Back to GetFilings.com

UNITED STATES

FORM 10-Q

Commission File Number 333-61713

American Tire Distributors, Inc.

12200 Herbert Wayne Court

(704) 992-2000

      Indicate by a 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 o

      Number of common shares outstanding at November 12, 2002: 5,086,917

TABLE OF CONTENTS

PART I.     FINANCIAL INFORMATION

American Tire Distributors, Inc.

The accompanying notes to condensed consolidated financial statements

1

American Tire Distributors, Inc.

The accompanying notes to condensed consolidated financial statements

2

American Tire Distributors, Inc.

The accompanying notes to condensed consolidated financial statements

3

American Tire Distributors, Inc.

1.     Nature of Business:

      American Tire Distributors, Inc. (together with its subsidiaries, the “Company”) (formerly Heafner Tire Group, Inc.), is a Delaware corporation primarily engaged in the wholesale distribution of tires and tire accessories. On May 30, 2002, the Company changed its name from Heafner Tire Group, Inc. to American Tire Distributors, Inc. The new name is part of the Company’s transition from a collection of companies joined through acquisition into a single-minded organization with an unmatched, coast-to-coast footprint in the distribution market. The move follows two years of reorganization during which the Company discontinued its venture into tire retailing.

2.     Basis of Presentation:

      The unaudited condensed consolidated financial statements 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 29, 2001. The results of the operations for the quarter and nine months ended September 28, 2002 are not necessarily indicative of the operating results for the full fiscal year. Certain prior period amounts have been reclassified to conform to the current period presentation.

3.     New Accounting Pronouncements:

      In July 2001, the FASB issued Statement No. 141 “Business Combinations” (“SFAS 141”) and Statement No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. This statement also specifies that intangible assets acquired in a purchase method business combination must meet certain criteria to be recognized and reported apart from goodwill. SFAS 142 revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually and in the event of an impairment indicator adjustments will be made to comply with the standard. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS 121”). The Company adopted the provisions of SFAS 142 effective January 1, 2002. The Company has completed the initial analysis effective as of the beginning of 2002 and has determined that there is no goodwill impairment. The following

4

Notes to Condensed Consolidated Financial Statements — (Continued)

table illustrates the comparable adjusted income (loss) before extraordinary item and adjusted net income (loss) for the quarters and nine months ended September 28, 2002 and September 29, 2001, respectively:

      In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS 121. However, this Statement retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”), for the disposal of a segment of a business. However, this Statement retains the requirement of APB 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in a distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, “Consolidated Financial Statements”, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company has adopted the provisions effective January 1, 2002 and the effect of the adoption was not material.

      In April 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002.” This statement contains a number of changes under existing GAAP, including the elimination of extraordinary item classification of debt extinguishments that was previously required under SFAS 4. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002 with early adoption encouraged. The Company expects to adopt SFAS No. 145 in fiscal 2003.

      In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between this Statement and Issue 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement

5

Notes to Condensed Consolidated Financial Statements — (Continued)

requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect that adoption of this statement will have a material impact on the results of operations or financial position in the foreseeable future.

4.     Inventories:

      Inventories consist primarily of automotive tires, wheels and accessories and are valued at the lower of cost, determined on the first-in, first-out (FIFO) method or market. The Company performs periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and records necessary provisions to reduce such inventories to net realizable value. Terms with a majority of the Company’s tire vendors allow return of tire products, within limitations, specified in their supply agreements.

5.     Shipping and Handling Costs:

      Outbound shipping and handling costs are classified as selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Such expenses totaled $16.4 million and $17.8 million for the quarters ended September 28, 2002 and September 29, 2001, respectively and $48.3 million and $54.2 million for the nine months ended September 28, 2002 and September 29, 2001, respectively.

6.     Deferred Income Taxes:

      The Company has deferred tax assets of $21.0 million and $44.0 million at September 28, 2002 and December 29, 2001, respectively. The decrease in net deferred tax assets is primarily attributable to the utilization of net operating loss carryforwards as it relates to the extraordinary gain on retirement of the Series D Senior Notes and from net income generated from continuing operations through September 28, 2002. Management has evaluated the Company’s deferred tax assets and has concluded that the realizability of the deferred tax assets is more likely than not, except as it relates to certain state net operating loss carryforwards (“NOLs”). Accordingly, a valuation allowance of $2.0 million was provided in fiscal 2001. This evaluation considered the historical and long-term expected profitability of the Company’s continuing operations and the expected efficiencies to be gained from efforts initiated in 2001 to streamline operations. Given the timing of the reversal of its temporary differences and the expiration date of its net operating loss carryovers, the Company believes that taxable income generated in current and future years will be sufficient to utilize the remaining net deferred tax assets. The Company’s ability to generate future taxable income is dependent on numerous factors including general economic conditions, the state of the replacement tire market and other factors beyond management’s control. Therefore, there can be no assurance that the Company will meet its expectation of future taxable income. Changes in expected future income could lead to an additional valuation allowance against deferred tax assets.

7.     Financing Arrangements:

     Revolving Credit Facility

      On March 18, 2002, the Company and its lenders executed an amendment to the revolving credit facility (“Revolver”) to, among other things, amend the financial covenants contained therein, change the rate at which borrowings thereunder bear interest and amend certain definitions contained therein. In addition, the amended facility provides for additional availability due in part to a reduction in the minimum availability reserve (as defined in the agreement). The minimum availability reserve will begin to increase by $0.5 million in August 2002 and will increase each month until the reserve reaches the original amount in August 2003. As

6

Notes to Condensed Consolidated Financial Statements — (Continued)

a result of the amendment, the applicable margins as of April 1, 2002 for Eurodollar Rate loans were increased to 3.5%. A nonrefundable fee of approximately $0.5 million was charged in connection with this amendment.

      Effective August 22, 2002, the Company and its lenders executed a waiver and amendment to the Revolver to waive the effects of a failure to meet the minimum fixed charge coverage covenant, as defined in the credit agreement, as of June 29, 2002 and to amend certain definitions contained therein.

      On September 25, 2002, the Company and its lenders executed an amendment to the Revolver to, among other things, amend the financial covenants contained therein and revise certain components of the definitions of Borrowing Base. The amended agreement provides for borrowings in the aggregate principal amount of up to the lesser of $180.0 million or the Borrowing Base, as defined in the agreement, which is based on 85% of eligible accounts receivable, the lesser of 65% of eligible tire inventory plus 60% of certain secured tire inventory (within limitations as defined in the agreement) or $100 million and the lesser of 50% of all other eligible inventory or $25 million less defined reserves. A nonrefundable fee of approximately $0.2 million was charged in connection with this amendment. As of November 12, 2002, the Company’s financial measures were in excess of the minimums required, as amended, and management expects that such amounts will remain above the minimums for the foreseeable future.

      The Revolver term expires in March 2005, extendable by the Company and the banks for an additional five years. Borrowings under the Revolver bear interest, at (i) the Base Rate, as defined, plus the applicable margin (2.0% as of September 28, 2002) or (ii) the Eurodollar Rate, as defined, plus the applicable margin (3.5% as of September 28, 2002). These margins are subject to performance-based step-downs resulting in margins ranging from 0.75% to 2.0% for Base Rate loans and 2.0% to 3.5% for Eurodollar Rate loans, respectively.

      The Revolver, as amended, requires the Company to meet certain financial requirements, including minimum EBITDA, fixed charge coverage and tangible capital funds, all as defined, and minimum loan availability and 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 Revolver are secured by all inventories and accounts receivable.

      Aggregate annual maturities of long-term debt, reflecting the debt restructuring discussed in Note 9, (excluding capital lease obligations) at September 28, 2002, are as follows (in thousands):

     Capital Lease Obligations

      On March 27, 2002, the Company completed an agreement for the sale and leaseback of three of its owned facilities generating cash proceeds of $13.9 million. The Company reports this transaction as a capital

7

Notes to Condensed Consolidated Financial Statements — (Continued)

lease using direct financing lease accounting. As such, the Company recorded a $14.0 million capital lease obligation during first quarter 2002. The Company has determined that all cash paid to the lessor is properly recorded as interest expense and that the capital lease obligation will be reduced when the Company no longer has continuing involvement with the properties. The initial term of the lease is for 20 years, followed by two, 10-year renewal options. The annual rent paid under the terms of the lease is $1.6 million annually (paid quarterly) and is adjusted for CPI changes every two years. In addition, the purchaser received warrants to purchase 0.75% of the Company’s fully diluted common stock. The warrants have a term of 10 years with a stated exercise price of $3.00 per warrant.

8.     Discontinued Operations:

      Effective May 15, 2001, the Company completed a transaction pursuant to a Stock Purchase Agreement to sell all the capital stock in Winston Tire Company (“Winston”), its retail segment, to Performance Management, Inc. for a purchase price of approximately $10.0 million, of which $2.8 million was payable May 15, 2002 for which the Company has previously established an appropriate reserve. As of November 12, 2002 this balance remains outstanding and the Company is currently pursuing collection from Performance Management, Inc. In the nine months ended September 28, 2002, the Company recorded an additional loss on disposal of discontinued operations of approximately $0.4 million, net of income tax benefit of $0.2 million, for a cumulative net loss on sale of $14.2 million, of which $12.6 million was recognized in 2001. There have been no material changes in the Company’s guarantee of certain Winston leases since those reported in the Company’s Report on Form 10-K for the fiscal year ended December 29, 2001. The Company’s receivable/administrative claim of approximately $2.0 million due from Winston was fully recovered in the third quarter of 2002 by a return of merchandise of approximately $0.5 million and the receipt of certain unencumbered trademark rights for the state of California as a result of the proposed rejection of licenses by Winston. The intangible asset recorded for this trademark is being amortized on a straight-line basis over a period of five years.

9.     Extraordinary Item:

      On March 27, 2002, the Company repurchased $121.4 million in outstanding principal amount of the 10% Series D Senior Notes (“Senior Notes”) due in 2008 at a purchase price of $535 per $1,000 in face amount of Senior Notes, plus accrued and unpaid interest of $4.5 million. The Company funded the repurchase of the Senior Notes through several debt restructuring transactions (“Restructuring Transactions”). The Restructuring Transactions consisted of (i) an amendment to the Company’s revolving credit facility to provide additional availability, (ii) a sale and leaseback of three of the Company’s tire distribution warehouses generating cash proceeds of $13.9 million and (iii) an equity investment of $28.9 million from the issuance of 9,637,592 shares of Series D preferred stock to the Company’s existing stockholders. Concurrently with the repurchase of the Senior Notes, the Company, the Subsidiary Guarantors and the Trustee executed the Fourth Supplemental Indenture to the Indenture. The amendments to the Indenture were effected primarily to permit the Restructuring Transactions and make other required modifications.

      The Company has accounted for the repurchase and extinguishment of the Senior Notes as an extraordinary item. In the nine months ended September 28, 2002, the Company has recorded approximately $29.9 million to extraordinary gain, net of income tax provision of $19.9 million. No additional charges were made against the extraordinary gain in third quarter 2002.

8

Notes to Condensed Consolidated Financial Statements — (Continued)

10.     Redeemable Preferred Stock:

      The following represents the Company’s issued and outstanding redeemable preferred stock, reflecting the amendment and modifications discussed in Note 11 below (in thousands, except share amounts):

11.     Stockholders’ Investment:

     Amendment to Articles of Incorporation

      In conjunction with the Restructuring Transactions, the Company amended and restated its articles of incorporation to authorize 50,000,000 shares of a single class of $.01 par value common stock and 10,982,426 shares of $.01 par value preferred stock. Of the 10,982,426 shares of preferred stock, 7,000 shares are initially designated Series A preferred stock, 4,500 shares are initially designated Series B preferred stock, 1,333,334 shares are initially designated Series C preferred stock and 9,637,592 shares are initially designated Series D preferred stock. The conversion price of the Series C preferred stock was reduced to $3.00 per common share and the holders’ redemption rights were eliminated.

     Preferred Stock

      The following represents the Company’s issued and outstanding preferred stock (in thousands, except share amounts):

      On March 27, 2002, the Company issued 9,637,592 shares of Series D preferred stock for $3.00 per share in exchange for $28.9 million in cash contributed by certain of its principal stockholders. The proceeds were used to repurchase certain of the Company’s Senior Notes. Shares of Series D preferred stock accrue dividends at an annual rate of 12% and are redeemable by the Company, but not the holder, at the initial price plus any cumulative unpaid dividends as of the redemption date. However, as long as any shares of Series A preferred stock or Series B preferred stock remain outstanding, no dividends may be paid, nor can redemption occur. In addition, shares of Series D preferred stock are convertible into common stock at a conversion price of $3.00 per common share.

12.     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

Notes to Condensed Consolidated Financial Statements — (Continued)

13.     Subsidiary Guarantor Financial Information:

      The Company’s 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 condensed consolidating financial information for the Company is as follows (in thousands):

Condensed consolidated balance sheets as of September 28, 2002 and December 29, 2001, are as follows:

10

Notes to Condensed Consolidated Financial Statements — (Continued)