.0 million due to higher borrowings
on the revolving credit line for acquisitions and capital additions.
The income tax benefit in the nine-month period 2000 was $1.5 million
compared to an income tax provision of $0.2 million for the nine-month period
1999. The net loss for the nine-month period 2000 was $6.5 million compared to a
net loss of $3.0 million in the nine-month period 1999.
Wholesale Distribution
Net sales in the Wholesale Distribution segment increased $113.6 million,
or 17.5%, from net sales of $649.8 million in the nine-month period 1999 to
$763.3 million in the nine-month period 2000. Acquired operations accounted for
approximately $57.1 million of the sales increase for the nine-month period
2000. The effects of the very strong consumer market for replacement tires
during the third quarter resulting from the publicity surrounding the Firestone
recall more than offset a rather lackluster sales performance during the first
half of 2000.
EBITDA increased $6.7 million from $31.8 million in the nine-month period
1999 to $38.5 million in the nine-month period 2000. Gross profit margins
increased from 18.3% to 19.1% as a percent of sales for the nine-
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<PAGE> 13
month period 1999 and 2000, respectively. Sales volume and higher gross profit
margins accounted for the EBITDA increase. Selling, general, and administrative
expenses increased from 14.9% to 15.5% as a percent of sales for the nine-month
period 1999 and 2000, respectively. Higher wages and occupancy were the direct
result of expanded operations including acquired operations and sales volume.
Retail
The Retail segment (Winston Tire Company) experienced an increase in net
sales in the nine-month period 2000 of $13.3 million or 10.8%, up from $123.4
million in the nine-month period 1999 to $136.8 million. Retail operated 197
retail stores as of September 30, 2000 compared to 196 stores as of September
30, 1999. EBITDA fell from $1.9 million in the nine-month period 1999 to $(7.8)
million in nine-month period 2000. 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, and significant expenses associated with these
problems and their correction were incurred during 2000. Management took a
number of actions during the third quarter 2000 to reduce costs and improve
profits which were expected to reverse the EBITDA losses experienced in the
Retail segment during 2000. These actions included headcount reductions,
additional vendor discounts, controlled management of parts pricing and a return
to selected price-based print advertising. While many of these actions were
successful in reducing costs, the issues to be corrected and problems in the
systems capabilities have made the management of store activities very difficult
and therefore earnings in the third quarter were significantly less than
expected. The point-of-sale system is not yet fully operational, and as a
result, the ability of the management team to measure and control the effects of
intended changes has been hampered. This, among other things, has further
delayed the expected improvement in operating results in Retail. The Company is
evaluating a number of options for improving earnings in retail, and therefore
improving enterprise value and other measures of financial strength.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the combined net indebtedness (net of cash) of the
Company was $255.4 million compared to $230.1 million 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 September 30, 2000, $64.7 million was available for
additional borrowings under the credit facility.
The Company's principal sources of cash during the third quarters ended
2000 and 1999 came from operations and borrowings under the revolving credit
facility. Cash provided by operating activities totaled $35.8 million and $24.7
million respectively, during each of those periods. Trade accounts receivable
increased by $11.2 million in the third quarter 2000 compared to a decrease of
$3.1 million in the third quarter 1999 due primarily to increased sales levels.
Decreases in inventories totaled $1.0 million in the third quarter 2000 compared
to $1.2 million in the third quarter 1999. Trade accounts payable and accrued
expenses increased by $39.4 million in the third quarter 2000 compared to $9.8
million in the same period 1999. Accounts payable increases are due primarily to
the significantly higher level of sales and purchases in the third quarter ended
2000 and the effects of the ATD acquisition.
Capital expenditures during the third quarter 2000 and 1999 amounted to
$2.0 million and $1.7 million, respectively. Capital expenditures in 2000
included $0.7 million in Retail for new retail stores, existing retail store
refurbishment and relocations, and information systems.
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
11
<PAGE> 14
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.
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.
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. Previously, the parties mediated the
various issues involved in these matters and resolved all issues except for one.
By Settlement Agreement dated September 18, 2000 the parties resolved the
outstanding issues remaining.
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
</TABLE>
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended September 30,
2000.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 14, 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)
13
