Back to GetFilings.com

Table of Contents

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

      Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes o     No x

      Number of common shares outstanding at May 17, 2004: 5,086,917

TABLE OF CONTENTS

Table of Contents

Cautionary Statements on Forward-Looking Information

      This Form 10-Q contains forward-looking statements relating to the Company’s business and financial outlook, which are based on the Company’s current expectations, estimates, forecast and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or other comparable terminology. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any such statement to reflect new information, the occurrence of future events or circumstances or otherwise.

      The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation. The Company would like to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act in connection with the forward-looking statements included in this document.

      Factors that could cause actual results to differ materially from those indicated by the forward-looking statements or that could contribute to such differences include, but are not limited to, integration of new systems, unanticipated expenditures, acquisitions and the successful integration of acquisitions into the business, changing relationships with customers, suppliers and strategic partners, changes to governmental regulation of the tire industry, the impact of competitive products, changes to the competitive environment, the acceptance of new products in the market, the economy and world events.

Table of Contents

PART I.     FINANCIAL INFORMATION

American Tire Distributors, Inc.

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Table of Contents

American Tire Distributors, Inc.

Condensed Consolidated Statements of Operations

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

American Tire Distributors, Inc.

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

American Tire Distributors, Inc.

      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 unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and changes in financial position in conformity with accounting principles generally accepted in the United States. In the opinion of the Company, all adjustments, consisting of 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. 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 27, 2003. The results of operations for the quarter ended April 3, 2004 are subject to year-end audit and adjustments, and are not necessarily indicative of the operating results for the full fiscal year.

      The Company’s fiscal year is based on either a 52 or 53 week period ending on the Saturday closest to each December 31. Therefore, the financial results of certain fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarters ended April 3, 2004 and March 29, 2003 contain operating results for 14 weeks and 13 weeks, respectively.

      Certain prior period amounts have been reclassified to conform to the current period presentation.

      In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how financial instruments with characteristics of both liabilities and equity should be measured and classified and requires that an issuer classify a financial instrument that is within its scope as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. On November 7, 2003, the FASB issued FASB Staff Position (“FSP”) No. 150-3 “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” FSP No. 150-3 requires that implementation of certain provisions of SFAS No. 150 be deferred indefinitely. The adoption of SFAS No. 150 did not have a material impact on the Company’s consolidated financial position or results of operations.

      As permitted by SFAS No. 123, “Accounting For Stock-Based Compensation,” the Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and its related interpretations. Pursuant to APB No. 25, compensation expense is recognized for financial reporting purposes using the intrinsic value method. The amount of compensation expense to be recognized is determined by the excess of the fair value of common

4

Table of Contents

Notes to Condensed Consolidated Financial Statements — (Continued)

stock over the exercise price of the related option at the measurement date. The exercise price of all stock options represented fair value of the underlying common stock at the date of grant. Accordingly, no compensation expense has been recorded in the condensed consolidated statements of operations.

      In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” an amendment of SFAS No. 123. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. At this time, the Company has not voluntarily adopted the fair value method of accounting under SFAS No. 123, but is required to provide certain pro forma disclosures, which are presented below.

      The following information is presented as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123 (in thousands):

      During first quarter 2004, the Company granted options for 268,226 shares with an exercise price of $4.25. The weighted average fair value of options granted during first quarter 2004 estimated on the date of grant using the Black-Scholes option pricing model was $1.40. The fair value of options granted in first quarter 2004 was determined using the following assumptions: a weighted average risk-free interest rate of 3.98%, no dividend yield, expected life of 10 years which equals the terms of the options, and no expected volatility.

      The Company granted options for 198,308 shares in first quarter 2003 with an exercise price of $3.00. The weighted average fair value of options granted during 2003 estimated on the date of grant using the Black-Scholes option pricing model was $1.00. The fair value of options granted in first quarter 2003 was determined using the following assumptions: a risk-free interest rate of 4.05%, no dividend yield, expected life of 10 years which equals the terms of the options, and no expected volatility.

      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. All of the Company’s inventories are held as collateral under the revolving credit facility (“Revolver”).

      Outbound shipping and handling costs are classified as selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Such expenses totaled $18.0 million and $17.0 million for the quarters ended April 3, 2004 and March 29, 2003, respectively.

5

Table of Contents

Notes to Condensed Consolidated Financial Statements — (Continued)

      The Company has deferred tax assets of $14.4 million and $15.3 million at April 3, 2004 and December 27, 2003, respectively. The decrease in net deferred tax assets is primarily attributable to current period income and the corresponding net operating loss carryforward (“NOLs”) utilization. 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 NOLs, for which a valuation allowance of $1.0 million is recorded as of April 3, 2004, unchanged from December 27, 2003. This evaluation considered the historical and long-term expected profitability of the Company. Given the timing of the reversal of its temporary differences and the expiration date of its NOLs, 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. There can be no assurance that the Company will meet its expectation of future taxable income and adjustments to the valuation allowance may be required in the future.

      On March 19, 2004, the Company executed a Third Amended and Restated Loan and Security Agreement (the “Revolver”). The Borrowers to the Revolver are the Company and its subsidiaries. The Revolver provides for borrowings in the aggregate principal amount of up to the lesser of $245.0 million, less defined reserves, or the Borrowing Base, as defined in the agreement. On April 2, 2004, the Company and its lenders executed an amendment to the Revolver to amend the requirements and form of the officer’s compliance certificate to be issued to the lenders.

      Borrowings under the Revolver bear interest, at (i) the Base Rate, as defined, plus the applicable margin (0.75% as of April 3, 2004) or (ii) the Eurodollar Rate, as defined, plus the applicable margin (2.25% as of April 3, 2004). These margins are subject to performance-based step-downs resulting in margins ranging from 0.25% to 1.25% for Base Rate loans and 1.75% to 2.75% for Eurodollar Rate loans, respectively.

      The Revolver, as amended, requires the Company to meet a fixed charge coverage test, as defined, as well as certain covenants, which among other things, limits 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. As of April 3, 2004, the Company was in compliance with these covenants. The Company’s obligations under the Revolver are secured by all inventories and accounts receivable. The Revolver expires February 15, 2008.

      During the second quarter 2003, the Company entered into an interest rate swap agreement (“Swap”) to manage exposure to fluctuations in interest rates. The Swap represents a contract to exchange floating rate for fixed interest payments periodically over the life of the agreement without exchange of the underlying notional amount. The notional amount of the Swap is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. At April 3, 2004, the Swap in place covers a notional amount of $50.0 million of indebtedness at a fixed interest rate of 2.14% and expires in June 2006. This Swap has not been designated for hedge accounting treatment. Accordingly, the Company recognizes the fair value of the Swap in the accompanying condensed consolidated balance sheets and any changes in the fair value are recorded as adjustments to interest expense in the accompanying condensed consolidated statements of

6

Table of Contents

Notes to Condensed Consolidated Financial Statements — (Continued)

operations. The fair value of the Swap is the estimated amount that the Company would pay or receive to terminate the agreement at the reporting date. The fair value of the Swap was an asset of $0.1 million and $0.2 million at April 3, 2004 and December 27, 2003, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets. As a result of the change in fair value, $0.1 million net increase to interest expense was recorded for the quarter ended April 3, 2004.

      As of April 3, 2004, the Company has a capital lease obligation of $14.1 million relating to the sale and leaseback of three of its owned facilities. All cash paid to the lessor is recorded as interest expense and 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 (paid quarterly) and is adjusted for Consumer Price Index changes every two years. As of April 25, 2004, the annual rent increased to $1.7 million. In addition, the purchaser received warrants to purchase 153,597 shares of the Company’s common stock. The warrants have a term of 10 years with a stated exercise price of $3.00 per warrant. The Company recorded these warrants at fair value and has presented them as a component of stockholders’ equity in the condensed consolidated balance sheets.

      Aggregate annual maturities of long-term debt at April 3, 2004, are as follows (in thousands):

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

      The stated value of Series A preferred stock is $1,000 per share. Holders of Series A preferred stock are entitled to receive, when and if declared by the Board of Directors, cumulative cash dividends at an annual rate of 4%, subject to adjustment based on the volume of purchases from the supplier. Additional dividends

7

Table of Contents

Notes to Condensed Consolidated Financial Statements — (Continued)

will accrue, when and if declared by the Board of Directors, and are payable on the last business day of January. In first quarter 2004, the Company declared and paid a dividend based on a 4% rate. The Series A preferred stock is classified as a liability in the accompanying condensed consolidated balance sheets and the related dividends are included in interest expense in the accompanying condensed consolidated statements of operations. The Series A preferred stock can be redeemed by the Company, beginning on the last business day of December 2002 and on the last business day of each June and December thereafter, through June 2007. In January 2004, the Company redeemed 500 shares of the Series A preferred stock for $0.5 million.

      The stated value of Series B preferred stock is initially $1,000 per share, to be adjusted based on tire purchase credits as determined by the number of units purchased under a purchase agreement with a supplier entered into in May 1997. If the Company does not meet certain tire purchase requirements, holders of Series B preferred stock are entitled to receive dividend payments, when and if declared by the Board of Directors, at the prime rate. The remaining value of Series B preferred stock shall be redeemed by the Company on the last business day of June 2007 at a price equal to the adjusted stated value plus all accrued and unpaid dividends. The Series B preferred stock is classified as a liability in the accompanying condensed consolidated balance sheets. To date, the Company has met the purchase requirements, thus no dividends have been declared and paid.

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

      Shares of Series C preferred stock accrue dividends at an annual rate of 12%. However, as long as any shares of Series A preferred stock or Series B preferred stock remain outstanding, no dividends may be paid. Shares of Series C preferred stock are convertible into common stock at a conversion price of $3.00 per common share.

      Shares of Series D preferred stock accrue dividends at an annual rate of 12%. However, as long as any shares of Series A preferred stock or Series B preferred stock remain outstanding, no dividends may be paid. In addition, shares of Series D preferred stock are convertible into common stock at a conversion price of $3.00 per common share.

      On October 31, 2003, the Company amended and restated its articles of incorporation to eliminate the redemption clause of the Series C and Series D preferred stock. No dividends have been declared or paid to date on the Series C or Series D preferred stock.

      The Company remains liable as a guarantor on certain leases of Winston Tire Company (“Winston”), its discontinued retail segment. As of April 3, 2004, total obligations of the Company, as guarantor on these leases is approximately $12.0 million extending over 15 years. However, the Company has secured

8

Table of Contents

Notes to Condensed Consolidated Financial Statements — (Continued)

assignments or sublease agreements for the vast majority of these commitments with contractual assigned or subleased rentals of approximately $11.4 million. A provision has been made for the net present value of the estimated shortfall.

      The Company is involved from time to time in various lawsuits, including alleged class action lawsuits arising out of the ordinary conduct of its business. Although no assurances can be given, management does not expect that any of these matters will have a material adverse effect on the Company’s business or financial condition. The Company is also involved in various proceedings incidental to the ordinary course of its business. The Company believes, based on consultation with legal counsel, that none of these will have a material adverse effect on its financial condition or results of operations.

9

Table of Contents

Notes to Condensed Consolidated Financial Statements — (Continued)

      The Company’s Series D Senior Notes are guaranteed on a full, unconditional and joint and several basis by all of the Company’s subsidiaries, each of which is wholly-owned. The condensed consolidating financial information for the Company is as follows (dollars in thousands, except per share amounts):

      Condensed consolidating balance sheets as of April 3, 2004 and December 27, 2003, are as follows:

10

Table of Contents

Notes to Condensed Consolidated Financial Statements — (Continued)

11

Table of Contents

Notes to Condensed Consolidated Financial Statements — (Continued)

      Condensed consolidating statements of operations for the quarters ended April 3, 2004 and March 29, 2003 are as follows: