American Tire Distributors Holdings, Inc. - FORM 10-K

Attached files

file	filename
EX-32.1 - CERTIFICATIONS PURSUANT TO SECTION 906 - American Tire Distributors Holdings, Inc.	dex321.htm
EX-21.1 - CHART OF THE SUBSIDIARIES OF AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC. - American Tire Distributors Holdings, Inc.	dex211.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 - American Tire Distributors Holdings, Inc.	dex312.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - American Tire Distributors Holdings, Inc.	dex311.htm
EX-12.1 - STATEMENT SETTING FORTH THE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - American Tire Distributors Holdings, Inc.	dex121.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 1, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 333-124878

American Tire Distributors Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

59-3796143

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

12200 Herbert Wayne Court, Suite 150

Huntersville, North Carolina 28078

(Address, including zip code, of principal executive offices)

(704) 992-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No x

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 ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the voting stock held by non-affiliates of the registrant: None

Number of common shares outstanding at March 4, 2011: 1,000

TABLE OF CONTENTS


		Page
PART I
ITEM 1.	Business		2
ITEM 1A.	Risk Factors		11
ITEM 1B.	Unresolved Staff Comments		18
ITEM 2.	Properties		18
ITEM 3.	Legal Proceedings		18
ITEM 4.	[Reserved]		19

PART II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
ITEM 6.	Selected Financial Data		20
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
ITEM 7A.	Quantitative and Qualitative Disclosure about Market Risk		43
ITEM 8.	Financial Statements and Supplementary Data		44
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		89
ITEM 9A.	Controls and Procedures		89
ITEM 9B.	Other Information		89

PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance		90
ITEM 11.	Executive Compensation		93
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		107
ITEM 13.	Certain Relationships and Related Transactions and Director Independence		108
ITEM 14.	Principal Accountant Fees and Services		109

PART IV

ITEM 15.	Exhibits and Financial Statement Schedules		110
	Signatures		115

Cautionary Statements on Forward-Looking Information

This Annual Report on Form 10-K, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements relating to our business and financial outlook, that are based on our current expectations, estimates, forecasts and projections. In some cases, you can identify forward-looking statements by terminology such as “may,” “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. 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. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any such statement to reflect new information, or the occurrence of future events or changes in circumstances, after we distribute this Annual Report on Form 10-K, except as required by the federal securities laws. Many factors could cause actual results to differ materially from those indicated by the forward-looking statements or could contribute to such differences including:

•

general business and economic conditions in the United States and other countries, including uncertainty as to changes and trends;

•

our ability to develop and implement the operational and financial systems needed to manage our operations;

•

our ability to execute key strategies, including pursuing acquisitions and successfully integrating and operating acquired companies;

•

the ability of our customers and suppliers to obtain financing related to funding their operations in the current economic market;

•

the financial condition of our customers, many of which are small businesses with limited financial resources;

•

changing relationships with customers, suppliers and strategic partners;

•

changes in state or federal laws or regulations affecting the tire industry;

•

impacts of competitive products and changes to the competitive environment;

•

acceptance of new products in the market; and

•

unanticipated expenditures.

See Item 1A—“Risk Factors” for further discussion.

PART I

The terms “American Tire Distributors,” “ATD,” “the Company,” “we,” “us,” “our,” and similar terms in this report refer to American Tire Distributors Holdings, Inc. and its consolidated subsidiaries. The term “Holdings” refers only to American Tire Distributors Holdings, Inc., a Delaware corporation that owns 100% of the issued and outstanding capital stock of American Tire Distributors, Inc. (ATDI), a Delaware corporation. Holdings has no significant assets or operations other than its ownership of ATDI. The operations of ATDI and its consolidated subsidiaries constitute the operations of Holdings presented under accounting principles generally accepted in the United States.

Item 1.

Business.

Our Company

We are the leading replacement tire distributor in the United States, providing a critical range of services to enable tire retailers to effectively service and grow sales to consumers. Through our network of 88 distribution centers, we offer access to an extensive breadth and depth of inventory, representing approximately 40,000 stock-keeping units (SKUs) to approximately 50,000 customers. The critical range of services we provide includes frequent and timely delivery of inventory as well as business support services such as credit, training, access to consumer market data and the administration of tire manufacturer affiliate programs. In addition, our customers have access to a leading online ordering and reporting system as well as a website that enables our tire retailer customers to participate in the Internet marketing of tires to consumers. We estimate that our share of the replacement passenger and light truck tire market in the United States (U.S.) is approximately 9%, up from approximately 1% in 1996, with our largest customer and top ten customers accounting for less than 1.9% and 8.0%, respectively, of our net sales in fiscal 2010.

We believe we distribute the broadest product offering in our industry, supplying our customers with the top ten leading passenger and light truck tire brands. We carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear, and Michelin—as well as the Hankook, Kumho, Nexen, Nitto and Pirelli brands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers. In addition, we sell custom wheels and accessories and related tire supplies and tools. We believe our large, diverse product offering allows us to better penetrate the replacement tire market across a broad range of price points.

On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, we were acquired by affiliates of TPG Capital, L.P. (TPG) for an aggregate purchase price valued at $1,287.5 million. As a result, Holdings became a wholly-owned subsidiary of TPG. The merger was financed by $635 million in aggregate principle of debt financing as well as common equity capital. In connection with the merger, we tendered our existing outstanding debt which was subsequently purchased and retired. See Note 3 in Notes to Consolidated Financial Statements for additional information.

Our Industry

The U.S. replacement tire market generated annual retail sales of approximately $32.1 billion in 2010, according to Modern Tire Dealer. In 2010, passenger tires, medium truck tires and light truck tires accounted for 67.9%, 15.9% and 13.4%, respectively, of the U.S. replacement tire market. Farm, specialty and other types of tires accounted for the remaining 2.8%. In 2010, according to Tire Review, tire retailers obtained 63% of their tire volume from wholesale tire distributors, like us, and 30% of their tire volume from tire manufacturers.

In the U.S., replacement tires are sold to consumers through several different channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships, service stations and web-based marketers. Between 1990 and 2010, independent tire retailers and automotive dealerships have enjoyed the largest increase in market share, according to Modern Tire Dealer, moving from 54.0% to 60.0% and 1.0% to 6.0% of the market, respectively.

The U.S. replacement tire market has historically experienced stable growth and favorable pricing dynamics. From 1955 through 2010, U.S. replacement tire unit shipments increased by an average of approximately 2.8% per year. However, during challenging economic periods, consumers may opt to defer replacement tire purchases or purchase less costly brand tires. Since the onset of the economic downturn in 2008, we have seen increased economic uncertainly, unemployment and rising fuel prices. As a result, the tire replacement market experienced negative growth during 2008 and 2009. During 2010, the negative growth trend ended as U.S. replacement tire unit shipments increased 7.8% over 2009.

Going forward, we believe growth in the U.S. replacement tire market will continue to be driven by favorable underlying dynamics, including:

•

increases in the number and average age of passenger cars and light trucks;

•

increases in the number of miles driven;

•

increases in the number of licensed drivers as the U.S. population continues to grow;

•

increases in the number of replacement tire SKUs;

•

growth of the high performance tire segment; and

•

shortening tire replacement cycles due to changes in product mix that increasingly favor high performance tires, which have shorter average lives.

Our Business Strategy

Our objective is to be the largest distributor of replacement tires to local, regional and national independent U.S. tire retailers, as well as automotive dealerships, service stations and mass merchandisers, to drive above-market growth and further enhance profitability and cash flow. We intend to accomplish this objective by executing the following key operating strategies:

Leverage Our Infrastructure in Existing Markets. Through infrastructure expansions over the past several years, we have developed a scalable platform with available incremental distribution capacity. Our distribution infrastructure enables us to efficiently add new customers and service growing channels, such as automotive dealerships, thereby increasing profitability by leveraging the utilization of our existing assets. We believe our relative penetration in existing markets is largely a function of the services we offer and the length of time we have operated locally. Specifically, in new markets, we have experienced growth in market share over time, and in states we have served the longest, we generally have market share well in excess of our national average.

Maintain a Comprehensive and Deep Tire Portfolio to Meet Our Customers’ Needs. We provide a broad range of products covering all price points from entry-level to faster growing high and ultra-high performance tires, through a full suite of flag, associate and proprietary brand tires. We will continue to focus on high and ultra-high performance tires, given the growth in demand for such tires, while maintaining our emphasis on providing broad market and entry level tire offerings. Our comprehensive tire portfolio is designed to satisfy all of our customers’ needs and allow us to become the supplier of choice, thereby increasing customer penetration and retention.

Utilize Technology Platform to Continue to Increase Distribution Efficiency. We intend to continue to invest in our inventory and warehouse management systems and logistics technology in order to further increase our efficiency and profit margins and improve customer service. We continue to evaluate and incorporate technical solutions including our current roll out of handheld scanning for receiving, picking and delivery of products to our customers. We believe these increased efficiencies will continue to enhance our reputation with our customers for providing a high level of prompt customer service, while also reducing costs.

Continue to Expand in Existing and New Geographic Markets. While we have the largest distribution footprint in the U.S. replacement tire market, we have limited or no market presence in 14 of the contiguous

United States that represent approximately 25% of the replacement tire market. We intend to expand in previously unserved geographic markets as well as in existing markets by opening new distribution centers and opportunistic acquisitions. During 2010, we opened new distribution centers in both Cincinnati and Indianapolis, followed by Chicago, Detroit and Seattle during January 2011. Our acquisition strategy allows us to increase our share in existing markets and add distribution in new markets, utilizing our scale to realize cost savings. Over the past seven years, we have successfully acquired and integrated twelve businesses representing in excess of $750 million in annual net sales. We believe our position as the leading replacement tire distributor in the United States, combined with our access to capital and our scalable platform, allows us to make acquisitions at attractive post-synergy valuations.

Expand Penetration of the Emerging Automotive Dealership Channel. Automotive dealerships are focused on growing their service business in an effort to expand profitability, and we believe they view having replacement tire capabilities as an important service element. Between 1990 and 2010, automotive dealerships have enjoyed a large increase in market share, according to Modern Tire Dealer, moving from 1.0% of the U.S. replacement tire market to 6.0% of the market. During 2010, we began to train and deploy sales personnel to help build our sales at these accounts. In addition, we continue to strengthen and expand our relationships with the automobile manufacturers to further grow our share of tire sales to their dealerships.

Grow TireBuyer.com^® into a Premier Internet Tire Provider. TireBuyer.com^® is an Internet site that enables our local independent tire retailer customers to connect with consumers and sell to them over the Internet. TireBuyer.com^® allows our broad base of independent tire retailer customers to participate in a greater share of the growing Internet tire market. We believe that TireBuyer.com^® complements and services our participating local independent tire retailers by providing them access to a sales and marketing channel previously unavailable to them. Since launching TireBuyer.com^® in late 2009, we have continued to enhance the online consumer experience and have seen increased consumer traffic on the site.

Our Competitive Strengths

We believe the following key strengths position us well to maintain our ability to achieve revenue growth that exceeds that of the U.S. replacement tire industry:

Leading Position in a Highly-Fragmented Marketplace. We are the leading replacement tire distributor in the United States with an estimated market share of approximately 9%. We believe our scale provides us key competitive advantages relative to our smaller, and generally regionally-focused, competitors. These include the ability to: efficiently stock and deliver a wide variety of tires, custom wheels, tire supplies, tools and accessories; invest in services, including sales tools and technologies, to support our customers; and realize operating efficiencies from our scalable infrastructure. We believe our leading market position, combined with our commitment to distribution, as opposed to the retail operations engaged in by our customers, enhances our ability to expand our sales footprint cost effectively both in our existing markets and in new domestic geographic markets.

Extensive and Efficient Distribution Network. We believe we have the largest independent replacement tire distribution network in the United States with 88 distribution centers and approximately 775 delivery vehicles serving 40 states. Our extensive distribution footprint, combined with our sophisticated inventory management and logistics technologies, enables us to deliver the vast majority of orders on a same or next day basis, which is critical for tire retailers who are typically limited by physical inventory capacity and working capital constraints. Our delivery technologies allow us to more effectively and efficiently organize and optimize our route systems to provide timely product delivery. Our Oracle ERP system provides a scalable platform that can support future growth and ongoing cost reduction initiatives, including warehouse and truck management systems, which we believe will allow us to continue reducing warehouse and delivery costs per unit.

Broad Product Offering from Diverse Supplier Base. We believe we offer the most comprehensive selection of tires in the industry through a diverse group of suppliers. We supply the top ten leading passenger tire brands,

and we carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Hankook, Kumho, Nexen, Nitto and Pirelli brands. Our tire product line includes a full suite of flag, associate and proprietary brand tires, allowing us to service a broad range of price points from entry level to the faster growing ultra-high performance category. In addition to tires, we also offer custom wheels and accessories and related tire supplies and tools. We believe that our broad product offering drives penetration among existing customers, attracts new customers and maximizes customer retention.

Broad Range of Critical Services. We provide a critical range of services which enable our tire retailer customers to operate their businesses more profitably. These services include convenient access to and timely delivery of the broadest product offerings available in the industry, as well as fundamental business support services, such as credit, training and access to consumer market data, that enable our tire retailer customers to better service their individual markets, and administration of tire manufacturer affiliate programs. We provide our customers with convenient 24/7 access to our extensive product offerings through our innovative and proprietary business-to-business web portal, ATDOnline^®. Our online services also include TireBuyer.com^®, which was launched in late 2009 to allow our local independent tire retailer customers to participate in the Internet marketing of tires to consumers. We also provide select, qualified independent tire retailers with the opportunity to participate in our Tire Pros^® franchise program through which they receive advertising and marketing support and the benefits of a national brand identity.

Diversified Customer Base and Longstanding Customer Relationships. We serve a highly diversified customer base comprised of local, regional and national independent tire retailers, automotive dealerships, tire manufacturer-owned stores, mass merchandisers and service stations. In fiscal 2010, our largest customer and our top ten customers accounted for less than 1.9% and 8.0%, respectively, of our net sales. We believe we are a top supplier to many of our customers and maintain customer relationships that exceed a decade on average for our top 20 customers. We believe the diversity of our customer base and the strength of our customer relationships present an opportunity to grow market share regardless of macroeconomic and replacement tire market conditions.

Consistent Financial Performance and Strong Cash Flow Generation. Our financial performance has benefited from substantial growth that has been achieved based on a combination of organic initiatives and acquisitions. In addition, the low capital intensity of our business combined with the efficient management of our working capital, due to our advanced inventory management systems and close vendor relationships, enable us to generate strong cash flow from operations.

Experienced Management Team Supported by Strong Equity Sponsorship. Our senior management team, led by our President and CEO William E. Berry, has an average of over 22 years of experience in the replacement tire distribution industry. Management has a proven track record of implementing successful initiatives in a leverage environment, including the execution of a disciplined acquisition strategy, which has contributed to our gross profit expansion and above-market net sales growth. In addition, we have reduced costs through the integration of operating systems and introduction of standard operating practices across all locations, resulting in improved operating efficiencies, reduced headcount and improved operating profit at existing and acquired locations. We also benefit from the extensive management and business experience provided by our Sponsor, TPG.

Products

We provide our customers with a complete package of tires, tire supplies and tools as well as custom wheels and accessories. During 2010, tire sales accounted for 94.6% of our combined net sales. Tire supplies, tools and custom wheels and accessories represented approximately 3.7% of our combined net sales. In the third quarter of 2010, we made the decision to discontinue selling certain products within our equipment product offering by the end of the year. These products accounted for 1.7% of our combined net sales.

Tires

We sell a broad selection of well-known flag as well as lower price point associate and proprietary brand tires. We believe our large, diverse product offering allows us to service the broad range of price points in the replacement tire market. Sales of passenger and light truck tires accounted for 82.9% of our combined net sales in fiscal 2010. The remainder of our tire sales were for medium trucks, farm vehicles and other specialty tires.

Flag brands. Flag brands, which have the greatest brand recognition as a result of both strong sales and strong marketing support from tire manufacturers, are generally premium-quality and premium-priced offerings. The flag brands that we sell have high consumer recognition and generate higher per-tire profit than associate or proprietary brands. We carry the flag brands from each of the four largest tire manufacturers—Bridgestone, Continental, Goodyear and Michelin—as well as the Hankook, Kumho, Nexen, Nitto and Pirelli brands. Within our flag brand product portfolio, we also carry high and ultra-high performance tires.

Associate brands. Associate brands are primarily lower-priced tires manufactured by well-known manufacturers. Our associate brands, such as Fusion^® and Riken^®, allow us to offer tires in a wider price range. In addition, associate brands are attractive to our tire retailer customers because they may count towards various incentive programs offered by manufacturers.

Proprietary and exclusive brands. Our Capitol^® and Negotiator^® brands are lower-priced tires made by tire manufacturers exclusively for, and marketed by, us for which we hold or control the trademark. These brands strengthen our entry-level priced product offering and allow us to sell value-oriented tires to tire retailers, increasing our overall market penetration.

Custom Wheels and Accessories

Custom wheels directly complement our tire products as many custom wheel consumers purchase tires when purchasing wheels. Customers can order custom wheels from us along with their regular tire shipments without the added complexity of being serviced by an additional vendor. We offer over 30 different wheel brands, along with installation and service accessories. Of these brands, five are proprietary: ICW^® Racing, Pacer^®, Drifz^®, Cruiser Alloy^® and O.E. Performance^®. An additional four brands are exclusive to us: CX, Maas, Zora and Gear. Nationally available flag brands complement our offering with such brands as Asanti, Advanti Racing, Cragar, Ultra, Lexani, Mickey Thompson, Konig, HRE, Lowenhart and Racinghart. Collectively, these brands represent one of the most comprehensive wheel offerings in the industry. Sourcing of product is worldwide through a number of manufacturers.

Tire Supplies and Tools

We supply our customers with a wide array of tire supplies and tools which enable them to better service their customers as well as help them become a more profitable business. Our tire supplies and tools are the most popular brand names from leading manufacturers. These products broaden our portfolio and leverage our customer relationships.

Distribution System

We have designed our distribution system to deliver products from a wide variety of tire manufacturers to our tire retailer customers. In recent years, tire manufacturers have reduced the number of tire retailers they service directly and tire retailers have reduced the inventory they hold. At the same time, the depth and breadth of replacement SKUs has continued to expand. According to the Tire and Rim Association, the number of specific tire sizes and dimensions (that each brand covers either entirely or selectively) has increased from 213 in 2000 to 324 in 2009. As a result of these changes, tire retailers have increasingly relied on us and we have become a more critical link in enabling tire retailers to more efficiently manage their business.

We utilize a sophisticated inventory and delivery system to distribute our products to most customers on a same or next day basis. In our distribution centers, we use sophisticated bin locator systems, material handling equipment and routing software that link customer orders to our inventory and delivery routes. We believe this distribution system, which is integrated with our innovative and proprietary business-to-business ATDOnline^® ordering and reporting system, provides us a competitive advantage by allowing us to ship customer orders quickly and efficiently while also reducing labor costs. Our logistics and routing technology uses third-party software packages and GPS systems, including dynamic routing and Roadnet 5000, to optimize route design and delivery capacity. Coupled with our fleet of approximately 775 delivery vehicles, this technology enables us to cost effectively make multiple daily or weekly shipments to customers as necessary. With this distribution infrastructure, we were able to deliver the vast majority of our customers’ orders on a same or next day basis during fiscal 2010.

Approximately 80% of our tire purchases are shipped directly by tire manufacturers to our distribution centers. The remainder is shipped by manufacturers to our redistribution centers located in Maiden, North Carolina and Bakersfield, California. These redistribution centers warehouse slower-moving and foreign-manufactured products, which are forwarded to our distribution centers as needed.

Marketing and Customer Service

Our marketing efforts are focused on driving growth through customer service, additional product placement and market expansion. We provide a critical range of services which enable our tire retailer customers to operate their businesses more profitably. These services include frequent and timely delivery of inventory, as well as fundamental business support services such as credit, training and access to customer market data which enable our tire retailer customers to better service their individual markets. In addition, we provide our customers with an online web portal with convenient 24/7 access to our inventory, an internet site that allows our tire retailer customers to participate in the internet marketing of tires to customers as well as a franchise program where we deliver advertising and marketing support to our tire retailer customers.

Sales Force

We have structured our sales organization to best service our existing customers and develop new prospective customers such as automotive dealerships. As the manufacturers have reduced their own sales staffs, our sales force has assumed the consultative role manufacturers previously provided to tire retailers. Our tire sales force consists of sales personnel at each distribution center plus a sales administrative team located at our field support center in Huntersville, North Carolina.

Sales teams, consisting of salespeople and customer service representatives, focus on tire retailers located within the service area of the distribution center and include a combination of tire-, wheel- and supplies-focused sales personnel. Some sales personnel visit targeted customers to advance our business opportunities and those of our customers, while other sales personnel remain at our facility, making client contact by telephone to advance specific products or programs. Customer service representatives manage incoming calls from customers and provide assistance with order placement, inventory inquiries and general customer support.

The Huntersville-based sales administrative team directs sales personnel at the distribution centers and manages our corporate account customers, including large national and regional retail tire and service companies. This sales administrative team also manages our Huntersville-based call center, which provides call management assistance to the distribution centers during peak times of the day, thereby minimizing customer wait time, and also provides support upon any disruption in a distribution center’s local telephone service. This team also serves as the primary point of contact for product and technical inquiries from TireBuyer.com^® shoppers.

Our aftermarket wheel sales group employs sales and technical support personnel in the field and performance specialists in each region. This sales group’s responsibilities include cultivating new prospective

wheel and supplies customers and coordinating with tire sales professionals to cover existing accounts. The technical support professionals provide answers to customer questions regarding wheel style and fitment and supplies.

Automotive dealerships are focused on growing their service business in an effort to expand profitability, and we believe they view having replacement tire capabilities as an important service element. Between 1990 and 2010, automotive dealerships have enjoyed a large increase in market share according to Modern Tire Dealer, moving from 1.0% of the U.S. replacement tire market to 6.0% of the market. During 2010 we began hiring, training and deploying sales personnel to help build our sales in the emerging automotive dealership channel. Additionally, this sales force works to strengthen and expand our relationships with the automobile manufacturers.

ATDOnline^® and TireBuyer.com^®

ATDOnline^® provides our customers with web-based online ordering and 24/7 access to our inventory availability and pricing. Orders are processed automatically and printed in the appropriate distribution center within minutes of entry through ATDOnline^®. Our customers are able to track expected deliveries and retrieve copies of their signed delivery receipts. ATDOnline^® also allows customers to track account balances and participation in tire manufacturer incentive programs. We have encouraged our customers to use this system because it represents a more efficient method of order entry and information access than traditional order systems. In fiscal 2010, approximately 64% of our total order volume was ordered through ATDOnline^®, up from 56% in fiscal 2007.

TireBuyer.com^® is an Internet site that enables our local independent tire retailer customers to connect with consumers and sell to them over the Internet. Consumers using TireBuyer.com^® choose to buy from a select, qualified independent tire retailer participating in our TireBuyer.com^® program. We then distribute the purchased products to the selected tire retailer for local installation. The tire retailer receives the full revenue of the transaction, less any applicable processing fees, upon product installation. We employ a third-party provider to handle the online billing and payment process. We do not handle customers’ credit card or other sensitive information.

We account for revenues from TireBuyer.com^® in the same manner as other orders received from tire retailer customers. The TireBuyer.com^® transaction structure allows us to retain our distribution focus, while strengthening our relationship with our tire retailer customers by providing them access to a sales and marketing channel previously unavailable to them. Since launching TireBuyer.com^® in late 2009, we have continued to enhance the online consumer experience and have seen increased consumer traffic on the site.

Tire Retailer Programs

Through our Tire Pros^® franchise program we deliver advertising and marketing support to tire retailer customers operating as Tire Pros^® franchisees. Local independent tire retailers participating in this franchise program enjoy the benefits of a national brand identity with minimal investment, while still maintaining their local identity. We anticipate increasing volume penetration among, and further aligning ourselves with, franchisees.

Individual manufacturers offer a variety of programs for tire retailers that sell their products, such as Bridgestone’s TireStarz, Continental’s Gold, Goodyear’s G³X, Kumho’s Fuel and Michelin’s Alliance. These programs, which are relatively complex, provide cooperative advertising funds, volume discounts and other incentives. As part of our service to our customers, we assist in the administration of managing these programs for the manufacturers and enhance these programs through dedicated staff to assist tire retailers in managing their participation. We believe these enhancements, combined with other aspects of our customer service, provide significant value to our customers.

We also offer our tire retailer customers ATDServiceBAY^®, which makes available a comprehensive suite of benefits including nationwide tire and service warranties (through third-party warranty providers), a nationally accepted, private-label credit card (through GE Capital), access to consumer market data and training and marketing programs to provide our tire retailer customers with the support and service that are critical to succeed in today’s increasingly competitive marketplace.

Customers

We serve a highly diversified customer base comprised of local, regional and national independent tire retailers, automotive dealerships, tire manufacturer-owned stores, mass merchandisers and service stations. During fiscal 2010, we sold to approximately 50,000 customers in 40 states, principally located in the Southeastern and Mid-Atlantic regions, as well as portions of the Northeast, Midwest, Southwest and the West Coast of the United States. In fiscal 2010, our largest customer and our top ten customers accounted for less than 1.9% and 8.0%, respectively, of our combined net sales. We believe we are a top supplier to many of our customers and maintain customer relationships that exceed a decade on average for our top 20 customers.

Suppliers

We purchase our tires from several sources, including the four largest tire manufacturers, Bridgestone, Continental, Goodyear and Michelin, from whom we bought 55.0% of our tire products in fiscal 2010. In general, we do not have long-term supply agreements with tire manufacturers, instead relying on oral arrangements or written agreements that are renegotiated annually and can be terminated on short notice. However, we have conducted business with many of our major tire suppliers for over 20 years, and we believe that we have good relationships with all of our major suppliers. In recent years, tire manufacturers have reduced the number of tire retailers they service directly. As a result of this change, tire retailers have increasingly relied on us, and we have become a more critical link between manufacturers and tire retailers.

There are a number of worldwide manufacturers of wheels and other automotive products. Most of the wheels we purchase are proprietary brands, namely, Pacer^®, Cruiser Alloy^®, Drifz^®, O.E. Performance^® and ICW^® Racing, and are produced by a variety of manufacturers.

Competition

The U.S. tire distribution industry is highly competitive and fragmented. In the United States, replacement tires are sold to consumers through several different outlets, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships, service stations and web-based marketers. We compete with a number of tire distributors on a regional basis. Our main competitors include TBC/Treadways Wholesale (owned by Sumitomo), which has retail operations that compete with its distribution customers, and TCI Tire Centers. In the automotive dealership channel, our principal competitor is Dealer Tire, which is focused principally on administering replacement tire programs for selected automobile manufacturers’ dealerships. In the online channel, our principal competitor is Tire Rack, which is principally focused on high and ultra-high performance offerings, acting as both a retailer and a wholesaler. We face competition from smaller regional companies and would be adversely affected if mass merchandisers and warehouse clubs gained market share from local independent tire retailers, as our market share in those channels is lower.

Information Systems

Through infrastructure expansions over the past several years, we have developed a scalable platform with incremental capacity available. We are currently finishing the implementation of an Oracle ERP system that supports future growth and ongoing cost reduction initiatives, including warehouse and truck management systems, which we believe will allow us to continue reducing warehouse and delivery costs per unit. The ERP implementation, which is nearing completion, has basically replaced our legacy computer system. We continue to evaluate and incorporate technical solutions such as handheld scanning for receiving, picking and delivery of product to our customers.

Trademarks

The proprietary brand names under which we market our products are trademarks of our company. We value our brand names because they help develop brand identification. All of our trademarks are of perpetual duration as long as they are periodically renewed. We currently intend to maintain all of them in force. The principal proprietary brand names under which we market our products are: DYNATRAC^® tires, CRUISERALLOY^® custom wheels, DRIFZ^® custom wheels, ICW^® custom wheels, PACER^® custom wheels, O.E. PERFORMANCE^® custom wheels and MAGNUM^® automotive lifts. Our other trademarks include: AMERICAN TIRE DISTRIBUTORS^®, ATDONLINE^®, ATDSERVICEBAY^®, WHEEL WIZARD^®, ENVIZIO^®, WHEEL WIZARD ENVIZIO^®, WHEELENVIZIO.COM^®, XPRESSPERFORMANCE^®, TIREBUYER.COM^® AND TIRE PROS^®.

Seasonality

Although the effects of seasonality are not significant to our business, we have historically experienced an increase in net sales in the second and third fiscal quarters and an increase in working capital in the first fiscal quarter.

Environmental Matters

Our operations and properties are subject to federal, state and local laws and regulations relating to the use, storage, handling, generation, transportation, treatment, emission, release, discharge and disposal of hazardous materials, substances and waste as well as relating to the investigation and clean-up of contaminated properties, including off-site disposal locations. We do not incur significant costs complying with environmental laws and regulations. However, we could be subject to material environmental costs, liabilities or claims in the future, especially in the event of the adoption of new environmental laws or changes in existing laws and regulations or in their interpretation.

Employees

As of January 1, 2011, our operations employed approximately 2,500 people. None of our employees are represented by a union. We believe our employee relations are satisfactory.

Inventory Control

We believe that we maintain levels of inventory that are adequate to meet our customers’ needs on a same day or next day basis. Since customers look to us to fulfill their needs on short notice, inventory levels are a primary focus of our business model. As a result, backlog of orders is not considered material to, or a significant factor in, evaluating and understanding our business. Our inventory levels are determined using sales data derived from distribution centers (on a combined basis, an individual basis or by geographic region) as well as from vendors who supply the distribution centers and retail customer stores that are served by the distribution center. All distribution centers stock a base inventory and may expand beyond preset inventory levels as deemed appropriate by their general managers. Computer systems monitor inventory levels for all stock items and quantities are periodically re-balanced from center-to-center.

Available Information

In accordance with the requirements of the Securities and Exchange Act of 1934, we file reports and other information with the Securities and Exchange Commission (“SEC”). You may read and, for a fee, copy any document that we file with the SEC at the public reference room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public from commercial document retrieval services and at the website maintained by the SEC at www.sec.gov.

You may also request a copy of these filings at no cost, by writing or telephoning us at the following address:

American Tire Distributors Holdings, Inc.

Attention: Corporate Secretary

12200 Herbert Wayne Court

Suite 150

Huntersville, NC 28078

(704) 992-2000

Item 1A.

Risk Factors.

You should carefully consider the risks described below when evaluating our business and operations. The risks described below could materially adversely affect our business, financial condition or results of operations.

Risks Relating to Our Business

Demand for tire products is lower when general economic conditions are weak. Decreases in the availability of consumer credit or consumer spending could adversely affect our business, results of operations or cash flows.

The popularity, supply and demand for tire products changes from year to year based on consumer confidence, the volume of tires reaching the replacement tire market and the level of personal discretionary income, among other factors. Decreases in the availability of consumer credit or decreases in consumer spending as a result of recent economic conditions, including increased unemployment and rising fuel prices, may cause consumers to delay tire purchases, reduce spending on tires or purchase less expensive tires. These changes in consumer behavior could reduce the number of tires we sell, reduce our net sales or cause a change in our product mix toward products with lower per-tire margins, any of which could adversely affect our business, results of operations or cash flows.

Local economic, employment, weather, transportation and other conditions also affect tire sales, on both a wholesale and retail basis. Such fluctuations have been exacerbated by the current economic downturn. We cannot, as a result of these factors and others, assure you that our business will continue to generate sufficient cash flows to finance or grow our business or that our cash needs will not increase. For instance, in 2008, rising fuel costs, increased unemployment and tightening credit caused a decrease in miles driven and consumer spending, both of which we believe caused a decrease in unit sales in the U.S. replacement tire industry. Similarly, industry-wide unit sales decreased in 2006 primarily due to increases in, and consumer expectations about future increases in, interest rates, minimum credit card payments and fuel costs. Our business was adversely affected as a result of these industry-wide events and we may be adversely affected by similar events in the future.

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our notes and our other indebtedness.

We have a substantial amount of debt, which requires significant interest and principal payments. As of January 1, 2011, we had approximately $652.5 million of total indebtedness outstanding. Subject to the limits

contained in our ABL Facility, the indenture governing our Senior Secured Notes, the indenture governing our Senior Subordinated Notes and our other debt instruments, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt will intensify.

Specifically, our high level of debt could have important consequences to the holders of our notes, including the following:

•

making it more difficult to satisfy our obligations with respect to our notes and our other debt. Any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in a default under the indenture governing our notes and the agreements governing our other debt;

•

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and other general corporate requirements;

•

requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and general corporate requirements;

•

increasing our vulnerability to general adverse economic and industry conditions;

•

exposing us to the risk of increased interest rates as a significant amount of our borrowings are at variable rates of interest, including borrowings under our ABL Facility;

•

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

•

placing us at a disadvantage compared to other, less leveraged competitors;

•

increasing our cost of borrowing; and

•

preventing us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control, which would constitute an event of default under the indenture governing our notes.

In addition, the indentures that govern our notes and our ABL Facility contain restrictive covenants that limit our ability to engage in activities that may be in our long term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all our debt.

Our business requires a significant amount of cash, and fluctuations in our cash flows may adversely affect our ability to fund our business or acquisitions or satisfy our debt obligations.

Our ability to fund working capital needs and planned capital expenditures and acquisitions and our ability to satisfy our debt obligations depend on our ability to generate cash flows. If we are unable to generate sufficient cash flows from operations to meet these needs, we may need to refinance all or a portion of our existing debt, obtain additional financing or reduce expenditures that we deem necessary to our business. Further, our ability to grow our business and market share through acquisitions may be impaired. We cannot assure you that we would be able to obtain refinancing of this kind on favorable terms or at all or that any additional financing could be obtained. The inability to obtain additional financing could materially and adversely affect our business, financial condition and cash flows.

The industry in which we operate is highly competitive and our failure to effectively compete may adversely affect our results of operations, financial condition and cash flows.

The industry in which we operate is highly competitive. In the United States, replacement tires are sold to consumers through several different outlets, including local independent tire retailers and mass merchandisers,

warehouse clubs, tire manufacturer-owned stores, automotive dealerships, service stations and web-based marketers. A number of independent wholesale tire distributors compete with us in the regions in which we do business. Most of our tire retailer customers buy products from both us and our competitors. We cannot assure you that we will be able to compete successfully in our markets in the future. Furthermore, some of our competitors, including mass merchandisers, warehouse clubs and tire manufacturers, are significantly better financed than us and have greater resources. See Item 1 “Business—Competition.”

We would also be adversely affected if certain channels in the replacement tire market, including mass merchandisers and warehouse clubs, gain market share at the expense of the local independent tire retailers, as our market share in those channels is lower.

We depend on manufacturers to provide us with the products we sell and disruptions in these relationships or manufacturers’ operations could adversely affect our results of operations, financial condition or cash flows.

There are a limited number of tire manufacturers worldwide. Accordingly, we rely on a limited number of tire manufacturers to supply us with the products we sell, including flag and associate brands and our proprietary brands. Our business depends on developing and maintaining productive relationships with these manufacturers. Outside of our proprietary brands, we do not have long-term contracts with these manufacturers, and we cannot assure you that these manufacturers will continue to supply products to us on favorable terms or at all. Many of our supplier manufacturers are free to terminate their business relationship with us with little or no notice and may elect to do so for any reason or no reason. Further, certain of our key suppliers also compete with us as they distribute and sell tires to certain of our tire retailer customers. A move towards this business model among our supplier manufacturers could adversely affect our results of operations, financial condition or cash flows.

In addition, our growth strategy depends in part on our ability to make selective acquisitions, but manufacturers may not be willing to supply the companies we acquire, which could adversely affect our business and results of operations. Furthermore, we could be adversely affected if any significant manufacturer experiences financial, operational, production, supply, labor or quality assurance difficulties that result in a reduction or interruption in our supply, or if they otherwise fail to meet our needs. These risks have been more pronounced recently in light of the economic downturn, commodity price volatility and governmental actions. In addition, our failure to order or promptly pay for sufficient quantities of our products may result in an increase in the unit cost of the products we purchase, a reduction in cooperative advertising and marketing funds, or a manufacturer’s unwillingness or refusal to sell products to us. If we are required to replace our manufacturers, we could experience cost increases, time delays in deliveries and a loss of customers, any of which would adversely affect us. Finally, although most newly manufactured tires are sold in the replacement tire market, manufacturers pay disproportionate attention to automobile manufacturers that purchase tires for new cars. Increased demand from automobile manufacturers could result in cost increases and time delays in deliveries to us, any of which could adversely affect us.

We are reliant upon information technology in the operation of our business.

We rely on electronic information and telephony systems to support all aspects of our geographically diverse business operations, including our inventory control, distribution network and order placement and fulfillment. A prolonged interruption or failure of any of these systems or their connective networks could have a material adverse effect on our business, results of operations, financial condition or cash flows.

Pricing volatility for raw materials could result in increased costs and may affect our profitability.

Costs for certain raw materials used in manufacturing the products we sell, including natural rubber, chemicals, steel reinforcements, carbon black, synthetic rubber and other petroleum-based products are volatile. Increasing costs for raw materials supplies would result in increased production costs for tire manufacturers. Tire manufacturers typically pass along a portion of their increased costs to us through price increases. While we

typically try to pass increased prices and fuel costs through to tire retailers or to modify our activities to mitigate the impact of higher prices, we may not be successful. Failure to fully pass these increased prices and costs through to tire retailers or to modify our activities to mitigate the impact would adversely affect our operating margins and results of operations. Further, even if we do successfully pass along these costs, demand for tires may decline as a result of the increased costs, which would adversely affect us.

We may be unable to identify desirable acquisition targets or future acquisitions may not be successful.

We plan to investigate and acquire strategic businesses or product lines with the potential to be accretive to earnings, increase our market penetration, strengthen our market position or enhance our existing product offering. We cannot assure you, however, that we will identify or successfully complete transactions with suitable acquisition candidates in the future. A failure to identify and acquire desirable acquisition targets may slow growth in our annual unit volume, which could adversely affect our existing business, financial condition, results of operations or cash flows.

We also cannot assure you that completed acquisitions will be successful. If an acquired business fails to operate as anticipated or cannot be successfully integrated with our existing business, our financial condition, results of operations or cash flows could be adversely affected.

Future acquisitions could require us to issue additional debt or equity.

If we were to undertake a substantial acquisition, the acquisition would likely need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities or other arrangements. We cannot assure you that the necessary acquisition financing would be available to us on acceptable terms if and when required, particularly because we are currently highly leveraged, which may make it difficult or impossible for us to secure financing for acquisitions. If we were to undertake an acquisition by issuing equity securities or equity-linked securities, the acquisition may have a dilutive effect on the interests of the holders of our common shares. If we were to undertake an acquisition by incurring additional debt, the risks associated with our already substantial level of indebtedness could intensify.

Attempts to expand our distribution services into new domestic geographic markets may adversely affect our business, results of operations, financial condition or cash flows.

We plan to expand our distribution services into new domestic geographic markets, which will require us to make capital investments to extend and develop our distribution infrastructure. We may not achieve profitability in new regions for a period of time. If we do not successfully add new distribution centers and routes, we experience unanticipated costs or delays or we experience competition in such markets that is greater than we expect, our business, results of operations, financial condition or cash flows may be adversely affected.

Our business strategy relies increasingly upon online commerce. If our customers were unable to access any of our websites, such as ATDOnline^®, our business and operations could be disrupted and our operating results would be adversely affected.

Customers’ access to our websites directly affects the volume of orders we fulfill and our revenues. Approximately 64% of our total order volume in fiscal 2010 was placed online using ATDOnline^®, up from approximately 56% in fiscal 2007. We expect our Internet-generated business to continue to grow as a percentage of overall sales. To be successful, we must ensure that ATDOnline^® is well supported and functional on a 24/7 basis. If we are not able to continuously make these ordering tools available to our customers, there could be a decline in online orders and a decrease in our net sales.

We may not successfully execute our plan to grow our TireBuyer.com^® service or we may not attain the growth we expect from our TireBuyer.com^® service.

In late 2009, we launched TireBuyer.com^®, an Internet site which enables our local independent tire retailer customers to access the online tire consumer market and sell tires to consumers over the Internet. We expect that by growing and developing our TireBuyer.com^® service, we can leverage our tire retailer customer footprint to capture a greater share of the Internet tire market. For TireBuyer.com^® to be successful, however, we must ensure that it is well supported and functional on a 24/7 basis. In addition, TireBuyer.com^® faces significant competition from other online participants, some of which have significantly larger Internet market share, longer Internet market presence, greater Internet marketing experience and better name recognition than we enjoy. We may fail to successfully grow, develop or support the TireBuyer.com^® service or we may not attain the growth or benefits we expect TireBuyer.com^® to provide us due to strong competition or other factors, which may adversely affect our business, financial condition or results of operations.

Because the majority of our inventory is stored in our warehouse distribution centers, a disruption in our warehouse distribution centers could adversely affect our results of operations by increasing our cost and distribution lead times.

We maintain the majority of our inventory in 88 distribution centers. Serious disruptions affecting these distribution centers or the flow of products in or out of these centers, including disruptions from inclement weather, fire, earthquakes or other causes, could damage a significant portion of our inventory and could adversely affect our ability to distribute our products to tire retailers in a timely manner or at a reasonable cost. During the time that it may take us to reopen or replace a distribution center, we could incur significantly higher costs and longer lead times associated with distributing our products to tire retailers, which could adversely affect our reputation, as well as our results of operations and our customer relationships.

If we experience problems with our fleet of trucks or are otherwise unable to make timely deliveries of our products to our customers, our business and reputation could be adversely affected.

We use a fleet of trucks to deliver our products to our customers, most of which are leased from third parties. We are subject to the risks associated with product delivery, including inclement weather, disruptions in the transportation infrastructure, disruptions in our lease arrangements, availability and price of fuel, and liabilities arising from accidents to the extent we are not covered by insurance. Our failure to deliver tires and other products in a timely and accurate manner could harm our reputation and brand, which could adversely affect our business and reputation.

Participants in our Tire Pros^® franchise program are independent operators, and we have limited influence over their operations. Our Tire Pros^® franchisees could take actions that could harm the value of the Tire Pros^® franchise, or could be unwilling or unable to continue to participate in the program, which could materially and adversely affect our business, results of operations, financial condition and cash flows.

Participants in our Tire Pros^® franchise program are independent operators and have significant discretion in running their operations. Their employees are not our employees. Franchisees could take actions that subject them to legal and financial liabilities, and we may, regardless of the actual validity of such a claim, be named as a party in an action relating to, or be held liable for, the conduct of our franchisees if it is shown that we exercise a sufficient level of control over a particular franchisee’s operation. In addition, the quality of franchise operations may be diminished by any number of factors beyond our control. We do not offer financial or management services to our franchisees, which may not have sufficient resources or expertise to operate their businesses at the level we would expect. While we ultimately can take action to terminate franchisees that do not comply with the standards contained in our franchise agreements, we may not be able to identify problems and take action quickly enough and, as a result, the image and reputation of Tire Pros^® may suffer, fewer tire retailers may become Tire Pros^® franchisees and existing participants may leave the Tire Pros^® program.

In addition, our franchise agreements have limited durations and our franchisees may not be willing or able to renew their franchise agreements with us. For example, a franchisee may decide not to renew due to a lawsuit or disagreement with us, dissatisfaction with the Tire Pros^® program or a perception that the Tire Pros^® program conflicts with other business interests. Similarly, a franchisee may be unable to renew its franchise agreement with us due to a bankruptcy or restructuring event or the failure to secure a real estate lease renewal, among other factors.

Our business, business prospects, results of operations, financial condition and cash flows could be adversely affected if we are forced to defend claims made against our franchisees, if others seek to hold us accountable for our franchisees’ actions, if the Tire Pros^® program does not grow as we expect or if the Tire Pros^® franchise program is not otherwise successful.

We could become subject to additional government regulation which could cause us to incur significant liabilities.

We are currently subject to federal and state laws and other regulations that apply to our business, including laws and regulations that affect tire distribution and sale, safety matters and tire specifications. Our costs of complying with these laws and regulations, including our operating expenses and liabilities arising under governmental regulations, may be increased in the future and additional fees and taxes may be imposed by governmental authorities. Future regulatory requirements, such as required disclosure of made-on dates for tires or an expansion of the Transportation Recall Enhancement Accountability and Documentation (TREAD) Act to cover tire distributors, could cause a material increase in our liabilities or operating expenses, which would materially and adversely affect our business, results of operations, financial condition and cash flows.

Loss of key personnel or failure to attract and retain highly qualified personnel could adversely affect our results of operations, financial condition and cash flows.

We are dependent on the continued services of our senior management team. We may not be able to retain our existing senior management, fill new positions or vacancies created by expansion or turnover, or attract additional senior management personnel. We believe the loss of such key personnel could adversely affect our financial performance. In addition, our ability to manage our anticipated growth will depend on our ability to identify, hire and retain qualified management personnel. We cannot assure you that we will attract and retain sufficient qualified personnel to meet our business needs.

Consolidation among customers may reduce our importance as a holder of sizable inventory, which could adversely affect our business and results of operations.

Our success has been dependent, in part, on the fragmented customer base in our industry. Due to the small size of most tire retailers, they cannot support substantial inventory positions and thus, as our size permits us to maintain a sizable inventory, we fill an important role. We do not generally have long-term arrangements with our tire retailer customers and they can cease doing business with us at any time. If a trend towards consolidation among tire retailers develops in the future, it could reduce our importance and reduce our revenues, margins and earnings. While the local independent tire retailer share of the replacement tire market has been relatively stable in the recent past, the share of larger tire retailers has grown at the expense of smaller tire retailers. If that trend continues, the number of tire retailers able to handle sizable inventory could increase, reducing the importance of distributors to the local independent tire retailer market.

We could be subject to product liability, personal injury or other litigation claims that could adversely affect our business, results of operations and financial condition.

Purchasers of our products, or their employees or customers, could be injured or suffer property damage from exposure to, or defects in, products we sell or distribute, or have sold or distributed in the past. We could be

subject to claims, including personal injury claims. These claims may not be covered by insurance or tire manufacturers may be unwilling or unable to assume the defense of these claims, as they have in the past. In addition, if any tire manufacturer encounters financial difficulty or ceases to operate, it may not be able to assume the defense of such claims. We also may be subject to claims due to injuries caused by our truck drivers which may not be covered by insurance. As a result, the defense, settlement or successful assertion of any future product liability, personal injury or other litigation claims could cause us to incur significant costs and could have an adverse effect on our business, financial condition, results of operations or cash flows.

We could be adversely affected by compliance with environmental regulations and could incur costs relating to environmental matters, particularly those relating to our distribution centers.

We are subject to various federal, state, local and foreign environmental laws and regulations, as well as health and safety laws and regulations. Environmental laws are complex, change frequently and have tended to become more stringent over time. Compliance costs associated with current and future environmental and health and safety laws, particularly as they relate to our distribution centers, as well as liabilities arising from past or future releases of, or exposure to, hazardous substances, may adversely affect our business, results of operations, financial condition or cash flows.

Failure to maintain effective internal control over financial reporting could materially adversely affect our business, results of operations and financial condition.

Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Changes to our business will necessitate ongoing changes to our internal control systems and processes. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain adequate internal controls, including any required new or improved controls, we may be unable to provide financial information in a timely and reliable manner and might be subject to sanctions or investigation by regulatory authorities such as the SEC or the Public Company Accounting Oversight Board. Any such action could adversely affect our financial results or investors’ confidence in us and could cause the price of our securities to fall.

If we determine that our goodwill and other intangible assets have become impaired, we may record significant impairment charges, which would adversely affect our results of operations.

Goodwill and other intangible assets represent a significant portion of our assets. Goodwill is the excess of cost over the fair market value of net assets acquired in business combinations. In the future, goodwill and intangible assets may increase as a result of future acquisitions. We review our goodwill and intangible assets at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of acquired businesses, adverse market conditions and adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business. Any impairment of goodwill or other intangible assets would result in a non-cash charge against earnings, which would adversely affect our results of operations. As of January 1, 2011, our total goodwill was approximately $431.1 million and our total intangible assets, net of amortization, were $754.4 million.

Affiliates of the Sponsor indirectly own substantially all our equity interests and may have conflicts of interest with us or the holders of our notes.

As a result of the Merger, investment funds affiliated with the Sponsor indirectly own substantially all of our capital stock, and the Sponsor’s designees hold a majority of the seats on our indirect parent company’s board of directors. As a result, affiliates of the Sponsor will have control over our decisions to enter into any

corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders regardless of whether holders of the notes believe that any such transactions are in their own best interests. For example, affiliates of the Sponsor could collectively cause us to make acquisitions that increase the amount of our indebtedness or to sell assets, or could cause us to issue additional capital stock or declare dividends. So long as investment funds affiliated with the Sponsor continue to indirectly own a significant amount of the outstanding shares of our capital stock, affiliates of the Sponsor will continue to be able to strongly influence or effectively control our decisions. The indenture governing our notes and our ABL Facility permit us to pay advisory and other fees, dividends and make other restricted payments to the Sponsor under certain circumstances and our arrangements with the Sponsor and its affiliates require us to pay certain fees on quarterly basis. See Item 13 “Certain Relationships and Related Party Transactions and Director Independence.” In addition, the Sponsor has no obligation to provide us with any additional debt or equity financing.

Additionally, the Sponsor is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or that supply us with goods and services. The Sponsor may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. You should consider that the interests of the Sponsor may differ from your interests in material respects.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.

Borrowings under our ABL Facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

Our principal properties are geographically situated to meet sales and operating requirements. We believe that our properties have been well maintained, are generally in good condition and are suitable for the conduct of our business. As of January 1, 2011, we operate a total of 88 distribution centers located in 33 states, aggregating approximately 7.7 million square feet. Of these centers, two are owned by us, the remaining properties are leased. We also lease our principal executive office, located in Huntersville, North Carolina. This lease is scheduled to expire in 2021. In addition, we have some non-essential properties, principally acquired in the Am-Pac Tire Dist., Inc. acquisition, which we are attempting to sell or sublease.

Several of our property leases contain provisions prohibiting a change of control of the lessee or permitting the landlord to terminate the lease or increase rent upon a change of control of the lessee. Based primarily upon our belief that (i) we maintain good relations with the substantial majority of our landlords, (ii) most of our leases are at market rates and (iii) we have historically been able to secure suitable leased property at market rates when needed, we believe that these provisions will not have a material adverse effect on our business or financial position.

Item 3.

Legal Proceedings.

We are involved from time to time in various lawsuits, including class action lawsuits arising out of the ordinary conduct of our business. Although no assurances can be given, we do not expect that any of these matters will have a material adverse effect on our business or financial condition. We are also involved in various

litigation proceedings incidental to the ordinary course of our business. We believe, based on consultation with legal counsel, that none of these will have a material adverse effect on our financial condition or results of operations.

Item 4.

Reserved.

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

As of March 4, 2011, there was one holder of record of our common stock. There is no public trading market for our common stock.

As of January 1, 2011, we have not declared or paid dividends on our common stock since our incorporation in 2005, and we have no intention to declare or pay dividends in the foreseeable future. In addition, our ability to pay dividends is restricted by certain covenants contained in our ABL Facility and in the indentures that govern our Senior Subordinated Notes and Senior Secured Notes and may be further restricted by any future indebtedness that we incur. Our business is conducted through our subsidiaries. Dividends from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

Information regarding securities authorized for issuance under equity compensation plans is set forth in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10-K.

Item 6.

Selected Financial Data.

On May 28, 2010, as a result of the Merger, Holdings was acquired by affiliates of TPG. In the following table, periods prior to May 28, 2010 reflect the financial position, results of operations and changes in financial position of Holdings and its consolidated subsidiaries prior to the Merger (the “Predecessor”). Periods after May 28, 2010 reflect the financial position, results of operations, and changes in financial position of Holdings and its consolidated subsidiaries after the Merger (the “Successor”).

The following table sets forth both the Predecessor and Successor selected historical consolidated financial data for the periods indicated. Selected historical financial data for fiscal years 2006, 2007, 2008, and 2009 and the five months ended May 28, 2010 is derived from the Predecessor’s consolidated financial statements as of and for those periods. Selected historical financial data for the seven months ended January 1, 2011 is derived from the Successor’s consolidated financial statements as of and for that period. Both the Predecessor’s and the Successor’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 will not be exactly comparable to the prior or subsequent fiscal years. The 2006 fiscal year, which ended December 30, 2006, the 2007 fiscal year, which ended December 29, 2007, and the 2009 fiscal year, which ended January 2, 2010, contain operating results for 52 weeks. The 2008 fiscal year, which ended January 3, 2009, contains operating results for 53 weeks. The five months ended May 28, 2010 contains operating results for 21 weeks. The seven months ended January 1, 2011 contains operating results for 31 weeks. The following selected historical consolidated financial information should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included under Item 8 of this report.


	Successor			Predecessor
	Seven Months Ended January 1, 2011 (1)			Five Months Ended May 28, 2010			Fiscal Year 2009			Fiscal Year 2008 (2)			Fiscal Year 2007 (3)			Fiscal Year 2006 (4)
*Dollars in thousands*
Statement of Operations Data:
Net sales	$	1,525,249		$	934,925		$	2,171,787		$	1,960,844		$	1,877,480		$	1,577,973
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below		1,316,679			775,678			1,797,905			1,605,064			1,552,975			1,293,594
Selling, general and administrative expenses		228,513			135,146			306,189			274,412			258,347			227,399
Impairment of intangible asset		—			—			—			—			—			2,640
Transaction expenses		1,315			42,608			—			—			—			—

Operating income (loss)		(21,258	)		(18,507	)		67,693			81,368			66,158			54,340
Other income (expense):
Interest expense		(37,391	)		(32,669	)		(54,415	)		(59,169	)		(61,633	)		(60,065	)
Other, net		(958	)		(127	)		(1,020	)		(1,155	)		(285	)		(364	)

Income (loss) from operations before income taxes		(59,607	)		(51,303	)		12,258			21,044			4,240			(6,089	)
Income tax provision (benefit)		(23,295	)		(15,227	)		7,326			11,373			2,867			(1,482	)

Net income (loss)	$	(36,312	)	$	(36,076	)	$	4,932		$	9,671		$	1,373		$	(4,607	)


	Successor			Predecessor
	Seven Months Ended January 1, 2011 (1)			Five Months Ended May 28, 2010			Fiscal Year 2009			Fiscal Year 2008 (2)			Fiscal Year 2007 (3)			Fiscal Year 2006 (4)
*Dollars in thousands*
Other Financial Data:
Cash flows provided by (used in):
Operating activities	$	(23,439	)	$	28,106		$	131,105		$	(54,086	)	$	19,119		$	66,586
Investing activities		(17,237	)		(7,523	)		(4,620	)		(81,671	)		(29,860	)		(28,527	)
Financing activities		40,405			(15,631	)		(127,690	)		139,503			11,890			(40,004	)
Depreciation and amortization		40,905			14,707			32,078			25,530			28,096			25,071
Capital expenditures		12,381			6,424			12,757			13,424			8,648			9,845
EBITDA (5)		18,689			(3,927	)		98,751			105,743			93,969			79,047
Adjusted EBITDA (5)		87,974			45,696			101,035			106,994			95,397			83,658
Ratio of earnings to fixed charges (6)		—			—			1.2x			1.3x			1.1x			—

Balance Sheet Data:
Cash and cash equivalents	$	11,971					$	7,290		$	8,495		$	4,749		$	3,600
Working capital (7)		270,332						197,317			288,313			186,556			172,627
Total assets		2,057,348						1,300,624			1,390,860			1,210,696			1,123,506
Total debt (8)		652,544						549,576			642,434			539,853			521,007
Total redeemable preferred stock		—						26,600			23,941			21,450			19,822
Total stockholders’ equity		651,446						230,647			224,486			216,395			216,758

(1)	Reflects the acquisition of Lisac’s of Washington, Inc. and Tire Wholesalers, Inc. in December 2010.

(2)	Reflects the acquisition of Remington Tire Distributors, Inc., d/b/a Gray’s Wholesale Tire Distributors in October 2008 and the acquisition of Am-Pac Tire Dist., Inc. in December 2008.

(3)	Reflects the acquisition of Jim Paris Tire City of Montebello, Inc. in May 2007, the acquisition of the distribution assets of Martino Tire Company in July 2007 and the acquisition of 6H-Homann, LLC and Homann Tire, LTD in December 2007.

(4)	Reflects the acquisition of Silver State Tire Company and Golden State Tire Distributors in January 2006 and the acquisition of Samaritan Wholesale Tire Company in July 2006.

(5)

EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA as further adjusted to reflect the items set forth in the table below. The presentation of EBITDA and Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. We present EBITDA and Adjusted EBITDA because we believe they provide a more complete understanding of the factors and trends affecting our business than GAAP measures alone. We also believe that such measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Our board of directors, management and investors use EBITDA and Adjusted EBITDA to assess our financial performance because it allows them to compare our operating performance on a consistent basis across periods by removing items that we do not believe are indicative of our core operating performance. In addition, the indentures governing our senior notes use a measure similar to Adjusted EBITDA to measure our compliance with certain covenants. Our board of directors also uses Adjusted EBITDA in determining compensation for our management. We caution investors that amounts presented in accordance with our definition of Adjusted EBITDA may not be comparable to similar measures disclosed by other issuers because not all issuers calculate Adjusted EBITDA in the same manner. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same or similar to some of the adjustments set forth below. Neither EBITDA nor Adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP.

The following tables show the calculation of EBITDA and Adjusted EBITDA from the most directly comparable GAAP measure, net income (loss):


	Successor			Predecessor
	Seven Months Ended January 1, 2011 (1)			Five Months Ended May 28, 2010			Fiscal Year 2009		Fiscal Year 2008 (2)		Fiscal Year 2007 (3)		Fiscal Year 2006 (4)
*In thousands*
Net income (loss)	$	(36,312	)	$	(36,076	)	$	4,932	$	9,671	$	1,373	$	(4,607	)
Depreciation and amortization		40,905			14,707			32,078		25,530		28,096		25,071
Interest expense		37,391			32,669			54,415		59,169		61,633		60,065
Income tax provision (benefit)		(23,295	)		(15,227	)		7,326		11,373		2,867		(1,482	)

EBITDA	$	18,689		$	(3,927	)	$	98,751	$	105,743	$	93,969	$	79,047


	Successor		Predecessor
	Seven Months Ended January 1, 2011 (1)		Five Months Ended May 28, 2010			Fiscal Year 2009		Fiscal Year 2008 (2)		Fiscal Year 2007 (3)		Fiscal Year 2006 (4)
*In thousands*
EBITDA	$	18,689	$	(3,927	)	$	98,751	$	105,743	$	93,969	$	79,047
Management fee		2,352		125			500		500		500		1,875
Incentive compensation		3,706		5,892			325		—		—		—
Transaction fees		1,315		42,608			—		—		—		—
Inventory step-up		58,797		—			—		—		—		—
Other		3,115		998			1,459		751		928		2,736

Adjusted EBITDA	$	87,974	$	45,696		$	101,035	$	106,994	$	95,397	$	83,658

(6)

For purposes of these ratios, (i) earnings have been calculated by adding interest expense and the estimated interest portion of rental expense to earnings before income taxes and (ii) fixed charges are comprised of interest expense and capitalized interest, if any. In the twelve months ended December 30, 2006, five months ended May 28, 2010 and seven months ended January 1, 2011, earnings were insufficient to cover fixed charges by approximately $6.1 million, $51.3 million and $59.6 million, respectively.

(7)	Working capital is defined as current assets less current liabilities.

(8)	Total debt is the sum of current maturities of long-term debt, non-current portion of long-term debt and capital lease obligations.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context otherwise requires, the terms “American Tire Distributors,” “ATD,” “the Company,” “we,” “us” and “our” in this report refer to American Tire Distributors Holdings, Inc. and its consolidated subsidiaries, the term “Holdings” refers only to American Tire Distributors Holdings, Inc., a Delaware Corporation, and the term “ATDI” refers only to American Tire Distributors, Inc., a Delaware corporation.

The following discussion and analysis of our consolidated results of operations, financial condition and liquidity should be read in conjunction with our consolidated financial statements and the related notes included in Item 8 of this report. The following discussion contains forward-looking statements that reflect our current expectations, estimates, forecast and projections. These forward-looking statements are not guarantees of future performance, and actual outcomes and results may differ materially from those expressed in these forward-looking statements. See Item 1A “Risk Factors” and “Cautionary Statements on Forward-Looking Information.”

Company Overview

Trends and Economic Events

The U.S. replacement tire market has historically experienced stable growth and favorable pricing dynamics. From 1955 through 2010, U.S. replacement tire unit shipments increased by an average of approximately 2.8% per year. However, during challenging economic periods, consumers may opt to defer replacement tire purchases or purchase less costly brand tires. Since the onset of the economic downturn in 2008, we have seen increased economic uncertainty, increased unemployment and rising fuel prices. These factors have impacted the availability of consumer credit and have changed consumer spending of disposable income, thus impacting our business and the industry as a whole.

During 2010, the economic environment has been showing signs of stabilization. We have experienced modest year-over-year unit volume growth in 2010, which reflects an economy slowly reemerging from the severe economic downturn. The return to established driving habits, stable energy prices and longer vehicle life has led to moderate growth in the U.S. replacement tire market compared with 2009.

Going forward, we believe growth in the U.S. replacement tire market will continue to be driven by favorable underlying dynamics, including:

•

increases in the number and average age of passenger cars and light trucks;

•

increases in the number of miles driven;

•

increases in the number of licensed drivers as the U.S. population continues to grow;

•

increases in the number of replacement tire SKUs;

•

growth of the high performance tire segment; and

•

shortening tire replacement cycles due to changes in product mix that increasingly favor high performance tires, which have shorter average lives.

Despite the current market environment, we have a solid infrastructure, an extensive and efficient distribution network and a broad product offering. Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand in existing markets as well as in new geographic areas. In addition, we are investing in technology and new sales channels which will help fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above market results in both contracting and expanding market demand cycles.

Acquisition of Holdings

On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010 (as amended and supplemented, the “Merger Agreement”), among Holdings, Accelerate Holdings Corp., a Delaware corporation (the “Buyer”), Accelerate Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Buyer (“Merger Sub”), and Investcorp International, Inc., solely in its capacity as a representative of the stockholders, optionholders and warrantholders of Holdings, Merger Sub merged with and into Holdings with Holdings being the surviving corporation (the “Merger” or the “Acquisition”). As a result of the Merger, Holdings became a wholly-owned subsidiary of the Buyer and an indirect wholly-owned subsidiary of Accelerate Parent Corp. (“Accelerate Parent”), substantially all of whose outstanding capital stock is owned by investment entities affiliated with TPG Capital, L.P. (“TPG” or the “Sponsor”). The Merger was completed on May 28, 2010. See Note 3 in Notes to Consolidated Financial Statements for additional information.

The Merger was accounted for using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. Accordingly, the purchase price of the Merger has been allocated to our assets and liabilities based upon their estimated fair values at the acquisition date. For accounting purposes, the purchase price allocation was applied on May 28, 2010.

2010 Acquisitions

On December 10, 2010, we completed the purchase of substantially all the assets of Lisac’s of Washington, Inc. (“Lisac’s”) pursuant to the terms of an Asset Purchase Agreement dated as of December 10, 2010. Lisac’s operated tire distribution centers in Portland, Oregon and Spokane, Washington, serving over 1,400 customers in the area.

On December 10, 2010, we completed the purchase of 100% of the capital stock of Tire Wholesalers, Inc. (“Tire Wholesalers”) pursuant to a Stock Purchase Agreement dated as of December 10, 2010. Tire Wholesalers operated one distribution center in Kent, Washington, which serviced over 750 customers in the area.

The aggregate purchase price of these acquisitions was approximately $11 million, which was funded through our ABL Facility. The purchase of Lisac’s and Tire Wholesalers significantly expanded our position in the Northwestern United States.

2008 Acquisitions

On October 8, 2008, we completed the purchase of certain assets and the assumption of certain liabilities of Remington Tire Distributors, Inc., which does business under the name Gray’s Wholesale Tire Distributors

(“Gray’s Tire”) pursuant to the terms of an Asset Purchase Agreement dated as of October 8, 2008. The aggregate purchase price was $6.6 million, which was funded through borrowings under our revolving credit facility. This acquisition expanded our presence in Texas and Oklahoma and complemented our existing distribution centers located within the states of Texas and Oklahoma.

On December 18, 2008, we completed the purchase of all the issued and outstanding capital stock of Am-Pac Tire Dist., Inc. (“Am-Pac”) pursuant to the terms of a Stock Purchase Agreement dated December 18, 2008. The aggregate purchase price of the Am-Pac acquisition was approximately $74.7 million, consisting of $71.1 million in cash and $3.6 million in direct acquisition costs. We financed the purchase through borrowings under our revolving credit facility. This acquisition significantly strengthened our presence in markets we served and allowed us to expand our operations into St. Louis, Missouri and western Texas.

Results of Operations

Our 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 will not be exactly comparable to other fiscal years. The seven months ended January 1, 2011 for the Successor contains operating results for 31 weeks and the five months ended May 28, 2010 for the Predecessor contains operating results for 21 weeks. The 2009 fiscal year for the Predecessor, which ended January 2, 2010, contains operating results for 52 weeks while, the 2008 fiscal year for the Predecessor, which ended January 3, 2009, contains operating results for 53 weeks.

Five Months Ended May 28, 2010 for the Predecessor Compared to Fiscal 2009 for the Predecessor

As a result of the Merger and related change in control, generally accepted accounting principles requires us to present separately our operating results for the Predecessor five months ended May 28, 2010. In the following discussion, historical results for the five months ended May 28, 2010 for the Predecessor are compared and discussed in relation to the historical Predecessor results for the fiscal year ended January 2, 2010.

The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:


*In thousands*	Predecessor			Predecessor			Period Over Period Change Favorable (unfavorable)			Period Over Period % Change Favorable (unfavorable)
	Five Months Ended May 28, 2010			Fiscal Year Ended January 2, 2010									Percentage of Net Sales For the Respective Period Ended
	Five Months Ended May 28, 2010			Fiscal Year Ended January 2, 2010									May 28, 2010			January 2, 2010
Net sales	$	934,925		$	2,171,787		$	(1,236,862	)		-57.0	%		100.0	%		100.0	%
Cost of goods sold		775,678			1,797,905			1,022,227			56.9	%		83.0	%		82.8	%
Selling, general and administrative expenses		135,146			306,189			171,043			55.9	%		14.5	%		14.1	%
Transaction expenses		42,608			—			(42,608	)		-100.0	%		4.6	%		0.0	%

Operating income (loss)		(18,507	)		67,693			(86,200	)		-127.3	%		-2.0	%		3.1	%
Other income (expense):
Interest expense		(32,669	)		(54,415	)		21,746			40.0	%		-3.5	%		-2.5	%
Other, net		(127	)		(1,020	)		893			87.5	%		0.0	%		0.0	%

Income (loss) from operations before income taxes		(51,303	)		12,258			(63,561	)		-518.5	%		-5.5	%		0.6	%
Income tax provision (benefit)		(15,227	)		7,326			22,553			307.8	%		-1.6	%		0.3	%

Net income (loss)	$	(36,076	)	$	4,932		$	(41,008	)		-831.5	%		-3.9	%		0.2	%

Net Sales

Total net sales for the five months ended May 28, 2010 were $934.9 million, a $1,236.9 million or 57.0% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a five month period with a twelve month period. Also, lower sales contributions from the retail stores acquired from Am-Pac and subsequently sold in fiscal 2009 impacted the five month period ended May 28, 2010 as compared to fiscal 2009 by approximately $27.9 million. Additionally, the decline in tire unit sales attributable to the difference in the number of months in the comparable periods was partially offset by an increase in passenger and light truck tire pricing of approximately 9.6% during the five months ended May 28, 2010 as compared to fiscal 2009. This increase was driven both by manufacturer price increases and, to a lesser extent, mix of products sold.

Cost of Goods Sold

Total cost of goods sold for the five months ended May 28, 2010 were $775.7 million, a $1,022.2 million or a 56.9% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a five month period with a twelve month period. Cost of goods sold as a percentage of net sales was 83.0% and 82.8% for the five months ended May 28, 2010 and fiscal 2009, respectively. Included in fiscal 2009 were expenses related to the Am-Pac retail stores, which were completely sold by December 2009. These retail stores had a $14.7 million impact on cost of goods sold during fiscal 2009 that did not repeat during the five month period ended May 28, 2010.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the five month period ended May 28, 2010 were $135.1 million or 14.5% of net sales compared to $306.2 million or 14.1% of net sales for fiscal 2009. The decline in selling, general and administrative expenses was primarily attributable to the comparison of operating results for a five month period with a twelve month period. The increase in selling, general and administrative expenses as a percentage of sales between the five month period ended May 28, 2010 and fiscal 2009 was primarily driven by higher non-cash stock-based compensation expense of $5.6 million related to the discretionary vesting of certain previously unvested stock options and an increased price per gallon of fuel, which approximated 19% per gallon. Expenses during 2009 included costs for retail stores acquired from Am-Pac and subsequently sold during 2009. In addition, we experienced lower compensation, rent, fuel and vehicle expenses during fiscal 2010 as we integrated 20 of the Am-Pac distribution centers into our existing centers as of July 2009 and eliminated certain duplicate expenses.

During the five months ended May 28, 2010, we recorded an out of period adjustment to our financial statements to correct an error related to the final adjustments recorded to goodwill upon sale of our retail stores in fiscal 2009. Upon review of these adjustments, we determined that $4.9 million previously recorded as goodwill should have been recorded as customer list intangibles at the time of the sale of the Am-Pac retail stores. Consequently, we have recorded an out-of-period adjustment related to the amortization of the customer list intangible and a non-cash charge related to a single retail store that was shut-down. In aggregate, the out-of-period non-cash charge included in the five months ended May 28, 2010 approximates $0.4 million and is included within selling, general and administrative expenses. We evaluated these errors in relation to the periods in which they originated, the current period in which they were corrected, and the estimated income for the full fiscal year, including the trend of earnings. Management believes these errors are immaterial to the consolidated annual financial statements.

Transaction Expenses

In connection with the Merger, during the five month period ended May 28, 2010, we incurred $42.6 million of transaction expenses that related to direct acquisition costs including investment banking, legal, accounting and other fees for professional services as well as certain financing fees that did not qualify for capitalization. Also included within this amount was $2.4 million related to our now suspended public offering of our common stock.

Interest Expense

Total interest expense, net of capitalized interest, for the five month period ended May 28, 2010 was $32.7 million, a $21.7 million or 40.0% decrease compared with fiscal 2009. The decrease was primarily attributable to the comparison of operating results of a five month period with a twelve month period. Partially offsetting this decline during the five months ended May 28, 2010, we wrote off $8.0 million of deferred financing fees related to the Predecessor’s existing debt and accreted the carrying amount of the Predecessor’s redeemable preferred stock to the redemption amount at the date of the Merger, which impacted interest expense by $2.1 million. These amounts were partially offset during the five month period ended May 28, 2010 by lower average borrowings under our ABL Facility and termination of the Predecessor’s 2009 swap agreement.

Provision (Benefit) for Income Taxes

Our income tax benefit was $15.2 million during the five month period ended May 28, 2010 compared with an income tax provision of $7.3 million during fiscal 2009. The benefit recorded during the five months ended May 28, 2010 was based on a pre-tax loss of $51.3 million, primarily resulting from the $42.6 million of transaction expenses recorded during this time period. The provision recorded during fiscal 2009 was based on pre-tax income of $12.3 million. Our effective tax rates for the five month period of 2010 and the twelve month period of 2009 were 29.7% and 59.8%, respectively. The decrease in the effective tax rate is due primarily to changes in pre-tax income levels for 2010 as compared to 2009 and the impact related to certain permanent differences, which are not deductible for income tax purposes and that relate to certain transaction expenses incurred as a result of the Merger.

Net Income (Loss)

Net loss for the five month period ended May 28, 2010 was $36.1 million compared with net income of $4.9 million for fiscal 2009. The decrease was directly attributable to the comparison of operating results of a five month period with a twelve month period, the impact of non-recurring transaction expenses and the write-off of previously existing deferred financing fees during the five month period ended May 28, 2010.

Seven Months Ended January 1, 2011 for the Successor Compared to Fiscal 2009 for the Predecessor

As a result of the Merger and related change in control, generally accepted accounting principles requires us to present separately our operating results for the Successor seven months ended January 1, 2011. In the following discussion, historical results for the seven months ended January 1, 2011 for the Successor are compared and discussed in relation to the historical Predecessor results for the fiscal year ended January 2, 2010.

The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:


	Successor			Predecessor			Period Over Period Change Favorable (unfavorable)			Period Over Period % Change Favorable (unfavorable)
	Seven Months Ended January 1, 2011			Fiscal Year Ended January 2, 2010									Percentage of Net Sales For the Respective Period Ended
*In thousands*	Seven Months Ended January 1, 2011			Fiscal Year Ended January 2, 2010									January 1, 2011			January 2, 2010
Net sales	$	1,525,249		$	2,171,787		$	(646,538	)		-29.8	%		100.0	%		100.0	%
Cost of goods sold		1,316,679			1,797,905			481,226			26.8	%		86.3	%		82.8	%
Selling, general and administrative expenses		228,513			306,189			77,676			25.4	%		15.0	%		14.1	%
Transaction expenses		1,315			—			(1,315	)		-100.0	%		0.1	%		0.0	%

Operating income (loss)		(21,258	)		67,693			(88,951	)		-131.4	%		-1.4	%		3.1	%
Other income (expense):
Interest expense		(37,391	)		(54,415	)		17,024			31.3	%		-2.5	%		-2.5	%
Other, net		(958	)		(1,020	)		62			6.1	%		-0.1	%		0.0	%

Income (loss) from operations before income taxes		(59,607	)		12,258			(71,865	)		-586.3	%		-3.9	%		0.6	%
Income tax provision (benefit)		(23,295	)		7,326			30,621			418.0	%		-1.5	%		0.3	%

Net income (loss)	$	(36,312	)	$	4,932		$	(41,244	)		-836.3	%		-2.4	%		0.2	%

Net Sales

Total net sales for the seven months ended January 1, 2011 were $1,525.2 million, a $646.5 million or 29.8% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a seven month period with a twelve month period. Also, lower sales contributions from the retail stores acquired from Am-Pac and subsequently sold in fiscal 2009 impacted the seven month period ended January 1, 2011 as compared to fiscal 2009 by approximately $27.9 million. The decline in tire unit sales attributable to the difference in the number of months in the comparable periods, however, was partially offset by an increase in passenger and light truck tire pricing of approximately 15.4% during the seven months ended January 1, 2011 as compared to fiscal 2009. This increase was driven both by manufacturer price increases and, to a lesser extent, mix of products sold.

Cost of Goods Sold

Total cost of goods sold for the seven months ended January 1, 2011 were $1,316.7 million, a $481.2 million or a 26.8% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a seven month period with a twelve month period. Cost of goods sold as a percentage of net sales was 86.3% and 82.8% for the seven months ended January 1, 2011 and fiscal 2009, respectively. The amortization of the inventory step-up adjustment recorded in connection with the Merger increased cost of goods sold during the seven months ended January 1, 2011 by $58.8 million as our entire Merger-related inventory was sold during the seven month period. In addition, we recognized a $1.0 million impairment charge in cost of goods sold during the seven month period of 2010 related to the write-down of a component of our equipment inventory due to our decision to discontinue selling certain products within this product offering (see Note 4 in Notes to Consolidated Financial Statements for further information). Included in fiscal 2009 were expenses related to the Am-Pac retail stores, which were completely sold by December 2009. These retail stores had a $14.7 million impact on cost of goods sold during fiscal 2009 that did not repeat during the seven month period ended January 1, 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the seven month period ended January 1, 2011 were $228.5 million or 15.0% of net sales compared to $306.2 million or 14.1% of net sales for fiscal 2009. The decline in selling, general and administrative expenses was directly attributable to the comparison of operating results for a seven month period with a twelve month period. In addition, included in selling, general and administrative expense for the seven months ended January 1, 2011 is an additional $14.5 million of amortization related to the valuation of amortizable intangible assets acquired in the Merger, primarily associated with a customer relationship intangible asset. Also, expenses during 2009 included costs for retail stores acquired from Am-Pac and subsequently sold during 2009, as well as, lower compensation, rent, fuel and vehicle expenses during fiscal 2010 as we integrated 20 of the Am-Pac distribution centers into our existing centers as of July 2009 and eliminated certain duplicate expenses.

Interest Expense

Total interest expense, net of capitalized interest, for the seven month period ended January 1, 2011 was $37.4 million, a $17.0 million or 31.3% decrease compared with fiscal 2009. The decrease was directly attributable to the comparison of operating results of a seven month period with a twelve month period. Partially offsetting this decline was a higher average debt level during the seven month period of 2010 as compared to fiscal 2009, associated with the Successor’s senior debt obligations as compared to the Predecessor’s senior debt obligations, as well as, a slightly higher interest rate associated with the Successor’s senior debt obligations as compared to the Predecessor’s senior debt obligations.

Provision (Benefit) for Income Taxes

Our income tax benefit was $23.3 million during the seven month period ended January 1, 2011 compared with an income tax provision of $7.3 million during fiscal 2009. The benefit recorded during the seven months ended January 1, 2011 was based on a pre-tax loss of $59.6 million, primarily resulting from the non-recurring amortization of the inventory step-up adjustment as well as the additional amortization expense related to the valuation of amortizable intangible assets acquired, both recorded in connection with the Merger. The provision recorded during fiscal 2009 was based on pre-tax income of $12.3 million. Our effective tax rates for the seven month period of 2010 and fiscal 2009 were 39.1% and 59.8%, respectively. The decrease in the effective tax rate is due primarily to changes in pre-tax income levels for 2010 as compared to 2009 and the elimination of a valuation allowance against certain capital loss carryforwards during the seven month period ended January 1, 2011.

Net Income (Loss)

Net loss for the seven month period ended January 1, 2011 was $36.3 million compared with net income of $4.9 million for fiscal 2009. The decrease was directly attributable to the comparison of operating results of a seven month period with a twelve month period. In addition, the non-recurring amortization of the inventory step-up adjustment, the additional amortization expense related to the valuation of amortizable intangible assets and the increase in interest expense as discussed above impacted the results during the seven month period ended January 1, 2011.

Predecessor Fiscal 2009 Compared to Predecessor Fiscal 2008

The following table sets forth the period change for each category of the statements of operations, as well as each category as a percentage of net sales:


*In thousands*	Predecessor			Predecessor
	Fiscal Year Ended January 2, 2010			Fiscal Year Ended January 3, 2009			Period Over Period Change Favorable (unfavorable)			Period Over Period % Change Favorable (unfavorable)			Percentage of Net Sales For the Respective Period Ended
	Fiscal Year Ended January 2, 2010			Fiscal Year Ended January 3, 2009			Period Over Period Change Favorable (unfavorable)			Period Over Period % Change Favorable (unfavorable)			January 2, 2010			January 3, 2009
Net sales	$	2,171,787		$	1,960,844		$	210,943			10.8	%		100.0	%		100.0	%
Cost of goods sold		1,797,905			1,605,064			(192,841	)		-12.0	%		82.8	%		81.9	%
Selling, general and administrative expenses		306,189			274,412			(31,777	)		-11.6	%		14.1	%		14.0	%

Operating income (loss)		67,693			81,368			(13,675	)		-16.8	%		3.1	%		4.1	%
Other income (expense):
Interest expense		(54,415	)		(59,169	)		4,754			8.0	%		-2.5	%		-3.0	%
Other, net		(1,020	)		(1,155	)		135			11.7	%		0.0	%		-0.1	%

Income (loss) from operations before income taxes		12,258			21,044			(8,786	)		-41.8	%		0.6	%		1.1	%
Income tax provision (benefit)		7,326			11,373			4,047			35.6	%		0.3	%		0.6	%

Net income (loss)	$	4,932		$	9,671		$	(4,739	)		-49.0	%		0.2	%		0.5	%

Net Sales

Net sales increased $210.9 million, or 10.8%, from $1,960.8 million in fiscal 2008 to $2,171.8 million in fiscal 2009. The increase in sales was primarily driven by our acquisition of Am-Pac in late 2008, which contributed $258.4 million to the increase. Additionally, net pricing contributed an additional $39.5 million to the increase and resulted primarily from our passing through the tire manufacturers multiple price increases in 2008. Excluding the Am-Pac acquisition and the three additional business days in fiscal 2008, our sales of passenger and light truck tire units continued to outperform the overall passenger and light truck tire market (down 7.5% as measured by Modern Tire Dealer), but still declined 0.8% during fiscal 2009 as compared to fiscal 2008. Softer tire unit sales of $43.4 million (approximately $20.9 million of which resulted from the additional three business days in fiscal 2008 compared to fiscal 2009), combined with a decline in wheel, equipment and supply sales, collectively $43.5 million, partially offset the increases noted above.

Cost of Goods Sold

Cost of goods sold increased $192.8 million, or 12.0%, from $1,605.1 million in fiscal 2008 to $1,797.9 million in fiscal 2009. This increase is primarily due to our acquisition of Am-Pac in late 2008, which contributed increases of $194.6 million and $14.7 million of cost of goods sold from its wholesale and retail operations, respectively, combined with higher net tire pricing, which resulted from the multiple manufacturer price increases that occurred throughout fiscal 2008. Partially offsetting these increases was the decline in tire, wheel, equipment and supply unit sales (excluding Am-Pac) year-over-year, and the effect of three fewer business days in fiscal 2009.

Selling, General and Administrative Expenses

In fiscal 2009, selling, general and administrative expenses increased $31.8 million, or 11.6%, from $274.4 million in fiscal 2008 to $306.2 million, primarily because of our acquisition of Am-Pac in late 2008, which accounted for approximately $41.3 million of the increase. The majority of the increase related to Am-Pac

occurred in the first half of 2009 as our integration strategy was substantially completed by July 2009. Other increases included higher rents for larger facilities occupied during late fiscal 2008 and early fiscal 2009 ($4.8 million) and higher amortization expense related to the change in accounting estimate for certain customer list intangible assets ($3.6 million). Lower employee-related expenses of $8.1 million, including lower overall employee headcount, three fewer business days in fiscal 2009 and lower 401(k) expense as compared to fiscal 2008, as well as lower fuel cost of $5.3 million and travel and meeting expenses of $1.5 million partially offset the increases noted above.

Interest Expense

In fiscal 2009, interest expense, net of capitalized interest, decreased $4.8 million, or 8.0%, from $59.2 million in fiscal 2008 to $54.4 million, primarily due to lower interest rates on our variable rate debt, partially offset by higher average borrowings from our revolving credit facility during fiscal 2009 and a $0.9 million increase in interest expense related to the change in fair value of the interest rate swap agreement entered into in the second quarter of 2009.

Interest expense, net of capitalized interest, for fiscal 2009 of $54.4 million exceeds cash payments for interest during the same period in fiscal 2008 of $43.0 million, principally due to non-cash amortization of debt issuance costs and accretion of interest on our redeemable preferred stock, as well as interest accrued but not yet paid.

Provision for Income Tax

Our income tax provision decreased from $11.4 million in fiscal 2008, based on a pre-tax income of $21.0 million, to $7.3 million in fiscal 2009, based on a pre-tax income of $12.3 million. Our effective tax rates for fiscal 2008 and fiscal 2009 were 54.0% and 59.8%, respectively. The increase in the effective tax rate is due primarily to lower pre-tax income for fiscal 2009, the effects of certain permanent timing differences (primarily the effect of preferred stock dividends that are not deductible for income tax purposes) on our pre-tax income of $12.3 million in fiscal 2009 as opposed to the same permanent timing differences on our pre-tax income of $21.0 million in fiscal 2008, and a higher state effective tax rate as we do not anticipate to be able to benefit from losses generated in certain states.

Net Income

Net income for fiscal 2009 decreased $4.7 million, or 49.0%, from $9.7 million in fiscal 2008 to $4.9 million. The decrease in net income is due, in part, to higher selling, general and administrative expenses, as discussed above, partially offset by contributions from the Am-Pac acquisition, lower interest expense and the fluctuation in the income tax provision between fiscal years.

Liquidity and Capital Resources

Overview

The following table contains several key measures to gauge our financial condition and liquidity:


	Successor			Predecessor
*In thousands*	January 1, 2011			January 2, 2010			January 3, 2009
Cash and cash equivalents	$	11,971		$	7,290		$	8,495
Working capital		270,332			197,317			288,313
Total debt		652,544			549,576			642,434
Redeemable preferred stock		—			26,600			23,941
Total stockholders’ equity		651,446			230,647			224,486
Debt to capital ratio		50.0	%		70.4	%		74.1	%

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditures commitments and income tax rates. Our cash requirements consist primarily of the following:

•

Debt service requirements

•

Funding of working capital

•

Funding of capital expenditures

Our primary sources of liquidity include cash flows from operations and our availability under our ABL Facility. We expect our cash flow from operations, combined with availability under our ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements, restructuring obligations and capital spending during the next twelve month period. In addition, we expect our cash flow from operations and our availability under our ABL Facility, which matures on November 28, 2014, to continue to provide sufficient liquidity to fund our ongoing obligations, projected working capital requirements, restructuring obligations and capital spending during the foreseeable future.

As a result of the Acquisition, we are significantly leveraged. Accordingly, our liquidity requirements are significant, primarily due to our debt service requirements. As of January 1, 2011, our total indebtedness is $652.5 million. Our cash interest payments for the seven months ended January 1, 2011 for the Successor and the five months ended May 28, 2010 for the Predecessor was $30.2 million and $26.2 million, respectively. As of January 1, 2011, we have an additional $238.9 million of availability under our ABL Facility. The availability under our ABL Facility is determined in accordance with a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facility may not be available when we need them.

Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control and many of which are described under “Item 1A—Risk Factors.” If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations or we may not be able to obtain future financings to meet our liquidity needs. We anticipate that to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under our ABL Facility, the incurrence of other indebtedness, additional equity financings or a combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity on terms acceptable to us or at all.

Cash Flows

As a result of the Merger and related change in control, generally accepted accounting principles requires us to present separately our cash flows for the Successor seven months ended January 1, 2011 and the Predecessor five months ended May 28, 2010. In the following discussion, the Successor seven months ended January 1, 2011 and the Predecessor five months ended May 28, 2010 are each compared with the Predecessor fiscal year ended January 2, 2010 in accordance with generally accepted accounting principles.

The following table sets forth the major categories of cash flows:


*In thousands*	Successor			Predecessor
	Seven Months Ended January 1, 2011			Five Months Ended May 28, 2010			Fiscal Year
	Seven Months Ended January 1, 2011			Five Months Ended May 28, 2010			2009			2008
Cash provided by (used in) operating activities	$	(23,439	)	$	28,106		$	131,105		$	(54,086	)
Cash provided by (used in) investing activities		(17,237	)		(7,523	)		(4,620	)		(81,671	)
Cash provided by (used in) financing activities		40,405			(15,631	)		(127,690	)		139,503

Net increase (decrease) in cash and cash equivalents		(271	)		4,952			(1,205	)		3,746
Cash and cash equivalents—beginning of period		12,242			7,290			8,495			4,749

Cash and cash equivalents—end of period	$	11,971		$	12,242		$	7,290		$	8,495

Cash payments for interest	$	30,202		$	26,188		$	42,953		$	57,711
Cash payments for taxes, net	$	1,971		$	1,122		$	6,457		$	11,634
Capital expenditures financed by debt	$	—		$	—		$	2,307		$	3,295
Noncash capital expenditures	$	—		$	—		$	2,876		$	—

Operating Activities

Net cash used in operating activities for the seven month period ended January 1, 2011 was $23.4 million compared with $131.1 million of net cash provided by operating activities for fiscal 2009. The decrease of $154.5 million is partially attributable to the comparison of cash flow results of a seven month period with a twelve month period. In addition, working capital requirements during the seven month period ended January 1, 2011 resulted in a cash outflow of $69.1 million and were driven by increases in safety stock levels of inventory attributable to vendor fill rates, increases in customer accounts receivables, and decreases in vendor accounts payable, which resulted from timing of vendor payments. In comparison, working capital requirements during fiscal 2009 resulted in a cash inflow of $78.3 million, which were primarily driven by the decrease in inventory as a result of the consolidations of the acquired Am-Pac distribution centers (finalized in early July 2009) and related rationalization of their inventories, in addition to a reduction in elevated 2008 year-end inventory levels.

Net cash provided by operating activities for the five month period ended May 28, 2010 was $28.1 million compared with $131.1 million for fiscal 2009. The decrease of $103.0 million is partially attributable to the comparison of cash flow results of a five month period with a twelve month period. A component of the decrease resulted from the impact of the $42.6 million expense recorded during the five month period ended May 28, 2010 related to transaction costs paid by the Predecessor. In addition, working capital requirements during the five month period ended May 28, 2010 resulted in a cash inflow of $31.0 million as increases in safety stock levels of inventory attributable to vendor fill rates and increases in customer accounts receivables were more than offset by increases in vendor accounts payable, related to the timing of vendor payments. In comparison, working capital requirements during fiscal 2009 resulted in a cash inflow of $78.3 million, which were primarily driven by the decrease in inventory as a result of the consolidations of the acquired Am-Pac distribution centers (finalized in early July 2009) and related rationalization of their inventories, in addition to a reduction in elevated 2008 year-end inventory levels.

Net cash provided by operating activities for fiscal 2009 increased $185.2 million, from $54.1 million used in operating activities in fiscal 2008 to $131.1 million provided by operating activities in fiscal 2009. The increase in net cash provided by operating activities was primarily due to a decrease in our net working capital requirements. For fiscal 2009, our change in operating assets and liabilities generated a cash inflow of approximately $78.3 million, primarily driven by a decrease in inventories and, to a lesser extent, an increase in accounts payable, partially offset by a decrease in accrued expenses. The decrease in inventories resulted from the consolidation of the acquired Am-Pac distribution centers (finalized in early July 2009) and rationalization of their inventories, as well as a reduction in elevated 2008 year-end inventory levels. The decrease in accrued

expenses resulted from income tax payments and incentive compensation payments made during fiscal 2009, both of which related to 2008 fiscal performance, versus income tax and incentive compensation accrual levels for fiscal 2009 that will be paid.

Investing Activities

Net cash used in investing activities for the seven month period ended January 1, 2011 was $17.2 million compared with $4.6 million for fiscal 2009. The acquisition of Lisac’s and Tire Wholesalers in December 2010 reduced net cash flows from investing activities by $11.0 million. Capital expenditures during the seven months ended January 1, 2011 were $12.4 million compared with $12.8 million in fiscal 2009. Both periods included expenditures for information technology upgrades, IT application development and leasehold improvements. In addition, proceeds related to the sale of assets held for sale of $6.8 million during the seven months ended January 1, 2011 compared with $9.2 million during fiscal 2009.

Net cash used in investing activities for the five month period ended May 28, 2010 was $7.5 million compared with $4.6 million for fiscal 2009. Increased capital expenditures during fiscal 2009 included expenditures for information technology upgrades, IT application development and leasehold improvements. In addition, included in fiscal 2009 results are proceeds of $9.2 million related to the sale of assets held for sale, associated with the sale of certain retail operations acquired in the Am-Pac acquisition.

Net cash used in investing activities decreased $77.1 million to $4.6 million in fiscal 2009 compared to net cash used in investing activities of $81.7 million in fiscal 2008. The decrease in net cash used in investing activities was due primarily to a decrease in our acquisition activity as the Am-Pac acquisition took place in fiscal 2008, as well as an increase in the proceeds from the sale of assets held for sale, including $8.1 million for the sale of certain retail operations acquired in the Am-Pac acquisition, and a lower level of purchases of property and equipment between fiscal 2008 and fiscal 2009, primarily resulting from the expansion of one of our distribution centers in fiscal 2008. Capital expenditures for fiscal 2009 included information technology upgrades, warehouse racking and the assumption and subsequent payment of certain mortgage liabilities for real estate obtained for security in certain notes receivable. During fiscal 2009, we also had capital expenditures financed by debt of $2.3 million relating to information technology, which amount is not reflected as capital expenditures in our consolidated statements of cash flows in accordance with GAAP.

Financing Activities

Net cash provided by financing activities for the seven month period ended January 1, 2011 was $40.4 million compared with net cash used in financing activities of $127.7 for fiscal 2009. The increase in net cash provided by financing activities was primarily due to the proceeds from the issuance of our Senior Secured Notes and our Senior Subordinated Notes, partially offset by the repayment of our previously outstanding Existing Fixed Rate Notes, Existing Floating Rate Notes, Existing Discount Notes, which we refer to collectively as the Existing Notes, and redeemable preferred stock as well as payments for deferred financing costs in connection with the Merger.

Net cash used in financing activities for the five month period ended May 28, 2010 was $15.6 million compared with $127.7 million for fiscal 2009. During fiscal 2009, increased repayments of our revolving credit facility and a larger amount of outstanding checks at the balance sheet date were the primary drivers of amounts used in financing activities.

Net cash used in financing activities increased $267.2 million to $127.7 million in fiscal 2009 compared to net cash provided by financing activities of $139.5 million in fiscal 2008. The increase in net cash used in financing activities was primarily due to lower net borrowings under our revolving credit facility, primarily due to the reduction in working capital requirements discussed above, as well as the timing of outstanding checks from year-end 2008 that cleared in the first quarter 2009.

Supplemental Disclosures of Cash Flow Information

Cash payments for interest for the seven month period ended January 1, 2011 were $30.2 million compared with cash payments for interest for fiscal 2009 of $43.0 million. The decrease is primarily related to the comparison of a seven month period to a twelve month period. However, as a result of the Acquisition, our overall debt structure of the Successor has increased along with associated higher interest rates as compared with the Predecessor. Cash payments for interest for the five month period ended May 28, 2010 were $26.2 million compared with cash payments for interest for fiscal 2009 of $43.0 million. The decrease is primarily related to the comparison of a five month period to a twelve month period.

Cash payments for taxes for the seven month period ended January 1, 2011 were $2.0 million compared with $6.5 million in the fiscal year ended January 2, 2010. The decrease is primarily due to the number of months in the comparative periods and the related quarterly state and federal tax payment requirements during these months. Cash payments for taxes for the five month period ended May 28, 2010 were $1.1 million compared with $6.5 million in the fiscal year ended January 2, 2010. The decrease is primarily due to the balance and timing of income tax extension payments for fiscal 2008, made during fiscal 2009, as compared to income tax extension payments for fiscal 2009, made in the first five months of 2010.

Cash payments for interest in fiscal 2009 were $43.0 million, a $14.8 million or 25.6% decrease compared with fiscal 2008. The decrease was primarily due to the timing of our 2008 calendar period, which included five interest payments on the Predecessor’s Existing Floating Rate Notes totaling $17.8 million compared to only three interest payments in fiscal 2009 totaling $7.7 million. In addition, lower interest rates during fiscal 2009 compared to fiscal 2008 also contributed to the year-over-year decline in cash payments for interest.

Cash payments for taxes in fiscal 2009 were $6.5 million, a $5.2 million or 44.5% decrease compared with fiscal 2008. The decrease was primarily due to the differences between the amount of income tax extension payments for fiscal 2007 made in the first part of 2008 and the amount of such payments for fiscal 2008 made in the first part of 2009.

Indebtedness

The following table summarizes the Successor’s outstanding debt at January 1, 2011:


*In thousands*	Matures		Interest Rate (1)			Outstanding Balance
ABL Facility		2014		3.6	%	$	190,271
Senior Secured Notes		2017		9.75			247,084
Senior Subordinated Notes		2018		11.50			200,000
Capital lease obligations		2012 - 2022		7.1 - 13.7			14,290
Other		2011 - 2020		6.6 - 10.6			899

Total debt							652,544
Less—Current maturities							(656	)

Long-term debt						$	651,888

(1)	Interest rate for the ABL Facility is the weighted average interest rate at January 1, 2011.

ABL Facility

In connection with the Merger, ATDI amended and restated its existing senior secured asset-backed revolving credit facility, which we refer to as the ABL Facility. The borrowers to the ABL Facility are ATDI and certain of its subsidiaries. The ABL Facility provides for a senior secured revolving credit facility of up to $450.0 million (of which up to $50.0 million may be utilized in the form of commercial and standby letters of credit), subject to borrowing base availability. Provided that no default or event of default is then existing or would arise

therefrom, we have the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million, subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. As of January 1, 2011, the outstanding ABL Facility balance was $190.3 million. In addition, we had certain letters of credit outstanding at January 1, 2011 in the aggregate amount of $7.8 million, leaving $238.9 million available for additional borrowings. The ABL Facility matures on November 28, 2014.

Borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 3.0% or (b) a base rate determined by reference to the highest of (1) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans, (2) the federal funds effective rate plus ¹/2 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 2.0%. The applicable margins under the ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

The borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of:

•

85% of eligible accounts receivable; plus

•

The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory and (b) 85% of the net orderly liquidation value of eligible tire inventory; plus

•

The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory and (b) 85% of the net orderly liquidation value of eligible non-tire inventory.

All obligations under the ABL Facility are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp. Obligations under the ABL Facility are also secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets, in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.

The ABL Facility contains customary covenants, including covenants that restrict our ability to incur additional debt, grant liens, enter into guarantees, enter into certain mergers, make certain loans and investments, dispose of assets, prepay certain debt, declare dividends, modify certain material agreements, enter into transactions with affiliates or change our fiscal year. If the amount available for additional borrowing under the ABL Facility is less than the greater of (a) 12.5% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the borrowing base and (b) $25.0 million, then we would be subject to an additional covenant requiring us to meet a fixed charge coverage ratio of 1.0 to 1.0. As of January 1, 2011, our additional borrowing availability under the ABL Facility were above the required amount and we were therefore not subject to the additional covenants.

Senior Secured Notes

On May 28, 2010, in connection with the consummation of the Merger, ATDI issued Senior Secured Notes (“Senior Secured Notes”) due June 1, 2017 in an aggregate principal amount at maturity of $250.0 million. The Senior Secured Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $240.7 million after debt issuance costs (which represents a non-cash financing activity of $9.3 million). The Senior Secured Notes will accrete based on an effective interest rate of 10% to an aggregate accreted value of $250.0 million, the full principal amount at maturity. The Senior Secured Notes bear interest at a fixed rate of 9.75% per annum. Interest on the Senior Secured Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Secured Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Secured Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 107.313% of the principal amount if the redemption

date occurs between June 1, 2013 and May 31, 2014, 104.875% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015, 102.438% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016 and 100.0% of the principal amount if the redemption date occurs between June 1, 2016 and May 31, 2017.

Until June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Secured Notes issued at a redemption price equal to 109.75% of the aggregate principal amount thereof, plus accrued and unpaid interest, to, but not including, the redemption date, with the net cash proceeds from one or more equity offerings to the extent that such net cash proceeds are received by or contributed to ATDI; provided that:

(1)

at least 50% of the sum of the aggregate principal amount of the Senior Secured Notes remains outstanding immediately after the occurrence of such redemption; and

(2)

each such redemption occurs within 120 days of the date of the closing of the related equity offering.

In addition, at any time prior to June 1, 2013, ATDI may redeem all or a part of the Senior Secured Notes upon not less than 30 or more than 60 days notice at a redemption price equal to 100.0% of the principal amount of notes to be redeemed, plus the applicable premium (an amount intended to approximate a “make-whole” price based on the price of a U.S. treasury security plus 50 basis points) as of, plus accrued and unpaid interest, to, but not including , the redemption date, subject to the rights of holders on the relevant record date to receive interest due on the relevant interest payment date.

The Senior Secured Notes are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp, subject to certain exceptions. The Senior Secured Notes are also collateralized by a second-priority lien on accounts receivable and related assets and a first-priority lien on substantially all other assets (other than inventory), in each case of Holdings, ATDI and the guarantor subsidiaries, subject to certain exceptions.

The indenture governing the Senior Secured Notes contains covenants that, among other things, limits ATDI’s ability and the ability of its restricted subsidiaries to incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; engage in transactions with stockholders or affiliates; transfer or sell certain assets; guarantee indebtedness or incur other contingent obligations; incur certain liens; consolidate, merge or sell all or substantially all of ATDI’s assets; enter into certain transactions with ATDI’s affiliates; and designate ATDI’s subsidiaries as unrestricted subsidiaries.

Senior Subordinated Notes

On May 28, 2010, in connection with the consummation of the Merger, ATDI issued $200.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due June 1, 2018, which we refer to as the Senior Subordinated Notes. Interest on the Senior Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010. The Senior Subordinated Notes are not redeemable, except as described below, at the option of ATDI prior to June 1, 2013. Thereafter, the Senior Subordinated Notes may be redeemed at any time at the option of ATDI, in whole or in part, upon not less than 30 nor more than 60 days notice at a redemption price of 104.0% of the principal amount if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount if the redemption date occurs between June 1, 2015 and May 31, 2016.

Prior to June 1, 2013, ATDI may, at its option, on one or more occasions, redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes issued at a redemption price equal to 111.5% of the aggregate principal amount thereof, plus accrued and unpaid interest, to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings; provided that:

(1)

at least 50% of the aggregate principal amount of the Senior Subordinated Notes remains outstanding immediately after the occurrence of such redemption; and

(2)

each such redemption occurs within 120 days of the date of the closing of the related equity offering.

In addition, at any time prior to June 1, 2013, ATDI may redeem all or a part of the Senior Subordinated Notes upon not less than 30 or more than 60 days notice at a redemption price equal to 100.0% of the principal amount of notes to be redeemed, plus the applicable premium (an amount intended to approximate a “make-whole” price based on the price of a U.S. treasury security plus 50 basis points) as of, and accrued and unpaid interest, to, but not including, the redemption date.

The Senior Subordinated Notes are unconditionally guaranteed by Holdings and substantially all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material restricted subsidiaries, other than Tire Pros Francorp, subject to certain exceptions.

The indenture governing the Senior Subordinated Notes contains covenants that, among other things, limits ATDI’s ability and the ability of its restricted subsidiaries to incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; engage in transactions with stockholders or affiliates; transfer or sell certain assets; guarantee indebtedness or incur other contingent obligations; incur certain liens without securing the Senior Subordinated Notes; consolidate, merge or sell all or substantially all of ATDI’s assets; enter into certain transactions with ATDI’s affiliates; and designate ATDI’s subsidiaries as unrestricted subsidiaries.

Repurchase of Existing Notes

In connection with the Merger, on May 4, 2010, Merger Sub commenced cash tender offers for any and all of the Discount Notes, 2013 Notes and Floating Rate Notes, which we refer to as the Existing Notes. All of the Existing Notes were tendered and subsequently purchased and retired by Merger Sub. The aggregate total consideration paid in respect of the Existing Notes was $346.7 million, including accrued and unpaid interest.

Contractual Commitments

As of January 1, 2011, we had certain cash obligations associated with contractual commitments. The amounts due under these commitments are as follows:


*In millions*	Total		Less than 1 year		1 – 3 years			4 – 5 years		After 5 years
Long-term debt (variable rate)	$	190.3	$	—	$	—		$	190.3	$	—
Long-term debt (fixed rate)		447.9		0.6		—			—		447.3
Estimated interest payments (1)		376.3		56.2		112.4			105.0		102.7
Operating leases, net of sublease income		294.2		50.5		83.7			63.6		96.4
Capital leases (2)		0.2		—		0.2			—		—
Uncertain tax positions		2.2		0.7		(0.1	)		1.4		0.2
Deferred compensation obligation		2.5		—		—			—		2.5

Total contractual cash obligations	$	1,313.6	$	108.0	$	196.2		$	360.3	$	649.1

(1)	Represents the annual interest expense on fixed and variable rate debt. Projections of interest expense on variable rate debt are based on current interest rates.

(2)	Excludes capital lease obligation relating to the sale and leaseback of three owned facilities. All cash paid to the lessor is recorded as interest expense and is included in the estimated interest payments amount in the above table.

Off-Balance Sheet Arrangements

We have no significant off balance sheet arrangements, other than liabilities related to leases of Winston Tire Company that we guaranteed when we sold Winston Tire Company in 2001. As of January 1, 2011, our total obligations as guarantor on these leases are approximately $4.6 million extending over eight years. However, we have secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $4.2 million as of January 1, 2011. A provision has been made for the net present value of the estimated shortfall. The accrual for lease liabilities could be materially affected by factors such as the credit worthiness of lessors, assignees and sublessees and our success at negotiating early termination agreements with lessors. These factors are significantly dependent on general economic conditions. While we believe that our current estimates of these liabilities are adequate, it is possible that future events could require significant adjustments to those estimates.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with those accounting principles requires management to use judgment in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates. The following is a summary of certain accounting estimates and assumptions made by management that we consider critical.

Allowance for Doubtful Accounts

The allowance for doubtful accounts represents the best estimate of probable loss inherent within our accounts receivable balance. Estimates are based upon both the creditworthiness of specific customers and the overall probability of losses based upon an analysis of the overall aging of receivables, past collection trends and general economic conditions. Estimating losses from doubtful accounts is inherently uncertain because the amount of such losses depends substantially on the financial condition of our customers. If the financial condition of our customers were to deteriorate beyond estimates, and impair their ability to make payments, we would be required to write off additional accounts receivable balances, which would adversely impact our results of operations.

Inventories

Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or fair market value and consist primarily of automotive tires, custom wheels, and related tire supplies and tools. We perform periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and record necessary provisions to reduce such inventories to net realizable value. If actual market conditions are less favorable than those projected by management, we could be required to reduce the value of our inventory or record additional reserves, which would adversely impact our results of operations.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill and intangible assets with indefinite useful lives are no longer amortized, but are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset.

Recoverability of goodwill is determined using a two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.

Recoverability of other intangible assets with indefinite useful lives is measured by a comparison of the carrying amount of the intangible assets to the estimated fair value of the respective intangible assets. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.

The determination of estimated fair value requires management to make assumptions about estimated cash flows, including profit margins, long-term forecasts, discount rates, royalty rates and terminal growth rates. Management developed these assumptions based on the best information available as of the date of the assessment. We completed our assessment of goodwill and intangible assets with indefinite useful lives as of November 30, 2010 and determined that no impairment existed at that date. Although no impairment has been recorded to date, there can be no assurances that future impairments will not occur. Future adverse developments in market conditions or our current or projected operating results could cause the fair value of our goodwill and intangible assets with indefinite useful lives to fall below carrying value, which would result in an impairment charge that would adversely affect our results of operations.

Long-Lived Assets

Management reviews long-lived assets, which consist of property, leasehold improvements, equipment and definite-lived intangibles, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. For long-lived assets to be held and used, management evaluates recoverability by comparing the carrying value of the asset to future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying value of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset. For long-lived assets for which we have committed to a disposal plan, we report such assets at the lower of the carrying value or fair value less the cost to sell.

In determining the fair value of long-lived assets, we make judgments relating to the expected useful lives of long-lived assets and our ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets. Factors that impact these judgments include the ongoing maintenance and improvements of the assets, changes in the expected use of the assets, changes in economic conditions, changes in operating performance and anticipated future cash flows. If actual fair value is less than our estimates, long-lived assets may be overstated on the balance sheet, which would adversely impact our results of operations.

Self-Insured Reserves

We are self-insured for automobile liability, workers’ compensation and the health care claims of our team members, although we maintain stop-loss coverage with third-party insurers to limit our total liability exposure. We establish reserves for losses associated with claims filed, as well as claims incurred but not yet reported, using actuarial methods followed in the insurance industry and our historical claims experience. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our results of operations and financial condition could be materially affected if losses from these claims differs significantly from our estimates.

Acquisition Exit Cost Reserves

In connection with certain acquisitions, we have acquired certain facilities that we have closed or intend to close. We record reserves for certain exit costs associated with closing these facilities. These exit cost reserves are recorded in an amount equal to future minimum lease payments and related ancillary costs from the date of closure to the end of the lease term, net of estimated sublease rentals we reasonably expect to obtain for the property. We estimate future cash flows based on contractual lease terms, the geographic market in which the facility is located, inflation, ability to sublease the property and other economic conditions. We estimate sublease rentals based on the geographic market in which the property is located, our experience subleasing similar properties and other economic conditions. If actual exit costs associated with closing these facilities differ from our estimates, it could impact our results of operations.

Income Taxes and Valuation Allowances

Pursuant to Financial Accounting Standards Board (“FASB”) authoritative guidance for accounting for income taxes and uncertain tax positions, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities, in each case using the enacted marginal tax rate we expect will apply when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability from period to period. We record a valuation allowance, which reduces deferred tax assets, if available evidence suggests that it is more likely than not that some portion or all of a deferred tax asset will not be realized. Changes in the valuation allowance are recognized in our provision for deferred income taxes in the period of change.

The application of income tax law is inherently complex. We are required to make certain assumptions and judgments regarding our income tax positions and the likelihood that such tax positions will be sustained if challenged. Interest and penalties related to uncertain tax provisions are recorded as a component of the provision for income taxes. Interpretations and guidance surrounding income tax laws and regulations change over time. Changes in our assumptions and judgments can materially affect the amounts we recognize in our consolidated balance sheets and statements of operations.

Revenue Recognition

Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. We recognize revenue when the title and the risk and rewards of ownership have substantially transferred to the customer, which is upon delivery under free-on-board destination terms.

We permit customers from time to time to return certain products but there is no contractual right of return. We continuously monitor and track such returns and record an estimate of such future returns, based on historical experience and recent trends. While such returns have historically been within management’s expectations and the provisions established have been adequate, we cannot guarantee that we will continue to experience the same return rates that we have in the past. If future returns increase significantly, operating results would be adversely affected.

Tire Manufacturer Rebates

We receive rebates from tire manufacturers pursuant to a variety of rebate programs. These rebates are recorded in accordance with accounting standards applicable to cash consideration received from vendors. Many of the tire manufacturer programs provide that we receive rebates when certain measures are achieved, generally related to the volume of our purchases. We account for these rebates as a reduction to the price of the product, which reduces the carrying value of our inventory and our cost of goods sold when product is sold. During the

year, we record amounts earned for annual rebates based on purchases management considers probable for the full year. These estimates are periodically revised to reflect rebates actually earned based on actual purchase levels. Tire manufacturers may change the terms of some or all of these programs, which could increase our cost of goods sold and decrease our net income, particularly if these changes are not passed along to the customer.

Customer Rebates

We offer rebates to our customers under a number of different programs. These rebates are recorded in accordance with authoritative guidance related to accounting for consideration given by a vendor to a customer. These programs typically provide customers with rebates, generally in the form of a reduction to the amount they owe us, when certain measures are achieved, generally related to the volume of product purchased from us. We record these rebates through a reduction in the related price of the product, which decreases our net sales. During the year, we estimate rebate amounts based on the rebate rates we expect customers will achieve for the full year. These estimates are periodically revised to reflect rebates actually earned by customers.

Cooperative Advertising and Marketing Programs

We participate in cooperative advertising and marketing programs, or co-op advertising, with our vendors. Co-op advertising funds are provided to us generally based on the volume of purchases made with vendors that offer such programs. A portion of the funds received must be used for specific advertising and marketing expenditures incurred by us or our customers. The co-op advertising funds received by us from our vendors are accounted for in accordance with authoritative guidance related to accounting for cash consideration received from a vendor, which requires that we record the funds received as a reduction of cost of sales or as an offset to specific costs incurred in selling the vendor’s products. The co-op advertising funds that are provided to our customers are accounted for in accordance with authoritative guidance related to accounting for cash consideration given by a vendor to a customer, which requires that we record the funds paid as a reduction of revenue since no separate identifiable benefit is received by us.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, (ii) disclose separately the reasons for any transfers in and out of Level 3, and (iii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. We adopted this guidance in full beginning with the interim period ended April 3, 2010, except for the gross presentation of Level 3 rollforward information which is required for reporting periods beginning after December 15, 2010 and interim reporting periods within those years.

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk.

Our results of operations are exposed to changes in interest rates primarily with respect to our ABL Facility. Interest on the ABL Facility is tied to Base Rate, as defined, or LIBOR. At January 1, 2011, we had $190.3 million outstanding under our ABL Facility, none of which has been hedged by an interest rate swap agreement and was thus subject to interest rate changes. An increase of 1% in such interest rate percentages would increase our annual interest expense by $1.9 million, based on the outstanding balance of the ABL Facility.

Item 8.

Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
American Tire Distributors Holdings, Inc.—Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting		45
Reports of Independent Registered Public Accounting Firm		46
Consolidated Balance Sheets as of January 1, 2011 for the Successor and January 2, 2010 for the Predecessor		48
Consolidated Statements of Operations for the seven months ended January 1, 2011 for the Successor and for the five months ended May 28, 2010 and fiscal years ended January 2, 2010 and January 3, 2009 for the Predecessor		49
Consolidated Statements of Stockholder’s Equity and Other Comprehensive Income (Loss) for the seven months ended January 1, 2011 for the Successor and for the five months ended May 28, 2010 and fiscal years ended January 2, 2010 and January 3, 2009 for the Predecessor		50
Consolidated Statements of Cash Flows for the seven months ended January 1, 2011 for the Successor and for the five months ended May 28, 2010 and fiscal years ended January 2, 2010 and January 3, 2009 for the Predecessor		51
Notes to Consolidated Financial Statements		52

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of American Tire Distributors Holdings, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

•

Provide reasonable assurance that transactions are recorded and necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company;

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an assessment of the Company’s internal control over financial reporting as of January 1, 2011. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective at a reasonable assurance level as of January 1, 2011.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of American Tire Distributors Holdings, Inc. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheet as of January 1, 2011 and the related consolidated statements of operations, of stockholder’s equity and comprehensive loss and of cash flows for the seven months ended January 1, 2011 present fairly, in all material respects, the financial position of American Tire Distributors Holdings, Inc. and its subsidiaries (Successor Company) at January 1, 2011, and the results of their operations and their cash flows for the seven months ended January 1, 2011 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2)for the seven months ended January 1, 2011 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina

March 15, 2011

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of American Tire Distributors Holdings, Inc. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheet as of January 2, 2010 and the related consolidated statements of operations, of stockholder’s equity and comprehensive income (loss) and of cash flows for the five months ended May 28, 2010 and for each of the two years in the period ended January 2, 2010 present fairly, in all material respects, the financial position of American Tire Distributors Holdings, Inc. and its subsidiaries (Predecessor Company) at January 2, 2010, and the results of their operations and their cash flows for the five months ended May 28, 2010 and for each of the two years in the period ended January 2, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) for the five months ended May 28, 2010 and for each of the two years in the period ended January 2, 2010 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina

March 15, 2011

AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS


	Successor			Predecessor
*In thousands, except share amounts*	January 1, 2011			January 2, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	11,971		$	7,290
Restricted cash		250			9,750
Accounts receivable, net of allowance for doubtful accounts of $340 and $2,280 in fiscal 2010 and 2009, respectively		213,928			188,888
Inventories		466,433			388,901
Deferred income taxes		13,839			10,657
Income tax receivable		9,646			—
Assets held for sale		203			458
Other current assets		11,488			11,717

Total current assets		727,758			617,661

Property and equipment, net		89,553			61,775
Goodwill		431,065			375,734
Other intangible assets, net		754,387			226,682
Other assets		54,585			18,772

Total assets	$	2,057,348		$	1,300,624

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	430,979		$	368,852
Accrued expenses		25,791			37,513
Current maturities of long-term debt		656			13,979

Total current liabilities		457,426			420,344

Long-term debt		651,888			535,597
Deferred income taxes		283,169			75,636
Other liabilities		13,419			11,800
Redeemable preferred stock; 20,000 shares authorized, issued and outstanding		—			26,600
Commitments and contingencies
Stockholder’s equity:
Common stock		—			10
Additional paid-in capital		687,537			218,348
Warrants		—			4,631
Accumulated (deficit) earnings		(36,312	)		9,922
Accumulated other comprehensive income (loss)		221			(2,164	)
Predecessor treasury stock, at cost, 473 shares of Series A Common Stock		—			(100	)

Total stockholder’s equity		651,446			230,647

Total liabilities and stockholder’s equity	$	2,057,348		$	1,300,624

See accompanying notes to consolidated financial statements.

AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Successor			Predecessor
	Seven Months Ended January 1, 2011			Five Months Ended May 28, 2010			Fiscal Year Ended
*In thousands*	Seven Months Ended January 1, 2011			Five Months Ended May 28, 2010			January 2, 2010			January 3, 2009
Net sales	$	1,525,249		$	934,925		$	2,171,787		$	1,960,844
Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below		1,316,679			775,678			1,797,905			1,605,064
Selling, general and administrative expenses		228,513			135,146			306,189			274,412
Transaction expenses		1,315			42,608			—			—

Operating income (loss)		(21,258	)		(18,507	)		67,693			81,368
Other income (expense):
Interest expense		(37,391	)		(32,669	)		(54,415	)		(59,169	)
Other, net		(958	)		(127	)		(1,020	)		(1,155	)

Income (loss) from operations before income taxes		(59,607	)		(51,303	)		12,258			21,044
Income tax provision (benefit)		(23,295	)		(15,227	)		7,326			11,373

Net income (loss)	$	(36,312	)	$	(36,076	)	$	4,932		$	9,671

See accompanying notes to consolidated financial statements.

AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)


*In thousands, except* *share amounts*	Total Stockholder’s Equity			Common Stock ( Note 16)						Additional Paid-In Capital			Warrants			Accumulated Earnings (Deficit)			Accumulated Other Comprehensive (Loss) Income			Treasury Stock at Cost			Comprehensive Income (Loss)
				Common Stock ( Note 16)
				Shares			Amount
Predecessor balance, December 29, 2007	$	216,395			999,528		$	10		$	217,990		$	4,631		$	(4,835	)	$	(1,301	)	$	(100	)
Adjustment to initially apply fair value accounting standard, net of tax of $0.1 million		154			—			—			—			—			154			—			—
Net income (loss)		9,671			—			—			—			—			9,671			—			—		$	9,671
Change in value of derivative instrument, net of tax of $1.0 million		(1,496	)		—			—			—			—			—			(1,496	)					(1,496	)
Unrealized gain (loss) on rabbi trust assets, net of tax of $0.2 million		(270	)		—			—			—			—			—			(270	)					(270	)

Total comprehensive income (loss)																									$	7,905

Stock-based compensation		32			—			—			32			—			—			—			—

Predecessor balance, January 3, 2009		224,486			999,528			10			218,022			4,631			4,990			(3,067	)		(100	)
Net income (loss)		4,932			—			—			—			—			4,932			—			—		$	4,932
Change in value of derivative instrument, net of tax of $0.3 million		474			—			—			—			—			—			474			—			474
Unrealized gain (loss) on rabbi trust assets, net of tax of $0.3 million		429			—			—			—			—			—			429						429

Total comprehensive income (loss)																									$	5,835

Stock-based compensation		326			—			—			326			—			—			—			—

Predecessor balance, January 2, 2010		230,647			999,528			10			218,348			4,631			9,922			(2,164	)		(100	)
Net income (loss)		(36,076	)		—			—			—			—			(36,076	)		—			—		$	(36,076	)
Change in value of derivative instrument, net of tax of $1.4 million		2,168			—			—			—			—			—			2,168			—			2,168
Unrealized gain (loss) on rabbi trust assets, net of tax of $0.0 million		(182	)		—			—			—			—			—			(182	)		—			(182	)

Total comprehensive income (loss)																									$	(34,090	)

Stock-based compensation		5,892			—			—			5,892			—			—			—			—

Predecessor balance, May 28, 2010		202,449			999,528			10			224,240			4,631			(26,154	)		(178	)		(100	)



Purchase accounting adjustments		(202,449	)		(999,528	)		(10	)		(224,240	)		(4,631	)		26,154			178			100
Net income (loss)		(36,312	)		—			—			—			—			(36,312	)		—			—		$	(36,312	)
Unrealized gain (loss) on rabbi trust assets, net of tax of $0.0 million		221			—			—			—			—			—			221			—			221

Total comprehensive income (loss)																									$	(36,091	)

Equity contributions		683,831			1,000			—			683,831			—			—			—			—
Stock-based compensation		3,706			—			—			3,706			—			—			—			—

Successor balance, January 1, 2011	$	651,446			1,000		$	—		$	687,537		$	—		$	(36,312	)	$	221		$	—

See accompanying notes to consolidated financial statements.

AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Successor			Predecessor
	Seven Months Ended January 1, 2011			Five Months Ended May 28, 2010			Fiscal Year Ended
*In thousands*	Seven Months Ended January 1, 2011			Five Months Ended May 28, 2010			January 2, 2010			January 3, 2009
Cash flows from operating activities:
Net income (loss)	$	(36,312	)	$	(36,076	)	$	4,932		$	9,671
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of intangibles		40,905			14,707			32,078			25,530
Amortization of other assets		2,692			9,983			4,834			4,834
Provision (benefit) for deferred income taxes		(27,518	)		(3,846	)		5,030			3,432
Accretion of 8% cumulative preferred stock		—			2,537			441			441
Accrued dividends on 8% cumulative preferred stock		—			966			2,219			2,051
Provision for doubtful accounts		1,762			608			1,381			2,514
Inventory step-up amortization		58,797			—			—			—
Stock-based compensation		3,706			5,892			326			32
Other, net		1,596			2,357			1,580			409
Change in operating assets and liabilities:
Accounts receivable		(4,298	)		(19,280	)		(15,462	)		868
Inventories		(36,832	)		(37,751	)		63,773			(43,067	)
Income tax receivable		(1,383	)		(8,263	)		—			—
Other current assets		(738	)		972			2,706			110
Accounts payable and accrued expenses		(7,942	)		96,375			32,839			(59,614	)
Other, net		(17,874	)		(1,075	)		(5,572	)		(1,297	)

Net cash provided by (used in) operating activities		(23,439	)		28,106			131,105			(54,086	)

Cash flows from investing activities:
Acquisitions, net of cash acquired		(11,018	)		—			116			(68,584	)
Purchase of property and equipment		(12,381	)		(6,424	)		(12,757	)		(13,424	)
Purchase of assets held for sale		(718	)		(1,498	)		(1,382	)		(3,020	)
Proceeds from sale of assets held for sale		6,806			185			9,232			3,187
Proceeds from sale of property and equipment		74			214			171			170

Net cash provided by (used in) investing activities		(17,237	)		(7,523	)		(4,620	)		(81,671	)

Cash flows from financing activities:
Borrowings from revolving credit facility		1,995,596			828,727			2,056,414			1,902,324
Repayments of revolving credit facility		(1,997,413	)		(822,005	)		(2,147,985	)		(1,798,645	)
Outstanding checks		5,328			(15,369	)		(32,524	)		49,951
Payments of other long-term debt		(7,016	)		(721	)		(3,595	)		(4,452	)
Payments of deferred financing costs		(24,958	)		—			—			—
Payment for termination of interest rate swap agreements		(2,804	)		—			—			—
Payment of seller fees on behalf of Buyer		(16,792	)		—			—			—
8% cumulative preferred stock redemption		(30,102	)		—			—			—
Proceeds from issuance of long-term debt		446,900			—			—			—
Payments of Predecessor senior notes		(340,131	)		(6,263	)		—			—
Equity contribution		11,797			—			—			—
Change in restricted cash		—			—			—			(9,675	)

Net cash provided by (used in) financing activities		40,405			(15,631	)		(127,690	)		139,503

Net increase (decrease) in cash and cash equivalents		(271	)		4,952			(1,205	)		3,746
Cash and cash equivalents—beginning of period		12,242			7,290			8,495			4,749

Cash and cash equivalents—end of period	$	11,971		$	12,242		$	7,290		$	8,495

Supplemental disclosures of cash flow information:
Cash payments for interest	$	30,202		$	26,188		$	42,953		$	57,711
Cash payments for taxes, net	$	1,971		$	1,122		$	6,457		$	11,634
Supplemental disclosures of noncash activities:
Capital expenditures financed by debt	$	—		$	—		$	2,307		$	3,295
Noncash capital expenditures	$	—		$	—		$	2,876		$	—

See accompanying notes to consolidated financial statements.

AMERICAN TIRE DISTRIBUTORS HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Company:

American Tire Distributors Holdings, Inc. (also referred to herein as “Holdings”) is a Delaware corporation that owns 100% of the issued and outstanding capital stock of American Tire Distributors, Inc. (“ATDI”), a Delaware corporation. Holdings has no significant assets or operations other than its ownership of ATDI. The operations of ATDI and its subsidiaries constitute the operations of Holdings presented under accounting principles generally accepted in the United States. Unless the context otherwise requires, “Company” herein refers to Holdings and its consolidated subsidiaries.

The Company is primarily engaged in the wholesale distribution of tires, custom wheels and accessories, and related tire supplies and tools, representing 94.6%, 2.3% and 1.4%, respectively, of our net sales. Operating as one operating and reportable segment through a network of 88 distribution centers, including two redistribution centers in the United States, the Company offers access to an extensive breadth and depth of inventory, representing approximately 40,000 stock-keeping units (SKUs) to approximately 50,000 customers. The Company’s customer base is comprised primarily of independent tire dealers with the remainder of other customers representing national retail chains, service stations and other automotive dealer and repair facilities. The Company serves all or parts of 40 states located in the Southeastern and Mid-Atlantic regions, portions of the Northeast, Midwest, Southwest and the West Coast of the United States.

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 53-week fiscal years will not be exactly comparable to the prior and subsequent 52-week fiscal years. The seven months ended January 1, 2011 for the Successor contains operating results for 31 weeks. The five months ended May 28, 2010 for the Predecessor contains operating results for 21 weeks. The fiscal years ended January 2, 2010 and January 3, 2009 contain operating results for 52 weeks and 53 weeks, respectively.

2. Summary of Significant Accounting Policies:

A summary of significant accounting policies used in the preparation of the accompanying financial statements follows:

Basis of Preparation

The accompanying consolidated financial statements reflect the consolidated operations of Holdings and its wholly-owned subsidiaries and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) as defined by the Financial Accounting Standards Board (FASB) within the FASB Accounting Standards Codification (FASB ASC). In the opinion of management, the accompanying consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated results for the periods presented.

On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010 (as amended and supplemented, the “Merger Agreement”), among Holdings, Accelerate Holdings Corp., a Delaware corporation (the “Buyer”), Accelerate Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Buyer (“Merger Sub”), and Investcorp International, Inc., solely in its capacity as a representative of the stockholders, optionholders and warrantholders of Holdings, Merger Sub merged with and into Holdings with Holdings being the surviving corporation (also referred herein as the “Merger” or the “Acquisition”). As a result of the Merger, Holdings became a wholly-owned subsidiary of the Buyer and an indirect wholly-owned subsidiary of Accelerate Parent Corp. (“Accelerate Parent”), substantially all of whose outstanding capital stock is owned by investment entities affiliated with TPG Capital, L.P. (“TPG” or the “Sponsor”). Additionally, under

the guidance provided by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 5J, “New Basis of Accounting Required in Certain Circumstances,” push-down accounting is required when such transactions result in an entity becoming substantially wholly-owned. Under push-down accounting, certain transactions incurred by the Buyer, which would otherwise be accounted for in the accounts of the parent, are “pushed down” and recorded on the financial statements of the subsidiary. Therefore, the basis in shares of common stock of Holdings have been pushed down from the Buyer to Holdings.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiaries. Partially-owned investments are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are based on several factors including the facts and circumstances available at the time of the estimates are made, historical experience, risk of loss, general economic conditions and trends, and the assessment of the probably future outcome. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of operations in the period that they are determined.

Cash and Cash Equivalents

The Company considers all deposits with an original maturity of three months or less to be cash equivalents in its consolidated financial statements. Outstanding checks are presented as a financing cash outflow in the statement of cash flows because they are funded by drawing on the ABL Facility as they are presented for payment.

Inventories

Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or fair market value and consist primarily of automotive tires, custom wheels, and related tire supply and tool products. 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. A majority of the Company’s tire vendors allow for the return of tire products, subject to certain limitations, specified in supply arrangements with the vendors. In addition, the Company’s inventory is collateral under the ABL Facility. See Note 8 for additional information.

Allowance for Doubtful Accounts

The allowance for doubtful accounts represents the best estimate of probable loss inherent within the Company’s accounts receivable balance. Estimates are based upon both the creditworthiness of specific customers and the overall probability of losses based upon an analysis of the overall aging of receivables, past collection trends and general economic conditions.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. For financial reporting purposes, assets placed in service are recorded at cost and depreciated using the straight-line method at annual rates

sufficient to amortize the cost of the assets less estimated salvage values over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of their economic useful life or their lease term. The range of useful lives used to depreciate property and equipment is as follows:


Buildings		25 to 31 years
Leasehold improvements		9 years
Machinery and equipment		2 to 7 years
Furniture and fixtures		8 years
Internal use software		3 to 5 years
Vehicles and other		4 to 6 years

Repairs and maintenance expenditures that do not extend the useful life of the asset are charged to expense as incurred. Major expenditures for replacements and significant improvements that increase asset values and extend useful lives are capitalized. The carrying amounts of assets that are sold or retired and the related accumulated depreciation are removed from the accounts in the year of disposal, and any resulting gain or loss is reflected in the statement of operations.

The Company capitalizes costs, including interest, incurred to develop or acquire internal-use software. These costs are capitalized subsequent to the preliminary project stage once specific criteria are met. Costs incurred in the preliminary project planning stage are expensed. Other costs, such as maintenance and training, are also expensed as incurred. Capitalized costs are amortized over their estimated useful lives using the straight-line method.

The Company assesses the recoverability of the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the assets.

Goodwill and Intangible Assets

In accordance with GAAP, goodwill and other indefinite-lived intangible assets are no longer amortized, but are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset.

Recoverability of goodwill is measured at the reporting unit level and determined using a two step process. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit’s carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.

Recoverability of other indefinite-lived intangible assets is measured by a comparison of the carrying amount of the intangible assets to the estimated fair value of the respective intangible assets. Any excess of the carrying value over the estimated fair value is recognized as an impairment loss equal to that excess.

Intangible assets such as customer-related intangible assets and noncompete agreements with finite useful lives are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful lives approximate the following:


Customer list		19 years
Tradenames		1 to 5 years
Noncompete agreements		2 years

The Company assesses the recoverability of the carrying value of its intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If the undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the fair value of the assets.

Deferred Financing Costs

Costs associated with financing activities (see Note 8) are included in the accompanying consolidated balance sheets as deferred financing costs (included within Other Assets) and are being amortized over the terms of the loans to which such costs relate. Amortization of deferred financing costs included in operating income was $2.7 million for the Successor seven months ended January 1, 2011. Amortization of deferred financing costs for the Predecessor five months ended May 28, 2010 and fiscal years 2009 and 2008 were $10.0 million, $4.8 million and $4.8 million, respectively. These amounts are included in interest expense in the accompanying consolidated statements of operations. As a result of the Acquisition, $8.0 million of deferred financing costs associated with the old debt structure were written off and included in the $10.0 million amortization of deferred financing costs for the Predecessor five months ended May 28, 2010. The unamortized balance of deferred financing costs included in the accompanying consolidated balance sheets was $22.3 million for the Successor at January 1, 2011 and $12.5 million for the Predecessor at January 2, 2010.

Equity Method Investment

The Company has a 52% equity investment in American Car Care Centers (“ACCC”), an association of independent tire and automotive service dealers with over 1,100 locations nationwide. ACCC engages in a program to assist its stockholders and their customers in the promotion, marketing, distribution and sale of tires, tire supplies, accessories and equipment. Although we hold a majority ownership interest, our interest does not provide us with the ability to exercise significant influence. Accordingly, the investment is accounted for under the equity method and is included in other assets in the accompanying consolidated balance sheet at January 1, 2011.

Derivative Instruments and Hedging Activities

For derivative instruments, the Company applies FASB authoritative guidance which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.

Self Insurance

The Company is self-insured with respect to employee health liability claims and maintains a large deductible program on workers’ compensation and auto. The Company has stop-loss insurance coverage for

individual claims in excess of $0.3 million for employee health insurance and deductibles of $0.3 million on the workers’ compensation and auto on a per claim basis. Aggregate stop-loss limits for workers’ compensation and auto are $7.8 million. There is no aggregate stop-loss limit on employee health insurance. A reserve for liabilities associated with losses is established for claims filed and claims incurred but not yet reported using actuarial methods followed in the insurance industry and the Company’s historical claims experience.

Revenue Recognition and Concentration of Credit Risk

Revenue is recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred or service has been rendered. The Company recognizes revenue when the title and the risks and rewards of ownership have substantially transferred to the customer, which is upon delivery under free on board (“FOB”) destination terms.

The Company permits customers from time to time to return certain products, but there is no contractual right of return. The Company continuously monitors and tracks such returns and records an estimate of such future returns, which is based on historical experience and recent trends.

In the normal course of business, the Company extends credit, on open accounts, to its customers after performing a credit analysis based on a number of financial and other criteria. The Company performs ongoing credit evaluations of its customers’ financial condition and does not normally require collateral; however, letters of credit and other security are occasionally required for certain new and existing customers. The Company’s top ten customers accounted for approximately 8.0%, 5.5%, and 6.7% of net sales, respectively, for the fiscal years of 2010, 2009, and 2008.

Shipping and Handling Costs

Certain Company shipping, handling and other distribution costs are classified as selling, general and administrative expenses in the accompanying consolidated statements of operations. For the Successor, such expenses totaled $64.5 million for the seven months ended January 1, 2011. For the Predecessor, such expenses totaled $43.1 million for the five months ended May 28, 2010, $99.6 million for the fiscal year ended January 2, 2010, and $99.5 million for the fiscal year ended January 3, 2009. Shipping revenue is classified within net sales in accordance with accounting standards on shipping and handling fees and costs.

Tire Manufacturer Rebates

The Company receives rebates from its vendors under a number of different programs. These rebates are recorded in accordance with the accounting standards for cash consideration received from a vendor. Many of the vendor programs provide for the Company to receive rebates when any of a number of measures are achieved, generally related to the volume of purchases. These rebates are accounted for as a reduction to the price of the product, which reduces the carrying value of inventory until the product is sold. Throughout the year, the amount recognized for annual rebates is based on purchases management considers probable for the full year. These estimates are continually revised to reflect rebates earned based on actual purchase levels.

Customer Rebates

The Company offers rebates to its customers under a number of different programs. These rebates are recorded in accordance with the accounting standards for consideration given by a vendor to a customer. The majority of these programs provide for the customer to receive rebates, generally in the form of a reduction in the related accounts receivable balance, when certain measures are achieved, generally related to the volume of product purchased from the Company. These rebates are recorded as a reduction of the related price of the product, which reduces the amount of revenue recorded. Throughout the year, the amount of rebates is estimated based on the expected level of purchases to be made by customers that participate in the rebate programs. These estimates are periodically revised to reflect rebates earned by customers based on actual purchases made.

Cooperative Advertising and Marketing Programs

The Company participates in cooperative advertising and marketing programs (“co-op”) with its vendors. Co-op funds are provided to the Company generally based on the volume of purchases made with vendors that offer such programs. A portion of the funds received must be used for specific advertising and marketing expenditures incurred by the Company or its customers. The co-op funds received by the Company from its vendors are accounted for in accordance with the accounting standards related to accounting for cash consideration received from a vendor, which requires that the Company record the funds received as a reduction of cost of sales or as an offset to specific costs incurred in selling the vendor’s products. The co-op funds that are provided to the Company’s customers are accounted for in accordance with authoritative guidance related to accounting for cash consideration given by a vendor to a customer, which requires that the Company record the funds paid as a reduction of revenue since no separate identifiable benefit is received by the Company.

Income Taxes

The Company accounts for its income taxes in accordance with FASB authoritative guidance. The accounting standard requires the use of the asset and liability method of accounting for deferred income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes, at the applicable enacted tax rates. The Company provides a valuation allowance against its deferred tax assets when the future realizability of the assets is no longer considered to be more likely than not.

The Company accounts for uncertain tax positions in accordance with FASB authoritative guidance. The application of income tax law is inherently complex. As such, the Company is required to make certain assumptions and judgments regarding its income tax positions and the likelihood whether such tax positions would be sustained if challenged. Interest and penalties related to uncertain tax provisions are recorded as a component of the provision for income taxes. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in the Company’s assumptions and judgments can materially affect amounts recognized in the Company’s consolidated balance sheets and statement of operations.

Recently Issued Accounting Pronouncements

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to Accounting Standards Codification Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, (ii) disclose separately the reasons for any transfers in and out of Level 3, and (iii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. The Company adopted this guidance in full beginning with the interim period ended April 3, 2010, except for the gross presentation of Level 3 rollforward information which is required for reporting periods beginning after December 15, 2010 and interim reporting periods within those years.

3. Acquisitions:

Acquisition of Holdings

On May 28, 2010, pursuant to the Merger and in exchange for an aggregate purchase price of $1,287.5 million in cash, less the amount of the Company’s funded indebtedness, transaction expenses, aggregate redemption payments with respect to Holdings outstanding preferred stock, certain holdback amounts plus the amount of estimated cash, plus or minus certain working capital adjustments, Merger Sub merged with and into Holdings. In connection with the Merger, Holdings existing redeemable preferred stock was redeemed and each holder of shares of Holdings common stock received a portion of the merger consideration equal to $596.65 per share. To the extent that any existing holder of options or warrants to acquire shares of Holdings common stock

did not exercise such options or warrants prior to the effective time of the Merger, such holder was paid an amount in cash equal to $596.65 per share consideration less the exercise price of such option or warrant in complete satisfaction of the option or warrant. Holdings continued as the surviving corporation with Accelerate Holdings Corp. as its sole stockholder.

In connection with the Merger, the following transactions occurred:

•

TPG Partners V, L.P. and TPG Partners VI, L.P. (collectively “TPG” or the “Sponsor”) and certain co-investors contributed $675.4 million through the purchase of common stock in Holdings indirect parent company (the “Equity Contributions”);

•

ATDI amended and restated its senior secured asset-based revolving credit facility, which now provides for revolving credit financing of up to $450.0 million, subject to borrowing base availability (as subsequently amended, the “ABL Facility”), and under which there was $185.0 million of outstanding loans on the closing date. The ABL facility matures on November 28, 2014;

•

ATDI issued $250.0 million in aggregate principal amount at maturity of 9.750% senior secured notes due June 1, 2017 (“Senior Secured Notes”), which notes were offered at a discount from their principal amount at maturity and generated gross proceeds (without taking into account the initial purchasers’ discount and other transaction fees and expenses) of approximately $246.9 million;

•

ATDI issued $200.0 million in aggregate principal amount of 11.50% senior subordinated notes due June 1, 2018 (“Senior Subordinated Notes”);

•

Holdings redeemed all of its outstanding redeemable preferred stock for $30.1 million, which includes $10.1 million of accrued and unpaid dividends;

•

Holdings repurchased and cancelled all of its outstanding 13% Senior Discount Notes due 2013 (“Discount Notes”) for $47.0 million, which includes a tender premium of $0.9 million plus accrued and unpaid interest of $0.9 million;

•

ATDI repurchased and cancelled all of its outstanding 10 3/4% Senior Notes due 2013 (“2013 Notes”) for $157.7 million, which includes a tender premium of $5.1 million plus accrued and unpaid interest of $2.6 million;

•

ATDI repurchased and cancelled all of its outstanding Floating Rate Notes due 2012 for $142.0 million, which includes a tender premium of $0.6 million plus accrued and unpaid interest of $1.4 million;

•

The Company paid $2.8 million to terminate its interest rate swap agreements;

•

Fees of $25.0 million were paid in connection with the ABL Facility and the issuance of the Senior Secured Notes and Senior Subordinated Notes. These fees are recorded as assets in the Successor’s balance sheet and are being amortized over the life of the respective debt;

•

Seller transaction fees of $20.0 million were paid, all of which were accrued by the Predecessor;

•

Transaction bonuses of $2.8 million were paid, all of which were accrued by the Predecessor; and

•

Payment of seller fees on behalf of the Buyer presented in the consolidated statements of cash flows represents ATDI’s payment of seller transaction fees and transaction bonuses less an offsetting reimbursement for these costs by the Buyer.

The net proceeds from the Equity Contributions, the notes issued, and the borrowings under the ABL Facility were used to effect the Merger, to repay certain of the Company’s existing debt as described above and to pay related fees and expenses and other amounts payable under the Merger Agreement.

The fair value of consideration transferred was as follows:


In thousands
Aggregate purchase price	$	1,287,500
Redemption of Funded Indebtedness		(529,176	)
Redemption of Preferred Stock		(30,102	)
Termination of Interest Rate Swaps		(2,804	)
Transaction fees		(66,234	)
Holdback amount		(13,000	)
Cash on hand		7,273
Working capital adjustments		(7,000	)

Total Fair Value of Consideration Paid	$	646,457

The Acquisition was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of Acquisition. The allocation of the purchase price is as follows:


In thousands	May 28, 2010
Cash	$	12,242
Restricted cash		9,750
Accounts receivable		207,561
Inventory		485,448
Other current assets		20,489
Property and equipment		91,150
Intangible assets		781,324
Other assets		48,100

Total assets acquired		1,656,064
Debt		612,638
Accounts payable		422,245
Accrued and other liabilities		108,456
Deferred income taxes		296,549

Total liabilities assumed		1,439,888
Net assets acquired		216,176
Goodwill		430,281

Purchase price allocation	$	646,457

Cash and cash equivalents, accounts receivable and accounts payable were stated at their historical carrying values, which approximate their fair value, given the short-term nature of these assets and liabilities. Inventories were recorded at fair value, based on computations which considered many factors, including the estimated selling price of the inventory, the cost to dispose of the inventory, as well as the replacement cost of the inventory, where applicable.

The Company recorded intangible assets based on their estimated fair value and consisted of the following:


In thousands	Estimated Useful Life	Estimated Fair Value
Customer list	19 years	$	527,898
Tradenames—Infinite	Indefinite		249,893
Tradenames—Finite	1 - 5 years		3,168
Noncompete agreement	2 years		365

Total		$	781,324

The Company has allocated $249.9 million to tradenames related to ATDI. Management considered many factors in the determination that it will account for the asset as an indefinite-lived intangible assets, including the current market leadership position of the name as well as the recognition in the industry. Therefore, in accordance with current accounting guidance, the indefinite-lived intangible asset will not be amortized, but instead tested for impairment at least annually (more frequently if certain indicators are present).

Transaction Expenses

The consolidated statements of operations for the seven months ended January 1, 2011 for the Successor and the five months ended May 28, 2010 for the Predecessor includes the following transaction expenses relating to the Acquisition:


	Successor		Predecessor
In thousands	Seven Months Ended January 1, 2011		Five Months Ended May 28, 2010
Seller transaction fees	$	—	$	20,004
Accrued transaction bonuses		—		2,800
Suspended public offering expenses		—		2,410
Bond premiums		—		6,519
Bridge loan fee		—		10,875
Buyer transaction fees		1,124		—

Total	$	1,124	$	42,608

The following unaudited pro forma supplementary data for the five months ended May 28, 2010 and the fiscal years ended January 2, 2010 and January 3, 2009 give effect to the Acquisition as if it had occurred on December 30, 2007 (the first day of the Company’s 2008 fiscal year).


	Pro Forma
	Five Months Ended			Fiscal Year Ended
In thousands	May 28, 2010			January 2, 2010			January 3, 2009
Net sales	$	934,925		$	2,171,787		$	1,960,844
Net (loss) income		(17,509	)		(23,506	)		(18,927	)

The pro forma supplementary data is provided for informational purposes only and should not be construed to be indicative of the Company’s results of operations had the Acquisition been consummated on the date assumed and does not project the Company’s results of operations for any future date.

2010 Acquisitions

On December 10, 2010, the Company completed the purchase of substantially all the assets of Lisac’s of Washington, Inc. (“Lisac’s”) pursuant to an Asset Purchase Agreement dated as of December 10, 2010. Lisac’s operated tire distribution centers in Portland, Oregon and Spokane, Washington, serving over 1,400 customers in the area.

On December 10, 2010, the Company completed the purchase of 100% of the capital stock of Tire Wholesalers, Inc. (“Tire Wholesalers”) pursuant to a Stock Purchase Agreement dated as of December 10, 2010. Tire Wholesalers operated one distribution center in Kent, Washington, which serviced over 750 customers in the area.

The aggregate purchase price of these acquisitions was approximately $11 million, which was funded through the Company’s ABL Facility. The purchase of Lisac’s and Tire Wholesalers significantly expanded the Company’s position in the Northwestern United States.

2008 Acquisitions

On October 8, 2008, the Company completed the purchase of certain assets and the assumption of certain liabilities of Remington Tire Distributors, Inc., which does business under the name Gray’s Wholesale Tire Distributors (“Gray’s Tire”) pursuant to the terms of an Asset Purchase Agreement dated as of October 8, 2008. The aggregate purchase price was $6.6 million, which was funded through borrowings under the Company’s revolving credit facility. This acquisition expanded the Company’s presence in Texas and Oklahoma and complemented the Company’s existing distribution centers located within the states of Texas and Oklahoma.

On December 18, 2008, the Company completed the purchase of all the issued and outstanding capital stock of Am-Pac Tire Dist., Inc. (“Am-Pac”) pursuant to the terms of a Stock Purchase Agreement dated December 18, 2008. The aggregate purchase price of the Am-Pac acquisition was approximately $74.7 million, consisting of $71.1 million in cash and $3.6 million in direct acquisition costs. The Company financed the purchase through borrowings under its revolving credit facility. During May 2010, the Company made a claim against the amount of purchase price held in escrow in the amount of $0.3 million and the remaining escrow balance of $9.5 million was released to the sellers, which resulted in an increase to goodwill of $9.5 million. This acquisition significantly strengthened the Company’s presence in markets it served and allowed the Company to expand its operations into St. Louis, Missouri and western Texas.

As part of the acquisition of Am-Pac, the Company acquired certain retail stores and operations. As the Company’s core business does not relate to the operations of retail stores and as management believed that by operating retail stores it would be in direct competition with its customers, the Company decided that it would divest of these retail stores. As a result, during fiscal 2009, the Company sold 36 of the 37 acquired retail stores and shutdown the remaining acquired store.

4. Inventories:

Inventories consist primarily of automotive tires, custom wheels, tire supplies and tools and are valued at the lower of cost, determined on the first-in, first-out (FIFO) method, or fair market value. 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. A majority of the Company’s tire vendors allow for the return of tire products, subject to certain limitations, specified in supply arrangements with the vendors. In addition, the Company’s inventory is collateral under the ABL Facility. See Note 8 for further information.

As a result of the Acquisition, the carrying value of inventory was increased by $58.8 million to adjust to estimated fair value in accordance with the accounting guidance for business combinations. The step up in inventory value was amortized into cost of goods sold in the accompanying consolidated statements of operations over the period of the Company’s normal inventory turns, which approximated two months.

During the quarter ended October 2, 2010, the Company made the decision to discontinue selling certain products within its equipment product offering. As a result of the decision, the Company recognized a $1.0 million impairment charge, which is included in cost of goods sold in the accompanying consolidated statements of operations, related to the estimated write-down of related inventory to their fair market values as the Company moves to dispose of the residual equipment in these product offerings. Sales related to these products accounted for 1.7% of our combined net sales during fiscal 2010.

5. Property and Equipment:

The following table represents the major classes of property and equipment at January 1, 2011 for the Successor and January 2, 2010 for the Predecessor:


	Successor			Predecessor
In thousands	January 1, 2011			January 2, 2010
Land	$	5,538		$	7,547
Buildings and leasehold improvements		21,357			32,999
Machinery and equipment		8,470			11,344
Furniture and fixtures		22,571			22,354
Software		35,567			37,947
Vehicles and other		3,957			2,592

Total property and equipment		97,460			114,783
Less—Accumulated depreciation		(7,907	)		(53,008	)

Property and equipment, net	$	89,553		$	61,775

Depreciation expense was $8.0 million for the seven months ended January 1, 2011 for the Successor. The Predecessor recorded depreciation expense of $7.0 million for the five months ended May 28, 2010, $14.0 million for the fiscal year ended January 2, 2010, and $11.7 million for the fiscal year ended January 3, 2009. Depreciation expense is classified in selling, general and administrative expense in the accompanying consolidated statements of operations.

Included in the above table within Land and Buildings and leasehold improvements are assets under capital leases related to the sale and leaseback of three of the Company’s owned facilities (see Note 8). The net book value of these assets at January 1, 2011 for the Successor and January 2, 2010 for the Predecessor was $10.2 million and $10.7 million, respectively. Accumulated depreciation was $0.2 million and $3.4 million for the respective periods. Depreciation expense was $0.2 million for the seven months ended January 1, 2011. The Predecessor recorded depreciation expense of $0.3 million for the five months ended May 28, 2010, $0.8 million for fiscal year ended January 2, 2010 and $0.7 million for fiscal year ended January 3, 2009.

In connection with the Merger, the Company recorded a step-up of $28.6 million in the carrying value of its property and equipment to fair value. The following table sets forth the step-up in the carrying value by category as well as the estimated useful lives for the Successor and Predecessor periods:


(dollars in thousands)	Successor Estimated Useful Lives (years)	Predecessor Estimated Useful Lives (years)	Step-up to FMV at May 28, 2010
Land	N/A	N/A	$	220
Buildings	25 – 31	25 – 40		(2,351	)
Leasehold improvements	9	7		3,347
Machinery and equipment	2 – 7	3 – 4		2,404
Furniture and fixtures	8	7		10,886
Software	3 – 5	3		12,574
Vehicles and other	4 – 6	3		1,510

Total			$	28,590

The change in fair value of select assets recorded at the acquisition date was based upon management’s assessment of the acquired assets’ condition, as well as an evaluation of the current market value for such assets. The increase in fair value primarily consisted of changes in internal use software and furniture and fixtures, approximately $10.9 million and $12.6 million, respectively. The increase from net book value to fair value of these assets types was primarily the result of increased flexibility and adaptability in their respective uses, including implementation of common software and warehousing platforms across our business, as well as our evaluation of current market conditions. In addition, the Company also considered the length of time over which the economic benefit of these assets is expected to be realized and adjusted the useful life of such assets accordingly as of the valuation date.

6. Goodwill:

The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired. Goodwill is tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset. As of January 1, 2011 and January 2, 2010, the change in the carrying amount of goodwill is as follows:


	Successor		Predecessor
In thousands	January 1, 2011		May 28, 2010			January 2, 2010
Beginning balance	$	—	$	375,734		$	369,961
Purchase accounting adjustments		—		4,275			5,773
Elimination of Predecessor goodwill		—		(380,009	)		—
Acquisition of Holdings		430,281		—			—
Acquisitions		784		—			—

Ending balance	$	431,065	$	—		$	375,734

As of January 1, 2011, the Company has recorded goodwill of $431.1 million, of which approximately $21 million of net goodwill is deductible for income tax purposes in future periods. The Acquisition of Holdings was accounted for under the accounting standard for business combinations. Accordingly, the purchase price of the acquisition has been allocated to the Company’s assets and liabilities based upon their estimated fair values at the acquisition date. During the fourth quarter, the Company identified an income tax item that was not previously identified as part of the initial purchase price allocation, specifically, an income tax benefit related to option cancellation payments of vested stock option awards previously granted to certain members of management. As a

result, the Company reduced deferred tax liability and goodwill by approximately $18 million. The Company evaluated this item in relation to the prior interim periods presented and determined that this balance sheet adjustment is immaterial to the Company’s financial statements. On December 10, 2010, the Company completed the purchase of substantially all the assets of Lisac’s and 100% of the capital stock of Tire Wholesalers. As a result, the Company recorded $0.8 million of goodwill in the fourth quarter of 2010. See Note 3 for additional information.

On December 18, 2008, the Company completed the purchase of all of the issued and outstanding capital stock Am-Pac pursuant to the terms of a Stock Purchase Agreement dated December 18, 2008. During May 2010, the Company made a claim against the amount of purchase price held in escrow in the amount of $0.3 million and the remaining escrow balance of $9.5 million was released to the sellers, which resulted in an increase to goodwill of $9.5 million.

During the first quarter of 2010, the Predecessor recorded an out of period adjustment to its financial statements to correct an error related to the final adjustments recorded to goodwill upon the sale of its retail stores in fiscal 2009. Upon review of these adjustments, the Predecessor determined that $4.9 million previously recorded as goodwill should have been recorded as customer list intangibles at the time of the sale of the retail stores. Consequently, the Predecessor has recorded an out-of-period adjustment related to the amortization of the customer list intangible and a non-cash charge related to a single retail store that was shut-down. In aggregate, the out-of-period non-cash charge included in the first quarter of 2010 approximates $0.4 million and is included within selling, general and administrative expenses within the accompanying consolidated statements of operations. The Predecessor evaluated these errors in relation to the periods in which they originated, the current period in which they were corrected, and the estimated income for the full fiscal year, including the trend of earnings. Management believes these errors are immaterial to the consolidated annual financial statements.

7. Intangible Assets:

The following table sets forth the gross amount and accumulated amortization of the Company’s intangible assets at January 1, 2011 for the Successor and January 2, 2010 for the Predecessor:

Successor

Predecessor

January 1, 2011

January 2, 2010

American Tire Distributors Holdings, Inc. - FORM 10-K - March 15, 2011

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