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EX-4.10 - EX-4.10 - ATD Corpd738352dex410.htm
EX-23.7 - EX-23.7 - ATD Corpd738352dex237.htm
EX-23.9 - EX-23.9 - ATD Corpd738352dex239.htm
EX-10.3 - EX-10.3 - ATD Corpd738352dex103.htm
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EX-23.5 - EX-23.5 - ATD Corpd738352dex235.htm
EX-3.1 - EX-3.1 - ATD Corpd738352dex31.htm
EX-23.2 - EX-23.2 - ATD Corpd738352dex232.htm
EX-3.2 - EX-3.2 - ATD Corpd738352dex32.htm
EX-4.1 - EX-4.1 - ATD Corpd738352dex41.htm
EX-23.3 - EX-23.3 - ATD Corpd738352dex233.htm
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EX-10.23 - EX-10.23 - ATD Corpd738352dex1023.htm

As filed with the Securities and Exchange Commission on August 18, 2014

Registration No. 333-196816

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ATD CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   5013   27-2763683
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer Identification Number)

12200 Herbert Wayne Court

Suite 150

Huntersville, NC 28078

(704) 992-2000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

William E. Berry

President and Chief Executive Officer

12200 Herbert Wayne Court

Suite 150

Huntersville, NC 28078

(704) 992-2000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Craig E. Marcus

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

(617) 951-7000

 

J. Michael Gaither

Executive Vice President, General Counsel and Secretary

12200 Herbert Wayne Court

Suite 150

Huntersville, NC 28078

(704) 992-2000

 

William V. Fogg

D. Scott Bennett

Cravath, Swaine & Moore LLP

Worldwide Plaza

825 Eighth Avenue

New York, New York 10019

(212) 474-1131

 

 

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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.

 

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

(Do not check if a

smaller reporting company)

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated August 18, 2014

PROSPECTUS

             Shares

 

LOGO

ATD Corporation

Common Stock

 

 

This is ATD’s initial public offering. We are selling                  shares of our common stock. The selling stockholders identified are selling                  shares of our common stock. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders.

We expect the public offering price to be between $         and $         per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the New York Stock Exchange under the symbol “ATD.”

After the completion of this offering, investment funds affiliated with TPG Global, LLC will continue to own a majority of the voting power of our outstanding shares of common stock. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. See “Principal and Selling Stockholders.”

Investing in the common stock involves risks that are described in the ‘‘Risk  Factors’’ section beginning on page 18 of this prospectus.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $           $     

Underwriting discount

   $           $     

Proceeds, before expenses, to us(1)

   $           $     

Proceeds, before expenses, to the selling stockholders

   $           $     

 

  (1) We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting (Conflicts of Interest).”

The underwriters may also exercise their option to purchase up to an additional                 shares from us and the selling stockholders at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2014.

 

 

 

BofA Merrill Lynch   Deutsche Bank Securities   Goldman, Sachs & Co.

 

Barclays   J.P. Morgan   UBS Investment Bank

 

 

 

TPG Capital BD, LLC   RBC Capital Markets   SunTrust Robinson Humphrey

 

 

The date of this prospectus is                     , 2014.


LOGO


TABLE OF CONTENTS

 

Prospectus Summary

     1   

Risk Factors

     18   

Cautionary Note Regarding Forward-Looking Statements

     36   

Use of Proceeds

     38   

Dividend Policy

     39   

Capitalization

     40   

Dilution

     41   

Selected Consolidated Financial and Other Data

     43   

Unaudited Pro Forma Combined Condensed Financial Information

     48   

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

     63   

Business

     94   

Management

     107   

Executive Compensation

     115   

Certain Relationships and Related Party Transactions

     136   

Principal and Selling Stockholders

     138   

Description of Indebtedness

     140   

Description of Capital Stock

     145   

Shares Eligible for Future Sale

     149   

Material United States Federal Income Tax Considerations for Non-U.S. Holders

     151   

Underwriting (Conflicts of Interest)

     156   

Legal Matters

     164   

Experts

     164   

Where You Can Find More Information

     165   

Index to Consolidated Financial Statements and Financial Statement Schedules

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize to be distributed to you. Neither we nor the underwriters have authorized anyone to provide you with different information, and neither we nor the underwriters take responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

 

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Industry and Market Data

This prospectus includes market data and forecasts with respect to the replacement tire industry. Although we are responsible for all of the disclosure contained in this prospectus, in some cases we rely on and refer to market data that was obtained from publicly available information and industry publications and surveys, including Modern Tire Dealer, Tire Review and Rubber Manufacturers Association (“RMA”) data, that we believe to be reliable. Other industry and market data included in this prospectus are from internal analyses based upon data available from known sources or other proprietary research and analysis. We believe this data to be accurate as of the date of this prospectus. However, this information may prove to be inaccurate because this information cannot always be verified with complete certainty due to the limitations on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market and other similar industry data included in this prospectus, and estimates and beliefs based on that data, may not be reliable.

Trademarks and Service Marks

We own or have rights to trademarks and service marks that we use in connection with the operation of our business. 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: HERCULES® tires, IRONMAN® tires, CAPITOL® tires, NEGOTIATOR® tires, REGUL® tires, DYNATRAC® tires, CRUISERALLOY® custom wheels, DRIFZ® custom wheels, ICW® custom wheels, PACER® custom wheels and O.E. PERFORMANCE® custom wheels. Our other trademarks include: AMERICAN TIRE DISTRIBUTORS®, ATD®, TRICAN TIRE DISTRIBUTORS INC®, REGIONAL TIRE DISTRIBUTORS®, ATDONLINE®, ATDSERVICEBAY®, TIREBUYER.COM® and TIRE PROS®.

All other trademarks or service marks appearing in this prospectus that are not identified as marks owned by us are the property of their respective owners.

Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may be listed without the ®, SM and TM symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

 

ii


PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors” and our financial statements and the related notes, before deciding to buy shares of our common stock. Except as otherwise indicated herein or as the context otherwise requires, references in this prospectus to “ATD Corporation,” “the Company,” “we,” “our,” and “us” refer collectively to ATD Corporation and its consolidated subsidiaries for the period, commencing on May 29, 2010, and to American Tire Distributors Holdings, Inc. and its consolidated subsidiaries for the period prior to May 29, 2010. The consolidated financial data for 2010 are presented in this prospectus for two periods: January 3, 2010 through May 28, 2010, which represents the period immediately preceding the Merger (as defined below), and May 29, 2010 through January 1, 2011, which represents the period following the Merger. Prior to the Merger, ATD Corporation had no operations or activities other than transaction costs related to the Merger. See “—Summary Historical Consolidated Financial Information” for more information. Unless otherwise noted, all information in this prospectus assumes no exercise of the underwriters’ option to purchase additional shares and gives effect to the one-for-         reverse split of our outstanding shares of common stock that we effected on                     , 2014.

Our Company

We are the largest distributor of replacement tires in North America based on dollar amount of wholesale sales and number of warehouses. We provide a wide range of products and value-added services to customers in each of the key market channels to enable tire retailers to more effectively service and grow sales to consumers. Through our network of more than 140 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing more than 40,000 stock-keeping units (“SKUs”), to approximately 80,000 customers. In 2013, we distributed more than 40 million replacement tires after giving effect to recent acquisitions. We estimate that our share of the replacement passenger and light truck tire market in 2013, after giving effect to our recently completed acquisitions, would have been approximately 14% in the United States, up from approximately 1% in 1996, and approximately 21% in Canada.

We serve a highly diversified customer base across multiple channels, comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We have a significant market presence in a number of these key market channels and we believe that we are the only replacement tire distributor in North America that services each of these key market channels. During fiscal 2013, our largest customer and top ten customers accounted for 3.1% and 10.9%, respectively, of our net sales. We believe we are a top supplier to many of our customers and have maintained relationships with our top 20 customers that exceed a decade on average.

We believe we distribute one of the broadest product offerings in our industry, supplying our customers with nine of 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 Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers, and through our acquisition of The Hercules Tire and Rubber Company (“Hercules”) we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition, we sell custom wheels and accessories and related tire supplies and tools. In fiscal 2013, tire sales accounted for 97.4% of our net sales, with sales of passenger and light truck tires accounting for 82.3% of our net sales. Tire supplies, tools and custom wheels and accessories represented approximately 2.6% of our net sales. We believe that our large and diverse product offering allows us to penetrate the replacement tire market across a broad range of price points.

 

 

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Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand organically in existing markets as well as in new geographic areas. We also expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. In addition, we are investing in technology and each sales channel to fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above-market growth in all market environments and to continue to enhance our profitability and cash flows.

Geographic Footprint

 

LOGO

In fiscal 2009, our net income was $4.9 million and in fiscal 2013 our net loss was $6.4 million. This decrease in net income was primarily the result of increased interest expense related to our acquisition by investment funds affiliated with TPG in 2010, as well as interest associated with our eight acquisitions from 2010 through 2013, and non-cash amortization expense related to our intangible assets. From fiscal 2009 to fiscal 2013, our net sales increased from $2.2 billion to $3.8 billion, reflecting a compound annual growth rate of 15.3%, and Adjusted EBITDA increased from $101.0 million to $195.5 million, reflecting a compound annual growth rate of 17.9%. See “Selected Consolidated Financial and Other Data” for a presentation of net sales and Adjusted EBITDA data for each of our fiscal years in this period. Over the same period, our unit volume grew from approximately 19.5 million to approximately 26.0 million while, according to the RMA, unit volume in the North American replacement tire market grew from approximately 238.9 million to approximately 246.0 million. Our superior growth was driven by our organic initiatives and our acquisitions.

For the six months ended July 5, 2014 and the year ended December 28, 2013, our net sales were $2.6 billion and $5.1 billion, respectively, our net loss from continuing operations was $77.6 million and $47.8 million, respectively, and our Adjusted EBITDA was $92.4 million and $251.1 million, respectively, in each case including the pro forma effects of our recent acquisitions. Additional information regarding Adjusted EBITDA

 

 

2


and pro forma Adjusted EBITDA, including a reconciliation of Adjusted EBITDA to income (loss) from continuing operations and a reconciliation of pro forma Adjusted EBITDA to pro forma net income (loss) from continuing operations, is included in “—Summary Consolidated Financial and Other Data.” Additional information regarding the pro forma effects of our recent acquisitions is included in “—Summary Consolidated Financial and Other Data” and “Unaudited Pro Forma Combined Condensed Financial Information.”

We have a substantial amount of debt, which requires significant interest and principal payments. See “Risk Factors—As of July 5, 2014, on a pro forma basis after giving effect to this offering and the application of the net proceeds therefrom, we would have had total indebtedness of approximately $             million, and our substantial indebtedness could adversely affect our financial condition and growth strategy.”

Our Industry

According to Modern Tire Dealer, the U.S. replacement tire market generated annual retail sales of approximately $37.3 billion in 2013. Passenger tires, medium truck tires and light truck tires accounted for 66.9%, 16.9% and 13.1%, respectively, of the total U.S. market. Farm, specialty and other types of tires accounted for the remaining 3.1% of the total U.S. market. The Canadian replacement tire market generated annual retail sales of approximately $3.7 billion in 2012. Passenger and light truck tires accounted for 53% while commercial tires accounted for 20% of the total Canadian replacement tire market. Farm, specialty and other types of tires accounted for the remaining 27% of the total Canadian replacement tire market. According to a Tire Review survey conducted in 2013, U.S. tire dealers buy 55.4% of their consumer tires from wholesale distributors like us and 27.7% direct from tire manufacturers, with the remaining volume coming from various other sources.

In the United States and Canada, 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 and web-based marketers. Between 1990 and 2013, independent tire retailers and automotive dealerships have enjoyed the largest increase in U.S. replacement tire market share, according to Modern Tire Dealer, moving from 54% to 60.5% and 1% to 7.5% of the market, respectively. In 2012, replacement tire sales to independent tire retailers and automotive dealerships represented approximately 44% and 18%, respectively, of Canadian replacement tire market share. Mass merchandisers, warehouse clubs, manufacturer-owned stores and web-based marketers comprise the remaining market share in both the United States and Canada.

Since 2000, the number of specific tire sizes in the market has increased by 61%. One driver of this increase was above-market growth in high-performance tires. The increase in the number of tire sizes, coupled with the large number of brands in the market place, has driven SKU proliferation in the replacement tire market. As a result of this SKU proliferation and due to their capital and physical space constraints, many tire retailers are unable to carry sufficient inventory to meet the demands of their customers. This trend has helped increase the need for distributors in the replacement tire market.

The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are subject to changes in consumer confidence and economic conditions. As a result, tire consumers may opt to temporarily defer replacement tire purchases or purchase less costly brands during challenging economic periods when macroeconomic factors such as unemployment, high fuel costs and weakness in the housing market impact their financial health.

From 1955 through 2013, U.S. replacement tire unit shipments increased by an average of approximately 3% per year. We believe that we are experiencing the beginning of a recovery after a prolonged downturn, which began in 2008 for the replacement tire market. Replacement tire unit shipments were up 4.4% in the United States and 0.7% in Canada in 2013 as compared to 2012, as a rebound in the housing market, a decline in unemployment rates and increases in vehicle sales and vehicle miles driven impacted the U.S. and Canadian replacement tire markets favorably. The RMA projects that replacement tire shipments will increase by approximately 2% in the United States in 2014 as compared to 2013, as demand drivers continue to strengthen.

 

 

3


Going forward, we believe that long-term growth in the U.S. and Canadian replacement tire markets 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. and Canadian population continues to grow;

 

    increases in the number of replacement tire SKUs;

 

    growth of the high-performance tire market; and

 

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

Our Competitive Strengths

We believe the following key strengths have enabled us to become the largest distributor of replacement tires in North America and position us to achieve future revenue growth in excess of the long-term growth rates of the U.S. and Canadian replacement tire industry:

Leading Position in a Large and Highly Fragmented Marketplace. We are the largest distributor of replacement tires in North America with an estimated market share in 2013 of approximately 14%, after giving effect to our recently completed acquisitions, in a $37.3 billion market in the United States. Our estimated market share in 2013 of the replacement passenger and light truck tire market in Canada was approximately 21%, after giving effect to our recently completed acquisitions. 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; 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 and presence in each of the key market channels, 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.

Scale Advantage from Extensive and Efficient Distribution Network. We believe we have the largest independent replacement tire distribution network in North America with more than 140 distribution centers (excluding distribution centers acquired in our recent acquisitions that are expected to be closed as part of the integration process) and approximately 1,000 delivery vehicles. Our distribution footprint services geographic regions in the United States that represented more than 90% of the replacement tire market for passenger and light truck tires in 2013, and we believe our geographic coverage in Canada is also very extensive. Our extensive distribution footprint, combined with 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 distribution systems are integrated with our proprietary business-to-business ATDOnline® order fulfillment system that captures more than 65% of our orders electronically, and our Oracle enterprise resource planning (“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.

 

 

4


Broad Product Offering from Diverse Supplier Base. We believe we offer the most comprehensive selection of passenger and light truck tires in the industry through a diverse group of suppliers. We supply nine of the top ten leading passenger and light truck 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 Cooper, 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 imported products to the faster-growing high- performance category. Through our acquisition of Hercules, we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. 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 increased sales among existing customers, attracts new customers and increases customer retention.

Broad Range of Value-Added Services. We provide a wide range of services that 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 administration of tire manufacturer affiliate programs and credit, training and access to consumer market data, which enable our tire retailer customers to better service their individual markets. We provide our U.S. customers with convenient 24/7 access to our extensive product offerings through our proprietary business-to-business web portal, ATDOnline®. Our online services also include TireBuyer.com®, which allows our U.S. independent tire retailers the ability to participate in the Internet marketing of tires to consumers. We also provide select, qualified U.S. 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. We believe our value-added services as well as the integration between our infrastructure and our customers’ operations enable us to maintain high rates of customer retention and build strong customer loyalty.

Diversified Customer Base and Longstanding Customer Relationships Across Multiple Channels. We serve a highly diversified customer base in each of the key market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We believe we are the only distributor of replacement tires in North America that services each of these key market channels. Our business is diversified across the key market channels and reflects the evolving complexity of the North American replacement tire market, with independent tire retailers accounting for 76% of our net sales in 2013 as compared to 85% of our net sales in 2009. We believe we are a top supplier to many of our customers and maintain relationships with our top 20 customers that exceed a decade on average. 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 through a combination of organic initiatives and acquisitions. Over the ten-year period from fiscal 2003 to fiscal 2013, our net sales grew at a compound annual rate of 13.2%, reflecting our strong revenue base, evolving business mix, scalable operating model and successful growth strategies. For information regarding our net sales in each fiscal year during this period, see the chart appearing in “Business—Our Competitive Strengths” elsewhere in this prospectus. In addition, we believe the low capital intensity of our business combined with the efficient management of our working capital, due in part to our advanced inventory management systems in the United States that we are also in the process of implementing in Canada, and close vendor relationships, will enable us to generate strong cash flows. In addition, as a result of our presence in each major channel within the replacement tire market and based upon our ability to rationalize our operating costs, as necessary, we experienced only moderate margin contraction during the recent economic downturn.

Experienced Management Team Supported by Strong Equity Sponsorship. Our senior management team, led by our President and Chief Executive Officer William E. Berry, has an average of over 20 years of experience in the replacement tire distribution industry. Although we have experienced net losses for the past three years, management has implemented successful initiatives in a leveraged environment, including the

 

 

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execution of a disciplined acquisition strategy, which has contributed to our gross profit expansion and above-market net sales growth during that period. In addition, we have reduced costs through the integration of operating systems and introduction of standard operating practices, particularly in the United States, 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.

Our Business Strategy

Our objective is to further expand our position as the largest distributor of replacement tires in North America and establish our company as the leading distributor in each of the key market channels that we serve, while continuing to provide our customers with a range of value-added services such as frequent and timely delivery of inventory, the broadest and deepest range of products, and other business support services. We intend to accomplish this objective, drive above-market growth and further enhance our profitability and cash flows by executing on the following key operating strategies:

Grow Organically in Excess of Market. It is at the core of our strategy to grow our profits and cash flows organically through further penetration of all of our key market channels, through greenfield expansion, through further penetration of our Hercules® brand, the number one private brand in North America in 2013 based on unit sales, through further establishment and expansion of TireBuyer.com®, and through further expansion and development of our value-added services.

Expand Penetration in Each of the Key Market Channels. We have a significant presence in each of the key market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We regularly seek opportunities to grow our market share in each channel by customizing our sales strategies to suit the particular needs of that channel, and are focused on training and deploying sales personnel to help build our sales, particularly in the faster-growing automotive dealership channel, and strengthen and expand our relationships with retailers. We have observed an increase in sales through web-based marketers and seek to grow our presence in that channel through our Internet site, TireBuyer.com®.

Continue Greenfield Expansion in Existing and New Geographic Markets. While we already have the largest distribution footprint in the North American replacement tire market, servicing geographic regions in the United States that represented more than 90% of the replacement tire market for passenger and light truck tires in 2013 and with geographic coverage in Canada that we believe is also very extensive, we believe there are numerous further underserved areas in both our existing geographic markets as well as in areas not currently serviced by us that are favorably situated to support and grow additional distribution centers. Since 2010, we have successfully opened 23 greenfield distribution centers, and we intend to continue to expand our existing footprint in the United States and Canada in areas where we see opportunities.

Expand our Hercules® Brand. Through our recently completed acquisition of Hercules, we now market the proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. We believe our expansive distribution network in the United States and Canada, combined with our greater access to capital, will allow us to both expand product availability and increase market share of the Hercules® brand. Further, we expect that Hercules’ multi-decade Asian sourcing experience, including its 250,000 square foot warehouse in northern China, will enhance our supply and distribution capabilities.

Grow TireBuyer.com® into a Premier Internet Tire Provider. TireBuyer.com® is an Internet site that enables our U.S. independent tire retailer customers to connect with consumers. TireBuyer.com® allows our broad base of independent tire retailers to participate in a greater share of the growing Internet tire

 

 

6


market. We believe that TireBuyer.com® complements and services our participating U.S. independent tire retailers by providing them access to a sales and marketing channel previously unavailable to them. In 2012, the TireBuyer.com® site was re-launched on a newer, faster and more flexible platform, which has enhanced the overall consumer experience and resulted in increased traffic to the site.

Continue to Develop and Expand our Value-Added Services. Our Tire Pros® franchise program enables us to deliver advertising and marketing support to tire retailers operating as Tire Pros® franchisees. The Tire Pros® franchise program allows participating local tire retailers to enjoy the benefits of a national brand identity with minimal investment, while still maintaining their local identities. In return, we benefit from increasing volume penetration among, and further aligning ourselves with, our franchisees. We are focused on continuing to upgrade and improve the Tire Pros® franchise program and seek opportunities to develop similar programs in the future. In addition, individual manufacturers offer a variety of relatively complex programs for tire retailers that sell their products, providing cooperative advertising funds, volume discounts and other incentives. As part of our service to our customers, we assist them in managing the administration of these programs through dedicated staff. We believe these enhancements, combined with other aspects of our customer service, provide significant value to our customers.

Selectively Pursue Acquisitions. We expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. Over the past six years we have successfully acquired and integrated nine businesses representing, in the aggregate, over $850 million in annual revenue through 2013, and on a pro forma basis, including our recently completed acquisitions of Hercules and Terry’s Tire Town Holdings, Inc. (“Terry’s Tire”), the 2013 annual revenue of businesses acquired is over $2 billion in the aggregate. We believe our position as the largest distributor of replacement tires in North America, combined with our access to capital and our scalable platform, has allowed us to make acquisitions at very attractive post-synergy valuations.

Leverage Our Infrastructure in Existing Markets. Through infrastructure expansions over the past several years in the United States, we have developed a scalable platform with available incremental distribution capacity. Our distribution infrastructure enables us to efficiently add new customers, such as corporate accounts, and service growing channels, such as automotive dealerships, thereby increasing profitability by leveraging the utilization of our existing assets. We expect to complete the implementation of a similar platform in Canada near the beginning of 2015. 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 geographic markets, we have experienced growth in market share over time, and in markets that we have served the longest, we generally have market share well in excess of our national average.

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. For example, we operate on our Oracle ERP platform in the United States and are in the process of implementing it in Canada. We continue to evaluate and incorporate technical solutions including utilization 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 timely service, while also reducing costs. Additionally, we continue to roll out customized electronic solutions and point of sale (“POS”) system integration for our larger customers.

Maintain a Comprehensive and Deep Tire Portfolio to Meet Our Customers’ Needs. We provide a broad range of products covering a broad range of price points from entry-level imported products to faster-growing high-performance tires, through a full suite of flag, associate and proprietary brand tires. We acquired the

 

 

7


Hercules® brand in January 2014 and intend to further expand its market presence throughout North America. We intend to continue to focus on high-performance tires, given the growth in demand for such tires, while maintaining our emphasis on providing broad 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 across all channels.

Recent Developments

As part of our ongoing business strategy, we intend to expand organically in existing markets as well as enter into previously underserved markets and new geographic areas. Since the second half of 2010, we opened new distribution centers in 23 locations throughout the contiguous United States. We expect to continue to evaluate additional geographic markets during the remainder of 2014 and beyond.

On June 27, 2014, we completed the following acquisitions:

 

    Trail Tire. We acquired the wholesale distribution business of Trail Tire Distributors Ltd. (“Trail Tire”) pursuant to an Asset Purchase Agreement by and among our subsidiary, TriCan Tire Distributors (“TriCan”), and the shareholders and principals of Trail Tire. Trail Tire is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada.

 

    Extreme Wheel. We acquired the wholesale distribution business of Extreme Wheel Distributors Ltd. (“Extreme Wheel”) pursuant to an Asset Purchase Agreement by and between TriCan and the shareholder and principal of Extreme Wheel. Extreme Wheel is a wholesale distributor of wheels and related accessories in Canada.

 

    Kirks. We acquired the wholesale distribution business of Kirks Tire Ltd. (“Kirks Tire”) pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of Kirks Tire. Kirks Tire is engaged in (i) the wholesale distribution of tire, tire parts, tire accessories and related equipment and (ii) the retail sale and installation of tires, tire parts, and tire accessories and the manufacturing and sale of retread tires. We did not acquire Kirks Tire’s retail operations.

 

    RTD Edmonton. We acquired the wholesale distribution business of Regional Tire Distributors (Edmonton) Inc. (“RTD Edmonton”) pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of RTD Edmonton. RTD Edmonton is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada.

 

    RTD Calgary. We acquired the wholesale distribution business of Regional Tire Distributors (Calgary) Inc. (“RTD Calgary”) pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of RTD Calgary. RTD Calgary is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada.

Terry’s Tire. On March 28, 2014, we completed the acquisition of Terry’s Tire pursuant to a Stock Purchase Agreement between us and TTT Holdings, Inc. (“TTT Holdings”), which owned all of the capital stock of Terry’s Tire. Terry’s Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the Internet. Terry’s Tire operated ten distribution centers spanning from Virginia to Maine and in Ohio. We believe the acquisition of Terry’s Tire will enhance our market position in these areas and aligns very well with our distribution centers, especially our new distribution centers that we opened over the past two years in the Northeast and Ohio.

 

 

8


Hercules. On January 31, 2014, we completed the acquisition of Hercules Tire Holdings LLC (“Hercules Holdings”) pursuant to an Agreement and Plan of Merger, dated January 24, 2014. Hercules Holdings owns all of the capital stock of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing and selling replacement tires for passenger cars, trucks and certain off-road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. Hercules operated 15 distribution centers in the United States, six distribution centers in Canada and one warehouse in northern China. Hercules also markets the Hercules® brand, which is one of the most sought-after proprietary tire brands in the industry. We believe the acquisition of Hercules will strengthen our presence in major markets such as California, Texas and Florida in addition to increasing our presence in Canada. Additionally, Hercules’ strong logistics and sourcing capabilities, including a long-standing presence in China, will also allow us to capitalize on the growing import market, as well as provide the ability to expand the international sales of the Hercules® brand. Finally, this acquisition will allow us to be a brand marketer of the Hercules® brand, which in 2013 had a 2% market share of the passenger and light truck market in North America and a 3% market share of highway truck tires in North America.

RTD. On April 30, 2013, we completed the acquisition of Regional Tire Holdings, Inc. (“RTD Holdco”) pursuant to a Share Purchase Agreement dated as of March 22, 2013, among TriCan, ATDI, RTD Holdco and Regional Tire Distributors Inc., a 100% owned subsidiary of RTD Holdco (“RTD”). RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada.

Credit Agreement Amendment. In addition, on June 16, 2014, we amended our credit agreement relating to our senior secured term loan facility to borrow an additional $420 million on the same terms as our existing Term Loan (as defined below). The proceeds from these additional borrowings were or will be used to redeem all amounts outstanding under our Senior Secured Notes (as defined below) and pay related fees and expenses, as well as for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions.

Risk Factors

An investment in our common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock. Among these important risks are the following:

 

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

 

    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 and cash flows.

 

    The failure of our information technology systems could disrupt our business operations, which could have a material adverse effect on our business, financial condition and results of operations.

 

    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 substantial indebtedness could adversely affect our financial condition and limit our ability to pursue our growth strategy.

 

 

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    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.

 

    We face risks related to integration of our recent significant acquisitions.

 

    We may not realize the growth opportunities and cost savings synergies that we anticipated from our recent significant acquisitions.

 

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

 

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

 

    We regularly seek to grow our business through acquisitions, and our inability to identify desirable acquisition targets or integrate such acquisitions, including our recent significant acquisitions, could have a material adverse effect on us.

 

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

For additional information about the risks we face, please see the section of this prospectus captioned “Risk Factors.”

Our Sponsor

TPG is a leading global private investment firm founded in 1992 with over $59 billion of assets under management as of March 31, 2014, and offices in San Francisco, Fort Worth, Austin, Beijing, Dallas, Hong Kong, Houston, London, Luxembourg, Melbourne, Moscow, Mumbai, New York, São Paulo, Shanghai, Singapore, Tokyo and Toronto. TPG has extensive experience with global public and private investments executed through leveraged buyouts, recapitalizations, spinouts, growth investments, joint ventures and restructurings. The firm’s investments span a variety of industries, including healthcare, financial services, travel and entertainment, technology, energy, industrials, retail, consumer, real estate and media and communications.

Following the completion of this offering, investment funds affiliated with TPG Global, LLC (together with its affiliates, “TPG” or the “Sponsor”) will own approximately     % of our common stock, or     % if the underwriters’ option to purchase additional shares of our common stock is fully exercised. As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange (the “NYSE”) and TPG will continue to have significant influence over us and decisions made by stockholders and may have interests that differ from yours. See “Risk Factors—Risks Related to our Common Stock and this Offering—TPG will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.”

Corporate Information and Structure

On May 28, 2010, pursuant to an Agreement and Plan of Merger dated as of April 20, 2010, we were acquired by investment funds affiliated with TPG and certain co-investors (the “Merger”). ATD Corporation is a Delaware corporation that was formed in 2010 in connection with the Merger under the name Accelerate Parent Corp. On June 5, 2014, Accelerate Parent Corp. changed its name to ATD Corporation. The only material asset of ATD Corporation is the equity of Accelerate Holdings Corp., which is the holder of 100% of the equity of American Tire Distributors Holdings, Inc. (“Holdings”), which is the holder of 100% of the equity of American Tire Distributors, Inc.

 

 

10


(“ATDI”), through which we conduct our operations. Our principal executive offices are located at 12200 Herbert Wayne Court, Suite 150, Huntersville, North Carolina 28078, and our telephone number at that address is (704) 992-2000. Our website address is http://www.atd-us.com. Our website and the information contained on our website do not constitute a part of this prospectus.

The following chart shows our simplified organizational structure immediately following the consummation of this offering assuming no exercise of the underwriters’ option to purchase additional shares:

 

LOGO

 

 

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The Offering

 

Common stock offered by us

            shares

 

Common stock offered by the selling stockholders

            shares

 

Common stock to be outstanding after this offering

            shares (or             shares if the underwriters exercise their option to purchase additional shares in full)

 

Option to purchase additional shares

The underwriters have an option for a period of 30 days to purchase up to             additional shares of our common stock from us and the selling stockholders.

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares in full, at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds of this offering to repay a portion of our long-term indebtedness. We intend to use the remainder of the net proceeds, if any, for working capital and other general corporate purposes, including supporting our strategic growth opportunities in the future. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

 

Dividend policy

Our board of directors does not currently intend to pay dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis following the offering and may, subject to compliance with the covenants contained in the agreements governing our indebtedness and other considerations, determine to pay dividends in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our board of directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and any other factors that our board of directors may deem relevant. See “Dividend Policy” and “Description of Indebtedness.”

 

Principal stockholders

Upon completion of this offering, the TPG Funds will continue to beneficially own a controlling interest in us. As a result, we intend to avail ourselves of the controlled company exemption under the rules of the NYSE. See “Risk Factors” and “Management.”

 

 

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Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed NYSE symbol

“ATD”

 

Conflicts of Interest

Affiliates of TPG Capital BD, LLC, an underwriter of this offering, own in excess of 10% of our issued and outstanding common stock. Therefore, a “conflict of interest” is deemed to exist under FINRA Rule 5121(f)(5)(B). In addition, because the TPG Funds (as defined below) are affiliates of TPG Capital BD, LLC and, as selling stockholders, will receive more than 5% of the net proceeds of this offering, a “conflict of interest” is also deemed to exist under Rule 5121(f)(5)(C)(ii) of the Financial Industry Regulatory Authority (“FINRA”). Accordingly, this offering will be made in compliance with the applicable provisions of FINRA Rule 5121. In accordance with FINRA Rule 5121(c), no sales of the shares will be made to any discretionary account over which TPG Capital BD, LLC exercises discretion without the prior specific written approval of the account holder. However, no “qualified independent underwriter” is required because the underwriters primarily responsible for managing this offering are free of any “conflict of interest,” as that term is defined in the rule. See “Use of Proceeds” and “Underwriting (Conflicts of Interest).”

The number of shares of common stock to be outstanding after this offering is based on             shares of common stock outstanding as of                     , 2014 (after giving effect to the one-for-                 reverse stock split effected on                     , 2014) and excludes the following:

 

                shares reserved for future issuance in connection with the exercise of outstanding stock options at a weighted-average exercise price of $         per share; and

 

                shares of common stock reserved for future issuance under our equity incentive plans.

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

    the adoption of our amended and restated certificate of incorporation and our amended and restated bylaws, to be effective upon the closing of this offering;

 

    no exercise by the underwriters of their option to purchase up to             additional shares of our common stock in this offering; and

 

    a one-for-             reverse stock split of our common stock that became effective on                     , 2014.

 

 

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Summary Consolidated Financial and Other Data

The following table sets forth summary historical consolidated financial and other data for the periods indicated. The summary historical financial and other data as of December 28, 2013 and December 29, 2012 and for fiscal years 2013, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical balance sheet data as of December 31, 2011 have been derived from our unaudited consolidated financial statements as of such date, which are not included in this prospectus. The summary historical financial and other data as of July 5, 2014 and for the six months of 2014 and 2013 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The summary historical balance sheet data as of June 29, 2013 have been derived from our unaudited consolidated financial statements for such quarter, which are not included in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods, and operating results for the six months of 2014 are not necessarily indicative of the results that may be expected for the year ending January 3, 2015. The pro forma data for fiscal year 2013 and the six months of 2014 have been derived from our unaudited pro forma condensed combined financial data included elsewhere in this prospectus.

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 53-week fiscal years, and the associated 14-week quarter, will not be comparable to 52-week fiscal years, and the associated quarters having only 13 weeks. The 2011 fiscal year, which ended December 31, 2011, the 2012 fiscal year, which ended December 29, 2012, and the 2013 fiscal year, which ended December 28, 2013, each contain operating results for 52 weeks. The six months ended July 5, 2014 contains operating results for 27 weeks while the six months ended June 29, 2013 contains operating results for 26 weeks. It should be noted that the Company’s recently acquired subsidiaries, Hercules, Terry’s Tire, Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton and RTD Calgary have different quarter-end reporting dates than that of the Company for the second quarter of 2014, with their quarters ending on June 30. Prior to the acquisitions, Hercules had an October 31 fiscal year end, Terry’s Tire had a December 31 fiscal year end, RTD and Kirks Tire had a January 31 fiscal year end and Trail Tire, Extreme Wheel, RTD Edmonton and RTD Calgary each had a February 28 fiscal year end, but each such subsidiary changed its year end to be the same as that of the Company, effective as of their respective acquisition dates. It should also be noted that, prior to fiscal 2013, our year-end reporting date was different from that of our TriCan subsidiary. For fiscal 2012, TriCan had a calendar year-end reporting date. TriCan converted to our fiscal year-end reporting date during fiscal 2013. The impact from these differences on the consolidated financial statements was not material. This summary historical consolidated financial data should be read in conjunction with the disclosures set forth under “Unaudited Pro Forma Combined Condensed Financial Information,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. Due to our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting future results. See “Risk Factors—Risks Related to our Business and Industry—Because of our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting our future results.”

 

 

14


Dollars in thousands

(except for per share data)

 

Six Months
2014 (1)

   

Six Months
2013 (2)

   

Fiscal Year
2013 (3)

   

Fiscal Year
2012 (4)

   

Fiscal Year
2011 (5)

 

Statement of Operations Data:

         

Net sales

  $ 2,343,051      $ 1,795,053      $ 3,839,269      $ 3,455,864      $ 3,050,240   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

    1,980,690        1,510,648        3,188,409        2,887,421        2,535,020   

Selling, general and administrative expenses

    381,313        272,825        569,234        499,112        432,636   

Management fees

    15,575        2,246        5,753        7,446        4,624   

Transaction expenses

    20,176        3,289        6,719        5,246        3,946   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (54,703     6,045        69,154        56,639        74,014   

Other income (expense):

         

Interest expense

    (56,622     (34,627     (74,316     (72,910     (67,572

Loss on extinguishment of debt

    (17,113     —          —          —          —     

Other, net (6)

    1,950        (2,908     (5,196     (3,895     (2,110
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (126,488     (31,490     (10,358     (20,166     4,332   

Income tax provision (benefit)

    (42,976     (9,362     (3,982     (5,965     4,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (83,512     (22,128     (6,376     (14,201     (132

Income (loss) from discontinued operations, net of tax

    (48     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (83,560   $ (22,128   $ (6,376   $ (14,201   $ (132
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share (7)

  $ (0.11   $ (0.03   $ (0.01   $ (0.02   $ (0.00

Diluted net income (loss) per share (7)

  $ (0.11   $ (0.03   $ (0.01   $ (0.02   $ (0.00

Weighted average shares outstanding (7)

         

Basic

    761,950,775        734,168,402        734,168,402        688,300,235        684,172,402   

Diluted

    761,950,775        734,168,402        734,168,402        688,300,235        684,172,402   

Other Financial Data:

         

Cash flows provided by (used in):

         

Continuing operating activities

  $ (167,545   $ 29,033      $ 100,982      $ 10,072      $ (90,699

Discontinued operating activities

    350        —          —          —          —     

Investing activities

    (855,423     (88,532     (118,435     (167,821     (92,249

Financing activities

    1,013,358        63,000        22,998        168,824        186,263   

Depreciation and amortization

    66,013        51,140        105,458        89,167        78,071   

Capital expenditures

    34,241        23,848        47,127        52,388        31,044   

EBITDA (8)

    (3,853     54,277        169,416        141,911        149,975   

Adjusted EBITDA (8)

    82,649        68,156        195,486        165,416        164,255   

Balance Sheet Data:

         

Cash and cash equivalents

  $ 27,533      $ 35,653      $ 35,760      $ 34,700      $ 23,682   

Working capital (9)

    859,525        572,226        541,051        556,646        457,443   

Total assets

    3,747,966        2,547,921        2,541,655        2,486,837        2,285,364   

Total debt (10)

    1,944,297        1,022,369        967,000        951,204        835,808   

Total stockholder’s equity

    649,059        664,954        680,054        692,753        642,773   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

Six Months
2014

         

Fiscal Year
2013

       

Pro Forma Data:

       

Pro forma net sales

  $ 2,551,256        $ 5,107,330     

Pro forma Adjusted EBITDA (11)

    92,445          251,120     

Pro forma net income (loss) from continuing operations

    (77,567       (47,754  

 

(1) Reflects the acquisition of Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton and RTD Calgary in June 2014, the acquisition of Terry’s Tire in March 2014 and the acquisition of Hercules and Kipling Tire Co. LTD in January 2014.

 

(2) Reflects the acquisition of RTD in April 2013.

 

(3) Reflects the acquisition of Wholesale Tire Distributors Inc. in December 2013, the acquisition of Tire Distributors, Inc. (“TDI”) in August 2013 and the acquisition of RTD in April 2013.

 

 

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(4) Reflects the acquisition of Triwest Trading (Canada) Ltd. d/b/a TriCan Tire Distributors in November 2012 and the acquisition of Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil in May 2012.

 

(5) Reflects the acquisition of Bowlus Service Company d/b/a North Central Tire in April 2011.

 

(6) Other, net primarily includes bank fees, credit card charges to us and gains and losses on foreign currency, net of financing service fees that we charge our customers.

 

(7) Does not reflect the one-for         reverse stock split effected on                  , 2014.

 

(8) 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 use EBITDA and Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our GAAP results and the following reconciliation, we believe provides a more complete understanding of 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 similar to ours. 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. Our board of directors also uses Adjusted EBITDA in determining compensation for our management. The adjustments from EBITDA to Adjusted EBITDA include management and advisory fees paid to our Sponsor, non-cash stock compensation expense, transaction expenses related to our acquisitions, non-cash amortization of inventory step-up resulting from the business combination rules for our acquisitions and other items, including franchise and other taxes, non-cash gains and losses on the disposal of fixed assets and assets held for sale, exchange gains and losses on foreign currency, and non-cash impairment of long-lived assets. 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 table presents a reconciliation of each of EBITDA and Adjusted EBITDA to income (loss) from continuing operations, determined in accordance with GAAP:

 

In thousands

 

Six Months

2014

   

Six Months

2013

   

Fiscal Year
2013

   

Fiscal Year
2012

   

Fiscal Year
2011

 

Income (loss) from continuing operations

  $ (83,512   $ (22,128   $ (6,376   $ (14,201   $ (132

Depreciation and amortization

    66,013        51,140        105,458        89,167        78,071   

Interest expense

    56,622        34,627        74,316        72,910        67,572   

Income tax provision (benefit)

    (42,976     (9,362     (3,982     (5,965     4,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ (3,853   $ 54,277      $ 169,416      $ 141,911      $ 149,975   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management fees

    15,575        2,246        5,753        7,446        4,624   

Non-cash stock compensation

    1,987        1,452        2,634        4,349        4,114   

Transaction expenses

    20,176        3,289        6,719        5,246        3,946   

Non-cash inventory step-up

    31,640        4,907        5,379        4,074        —     

Early debt extinguishment

    17,113        —          —          —          —     

Other (A)

    11        1,985        5,585        2,390        1,596   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 82,649      $ 68,156      $ 195,486      $ 165,416      $ 164,255   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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  (A) Other includes non-income based taxes, impairment, gain/loss on property and equipment disposals, deferred compensation and foreign currency exchange gains/losses.

 

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

 

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

 

(11) Pro forma EBITDA and pro forma Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. We present pro forma EBITDA and pro forma Adjusted EBITDA, in addition to EBITDA and Adjusted EBITDA, to provide a more complete understanding of our results of operations that gives effect to the recent significant acquisitions that we have completed. These amounts have similar limitations to the limitations described in footnote (8) regarding EBITDA and Adjusted EBITDA. In addition, the pro forma financial information we present is based on estimates and assumptions regarding our recent acquisitions that may end up being materially different from our actual experience. Neither pro forma EBITDA nor pro forma Adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP or pro forma net income (loss). Moreover, our debt agreements use a measure similar to pro forma Adjusted EBITDA to measure compliance with certain covenants except that, under certain of these debt agreements, the calculation of the measure allows us (subject to certain limitations) to take into account the amount of cost savings and synergies projected in good faith to be realized in the future in connection with cost saving restructuring initiatives as though those cost savings had already been realized in past periods. We have not included such projected cost savings or synergies in our presentation of pro forma Adjusted EBITDA in this prospectus. Therefore, the amount calculated pursuant to our debt agreements may be higher than pro forma Adjusted EBITDA as set forth in this prospectus. For further discussion of our cost savings initiatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following table presents a reconciliation of each of pro forma EBITDA and pro forma Adjusted EBITDA to pro forma net income (loss) from continuing operations:

 

    

Six Months

    Fiscal Year  

In thousands

   2014     2013  

Pro forma net income (loss) from continuing operations

   $ (77,567   $ (47,754

Depreciation and amortization

     82,699        164,902   

Interest expense

     67,415        133,440   

Income tax provision (benefit)

     (21,664     (32,055
  

 

 

   

 

 

 

Pro forma EBITDA

   $ 50,883      $ 218,533   
  

 

 

   

 

 

 

Management fees

     15,822        5,928   

Non-cash stock compensation

     1,987        5,222   

Transaction expenses

     6,530        4,799   

Non-cash inventory step-up

     167        2,348   

Early debt extinguishment

     17,113        —     

Other (A)

     (57     14,290   
  

 

 

   

 

 

 

Pro forma Adjusted EBITDA

   $ 92,445      $ 251,120   
  

 

 

   

 

 

 

 

  (A) Other includes non-income based taxes, impairment, gain/loss on property and equipment disposals, deferred compensation and foreign currency exchange gains/losses.

For a discussion of pro forma net income (loss) from continuing operations, see “Unaudited Pro Forma Combined Condensed Financial Information.”

 

 

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RISK FACTORS

This offering and investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to our Business and Industry

Demand for tire products is lower when general economic conditions are weak and 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. 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. Historically, we have experienced that rising fuel costs, higher unemployment and credit tightening cause a decrease in miles driven and consumer spending, both of which we believe cause a decrease in unit sales in the U.S. and Canadian replacement tire industries. Our business is adversely affected as a result of such industry-wide events and we may be adversely affected by similar events in the future.

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 and 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 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. We believe that part of our value proposition is our ability to distribute the broadest product offering in our industry. As a result, if one or more of our manufacturers were to discontinue business with us, our business could be adversely affected by the negative impact on our reputation and ability to continue to deliver on this value proposition, as well as any decrease in net sales. 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 manufacturers could adversely affect our results of operations, financial condition and 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, regulatory 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

 

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been more pronounced recently in light of 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 one or more of 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, either of which could adversely affect us.

The failure of our information technology systems could disrupt our business operations, which could have a material adverse effect on our business, financial condition and results of operations.

The operation of our business depends on our information technology systems. The failure of our information technology systems, including our Oracle ERP platform, to perform as we anticipate could disrupt our business substantially and could result in, among other things, transaction errors, processing inefficiencies, loss of data and the loss of sales and customers, all of which could cause our business and results of operations to suffer. While we have made significant investments in our disaster recovery strategies and infrastructure, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including, without limitation, fire, natural disasters, power outages, systems failure, system conversions, security breaches, cyber-attacks, viruses and/or human error. In any such event, we could be required to make a significant investment to fix or replace information technology systems, and we could experience interruptions in our ability to service our customers. Additionally, we and our customers could suffer financial and reputational harm if customer or Company proprietary information was compromised by a security breach or cyber-attack. Any such damage or interruption could have a material adverse effect on our business, financial condition and results of operations.

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, planned capital expenditures and acquisitions and our ability to satisfy our debt obligations depend on our ability to generate cash flows, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. 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.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facilities and the indenture governing our outstanding notes restrict our ability to dispose of assets and use the proceeds from any such disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to

 

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meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our debt service obligations.

As of July 5, 2014, on a pro forma as adjusted basis after giving effect to this offering and the application of the net proceeds therefrom, we would have had total indebtedness of approximately $         , and our substantial indebtedness could adversely affect our financial condition and limit our ability to pursue our growth strategy.

We have a substantial amount of debt, which requires significant interest and principal payments. As of July 5, 2014, on a pro forma as adjusted basis after giving effect to this offering and the application of the net proceeds therefrom, at an assumed public offering price per share of $        , the midpoint of the range set forth on the cover of the prospectus, we would have had total indebtedness of approximately $         . Subject to the restrictions contained in our ABL Facility, our Term Loan, 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. These restrictions will not prevent us from incurring obligations that do not constitute indebtedness, may be waived by certain votes of debt holders and, if we refinance our existing indebtedness, such refinancing indebtedness may contain fewer restrictions on our activities. To the extent new indebtedness or other financial obligations are added to our and our subsidiaries’ currently anticipated indebtedness levels, the related risks that we and our subsidiaries face could intensify.

Our substantial level of indebtedness could adversely affect our financial condition and increase the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our other existing and any future financial obligations and contractual commitments, could have important consequences. For example, it could:

 

    make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing such indebtedness;

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other purposes;

 

    increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have proportionately less indebtedness;

 

    increase our cost of borrowing and cause us to incur substantial fees from time to time in connection with debt amendments or refinancings;

 

    increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; and

 

    limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other corporate purposes.

For additional risks relating to our substantial indebtedness, see “—Restrictions imposed by our outstanding indebtedness, including the indenture governing our outstanding notes, may limit our ability to operate our business and to finance our future operation or capital needs or to engage in other business activities.”

 

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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 North America, replacement tires are sold to consumers through several different retail channels, including local independent tire retailers and mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. A number of independent wholesale tire distributors compete with us for the business of tire retailers 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. We would also be adversely affected if certain channels in the replacement tire retail market, including mass merchandisers and warehouse clubs, were to gain market share at the expense of the local independent tire retailers, as our market share in those channels is lower. See “Business—Competition.”

We face risks related to the integration of our recent significant acquisitions.

The acquisitions of Hercules and Terry’s Tire constitute significant acquisitions for our business. Our management will be required to devote a significant amount of time and attention to the process of integrating the businesses and operations of Hercules and Terry’s Tire with our business and operations, which may decrease the time management will have to serve existing customers, attract new customers and develop new products, services or strategies, and could adversely affect the performance of the combined company. The size and complexity of both acquired businesses, if not managed successfully by our management, may result in interruptions in our business activities, inconsistencies in our operations, standards, controls, procedures and policies, a decrease in the quality of our services and products, a deterioration in our employee and customer relationships, increased costs of integration and harm to our reputation, all of which could have a material adverse effect on our business, financial condition and results of operations.

We may not realize the growth opportunities and cost savings synergies that are anticipated from our recent significant acquisitions.

The benefits that we expect to achieve as a result of the recent acquisitions of Hercules and Terry’s Tire will depend in part on our ability to realize anticipated growth opportunities and cost savings synergies. Our success in realizing these opportunities and synergies and the timing of this realization depend on the successful integration of the businesses and operations of Hercules and Terry’s Tire with our business and operations and the adoption of our respective best practices. Even if we are able to integrate these businesses and operations successfully, this integration may not result in the realization of the full benefits of the growth opportunities and synergies we currently expect from this integration within the anticipated time frame or at all. While we anticipate that substantial expenses will be incurred in connection with the integration of Hercules and Terry’s Tire, such expenses are difficult to estimate accurately, and may significantly exceed current estimates. Accordingly, the benefits from these acquisitions may be offset by unanticipated costs or delays in integrating the companies.

Pricing volatility for raw materials acquired by our suppliers 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 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.

 

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

We plan to expand our distribution services into new geographic markets in North America, 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.

We regularly seek to grow our business through acquisitions, and our inability to identify desirable acquisition targets or integrate such acquisitions, including our recent significant acquisitions, could have a material adverse effect on us.

We regularly 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. In executing our business strategy, we routinely conduct discussions, evaluate opportunities and enter into agreements for such acquisitions. Pursuing growth by way of these types of transactions involves significant challenges and risks, including the inability to successfully identify suitable acquisition targets on terms acceptable to us, advance our business strategy, realize a satisfactory return on investment, successfully integrate business activities or resources, or retain key personnel, customers and suppliers. 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 and cash flows. In addition, if we are unable to manage acquisitions or investments, successfully complete transactions or effectively integrate acquired businesses, such as Hercules or Terry’s Tire, we may not realize the cost savings or other financial benefits we anticipated from the transaction relative to the consideration paid in the anticipated time frame or at all, and our business, results of operations and financial condition may be materially and adversely affected.

Further, we may be unsuccessful in identifying and evaluating business, legal or financial risks as part of the due diligence process associated with a particular transaction, and could be held liable for environmental, tax or other risks and liabilities of the acquired business. In addition, some investments may result in the incurrence of debt or may have contingent consideration components that may require us to pay additional amounts in the future in relation to future performance results of the subject business. We may also experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury, management and financial reporting as a result of such transactions. These factors could divert attention from our business and otherwise harm our business, financial condition and operating results.

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

A number of our recent acquisitions have been financed primarily through the incurrence of additional debt, either through increases in availability under our ABL Facility, the issuance of additional subordinated notes or through term loans. We have also financed some recent acquisitions by selling additional equity to the TPG Funds and certain co-investors. If we were to undertake another substantial acquisition, the acquisition would likely need to be financed in part through further amendments to our ABL Facility, additional financing from banks, 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 stock. If we were to undertake an acquisition by incurring additional debt, the risks associated with our already substantial level of indebtedness could intensify.

 

 

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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 in the United States. Approximately 65% of our U.S. total order volume in fiscal 2013 was placed online using ATDOnline®, up from approximately 56% in fiscal 2007. We expect our Internet-generated business in the United States 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.

We continue to invest in TireBuyer.com®, an Internet site which enables our independent tire retailer customers to connect with consumers over the Internet. In 2012, the TireBuyer.com® site was re-launched on a platform that is faster and more flexible in allowing us to respond to the needs of our customers and enhancing the overall consumer experience. Since its initial launch in 2009, we have generally seen a consistent increase in consumer traffic on the site. 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 our more than 140 distribution centers in North America. 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, liabilities arising from accidents to the extent we are not covered by insurance and insurance premium increases. 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.

 

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Our Hercules® brand tires are generally manufactured in various countries in Asia and as a result are subject to risks associated with doing business outside the United States and Canada.

Following our acquisition of Hercules, we distribute a private brand tire marketed under the Hercules® brand. These tires are generally manufactured in various countries in Asia. There are a number of risks in doing business abroad, including political and economic uncertainty, social unrest, sudden changes in laws and regulations, shortages of trained labor, transportation risks and the uncertainties associated with doing business in foreign countries. These risks may impact our ability to expand our outsourced manufacturing operations and otherwise achieve our objectives relating to private brand marketing, including capitalizing on the expanding import market. In addition, compliance with multiple and potentially conflicting foreign laws and regulations, import and export limitations, anti-corruption laws such as the Foreign Corrupt Practices Act and exchange controls is burdensome and expensive. Our foreign operations also subject us to the risks of international terrorism and hostilities and to foreign currency risks, including exchange rate fluctuations and limits on the repatriation of funds.

Our exposure to the credit risks of our customers may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition.

In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. Economic conditions may impact some of our customers’ ability to pay their accounts payable. While we attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid accounts receivable write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could harm our operating results.

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. However, 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 like us to the local independent tire retailer market.

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.

 

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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, state and foreign laws and 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, including due to expansion of our business into new geographic areas, 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.

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. In addition, we now own the Hercules® tire brand and therefore could be liable for these claims in the future in connection with the manufacture and sale of the Hercules® brand tires. 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 and cash flows.

We could incur costs to comply with environmental regulations and to address liabilities relating to environmental matters, particularly those relating to our distribution centers.

We are subject to various federal, state, local and foreign environmental, health and safety laws and regulations. These requirements are complex, change frequently and have tended to become more stringent over

 

25


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, including fines, claims or clean-up costs, 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 (the “Sarbanes-Oxley Act”), we 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 and the integration of newly-acquired businesses will necessitate ongoing changes to our internal control systems and processes, including to address any internal control issues of the businesses that we acquire from time to time. For example, the Terry’s Tire auditors identified material weaknesses, which were in existence at the time we acquired the business, relating to security administration and access to systems, separation of duties, and external financial reporting. We are in the process of integrating the Terry’s Tire business, including placing them on our information technology and accounting systems, as well as implementing our own internal controls and procedures with respect to the Terry’s Tire business. While we do not expect the issues identified by the Terry’s Tire auditors to continue following the completion of the integration, which we anticipate will be completed during the third quarter of 2014, we face risks like this in the ordinary course of business.

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 or in the integrity of our financial statements and public filings 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 indefinite lived 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.

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, FILO Facility and Term Loan 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.

 

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Currency exchange rate fluctuations may adversely affect our financial results.

The financial position and results of operations for TriCan, our 100% owned subsidiary acquired during 2012, was initially recorded in its functional currency which is the Canadian dollar. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues and expenses into U.S. dollars at the weighted-average exchange rate prevailing during the year and assets and liabilities into U.S. dollars at the year-end exchange rate. Therefore, fluctuations in the value of the U.S. dollar versus the Canadian dollar will have an impact on the value of these items in our consolidated financial statements, even if its value has not changed in its original currency.

Restrictions imposed by our outstanding indebtedness, including the indenture governing our outstanding notes, may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.

The terms of our outstanding indebtedness restrict us from engaging in specified types of transactions. These covenants restrict our ability, among other things, to:

 

    incur indebtedness or guarantees or engage in sale-leaseback transactions;

 

    incur liens;

 

    engage in mergers, acquisitions and asset sales;

 

    alter the business conducted by ATDI and its restricted subsidiaries;

 

    make investments and loans;

 

    declare dividends or other distributions;

 

    enter into agreements limiting restricted subsidiary distributions; and

 

    engage in certain transactions with affiliates.

In addition, the credit agreement for our ABL Facility requires us to comply with a fixed charge coverage ratio test if certain conditions are triggered. Our ability to comply with this financial covenant can be affected by events beyond our control, and we may not be able to satisfy it. Additionally, the restrictions contained in the indenture governing our outstanding notes could also limit our ability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans. See “Description of Indebtedness.” The terms of any future indebtedness we incur could include more restrictive covenants.

A breach of any of these covenants could result in a default under our credit facilities or the indenture governing our outstanding notes, which could trigger acceleration of our indebtedness and may result in the acceleration of or default under any other debt to which a cross-acceleration or cross-default provision applies, which could have a material adverse effect on our business, operations and financial results. In the event of any default under our credit facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings and loans outstanding, together with accrued and unpaid interest and any fees and other obligations, to be due and payable. In addition, or in the alternative, the applicable lenders could exercise their rights under the security documents entered into in connection with our credit facilities. We have pledged a significant portion of our assets as collateral under our credit facilities.

If we were unable to repay or otherwise refinance these borrowings and loans when due, the applicable lenders could proceed against the collateral granted to them to secure that indebtedness, which could force us into

 

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bankruptcy or liquidation. In the event the applicable lenders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under the agreements governing our credit facilities or the exercise by the applicable lenders of their rights under the security documents would likely have a material adverse effect on us.

Because of our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting our future results.

We have acquired a number of businesses in recent years, including TriCan, RTD, Hercules, Terry’s Tire, Trail Tire, Extreme Wheels, Kirks Tire, RTD Edmonton and RTD Calgary, and we expect that we will engage in acquisitions of other businesses from time to time in the future. The operating results of the acquired businesses are included in our financial statements included in this prospectus only from the date of the completion of such acquisitions. All of our acquisitions have been accounted for using the acquisition method of accounting. Use of this method has resulted in a new valuation of the assets and liabilities of the acquired companies. As a result of these acquisitions and any future acquisitions, our historical operating results may be of limited use in evaluating our historical performance and predicting our future results. In addition, other significant changes may occur in our cost structure, management, financing and business operations as a result of these acquisitions and any future acquisitions.

The pro forma financial information in this prospectus is presented for illustrative purposes only and does not represent what the financial position or results of operations of the Company would have been had the applicable acquisitions and other transactions been completed on the dates assumed for purposes of that pro forma information nor does it represent the actual financial position or results of operations of the Company following such transactions.

The pro forma financial information in this prospectus is derived from the respective historical consolidated financial statements and related notes of the Company, Terry’s Tire, Hercules, RTD, Trail Tire, Extreme Wheels, Kirks Tire, RTD Edmonton and RTD Calgary included in this prospectus. It is presented for illustrative purposes only and contains certain estimates and assumptions about the acquisitions and other transactions described therein. The preparation of this pro forma financial information is based on certain assumptions and estimates that we believe are reasonable. Our assumptions may prove to be inaccurate over time and may be affected by other factors. Accordingly, the pro forma financial information may not reflect what our results of operations, financial positions and cash flows would have been had the applicable transactions occurred during the periods presented or what our results of operations, financial positions and cash flows will be in the future.

In addition, for purposes of the pro forma financial information, the consideration for the relevant acquisitions has been preliminarily allocated to the assets acquired and liabilities assumed based on the preliminary valuations. The final allocation is dependent upon third-party valuations and other studies that have not been completed. The final allocation could vary materially from the preliminary allocation used in the financial information contained in this prospectus. Additionally, the pro forma financial information does not give effect to any unforeseen costs that could result from the relevant acquisitions, nor does it include any other items not expected to have a continuing impact on the consolidated results of operations.

Risks Related to our Common Stock and this Offering

TPG will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

We are currently controlled, and after this offering is completed will continue to be controlled, by the TPG Funds. Upon completion of this offering, the TPG Funds will beneficially own     % of our outstanding common stock (or     % if the underwriters exercise in full their option to purchase additional shares). As long as the TPG Funds own or control at least a majority of our outstanding voting power, they will have the ability to

 

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exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. Even if the TPG Funds’ ownership falls below 50%, TPG will continue to be able to strongly influence or effectively control our decisions.

Additionally, TPG’s interests may not align with the interests of our other stockholders. TPG is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. TPG 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.

Upon the listing of our shares, we will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements; you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Because the TPG Funds will continue to control a majority of the voting power of our outstanding common stock after completion of this offering, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our common stock:

 

    we have a board that is composed of a majority of “independent directors,” as defined under the rules of the NYSE;

 

    we have a compensation committee that is composed entirely of independent directors; and

 

    we have a nominating and corporate governance committee that is composed entirely of independent directors.

Following this offering, we intend to utilize all of these exemptions. Accordingly, in the event TPG’s interests differ from those of other stockholders, and, for so long as we are a “controlled company,” you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

Our directors who have relationships with TPG may have conflicts of interest with respect to matters involving our company.

Following this offering, two of our                     directors will be affiliated with TPG. Our TPG-affiliated directors have fiduciary duties to us and, in addition, will have duties to TPG.                  additional directors will be Senior Advisors to TPG. As a result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and TPG, whose interests, in some circumstances, may be adverse to ours.

Provisions of our corporate governance documents could make an acquisition of our company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

In addition to the TPG Funds’ beneficial ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to

 

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our stockholders. These provisions include:

 

    the division of our board of directors into three classes and the election of each class for three-year terms;

 

    advance notice requirements for stockholder proposals and director nominations;

 

    the ability of the board of directors to fill a vacancy created by the expansion of the board of directors;

 

    the ability of our board of directors to issue new series of, and designate the terms of, preferred stock, without stockholder approval, which could be used to, among other things, institute a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors;

 

    limitations on the ability of stockholders to call special meetings and to take action by written consent following the date that the TPG Funds no longer beneficially own a majority of our common stock; and

 

    the required approval of holders of at least 75% of the voting power of the outstanding shares of our capital stock to adopt, amend or repeal certain provisions of our certificate of incorporation and bylaws or remove directors for cause, in each case following the date that the TPG Funds no longer beneficially own a majority of our common stock.

In addition, Section 203 of the DGCL may affect the ability of an “interested stockholder” to engage in certain business combinations, for a period of three years following the time that the stockholder becomes an “interested stockholder.” While we have elected in our certificate of incorporation not to be subject to Section 203 of the DGCL, our certificate of incorporation contains provisions that have the same effect as Section 203 of the DGCL, except that they provide that investment funds affiliated with TPG will not be deemed to be an “interested stockholder,” and accordingly will not be subject to such restrictions.

Because our board is responsible for appointing the members of our senior management, the foregoing provisions of our certificate of incorporation and bylaws may frustrate or prevent any attempts by our stockholders to replace or remove our current management, or otherwise change the strategic direction of the Company, by making it more difficult for stockholders to replace members of our board of directors. In addition, certain of these provisions may limit your ability to sell your stock for a price in excess of the prevailing market price in a transaction that is not approved by our board of directors. See “Description of Capital Stock.”

If you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our common stock is substantially higher than the net tangible book deficit per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book deficit per share after this offering. Based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, you will experience immediate dilution of $         per share, representing the difference between our pro forma net tangible book deficit per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed     % of the aggregate price paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this offering. We also have a large number of outstanding stock options to purchase

 

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common stock with exercise prices that are below the estimated initial public offering price of our common stock. To the extent that these options are exercised, you will experience further dilution. See “Dilution” for more detail.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Pursuant to our certificate of incorporation and bylaws, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

An active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.

Prior to this offering, there was no public market for our common stock. Although we intend to list our common stock on the NYSE under the symbol “ATD,” an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price will be determined by negotiations between us and the underwriters and may not be indicative of market prices of our common stock that will prevail in the open market after the offering. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market price of our common stock may decline below the initial public offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

As a public company, we will become subject to additional laws, regulations and stock exchange listing standards, which will impose additional costs on us and may strain our resources and divert our management’s attention.

Prior to this offering, although Holdings has filed periodic and current reports with the SEC to satisfy obligations under our debt instruments, we operated our company on a private basis. After this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the NYSE, and other applicable securities laws and regulations. Compliance with these laws and regulations will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly. In particular, we estimate that we will incur incremental costs in connection with the requirements to obtain an attestation report on our internal controls from our independent auditors under Section 404 of the Sarbanes-Oxley Act. In connection with preparation for providing this attestation, our independent auditors may identify deficiencies or weaknesses in our controls. We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. We estimate that we will incur between $         million and $         million annually in expenses related to incremental insurance costs and other expenses associated with being a public company, including listing, printer, audit and XBRL fees and investor relations costs. However, the incremental costs that we incur as a result of becoming a public company could exceed our estimate. These factors may therefore strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

 

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Our operating results and share price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

Our quarterly operating results are likely to fluctuate in the future as a publicly traded company. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price or at all. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:

 

    market conditions in the broader stock market;

 

    actual or anticipated fluctuations in our quarterly financial and operating results;

 

    introduction of new products or services by us or our competitors;

 

    issuance of new or changed securities analysts’ reports or recommendations;

 

    results of operations that vary from expectations of securities analysis and investors;

 

    guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

    strategic actions by us or our competitors;

 

    announcement by us, our competitors or our vendors of significant contracts or acquisitions;

 

    sales, or anticipated sales, of large blocks of our stock;

 

    additions or departures of key personnel;

 

    regulatory, legal or political developments;

 

    public response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

    litigation and governmental investigations;

 

    changing economic conditions;

 

    changes in accounting principles;

 

    default under agreements governing our indebtedness;

 

    exchange rate fluctuations; and

 

    other events or factors, including those from natural disasters, war, actors of terrorism or responses to these events.

These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. While we believe that operating results for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly operating results could limit or prevent investors from readily selling their shares and may otherwise negatively

 

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affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. After this offering, we will have outstanding             shares of common stock based on the number of shares outstanding as of                     , 2014. This includes             shares that we are selling in this offering, as well as the             shares that the selling stockholders are selling, which may be resold in the public market immediately, and assumes no exercises of outstanding options. Substantially all of the shares that are not being sold in this offering will be subject to a 180-day lock-up period provided under agreements executed in connection with this offering. These shares will, however, be able to be resold after the expiration of the lock-up agreement as described in the “Shares Eligible for Future Sale” section of this prospectus. We also intend to file a Form S-8 under the Securities Act of 1933, as amended (“Securities Act”), to register all shares of common stock that we may issue under our equity compensation plans. In addition, the TPG Funds have certain demand registration rights that could require us in the future to file registration statements in connection with sales of our stock by them. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.” Such sales could be significant. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the “Underwriting (Conflicts of Interest)” section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

Since we have no current plans to pay regular cash dividends on our common stock following this offering, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

Although we have previously declared dividends to our stockholders, we do not anticipate paying any regular cash dividends on our common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends.

ATD Corporation is a holding company with nominal net worth. We do not have any material assets or conduct any business operations other than our investments in our subsidiaries. Our business operations are conducted primarily out of our indirect operating subsidiary, ATDI and its subsidiaries. As a result, notwithstanding any restrictions on payment of dividends under our existing indebtedness, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from our subsidiaries, including from ATDI. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us.

 

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If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

A ratings downgrade or other negative action by a ratings organization could adversely affect the trading price of the shares of our common stock.

Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for us or our subsidiaries. Any such fluctuation in the rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our operations and financial condition, which in return may adversely affect the trading price of shares of our common stock.

Our certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws or (v) any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”). In addition, our certificate of incorporation provides that if any action the subject matter of which is a Covered Proceeding is filed in a court other than the specified Delaware courts without the approval of our board of directors (each, a “Foreign Action”), the claiming party will be deemed to have consented to (i) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the Foreign Action as agent for such claiming party. Our certificate of incorporation also provides that, except to the extent prohibited by the DGCL, in the event that a claiming party initiates, asserts, joins, offers substantial assistance to or has a direct financial interest in any Foreign Action without the prior approval of our board of directors, each such claiming party shall be obligated jointly and severally to reimburse us and any officer, director or other employee made a party to such proceeding for all fees, costs and expenses of every kind and description (including, but not limited to, all attorneys’ fees and other litigation expenses) that the parties may incur in connection with such Foreign Action. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

 

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Our bylaws provide that if a claiming party brings certain actions against us and is not successful on the merits then they will be obligated to pay our litigation costs, which could have the effect of discouraging litigation, including claims brought by our stockholders.

Under our bylaws, except to the extent prohibited by the DGCL, and unless our board of directors otherwise approves, in the event that any claiming party (a) initiates, asserts, joins, offers substantial assistance to or has a direct financial interest in a Covered Proceeding and (b) such claiming party does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought by such claiming party, then each such claiming party shall be obligated to reimburse us and any applicable director, officer or other employee for all fees, costs and expenses of every kind and description (including, but not limited to, all attorneys’ fees and other litigation expenses) that we or any such director, officer or other employee actually incurs in connection with the Covered Proceeding. Any person or entity purchasing or otherwise acquiring any interest in the shares of capital stock of the Company shall be deemed to have notice of and consented to this provision. This provision could have the effect of discouraging litigation against us, including claims brought by our stockholders and including claims that are partially (but not wholly) successful on the merits. However, it is currently unclear whether the Delaware legislature will take action to eliminate or limit the ability of stock corporations to implement provisions such as this, or whether Delaware courts will enforce in full a provision such as this for a Delaware stock corporation. If the Delaware legislature takes action to limit or eliminate our ability to include this provision in our bylaws or a court were to find this provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:

 

    plans for future growth and other business development activities;

 

    plans for capital expenditures;

 

    expectations for market and industry growth and trends;

 

    financing sources;

 

    dividends;

 

    the effects of regulation and competition;

 

    synergies and cost savings related to acquisitions;

 

    foreign currency conversion; and

 

    all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, those discussed in the “Risk Factors” section of this prospectus, which include the following:

 

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

 

    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 and cash flows.

 

    The failure of our information technology systems could disrupt our business operations, which could have a material adverse effect on our business, financial condition and results of operations.

 

    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 substantial indebtedness could adversely affect our financial condition and limit our ability to pursue our growth strategy.

 

36


    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.

 

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

 

    We face risks related to integration of our recent significant acquisitions.

 

    We may not realize the growth opportunities and cost savings synergies that we anticipated from our recent significant acquisitions.

 

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

 

    We regularly seek to grow our business through acquisitions, and our inability to identify desirable acquisition targets or integrate such acquisitions, including our recent significant acquisitions, could have a material adverse effect on us.

 

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

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

 

37


USE OF PROCEEDS

We estimate that the net proceeds to us from our issuance and sale of             shares of common stock in this offering will be approximately $         million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us (or approximately $         million if the underwriters exercise their option to purchase additional shares of common stock in full). This estimate assumes an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus.

We intend to use the net proceeds of this offering to repay a portion of our long-term indebtedness. We intend to use the remainder of the net proceeds, if any, for working capital and other general corporate purposes, including supporting our strategic growth opportunities in the future.

We will not receive any proceeds from the sale of shares by the selling stockholders, including if the underwriters exercise their option to purchase additional shares. After deducting the underwriting discounts, the selling stockholders will receive approximately $         million of proceeds from this offering.

A $1.00 increase (decrease) in the assumed public offering price of $        , based upon the midpoint of the estimated price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by $         million (or approximately $         million if the underwriters exercise their option to purchase additional shares of common stock in full), assuming the number of shares we offer, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Affiliates of TPG Capital BD, LLC, an underwriter of this offering, own in excess of 10% of our issued and outstanding common stock. Therefore, a “conflict of interest” is deemed to exist under FINRA Rule 5121(f)(5)(B). In addition, because the TPG Funds are affiliates of TPG Capital BD, LLC and, as selling stockholders, will receive more than 5% of the net proceeds of this offering, a “conflict of interest” is also deemed to exist under FINRA Rule 5121(f)(5)(C)(ii). Accordingly, this offering will be made in compliance with the applicable provisions of FINRA Rule 5121. In accordance with FINRA Rule 5121(c), no sales of the shares will be made to any discretionary account over which TPG Capital BD, LLC exercises discretion without the prior specific written approval of the account holder. However, no “qualified independent underwriter” is required because the underwriters primarily responsible for managing this offering are free of any “conflict of interest,” as that term is defined in the rule. See “Underwriting (Conflicts of Interest).”

 

38


DIVIDEND POLICY

Our board of directors does not currently intend to pay dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis following the offering and may, subject to compliance with the covenants contained in our credit facilities and other instruments governing our indebtedness which limit our ability to pay dividends and other considerations, determine to pay dividends in the future. The declaration, amount and payment of any future dividends on shares of our common stock will be at the sole discretion of our board of directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our stockholders or by our subsidiaries to us, and any other factors that our board of directors may deem relevant.

Our ability to pay dividends is restricted by certain covenants contained in our ABL Facility (as defined below) and in the indenture that governs our Senior Subordinated 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 “Description of Indebtedness.”

 

39


CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization at July 5, 2014:

 

    on an actual basis;

 

    on an as adjusted basis to give effect to (1) the issuance of shares of common stock by us in this offering and the receipt of approximately $         million in net proceeds from the sale of such shares, assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses, and (2) the application of the estimated net proceeds from the offering as described in “Use of Proceeds.”

You should read this table in conjunction with the information contained in “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” Unaudited Pro Forma Combined Condensed Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Indebtedness” as well as our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

   

As of July 5, 2014

 

(dollars in thousands)

 

Actual

   

As Adjusted
(1)(2)

 

Cash and cash equivalents

  $ 27,533     $                
 

 

 

   

 

 

 

Long-term debt, including current portions:

   

U.S. ABL Facility

  $ 641,639     

Canadian ABL Facility

    53,165     

U.S. FILO Facility

    80,000     

Canadian FILO facility

    10,266     

Term Loan

    717,693     

Senior Secured Notes

    —       

Senior Subordinated Notes

    421,361     

Capital lease obligations

    12,577     

Other

    7,596     
 

 

 

   

 

 

 

Total debt

    1,944,297     
 

 

 

   

 

 

 

Stockholders’ equity:

   

Common stock, par value $0.01 per share; 2,000,000,000 shares authorized and 768,082,437 shares issued and outstanding on an actual basis,              shares authorized and              shares issued and outstanding on an as adjusted basis

    7,681     

Additional paid-in capital

    803,278     

Accumulated deficit

    (153,378  

Accumulated other comprehensive loss

    (8,522  
 

 

 

   

 

 

 

Total stockholders’ equity

    649,059     
 

 

 

   

 

 

 

Total capitalization

  $ 2,593,356      $     
 

 

 

   

 

 

 

 

(1) As adjusted reflects the application of the estimated proceeds of the offering as described in “Use of Proceeds.”

 

(2) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase (decrease) the as adjusted amount of each of cash and cash equivalents and total stockholders’ equity by approximately $         million after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

40


DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Dilution results from the fact that the initial public offering price per share of common stock is substantially in excess of the net tangible book deficit per share of our common stock attributable to the existing stockholders for our presently outstanding shares of common stock. Our net tangible book deficit per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares of common stock issued and outstanding.

As of July 5, 2014, we had a historical net tangible book deficit of $         million, or $         per share of common stock, based on              shares of our common stock outstanding as of                     , 2014 (after giving effect to the one-for-                 reverse stock split effected on                     , 2014). Dilution is calculated by subtracting net tangible book deficit per share of our common stock from the assumed initial public offering price per share of our common stock.

Investors participating in this offering will incur immediate and substantial dilution. Without taking into account any other changes in such net tangible book deficit after July 5, 2014, after giving effect to the sale of shares of our common stock in this offering assuming an initial public offering price of $         per share (the midpoint of the offering range shown on the cover of this prospectus), less the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book deficit as of July 5, 2014 would have been approximately $         million, or $         per share of common stock. This amount represents an immediate decrease in net tangible book deficit of $         per share of our common stock to the existing stockholders and immediate dilution in net tangible book deficit of $         per share of our common stock to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $                

Net tangible book deficit per share as of July 5, 2014, before giving effect to this offering

   $        

Decrease in net tangible book deficit per share attributable to investors purchasing shares in this offering

     
  

 

 

    

Pro forma net tangible book value per share, after giving effect to this offering

     

Dilution in as adjusted net tangible book deficit per share to investors in this offering

      $     

If the underwriters exercise their option in full to purchase additional shares, the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering would be $         per share of our common stock. This represents an increase in pro forma as adjusted net tangible book deficit of $         per share of our common stock to existing stockholders and dilution in pro forma as adjusted net tangible book deficit of $         per share of our common stock to new investors.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the pro forma as adjusted net tangible book deficit per share of our common stock after giving effect to this offering by $        , or by $         per share of our common stock, assuming no change to the number of shares of our common stock offered by us as set forth on the front cover page of this prospectus and after deducting the estimated underwriting discounts and expenses payable by us.

 

41


The following table summarizes, as of July 5, 2014, on the pro forma basis described above, the total number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share of our common stock paid by purchasers of such shares and by new investors purchasing shares of our common stock in this offering.

 

    

Shares purchased

  

Total consideration

   

Average price
per share

 
    

Number

  

Percent

  

Amount

    

Percent

   

Existing stockholders

         $                                 $                

New investors

         $                             $                
  

 

  

 

  

 

 

    

 

 

   

 

 

 

Total

         $                            
  

 

  

 

  

 

 

    

 

 

   

The number of shares of common stock to be outstanding after this offering is based on              shares of common stock outstanding as of                     , 2014 (after giving effect to the one-for-         reverse stock split effected on                  , 2014) and excludes the following:

 

                 shares of common stock issuable upon exercise of stock options outstanding as of                     , 2014 at a weighted-average exercise price of $         per share; and

 

                 shares of common stock reserved for future issuance under our equity incentive plans as of                     , 2014.

 

42


SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth our selected historical consolidated financial and other data for the periods indicated. The selected historical financial data as of December 28, 2013 and December 29, 2012 and for fiscal years 2013, 2012 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical balance sheet data as of December 31, 2011 have been derived from our unaudited consolidated financial statements as of such date, which are not included in this prospectus. The selected historical financial data as of July 5, 2014 and for the six months of 2014 and 2013 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The selected historical balance sheet data as of June 29, 2013 have been derived from our unaudited consolidated financial statements for such quarter, which are not included in this prospectus. On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, we were acquired by investment funds affiliated with TPG and certain co-investors (the “Merger”). In the following table, periods prior to May 28, 2010 reflect our financial position, results of operations and changes in financial position prior to the Merger (the “Predecessor”). Periods after May 28, 2010 reflect our financial position, results of operations, and changes in financial position after the Merger (the “Successor”). The selected historical financial data for the fiscal year 2009 and the five months ended through May 28, 2010 which are under the Predecessor ownership and for the seven months ended January 1, 2011 which are under Successor ownership have been derived from unaudited consolidated financial statements for such periods, which have not been included in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods, and operating results for the six months of 2014 are not necessarily indicative of the results that may be expected for the year ending January 3, 2015. The pro forma data for fiscal year 2013 and the six months of 2014 have been derived from our unaudited pro forma condensed combined financial data included elsewhere in this prospectus.

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 53-week fiscal years, and the associated 14-week quarter, will not be comparable to 52-week fiscal years, and the associated quarters having only 13 weeks. The 2009 fiscal year, which ended January 2, 2010, the 2011 fiscal year, which ended December 31, 2011, the 2012 fiscal year, which ended December 29, 2012, and the 2013 fiscal year, which ended December 28, 2013, each contain operating results for 52 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 six months ended July 5, 2014 contains operating results for 27 weeks while the six months ended June 29, 2013 contains operating results for 26 weeks. It should be noted that the Company’s recently acquired subsidiaries, Hercules, Terry’s Tire, Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton and RTD Calgary, have different quarter-end reporting dates than that of the Company for the second quarter of 2014, with their quarters ending June 30. Prior to the acquisitions, Hercules had an October 31 fiscal year end, Terry’s Tire had a December 31 fiscal year end, RTD and Kirks Tire each had a January 31 fiscal year end and Trail Tire, Extreme Wheel, RTD Edmonton and RTD Calgary each had a February 28 fiscal year end, but each such subsidiary changed its year end to be the same as that of the Company, effective with their respective acquisition dates. It should also be noted that, prior to fiscal 2013, our year-end reporting date was different from that of our TriCan subsidiary. For fiscal 2012, TriCan had a calendar year-end reporting date. TriCan converted to our fiscal year-end reporting date during fiscal 2013. The impact from these differences on the consolidated financial statements was not material. This selected historical consolidated financial and other data should be read in conjunction with the disclosures set forth under “Unaudited Pro Forma Combined Condensed Financial Information,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus. Due to our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting future results. See “Risk Factors—Risks Related to our Business and Industry—Because of our prior acquisitions and future acquisitions we may engage in, our historical operating results may be of limited use in evaluating our historical performance and predicting our future results.”

 

43


   

Successor

        

Predecessor

 

Dollars in thousands

(except for per share
data)

 

Six Months
2014(1)

   

Six Months
2013 (2)

   

Fiscal

Year

2013 (3)

   

Fiscal

Year

2012 (4)

   

Fiscal

Year

2011 (5)

   

Seven
Months
Ended
January 1,
2011 (6)

        

Five
Months
Ended
May 28,
2010

   

Fiscal

Year

2009

 

Statement of Operations Data:

                   

Net sales

  $ 2,343,051      $ 1,795,053      $ 3,839,269      $ 3,455,864      $ 3,050,240      $ 1,525,249          $ 934,925      $ 2,171,787   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

    1,980,690        1,510,648        3,188,409        2,887,421        2,535,020        1,316,679            775,678        1,797,905   

Selling, general and administrative expenses

    381,313        272,825        569,234        499,112        432,636        226,311            135,021        305,689   

Management fees

    15,575        2,246        5,753        7,446        4,624        2,352            125        500   

Transaction expenses

    20,176        3,289        6,719        5,246        3,946        18,500            42,608        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Operating income (loss)

    (54,703     6,045        69,154        56,639        74,014        (38,593         (18,507     67,693   
 

Other income (expense):

                   

Interest expense

    (56,622     (34,627     (74,316     (72,910     (67,572     (37,387         (32,669     (54,415

Loss on extinguishment of debt

    (17,113     —          —          —          —          —              —          —     

Other, net (7)

    1,950        (2,908     (5,196     (3,895     (2,110     (958         (127     (1,020
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (126,488     (31,490     (10,358     (20,166     4,332        (76,938         (51,303     12,258   

Income tax provision (benefit)

    (42,976     (9,362     (3,982     (5,965     4,464        (27,829         (15,227     7,326   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Income (loss) from continuing operations

    (83,512     (22,128     (6,376     (14,201     (132     (49,109         (36,076     4,932   

Income (loss) from discontinued operations, net of tax

    (48     —          —          —          —          —              —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Net income (loss)

  $ (83,560   $ (22,128   $ (6,376   $ (14,201   $ (132   $ (49,109       $ (36,076   $ 4,932   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Basic net income (loss) per common share (8)(9)

  $ (0.11   $ (0.03   $ (0.01   $ (0.02   $ (0.00   $ (0.07        

Diluted net income (loss) per share (8)(9)

  $ (0.11   $ (0.03   $ (0.01   $ (0.02   $ (0.00   $ (0.07        

Weighted average shares outstanding (8)(9)

                   

Basic

    761,950,775        734,168,402        734,168,402        688,300,235        684,172,402        682,830,902           

Diluted

    761,950,775        734,168,402        734,168,402        688,300,235        684,172,402        682,830,902           

Other Financial Data:

                   

Cash flows provided by (used in):

                   

Continuing operating activities

  $ (167,545   $ 29,033      $ 100,982      $ 10,072      $ (90,699   $ (15,043       $ 28,106      $ 131,105   

Discontinued operating activities

    350        —          —          —          —          —              —          —     

Investing activities

    (855,423     (88,532     (118,435     (167,821     (92,249     (17,237         (7,523     (4,620

Financing activities

    1,013,358        63,000        22,998        168,824        186,263        40,405            (15,631     (127,690

Depreciation and amortization

    66,013        51,140        105,458        89,167        78,071        40,905            14,707        32,078   

Capital expenditures

    34,241        23,848        47,127        52,388        31,044        12,381            6,424        12,757   

EBITDA (10)

    (3,853     54,277        169,416        141,911        149,975        1,354            (3,927     98,751   

Adjusted EBITDA (10)

    82,649        68,156        195,486        165,416        164,255        87,974            45,696        101,035   
 

Balance Sheet Data:

                   

Cash and cash equivalents

  $ 27,533      $ 35,653      $ 35,760      $ 34,700      $ 23,682      $ 20,367            $ 7,290   

Working capital (11)

    859,525        572,226        541,051        556,646        457,443        278,673              197,317   

Total assets

    3,747,966        2,547,921        2,541,655        2,486,837        2,285,364        2,040,076              1,300,624   

Total debt (12)

    1,944,297        1,022,369        967,000        951,204        835,808        652,544              549,576   

Total redeemable preferred stock

           —          —          —          —          —                26,600   

Total stockholders’ equity

    649,059        664,954        680,054        692,753        642,773        638,649              230,647   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

44


   

Six Months
2014

   

 

 

Fiscal Year
2013

 

Pro Forma Data:

     

Pro forma net sales

  $ 2,551,256        $ 5,107,330   

Pro forma Adjusted EBITDA (13)

    92,445          251,120   

Pro forma net income (loss) from continuing operations

    (77,567       (47,754

 

(1) Reflects the acquisition of Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton and RTD Calgary in June 2014, the acquisition of Terry’s Tire in March 2014 and the acquisition of Hercules and Kipling Tire Co. LTD in January 2014.

 

(2) Reflects the acquisition of RTD in April 2013.

 

(3) Reflects the acquisition of Wholesale Tire Distributors Inc. in December 2013, the acquisition of Tire Distributors, Inc. in August 2013 and the acquisition of RTD in April 2013.

 

(4) Reflects the acquisition of Triwest Trading (Canada) Ltd. d/b/a TriCan Tire Distributors in November 2012 and the acquisition of Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil in May 2012.

 

(5) Reflects the acquisition of Bowlus Service Company d/b/a North Central Tire in April 2011.

 

(6) Reflects the acquisition of Lisac’s of Washington, Inc. and Tire Wholesalers, Inc. in December 2010. Additionally, includes certain costs related to the start-up and development of ATD Corporation.

 

(7) Other, net primarily includes bank fees, credit card charges to us and gains and losses on foreign currency, net of financing service fees that we charge our customers.

 

(8) As a result of the Merger, our capital structures for periods before and after the Merger are not comparable, and therefore we are presenting our net income (loss) per share and weighted-average share information only for periods subsequent to the Merger.

 

(9) Does not reflect the one-for-                 reverse stock split effected on                 , 2014.

 

(10) 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 use EBITDA and Adjusted EBITDA to facilitate a comparison of our operating performance on a consistent basis from period to period that, when viewed in combination with our GAAP results and the following reconciliation, we believe provides a more complete understanding of 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 similar to ours. 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 indenture 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. The adjustments from EBITDA to Adjusted EBITDA include management and advisory fees paid to our Sponsor, non-cash stock compensation expense, transaction expenses related to our acquisitions, non-cash amortization of inventory step-up resulting from the business combination rules for our acquisitions and other items, including franchise and other taxes, non-cash gains and losses on the disposal of fixed assets and assets held for sale, exchange gains and losses on foreign currency, and non-cash impairment of long-lived assets. 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.

 

45


The following table presents a reconciliation of each of EBITDA and Adjusted EBITDA to income (loss) from continuing operations, determined in accordance with GAAP:

 

   

Successor

        

Predecessor

 
In thousands  

Six

Months

2014 (1)

   

Six

Months
2013 (2)

   

Fiscal
Year

2013 (3)

   

Fiscal
Year

2012 (4)

   

Fiscal
Year

2011 (5)

   

Seven
Months
Ended
January 1,
2011 (6)

        

Five
Months
Ended
May 28,
2010

   

Fiscal
Year

2009

 

Income (loss) from continuing operations

  $ (83,512   $ (22,128   $ (6,376   $ (14,201   $ (132   $ (49,109       $ (36,076   $ 4,932   

Depreciation and amortization

    66,013        51,140        105,458        89,167        78,071        40,905            14,707        32,078   

Interest expense

    56,622        34,627        74,316        72,910        67,572        37,387            32,669        54,415   

Income tax provision (benefit)

    (42,976     (9,362     (3,982     (5,965     4,464        (27,829         (15,227     7,326   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

EBITDA

  $ (3,853   $ 54,277      $ 169,416      $ 141,911      $ 149,975      $ 1,354          $ (3,927   $ 98,751   

Management fees

    15,575        2,246        5,753        7,446        4,624        2,352            125        500   

Non-cash stock compensation

    1,987        1,452        2,634        4,349        4,114        3,706            5,892        326   

Transaction expenses

    20,176        3,289        6,719        5,246        3,946        18,500            42,608        —     

Non-cash inventory step-up

    31,640        4,907        5,379        4,074        —          58,797            —          —     

Early debt extinguishment

    17,113        —          —          —          —          —              —          —     

Other (A)

    11        1,985        5,585        2,390        1,596        3,265            998        1,458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Adjusted EBITDA

  $ 82,649      $ 68,156      $ 195,486      $ 165,416      $ 164,255      $ 87,974          $ 45,696      $ 101,035   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

  (A) Other includes non-income based taxes, impairment, gain/loss on property and equipment disposals, deferred comp. and foreign currency exchange gains/losses.

 

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

 

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

 

(13) Pro forma EBITDA and pro forma Adjusted EBITDA are financial measures that are not calculated in accordance with GAAP. We present pro forma EBITDA and pro forma Adjusted EBITDA, in addition to EBITDA and Adjusted EBITDA, to provide a more complete understanding of our results of operations that gives effect to the recent significant acquisitions that we have completed. These amounts have similar limitations to the limitations described in footnote (10) regarding EBITDA and Adjusted EBITDA. In addition, the pro forma financial information we present is based on estimates and assumptions regarding our recent acquisitions that may end up being materially different from our actual experience. Neither pro forma EBITDA nor pro forma Adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP or pro forma net income (loss). Moreover, our debt agreements use a measure similar to pro forma Adjusted EBITDA to measure compliance with certain covenants except that, under certain of these debt agreements, the calculation of the measure allows us (subject to certain limitations) to take into account the amount of cost savings and synergies projected in good faith to be realized in the future in connection with cost saving restructuring initiatives as though those cost savings had already been realized in past periods. We have not included such projected cost savings or synergies in our presentation of pro forma Adjusted EBITDA in this prospectus. Therefore, the amount calculated pursuant to our debt agreements may be higher than pro forma Adjusted EBITDA as set forth in this prospectus. For further discussion of our cost savings initiatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

46


The following table presents a reconciliation of each of pro forma EBITDA and pro forma Adjusted EBITDA to pro forma net income (loss) from continuing operations:

 

    

Six Months

    Fiscal Year  

In thousands

   2014     2013  

Pro forma net income (loss) from continuing operations

   $ (77,567   $ (47,754

Depreciation and amortization

     82,699        164,902   

Interest expense

     67,415        133,440   

Income tax provision (benefit)

     (21,664     (32,055
  

 

 

   

 

 

 

Pro forma EBITDA

   $ 50,883      $ 218,533   
  

 

 

   

 

 

 

Management fees

     15,822        5,928   

Non-cash stock compensation

     1,987        5,222   

Transaction expenses

     6,530        4,799   

Non-cash inventory step-up

     167        2,348   

Early debt extinguishment

     17,113        —     

Other (A)

     (57     14,290   
  

 

 

   

 

 

 

Pro forma Adjusted EBITDA

   $ 92,445      $ 251,120   
  

 

 

   

 

 

 

 

  (A) Other includes non-income based taxes, impairment, gain/loss on property and equipment disposals, deferred compensation and foreign currency exchange gains/losses.

For a discussion of pro forma net income (loss) from continuing operations, see “Unaudited Pro Forma Combined Condensed Financial Information.”

 

47


UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

On June 27, 2014, we completed the acquisition of the wholesale distribution business of Trail Tire pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of Trail Tire. Trail Tire is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada. The Trail Tire acquisition was completed for aggregate cash consideration of approximately $20.8 million. The aggregate cash consideration was funded through borrowings under our ABL Facility. The Trail Tire purchase price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On June 27, 2014, we completed the acquisition of the wholesale distribution business of Extreme Wheel pursuant to an Asset Purchase Agreement by and between TriCan and the shareholder and principal of Extreme Wheel. Extreme Wheel is a wholesale distributor of wheels and related accessories in Canada. The Extreme Wheel acquisition was completed for aggregate cash consideration of approximately $6.5 million. The aggregate cash consideration was funded through borrowings under our ABL Facility. The Extreme Wheel purchase price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On June 27, 2014, we completed the acquisition of the wholesale distribution business of Kirks Tire pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of Kirks Tire. Kirks Tire is engaged in (i) the wholesale distribution of tire, tire parts, tire accessories and related equipment and (ii) the retail sale and installation of tires, tire parts, and tire accessories and the manufacturing and sale of retread tires. Kirks Tire’s retail operations were not acquired by us. The Kirks Tire acquisition was completed for aggregate cash consideration of approximately $73.0 million. The aggregate cash consideration was funded through borrowings under our ABL Facility. The Kirks Tire purchase price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On June 27, 2014, we completed the acquisition of the wholesale distribution business of RTD Edmonton pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of RTD Edmonton. RTD Edmonton is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada. The RTD Edmonton acquisition was completed for aggregate cash consideration of approximately $31.9 million. The aggregate cash consideration was funded through borrowings under our ABL Facility. The RTD Edmonton purchase price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On June 27, 2014, we completed the acquisition of the wholesale distribution business of Regional Tire RTD Calgary pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of RTD Calgary. RTD Calgary is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada. The RTD Calgary acquisition was completed for aggregate cash consideration of approximately $20.7 million. The aggregate cash consideration was funded through borrowings under our ABL Facility. The RTD Calgary purchase price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On March 28, 2014, we completed the acquisition of Terry’s Tire. The Terry’s Tire acquisition was completed pursuant to a Stock Purchase Agreement between us and TTT Holdings. TTT Holdings owned all of the capital stock of Terry’s Tire. TTT Holdings had no significant assets or operations other than its ownership of Terry’s Tire. The operations of Terry’s Tire and its subsidiaries constituted the operations of TTT Holdings. Terry’s Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the Internet. The Terry’s Tire acquisition was completed for an aggregate purchase price of approximately $372.7 million, consisting of cash

 

48


consideration of approximately $358.0 million, contingent consideration of $12.5 million and non-cash consideration for debt assumed of $2.2 million. The cash consideration paid for the Terry’s Tire acquisition included estimated working capital adjustments and a portion of consideration contingent on certain events which were achieved prior to closing. The closing purchase price is subject to certain post-closing adjustments, including but not limited to, working capital adjustments.

On January 31, 2014, we completed the acquisition of Hercules Holdings, the parent company of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing and selling replacement tires for passenger cars, trucks and certain off-road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. The acquisition was completed for an aggregate purchase price of approximately $318.9 million, consisting of net cash consideration of $310.0 million, contingent consideration of $3.5 million and non-cash consideration for debt assumed of $5.4 million. The merger agreement provides for the payment of up to $6.5 million in additional consideration contingent upon the occurrence of certain post-closing events. The closing purchase price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On April 30, 2013, we completed the acquisition of RTD Holdco, the parent company of RTD. RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and the Atlantic provinces of Canada. The acquisition was completed for an aggregate cash consideration of $65.9 million which includes post-closing working capital adjustments. The operations of RTD constitute the operations of RTD Holdco. RTD Holdco has no significant assets or operations other than its ownership of RTD.

The following presents unaudited pro forma combined condensed financial information for the six months ended July 5, 2014 and the year ended December 28, 2013. Since the most recent balance sheet presented in this prospectus as of July 5, 2014 includes the impact of all completed acquisitions, a pro forma balance sheet as of July 5, 2014 has not been presented. The unaudited pro forma combined condensed financial information has been prepared from, and should be read in conjunction with, the respective historical consolidated financial statements and related notes of the Company, Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton, RTD Calgary, Terry’s Tire, Hercules and RTD included in this prospectus. The Company’s fiscal year is based on either a 52- or 53 week period ending on the Saturday closest to each December 31 while prior to the respective acquisition dates, Trail Tire, Extreme Wheel, RTD Edmonton and RTD Calgary each had fiscal years that ended on February 28, Kirks Tire and RTD each had fiscal years that ended on January 31, Terry’s Tire’s fiscal year ended on December 31 and Hercules’ fiscal year ended on October 31. Accordingly, the unaudited pro forma condensed combined statements of operations for the six months ended July 5, 2014 and the year ended December 28, 2013 give effect to the acquisitions of Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton, RTD Calgary, Terry’s Tire, Hercules and RTD as if these transactions had occurred on December 30, 2012 (the first day of the Company’s 2013 fiscal year), and includes only factually supportable adjustments that are directly attributable to the acquisitions and expected to have a continuing effect.

The Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton, RTD Calgary, RTD, Terry’s Tire and Hercules acquisitions have been accounted for using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interests. As a result, the total purchase price for each acquisition has been preliminarily allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed is recognized as goodwill. The preliminary allocation reflects management’s best estimates of fair value, which are based on key assumptions of the acquisitions, including prior acquisition experience, benchmarking of similar acquisitions and historical data. In addition, portions of the preliminary allocation are dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Upon completion of detail valuation studies and the final determination of fair value, we may make additional adjustments to the fair value allocation, which may differ significantly from the valuations set forth in the unaudited pro forma condensed combined financial information. The final allocation of the purchase price will be completed within the required measurement period in accordance with the accounting guidance for business combinations, but in no event later than one year following the completion of the acquisitions.

 

49


The unaudited pro forma condensed combined statements of operations are based on estimates and assumptions, which have been made solely for the purposes of developing such pro forma information. Pro forma adjustments arising from the acquisitions are derived from the estimated fair value of the assets acquired and liabilities assumed. The unaudited pro forma condensed combined statements of operations also includes certain purchase accounting adjustments such as increased amortization expense on acquired intangible assets, changes in interest expense on the debt incurred to complete the acquisitions and debt repaid as part of the acquisitions as well as the tax impacts related to these adjustments. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable.

The unaudited condensed consolidated pro forma financial information is not a projection of our results of operations or financial position for any future period or date. The preparation of the unaudited pro forma condensed consolidated financial information requires the use of certain estimates and assumptions, which may be materially different from our actual experience.

 

50


ATD Corporation

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Six Months Ended July 5, 2014

(In Thousands except per share amounts)

 

    Historical     Pro Forma Adjustments        
    ATD
Corporation
    Hercules
(Jan-

uary 1-
Acqui-

sition Date,
January 31,
2014)
    Terry’s
Tire

(Jan-
uary 1 -
Acqui-

sition
Date,
March 28,
2014)
    Trail
Tire
(Jan-

uary 1 -
Acqui-

sition
Date,

June 27,
2014)
    Extreme
Wheel
(Jan-

uary 1 -
Acqui-
sition
Date,

June 27,
2014)
    Kirks
Tire
(Jan-

uary 1 -
Acqui-

sition
Date,
June 27,
2014)
    RTD
Edmonton
(Jan-

uary 1-
on Date,
June 27,
2014)
    RTD
Calgary
(Jan-

uary 1 -
Acqui-

sition
Date,

June 27,
2014)
    Hercules           Terry’s
Tire
          Trail
Tire
          Extreme
Wheel
          Kirks
Tire
          RTD
Edmonton
          RTD
Calgary
          Use of
Offering
Proceeds
(AT)
    Pro
Forma
Combined
 

Net sales

  $ 2,343,051      $ 42,136      $ 106,372      $ 16,578      $ 3,622      $ 26,616      $ 6,153      $ 10,766      $ —          $ (4,038     (I   $ —          $ —          $ —          $ —          $ —            $ 2,551,256   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

    1,980,690        33,719        91,021        13,470        2,778        21,904        5,010        8,468        (19,016     (A     (12,457     (J     —            —            —            —            —           
                        (3,138     (I     —            —            —            —            —              2,122,449   

Selling, general and administrative expenses

    381,313        6,796        18,317        2,286        370        400        560        1,305        1,815        (B     4,065        (L     972        (S     287        (W     3,514        (AA     1,531        (AF     884        (AJ    
                    58        (C     (1,089     (I     —            —            —            —            —           
                        —            —            —            —            —            —              423,384   

Management fees

    15,575        —          247        —          —          —          —          —          —            —            —            —            —            —            —              15,822   

Transaction expenses

    20,176        29,182        60        —          —          —          —          —          (37,498     (D     (5,390     (M     —            —            —            —            —              6,530   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

 

Operating income (loss)

    (54,703     (27,561     (3,273     822        474        4,312        583        993        54,641          13,971          (972       (287       (3,514       (1,531       (884         (16,929

Other income (expense):

                                               

Interest expense, net

    (56,622     (430     (3,374     —          —          —          —          (52     361        (E     3,207        (N     (357     (T     (112     (X     (1,255     (AB     (549     (AG     (355     (AK    
                    (2,346     (F     (5,531     (O     —            —            —            —            —              (67,415

Loss on extinguishment of debt

    (17,113     —          —          —          —          —          —          —          —            —            —            —            —            —            —            —          (17,113

Other, net

    1,950        177        —          94        15        —          23        (33     —            —            —            —            —            —            —              2,226   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (126,488     (27,814     (6,647     916        489        4,312        606        908        52,656          11,647          (1,329       (399       (4,769       (2,080       (1,239         (99,231

Income tax provision (benefit)

    (42,976     (402     1        235        123        1,079        173        238        20,536        (G     4,542        (P     (355     (U     (106     (Y     (1,273     (AC     (555     (AH     (331     (AL    
                        (2,593     (Q     —            —            —            —            —              (21,664
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ (83,512   $ (27,412   $ (6,648   $ 681      $ 366      $ 3,233      $ 433      $ 670      $ 32,120        $ 9,698        $ (974     $ (293     $ (3,496     $ (1,525     $ (908       $ (77,567

Net income (loss) per share:

                                               

Basic

  $ (0.11                                               $ (0.10
 

 

 

                                               

 

 

 

Diluted

  $ (0.11                                               $ (0.10
 

 

 

                                               

 

 

 

Weighted average shares outstanding (in thousands):

                                               

Basic

    761,951                                                    761,951   

Diluted

    761,951                                                    761,951   

See accompanying notes to unaudited pro forma condensed combined financial information.

 

51


ATD Corporation

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Fiscal Year Ended December 28, 2013

(In Thousands except per share amounts)

 

    Historical     Pro Forma Adjustments      
    ATD
Corporation
    RTD
(Jan-

uary 1 -
Acquis-
ition
Date,
April 30,
2013)
    Hercules
(Nov-

ember 1,
2012-
Oct-

ober 31,
2013)
    Terry’s
Tire
(Jan-

uary 1 -
Dec-

ember 31,
2013)
    Trail
Tire
(March 1,
2013 -
Feb-

ruary 28,
2014)
    Extreme
Wheel
(March 1,
2013 -
Feb-

ruary 28,
2014)
    Kirks
Tire
(Feb-

ruary 1,
2013 -
Jan-

uary 31,
2014)
    RTD
Edmo-

nton
(March
1, 2013 -
Feb-

ruary 28,
2014)
    RTD
Calgary
(March 1,
2013 -
Feb-

ruary 28,
2014)
    RTD           Hercules           Terry’s
Tire
          Trail
Tire
          Extreme
Wheel
          Kirks
Tire
          RTD
Edmonton
          RTD
Calgary
          Use of
Offering
Proceeds
(AT)
  Pro
Forma
Combined
 

Net sales

  $ 3,839,269      $ 34,200      $ 602,921      $ 502,194      $ 43,800      $ 7,459      $ 63,988      $ 18,948      $ 24,862      $ —          $ —          $ (23,645 )(I)      $ —          $ —          $ (6,666     (AE)      $ —          $ —            $ 5,107,330   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

    3,188,409        27,684        496,068        420,952        36,579        5,808        49,272        13,961        19,879        (3,031     (AS)        —            (18,641     (I)        —            —            (2,348     (AE)        —            —           
                              4,374        (K)        —            —            —            —            —              4,238,966   

Selling, general and administrative expenses

    569,234        6,785        89,711        83,233        4,858        811        2,839        1,483        3,282        2,569        (AN)        14,906        (B)        11,063        (L)        (213     (V)        (37     (Z)        (103     (AD)        (40     (AI)        (111     (AM)       
                      —            (833     (H)        (4,513     (I)        1,637        (S)        492        (W)        5,364        (AA)        2,643        (AF)        1,490        (AJ)       
                          697        (C)        (465     (R)        —            —            (2,330     (AE)        —            —              794,452   

Management fees

    5,753        —          —          —          —          —          —          —          175        —            —            —            —            —            —            —            —              5,928   

Transaction expenses

    6,719        580        —          —          —          —          —          —          —          (2,500     (AR)        —            465        (R)        —            —            —            —            —           
                              (465     (M)        —            —            —            —            —              4,799   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

 

Operating income (loss)

    69,154        (849     17,142        (1,991     2,363        840        11,877        3,504        1,526        2,962          (14,770       (15,463       (1,424       (455       (7,249       (2,603       (1,379         63,185   

Other income (expense):

                                                     

Interest expense, net

    (74,316     (82     (6,396     (9,853     —          —          —          —          —          82        (AO)        5,269        (E)        9,719        (N)        (723     (T)        (226     (X)        (2,542     (AB)        (1,111     (AG)        (720     (AK)       
                      (955     (AP)        (833     (H)        (22,455     (O)        —            —            —            —            —           
                      —            (28,298     (F)        —            —            —            —            —            —              (133,440

Other, net

    (5,196     (632     (1,952     —          74        10        89        (1,621     178        —            —            —            (213     (V)        (37     (Z)        (103     (AD)        (40     (AI)        (111     (AM)          (9,554
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

 

Income (loss) from continuing operations before income taxes

    (10,358     (1,563     8,794        (11,844     2,437        850        11,966        1,883        1,704        2,089          (38,632       (28,199       (2,360       (718       (9,894       (3,754       (2,210         (79,809

Income tax provision (benefit)

    (3,982     (853     3,209        (15     608        161        2,989        512        449        558        (AQ)        (15,066     (G)        (1     (I)        (630     (U)        (192     (Y)        (2,111     (AC)        (1,002     (AH)        (590     (AL)       
                              (10,998     (P)        —            —            (497     (AE)        —            —           
                              (4,604     (Q)        —            —            —            —            —              (32,055
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

 

Net income (loss) from continuing operations

  $ (6,376   $ (710   $ 5,585      $ (11,829   $ 1,829      $ 689      $ 8,977      $ 1,371      $ 1,255      $ 1,531        $ (23,566     $ (12,596     $ (1,730     $ (526     $ (7,286     $ (2,752     $ (1,620       $ (47,754

Net income (loss) per share:

                                                     

Basic

  $ (0.01                                                     $ (0.07
 

 

 

                                                     

 

 

 

Diluted

  $ (0.01                                                     $ (0.07
 

 

 

                                                     

 

 

 

Weighted average shares outstanding (in thousands):

                                                     

Basic

    734,168                                                          734,168   

Diluted

    734,168                                                          734,168   

See accompanying notes to unaudited pro forma condensed combined financial information.

 

52


Notes to Unaudited Pro Forma Condensed Combined Financial Information

1. Basis of Presentation

These unaudited pro forma condensed combined statements of operations were prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of the SEC Regulation S-X, and present the pro forma results of operations of the combined companies based upon the historical information after giving effect to the acquisitions of Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton, RTD Calgary, Terry’s Tire, Hercules and RTD and adjustments described in these footnotes. The unaudited pro forma condensed combined statements of operations for the six months ended July 5, 2014 and the year ended December 28, 2013 are presented as if the acquisitions of Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton, RTD Calgary, Terry’s Tire, Hercules and RTD had occurred on December 30, 2012 (the first day of the Company’s 2013 fiscal year). Prior to their respective acquisitions, Trail Tire, Extreme Wheel, RTD Edmonton and RTD Calgary each had fiscal years that ended on February 28, Kirks Tire and RTD each had fiscal years that ended on January 31, Hercules had an October 31 fiscal year end and Terry’s Tire had a December 31 fiscal year end. In addition, certain amounts in the Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton, RTD Calgary, Terry’s Tire and Hercules historical consolidated financial statements have been reclassified to conform to the Company’s basis of presentation. See also footnote 2(AE).

2. Pro Forma Adjustments

Hercules Pro Forma Adjustments

Adjustments included in the “Hercules” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows:

 

  (A) Represents the reversal of amortization of inventory step-up included in the historical results for ATD Corporation that is directly related to the Hercules acquisition and non-recurring. The carrying value of the acquired inventory was adjusted to the estimated fair market value, which is the estimated selling price less the sum of (a) costs of disposal and (b) a reasonable profit margin for completing the selling effort. The step-up in inventory value was amortized into cost of goods sold over the period of the Company’s normal inventory turns, which approximated two months.

 

  (B) Represents estimated amortization of the finite-lived intangible assets acquired of $1.8 million and $15.4 million for the six months ended July 5, 2014 and the year ended December 28, 2013, respectively. The acquired intangible assets consisted of a customer list with a valuation of $147.2 million that is being amortized on an accelerated basis over an estimated useful life of eighteen years and a tradename with a valuation of $8.5 million that is being amortized on a straight-line basis over an estimated useful life of fifteen years. The estimated useful lives have been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. The $15.4 million for the year ended December 28, 2013 is composed of $14.8 million of customer list amortization and $0.6 million of tradename amortization. A projection of future cash flows was utilized in valuing the customer list intangible asset. The Company utilizes the income-forecast method of amortization which is based on the relative annual contribution of cash flows of the asset over its life based on these projected future cash flows. Thus, the amount of the discounted cash flows generated in each year of this projection is used to determine the annual amortization of the customer list for the applicable year, which is then recognized evenly each month in the respective annual period. The annual amortization for the first year represents approximately 10% of the value of the customer list and the annual amortization for the second year represents approximately 15% of the customer list value. The pro forma adjustments for the six months ended July 5, 2014 and the year ended December 28, 2013 include amortization for one month and twelve months, respectively. The tradename amortization was based on the tradename value of $8.5 million divided by 15 years for the applicable number of months in the period. In addition, the pro forma adjustment for the year ended December 28, 2013 is net of $0.5 million for the reversal of the amortization of identifiable assets as previously recorded by Hercules that has been eliminated.

 

53


  (C) Represents estimated incremental depreciation expense related to the step-up in fair market value of Hercules’ property and equipment, net of $0.1 million and $0.7 million for the six months ended July 5, 2014 and the year ended December 28, 2013, respectively. The pro forma adjustment for the six months ended July 5, 2014 and the year ended December 28, 2013 included depreciation expense on a straight-line basis for one month and twelve months, respectively. The step-up in fair market value and useful life by asset category is as follows:

 

     FMV
Step-up
     Useful
Life (yrs)

Land

   $ 999       N/A

Building

     1,346       25

Tire Molds

     3,215       5
  

 

 

    

Total

   $ 5,560      
  

 

 

    

 

  (D) Represents the reversal of transaction expenses included in the historical results for ATD Corporation and Hercules that are directly related to the acquisition and non-recurring.

 

  (E) Represents the reversal of the interest expense recognized by Hercules, including amortization of deferred financing costs related to Hercules’ debt that was not assumed by ATD Corporation and paid-off in conjunction with the acquisition.

 

  (F) Represents the estimated increase in interest expense associated with the issuance of $225.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the “Additional Senior Subordinated Notes”) and the incremental borrowings incurred on the Company’s U.S. ABL Facility of $43.3 million, both of which were used to finance the Hercules acquisition. In addition, the incremental amortization of deferred financing costs was included to determine the total increase in interest expense.

The estimated increase in interest expense is calculated as follows:

 

In thousands

  

Six Months
Ended
July 5, 2014

   

Fiscal Year

Ended
December 28, 2013

 

Interest expense on Additional Senior Subordinated Notes (1)

   $ 2,156      $ 25,875   

Increase in interest expense on U.S. ABL Facility (2)

     124        1,510   

Amortization of the original issue discount related to the Additional Senior Subordinated Notes (3)

     65        737   

Change in amortization of deferred financing costs related to the ABL facility (4)

     (12     24   

Incremental amortization of deferred financing costs related to the Additional Senior Subordinated Notes (5)

     13        152   
  

 

 

   

 

 

 

Net adjustment

   $ 2,346      $ 28,298   
  

 

 

   

 

 

 

 

(1) Represents additional interest expense related to the $225.0 million of Additional Senior Subordinated Notes used to finance a portion of the Hercules acquisition, based on a fixed interest rate of 11.5%.

 

(2) Represents additional interest expense related to the incremental borrowings incurred on the Company’s of $43.3 million U.S. ABL Facility used to finance a portion of the Hercules acquisition. The Company used the weighted-average interest rate of 3.4% for the six months ended July 5, 2014 and 3.5% for the fiscal year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the U.S. ABL Facility.

 

(3) Represents additional interest expense related to the Additional Senior Subordinated Notes original issue discount of $3.9 million which is being amortized over the life of the Additional Senior Subordinated Notes, or 52 months.

 

54


(4) Represents additional interest expense for the amortization of deferred financing costs related to the Company’s ABL Facility of $35,000 and $424,000 for the six months ended July 5, 2014 and year ended December 28, 2013 net of historical amortization expense of $47,000 and $400,000 for the six months ended July 5, 2014 and December 28, 2013. Deferred financing costs related to the U.S. and Canadian FILO Facilities totaled $577,000 and are being amortized over the life of the facilities, or 36 months. Deferred financing costs related to the Canadian ABL Facility totaled $871,000 and are being amortized over the life of the Canadian ABL Facility, or 45 months.

 

(5) Represents additional interest expense for the amortization of deferred financing costs related to the Additional Senior Subordinated Notes of $661,000 amortized over the life of the Additional Senior Subordinated Notes, or 52 months.

A 0.125% change to interest rates on the Company’s incremental U.S. ABL Facility borrowings would result in a change in pro forma interest expense of approximately $0.1 million for the year ended December 28, 2013.

 

  (G) Represents the income tax effect of the pro forma adjustments using a combined federal and state statutory income tax rate of 39.0%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (H) Reflects the reclassification of amortization of deferred financing costs in Hercules’ historical statement of operations to conform to the Company’s basis of presentation.

Terry’s Tire Pro Forma Adjustments

Adjustments included in the “Terry’s Tire” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows. These adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

  (I) Reflects the reclassification of the operating results for Terry’s Tire commercial and retread businesses from continuing operations, as historically presented, to discontinued operations. As part of the acquisition of Terry’s Tire, the Company acquired Terry’s Tire’s commercial and retread businesses. As the Company’s core business does not include commercial and retread operations, the Company decided that it would divest of these businesses. Accordingly, pro forma adjustments have been made to reclassify the historical operating results of both the commercial and retread businesses from continuing operations, as historically presented, to discontinued operations in the accompanying unaudited pro forma condensed combined statement of operations.

 

  (J) Represents the reversal of amortization of inventory step-up included in the historical results for ATD Corporation that is directly related to the Terry’s Tire acquisition and non-recurring. The carrying value of the acquired inventory was adjusted to the estimated fair market value, which is the estimated selling price less the sum of (a) costs of disposal and (b) a reasonable profit margin for completing the selling effort. The step-up in inventory value was amortized into cost of goods sold over the period of the Company’s normal inventory turns, which approximated two months.

 

  (K) Represents an adjustment to Terry’s Tire’s historical consolidated financial statements to reverse their last-in, first-out (“LIFO”) reserve impact on cost of goods sold recorded during the year ended December 31, 2013 to conform to the Company’s accounting policy for inventory valuation using the first-in, first-out (“FIFO”) method. No similar adjustment is required for the six months ended July 5, 2014 as Terry’s Tire’s historical interim statement of operations for the six months did not include a LIFO reserve impact to cost of goods sold.

 

55


  (L) Represents estimated amortization of finite-lived intangible assets acquired of $6.3 million and $21.3 million for the six months ended July 5, 2014 and the year ended December 28, 2013, respectively. The acquired intangible assets were a customer list with a preliminary valuation of $185.8 million that is being amortized on an accelerated basis over an estimated useful life of 18 years and a favorable leases intangible asset with a preliminary valuation of $0.4 million that is being amortized on a straight-line basis over an estimated useful life of 5 years. The estimated useful lives have been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. The $21.3 million amortization for the year ended December 28, 2013 consists of $21.1 million of customer list amortization and $0.2 million of favorable lease amortization. A projection of future cash flows was utilized in valuing the customer list intangible asset. The Company utilizes the income-forecast method of amortization which is based on the relative annual contribution of cash flows of the asset over its life based on these projected future cash flows. Thus, the amount of the discounted cash flows generated in each year of this projection is used to determine the annual amortization of the customer list for the applicable year, which is then recognized evenly each month in the respective annual period. The annual amortization for the first year represents approximately 11% of the value of the customer list and the annual amortization for the second year represents approximately 13% of the customer list value. The pro forma adjustments for the six months ended July 5, 2014 and the year ended December 28, 2013 include amortization for three months and twelve months, respectively. In addition, the pro forma adjustments for the six months ended July 5, 2014 and the year ended December 28, 2013 are net of $2.2 million and $10.2 million, respectively, for the reversal of the amortization of identifiable assets as previously recorded by Terry’s Tire that has been eliminated.

 

  (M) Represents the reversal of transaction expenses included in the historical results for ATD Corporation and Terry’s Tire that are directly related to the acquisition and non-recurring.

 

  (N) Represents the reversal of the interest expense recognized by Terry’s Tire, including amortization of deferred financing costs related to Terry’s Tire debt that was not assumed by ATD Corporation and paid-off in conjunction with the acquisition.

 

  (O) Represents the estimated increase in interest expense associated with the issuance of the Additional Senior Subordinated Notes and the incremental borrowings incurred on the Company’s U.S. ABL Facility, both of which were used to finance the Terry’s Tire acquisition. In addition, the incremental amortization of deferred financing costs was included to determine the total increase in interest expense.

The estimated increase in interest expense is calculated as follows:

 

In thousands

  

Six Months
Ended
July 5, 2014

    

Fiscal Year

Ended
December 28, 2013

 

Interest expense on Term Loan (1)

   $ 4,269       $ 17,377   

Increase in interest expense on U.S. ABL Facility (2)

     652         2,641   

Amortization of the original issue discount related to the Term Loan (3)

     43         168   

Amortization of deferred financing costs related to the Term Loan (4)

     567         2,269   
  

 

 

    

 

 

 

Net adjustment

   $ 5,531       $ 22,455   
  

 

 

    

 

 

 

 

(1) Represents additional interest expense related to the $300.0 million Term Loan used to finance a portion of the Terry’s Tire acquisition, based on the current variable interest rate of 5.8%.

 

(2)

Represents additional interest expense related to incremental borrowings of $75.8 million incurred on the Company’s U.S. ABL Facility used to finance a portion of the Terry’s Tire acquisition. The Company used the weighted-average interest rate of 3.4% for the six months ended July 5, 2014 and 3.5% for the fiscal

 

56


  year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the U.S. ABL Facility. The six months ended July 5, 2014 and the year ended December 28, 2013 included interest expense for three months and twelve months, respectively.

 

(3) Represents additional interest expense for the amortization of the Term Loan original issue discount of $750,000 using the effective interest method over the life of the Term Loan, or 50 months.

 

(4) Represents additional interest expense for the amortization of deferred financing costs related to the Term Loan of $9.5 million amortized over the life of the Term Loan, or 50 months.

A 0.125% change to interest rates on the Company’s incremental U.S. ABL Facility borrowings would result in a change in pro forma interest expense of approximately $0.5 million for the year ended December 28, 2013.

 

  (P) Represents the income tax effect of the pro forma adjustments, other than adjustment (Q), using a combined federal and state statutory income tax rate of 39.0%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (Q) Represents an adjustment to record an income tax benefit on Terry’s Tire historical loss from continuing operations before income taxes using a combined federal and state statutory income tax rate of 39.0% to conform to the Company’s accounting policy for income taxes. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company. Prior to the acquisition, Terry’s Tire was formed and taxed as an S-Corporation for income tax purposes. Accordingly, Terry’s Tire did not record any historical income tax expense (benefit).

 

  (R) Reflects the reclassification of transaction expenses related to the acquisition in Terry’s Tire’s historical statement of operations to conform to the Company’s basis of presentation.

Trail Tire Pro Forma Adjustments

Adjustments included in the “Trail Tire” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows. These adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

  (S) Represents estimated amortization of a finite-lived intangible asset acquired. The acquired intangible asset consisted of a customer list with a preliminary valuation of $14.7 million that is being amortized on an accelerated basis over an estimated useful life of 16 years. The estimated useful life has been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. A projection of future cash flows was utilized in valuing the customer list intangible asset. The Company utilizes the income-forecast method of amortization which is based on the relative annual contribution of cash flows of the asset over its life based on these projected future cash flows. Thus, the amount of the discounted cash flows generated in each year of this projection is used to determine the annual amortization of the customer list for the applicable year, which is then recognized evenly each month in the respective annual period. The annual amortization for the first year represents approximately 11% of the value of the customer list and the annual amortization for the second year represents approximately 13% of the customer list value. The pro forma adjustments for the six months ended July 5, 2014 and the year ended December 28, 2013 include amortization for six months and twelve months, respectively.

 

  (T)

Represents the estimated increase in interest expense associated with the incremental borrowings incurred on the Company’s ABL Facility of $20.8 million which was used to finance the Trail Tire acquisition. The Company used the weighted-average interest rate of 3.4% for the six months

 

57


  ended July 5, 2014 and 3.5% for the year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the ABL Facility. The six months ended July 5, 2014 and the year ended December 28, 2013 included interest expense for six months and twelve months, respectively. A 0.125% change to interest rates on the Company’s incremental ABL Facility borrowings would result in a change in pro forma interest expense of less than $0.1 million for both the six months ended July 5, 2014 and the year ended December 28, 2013.

 

  (U) Represents the income tax effect of the pro forma adjustments using the Canadian statutory income tax rate of 26.7%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (V) Reflects the reclassification of Trail Tire’s historical bank charges to conform to the Company’s basis of presentation.

Extreme Wheel Pro Forma Adjustments

Adjustments included in the “Extreme Wheel” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows. These adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

  (W) Represents estimated amortization of a finite-lived intangible asset acquired. The acquired intangible asset consisted of a customer list with a preliminary valuation of $4.4 million that is being amortized on an accelerated basis over an estimated useful life of 16 years. The estimated useful life has been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. A projection of future cash flows was utilized in valuing the customer list intangible asset. The Company utilizes the income-forecast method of amortization which is based on the relative annual contribution of cash flows of the asset over its life based on these projected future cash flows. Thus, the amount of the discounted cash flows generated in each year of this projection is used to determine the annual amortization of the customer list for the applicable year, which is then recognized evenly each month in the respective annual period. The annual amortization for the first year represents approximately 11% of the value of the customer list and the annual amortization for the second year represents approximately 13% of the customer list value. The pro forma adjustments for the six months ended July 5, 2014 and the year ended December 28, 2013 include amortization for six months and twelve months, respectively.

 

  (X) Represents the estimated increase in interest expense associated with the incremental borrowings incurred on the Company’s ABL Facility of $6.5 million which was used to finance the Extreme Wheel acquisition. The Company used the weighted-average interest rate of 3.4% for the six months ended July 5, 2014 and 3.5% for the year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the ABL Facility. The six months ended July 5, 2014 and the year ended December 28, 2013 included interest expense for six months and twelve months, respectively. A 0.125% change to interest rates on the Company’s incremental ABL Facility borrowings would result in a change in pro forma interest expense of less than $0.1 million for both the six months ended July 5, 2014 and the year ended December 28, 2013.

 

  (Y) Represents the income tax effect of the pro forma adjustments using the Canadian statutory income tax rate of 26.7%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (Z) Reflects the reclassification of Extreme Wheel’s historical bank charges to conform to the Company’s basis of presentation.

 

58


Kirks Tire Pro Forma Adjustments

Adjustments included in the “Kirks Tire” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows. These adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

  (AA) Represents estimated amortization of a finite-lived intangible asset acquired. The acquired intangible asset consisted of a customer list with a preliminary valuation of $52.8 million that is being amortized on an accelerated basis over an estimated useful life of 16 years. The estimated useful life has been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. A projection of future cash flows was utilized in valuing the customer list intangible asset. The Company utilizes the income-forecast method of amortization which is based on the relative annual contribution of cash flows of the asset over its life based on these projected future cash flows. Thus, the amount of the discounted cash flows generated in each year of this projection is used to determine the annual amortization of the customer list for the applicable year, which is then recognized evenly each month in the respective annual period. The annual amortization for the first year represents approximately 10% of the value of the customer list and the annual amortization for the second year represents approximately 13% of the customer list value. The pro forma adjustments for the six months ended July 5, 2014 and the year ended December 28, 2013 include amortization for six months and twelve months, respectively.

 

  (AB) Represents the estimated increase in interest expense associated with the incremental borrowings incurred on the Company’s ABL Facility of $73.0 million which was used to finance the Kirks Tire acquisition. The Company used the weighted-average interest rate of 3.4% for the six months ended July 5, 2014 and 3.5% for the year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the ABL Facility. The six months ended July 5, 2014 and the year ended December 28, 2013 included interest expense for six months and twelve months, respectively. A 0.125% change to interest rates on the Company’s incremental ABL Facility borrowings would result in a change in pro forma interest expense of less than $0.1 million for both the six months ended July 5, 2014 and the year ended December 28, 2013.

 

  (AC) Represents the income tax effect of the pro forma adjustments using the Canadian statutory income tax rate of 26.7%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (AD) Reflects the reclassification of Kirks Tire’s historical bank charges to conform to the Company’s basis of presentation.

 

  (AE) Represents an adjustment to eliminate the operating results of Kirks Tire’s retail business from its historical statement of operations for the year ended December 28, 2013 as the Company did not acquire the Kirks Tire retail business. The historical interim statement of operations for the six months ended July 5, 2014 did not include Kirks Tire’s retail business so no adjustment is needed.

RTD Edmonton Pro Forma Adjustments

Adjustments included in the “RTD Edmonton” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows. These adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

  (AF)

Represents estimated amortization of a finite-lived intangible asset acquired. The acquired intangible asset consisted of a customer list with a preliminary valuation of $23.3 million that is being amortized on an accelerated basis over an estimated useful life of 16 years. The estimated

 

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  useful life has been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. A projection of future cash flows was utilized in valuing the customer list intangible asset. The Company utilizes the income-forecast method of amortization which is based on the relative annual contribution of cash flows of the asset over its life based on these projected future cash flows. Thus, the amount of the discounted cash flows generated in each year of this projection is used to determine the annual amortization of the customer list for the applicable year, which is then recognized evenly each month in the respective annual period. The annual amortization for the first year represents approximately 11% of the value of the customer list and the annual amortization for the second year represents approximately 13% of the customer list value. The pro forma adjustments for the six months ended July 5, 2014 and the year ended December 28, 2013 include amortization for six months and twelve months, respectively.

 

  (AG) Represents the estimated increase in interest expense associated with the incremental borrowings incurred on the Company’s ABL Facility of $31.9 million which was used to finance the RTD Edmonton acquisition. The Company used the weighted-average interest rate of 3.4% for the six months ended July 5, 2014 and 3.5% for the year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the ABL Facility. The six months ended July 5, 2014 and the year ended December 28, 2013 included interest expense for six months and twelve months, respectively. A 0.125% change to interest rates on the Company’s incremental ABL Facility borrowings would result in a change in pro forma interest expense of less than $0.1 million for both the six months ended July 5, 2014 and the year ended December 28, 2013.

 

  (AH) Represents the income tax effect of the pro forma adjustments using the Canadian statutory income tax rate of 26.7%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (AI) Reflects the reclassification of RTD Edmonton’s historical bank charges to conform to the Company’s basis of presentation.

RTD Calgary Pro Forma Adjustments

Adjustments included in the “RTD Calgary” columns in the accompanying unaudited pro forma condensed combined statements of operations are as follows. These adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

  (AJ) Represents estimated amortization of a finite-lived intangible asset acquired. The acquired intangible asset consisted of a customer list with a preliminary valuation of $13.6 million that is being amortized on an accelerated basis over an estimated useful life of 16 years. The estimated useful life has been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. A projection of future cash flows was utilized in valuing the customer list intangible asset. The Company utilizes the income-forecast method of amortization which is based on the relative annual contribution of cash flows of the asset over its life based on these projected future cash flows. Thus, the amount of the discounted cash flows generated in each year of this projection is used to determine the annual amortization of the customer list for the applicable year, which is then recognized evenly each month in the respective annual period. The annual amortization for the first year represents approximately 11% of the value of the customer list and the annual amortization for the second year represents approximately 13% of the customer list value. The pro forma adjustments for the six months ended July 5, 2014 and the year ended December 28, 2013 include amortization for six months and twelve months, respectively.

 

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  (AK) Represents the estimated increase in interest expense associated with the incremental borrowings incurred on the Company’s ABL Facility of $20.7 million which was used to finance the RTD Calgary acquisition. The Company used the weighted-average interest rate of 3.4% for the six months ended July 5, 2014 and 3.5% for the year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the ABL Facility. The six months ended July 5, 2014 and the year ended December 28, 2013 included interest expense for six months and twelve months, respectively. A 0.125% change to interest rates on the Company’s incremental ABL Facility borrowings would result in a change in pro forma interest expense of less than $0.1 million for both the six months ended July 5, 2014 and the year ended December 28, 2013.

 

  (AL) Represents the income tax effect of the pro forma adjustments using the Canadian statutory income tax rate of 26.7%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (AM) Reflects the reclassification of RTD Calgary’s historical bank charges to conform to the Company’s basis of presentation.

RTD Pro Forma Adjustments

Adjustments included in the “RTD” column in the accompanying unaudited pro forma condensed combined statement of operations for the year ended December 28, 2013 are as follows:

 

  (AN) Represents estimated amortization of the finite-lived intangible assets acquired. The acquired intangible assets consisted of a customer list with a valuation of $41.2 million that is being amortized on an accelerated basis over an estimated useful life of 16 years, a tradename with a valuation of $1.9 million that is being amortized on a straight-line basis over an estimated useful life of five years and a favorable leases intangible asset with a valuation of $0.4 million that is being amortized on a straight-line basis over an estimated useful life of four years. The estimated useful lives have been determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows. The pro forma adjustment for the year ended December 28, 2013 included amortization for four months consisting of $2.4 million of customer list amortization and $0.2 million of amortization related to the tradename and favorable leases. A projection of future cash flows was utilized in valuing the customer list intangible asset. The Company utilizes the income-forecast method of amortization which is based on the relative annual contribution of cash flows of the asset over its life based on these projected future cash flows. Thus, the amount of the discounted cash flows generated in each year of this projection is used to determine the annual amortization of the customer list for the applicable year, which is then recognized evenly each month in the respective annual period. The annual amortization for the first year represents approximately 17% of the value of the customer list asset.

 

  (AO) Represents the reversal of the interest expense recognized by RTD related to debt that was not assumed by ATD Corporation and paid off in conjunction with the acquisition.

 

  (AP) Represents the estimated increase in interest expense associated with the incremental borrowings incurred on the Company’s ABL Facility of $67.0 million which was used to finance the RTD acquisition. In addition, the incremental amortization of deferred financing costs was included to determine the total increase in interest expense.

 

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The estimated increase in interest expense is calculated as follows:

 

In thousands

  

Fiscal Year

Ended
December 28, 2013

 

Increase in interest expense on ABL Facility (1)

     778   

Incremental amortization of deferred financing costs related to the ABL Facility (2)

     177   
  

 

 

 

Net adjustment

   $ 955   
  

 

 

 

 

(1) Represents additional interest expense related to the incremental borrowings incurred on the Company’s ABL Facility of $67.0 million used to finance the RTD acquisition. The Company used the weighted-average interest rate of 3.5% for the fiscal year ended December 28, 2013 to calculate the estimated increase in interest expense related to incremental borrowings under the ABL Facility for the period from January 1, 2013 to April 30, 2013, the acquisition date.

 

(2) Represents additional interest expense for the period from January 1, 2013 to April 30, 2013 for the amortization of deferred financing costs related to the Canadian FILO Facility of $592,000 amortized over 17 months and amortization of deferred financing costs related to the Canadian ABL Facility of $469,000 amortized over 53 months.

A 0.125% change to interest rates on the Company’s incremental U.S. ABL Facility borrowings would result in a change in pro forma interest expense of approximately $0.1 million for the year ended December 28, 2013.

 

  (AQ) Represents the income tax effect of the pro forma adjustments using the Canadian statutory income tax rate of 26.7%. This rate is an estimate and does not take into account future tax strategies that may apply to the combined Company.

 

  (AR) Represents the reversal of transaction expenses included in the historical results for ATD Corporation and RTD that are directly related to the acquisition and non-recurring.

 

  (AS) Represents the reversal of amortization of inventory step-up included in the historical results for ATD Corporation that is directly related to the RTD acquisition and non-recurring. The carrying value of the acquired inventory was adjusted to the estimated fair market value, which is the estimated selling price less the sum of (a) costs of disposal and (b) a reasonable profit margin for completing the selling effort. The step-up in inventory value was amortized into cost of goods sold over the period of the Company’s normal inventory turns, which approximated two months.

Use of Offering Proceeds

 

  (AT) Reflects the             shares to be sold in this offering and the application of the net proceeds of approximately $         therefrom to be received by us, assuming an initial public offering price of $         per share (the midpoint of the offering range shown on the cover of this prospectus), as described in “Use of Proceeds.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should read the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The terms “Company,” “we,” “our” or “us,” as used herein, refer to ATD Corporation and its consolidated subsidiaries unless otherwise stated or indicated by context. Amounts presented may not add due to rounding.

Company Overview

We are the largest distributor of replacement tires in North America based on dollar amount of wholesale sales and number of warehouses. We provide a wide range of products and value-added services to customers in each of the key market channels to enable tire retailers to more effectively service and grow sales to consumers. Through our network of more than 140 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing more than 40,000 SKUs, to approximately 80,000 customers. In 2013, we distributed more than 40 million replacement tires after giving effect to recent acquisitions. We estimate that our share of the replacement passenger and light truck tire market in 2013, after giving effect to our recently completed acquisitions, would have been approximately 14% in the United States, up from approximately 1% in 1996, and approximately 21% in Canada.

We serve a highly diversified customer base across multiple channels, comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We have a significant market presence in a number of these key market channels and we believe that we are the only replacement tire distributor in North America that services each of these key market channels. During fiscal 2013, our largest customer and top ten customers accounted for 3.1% and 10.9%, respectively, of our net sales. We believe we are a top supplier to many of our customers and have maintained relationships with our top 20 customers that exceed a decade on average.

We believe we distribute one of the broadest product offerings in our industry, supplying our customers with nine of 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 Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers, and through our acquisition of Hercules we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition, we sell custom wheels and accessories and related tire supplies and tools. In fiscal 2013, tire sales accounted for 97.4% of our net sales, with sales of passenger and light truck tires accounting for 82.3% of our net sales. Tire supplies, tools and custom wheels and accessories represented approximately 2.6% of our net sales. We believe that our large and diverse product offering allows us to penetrate the replacement tire market across a broad range of price points.

Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand organically in existing markets as well as in new geographic areas. We also expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. In addition, we are investing in technology and each sales channel to fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above-market growth in all market environments and to continue to enhance our profitability and cash flows.

 

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Industry Overview

The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are subject to changes in consumer confidence and economic conditions. As a result, tire consumers may opt to temporarily defer replacement tire purchases or purchase less costly brands during challenging economic periods when macroeconomic factors such as unemployment, high fuel costs and weakness in the housing market impact their financial health.

From 1955 through 2013, U.S. replacement tire unit shipments increased by an average of approximately 3% per year. We believe that we are experiencing the beginning of a recovery after a prolonged downturn, which began in 2008 for the replacement tire market. Replacement tire unit shipments were up 4.4% in the United States and 0.7% in Canada in 2013 as compared to 2012, as a rebound in the housing market, a decline in unemployment rates and increases in vehicle sales and vehicle miles driven impacted the U.S. and Canadian replacement tire markets favorably. The RMA projects that replacement tire shipments will increase by approximately 2% in the United States 2014 as compared to 2013, as demand drivers continue to strengthen.

Going forward, we believe that long-term growth in the U.S. and Canadian replacement tire markets 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. and Canadian population continues to grow;

 

    increases in the number of replacement tire SKUs;

 

    growth of the high-performance tire market; and

 

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

Recent Developments

Acquisitions and Expansion

As part of our ongoing business strategy, we intend to expand in existing markets as well as enter into previously underserved markets and new geographic areas. Since the second half of 2010, we opened new distribution centers in 23 locations throughout the contiguous United States. We expect to continue to evaluate additional geographic markets during the remainder of 2014 and beyond.

On June 27, 2014, we completed the following acquisitions:

 

    Trail Tire. We acquired the wholesale distribution business of Trail Tire pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of Trail Tire. Trail Tire is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada.

 

    Extreme Wheel. We acquired the wholesale distribution business of Extreme Wheel pursuant to an Asset Purchase Agreement by and between TriCan and the shareholder and principal of Extreme Wheel. Extreme Wheel is a wholesale distributor of wheels and related accessories in Canada.

 

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    Kirks. We acquired the wholesale distribution business of Kirks Tire pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of Kirks Tire. Kirks Tire is engaged in (i) the wholesale distribution of tire, tire parts, tire accessories and related equipment and (ii) the retail sale and installation of tires, tire parts, and tire accessories and the manufacturing and sale of retread tires. We did not acquire Kirks Tire’s retail operations.

 

    RTD Edmonton. We acquired the wholesale distribution business of RTD Edmonton pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of RTD Edmonton. RTD Edmonton is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada.

 

    RTD Calgary. We acquired the wholesale distribution business of RTD Calgary pursuant to an Asset Purchase Agreement by and among TriCan and the shareholders and principals of RTD Calgary. RTD Calgary is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada.

Terry’s Tire. On March 28, 2014, we completed the acquisition of Terry’s Tire pursuant to a Stock Purchase Agreement between us and TTT Holdings, which owned all of the capital stock of Terry’s Tire. Terry’s Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the Internet. Terry’s Tire operated ten distribution centers spanning from Virginia to Maine and in Ohio. We believe the acquisition of Terry’s Tire will enhance our market position in these areas and aligns very well with our distribution centers, especially our new distribution centers that we opened over the past two years in the Northeast and Ohio. In its most recent fiscal year ended December 31, 2013, Terry’s Tire generated revenues and Adjusted EBITDA of approximately $502 million and $14 million, respectively and we expect the acquisition to generate annual operational synergies between $40 million and $45 million starting in 2015. For 2014, we expect to realize a portion of those synergies as we have begun the integration process.

Hercules. On January 31, 2014, we completed the acquisition of Hercules Holdings pursuant to an Agreement and Plan of Merger, dated January 24, 2014. Hercules Holdings owns all of the capital stock of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing, and selling replacement tires for passenger cars, trucks, and certain off-road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. Hercules operated 15 distribution centers in the United States, six distribution centers in Canada and one warehouse in northern China. Hercules also markets the Hercules® brand, which is one of the most sought-after proprietary tire brands in the industry. We believe the acquisition of Hercules will strengthen our presence in major markets such as California, Texas and Florida in addition to increasing our presence in Canada. Additionally, Hercules’ strong logistics and sourcing capabilities, including a long-standing presence in China, will also allow us to capitalize on the growing import market, as well as provide the ability to expand the international sales of the Hercules® brand. Finally, this acquisition will allow us to be a brand marketer of the Hercules® brand, which in 2013 had a 2% market share of the passenger and light truck market in North America and a 3% market share of highway truck tires in North America. In its most recent fiscal year ended October 31, 2013, Hercules generated revenues and Adjusted EBITDA of approximately $600 million and $27 million, respectively and we expect the acquisition to generate annual operational synergies between $30 million and $35 million starting in 2015. For 2014, we expect to realize a portion of those synergies as we have begun the integration process.

 

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The following table shows the calculation of Adjusted EBITDA from the most directly comparable GAAP measure, net income (loss), for Hercules’ fiscal year ended October 31, 2013 and Terry’s Tire’s fiscal year ended December 31, 2013:

 

In millions

  

Hercules

    

Terry’s Tire

 

Net income (loss)

   $ 6       $ (12

Depreciation and amortization

     6         12   

Interest expense

     7         10   

Income tax provision (benefit)

     3         —     

Non-cash stock compensation

     2         —     

Other(1)

     3         4   
  

 

 

    

 

 

 

Adjusted EBITDA

   $ 27       $ 14   

 

 

  (1) Other includes management fees, restructuring initiatives, non-cash gains and losses on the disposal of fixed assets and exchange gains and losses on foreign currency.

Kipling. On January 17, 2014, TriCan entered into and closed an Asset Purchase Agreement with Kipling Tire Co. LTD (“Kipling”) pursuant to which TriCan agreed to acquire the wholesale distribution business of Kipling. Kipling has operated as a retail-wholesale business since 1982. Kipling’s wholesale business distributes tires from its Etobicoke facilities to approximately 400 retail customers in Southern Ontario. Kipling’s retail operations were not acquired by TriCan and will continue to operate under its current ownership. This acquisition is expected to further strengthen TriCan’s presence in the Southern Ontario region of Canada.

RTD. On April 30, 2013, we completed the acquisition of RTD Holdco pursuant to a Share Purchase Agreement dated as of March 22, 2013, among TriCan, ATDI, RTD Holdco and RTD. RTD Holdco has no significant assets or operations other than its ownership of RTD. The operations of RTD constitute the operations of RTD Holdco. RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada.

Credit Agreement Amendment

In addition, on June 16, 2014, we amended our credit agreement relating to our senior secured term loan facility to borrow an additional $420 million on the same terms as our existing Term Loan. The proceeds from these additional borrowings were or will be used to redeem all amounts outstanding under our Senior Secured Notes and pay related fees and expenses, as well as for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions.

Our Sponsor

Following the completion of this offering, the TPG Funds will own approximately     % of our common stock, or     % if the underwriters’ option to purchase additional shares of our common stock is fully exercised. As a result, TPG has and will continue to have significant influence over us, including with respect to our operations. TPG may have interests that differ from our other stockholders. See “Risk Factors—Risks Related to our Common Stock and this Offering—TPG will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.” and “Certain Relationships and Related Party Transactions—Agreements with TPG and Management.”

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 53-week fiscal years, and the associated 14-week quarter, will

 

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not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The 2011 fiscal year, which ended December 31, 2011, the 2012 fiscal year, which ended December 29, 2012, and the 2013 fiscal year, which ended December 28, 2013, each contain operating results for 52 weeks. The quarters ended July 5, 2014 and June 29, 2013 each contain operating results for 13 weeks. The six months ended July 5, 2014 contains operating results for 27 weeks while the six months ended June 29, 2013 contains operating results for 26 weeks. It should be noted that our quarter-end reporting dates are different from our recently acquired subsidiaries. Hercules, Terry’s Tire, Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton and RTD Calgary all have calendar quarter-end reporting dates with their second quarter of 2014 ending on June 30. Prior to the acquisitions, Hercules had an October 31 fiscal year end, Terry’s Tire had a December 31 fiscal year end, RTD and Kirks Tire each had a January 31 fiscal year end and Trail Tire, Extreme Wheel, RTD Edmonton and RTD Calgary each had a February 28 fiscal year end, but each such subsidiary changed its year end to be the same as that of the Company, effective as of their respective acquisition dates. It should also be noted that, prior to fiscal 2013, our year-end reporting date was different from that of our TriCan subsidiary. For fiscal 2012, TriCan had a calendar year-end reporting date. TriCan converted to our fiscal year-end reporting date during fiscal 2013. The impact from these differences on the consolidated financial statements was not material.

Quarter Ended July 5, 2014 Compared to the Quarter Ended June 29, 2013

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:

 

   

Quarter
Ended

   

Quarter
Ended

   

Period Over

Period
Change

   

Period Over
Period

% Change

   

Percentage of Net Sales

For the Respective

Period Ended

 

In thousands

 

July 5,

2014

   

June 29,

2013

   

Favorable
(unfavorable)

   

Favorable
(unfavorable)

   

July 5,
2014

   

June 29,
2013

 

Net sales

  $ 1,267,582      $ 955,075      $ 312,507        32.7     100.0     100.0

Cost of goods sold

    1,063,376        802,492        (260,884     (32.5 %)      83.9     84.0

Selling, general and administrative expenses

    204,003        137,312        (66,691     (48.6 %)      16.1     14.4

Management fees

    14,967        1,255        (13,712     (1,092.6 %)      1.2     0.1

Transaction expenses

    15,490        2,266        (13,224     (583.6 %)      1.2     0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (30,254     11,750        (42,004     (357.5 %)      (2.4 %)      1.2

Other income (expense):

           

Interest expense

    (32,223     (17,387     (14,836     (85.3 %)      (2.5 %)      (1.8 %) 

Loss on extinguishment of debt

    (17,113     —          (17,113     (100.0 %)      (1.4 %)        

Other, net

    3,752        (1,935     5,687        293.9     0.3     (0.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (75,838     (7,572     (68,266     (901.6 %)      (6.0 %)      (0.8 %) 

Income tax provision (benefit)

    (26,370     (1,735     24,635        1,419.9     (2.1 %)      (0.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (49,468     (5,837     (43,631     (747.5 %)      (3.9 %)      (0.6 %) 

Income (loss) from discontinued operations, net of tax

    (48     —          (48     (100.0 %)      (0.0 %)        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (49,516   $ (5,837   $ (43,679     (748.3 %)      (3.9 %)      (0.6 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

Net sales for the quarter ended July 5, 2014 were $1,267.6 million, a $312.5 million, or 32.7%, increase, as compared with the quarter ended June 29, 2013. The increase in net sales was primarily driven by the combined results of new distribution centers as well as the acquisitions of Hercules and Terry’s Tire and our 2013 acquisitions of Wholesale Tire Distributors (“WTD”), TDI and RTD. These growth initiatives added $296.8

 

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million of incremental sales in the second quarter of 2014. In addition, we experienced an increase in comparable tire unit sales of $35.5 million primarily driven by an overall stronger sales unit environment. However, these increases were partially offset by lower net tire pricing of $16.8 million, primarily driven by manufacturer marketing specials, competitive pricing positions in certain U.S. markets, as well as a shift in product mix in our lower priced point offerings.

Cost of Goods Sold

Cost of goods sold for the quarter ended July 5, 2014 were $1,063.4 million, a $260.9 million, or 32.5%, increase, as compared with the quarter ended June 29, 2013. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers as well as the acquisitions of Hercules, Terry’s Tire, RTD, WTD and TDI. These growth initiatives added $263.6 million of incremental costs in the second quarter of 2014. Cost of goods sold for the quarter ended July 5, 2014 also includes $12.5 million related to the non-cash amortization of the inventory step-up recorded in connection with the acquisition of Terry’s Tire as compared to $2.7 million during the quarter ended June 29, 2013. In addition, an overall stronger sales unit environment increased cost of goods sold by $12.0 million. These increases were partially offset by lower net tire pricing of $15.1 million.

Cost of goods sold as a percentage of net sales was 83.9% for the quarter ended July 5, 2014, a slight decrease compared with 84.0% for the quarter ended June 29, 2013. The decrease in cost of goods sold as a percentage of net sales was primarily driven by the margin contribution of the Hercules brand, a lower level of manufacturer price repositioning this year as compared to the prior year and an incremental benefit from manufacturer programs during the current year. This decrease was partially offset by the non-cash amortization of the $12.5 million inventory step-up recorded in connection with the Terry’s Tire acquisition, which had a 1.0% impact on cost of goods sold as a percentage of net sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended July 5, 2014 were $204.0 million, a $66.7 million, or 48.6%, increase as compared with the quarter ended June 29, 2013. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers as well as the acquisitions of Hercules, Terry’s Tire, RTD, WTD and TDI. Combined, these factors added $51.9 million of incremental costs to the second quarter of 2014. In addition, we also experienced a $9.2 million increase in salaries and wage expense primarily related to higher sales volume and related headcount as well as higher incentive and commission compensation. Additionally, occupancy & vehicle expense increased $1.3 million due to higher cost as we expanded several of our distribution centers to better service our existing customers.

Selling, general and administrative expenses as a percentage of net sales were 16.1% for the quarter ended July 5, 2014; an increase compared with 14.4% for the quarter ended June 29, 2013. The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by an increase in costs associated with our growth expansion of recently opened and acquired distribution centers, as our consolidation of the Hercules distribution centers will not be finalized until the latter part of the third quarter and the consolidation of the Terry’s Tire’s distribution centers did not commence until the latter part of second quarter and will extend thru the latter part of the third quarter. In addition, higher depreciation and amortization expense between periods resulted in a 0.2% increase in selling, general and administrative expenses as a percentage of net sales.

Management fees

Management fees for the quarter ended July 5, 2014 of $15.0 million represents a monitoring fee paid to a management company affiliated with our Sponsor, TPG, for certain management, consulting and financial services as well as fees paid to our outside board of directors. In addition, the quarter ended July 5, 2014 includes a $13.5 million fee paid to a management company affiliated with TPG in connection with the acquisitions of Terry’s Tire and Hercules.

 

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Transaction Expenses

Transaction expenses for the quarter ended July 5, 2014 were $15.5 million and were primarily related to costs associated with our acquisitions of Hercules and Terry’s Tire, as well as with expenses related to potential future acquisitions and other corporate initiatives. During the quarter ended June 29, 2013, transaction expenses of $2.3 million primarily related to costs associated with our acquisition of RTD in April 2013 and TriCan in November 2012, as well as with expenses related to potential future acquisitions and other corporate initiatives.

Interest Expense

Interest expense for the quarter ended July 5, 2014 was $32.2 million, a $14.8 million, or 85.3%, increase, compared with the quarter ended June 29, 2013. This increase was due to higher debt levels associated with our ABL Facility, FILO Facility, Additional Subordinated Notes and Term Loan, all as defined under “Liquidity and Capital Resources,” which were driven by our 2014 acquisitions and the redemption of our Senior Secured Notes. In addition, changes in the fair value of our interest rate swaps resulted in a $0.8 million increase in interest expense.

Loss on Extinguishment of Debt

Loss on extinguishment of debt for the quarter ended July 5, 2014 of $17.1 million related to the early redemption of all $250.0 million aggregate principal amount of our 9.75% Senior Secured Notes on June 16, 2014 at a redemption price of 104.875% of the principal amount. Additionally, the loss on extinguishment of debt includes approximately $4.9 million related to the write-off of the unamortized original issuance discount and unamortized deferred financing fees associated with the Senior Secured Notes.

Provision (Benefit) for Income Taxes

Our income tax benefit for the quarter ended July 5, 2014 was $26.4 million, based on pre-tax loss of $75.8 million; our effective tax rate under the discrete method was 34.8%. For the quarter ended June 29, 2013, our income tax benefit was $1.7 million, based on a pre-tax loss of $7.6 million; our effective tax rate was 22.9%.

 

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Six Months Ended July 5, 2014 Compared to the Six Months Ended June 29, 2013

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:

 

    Six Months
Ended
    Six Months
Ended
    Period Over
Period
Change
    Period Over
Period
% Change
    Percentage of Net Sales
For the Respective
Period Ended
 

In thousands

 

July 5,

2014

   

June 29,
2013

   

Favorable
(unfavorable)

   

Favorable
(unfavorable)

   

July 5,
2014

   

June 29,
2013

 

Net sales

  $ 2,343,051      $ 1,795,053      $ 547,998        30.5     100.0     100.0

Cost of goods sold

    1,980,690        1,510,648        (470,042     (31.1 %)      84.5     84.2

Selling, general and administrative expenses

    381,313        272,825        (108,488     (39.8 %)      16.3     15.2

Management fees

    15,575        2,246        (13,329     (593.5 %)      0.7     0.1

Transaction expenses

    20,176        3,289        (16,887     (513.4 %)      0.9     0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (54,703     6,045        (60,748     (1,004.9 %)      -2.3     0.3

Other income (expense):

           

Interest expense

    (56,622     (34,627     (21,995     (63.5 %)      -2.4     -1.9

Loss on extinguishment of debt

    (17,113     —          (17,113     (100.0 %)      -0.7       

Other, net

    1,950        (2,908     4,858        167.1     0.1     -0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (126,488     (31,490     (94,998     (301.7 %)      -5.4     -1.8

Income tax provision (benefit)

    (42,976     (9,362     33,614        359.0     -1.8     -0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (83,512     (22,128     (61,384     (277.4 %)      -3.6     -1.2

Income (loss) from discontinued operations, net of tax

    (48     —          (48     (100.0 %)      0.0       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (83,560   $ (22,128   $ (61,432     (277.6 %)      -3.6     -1.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

Net sales for the six months ended July 5, 2014 were $2,343.1 million, a $548.0 million, or 30.5%, increase, as compared with the six months ended June 29, 2013. The increase in net sales was primarily driven by the combined results of new distribution centers as well as the acquisitions of Hercules and Terry’s Tire and our 2013 acquisitions of WTD, TDI and RTD. These growth initiatives added $464.3 million of incremental sales during the six month period of 2014. In addition, we experienced an increase in comparable tire unit sales of $134.3 million primarily driven by an overall stronger sales unit environment and the inclusion of five additional selling days in our first quarter of 2014 which contributed approximately $47.0 million to the unit increase. However, these increases were partially offset by lower net tire pricing of $47.0 million, primarily driven by manufacturer marketing specials, competitive pricing positions in certain U.S. markets, as well as a shift in product mix in our lower priced point offerings.

Cost of Goods Sold

Cost of goods sold for the six months ended July 5, 2014 were $1,980.7 million, a $470.0 million, or 31.1%, increase, as compared with the six months ended June 29, 2013. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers as well as the acquisitions of Hercules, Terry’s Tire, RTD, WTD and TDI. These growth initiatives added $402.2 million of incremental costs during the six month period of 2014. Cost of goods sold for the six months ended July 5, 2014 also includes $31.6 million related to the non-cash amortization of the inventory step-up recorded in connection with the acquisitions of Terry’s Tire, Hercules and WTD as compared to $4.9 million during the six months ended June 29, 2013. In

 

70


addition, the inclusion of five additional selling days in our first quarter of 2014 and an overall stronger sales unit environment increased cost of goods sold by $95.8 million (of which approximately $41.0 million was due to the five additional selling days). These increases were partially offset by lower net tire pricing of $42.5 million.

Cost of goods sold as a percentage of net sales was 84.5% for the six months ended July 5, 2014, an increase compared with 84.2% for the six months ended June 29, 2013. The increase in cost of goods sold as a percentage of net sales was primarily driven by the $31.6 million non-cash amortization of the inventory step-up recorded in connection with the Terry’s Tire, Hercules and WTD acquisitions. This increase had a 1.5% impact on cost of goods sold as a percentage of net sales. Excluding the non-cash amortization of the inventory step-up, the decrease in cost of goods sold as a percentage of net sales was primarily driven by the margin contribution of the Hercules brand, a lower level of manufacturer price repositioning this year as compared to the prior year and an incremental benefit from manufacturer programs during the current year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended July 5, 2014 were $381.3 million, a $108.5 million, or 39.8%, increase as compared with the six months ended June 29, 2013. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers as well as the acquisitions of Hercules, Terry’s Tire, RTD, WTD and TDI. Combined, these factors added $84.8 million of incremental costs to the six month period of 2014. In addition, we also experienced a $17.3 million increase in salaries and wage expense primarily due to higher sales volume and related headcount, higher incentive and commission compensation and the inclusion of five additional selling days in our first quarter of 2014, which contributed approximately $3.8 million to the year-over-year increase. Additionally, occupancy and vehicle expense increased $2.4 million due to higher cost as we expanded several of our distribution centers to better service our existing customers.

Selling, general and administrative expenses as a percentage of net sales were 16.3% for the six months ended July 5, 2014; an increase compared with 15.2% for the six months ended June 29, 2013. The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by an increase in costs associated with our growth expansion of recently opened and acquired distribution centers, as our consolidation of the Hercules distribution centers will not be finalized until the latter part of the third quarter and the consolidation of the Terry’s Tire’s distribution centers did not commence until the latter part of the second quarter and will extend thru the latter part of the third quarter.

Management fees

Management fees for the six months ended July 5, 2014 of $15.6 million represents a monitoring fee paid to a management company affiliated with our Sponsor, TPG, for certain management, consulting and financial services as well as fees paid to our outside board of directors. In addition, the six months ended July 5, 2014 includes a $13.5 million fee paid to a management company affiliated with TPG in connection with the acquisitions of Terry’s Tire and Hercules.

Transaction Expenses

Transaction expenses for the six months ended July 5, 2014 were $20.2 million and were primarily related to costs associated with our acquisitions of Hercules and Terry’s Tire, as well as with expenses related to potential future acquisitions and other corporate initiatives. During the six months ended June 29, 2013, transaction expenses of $3.3 million primarily related to costs associated with our acquisitions of RTD in April 2013 and TriCan in November 2012, as well as with expenses related to potential future acquisitions and other corporate initiatives.

Interest Expense

Interest expense for the six months ended July 5, 2014 was $56.6 million, a $22.0 million, or 63.5%, increase compared with the six months ended June 29, 2013. This increase was due to higher debt levels

 

71


associated with our ABL Facility, FILO Facility, Additional Subordinated Notes and Term Loan, all as defined under “Liquidity and Capital Resources,” which were driven by our 2014 acquisitions and the redemption of our Senior Secured Notes. In addition, changes in the fair value of our interest rate swaps resulted in a $1.2 million increase in interest expense.

Loss on Extinguishment of Debt

Loss on extinguishment of debt for the six months ended July 5, 2014 of $17.1 million related to the early redemption of all $250.0 million aggregate principal amount of our 9.75% Senior Secured Notes on June 16, 2014 at a redemption price of 104.875% of the principal amount. Additionally, the loss on extinguishment of debt includes approximately $4.9 million related to the write-off the of unamortized original issuance discount and unamortized deferred financing fees associated with the Senior Secured Notes.

Provision (Benefit) for Income Taxes

Our income tax benefit for the six months ended July 5, 2014 was $43.0 million, based on pre-tax loss of $126.5 million; our effective tax rate under the discrete method was 34.0%. For the six months ended June 29, 2013, our income tax benefit was $9.4 million, based on a pre-tax loss of $31.5 million; our effective tax rate was 29.7%. The effective rate of the year-to-date tax provision is lower than the statutory income tax rate primarily due to earnings in a foreign jurisdiction taxed at rates lower than the statutory U.S. federal rate and non-deductible transaction costs, which lowered the effective tax rate by 0.5% and 0.5%, respectively.

Fiscal 2013 Compared to Fiscal 2012

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:

 

    Fiscal Year
Ended
    Fiscal Year
Ended
   

Period Over
Period
Change

   

Period Over
Period %
Change

   

Percentage of Net Sales For
the Respective Period Ended

 

In thousands

 

December 28,
2013

   

December 29,
2012

   

Favorable
(unfavorable)

   

Favorable
(unfavorable)

   

December 28,
2013

   

December 29,
2012

 

Net sales

  $ 3,839,269     $ 3,455,864     $ 383,405       11.1 %     100.0     100.0

Cost of goods sold

    3,188,409       2,887,421       (300,988 )     (10.4 %)      83.0     83.6

Selling, general and administrative expenses

    574,987       506,558       (68,429 )     (13.5 %)      15.0     14.7

Transaction expenses

    6,719       5,246       (1,473 )     (28.1 %)      0.2     0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    69,154       56,639       12,515       22.1 %     1.8     1.6

Other income (expense):

           

Interest expense

    (74,316 )     (72,910     (1,406 )     (1.9 %)      (1.9 %)      (2.1 %) 

Other, net

    (5,196 )     (3,895     (1,301 )     (33.4 %)      (0.1 %)      (0.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

    (10,358 )     (20,166     9,808       48.6 %     (0.3 %)      (0.6 %) 

Income tax provision (benefit)

    (3,982 )     (5,965     (1,983 )     (33.2 %)      (0.1 %)      (0.2 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (6,376 )   $ (14,201   $ 7,825       55.1 %     (0.2 %)      (0.4 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

72


Net Sales

Net sales for fiscal 2013 were $3,839.3 million, a $383.4 million or 11.1% increase compared with fiscal 2012. The increase in net sales was primarily driven by the combined results of new distribution centers as well as the acquisition of TriCan and Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil (“CTO”) in fiscal 2012 and RTD, TDI and WTD in fiscal 2013. These growth initiatives added $464.4 million of incremental sales during fiscal 2013. In addition, despite one less selling day in fiscal 2013 as compared to fiscal 2012, we experienced an increase in comparable tire unit sales of $3.6 million primarily driven by an overall stronger sales unit environment particularly during the fourth quarter of 2013. However, these increases were partially offset by lower net tire pricing of $92.0 million, which included $68.8 million related to passenger and light truck tires and $15.5 million related to medium truck tires, primarily driven by manufacturer price repositioning, as well as a slight shift in product mix in our lower priced point offerings specifically our entry level imported products.

Cost of Goods Sold

Cost of goods sold for fiscal 2013 were $3,188.4 million, a $301.0 million or a 10.4% increase compared with fiscal 2012. The increase in cost of goods sold was primarily driven by the combined results of new distributions centers as well as the acquisition of TriCan and CTO in fiscal 2012 and RTD, TDI and WTD in fiscal 2013. These growth initiatives added $379.1 million of incremental costs during fiscal 2013. In addition, despite one less selling day in fiscal 2013 as compared to fiscal 2012, we experienced an overall stronger sales unit environment, particularly during fourth quarter of 2013, which increased cost of goods sold by $0.9 million. Cost of goods sold for fiscal 2013 also includes $5.4 million related to non-cash amortization of the inventory step-up recorded in connection with the acquisitions of TriCan, RTD, TDI and WTD as compared to $4.1 million during fiscal 2012. These increases were partially offset by lower net tire pricing of $78.6 million.

Cost of goods sold as a percentage of net sales was 83.0% for fiscal 2013, a decrease compared with 83.6% from fiscal 2012. The decrease in cost of goods sold as a percentage of net sales was primarily driven by a higher level of manufacturer program benefits in the current year, which was driven by an approximate 4% unit growth in the U.S., but was partially offset by a higher level of negative FIFO layers in 2013 as compared to 2012, which resulted from manufacturer price reductions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal 2013 were $575.0 million, a $68.4 million or 13.5% increase compared with fiscal 2012. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers as well as the acquisition of TriCan and CTO in fiscal 2012 and RTD, TDI and WTD in fiscal 2013. Combined, these factors added $69.6 million of incremental costs to fiscal 2013, including increased amortization expense of $12.1 million from newly established intangible assets. In addition, we experienced a $5.3 million increase to vehicle and occupancy expenses due to a higher overall consumption of fuel and other vehicle related expenses as well as increases in occupancy costs as we expanded several of our distribution centers to better service our existing customers. Depreciation expense added an additional $4.7 million of costs to fiscal 2013 as we increased our capital expenditure costs for information system technologies. These increases were partially offset by a decrease in salaries and wage expense of $9.0 million, which related to lower commission compensation, as well as, improved operating efficiencies and headcount leverage in most of our distribution centers.

Selling, general and administrative expenses as a percentage of net sales was 15.0% for fiscal 2013; an increase compared with 14.7% during fiscal 2012. The increase in selling, general and administrative expenses as a percentage of net sales was substantially driven by an increase in non-cash depreciation and amortization expense.

 

73


Transaction Expenses

Transaction expenses for fiscal 2013 were $6.7 million and were primarily related to costs associated with our acquisitions of RTD, TDI and WTD as well as expenses related to potential future acquisitions and other corporate initiatives. Transaction expenses for fiscal 2012 were $5.2 million, which primarily related to acquisition costs associated with our acquisition of TriCan in November 2012 and CTO in May 2012 as well as with expenses related to potential future acquisitions and corporate initiatives. In addition, we incurred $1.3 million for exit costs associated with our decision to relocate an existing distribution center into an expanded distribution center during fiscal 2012.

Interest Expense

Interest expense for fiscal 2013 was $74.3 million, a $1.4 million or 1.9% increase compared with fiscal 2012. The increase is primarily due to higher average debt levels on our ABL Facility as well as our FILO Facility, resulting from our acquisitions of TriCan at the end of fiscal 2012 as well as RTD, TDI and WTD during fiscal 2013. In addition, interest expense for fiscal 2012 included $2.8 million relating to the write-off of deferred financing costs associated with the amendment of our ABL Facility in November 2012 that did not repeat in fiscal 2013. During fiscal 2013, we also recorded $0.7 million associated with the fair value changes of our interest rate swaps. The comparable amount recorded associated with these swaps during fiscal 2012 was $1.3 million.

Provision (Benefit) for Income Taxes

Our income tax benefit for fiscal 2013 was $4.0 million. The benefit, which was based on a pre-tax loss of $10.4 million, includes $66.2 million of amortization expense that is not deductible for income tax purposes. Our income tax benefit for 2012 was $6.0 million, which was based on pre-tax loss of $20.2 million, primarily resulting from a higher state effective tax rate as well as additional amortization expense related to the valuation of intangible assets acquired, which were recorded in connection with the Merger. Our effective tax rate for fiscal years 2013 and 2012 was 38.4% and 29.5%, respectively. The effective tax rate for fiscal 2013 was higher than the statutory tax rate primarily due to the adjustment to the transaction costs related to 2013 acquisitions, the release of the valuation allowance related to various state net operating losses, and the rate differences between U.S. and Canada. The effective tax rate for fiscal 2012 was lower than the statutory tax rate primarily due to the adjustment to the transaction costs related to the acquisition of TriCan, the impact from certain amortization expense that is non-deductible for tax purposes, and the rate differences between U.S. and Canada.

Fiscal 2012 Compared to Fiscal 2011

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:

 

    Fiscal Year
Ended
    Fiscal Year
Ended
   

Period Over
Period
Change

   

Period Over
Period
% Change

    Percentage of Net Sales
For the Respective
Period Ended
 

In thousands

 

December 29,
2012

   

December 31,
2011

   

Favorable
(unfavorable)

   

Favorable
(unfavorable)

   

December 29,
2012

   

December 31,
2011

 

Net sales

  $ 3,455,864      $ 3,050,240      $ 405,624        13.3     100.0     100.0

Cost of goods sold

    2,887,421        2,535,020        (352,401     (13.9 %)      83.6     83.1

Selling, general and administrative expenses

    506,558        437,260        (69,298     (15.8 %)      14.7     14.3

Transaction expenses

    5,246        3,946        (1,300     (32.9 %)      0.2     0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    56,639        74,014        (17,375     (23.5 %)      1.6     2.4

Other income (expense):

           

Interest expense

    (72,910     (67,572     (5,338     (7.9 %)      (2.1 %)      (2.2 %) 

Other, net

    (3,895     (2,110     (1,785     (84.6 %)      (0.1 %)      (0.1 %) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

    (20,166     4,332        (24,498     (565.5 %)      (0.6 %)      0.1

Income tax provision (benefit)

    (5,965     4,464        10,429        233.6     (0.2 %)      0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (14,201   $ (132   $ (14,069     (10,658.3 %)      (0.4 %)      0.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

74


Net Sales

Net sales for fiscal 2012 were $3,455.9 million, a $405.6 million or 13.3% increase compared with fiscal 2011. The increase in net sales was partially driven by higher net tire pricing of $167.1 million. The pricing increase, which included $127.0 million related to passenger and light truck tires and $28.1 million related to medium truck tires, resulted from our passing through tire manufacturer price increases predominately established during 2011, as well as selling a higher mix of flag brand product and a lower mix of Chinese manufactured product. The combined results of new distribution centers opened since the beginning of 2011 as well as the acquisitions of TriCan, CTO and Bowlus Service Company d/b/a North Central Tire (“NCT”) added $181.5 million of incremental sales during fiscal 2012. In addition, an increase in comparable tire unit sales across all tire categories contributed $40.4 million, primarily driven by passenger and light truck tires. However, the increase in comparable tire unit sales was slightly impacted by destocking of lower price point inventories throughout the marketplace in anticipation of the expiration of tariffs imposed on Chinese tire imports that ceased at the end of September 2012. As a result, comparable net sales of the Chinese tire imports decreased by $34.1 million.

Cost of Goods Sold

Cost of goods sold for fiscal 2012 were $2,887.4 million, a $352.4 million or a 13.9% increase compared with fiscal 2011. The increase in cost of goods sold was primarily driven by the combined results of new distribution centers opening since the beginning of 2011, as well as the acquisitions of TriCan, CTO, and NCT. These growth initiatives added $159.2 million of incremental costs during fiscal 2012. In addition, higher net tire pricing of $126.3 million contributed to the increase. The pricing increase, which included $103.6 million related to passenger and light truck tires and $23.6 million related to medium truck tires, resulted from tire manufacturer price increases predominately established during 2011, as well as selling a higher mix of flag brand product and a lower mix of Chinese manufactured product. In addition, an increase in comparable tire unit sales contributed $22.8 million, primarily driven by passenger and light truck tires. Fiscal 2012 also includes $4.1 million related to the non-cash amortization of the inventory step-up recorded in connection with the acquisition of TriCan.

Cost of goods sold as a percentage of net sales was 83.6% for fiscal 2012, an increase compared with 83.1% from fiscal 2011. The increase in the cost of goods sold as a percentage of net sales was primarily driven by a lower level of manufacturer price increases implemented during 2012 as compared to 2011, coupled with selective discounting by certain tire manufacturers during 2012 for the intention of spurring unit sales. These price increases generate favorable inventory cost layers that are passed through to our customers in the period instituted. In addition, competitive pricing pressures have increased as distributors vie for customers in a sluggish market.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal 2012 were $506.6 million, a $69.3 million or 15.8% increase compared with fiscal 2011. The increase in selling, general and administrative expenses was primarily related to incremental costs associated with our new distribution centers opened since the beginning of 2011 as well as the acquisitions of TriCan, CTO and NCT. Combined, these factors added $28.0 million of incremental costs to fiscal 2012, including increased amortization expense of $5.0 million from newly established intangible assets. In addition, we experienced an increase to salaries and wage expense of $14.1 million, primarily due to higher sales volume and related headcount; a $9.8 million increase to vehicle expense due to a higher price per gallon of fuel, higher overall consumption of fuel and other vehicle related expenses; as well as a $6.0 million increase in occupancy costs as we expanded several of our distribution centers to better service our existing customers. Depreciation expense added an additional $5.7 million of costs to fiscal 2012 as we increased our capital expenditure costs primarily for information system technologies.

Selling, general and administrative expenses as a percentage of net sales was 14.7% for fiscal 2012; an increase compared with 14.3% during fiscal 2011. The increase in selling, general and administrative expenses as

 

75


a percentage of net sales was primarily driven by an increase in costs associated with our growth expansion of recently opened distribution centers as well as an increase in non-cash depreciation and amortization expense.

Transaction Expenses

Transaction expenses for fiscal 2012 were $5.2 million, which primarily related to acquisition costs associated with our acquisition of TriCan in November 2012 and CTO in May 2012 as well as with expenses related to potential future acquisitions and corporate initiatives. In addition, we incurred $1.3 million for exit costs associated with our decision to relocate an existing distribution center into an expanded distribution center during fiscal 2012. Transaction expenses for fiscal 2011 were $3.9 million, which primarily related to acquisition fees as well as costs incurred in connection with both the amendment of our ABL Facility and the registration of our Senior Secured Notes with the SEC. Additionally, we incurred $1.1 million for exit costs associated with our decision to relocate two existing distribution centers into two expanded distribution centers during fiscal 2011.

Interest Expense

Interest expense for fiscal 2012 was $72.9 million, a $5.3 million or 7.9% increase compared with fiscal 2011. The increase is primarily due to higher average debt levels on our ABL Facility partially offset by lower average interest rates on the outstanding debt. In addition, $2.8 million of the year-over-year increase relates to the write-off of deferred financing costs associated with the amendment of our ABL Facility in November 2012 due to a change in lenders in the syndication group for the amended ABL Facility. During fiscal 2012, we also recorded $1.3 million associated with the fair value changes of our interest rate swaps. The comparable amount recorded associated with these swaps during fiscal 2011 was $0.9 million.

Provision (Benefit) for Income Taxes

Our income tax benefit for fiscal 2012 was $6.0 million. The benefit, which was based on a pre-tax loss of $20.2 million, includes $58.6 million of amortization expense that is not deductible for income tax purposes. Our income tax provision for 2011 was $4.5 million, which was based on pre-tax income of $4.3 million, primarily resulting from a higher state effective tax rate as well as additional amortization expense related to the valuation of intangible assets acquired, which were recorded in connection with the Merger. Our effective tax rate for fiscal years 2012 and 2011 was 29.5% and 103.1%, respectively. The effective tax rate for fiscal 2012 was lower than the statutory tax rate primarily due to the unfavorable adjustment to the transaction costs related to the acquisition of TriCan, the impact from certain amortization expense that is non-deductible for tax purposes, and the rate differences between U.S. and Canada. The effective tax rate for fiscal 2011 was higher than the statutory tax rate primarily due to a 0.5% increase in our state effective tax rate, a result based on our growing presence in jurisdictions with higher than average tax rates, and the impact from certain amortization expense that is non-deductible for tax purposes.

Liquidity and Capital Resources

Overview

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

 

In thousands

  

July 5,

2014

   

December 28,
2013

   

December 29,
2012

   

December 31,
2011

 

Cash and cash equivalents

   $ 27,533      $ 35,760      $ 34,700      $ 23,682   

Working capital

     859,525        541,051        556,646        457,443   

Total debt

     1,944,297        967,000        951,204        835,808   

Total stockholder’s equity

     649,059        680,054        692,753        642,773   

Debt-to-capital ratio (1)

     75.0     58.7     57.9     56.5
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Debt-to-capital ratio = total debt / (total debt plus total stockholder’s equity)

 

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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 expenditure 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 and FILO Facility. We currently do not intend nor foresee a need to repatriate funds from our Canadian subsidiaries to the U.S., and no provision for U.S. income taxes has been made with respect to such earnings. We expect our cash flow from U.S. operations, combined with availability under our U.S. ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending in the U.S. during the next twelve month period. In addition, we expect our cash flow from U.S. operations and our availability under our U.S. ABL Facility to continue to provide sufficient liquidity to fund our ongoing obligations, projected working capital requirements, restructuring obligations and capital spending in the U.S. during the foreseeable future. We expect cash flows from our Canadian operations, combined with availability under our Canadian ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending in Canada during the next twelve month period and thereafter for the foreseeable future.

We are significantly leveraged. Accordingly, our liquidity requirements are significant, primarily due to our debt service requirements. As of July 5, 2014, our total indebtedness was $1,944.3 million with a debt-to-capital ratio of 75.0%. As of July 5, 2014, we have an additional $198.4 million of availability under our U.S. ABL Facility and an additional $70.8 million of availability under our Canadian ABL Facility. The availability under our U.S. and Canadian ABL Facilities is determined in accordance with our borrowing base.

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 “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 U.S. and Canadian ABL Facilities or through the incurrence of additional 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.

 

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Cash Flows

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

 

In thousands

 

Six months
ended

July 5,

2014

   

Six months

ended

June 29,

2013

   

Year ended
December 28,
2013

   

Year ended
December 29,
2012

   

Year ended
December 31,
2011

 

Cash provided by (used in) continuing operating activities

  $ (167,545   $ 29,033      $ 100,982      $ 10,072      $ (90,699

Cash provided by (used in) discontinued operations

    350        —          —          —          —     

Cash provided by (used in) investing activities

    (855,423     (88,532     (118,435     (167,821     (92,249

Cash provided by (used in) financing activities

    1,013,358        63,000        22,998        168,824        186,263   

Effect of exchange rate changes on cash

    1,033        (2,548     (4,485     (57     —     

Net increase (decrease) in cash and cash equivalents

    (8,227     953        1,060        11,018        3,315   

Cash and cash equivalents—beginning of period

    35,760        34,700        34,700        23,682        20,367   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents—end of period

  $ 27,533      $ 35,653      $ 35,760      $ 34,700      $ 23,682   

Cash payments for interest

  $ 58,025      $ 33,036      $ 68,179      $ 64,324      $ 61,732   

Cash payments (receipts) for taxes, net

  $ 3,817      $ 2,464      $ 23,740      $ 6,510      $ (8,101

Capital expenditures financed by debt

  $ —        $ —        $ 128      $ 515      $ —     

Operating Activities

Net cash used in continuing operating activities for the six months ended July 5, 2014 was $167.5 million compared with cash provided by continuing operating activities of $29.0 million during the six months ended June 29, 2013. During the current period, working capital requirements resulted in a cash outflow of $177.7 million, primarily driven by an increase in customer accounts receivable of $38.3 million and an increase in inventory levels of $100.1 million as a result of stocking new distribution centers opened and building out the product offering provided through the Hercules acquisition, and to a lesser extent, due to the build of inventory levels for the achievement of certain manufacturer first half program incentives.

Net cash provided by continuing operating activities for the six months ended June 29, 2013 was $29.0 million. During the current period, working capital requirements resulted in a cash inflow of $3.8 million, primarily driven by an increase in accounts payable associated with the timing of vendor payments and a decrease in customer accounts receivable. These amounts were partially offset by changes in inventory levels which resulted in a cash outflow during the current period as a result of stocking new distribution centers opened during the year, seasonal changes in inventory stocking levels and our recent acquisitions.

Net cash provided by operating activities for fiscal 2013 was $101.0 million compared with $10.1 million for fiscal 2012. The increase is primarily driven by cash earnings during the year. In addition, working capital requirements resulted in a net cash inflow of $9.6 million during fiscal 2013, primarily driven by a change in accounts payable associated with the timing of vendor payments which resulted in a cash inflow of $29.5 million partially offset by a cash outflow of $27.6 million related to changes in inventory levels as a result of stocking new distribution centers opened and acquired during the year as well as seasonal changes in inventory stocking levels (including the Canadian winter business).

Net cash provided by operating activities for fiscal 2012 was $10.1 million compared with net cash used in operating activities of $90.7 million for fiscal 2011. During fiscal 2012, working capital requirements resulted in a cash outflow of $73.2 million, primarily driven by the continued expansion of our distribution centers into new domestic geographic markets. In addition, inventory resulted in a cash outflow of $32.2 million as a result of stocking seven new distribution centers opened during 2012 and our recent acquisitions. Accounts payable and accrued expenses changes also resulted in a cash outflow of $38.1 million primarily associated with the earlier timing of vendor payments and changes in accrued incentive compensation.

 

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Net cash used in operating activities for fiscal 2011 was $90.7 million. During fiscal 2011, working capital requirements resulted in a cash outflow of $174.5 million, primarily driven by the continued expansion of our distribution centers into new domestic geographic markets. Cash outflows of $151.9 million related to inventory reflected our decision to increase manufacturer safety stock amounts as a result of tight supply levels with most of our manufacturers, the impact of manufacturer price increases on the replenishment of our inventory as well as the impact of new, acquired or expanded distribution centers. In addition, the combined impact of stocking new distribution centers and our recent acquisitions also contributed to the inventory increase. As well, higher sales volumes led to a $47.4 million increase to accounts receivable. However, these amounts were partially offset by a $19.2 million increase in accounts payable and accrued expenses primarily associated with the timing of vendor payments and accrued interest on our Senior Secured Notes.

Investing Activities

Net cash used in investing activities for the six months ended July 5, 2014 was $855.4 million, compared with $88.5 million during the six months ended June 29, 2013. The change was primarily associated with cash paid for acquisitions, which resulted in a $757.3 million increase in the current period. In addition, we invested $34.2 million and $23.8 million in property and equipment purchases during the six months ended July 5, 2014 and June 29, 2013, respectively, which included information technology upgrades, information technology application development and warehouse racking.

Net cash used in investing activities for fiscal 2013 was $118.4 million compared to $167.8 million during fiscal 2012. The change was primarily associated with cash paid for acquisitions, which resulted in a $38.3 million decrease during fiscal 2013. In addition, we invested $47.1 million and $52.4 million in property and equipment purchases during fiscal 2013 and fiscal 2012, respectively, which included information technology upgrades, IT application development and warehouse racking relating to existing and new distribution centers. During fiscal 2013 we received proceeds from the sale of assets held for sale of $7.8 million compared to $3.7 million during fiscal 2012.

Net cash used in investing activities for fiscal 2012 was $167.8 million compared to $92.2 million during fiscal 2011. The change was primarily associated with cash paid for acquisitions, which resulted in a $55.6 million increase. In addition, we invested $52.4 million and $31.0 million in property and equipment purchases during fiscal 2012 and fiscal 2011, respectively, which included information technology upgrades, IT application development and warehouse racking.

Financing Activities

Net cash provided by financing activities for the six months ended July 5, 2014 was $1,013.4 million, compared with $63.0 million during the six months ended June 29, 2013. The change was primarily related to proceeds received from the issuance of our Additional Subordinated Notes and Term Loan during the six months ended July 5, 2014. These proceeds were used to finance a portion of the Hercules and Terry’s Tire acquisitions as well to redeem all amounts outstanding under our Senior Secured Notes. In addition, higher net borrowings from our ABL Facility and FILO Facility, specifically our U.S. ABL Facility, contributed to the period-over-period increase. The higher net borrowings under our ABL Facility and FILO Facility were due to the increase in cash outflow for working capital requirements between periods and cash paid for acquisitions. Additionally, the Company received an equity contribution of $50.0 million from investment funds affiliated with TPG and certain co-investors during the six months ended July 5, 2014.

Net cash provided by financing activities for fiscal 2013 was $23.0 million compared with $168.8 million during fiscal 2012. The decrease was primarily related to lower net borrowings from our ABL Facility, specifically our U.S. ABL Facility due to the reduction in cash outflow for working capital requirements between periods and favorable cash earnings partially offset by cash paid for acquisition. In addition, cash provided by financing activities for fiscal 2012 included a $60.0 million equity contribution received from the TPG Funds and certain co-investors that did not repeat during fiscal 2013.

 

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Net cash provided by financing activities for fiscal 2012 was $168.8 million compared with $186.3 million during fiscal 2011. The decrease was primarily related to lower net borrowings from our ABL Facility due to the reduction in cash outflow for working capital requirements between periods as well as the change in outstanding checks between periods. These decreases were partially offset by a $60.0 million equity contribution received from the TPG Funds and certain co-investors during 2012.

Supplemental Disclosures of Cash Flow Information

Cash payments for interest during the six months ended July 5, 2014 were $58.0 million, compared with $33.0 million paid during the six months ended June 29, 2013. The increase is primarily due to the timing of our period end on July 5, 2014, and as such, included an additional quarterly interest payment on our ABL Facility and FILO Facility as compared to the prior year. Additionally, higher levels of indebtedness incurred in connection with the issuance of our Additional Subordinated Notes and under our Term Loan also contributed to the year-over-year increase.

Net cash payments for taxes during the six months ended July 5, 2014 were $3.8 million, compared with $2.5 million during the six months ended June 29, 2013. The difference between the periods primarily relates to the balance and timing of income tax extension payments and income tax payments due with returns.

Cash payments for interest for fiscal 2013 were $68.2 million compared with $64.3 million during fiscal 2012. The increase is primarily due to higher average debt levels during fiscal 2013. In addition, we paid an additional $0.4 million during fiscal 2013 related to our interest rate swaps.

Cash payments for interest for fiscal 2012 were $64.3 million compared with cash payments for interest for fiscal 2011 of $61.7 million. The increase is primarily due to higher average debt levels during fiscal 2012 partially offset by lower average interest rates on the outstanding debt during the year. We also paid an additional $0.7 million during fiscal 2012 related to our interest rate swaps.

Cash payments for taxes during fiscal 2013 were $23.7 million compared with $6.5 million during fiscal 2012. The difference between periods primarily relates to the balance and timing of estimated income tax payments and income tax payments due with returns.

Cash payments for taxes during fiscal 2012 were $6.5 million, net of a receipt of $1.2 million related to a federal income tax refund. The remaining balance included payments for 2012 estimated tax payments and 2011 tax return payments. Cash receipts for taxes for fiscal 2011 were $8.1 million. During fiscal 2011, we utilized a federal net operating loss to recover a portion of our prior federal income tax paid. As a result, we received a $9.1 million tax refund in the fourth quarter of 2011 based on the use of this net operating loss carryback.

Indebtedness

The following table summarizes our outstanding debt at July 5, 2014:

 

In thousands

  

Matures

  

Interest
Rate (1)

 

Outstanding
Balance

 

U.S. ABL Facility

   2017    3.4%   $ 641,639   

Canadian ABL Facility

   2017    4.5     53,165   

U.S. FILO Facility

   2017    5.8     80,000   

Canadian FILO Facility

   2017    6.0     10,266   

Term Loan

   2018    5.8     717,693   

Senior Secured Notes (2)

   2017    9.75     —     

Senior Subordinated Notes

   2018    11.50     421,361   

Capital lease obligations

   2015—2027    2.7—13.9     12,577   

Other

   2014—2021    2.3—10.6     7,596   
       

 

 

 

Total debt

          1,944,297   

Less—Current maturities

          (10,120
       

 

 

 

Long-term debt

        $ 1,934,177   
       

 

 

 

 

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(1) Interest rates for each of the U.S. ABL Facility and the Canadian ABL Facility are the weighted-average interest rate at July 5, 2014.

 

(2) The proceeds from the additional Term Loan borrowings were used in part to redeem our Senior Secured Notes. See “—Senior Secured Notes.”

ABL Facility

On January 31, 2014, in connection with the Hercules acquisition, we entered into the Second Amendment to Sixth Amended and Restated Credit Agreement (“Credit Agreement”) which provides for (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to U.S. borrowing base availability (the “U.S. ABL Facility”) and (ii) Canadian revolving credit commitments of $125.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to Canadian borrowing base availability (the “Canadian ABL Facility” and, collectively with the U.S. ABL Facility, the “ABL Facility”). In addition, the Credit Agreement provides the U.S. borrowers under the agreement with a first-in last-out facility (the “U.S. FILO Facility”) in an aggregate principal amount of up to $80.0 million, subject to a borrowing base specific thereto and the Canadian borrowers under the agreement with a first-in last-out facility (the “Canadian FILO Facility” and collectively with the U.S. FILO Facility, the “FILO Facility”) in an aggregate principal amount of up to $15.0 million, subject to a borrowing base specific thereto. The U.S. ABL Facility provides for revolving loans available to ATDI, its 100% owned subsidiary Am-Pac Tire Dist. Inc., Hercules and any other U.S. subsidiary that we designate in the future in accordance with the terms of the agreement. The Canadian ABL Facility provides for revolving loans available to TriCan, RTD and WTD and any other Canadian subsidiaries that we designate in the future in accordance with the terms of the agreement. Provided that no default or event of default then exists or would arise therefrom, we have the option to request that the ABL Facility be increased by an amount not to exceed $175.0 million (up to $25.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The maturity date for the ABL Facility is November 16, 2017. The maturity date for the FILO Facility is January 31, 2017.

As of July 5, 2014, we had $641.6 million outstanding under the U.S. ABL Facility. In addition, we had certain letters of credit outstanding in the aggregate amount of $10.0 million, leaving $198.4 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at July 5, 2014 was $53.1 million, leaving $70.8 million available for additional borrowings. As of July 5, 2014, the outstanding balance of the U.S. FILO Facility was $80.0 million and the outstanding balance of the Canadian FILO Facility was $10.3 million.

Borrowings under the U.S. 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 2.0% as of July 5, 2014 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 1.0% as of July 5, 2014. The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting

 

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through its Canada branch) as its “base rate,” (2) the federal funds rate effective plus 1/2 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of July 5, 2014, (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate,” (2) the sum of 1/2 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates Service for a 30 day interest period, plus an applicable margin of 1.0% as of July 5, 2014, (c) a rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances having an identical or comparable term as the proposed loan amount displayed and identified as such on the display referred to as the “CDOR Page” of Reuters Monitor Money Rates Service as at approximately 10:00 a.m. Toronto time on such day, plus an applicable margin of 2.0% as of July 5, 2014 or (d) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.0% as of July 5, 2014. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the U.S. FILO 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 3.5% as of July 5, 2014 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 2.5% as of July 5, 2014. The applicable margins under the U.S. FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian FILO Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting through its Canada branch) as its “base rate,” (2) the federal funds rate effective plus 1/2 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 2.5% as of July 5, 2014, (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate,” (2) the sum of 1/2 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates Service for a 30 day interest period, plus an applicable margin of 2.5% as of July 5, 2014, (c) a rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances having an identical or comparable term as the proposed loan amount displayed and identified as such on the display referred to as the “CDOR Page” of Reuters Monitor Money Rates Service as at approximately 10:00 a.m. Toronto time on such day, plus an applicable margin of 3.5% as of July 5, 2014 or (d) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 3.5% as of July 5, 2014. The applicable margins under the Canadian FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

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

 

    85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, applicable.

 

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

 

    5% of eligible accounts receivable of the U.S or Canadian. loan parties, as applicable; plus

 

    10.0% of the net orderly liquidation value of the eligible tire and non-tire inventory of the U.S. or Canadian loan parties, as applicable.

All obligations under the U.S. ABL Facility and the U.S. FILO 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. The Canadian ABL Facility and the Canadian FILO Facility are unconditionally guaranteed by the U.S. loan parties, TriCan, RTD, WTD and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility and the U.S. FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility and the Canadian FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets of the U.S. loan parties and the Canadian loan parties and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.

The ABL Facility and the FILO Facility contain 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. The terms of the ABL Facility and the FILO Facility generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions requiring compliance with certain availability levels and fixed charge coverage ratios under the ABL Facility and other customary negotiated exceptions, in each case, as further described in “Description of Indebtedness.” If the amount available for additional borrowings under the ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the aggregate 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 July 5, 2014, our additional borrowing availability under the ABL Facility was above the required amount and we were therefore not subject to the additional covenants.

Senior Secured Term Loan

In connection with the acquisition of Terry’s Tire, on March 28, 2014, ATDI entered into a credit agreement that provided for a senior secured term loan facility in the aggregate principal amount of $300.0 million (the “Initial Term Loan”). The Initial Term Loan was issued at a discount of 0.25% which, combined with certain debt issuance costs paid at closing, resulted in net proceeds of approximately $290.9 million. The Initial Term Loan will accrete based on an effective interest rate of 6% to an aggregate accreted value of $300.0 million, the full principal amount at maturity. The net proceeds from the Initial Term Loan were used to finance a portion of the Terry’s Tire purchase price. The maturity date for the Initial Term Loan is June 1, 2018.

On June 16, 2014, ATDI amended the Initial Term Loan (the “Incremental Amendment”) to borrow an additional $340.0 million (the “Incremental Term Loan”) on the same terms as the Initial Term Loan. Pursuant to the Incremental Amendment, until August 15, 2014 ATDI also has the right to borrow up to an additional $80.0 million (the “Delayed Draw Term Loan” and collectively with the Initial Term Loan and the Incremental Term Loan, the “Term Loan”) on the same terms as the Initial Term Loan. The proceeds from the Incremental Term Loan, net of related debt issuance costs paid at closing, amounted to approximately $335.7 million, and were used, in part, to redeem all $250.0 million aggregate principal amounts of notes outstanding under ATDI’s Senior Secured Notes and related fees and expenses as more fully described below, and the remaining proceeds will be used for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions. We received the proceeds from the Delayed Draw Term Loan at the end of the second quarter of 2014. The maturity date for the Term Loan is June 1, 2018.

 

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Borrowings under the Term Loan bear interest at a rate per annum equal to, at our option, initially, either (a) a Eurodollar rate determined by reference to LIBOR, plus an applicable margin of 4.75% at July 5, 2014 or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 1/2 of 1%, (2) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans and (3) the one month Eurodollar rate plus 1.0%, plus an applicable margin of 3.75% as of July 5, 2014. The Eurodollar rate is subject to an interest rate floor of 1.0%. The applicable margins under the Term Loan are subject to a step down based on a consolidated net leverage ratio, as defined in the credit agreement for the Term Loan.

All obligations under the Term Loan are unconditionally guaranteed by Holdings and, subject to certain customary exceptions, all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material subsidiaries. Obligations under the Term Loan are secured by a first-priority lien on substantially all property, assets and capital stock of ATDI except accounts receivable, inventory and related intangible assets and a second-priority lien on all accounts receivable and related intangible assets.

The Term Loan contains customary covenants, including covenants that restrict our ability to incur additional debt, create 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, change the nature of our business or change our fiscal year. The terms of the Term Loan generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning January 1, 2014 and other customary negotiated exceptions, in each case, as further described in “Description of Indebtedness.”

We are required to make principal payments equal to 0.25% of the aggregate principal amount outstanding under the Term Loan on the last business day of each March, June, September and December, commencing with the last business day of June 2014. In addition, subject to certain exceptions, we are required to repay the Term Loan in certain circumstances, including with 50% (which percentage will be reduced to 25% and 0%, as applicable, subject to attaining certain senior secured net leverage ratios) of our annual excess cash flow, as defined in the Term Loan agreement. The Term Loan also contains repayment provisions related to non-ordinary course asset or property sales when certain conditions are met, and related to the incurrence of debt that is not permitted under the credit agreement or incurred to refinance all or any portion of the Term Loan.

Senior Secured Notes

On May 28, 2010, 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%. 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 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 being redeemed if the redemption date occurs between June 1, 2013 and May 31, 2014, 104.875% of the principal amount being redeemed if the redemption date occurs between June 1, 2014 and May 31, 2015, 102.438% of the principal amount being redeemed if the redemption date occurs between June 1, 2015 and May 31, 2016 and 100.0% of the principal amount being redeemed if the redemption date occurs thereafter.

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 and TDI, subject to certain exceptions. The Senior Secured Notes are also collateralized by a

 

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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 capital stock or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of certain of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; transfer or sell certain assets; guarantee indebtedness or incur certain 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.

On May 16, 2014, ATDI delivered a Notice of Full Redemption, providing for the redemption of all $250.0 million aggregate principal amount of the Senior Secured Notes on June 16, 2014 (the “Redemption Date”) at a price equal to 104.875% of the principal amount of the Senior Secured Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the Redemption Date (the “Redemption Price”). On June 16, 2014, using proceeds from the Incremental Term Loan, the Senior Secured Notes were redeemed for a Redemption Price of $263.2 million.

Senior Subordinated Notes

In connection with the consummation of the Hercules acquisition, on January 31, 2014, ATDI completed the sale to certain purchasers of the Additional Senior Subordinated Notes. The net proceeds to ATDI from the sale of the Additional Senior Subordinated Notes were approximately $221.1 million.

The Additional Senior Subordinated Notes were issued pursuant to the Seventh Supplemental Indenture, dated as of January 31, 2014, among ATDI, the Guarantors and the Trustee (the “Seventh Supplemental Indenture”) to the Senior Subordinated Indenture. The Additional Senior Subordinated Notes have identical terms to the Initial Subordinated Notes, except the Additional Senior Subordinated Notes accrue interest from January 31, 2014. The Additional Senior Subordinated Notes and the Initial Subordinated Notes, as defined below, are treated as a single class of securities for all purposes under the Subordinated Indenture. However, the Additional Senior Subordinated Notes were issued with separate CUSIP numbers from the Initial Subordinated Notes and are not fungible for U.S. federal income tax purposes with the Initial Subordinated Notes. Interest on the Additional Senior Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2014. The Additional Senior Subordinated Notes will mature on June 1, 2018.

On May 28, 2010, ATDI issued $200.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due June 1, 2018, (the “Initial Subordinated Notes” and, collectively with the Additional Senior Subordinated Notes, the “Senior Subordinated Notes”). Interest on the Initial 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 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 being redeemed if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount being redeemed if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount being redeemed if the redemption date occurs thereafter.

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

 

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incur additional debt or issue preferred stock; pay certain dividends or make certain distributions in respect of ATDI’s capital stock or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of certain of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; transfer or sell certain assets; guarantee indebtedness or incur certain 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. The terms of the Senior Subordinated Notes generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning April 4, 2010 and other customary negotiated exceptions.

Contractual Commitments

As of July 5, 2014, 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) (2)

   $ 1,502.8       $ —         $ —         $ 1,502.8      $ —     

Long-term debt (fixed rate) (3)

     428.9         1.5         3.4         423.8        0.2   

Estimated interest payments (1)

     476.8         75.7         242.3         150.7        8.1   

Operating leases, net of sublease income

     573.7         61.9         178.6         129.6        203.6   

Capital leases

     12.6         0.1         0.9         1.1        10.5   

Uncertain tax positions

     0.6         —           0.6         (0.1     0.1   

Deferred compensation obligation

     3.5         —           —           —          3.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total contractual cash obligations

   $ 2,998.9       $ 139.2       $ 425.8       $ 2,207.9      $ 226.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Represents the annual interest expense on fixed and variable rate debt. Projections of interest expense for the U.S. ABL Facility, the Canadian ABL Facility, the U.S. FILO Facility, the Canadian FILO Facility and the Term Loan are based on the weighted-average interest rate of 3.4%, 4.5%, 5.8%, 6.0% and 5.8%, respectively as of July 5, 2014. Based on the combined outstanding balance of the U.S. ABL Facility, the Canadian ABL Facility, the U.S. FILO Facility, the Canadian FILO Facility and the Term Loan as of July 5, 2014, a hypothetical increase of 1% in such interest rate percentage would result in an increase to our annual interest payments of approximately $15.0 million.
(2) Includes U.S. ABL Facility ($641.6), U.S FILO Facility ($80.0), Canadian ABL Facility ($53.2), Canadian FILO Facility ($10.3) and Term Loan ($717.7).
(3) Includes Senior Subordinated Notes ($421.4) and other debt ($7.5).

Off-Balance Sheet Arrangements

We have no significant off balance sheet arrangements other than liabilities related to certain leases of the Winston Tire Company (“Winston”). These leases were guaranteed when we sold Winston in 2001. As of July 5, 2014, our total obligations as guarantor on these leases are approximately $1.6 million extending over five years. However, we have secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $1.4 million as of July 5, 2014. 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.

 

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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 as well as 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 financial position.

Inventories

Inventories are stated at the lower of cost, determined on the 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 financial position.

Goodwill and Indefinite-Lived Intangible Assets

We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets with indefinite useful lives 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. We have only one reporting segment which encompasses all operations including new acquisitions.

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.

 

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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, 2013 and determined that no impairment existed at that date. Based on the results of our goodwill impairment assessment, the fair value of our one reporting unit significantly exceeded the carrying value. Therefore, we do not believe there is any risk of the Company failing step one of the goodwill impairment test in the near future. 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 financial position.

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 financial position.

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. If amounts ultimately paid differ significantly from our estimates, it could adversely impact our financial position.

Exit Cost Reserves

During the normal course of business, we continually assess the location and size of our distribution centers in order to determine our optimal geographic footprint and overall structure. As a result, we have certain facilities that we have closed or intend to close and we record reserves for certain exit costs associated with 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, the 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 adversely impact our financial position.

 

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Income Taxes and Valuation Allowances

We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision is computed using the asset and liability method of accounting, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, we recognize future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in our judgment to be more likely than not. Deferred tax assets and liabilities are measured using currently enacted tax rates that apply to taxable income in effect for the years in which those tax items are expected to be realized or settled. We regularly review the recoverability of our deferred tax assets considering historic profitability, projected future taxable income, and timing of the reversals of existing temporary differences as well as the feasibility of our tax planning strategies. Where appropriate, we record a valuation allowance 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 to valuation allowances are recognized in earnings in the period such determination is made.

The application of income tax law is inherently complex and involves a significant amount of management judgment regarding interpretation of relevant facts and laws in the jurisdiction in which we operate. In addition, we are required to make certain assumptions regarding our income tax positions and the likelihood that such tax positions will be sustained if challenged. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on amounts we recognize in our consolidated balance sheets and adversely impact our financial position.

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, it could adversely impact our results of operations.

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.

 

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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.

Stock Based Compensation

We account for stock-based compensation awards in accordance with ASC 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. Our stock-based compensation plans include programs for stock options and restricted stock awards.

We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of highly subjective assumptions which determine the fair value of stock-based awards. These assumptions include:

Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. We used the simplified method to determine the expected term, which is calculated as the average of the time-to-vesting and the contractual life of the options.

Expected Volatility—Since we are currently privately held and do not have any trading history for our common stock, the expected volatility was estimated based on the average volatility for comparable publicly traded peer companies over a period equal to the expected term of the stock option grants. When selecting comparable publicly traded peer companies on which we based our expected stock price volatility, we selected companies with comparable characteristics to us, including enterprise value, risk profiles, and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Expected Dividend—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero.

In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture

 

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experience, analysis of employee turnover behavior, and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from our estimates, we might be required to record adjustments to stock-based compensation in future periods. These assumptions represent our best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our equity-based compensation expense could be materially different in the future.

The following table provides, by grant date, the number of stock options awarded from May 28, 2010, the date of the Merger, through the date of this prospectus and the exercise price for each set of grants, as well as the estimated fair value of the underlying common shares on the grant date:

 

Grant Date

   Options
Granted
     Exercise
Price
     Fair Value
At
Issuance
 

August 30, 2010

     40,824,000       $ 1.00       $ 1.00   

October 14, 2010

     1,248,000       $ 1.00       $ 1.00   

March 24, 2011

     200,000       $ 1.00       $ 1.00   

June 6, 2011

     1,500,000       $ 1.00       $ 1.00   

January 1, 2012

     777,600       $ 1.14       $ 1.14   

January 23, 2012

     1,500,000       $ 1.14       $ 1.14   

February 15, 2013

     3,466,903       $ 1.20       $ 1.20   

April 28, 2014

     4,528,833       $ 1.50       $ 1.50   

In the absence of a public trading market, our board of directors, based in part on input from management and the Sponsor, as well as the review of contemporaneous third-party valuation reports, determined a reasonable estimate of the then-current fair value of our common stock for purposes of determining fair value of our stock options on the date of grant. We determined the fair value of our common stock utilizing methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.” Our approach considered contemporaneous common stock valuations in determining the equity value of our company using a weighted combination of various methodologies, each of which can be categorized under either of the following two valuation approaches: the income approach and the market approach.

In addition, we exercised judgment in evaluating and assessing the foregoing based on several factors including:

 

    the nature and history of our business;
    our current and historical operating performance;
    our expected future operating performance;
    our financial condition at the grant date;
    the lack of marketability of our common stock;
    the value of companies we consider peers based on a number of factors, including, but not limited to, similarity to us with respect to industry, business model, stage of growth, intangible value, company size, geographic diversification, profitability, financial risk and other factors;
    likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions;
    industry information such as market size and growth; and
    macroeconomic conditions.

The board of directors and management intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. We generally grant options to participants with an exercise price equal to the then current fair value of the common stock.

 

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Foreign Currency Translation

All foreign currency denominated balance sheet accounts are translated at year end exchange rates and revenue and expense accounts are translated at weighted-average rates of exchange prevailing during the year. Gains and losses resulting from the translation of foreign currency are recorded in the accumulated other comprehensive income (loss) component of stockholder’s equity. Transactional foreign currency gains and losses are included in other expense, net in the accompanying consolidated statements of comprehensive income (loss).

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” which amended the guidance on the annual impairment testing of indefinite-lived intangible assets other than goodwill. The amended guidance will allow a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on the qualitative assessment, it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. This new guidance will be effective for fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted this guidance on December 30, 2012 (the first day of our 2013 fiscal year); however, we performed our annual impairment test in the fourth quarter of 2013.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which amended the guidance for reporting reclassifications out of accumulated other comprehensive income. The amended guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is entirely reclassified to net income, as required by U.S. GAAP. For other amounts, that are not required by U.S. GAAP to be entirely reclassified to net income, an entity is required to cross-reference other disclosures that will provide additional detail concerning these amounts. The amendments are effective for reporting periods beginning after December 15, 2012. We adopted this guidance on December 30, 2012 and its adoption did not have an effect on our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exits.” ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. We are currently assessing the impact, if any, on our consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” (“ASU 2014-08”). Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on a company’s operations and financial results should be presented as discontinued operations. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. However, ASU 2014-08 should not be applied to a component that is classified as held for sale before the effective date even if the component is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statement previously issued. We are currently assessing the impact, if any on our consolidated financial statements.

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into

 

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contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction—Type and Production—Type Contracts.” The standard’s core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us beginning in fiscal year 2018 and, at that time we may adopt the new standard under the full retrospective method or the modified retrospective method. Early adoption is not permitted. We are currently evaluating the method and impact the adoption of ASU 2014-09 will have on our condensed consolidated financial statements and disclosures.

Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

Our ABL Facility, FILO Facility and Term Loan are exposed to fluctuations in interest rates which could impact our results of operations and financial condition. Interest on the ABL Facility, FILO Facility and Term Loan are tied to, at our option, either a base rate, or a prime rate, or LIBOR. At July 5, 2014, the total amount outstanding under our ABL Facility, FILO Facility and Term Loan that was subject to interest rate changes was $1,502.8 million.

To manage this exposure, we use interest rate swap agreements in order to hedge the changes in our variable interest rate debt. Interest rate swap agreements utilized by us in our hedging programs are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. To minimize the risk of counterparty non-performance, interest rate swap agreements are made only through major financial institutions with significant experience in such instruments.

At July 5, 2014, $1,102.8 million of the total outstanding balance of our ABL Facility, FILO Facility and Term Loan that was not hedged by an interest rate swap agreement and thus subject to interest rate changes. Based on this amount, a hypothetical increase of 1% in such interest rate percentages would result in an increase to our annual interest expense by $11.0 million.

Foreign Currency Exchange Rate Risk

The financial position and results of operations for TriCan, our 100% owned subsidiary acquired during 2012, are impacted by movements in the exchange rates between the Canadian dollar and the U.S. dollar. As of July 5, 2014, we did not have any foreign currency derivatives in place. We assess the market risk of changes in foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact on our earnings. During the year ended December 28, 2013 and the six months ended July 5, 2014, a hypothetical 10% fluctuation in the U.S. dollar to Canadian dollar exchange rate would have affected our net income (loss) by $0.1 million and $0.7 million, respectively.

 

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BUSINESS

Our Company

We are the largest distributor of replacement tires in North America based on dollar amount of wholesale sales and number of warehouses. We provide a wide range of products and value-added services to customers in each of the key market channels to enable tire retailers to more effectively service and grow sales to consumers. Through our network of more than 140 distribution centers in the United States and Canada, we offer access to an extensive breadth and depth of inventory, representing more than 40,000 SKUs, to approximately 80,000 customers. In 2013, we distributed more than 40 million replacement tires after giving effect to recent acquisitions. We estimate that our share of the replacement passenger and light truck tire market in 2013, after giving effect to our recently completed acquisitions, would have been approximately 14% in the United States, up from approximately 1% in 1996, and approximately 21% in Canada.

We serve a highly diversified customer base across multiple channels, comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We have a significant market presence in a number of these key market channels and we believe that we are the only replacement tire distributor in North America that services each of these key market channels. During fiscal 2013, our largest customer and top ten customers accounted for 3.1% and 10.9%, respectively, of our net sales. We believe we are a top supplier to many of our customers and have maintained relationships with our top 20 customers that exceed a decade on average.

We believe we distribute one of the broadest product offerings in our industry, supplying our customers with nine of 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 Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. We also sell lower price point associate and proprietary brands of these and many other tire manufacturers, and through our acquisition of Hercules we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. In addition, we sell custom wheels and accessories and related tire supplies and tools. In fiscal 2013, tire sales accounted for 97.4% of our net sales, with sales of passenger and light truck tires accounting for 82.3% of our net sales. Tire supplies, tools and custom wheels and accessories represented approximately 2.6% of our net sales. We believe that our large and diverse product offering allows us to penetrate the replacement tire market across a broad range of price points.

Our growth strategy, coupled with our access to capital and our scalable platform, enables us to continue to expand organically in existing markets as well as in new geographic areas. We also expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. In addition, we are investing in technology and each sales channel to fuel our future growth. As a result, we believe that we are well positioned to continue to achieve above-market growth in all market environments and to continue to enhance our profitability and cash flows.

 

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Geographic Footprint

 

LOGO

In fiscal 2009, our net income was $4.9 million and in fiscal 2013 our net loss was $6.4 million. This decrease in net income was primarily the result of increased interest expense related to our acquisition by investment funds affiliated with TPG in 2010, as well as interest associated with our eight acquisitions from 2010 through 2013, and non-cash amortization expense related to our intangible assets. From fiscal 2009 to fiscal 2013, our net sales increased from $2.2 billion to $3.8 billion, reflecting a compound annual growth rate of 15.3%, and Adjusted EBITDA increased from $101.0 million to $195.5 million, reflecting a compound annual growth rate of 17.9%. See “Selected Consolidated Financial and Other Data” for a presentation of net sales and Adjusted EBITDA data for each of our fiscal years in this period. Over the same period, our unit volume grew from approximately 19.5 million to approximately 26.0 million while, according to the RMA, unit volume in the North American replacement tire market grew from approximately 238.9 million to approximately 246.0 million. Our superior growth was driven by our organic initiatives and our acquisitions.

For the six months ended July 5, 2014 and the year ended December 28, 2013 our net sales were $2.6 billion and $5.1 billion, respectively, our net loss from continuing operations was $77.6 million and $47.8 million, respectively, and our Adjusted EBITDA was $92.4 million and $251.1 million, respectively, in each case including the pro forma effects of our recent acquisitions. Additional information regarding Adjusted EBITDA and pro forma Adjusted EBITDA, including a reconciliation of Adjusted EBITDA to income (loss) from continuing operations and a reconciliation of pro forma Adjusted EBITDA to pro forma net income (loss) from continuing operations, is included in “—Summary Consolidated Financial and Other Data.” Additional information regarding the pro forma effects of our recent acquisitions is included in “—Summary Consolidated Financial and Other Data” and “Unaudited Pro Forma Combined Condensed Financial Information.”

We have a substantial amount of debt, which requires significant interest and principal payments. See “Risk Factors—As of July 5, 2014, on a pro forma basis after giving effect to this offering and the application of the net proceeds therefrom, we would have had total indebtedness of approximately $             million, and our substantial indebtedness could adversely affect our financial condition and growth strategy.”

 

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Our Industry

According to Modern Tire Dealer, the U.S. replacement tire market generated annual retail sales of approximately $37.3 billion in 2013. Passenger tires, medium truck tires and light truck tires accounted for 66.9%, 16.9% and 13.1%, respectively, of the total U.S. market. Farm, specialty and other types of tires accounted for the remaining 3.1% of the total U.S. market. The Canadian replacement tire market generated annual retail sales of approximately $3.7 billion in 2012. Passenger and light truck tires accounted for 53% while commercial tires accounted for 20% of the total Canadian replacement tire market. Farm, specialty and other types of tires accounted for the remaining 27% of the total Canadian replacement tire market. According to a Tire Review survey conducted in 2013, U.S. tire dealers buy 55.4% of their consumer tires from wholesale distributors like us and 27.7% direct from tire manufacturers, with the remaining volume coming from various other sources.

In the United States and Canada, 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 and web-based marketers. Between 1990 and 2013, independent tire retailers and automotive dealerships have enjoyed the largest increase in U.S. replacement tire market share, according to Modern Tire Dealer, moving from 54% to 60.5% and 1% to 7.5% of the market, respectively. In 2012, replacement tire sales to independent tire retailers and automotive dealerships represented approximately 44% and 18%, respectively, of Canadian replacement tire market share. Mass merchandisers, warehouse clubs, manufacturer-owned stores and web-based marketers comprise the remaining market share in both the United States and Canada.

Since 2000, the number of specific tire sizes in the market has increased by 61%. One driver of this increase was above-market growth in high-performance tires. The increase in the number of tire sizes coupled with the large number of brands in the market place has driven SKU proliferation in the replacement tire market. As a result of the SKU proliferation and due to their capital and physical space constraints, many tire retailers are unable to carry sufficient inventory to meet the demands of their customers. This trend has helped increase the need for distributors in the replacement tire market.

The U.S. and Canadian replacement tire markets have historically experienced stable growth and favorable pricing dynamics. However, these markets are subject to changes in consumer confidence and economic conditions. As a result, tire consumers may opt to temporarily defer replacement tire purchases or purchase less costly brands during challenging economic periods when macroeconomic factors such as unemployment, high fuel costs and weakness in the housing market impact their financial health.

From 1955 through 2013, U.S. replacement tire unit shipments increased by an average of approximately 3% per year. We believe that we are experiencing the beginning of a recovery after a prolonged downturn, which began in 2008 for the replacement tire market. Replacement tire unit shipments were up 4.4% in the United States and 0.7% in Canada in 2013 as compared to 2012, as a rebound in the housing market, a decline in unemployment rates and increases in vehicle sales and vehicle miles driven impacted the U.S. and Canadian replacement tire markets favorably. The RMA projects that replacement tire shipments will increase by approximately 2% in the United States in 2014 as compared to 2013, as demand drivers continue to strengthen.

Going forward, we believe that long-term growth in the U.S. and Canadian replacement tire markets 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. and Canadian population continues to grow;

 

    increases in the number of replacement tire SKUs;

 

    growth of the high-performance tire market; and

 

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

Our Competitive Strengths

We believe the following key strengths have enabled us to become the largest distributor of replacement tires in North America and position us to achieve future revenue growth in excess of the long-term growth rates of the U.S. and Canadian replacement tire industry:

Leading Position in a Large and Highly Fragmented Marketplace. We are the largest distributor of replacement tires in North America with an estimated market share in 2013 of approximately 14%, after giving effect to our recently completed acquisitions, in a $37.3 billion market in the United States. Our estimated market share in 2013 of the replacement passenger and light truck tire market in Canada was approximately 21%, after giving effect to our recently completed acquisitions. 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; 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 and presence in each of the key market channels, 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.

Scale Advantage from Extensive and Efficient Distribution Network. We believe we have the largest independent replacement tire distribution network in North America with more than 140 distribution centers (excluding distribution centers acquired in our recent acquisitions that are expected to be closed as part of the integration process) and approximately 1,000 delivery vehicles. Our distribution footprint services geographic regions in the United States that represented more than 90% of the replacement tire market for passenger and light truck tires in 2013, and we believe our geographic coverage in Canada is also very extensive. Our extensive distribution footprint, combined with sophisticated inventory management and logistics technologies, enable 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 distribution systems are integrated with our proprietary business-to-business ATDOnline® order fulfillment system that captures more than 65% of our orders electronically, and 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 passenger and light truck tires in the industry through a diverse group of suppliers. We supply nine of the top ten leading passenger and light truck 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 Cooper, 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 imported products to the faster-growing high-performance category. Through our acquisition of Hercules, we also own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. 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 increased sales among existing customers, attracts new customers and increases customer retention.

Broad Range of Value-Added Services. We provide a wide range of services that 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 administration of tire manufacturer affiliate programs and credit, training and access to consumer market data, which enable our tire retailer customers to better service their individual markets. We

 

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provide our U.S. customers with convenient 24/7 access to our extensive product offerings through our proprietary business-to-business web portal, ATDOnline®. Our online services also include TireBuyer.com®, which allows our U.S. independent tire retailers the ability to participate in the Internet marketing of tires to consumers. We also provide select, qualified U.S. 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. We believe our value-added services as well as the integration between our infrastructure and our customers’ operations enable us to maintain high rates of customer retention and build strong customer loyalty.

Diversified Customer Base and Longstanding Customer Relationships Across Multiple Channels. We serve a highly diversified customer base in each of the key market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We believe we are the only distributor of replacement tires in North America that services each of these key market channels. Our business is diversified across the key market channels and reflects the evolving complexity of the North American replacement tire market, with independent tire retailers accounting for 76% of our net sales in 2013 as compared to 85% of our net sales in 2009. We believe we are a top supplier to many of our customers and maintain relationships with our top 20 customers that exceed a decade on average. 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 through a combination of organic initiatives and acquisitions. Over the ten-year period from fiscal 2003 to fiscal 2013, our net sales grew at a compound annual rate of 13.2%, reflecting our strong revenue base, evolving business mix, scalable operating model and successful growth strategies.

The following chart shows our net sales for each fiscal year in the period from 2003 to 2013:

 

LOGO

In addition, we believe the low capital intensity of our business combined with the efficient management of our working capital, due in part to our advanced inventory management systems in the United States that we are also in the process of implementing in Canada, and close vendor relationships, will enable us to generate strong cash flows. In addition, as a result of our presence in each major channel within the replacement tire market and based upon our ability to rationalize our operating costs, as necessary, we experienced only moderate margin contraction during the recent economic downturn.

Experienced Management Team Supported by Strong Equity Sponsorship. Our senior management team, led by our President and Chief Executive Officer William E. Berry, has an average of over 20 years of

 

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experience in the replacement tire distribution industry. Although we have experienced net losses for the past three years, management has implemented successful initiatives in a leveraged environment, including the execution of a disciplined acquisition strategy, which has contributed to our gross profit expansion and above-market net sales growth during that period. In addition, we have reduced costs through the integration of operating systems and introduction of standard operating practices, particularly in the United States, 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.

Our Business Strategy

Our objective is to further expand our position as the largest distributor of replacement tires in North America and establish our company as the leading distributor in each of the key market channels that we serve, while continuing to provide our customers with a range of value-added services such as frequent and timely delivery of inventory, the broadest and deepest range of products, and other business support services. We intend to accomplish this objective, drive above-market growth and further enhance our profitability and cash flows by executing on the following key operating strategies:

Grow Organically in Excess of Market. It is at the core of our strategy to grow our profits and cash flows organically through further penetration of all of our key market channels, through greenfield expansion, through further penetration of our Hercules® brand, the number one private brand in North America in 2013 based on unit sales, through further establishment and expansion of TireBuyer.com®, and through further expansion and development of our value-added services.

Expand Penetration in Each of the Key Market Channels. We have a significant presence in each of the key market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We regularly seek opportunities to grow our market share in each channel by customizing our sales strategies to suit the particular needs of that channel, and are focused on training and deploying sales personnel to help build our sales, particularly in the faster-growing automotive dealership channel, and strengthen and expand our relationships with retailers. We have observed an increase in sales through web-based marketers and seek to grow our presence in that channel through our Internet site, TireBuyer.com.

Continue Greenfield Expansion in Existing and New Geographic Markets. While we already have the largest distribution footprint in the North American replacement tire market, servicing geographic regions of the United States that represented more than 90% of the replacement tire market for passenger and light truck tires in 2013 and with geographic coverage in Canada that we believe is also very extensive, we believe there are numerous further underserved areas in both our existing geographic markets as well as in areas not currently serviced by us that are favorably situated to support and grow additional distribution centers. Since 2010, we have successfully opened 23 greenfield distribution centers, and we intend to continue to expand our existing footprint in the United States and Canada in areas where we see opportunities.

Expand Our Hercules® Brand. Through our recently completed acquisition of Hercules, we now market the proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. We believe our expansive distribution network in the United States and Canada, combined with our greater access to capital, will allow us to both expand product availability and increase market share of the Hercules® brand. Further, we expect that Hercules’ multi-decade Asian sourcing experience, including its 250,000 square foot warehouse in northern China, will enhance our supply and distribution capabilities.

Grow TireBuyer.com® into a Premier Internet Tire Provider. TireBuyer.com® is our Internet site that enables our U.S. independent tire retailer customers to connect with consumers. TireBuyer.com® allows our broad base of independent tire retailers to participate in a greater share of the growing Internet tire

 

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market. We believe that TireBuyer.com® complements and services our participating U.S. independent tire retailers by providing them access to a sales and marketing channel previously unavailable to them. In 2012, the TireBuyer.com® site was re-launched on a newer, faster and more flexible platform, which has enhanced the overall consumer experience and resulted in increased traffic to the site.

Continue to Develop and Expand our Value-Added Services. Our Tire Pros® franchise program enables us to deliver advertising and marketing support to tire retailers operating as Tire Pros® franchisees. The Tire Pros® franchise program allows participating local tire retailers to enjoy the benefits of a national brand identity with minimal investment, while still maintaining their local identities. In return, we benefit from increasing volume penetration among, and further aligning ourselves with, our franchisees. We are focused on continuing to upgrade and improve the Tire Pros® franchise program and seek opportunities to develop similar programs in the future. In addition, individual manufacturers offer a variety of relatively complex programs for tire retailers that sell their products, providing cooperative advertising funds, volume discounts and other incentives. As part of our service to our customers, we assist them in managing the administration of these programs through dedicated staff. We believe these enhancements, combined with other aspects of our customer service, provide significant value to our customers.

Selectively Pursue Acquisitions. We expect to continue to employ a selective acquisition strategy to increase our share in the markets we currently service as well as to expand our distribution into new markets, utilizing our scale in an effort to realize significant synergies. Over the past six years we have successfully acquired and integrated nine businesses representing, in the aggregate, over $850 million in annual revenue through 2013, and on a pro forma basis, including our recently completed acquisitions of Hercules and Terry’s Tire, the 2013 annual revenue of businesses acquired is over $2 billion in the aggregate. We believe our position as the largest distributor of replacement tires in North America, combined with our access to capital and our scalable platform, has allowed us to make acquisitions at very attractive post-synergy valuations.

Leverage Our Infrastructure in Existing Markets. Through infrastructure expansions over the past several years in the United States, we have developed a scalable platform with available incremental distribution capacity. Our distribution infrastructure enables us to efficiently add new customers, such as corporate accounts, and service growing channels, such as automotive dealerships, thereby increasing profitability by leveraging the utilization of our existing assets. We expect to complete the implementation of a similar platform in Canada near the beginning of 2015. 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 geographic markets, we have experienced growth in market share over time, and in markets that we have served the longest, we generally have market share well in excess of our national average.

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. For example, we operate on our Oracle ERP platform in the United States and are in the process of implementing it in Canada. We continue to evaluate and incorporate technical solutions including utilization 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 timely service, while also reducing costs. Additionally, we continue to roll out customized electronic solutions and POS system integration for our larger customers.

Maintain a Comprehensive and Deep Tire Portfolio to Meet Our Customers’ Needs. We provide a wide range of products covering a broad range of price points, from entry-level imported products to offerings in the faster-growing high-performance tire market, through a full suite of flag, associate and proprietary brand tires. We acquired the Hercules® brand in January 2014 and intend to further expand its market presence throughout North America. We intend to continue to focus on high-performance tires, given the growth in demand for such tires,

 

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while maintaining our emphasis on providing broad 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 across all channels.

Products

We provide our customers with a comprehensive portfolio of tires, tire supplies and tools as well as custom wheels and accessories. During 2013, tire sales accounted for 97.4% of our net sales. Tire supplies, tools and custom wheels and accessories represented approximately 2.6% of our net sales.

Tires

We sell a broad selection of replacement tires, from well-known flag brands, which typically carry a premium price and profit per tire, to entry-level imported brands. We believe our ability to offer tires across multiple industry tiers provides us with a competitive advantage by enabling us to service a broad range of price points in the replacement tire market. Sales of passenger and light truck tires accounted for 82.3% of our net sales in fiscal 2013. The remainder of our tire sales was 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 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 Cooper, Hankook, Kumho, Nexen, Nitto and Pirelli brands. Within our flag brand product portfolio, we also carry high-performance tires.

Associate brands. Associate brands are primarily lower-priced tires manufactured by well-known manufacturers offered under different brand names. Our associate brands, such as Fuzion®, allow us to offer tires in a wider price range. In addition, associate brands are attractive to our tire retailer customers as they are regularly subject to incentive programs offered by tire manufacturers.

Proprietary and exclusive brands. Through our acquisition of Hercules, we own and market our proprietary Hercules® brand, the number one private brand in North America in 2013 based on unit sales. The Hercules® brand includes a full line of tires for passenger cars as well as light and medium trucks. Additionally, our Capitol® and Ironman® brands are lower-priced tires made by tire manufacturers exclusively for, and marketed by, us. These brands, in which we hold or control the trademark, strengthen our entry-level priced product offering and allow us to sell value-oriented tires to tire retailers, increasing our overall market penetration.

Entry level imported brands. Entry level imported brands are exclusively lower-priced tires manufactured offshore, and predominately by Asia-based manufacturers. Our entry level imported brands allow us to offer tires in a wider price range including opening price point products.

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 and accessories from us separately or in addition to their regular tire orders without the added complexity of being serviced by an additional vendor. We offer over 25 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®. Other nationally available brands that complement our offering include: Gear Alloy, Motiv LuxuryAlloys, TIS (Twenty Inches Strong) and Dropstars, which also includes Monster Energy Edition wheel styles, Advanti Racing, Black Rock, BMF, Cragar, Dick Cepek, Fondmetal, Focal, Platinum, Lexani, Mickey Thompson, Mamba, Konig and Ultra Wheel. Collectively, these brands represent one of the most comprehensive wheel offerings in the industry. Sourcing of product is worldwide through a number of manufacturers.

 

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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 more profitable businesses. Our tire supplies and tools are the most popular brand names from leading manufacturers. These products broaden our portfolio and leverage our customer relationships.

Customers

We serve a highly diversified customer base comprised of local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships and web-based marketers. We sell to approximately 80,000 customers (approximately 73,000 in the U.S. and 7,000 in Canada). In fiscal 2013, our largest customer and our top ten customers accounted for less than 3.1% and 10.9%, respectively, of our net sales. We believe we are a top supplier to many of our customers and maintain relationships with our top 20 customers that exceed a decade on average.

Suppliers

We purchase our tires from several sources, including the four largest tire manufacturers, Bridgestone, Continental, Goodyear and Michelin, from whom we bought 58.6% of our tire products in fiscal 2013. 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 our major tire suppliers for an average of 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.

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, we believe 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. 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 U.S. 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 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 1,000 delivery vehicles, this technology enables us to cost effectively make multiple daily or weekly shipments to customers as necessary.

Approximately 80% of our U.S. tire purchases are shipped directly by tire manufacturers to our U.S. distribution centers. The remainder is shipped by manufacturers to our redistribution centers located in Maiden, North Carolina and Bakersfield, California and we have begun to roll out these technologies in Findley, Ohio. These redistribution centers warehouse slower-moving and foreign-manufactured products, which are forwarded to our U.S. distribution centers as needed.

 

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Information Systems

Through infrastructure expansions over the past several years, we have developed a scalable platform with incremental capacity available. We are currently completing the U.S. 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 in the United States, has largely replaced our legacy computer system. We continue to implement technical solutions across the United States including handheld scanning for receiving, picking and delivery of product to our customers. In addition, we are preparing to implement a similar Oracle ERP platform in Canada near the beginning of 2015. Additionally, we continue to roll out customized electronic solutions and POS system integration for our larger customers.

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 centers. 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.

Marketing and Customer Service

Our marketing efforts are focused on driving growth through customer service, additional product placement and market expansion. We provide a 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 administration of tire manufacturer affiliate programs and credit, training and access to consumer market data, which enable our tire retailer customers to better service their individual markets. In addition, we provide our U.S. customers with an online web portal with convenient 24/7 access to our inventory, an Internet site that allows our U.S. tire retailer customers to participate in the Internet marketing of tires to customers as well as a franchise program in the United States where we deliver advertising and marketing support to our tire retailer customers.

Sales Force

We have structured our sales organization to best serve 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 team also manages our Huntersville-based call center, which provides call management assistance to the

 

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U.S. 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. They also serve as the primary point of contact for product and technical inquiries from TireBuyer.com® shoppers.

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 2013, U.S. automotive dealerships enjoyed a large increase in market share according to Modern Tire Dealer, moving from 1% of the U.S. replacement tire market to 7.5% of the market. Over the past few years we have steadily trained and deployed sales personnel to help build our sales at these accounts. We continue to invest and focus resources in this channel to strengthen and expand our relationships with the automobile manufacturers and further grow our share of tire sales to their dealerships.

Our aftermarket wheel sales group employs sales and technical support personnel in the field and performance specialists in each region. The responsibilities of this sales group include cultivating new prospective wheel and supplies customers as well as 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.

Tire Retailer Programs

Through our Tire Pros® franchise program we deliver advertising and marketing support to U.S. tire retailer customers operating as Tire Pros® franchisees. U.S. 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 Affiliated Retailer Network, 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 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 U.S. 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 Money), 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.

Order Fulfillment

ATDOnline® provides our U.S. 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 participate in tire manufacturer incentive programs. As a key element of our order fulfillment strategy, ATDOnline provides an a robust solution for order-tracking, logistics management, distribution, installation and payment services. We encourage 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 2013, approximately 65% of our total order volume was ordered through ATDOnline®, up from 56% in fiscal 2007. In 2014, we updated this site to provide a more modern platform with many upgrades and capabilities.

 

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TireBuyer.com® is our Internet site that enables our U.S. independent tire retailer customers to connect with consumers. Consumers using TireBuyer.com® purchase products from us and then select a qualified independent tire retailer participating in our TireBuyer.com® program for installation of their tires or wheels. We then deliver the purchased products to the selected tire retailer for local installation. The tire retailer charges the consumer for the installation costs 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. In 2012, the TireBuyer.com® site was re-launched on a newer, faster and more flexible platform, which has enhanced the overall consumer experience and resulted in increased traffic to the site.

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: HERCULES® tires, IRONMAN® tires, CAPITOL® tires, NEGOTIATOR® tires, REGUL® tires, DYNATRAC® tires, CRUISERALLOY® custom wheels, DRIFZ® custom wheels, ICW® custom wheels, PACER® custom wheels and O.E. PERFORMANCE® custom wheels. Our other trademarks include: AMERICAN TIRE DISTRIBUTORS®, ATD®, TRICAN TIRE DISTRIBUTORS INC®, REGIONAL TIRE DISTRIBUTORS®, ATDONLINE®, ATDSERVICEBAY®, TIREBUYER.COM® and TIRE PROS®.

Competition

The U.S. and Canadian tire distribution industry is highly competitive and fragmented. In these markets, replacement tires are sold to consumers through several different market channels, including local, regional and national independent tire retailers, mass merchandisers, warehouse clubs, tire manufacturer-owned stores, automotive dealerships 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 (owned by Michelin). 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-performance offerings, acting as both a retailer and a wholesaler.

Seasonality

Although the effects of seasonality in the United States 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. In Canada, however, as a result of the winter driving season we recognize a larger percentage of sales and EBITDA during the second half of the year.

Environmental Matters

Our operations and properties are subject to federal, state, foreign 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

 

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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 December 28, 2013, our operations employed approximately 3,800 people, approximately 3,400 of which are located in the United States and the balance located within our Canadian distribution centers. None of our employees are represented by a union. We believe our employee relations are satisfactory.

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 July 5, 2014, we operated 124 distribution centers located in 43 states in the United States and 26 distribution centers in Canada, aggregating approximately 15.3 million square feet. We expect some of the distribution centers acquired in our recent acquisitions to be closed as part of the integration process. Of these centers, two are owned by us and the remaining properties are leased. We also lease our principal executive office, located in Huntersville, North Carolina. This lease is scheduled to expire in 2022. In addition, we have some non-essential properties 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.

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.

 

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MANAGEMENT

Executive Officers and Directors

Below is a list of the names, ages as of July 5, 2014, positions and a brief account of the business experience of the individuals who serve as our executive officers and directors as of the date of this prospectus.

 

Name

  

Age

  

Position

William E. Berry

   59    President, Chief Executive Officer and Director

Jason T. Yaudes

   41    Executive Vice President and Chief Financial Officer

David L. Dyckman

   49    Executive Vice President and Chief Operating Officer

J. Michael Gaither

   61    Executive Vice President, General Counsel and Secretary

William P. Trimarco

   55    Executive Vice President, Product Strategy and Supply

James M. Micali

   66    Director

Kevin Burns

   50    Director

Peter McGoohan

   32    Director

W. James Farrell

   72    Director

Gary M. Kusin

   63    Director

David Krantz

   44    Director

We anticipate that an additional director who is not affiliated with us or any of our stockholders and is independent under the rules of the NYSE will be appointed to the board of directors prior to the effectiveness of the registration statement of which this prospectus forms a part.

William E. Berry, President and Chief Executive Officer, Director.

Mr. Berry has served on the Board of Directors since May 2010 and as our Chief Executive Officer since April 2009 and has been our President since May 2003. He was our Chief Operating Officer from May 2003 to April 2009, Executive Vice President and Chief Financial Officer from January 2002 to May 2003, and Senior Vice President of Finance for the Southeast Division from May 1998 to January 2002. Mr. Berry joined us in May 1998 as a result of our merger with Itco, where he served as Controller from 1984 to 1998, Executive Vice President in charge of business development and sales and marketing from 1996 to 1998 and prior to that was Senior Vice President of Finance. Prior to that, Mr. Berry held a variety of financial management positions for a subsidiary of the Dr. Pepper Company and also spent three years in a public accounting firm. He holds a bachelor’s degree in business administration from Virginia Tech. As our President and Chief Executive Officer, Mr. Berry brings to the Board leadership, industry, operations, risk management, financial and accounting and strategic planning experience, as well as in-depth knowledge of our business.

Jason T. Yaudes, Executive Vice President and Chief Financial Officer

Mr. Yaudes has been our Executive Vice President and Chief Financial Officer since January 2012. Mr. Yaudes joined us in September 2006 as Vice President and Controller and has been Senior Vice President and Controller since December 2011. Prior to joining us, Mr. Yaudes worked with Timco Aviation Services, Inc. holding several positions ranging from Senior Financial Reporting Manager to Chief Accounting Officer. Between 1996 and 2002, Mr. Yaudes worked with the accounting firm of Arthur Andersen as a Manager in the Audit and Business Advisory Services group. Mr. Yaudes holds a bachelor’s degree from Appalachian State University.

David L. Dyckman, Executive Vice President and Chief Operating Officer

Mr. Dyckman has been our Executive Vice President and Chief Operating Officer since January 2012. He was our Executive Vice President and Chief Financial Officer from January 2006 to January 2012. Prior to joining us, Mr. Dyckman was Executive Vice President and Chief Financial Officer of Thermadyne Holdings Corporation from January 2005 to December 2005, and Chief Financial Officer and Vice President of Corporate Development

 

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for NN, Inc. from April 1998 to December 2004. Mr. Dyckman holds a bachelor’s degree and an M.B.A. from Cornell University. Mr. Dyckman also serves on the Board of Directors for PetroChoice Holdings, Inc.

J. Michael Gaither, Executive Vice President, General Counsel and Secretary

Mr. Gaither has been our General Counsel and Secretary since 1991 and has been an Executive Vice President since May 1999. He was our Treasurer from February 2001 to June 2003 and Senior Vice President from 1991 to May 1999. Prior to joining us, he was a lawyer in private practice. He holds a bachelor’s degree from Duke University and a J.D. from the University of North Carolina-Chapel Hill. Mr. Gaither also serves as a member of the Board of Advisers for the Duke University Divinity School.

William P. Trimarco, Executive Vice President, Product Strategy and Supply

Mr. Trimarco has been Executive Vice President, Product Strategy and Supply since June 2014. Mr. Trimarco joined the company in February 2014 as a result of the acquisition of Hercules, where he had been President and Chief Executive Officer since March 2009. Prior to joining Hercules, Mr. Trimarco worked at Larson-Juhl for 27 years. Larson-Juhl, a Berkshire-Hathaway company, is the global leader in manufacturing and distributing of custom picture framing products. Mr. Trimarco started as Operations Manager of Larson-Juhl in 1982 and held numerous positions including President of U.S. Operations and President-International. Mr. Trimarco holds a Bachelor of Science degree in Finance from the University of Illinois.

James M. Micali, Director

Mr. Micali has served on the Board of Directors since May 2010. Mr. Micali has been Senior Advisor to, and limited partner of, Azalea Fund III of the private equity firm Azalea Capital LLC since 2008. He served as “Of Counsel” with the law firm Ogletree Deakins LLC in Greenville, SC, from 2008 to 2011. He was Chairman and President of Michelin North America, Inc. from 1996 until his retirement in August 2008 and was a member of Michelin Group’s Executive Council from 2001 to 2008. Prior to that time, he was Executive Vice President, Legal and Finance, of Michelin North America from 1990 to 1996 and General Counsel and Secretary from 1985 to 1990. Mr. Micali is a director of SCANA Corporation and lead Independent Director of Sonoco Products Company. Mr. Micali holds a bachelor’s degree from Lake Forest College and a J.D. from Boston College Law School. Through his executive positions, including as Chairman and President of Michelin North America and his work as a lawyer, Mr. Micali brings to the Board leadership, industry, legal, risk management, financial and strategic planning experience. Mr. Micali also possesses board experience, having previously served on the board of Lafarge North America from 2004 to 2007 and Ritchie Bros., Inc. from 2008 to 2012.

Kevin Burns, Director

Mr. Burns has served on the Board of Directors since May 2010. Mr. Burns joined TPG in 2003. Since March 2008, he has led TPG’s Manufacturing and Industrial Sector and in 2013 he became leader of TPG’s Global Operations. Prior to joining TPG, from 1998 to 2003 he served as Executive Vice President and Chief Materials Officer of Solectron Corporation. Prior to joining Solectron, Mr. Burns served as Vice President of Worldwide Operations of the Power Generation Business Unit of Westinghouse Corporation, and President of Westinghouse Security Systems. Prior to Westinghouse, Mr. Burns was a consultant at McKinsey & Co., Inc. and spent three years at the General Electric Corporation in various operating roles. Mr. Burns holds a B.S. in Mechanical and Metallurgical Engineering (cum laude) from the University of Connecticut and an M.B.A from the Wharton School of Business. He currently serves as Chairman of the Board of Isola Group, and is on the Boards of Armstrong World Industries, Nexeo Solutions, FleetPride, Inc. and Chobani. Mr. Burns brings to the Board leadership, operations, financial and strategic planning experience. Mr. Burns also possesses board experience.

Peter McGoohan, Director

Mr. McGoohan has served on the Board of Directors since January 2013. Mr. McGoohan is a TPG Vice President. He is focused on the firm’s industrials/manufacturing, energy and financial services investing efforts. Prior to joining TPG Capital in 2007, Mr. McGoohan was an investment banker at Goldman Sachs. Mr. McGoohan

 

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received his M.B.A. from the Stanford Graduate School of Business and is a summa cum laude graduate of Vanderbilt University. Mr. McGoohan brings to the Board risk management, financial and strategic planning experience.

W. James Farrell, Director

Mr. Farrell has served on the Board of Directors since October 2010. Mr. Farrell also serves as a Senior Advisor to TPG. Mr. Farrell retired as Chairman and CEO of Illinois Tool Works Inc. (ITW), based in Glenview, Illinois on May 5, 2006. ITW is a multi-national manufacturer of highly engineered fasteners, components, assemblies and systems. ITW is comprised of approximately 875 decentralized operations in 54 countries with more than 65,000 employees and 2008 Revenues of approximately $16 billion. Mr. Farrell currently serves on the board of directors of Abbott Laboratories. Mr. Farrell holds a bachelor’s degree in Electrical Engineering from the University of Detroit. Mr. Farrell brings to the Board leadership, risk management, operations, financial and strategic planning experience. Mr. Farrell also possesses board experience.

Gary M. Kusin, Director

Mr. Kusin has served on the Board of Directors since October 2010. Mr. Kusin has been a Senior Advisor to TPG since 2006. Mr. Kusin previously served as a President and Chief Executive Officer of FedEx Kinko’s Office and Print Services from 2001 to 2006. Mr. Kusin was responsible for the strategic growth and transformation of Kinko’s and oversaw the ultimate sale to FedEx. Mr. Kusin then assisted FedEx in the transition of Kinko’s into FedEx Kinko’s. During that two year transition Mr. Kusin served on the nine person Strategic Management Committee for FedEx Corporation worldwide. Prior to joining Kinko’s in 2001, Mr. Kusin was chief executive officer of HQ Global Workplaces, the world leader in serviced offices, now a part of Regus. In 1995, Mr. Kusin co-founded Laura Mercier Cosmetics, a makeup line now sold through leading specialty and department stores worldwide, which he sold to Neiman-Marcus in 1998. Prior to co-founding Laura Mercier Cosmetics, starting in 1983, Mr. Kusin was president and co-founder of Babbage’s Inc., the leading consumer software specialty store chain in the United States, which now operates under the name GameStop. Earlier in his career, he was vice president and general merchandise manager for the Sanger-Harris division of Federated Department Stores, today operating as Macy’s. Mr. Kusin currently serves on the board of directors of Petco, Sabre Corporation, Savers and Fleetpride. Mr. Kusin served as a Director of Electronic Arts Inc. from 1995 to 2011 and as a Director of RadioShack Corporation from 2004 to 2005. Mr. Kusin holds a bachelor’s degree from the University of Texas and an M.B.A. from the Harvard Business School. Mr. Kusin brings to the Board leadership, risk management, operations, financial and strategic planning experience. Mr. Kusin also possesses company board experience.

David Krantz, Director

Mr. Krantz has served on the Board of Directors since March 2011. He is CEO of YP Holdings LLC. Prior to YP Holdings LLC, Mr. Krantz was President and CEO of AT&T Interactive. In addition to AT&T Interactive, Mr. Krantz has held several other senior leadership positions with AT&T. Prior to joining AT&T, Mr. Krantz held senior leadership positions at GoDigital Networks, a telecommunications equipment company, AOL/Netscape, Pacific Bell, and Sprint. Mr. Krantz holds a bachelor’s degree in Finance and Management from the University of Virginia’s McIntire School of Commerce and earned an M.B.A. from Harvard University. Mr. Krantz brings to the Board leadership, industry, financial and strategic planning experience.

Board Composition and Director Independence

Our business and affairs are managed under the direction of the board of directors. Our board currently consists of seven directors and the TPG Funds have the right to nominate, and have nominated, all of the directors that serve on the board. Currently, our directors serve for terms of one year, or until their successors are duly elected and qualified. Our certificate of incorporation that will be in effect upon closing of this offering provides that our board of directors shall consist of at least three directors but not more than 15 directors and that

 

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the number of directors may be fixed from time to time by resolution of our board of directors. Under the amended and restated stockholders agreement described below, we have agreed to take necessary action to maintain the size of the board of directors at no greater than                     directors, subject to applicable laws and regulations. Our board of directors will be divided into three classes, as follows:

 

    Class I, which will initially consist of                     , whose terms will expire at our annual meeting of stockholders to be held in 2015;

 

    Class II, which will initially consist of                     , whose terms will expire at our annual meeting of stockholders to be held in 2016; and

 

    Class III, which will initially consist of                     , whose terms will expire at our annual meeting of stockholders to be held in 2017.

Upon the expiration of the initial term of office for each class of directors, each director in such class shall be elected for a term of three years and serve until a successor is duly elected and qualified or until his or her earlier death, resignation or removal. Any additional directorships resulting from an increase in the number of directors or a vacancy may be filled by the directors then in office.

We anticipate that an additional director who is not affiliated with us or any of our stockholders and is independent under the rules of the NYSE will be appointed to the board of directors prior to the effectiveness of the registration statement of which this prospectus forms a part.

In connection with this offering, we will enter into an amended and restated stockholders agreement with the TPG Funds governing their nomination rights with respect to our board of directors following this offering. Under the agreement, we are required to take all necessary action to cause the board of directors to include individuals designated by the TPG Funds in the slate of nominees recommended by the board of directors for election by our stockholders, as follows:

 

    for so long as the TPG Funds own at least 50% of the shares of our common stock held by them following the closing of this offering, they will be entitled to designate five individuals for nomination to serve on our board of directors;

 

    when the TPG Funds own less than 50% but at least 10% of the shares of our common stock held by them following the closing of this offering, they will be entitled to designate three individuals for nomination;

 

    when the TPG Funds own less than 10% but at least 5% of the shares of our common stock held by them following the closing of this offering, they will be entitled to designate two individuals for nomination; and

 

    when the TPG Funds own less than 5% but at least 3% of the shares of our common stock held by them following the closing of this offering, they will be entitled to designate one individual for nomination.

The TPG Funds will have also have the exclusive right to remove their designees and to fill vacancies created by the removal or resignation of their designees, and we are required to take all necessary action to cause such removals and fill such vacancies at the request of the TPG Funds.

Following the completion of this offering, we expect to be a “controlled company” under the rules of the NYSE because more than 50% of our outstanding voting power will be held by the TPG Funds. See “Principal and Selling Stockholders.” We intend to rely upon the “controlled company” exception relating to the board of directors and committee independence requirements under the rules of the NYSE. Pursuant to this exception, we will be exempt from the rules that would otherwise require that our board of directors consist of a majority of independent directors and that our compensation committee and nominating and governance committee be composed entirely of independent directors. The “controlled company” exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of the Exchange Act and the rules of the NYSE, which require that our audit committee have at least one independent director upon consummation of this offering, consist of a majority of independent directors within 90 days following the effective date of the registration statement of which this prospectus forms a part and exclusively of independent directors within one year following the effective date of the registration statement of which this prospectus forms a part.

 

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Our board of directors has determined that             is an independent director under the rules of the NYSE. In making this determination, the board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances that the board of directors deemed relevant in determining their independence, including beneficial ownership of our common stock.

Board Committees

Upon the completion of this offering, our board of directors will have three standing committees: the audit committee; the compensation committee; and the nominating and corporate governance committee. Each of the committees operates under its own written charter adopted by the board of directors, each of which will be available on our website upon closing of this offering. Under our amended and restated stockholders agreement, the TPG Funds have the right to appoint a director to serve on each of our committees, subject to NYSE and SEC rules.

Audit Committee

Following this offering, our audit committee will be composed of             , with             serving as chairman of the committee. We anticipate that, prior to the completion of this offering, our audit committee will determine that             meets the definition of “independent director” under the rules of the NYSE and under Rule 10A-3 under the Exchange Act. Within 90 days following the effective date of the registration statement of which this prospectus forms a part, we anticipate that the audit committee will consist of a majority of independent directors, and within one year following the effective date of the registration statement of which this prospectus forms a part, the audit committee will consist exclusively of independent directors. None of our audit committee members simultaneously serves on the audit committees of more than three public companies, including ours. Our board of directors has determined that             is an “audit committee financial expert” within the meaning of the SEC’s regulations and applicable listing standards of the NYSE. The audit committee’s responsibilities upon completion of this offering will include:

 

    appointing, approving the compensation of, and assessing the qualifications, performance and independence of our independent registered public accounting firm;

 

    pre-approving audit and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

 

    reviewing the internal audit plan with the independent registered public accounting firm and members of management responsible for preparing our financial statements;

 

    reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by us;

 

    reviewing the adequacy of our internal control over financial reporting;

 

    reviewing all related person transactions for potential conflict of interest situations and approving all such transactions;

 

    establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns;

 

    recommending, based upon the audit committee’s review and discussions with management and the independent registered public accounting firm, the inclusion of our audited financial statements in our Annual Report on Form 10-K;

 

    reviewing and assessing the adequacy of the committee charter and submitting any changes to the board of directors for approval;

 

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    monitoring our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters;

 

    preparing the audit committee report required by the rules of the SEC to be included in our annual proxy statement; and

 

    reviewing and discussing with management and our independent registered public accounting firm our earnings releases.

Compensation Committee

Following this offering, our compensation committee will be composed of             , with             serving as chairman of the committee. The compensation committee’s responsibilities upon completion of this offering will include:

 

    annually reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and our other executive officers;

 

    evaluating the performance of our chief executive officer in light of such corporate goals and objectives and determining and approving the compensation of our chief executive officer;

 

    reviewing and approving the compensation of our other executive officers;

 

    appointing, compensating and overseeing the work of any compensation consultant, legal counsel or other advisor retained by the compensation committee;

 

    conducting the independence assessment outlined in the rules of the NYSE with respect to any compensation consultant, legal counsel or other advisor retained by the compensation committee;

 

    reviewing and assessing the adequacy of the committee charter and submitting any changes to the board of directors for approval;

 

    reviewing and establishing our overall management compensation philosophy and policy;

 

    overseeing and administering our equity compensation and similar plans;

 

    reviewing and approving our policies and procedures for the grant of equity-based awards;

 

    reviewing and making recommendations to the board of directors with respect to director compensation; and

 

    reviewing and discussing with management the compensation discussion and analysis to be included in our annual proxy statement or Annual Report on Form 10-K.

Nominating and Corporate Governance Committee

Following this offering, our nominating and corporate governance committee will be composed of                     , with                      serving as chairman of the committee. The nominating and corporate governance committee’s responsibilities upon completion of this offering will include:

 

    developing and recommending to the board of directors criteria for board and committee membership;

 

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    establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders;

 

    identifying individuals qualified to become members of the board of directors;

 

    recommending to the board of directors the persons to be nominated for election as directors and to each of the board’s committees;

 

    developing and recommending to the board of directors a set of corporate governance principles;

 

    articulating to each director what is expected, including reference to the corporate governance principles and directors’ duties and responsibilities;

 

    reviewing and recommending to the board of directors practices and policies with respect to directors;

 

    reviewing and recommending to the board of directors the functions, duties and compositions of the committees of the board of directors;

 

    reviewing and assessing the adequacy of the committee charter and submitting any changes to the board of directors for approval;

 

    provide for new director orientation and continuing education for existing directors on a periodic basis;

 

    performing an evaluation of the performance of the committee; and

 

    overseeing the evaluation of the board of directors and management.

Director Experience and Qualifications

The Board of Directors believes that each director should possess a combination of skills, professional experience, and diversity of viewpoints necessary to oversee our business. In addition, it believes that there are certain attributes that every director should possess, as reflected in its membership criteria. Accordingly, the Board of Directors considers the qualifications of directors and director candidates individually and in the broader context of its overall composition and our current and future needs.

Among other things, the Board of Directors has determined that it is important to have individuals with the following skills and experiences:

 

    leadership experience, as directors with experience in significant leadership positions possess strong abilities to motivate and manage others and to identify and develop leadership qualities in others;

 

    knowledge of our industry, particularly distribution strategy and vendor and customer relations, which is relevant to understanding our business and strategy;

 

    operations experience, as it gives directors a practical understanding of developing, implementing and assessing our business strategy and operating plan;

 

    risk management experience, which is relevant to oversight of the risks facing our business;

 

    financial/accounting experience, particularly knowledge of finance and financial reporting processes, which is relevant to understanding and evaluating our capital structure, financial statements and reporting requirements; and

 

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    strategic planning experience, which is relevant to the Board of Director’s review of our strategies and monitoring their implementation and results.

Board Oversight of Risk Management

While the full board of directors has the ultimate oversight responsibility for the risk management process, its committees oversee risk in certain specified areas. In particular, our audit committee oversees management of enterprise risks as well as financial risks. Our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the incentives created by the compensation awards it administers. Our nominating and corporate governance committee oversees risks associated with corporate governance, business conduct and ethics, and is responsible for overseeing the review and approval of related party transactions. Pursuant to the board of directors’ instruction, management regularly reports on applicable risks to the relevant committee or the full board of directors, as appropriate, with additional review or reporting on risks conducted as needed or as requested by the board of directors and its committees.

Code of Conduct

We have adopted a code of conduct that applies to all of our employees, including our principal executive officer and principal financial officer. In connection with this offering, we will make our code of conduct available on our website. We intend to disclose any amendments to our codes, or any waivers of their requirements, on our website.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This discussion and analysis of our compensation program for our named executive officers should be read in conjunction with the accompanying tables below and text disclosing the compensation awarded to, earned by or paid to our named executive officers.

This section provides an analysis of our executive compensation program, the material compensation decisions made under this program during fiscal 2013, and the material factors considered in making those decisions during fiscal 2013. This section is followed by a series of tables containing specific information about the compensation earned in fiscal 2013 by the following individuals, referred to as our named executive officers:

William E. Berry, President and Chief Executive Officer;

Jason T. Yaudes, Executive Vice President and Chief Financial Officer;

J. Michael Gaither, Executive Vice President and General Counsel;

David L. Dyckman, Executive Vice President and Chief Operating Officer; and

Phillip E. Marrett, Executive Vice President, Product Planning and Positioning(1).

 

  (1) Mr. Marrett will cease to be our Executive Vice President, Product Planning and Positioning as of July 31, 2014 and will serve as a consultant to us through the end of 2014.

Decision-making Responsibility

Decisions regarding the compensation of our named executive officers are made by our board of directors, after taking into account recommendations from management regarding compensation opportunities for the fiscal year, as further described below.

Compensation Philosophy and Objectives

The overall goal of our board of directors in compensating our executive officers is to attract, retain and motivate key executives of superior ability who are critical to our future success. Our board of directors believes that both the short-term and long-term incentive compensation paid to our named executive officers should be directly aligned with our performance, and that compensation should be structured to ensure that a significant portion of our named executive officers’ compensation opportunities is directly related to the achievement of financial and operational goals and other factors that impact stockholder value.

The compensation decisions of our board of directors with respect to our named executive officers’ salaries, annual incentives and long-term incentive compensation awards are influenced by the executive’s level of responsibility and function, our overall performance and profitability and our board’s assessment of the competitive marketplace (as determined based on our board members’ business experience). Our board of directors also takes into account each named executive officer’s tenure and individual performance, our overall annual budget, and changes in the cost of living.

Our executive compensation package consists of base salary, target annual bonus, and long-term incentives, as well as additional benefits and perquisites. We have no set policy for allocating pay between the various elements of compensation and instead evaluate our named executive officers’ compensation opportunities on a case-by-case basis after taking into account the factors described above. To achieve competitive positioning for the annual cash compensation component of our executive compensation program,

 

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our board of directors sets base salaries at a level it believes to be competitive but places more emphasis on annual bonus opportunities because they are more directly linked to our performance. Thus, our compensation is focused less on fixed pay and more on performance-based opportunities, while still intending to remain competitive overall. Targeted annual cash bonus opportunities are based on, among other things, our budgeted financial goals and other factors, which may fluctuate from year to year.

Our board of directors also believes that the best way to directly align the interests of our executives with the interests of our stockholders is to provide opportunities for our executives to maintain an appropriate level of equity ownership throughout their tenure with us. Our compensation program achieves this objective through our use of equity-based long-term incentive awards.

Our executive compensation program is continually evaluated for effectiveness in achieving the stated objectives of our board of directors as well as to reflect the economic environment within which we operate.

Overview of Executive Compensation Components

In fiscal 2013, our executive compensation program consisted of several compensation elements, as noted in the table below and as further described below.

 

Pay Element

 

What the Pay Element Rewards

 

Purpose of the Pay Element

Base Salary

  Core competence of the executive relative to skills, experience and contributions to us.   Provides fixed compensation based on competitive market practice.

Annual Cash Incentive

  Contributions toward our achievement of specified financial targets and other key performance criteria.   Provides focus on meeting annual goals that lead to our short- and long-term success.

Stock Options

 

Appreciation in the value of our shares after the stock options are granted.

 

Achievement of specified financial targets.

 

Retention and continued contributions to our success.

 

Provides focus on our performance as follows:

 

•   aligns the interests of our executives with the interests of our stockholders;

 

•   rewards the achievement of performance goals (for performance-based options); and

 

•   encourages retention of our named executive officers with vesting schedules that apply to our time- and performance-based options.

Retirement Benefits

  Participation in our 401(k) plan and our nonqualified deferred compensation plan incentivizes employee retirement savings and continued service to the Company.   Provides attractive tax-deferred retirement savings vehicles for eligible executives and promotes retention of our executives over a longer-term time horizon.

 

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Pay Element

 

What the Pay Element Rewards

 

Purpose of the Pay Element

Welfare Benefits

  Executives participate in employee benefit plans generally available to our employees, including medical, health, life insurance and disability plans.   These benefits are part of our broad-based total compensation program.
  Certain named executive officers are also provided with supplemental health benefits, which reward executives for their service in leadership roles.   Encourages our executive officers to protect their health.

Additional Benefits and Perquisites

  Certain named executive officers are reimbursed for club memberships and all our named executive officers are provided with a vehicle allowance. These benefits reward executives for their service in leadership roles.   Consistent with offering our executives a competitive compensation program.

Termination Benefits

  Our named executive officers are parties to employment agreements that provide them with severance benefits if the named executive officer’s employment is terminated without cause or the officer leaves for good reason, each as defined in the agreements. These arrangements reward executives for their continued service to the Company and subject them to restrictive covenants that protect the Company’s interests.   Termination benefits are designed to retain executives and provide security for our named executive officers so their focus remains on driving the Company’s performance.

The use of these programs enables us to reinforce our pay for performance philosophy, as well as strengthen our ability to attract and retain highly qualified executives. We believe that this combination of programs provides an appropriate mix of fixed and variable pay, balances short-term operational performance with long-term stockholder value, and encourages executive recruitment and retention.

Elements of Compensation and Determination of Pay Levels

Base Salary

Historically, base salary levels have reflected a combination of factors including the executive’s experience and tenure, our overall annual budget, the executive’s individual performance, and changes in responsibility. Our board of directors does not target base salary at any particular percent of total compensation. Our board of directors reviews salary levels annually using the factors described above and takes into account salary recommendations made by our Chief Executive Officer and other senior members of management. In fiscal 2013, there were no base salary increases granted to our named executive officers that took effect in fiscal 2013. In December 2013, our board of directors approved an increase in Mr. Yaudes’ base salary from $350,000 to $400,000 that took effect on January 1, 2014 in recognition of Mr. Yaudes’ increased responsibilities and success in his role as our Chief Financial Officer.

 

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Annual Incentive Plan

Our annual incentive plan provides our named executive officers with an opportunity to earn annual cash bonuses based on our achievement of certain pre-established performance goals.

As in setting base salaries, our board of directors, after taking into account recommendations from our Chief Executive Officer and other senior members of management, considers a combination of the factors described above in establishing the annual target bonus opportunities for our named executive officers, which vary from year to year. Budgeted EBITDA (as defined below) is the primary factor considered, as target bonus opportunities are adjusted annually when our board of directors sets our annual budget, which includes our Budgeted EBITDA goals, for the year. Budgeted EBITDA is a non-GAAP financial measure that refers to our net income or loss from our consolidated statements of comprehensive income before interest income and expense, income taxes, depreciation and amortization, which is then further adjusted to exclude certain non-cash, non-recurring, cost reduction and other adjustment items. Target bonus opportunities are defined as a percentage of the overall bonus pool, which is set as described below. We do not target annual bonus opportunities at any particular percentage of base salary or total compensation.

In December of each year, our board of directors sets a bonus pool for the following year for all executives covered by our annual incentive plan, the size of which is equal to a designated percentage of Budgeted EBITDA actually achieved by us. Budgeted EBITDA was selected as the performance metric for our annual incentive plan because we believe it is an important measure of our financial performance and our ability to create free cash flow. No bonus pool is funded if actual performance falls below 90% of the Budgeted EBITDA goal. The pool grows pro-rata for actual performance between 90% and 100% of the Budgeted EBITDA goal. Above 100% of the Budgeted EBITDA goal, the pool grows by approximately 20% of each incremental dollar. The bonus pool is divided among participants in our annual incentive plan based on each participant’s designated percentage of the bonus pool, as described above.

We set the Budgeted EBITDA goal for fiscal 2013 bonus opportunities at a level that was intended to reflect improvement in performance over the prior fiscal year, specific market conditions and better-than-average growth within our competitive industry. For fiscal 2013, the targeted bonus pool was $10.1 million, subject to adjustment, based upon a Budgeted EBITDA target of $214.8 million. The percentage of the targeted bonus pool designated for each named executive officer for fiscal 2013 was: Mr. Berry, 15.3%; Mr. Dyckman, 6.9%; and Messrs. Yaudes, Gaither and Marrett, 5.3% each. For fiscal 2013, we achieved 91.0% of the Budgeted EBITDA goal, which resulted in a total bonus pool paid of $5.6 million. The amount of the actual bonuses paid to our named executive officers for fiscal 2013 are included in the Summary Compensation Table under the heading “Non-Equity Incentive Plan Compensation.”

Stock Options

We provide our named executive officers with long-term incentive opportunities in the form of stock options. All outstanding stock options were granted under the ATD Corporation Management Equity Incentive Plan, as amended from time to time, which we refer to as the 2010 Plan.

Each of our named executive officers received a grant of stock options following the Sponsor’s acquisition of the Company in fiscal 2010 that was intended to cover a multi-year period and generally align the interests of our senior management team with those of the Sponsor. The sizes of those grants were determined by our board of directors based on its experience, after consultation with our Chief Executive Officer, taking into account the fact that they were intended to serve as incentives over a longer-term period. We do not make annual stock option grants to our named executive officers and have only made additional stock option grants to our named executive officers in limited circumstances.

 

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In fiscal 2012, we granted additional stock options to Mr. Yaudes in connection with his promotion to Executive Vice President and Chief Financial Officer. The size of this grant was determined by our board of directors and was intended to generally align Mr. Yaudes’ aggregate stock option holdings with those of our other Executive Vice Presidents.

In fiscal 2013, we made additional stock option grants to each of our named executive officers following the Sponsor’s purchase of additional common stock of the Company in connection with the acquisition of RTD (described above under the heading “Unaudited Pro Forma Combined Condensed Financial Information”), which had resulted in the equity ownership of our named executive officers and other holders of our common stock being diluted. Our board of directors decided to make these grants so as to generally maintain the equity ownership levels of our named executive officers (on a fully diluted basis) before and after the additional equity purchase by the Sponsor.

Fifty percent of each stock option grant made to our named executive officers consists of time-based stock options and fifty percent of each stock option grant consists of performance-based options. The initial post-acquisition grants made in 2010 to our named executive officers were each eligible to vest over the five-year period following the closing of the acquisition on May 28, 2010. In order to maintain our named executive officers’ focus on maximizing our performance over that five-year period, subsequent grants to our named executive officers generally have had shorter vesting schedules that are aligned with the vesting schedule that applied to the initial post-acquisition grants. All time-based options granted to our named executive officers in fiscal 2013 vest in three equal installments, with the first installment having vested on May 28, 2013, the second installment having vested on May 28, 2014 and the last installment scheduled to vest on May 28, 2015, generally subject to the named executive officer remaining continuously employed by us through such vesting date. The time-based stock options granted to Mr. Yaudes in fiscal 2012 vest in equal installments on each of the first five anniversaries of May 28, 2012, generally subject to Mr. Yaudes remaining continuously employed by us through the applicable vesting date. The first two installments of Mr. Yaudes’ fiscal 2012 time-based stock options vested on May 28, 2013 and May 28, 2014, respectively.

For the initial post-acquisition grants, each performance-based option was eligible to vest in equal installments on each of the first five anniversaries following the closing of the acquisition if, as of the end of the most recent fiscal year ending on or prior to the applicable anniversary, we achieved the EBITDA target established for such fiscal year by the terms of the option at the time the option was granted. If the EBITDA target is not met for the relevant fiscal year, the performance-based option remains outstanding until terminated and immediately vests upon (i) except with respect to performance-based options eligible to vest as part of the final tranche subject to the grant, achievement of cumulative EBITDA targets for the fiscal year and the first fiscal year following that fiscal year or (ii) the occurrence of a liquidity event in which the Sponsor receives a cash return on its investment in us of at least 220%. As with the time-based options, subsequently granted performance-based options generally are eligible to vest over a shorter period that is aligned with the vesting schedule that applied to the initial post-acquisition grants. All performance-based options granted to our named executive officers in fiscal 2013 vest in three equal installments, with the first installment having vested on May 28, 2013 based on fiscal 2012 EBITDA, the second installment having failed to vest on May 28, 2014 due to our not having achieved the fiscal 2013 EBITDA target (but remaining eligible to vest as described below) and the last installment eligible to vest on May 28, 2015 based on fiscal 2014 EBITDA, generally subject to the named executive officer remaining continuously employed by us through such vesting date. The performance-based stock options granted to Mr. Yaudes in fiscal 2012 vest in five equal installments, with the first installment having vested on May 28, 2013 based on fiscal 2012 EBITDA, the second installment having failed to vest on May 28, 2014 due to our not having achieved the fiscal 2013 target (but remaining eligible to vest as described below) and the other installments eligible to vest based on fiscal 2014, 2015 and 2016 EBITDA, respectively, generally subject to Mr. Yaudes remaining employed by us through the relevant vesting date. Performance-based options granted in fiscal 2012 and fiscal 2013 to our named executive officers are also eligible to vest based on our two-year cumulative EBITDA or the cash return to the Sponsor in connection with a liquidity event on the same terms as described above.

 

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Investment in the Company

Each of our named executive officers made a direct cash investment in our common stock shortly following the Sponsor’s acquisition of us. Offering our named executive officers the opportunity to invest in our common stock aligns their interests with the interests of our other stockholders, leads them to act as “employee owners” of our company and allows them to benefit from increases in value that they helped to create. The number of shares of our common stock beneficially owned by each of named executive officers is described below under the heading “Principal and Selling Stockholders.”

Retirement Plans

Our named executive officers participate along with our other employees and/or other executives in our 401(k) plan and our nonqualified deferred compensation plan. Under our 401(k) plan, we make a matching contribution of 50% of employee contributions up to 6% of compensation, subject to certain limits under the Internal Revenue Code, and employees vest in Company matching contributions as to 20% of the amount of the contributions for each of their first five years of service.

Our deferred compensation plan is a nonqualified plan comprised of a voluntary deferral program that allows our named executive officers to defer a portion of their annual salary and bonus and a noncontributory program that provides for certain contributions to be made on behalf of certain executives by us according to a board-approved schedule. Our deferred compensation plan is described further below under the heading “Nonqualified Deferred Compensation for Fiscal 2013” and our contributions to this plan are included under that heading as well as in the Summary Compensation Table.

We believe that our retirement programs serve as an important tool to attract and retain our named executive officers and other key employees. We also believe that offering a baseline of stable retirement benefits encourages our named executive officers to make a long-term commitment to us. We do not adjust the level of retirement benefits based on the value of a named executive officer’s long-term incentive awards nor do we adjust the level of a named executive officer’s total direct compensation for a given year in light of the value of retirement benefits.

Severance and change in control arrangements

We provide severance protection to each of our named executive officers pursuant to their employment agreements. Certain limited change in control-related protections apply to stock options held by our named executive officers. Our severance and change in control protections are designed to be fair and competitive and to aid in attracting experienced executives, including our named executive officers. The terms of the severance and change in control protections we provide are described below under the heading “Potential Payments Upon Termination or Change in Control.”

Perquisites and Other Benefits

We provide vehicle allowances to each of our named executive officers and reimburse Messrs. Berry, Gaither and Dyckman for the cost of dues at country clubs. In addition, we sponsor an executive medical program for our executive officers, which provides for reimbursement to certain named executive officers and eligible dependents for medical expenses not covered by our group medical plan. Our board of directors believes that the costs of providing these perquisites and benefits are reasonable relative to their value to our named executive officers.

Tax Deductibility

Because our common stock is not currently publicly traded, executive compensation paid in fiscal 2013 was not subject to the provisions of Section 162(m) of the Internal Revenue Code, which limits the deductibility of compensation paid to certain individuals to $1 million, excluding qualifying performance-based compensation

 

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and certain other compensation. Following this offering, at such time as we are subject to the deduction limitation under Section 162(m) of the Internal Revenue Code, we expect that our board of directors (or a newly formed compensation committee) will consider the impact of Section 162(m).

Summary Compensation Table for Fiscal 2013, 2012 and 2011

The following table summarizes compensation for our named executive officers for fiscal years 2013, 2012 and 2011.

 

Name and Principal Position

  

Fiscal
Year

    

Salary ($)

    

Option Awards
($) (3)

    

Non-Equity
Incentive Plan
Compensation
($) (4)

    

All Other
Compensation
($) (5)

    

Total ($)

 

William E. Berry

     2013       $ 750,000       $ 353,997       $ 849,000       $ 56,297       $ 2,009,294   

President and Chief Executive Officer

    

 

2012

2011

  

  

    

 

750,000

600,000

  

  

    

 

—  

—  

  

  

    

 

600,000

1,584,000

  

  

    

 

51,921

54,347

  

  

    

 

1,401,921

2,238,347

  

  

Jason T. Yaudes (1)

     2013       $ 350,000       $ 103,585       $ 293,000       $ 23,665       $ 770,250   

Executive Vice President and Chief Financial Officer

    
2012
  
    
342,308
  
    
758,275
  
    
215,000
  
    
20,378
  
    
1,335,961
  

J. Michael Gaither

     2013       $ 400,000       $ 176,999       $ 293,000       $ 53,437       $ 923,436   

Executive Vice President, General Counsel and Secretary

    

 

2012

2011

  

  

    

 

400,000

350,000

  

  

    

 

—  

—  

  

  

    

 

215,000

545,000

  

  

    

 

55,581

52,664

  

  

    

 

670,581

947,664

  

  

David L. Dyckman (2)

     2013       $ 550,000       $ 199,123       $ 384,000       $ 26,195       $ 1,159,318   

Executive Vice President and Chief Operating Officer

    

 

2012

2011

  

  

    

 

550,000

350,000

  

  

    

 

—  

—  

  

  

    

 

280,000

727,000

  

  

    

 

26,239

27,170

  

  

    

 

856,239

1,104,170

  

  

Phillip E. Marrett

     2013       $ 350,000       $ 176,999       $ 293,000       $ 37,013       $ 857,012   

Executive Vice President, Product Planning and Positioning

    

 

2012

2011

  

  

    

 

350,000

325,000

  

  

    

 

—  

—  

  

  

    

 

215,000

545,000

  

  

    

 

34,751

33,507

  

  

    

 

599,751

903,507

  

  

 

(1) Mr. Yaudes was appointed Executive Vice President and Chief Financial Officer effective January 23, 2012. Mr. Yaudes was not a named executive officer of the Company during fiscal 2011 and therefore his compensation is not required to be reported for that year.

 

(2) Effective January 23, 2012, Mr. Dyckman was appointed Executive Vice President and Chief Operating Officer. Prior to January 23, 2012, Mr. Dyckman was our Executive Vice President and Chief Financial Officer.

 

(3) Represents the aggregate grant date fair value of option awards granted during the fiscal year ended December 28, 2013 and December 29, 2012, in each case, calculated in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The fair value of the options was calculated using a Black-Scholes option pricing model. For a discussion of the assumptions used in the valuation, see Note 12 in our notes to consolidated financial statements included elsewhere in this prospectus.

 

(4) Represents each named executive officer’s annual cash bonus earned with respect to the relevant fiscal year under our annual incentive plan.

 

(5) Please see the table below for a description of amounts included in this column.

 

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All Other Compensation from Summary Compensation Table for Fiscal 2013, 2012 and 2011

The following table contains a breakdown of the compensation and benefits included under “All Other Compensation” in the Summary Compensation Table above.

 

Name

  

Fiscal
Year

    

Registrant
Contributions
to Non-
Qualified
Deferred
Compensation
Plan

    

Vehicle
Allowance

    

401(k)
Company
Match

    

Club
Dues

    

Executive
Medical
Benefits (1)

    

Long-
term
Disability

    

Total

($)

 

William E. Berry

    

 

 

2013

2012

2011

  

  

  

   $

 

 

20,000

20,000

20,000

  

  

  

   $

 

 

19,200

19,200

19,200

  

  

  

   $

 

 

11,500

5,628

8,250

  

  

  

   $

 

 

5,082

5,544

5,544

  

  

  

   $

 

 

—  

994

596

  

  

  

   $

 

 

515

555

757

  

  

  

   $

 

 

56,297

51,921

54,347

  

  

  

Jason T. Yaudes

    

 

2013

2012

  

  

    

 

—  

—  

  

  

    

 

14,400

14,400

  

  

    

 

8,750

5,423

  

  

    

 

—  

—  

  

  

    

 

—  

—  

  

  

    

 

515

555

  

  

    

 

23,665

20,378

  

  

J. Michael Gaither

    

 

 

2013

2012

2011

  

  

  

    

 

 

17,000

17,000

17,000

  

  

  

    

 

 

16,800

16,800

16,800

  

  

  

    

 

 

11,500

7,776

8,250

  

  

  

    

 

 

6,000

6,000

6,000

  

  

  

    

 

 

1,622

7,450

3,757

  

  

  

    

 

 

515

555

857

  

  

  

    

 

 

53,437

55,581

52,664

  

  

  

David L. Dyckman

    

 

2013

2012

  

  

    

 

—  

—  

  

  

    

 

 

14,400

14,400

14,400

  

  

  

    

 

 

8,750

7,238

8,250

  

  

  

    

 

 

2,530

2,760

2,760

  

  

  

    

 

 

—  

1,286

903

  

  

  

    

 

 

515

555

857

  

  

  

    

 

 

26,195

26,239

27,170

  

  

  

Phillip E. Marrett

    

 

2012

2011

  

  

    

 

 

10,000

10,000

10,000

  

  

  

    

 

 

14,400

14,400

14,400

  

  

  

    

 

 

8,750

7,714

8,250

  

  

  

    

 

 

—  

—  

—  

  

  

  

    

 

 

3,348

2,082

—  

  

  

  

    

 
 

515

555
857

  

  
  

    

 

 

37,013

34,751

33,507

  

  

  

 

(1) Represents amounts paid by us under our executive medical plan to cover the cost of qualifying expenses that were incurred by Messrs. Berry, Gaither, Dyckman and Marrett under our health plan but that were not covered under such plan.

Grants of Plan-Based Awards During Fiscal 2013

The following table sets forth certain information regarding the grant of plan-based awards made during fiscal 2013 to our named executive officers:

 

         

Potential Payouts
Under Non-Equity
Incentive Plan Awards

 

Estimated
Future Payouts
Under Equity
Incentive
Plan Awards (4)

   

All Other
Options:
Number of
Securities
Underlying

Options

(#) (5)

   

Exercise
Price of
Option

Awards

($/Sh)

   

Grant Date
Fair Value

of Option
Awards (6)

 

Name

 

Grant
Date

   

Threshold

($) (1)

   

Target

($) (2)

   

Maximum

(3)

 

Target

(#)

       

William E. Berry

    $ 772,038      $ 1,544,076             
    2/15/2013              330,986        330,987      $ 1.20      $ 353,997   

Jason T. Yaudes

      267,438        534,876             
    2/15/2013              94,699        94,699        1.20        103,585   

J. Michael Gaither

      267,438        534,876             
    2/15/2013              165,493        165,494        1.20        176,999   

David L. Dyckman

      348,174        696,348             
    2/15/2013              186,180        186,180        1.20        199,123   

Phillip E. Marrett

      267,438        534,876             
    2/15/2013              165,493        165,494        1.20        176,999   

 

(1) Represents the minimum payments under our annual incentive plan if the threshold level of 90% of the Budgeted EBITDA target had been achieved during fiscal 2013.

 

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(2) Represents payments under our annual incentive plan if 100% of the Budgeted EBITDA target had been achieved during fiscal 2013. In fiscal 2013, we achieved 91% of the Budgeted EBITDA target, exceeding the threshold level discussed in footnote (1) above but not meeting the target level of performance. Actual bonuses paid to our named executive officers are included in the Summary Compensation Table under the heading “Non-Equity Incentive Plan Compensation.”

 

(3) There is no limit on the maximum amount payable under our annual incentive plan.

 

(4) Represents the number of performance-based options granted to our named executive officers under the 2010 Plan in fiscal 2013. All performance-based options granted to our named executive officers in fiscal 2013 vest in three equal installments, with the first installment having vested on May 28, 2013 based on fiscal 2012 EBITDA, the second installment having failed to vest on May 28, 2014 due to our not having achieved the fiscal 2013 EBITDA target (but remaining eligible to vest as described below) and the last installment eligible to vest on May 28, 2015 based on fiscal 2014 EBITDA, generally subject to the named executive officer remaining continuously employed by us through such vesting date. If the EBITDA target is not met for fiscal 2014, the performance-based option remains outstanding until terminated and immediately vests upon the occurrence of a liquidity event in which the Sponsor receives a cash return on its investment in us of at least 220%, generally subject to the named executive officer remaining employed by us through the vesting date. Because the EBITDA target was not met for fiscal 2013, performance-based options eligible to vest based on fiscal 2013 EBITDA, to the extent they remain outstanding, are eligible to vest based upon achievement of a cumulative EBITDA target for fiscal years 2013 and 2014.

 

(5) Represents the number of time-based options granted to our named executive officers under the 2010 Plan in fiscal 2013. All time-based options granted to our named executive officers in fiscal 2013 vest in three equal installments, with the first installment having vested on May 28, 2013, the second installment having vested on May 28, 2014 and the last installment scheduled to vest on May 28, 2015, generally subject to the named executive officer remaining continuously employed by us through such vesting date.

 

(6) Represents the aggregate grant date fair value of option awards granted during the fiscal year ended December 28, 2013, calculated in accordance with FASB ASC Topic 718, excluding the effect of estimated forfeitures. The fair value of the options was calculated using a Black-Scholes option pricing model. For a discussion of the assumptions used in the valuation, see Note 12 in our notes to consolidated financial statements included elsewhere in this prospectus.

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

We are a party to an employment agreement with each of our named executive officers. The term of each agreement will continue until the named executive officer’s termination of employment, unless the parties otherwise agree to terminate the agreement. Each agreement sets forth the named executive officer’s initial base salary, which has been subsequently increased prior to fiscal 2013 (except in the case of Mr. Yaudes, whose base salary of $350,000 was set in his employment agreement dated January 23, 2012 and remained in effect during fiscal 2013) and provides that the named executive officer is entitled to an annual performance-based cash bonus on such terms as are determined by our board of directors and is entitled to participate in the benefit plans maintained by the Company and made available to all executive officers.

The agreements with Messrs. Berry, Yaudes and Gaither require us to provide the named executive officer with a monthly car allowance ($1,600 per month for Mr. Berry, $1,200 per month for Mr. Yaudes and $1,400 per month for Mr. Gaither) and, for Messrs. Berry and Gaither, also require us to reimburse them for club membership dues of up to $500 per month.

For a description of the payments and benefits our named executive officers may be entitled to in connection with a termination of employment and/or a change in control and a description of the restrictive covenants covering our named executive officers, see “—Potential Payments upon Termination or Change in Control.”

 

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Outstanding Equity Awards at Fiscal 2013 Year End

The following table provides information concerning outstanding options held by our named executive officers as of December 28, 2013, the last day of our 2013 fiscal year.

 

Name

  

Number of
Securities
Underlying
Unexercised
Options
Exercisable

(#)

    

Number of
Securities
Underlying
Unexercised
Options
Unexercisable

(#) (1)

    

Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#) (2)

    

Option
Exercise
Price ($) (3)

    

Option
Expiration
Date

 

William E. Berry

     5,184,000         1,728,000         1,728,000       $ 1.00         08/30/20   
     220,658         220,658         220,657         1.20         02/15/23   

Jason T. Yaudes

     583,200         194,400         194,400         1.00         08/30/20   
     300,000         600,000         600,000         1.14         01/23/22   
     47,809         70,794         70,794         1.20         02/15/23   

J. Michael Gaither

     2,592,000         864,000         864,000         1.00         08/30/20   
     110,329         110,329         110,329         1.20         02/15/23   

David L. Dyckman

     2,916,000         972,000         972,000         1.00         08/30/20   
     124,120         124,120         124,120         1.20         02/15/23   

Phillip E. Marrett

     2,592,000         864,000         864,000         1.00         08/30/20   
     110,329         110,329         110,329         1.20         02/15/23   

 

(1) Represents the number of unvested and unexercised time-based options held by our named executive officers as of December 28, 2013. The time-based options expiring on August 30, 2020 vest in equal installments on each of the first five anniversaries of May 28, 2010; as of the end of fiscal 2013, 40% of each grant had not yet vested. Mr. Yaudes’ time-based options expiring on January 23, 2022 vest in equal installments on each of the first five anniversaries of May 28, 2012; as of the end of fiscal 2013, 80% of Mr. Yaudes’ grant had not yet vested. Except as described below, the time-based options expiring on February 15, 2023 vest in equal installments on each of the first three anniversaries of May 28, 2012; as of the end of fiscal 2013, 66.6% of each grant had not yet vested. Of Mr. Yaudes’ time-based options that expire on February 15, 2023, 37,236 are subject to the vesting terms described in the immediately preceding sentence. The remaining 57,463 time-based options vest in equal installments on each of the first five anniversaries of May 28, 2012; as of the end of fiscal 2013, 80% of the grant had not yet vested. In each case, the vesting of options generally is contingent on the named executive officer remaining continuously employed by us through the applicable vesting date.

 

(2)

Represents the number of unearned and unexercised performance-based options held by our named executive officers as of December 28, 2013. The performance-based options expiring on August 30, 2020 vest in equal installments on each of the first five anniversaries of May 28, 2010, provided that we have met the EBITDA target established for the preceding fiscal year; as of the end of fiscal 2013, 40% of each grant had not yet vested. Mr. Yaudes’ performance-based options expiring on January 23, 2022 vest in equal installments on each of the first five anniversaries of May 28, 2012, provided that we have met the EBITDA target established for the preceding fiscal year; as of the end of fiscal 2013, 80% of Mr. Yaudes’ grant had not yet vested. Except as described below, the performance-based options expiring on February 15, 2023 vest in equal installments on each of the first three anniversaries of May 28, 2012, provided that we have met the EBITDA target established for the preceding fiscal year; as of the end of fiscal 2013, 66.6% of each grant had not yet vested. Of Mr. Yaudes’ performance-based options that expire on February 15, 2023, 37,236 are subject to the vesting terms described in the immediately preceding sentence. The remaining 57,463 performance-based options vest in equal installments on each of the first five anniversaries of

 

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  May 28, 2012, provided that we have met the EBITDA target established for the preceding fiscal year; as of the end of fiscal 2013, 80% of the grant had not yet vested. With respect to each performance-based option, if the EBITDA target is not met for the relevant fiscal year, the performance-based option remains outstanding until terminated and immediately vests upon (i) except with respect to performance-based options eligible to vest as part of the final tranche subject to the grant, achievement of cumulative EBITDA targets for the relevant fiscal year and the first fiscal year following that fiscal year, or (ii) the occurrence of a liquidity event in which the Sponsor receives a cash return on its investment in us of at least 220%. In each case, the named executive officer generally must remain employed through the applicable vesting date in order for the applicable performance-based options to vest.

 

(3) The exercise price of all stock options is equal to 100% of the fair market value of a share of our common stock on the date the options were granted, as determined by our board of directors after considering, among other things, the results of an independent third party valuation.

Option exercises and stock vested

None of our named executive officers exercised any stock options or became vested in any stock awards during our 2013 fiscal year.

Nonqualified Deferred Compensation for Fiscal Year 2013

We sponsor a nonqualified deferred compensation plan in which all of our named executive officers are eligible to participate. Under the deferred compensation plan, a participant is permitted to defer up to 75% of his base salary and up to the full amount of his annual bonus, other performance-based compensation and any 401(k) plan refund. We may also make discretionary contributions to the deferred compensation plan on behalf of participants in an amount determined by our board of directors. In fiscal 2013, we continued our prior practice of making contributions to the plan on behalf of Messrs. Berry, Gaither and Marrett in the amounts shown below. Each participant’s elective deferrals under the plan are fully vested upon deferral; our contributions to the plan are only fully vested after a participant has provided five years of service to the Company, with 20% vesting on each of the first five anniversaries of the participant’s first day of service. Each participant may direct the investment of his account under the deferred compensation plan based on the investment alternatives available under the plan, which include a variety of equity, fixed income and other investment alternatives. A participant may receive a distribution upon his or her death, a separation from service, disability, a change in control event or an unforeseeable emergency. All distributions will be in the form of a lump sum, except that a participant may elect to receive distributions in installments over a period of up to five years in the event of his or her disability and, if a participant has attained either age 62 or age 55 with ten years of service, he or she may elect to receive distributions in installments over a period of up to ten years.

The following table sets forth information regarding our nonqualified deferred compensation plan, showing, with respect to each named executive officer, the aggregate contributions made by such executive officer, the aggregate contributions made by the Company, the aggregate earnings accrued and the aggregate value of withdrawals and distributions to the executive officer, in each case, during the fiscal year ended December 28, 2013 and the balance of his account under this plan as of December 28, 2013.

 

Name

  

Executive
Contributions
in 2013

($) (1)

    

Registrant
Contributions
in 2013

($) (2)

    

Aggregate
Earnings
in 2013

($) (3)

   

Aggregate
Withdrawals/
Distributions

($)

    

Aggregate
Balance at
December 28,
2013

($) (4)

 

William E. Berry

     30,000         20,000         119,308        —           553,966   

Jason T. Yaudes

     67,250         —           38,592        —           242,618   

J. Michael Gaither

     —           17,000         (2,153     —           329,951   

David L. Dyckman

     28,747         —           4,226        —           32,973   

Phillip E. Marrett

     —           10,000         6,745        —           89,595   

 

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(1) Amounts in this column are included in the amounts reported as “Salary” or “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table for fiscal year 2013 for each of the named executive officers, depending on the type of compensation the named executive officer elected to defer.

 

(2) Amounts in this column reflect company contributions and are included in the Summary Compensation Table under the heading “All Other Compensation.”

 

(3) Earnings on balances in the nonqualified deferred compensation plan equal the rate of return on investments elected by each participant in the plan. These amounts are not included in the Summary Compensation Table because the earnings are credited at a market rate of return.

 

(4) The amounts in the table below are reported as compensation in the Summary Compensation Table in the years indicated:

 

Name

  

Fiscal
Year

    

Reported
Amounts

($)

 

William E. Berry

     2013       $ 50,000   
     2012         48,769   
     2011         43,077   

Jason T. Yaudes

     2013         67,250   
     2012         60,740   

J. Michael Gaither

     2013         17,000   
     2012         17,000   
     2011         17,577   

David L. Dyckman

     2013         28,747   
     2012         —     
     2011         —     

Phillip E. Marrett

     2013         10,000   
     2012         10,000   
     2011         10,000   

Potential Payments upon Termination or Change in Control

Employment Agreements

As described above, we currently have employment agreements with each of our named executive officers.

We or the employee may terminate the applicable employment agreement at any time. Upon termination of employment for any reason, the named executive officer is entitled to receive a basic termination payment equal to his base salary earned through the date of termination and the previous year’s bonus to the extent earned. In the event of the termination of Mr. Berry’s employment for any reason other than cause, we have agreed to provide for the continued participation of him and his family in our health plan at our expense until the time he reaches age 65. In addition, if we terminate the employment of any of our named executive officers without “cause” or if the named executive officer resigns for “good reason” (each as defined in his employment agreement), he is entitled to the following severance payments and, in the case of Messrs. Yaudes, Gaither, Dyckman and Marrett, continuation of health benefits:

Mr. Berry is entitled to receive a monthly sum equal to his monthly base salary in effect at such time plus $25,000 for a period of two years (in addition to the health benefits that would be provided upon a termination for any reason other than a termination for cause).

 

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Mr. Yaudes is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time for a period of 12 months and (ii) continuation of health benefits for a period of 12 months.

Mr. Gaither is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time plus $22,222.22 for a period of 18 months and (ii) continuation of health benefits for a period of 18 months.

Mr. Dyckman is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time plus $20,833.34 for a period of 12 months and (ii) continuation of health benefits for a period of 12 months.

Mr. Marrett is entitled to receive: (i) a monthly sum equal to his monthly base salary in effect at such time plus $19,583.33 for a period of 12 months and (ii) continuation of health benefits for a period of 12 months.

Each named executive officer has agreed to sign a release of claims in connection with a termination of employment. The employment agreements contain confidentiality, non-compete and non-solicit provisions. The non-compete and non-solicit provisions apply during the named executive officer’s employment and for a post-employment period equal to the following: Mr. Berry—24 months; Mr. Gaither—18 months; and Messrs. Yaudes, Dyckman and Marrett—12 months.

Stock Options

Under the 2010 Plan, if a named executive officer’s employment is terminated within two years of a change of control transaction either by us without cause or by the named executive officer for good reason, 100% of the named executive officer’s outstanding time-based options become immediately vested and exercisable. In addition, the option grant agreements for each of the named executive officers provide that in the event of termination by us without cause or by the named executive officer for good reason, whether following a change of control transaction or not, (i) any time-based options that would have vested within six months of termination will become immediately vested on the termination date; and (ii) any performance-based options that would have vested within six months of termination if the employee had continued to be employed will vest upon the date the applicable performance criteria are determined to have been achieved.

 

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Payment Summary

The table below reflects the amount of compensation payable to each named executive officer in the event of termination of the executive’s employment for various reasons or a change in control. The table does not include amounts payable under the nonqualified deferred compensation plan, payments that would be made to a named executive officer under benefit plans or employment terms generally available to other salaried employees, such as group life or disability insurance, accrued but unpaid salary or payments under our annual incentive plan, which are earned if the named executive officer works through the end of the relevant fiscal year. The amounts shown assume that a termination of employment and/or a change in control occurred on December 28, 2013, the last day of our 2013 fiscal year.

 

Name

  

Payments upon Termination

 

Termination
without Cause or
Resignation for
Good Reason
without Change in
Control (1)

   

Termination
without Cause
or Resignation
for Good
Reason
following
Change in
Control (2)

   

Termination of
Employment
Under All Other
Circumstances

(3)

   

Change in
Control
without
Termination
of
Employment

(4)

 

William E. Berry

   Severance and Noncompetition Agreement   $ 2,100,000      $ 2,100,000      $             —        $             —     
  

Acceleration of Time-Based Stock Options

    465,099        930,197        —          —     
  

Health Benefits

    60,382        60,382        —          —     
    

 

 

   

 

 

   

 

 

   

 

 

 
  

Total

  $ 2,625,481      $ 3,090,579      $ —        $ —     
    

 

 

   

 

 

   

 

 

   

 

 

 

Jason T. Yaudes

   Severance and Noncompetition Agreement   $ 350,000      $ 350,000      $ —        $ —     
  

Acceleration of Time-Based Stock Options

    109,771        334,438        —          —     
  

Health Benefits

    10,064        10,064        —          —     
    

 

 

   

 

 

   

 

 

   

 

 

 
  

Total

  $ 469,835      $ 694,502      $ —        $ —     
    

 

 

   

 

 

   

 

 

   

 

 

 

J. Michael Gaither

   Severance and Noncompetition Agreement   $ 1,000,000      $ 1,000,000      $ —        $ —     
  

Acceleration of Time-Based Stock Options

    232,549        465,099        —          —     
  

Health Benefits

    13,226        13,226        —          —     
    

 

 

   

 

 

   

 

 

   

 

 

 
  

Total

  $ 1,245,776      $ 1,478,325      $ —        $ —     
    

 

 

   

 

 

   

 

 

   

 

 

 

David L. Dyckman

   Severance and Noncompetition Agreement   $ 800,001      $ 800,001      $ —        $ —     
  

Acceleration of Time-Based Stock Options

    261,618        523,236        —          —     
  

Health Benefits

    10,064        10,064        —          —     
    

 

 

   

 

 

   

 

 

   

 

 

 
  

Total

  $ 1,071,683      $ 1,333,301      $ —        $ —     
    

 

 

   

 

 

   

 

 

   

 

 

 

Phillip E. Marrett

   Severance and Noncompetition Agreement   $ 585,000      $ 585,000      $ —        $ —     
  

Acceleration of Time-Based Stock Options

    232,549      $ 465,099        —          —     
  

Health Benefits

    7,258        7,258        —          —     
    

 

 

   

 

 

   

 

 

   

 

 

 
  

Total

  $ 824,807      $ 1,057,356      $ —        $ —     
    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amounts shown in “Acceleration of Time-Based Stock Options” above represent the aggregate spread on all unvested time-based options held by the named executive officer that were scheduled to vest within six months following December 28, 2013, assuming a fair market value on December 28, 2013 of $1.50 per share (as determined by our board of directors).

 

(2) Amounts shown in “Acceleration of Time-Based Stock Options” above represent the aggregate spread on all outstanding unvested time-based options held by the named executive officer on December 28, 2013, assuming a fair market value on December 28, 2013 of $1.50 per share (as determined by our board of directors). Because none of the outstanding performance-based options held by our named executive officers would have vested within six months following December 28, 2013 based on our fiscal 2013 EBITDA or would have vested had a change in control occurred on December 28, 2013 assuming the Sponsor had received a price per share of $1.50, for purposes of this table we have assumed that none of the named executive officers would have vested in his outstanding unvested performance-based options had a termination of employment or a change in control occurred on that date.

 

(3) In the event of the death or disability of a named executive officer, the named executive officer will receive benefits under our disability plan or payments under our life insurance plan, as appropriate. These payments are generally available to all employees and are therefore not included in the above table.

 

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(4) Other than the performance-based options described above, which are eligible to vest if the Sponsor receives a certain return on its investment in us in connection with certain corporate transactions, we do not provide our named executive officers with severance or other payments that are payable on a change in control without an accompanying qualifying termination. If a named executive officer were terminated following a change in control, such officer would receive payments and benefits pursuant to the employment agreements and 2010 Plan and stock option agreements, in each case, as described above.

Compensation of Directors

For their service as members of our board of directors, each of James Farrell, Gary Kusin, James Micali, Carl Sewell, and David Krantz (the “Outside Directors”) receive an annual fee of $150,000 in cash, payable in quarterly installments. Upon their appointment to our board of directors, each of the Outside Directors also received a one-time grant of options under the 2010 Plan to purchase 200,000 shares of our common stock with an exercise price equal to the fair market value of a share of our common stock on the date of grant. These options vested in three equal installments on each of the first three anniversaries of the date of grant. In October 2010, we adopted the ATD Corporation Non-Employee Director Restricted Stock Plan (the “Restricted Stock Plan”). Each Outside Director may receive, at the discretion of our board of directors, an annual grant under the Restricted Stock Plan of restricted shares of our common stock valued at $50,000, with vesting to occur in two equal installments on each of the first two anniversaries of the date of grant. For fiscal 2013, no restricted shares were granted to the Outside Directors. Each Outside Director also received a one-time opportunity to purchase up to $1,000,000 of our common stock, at a per share price equal to the fair market value on the date of purchase. The number of shares of our common stock beneficially owned by each of directors is described below under the heading “Principal and Selling Stockholders.” These equity arrangements were entered into to further align our Outside Directors’ interests with the interests of our stockholders. The members of our board of directors other than the Outside Directors do not receive separate compensation for their service on our board of directors. Mr. Sewell resigned from the Board on July 10, 2013.

In connection with this offering, our board of directors intends to adopt a non-employee director compensation program under which our non-employee directors will be compensated following this offering.

The following table sets forth the compensation paid to our directors in fiscal 2013:

 

Name

   Fees Earned
or Paid in
Cash

($)
     Stock
Awards(1)
   Total
($)
 

James Farrell

   $ 150,000          $ 150,000   

Gary Kusin

     150,000            150,000   

James M. Micali

     150,000            150,000   

Carl Sewell (2)

     112,500            112,500   

David Krantz

     150,000            150,000   

Kevin Burns

                  

Peter McGoohan

                  

 

(1) As of December 28, 2013, Messrs. Farrell, Kusin, Micali and Krantz each held 21,930 unvested shares of restricted stock and neither of our other directors held any other unvested stock awards. As at December 28, 2013, Messrs. Farrell, Kusin, Micali and Krantz each held 200,000 stock options, and neither of our other directors held any stock options.

 

(2) Mr. Sewell resigned from our board of directors on July 10, 2013.

Compensation Committee Interlocks and Insider Participation

Executive compensation and related decisions are made by our board of directors, which does not currently have a compensation committee.

 

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Equity and Cash Incentive Plans

Fiscal 2014 Annual Incentive Plan

Our named executive officers are each entitled to participate in our annual incentive plan for fiscal 2014. The terms of our annual cash incentive plan for our 2014 fiscal year, including the performance metric used to determine plan funding, are substantially the same as the terms that applied for our 2013 fiscal year, as described above under “—Executive compensation—Elements of Compensation and Determination of Pay Levels—Annual Incentive Plan.” Each named executive officer’s percentage of the annual bonus pool for fiscal 2014 will remain the same as it was for fiscal 2013.

2014 Omnibus Plan

In connection with this offering, our board of directors intends to adopt the ATD Corporation 2014 Omnibus Incentive Plan, or the 2014 Omnibus Plan, and, following this offering, all equity-based awards will be granted under the 2014 Omnibus Plan. The following summary describes what we anticipate to be the material terms of the 2014 Omnibus Plan. This summary of the 2014 Omnibus Plan is not a complete description of all provisions of the 2014 Omnibus Plan and is qualified in its entirety by reference to the 2014 Omnibus Plan, a form of which will be filed as an exhibit to the registration statement of which this prospectus is a part.

Administration. The 2014 Omnibus Plan is administered by our compensation committee. Our compensation committee has the authority to, among other things, interpret the 2014 Omnibus Plan, determine eligibility for, grant and determine the terms of awards under the 2014 Omnibus Plan, determine the form of settlement of awards (whether in cash, shares of our common stock or other property), and do all things necessary or appropriate to carry out the purposes of the 2014 Omnibus Plan. Our compensation committee’s determinations under the 2014 Omnibus Plan are conclusive and binding.

Eligibility. Our key employees, directors, consultants and advisors are eligible to participate in the 2014 Omnibus Plan.

Authorized Shares. Subject to adjustment, as described below, the maximum number of shares of our common stock that may be delivered in satisfaction of awards under the 2014 Omnibus Plan is             shares. Any shares of common stock underlying awards that are settled in cash, expire or become unexercisable without having been exercised or that are forfeited or repurchased by us will again be available for issuance under the 2014 Omnibus Plan. In addition, the number of shares of our common stock delivered in satisfaction of awards will be determined net of shares of our common stock withheld by us in payment of the exercise price or purchase price of an award or in satisfaction of tax withholding requirements with respect to an award.

Individual Limits. The maximum number of shares of our common stock subject to stock options and the maximum number of shares of our common stock subject to stock appreciation rights, or SARs, that may be granted to any participant in the 2014 Omnibus Plan in any calendar year is each             shares. The maximum number of shares of our common stock subject to other awards that may be granted to any participant in the 2014 Omnibus Plan in any calendar year is             shares and the maximum amount payable to any participant in the 2014 Omnibus Plan in any calendar year under any cash awards is $            . In addition, in the case of a non-employee director, an additional limit applies such that the maximum grant-date fair value of stock-denominated awards, and the maximum amount of cash payable under any cash awards, granted under the 2014 Omnibus Plan in any fiscal year during any part of which the director is then eligible under such plan is, in each case, $            , except that such limit for a non-employee chairman of our board of directors or lead director is, in each case, $            .

Types of Awards. The 2014 Omnibus Plan provides for awards of stock options, SARs, restricted stock, unrestricted stock, stock units, performance awards, other awards convertible into or otherwise based on shares of our common stock and cash awards. Eligibility for stock options intended to be incentive stock options, or ISOs, is limited to our employees. Dividend equivalents may also be provided in connection with an award under the 2014 Omnibus Plan on terms and subject to conditions established by our compensation committee.

 

130


    Stock options and SARs. The exercise price of a stock option, and the base price against which a SAR is to be measured, may not be less than the fair market value (or, in the case of an ISO granted to a ten percent shareholder, 110% of the fair market value) of shares of our common stock on the date of grant. Our compensation committee will determine the time or times at which stock options or SARs become exercisable and the terms on which such awards remain exercisable.

 

    Restricted and unrestricted stock. A restricted stock award is an award of shares of our common stock subject to forfeiture restrictions, while an unrestricted stock award is not subject to such restrictions.

 

    Stock units. A stock unit award is an award denominated in shares of our common stock that entitles the participant to receive shares of our common stock or cash measured by the value of shares of our common stock in the future. The delivery of shares of our common stock or cash under a stock unit may be subject to the satisfaction of performance conditions or other vesting conditions.

 

    Performance awards. A performance award is an award the vesting, settlement or exercisability of which is subject to specified performance criteria.

 

    Cash awards. A cash award is an award denominated in cash.

 

    Other awards. Other awards are awards that are convertible into or otherwise based on shares of our common stock.

Performance Awards. The 2014 Omnibus Plan provides for the grant of performance awards that are made based upon, and subject to achieving, performance objectives. Performance objectives with respect to those awards that are intended to qualify as “performance-based compensation” for purposes of Section 162(m) of the Code, or Section 162(m), to the extent applicable, are limited to an objectively determinable measure or measures of performance relating to any or any combination of the following (measured either absolutely or by reference to an index or indices and determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business, project or geographical basis or in combinations thereof): sales; revenues; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation, or amortization or equity expense, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital, capital employed or assets; one or more operating ratios; operating income or profit, including on an after tax basis; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; sales of particular products or services; customer acquisition or retention; acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; or recapitalizations, restructurings, financings (issuance of debt or equity) or refinancings.

To the extent consistent with the requirements for satisfying the performance-based compensation exception under Section 162(m), to the extent applicable, our compensation committee may provide, by the deadline that otherwise applies to the establishment of the terms of any award intended to qualify for such exception, that one or more of the performance objectives applicable to an award will be adjusted in an objectively determinable manner to reflect events (for example, the impact of charges for restructurings, discontinued operations, mergers, acquisitions, extraordinary items, and other unusual or non-recurring items, and the cumulative effects of tax or accounting changes, each as defined by U.S. generally accepted accounting principles) occurring during the performance period that affect the applicable performance objectives.

Performance-based awards granted under the 2014 Omnibus Plan will not be required to comply with the provisions of the 2014 Omnibus Plan applicable to performance-based compensation under Section 162(m) of the Code if they are eligible for exemption from such provisions by reason of the transition relief for newly-public companies under Section 162(m).

 

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Vesting; Termination of Employment or Service. Our compensation committee has the authority to determine the vesting schedule applicable to each award, and to accelerate the vesting or exercisability of any award. Our compensation committee will determine the effect of a termination of employment or service on an award. Unless otherwise provided by our compensation committee, upon a termination of a participant’s employment or service, all unvested stock options and SARs then held by the participant will terminate and all other unvested awards will be forfeited and all vested stock options and SARs then held by the participant will remain outstanding for three months following such termination, or 12 months in the case of the cessation of the participant’s employment due to his or her death or the termination of the participant’s employment by us due to his or her disability, or, in each case, until the applicable expiration date, if earlier. All stock options and SARs held by a participant immediately prior to the participant’s termination of employment or service will immediately terminate if such termination is for cause, as defined in the 2014 Omnibus Plan, or occurs in circumstances that would have constituted grounds for the participant’s employment or service to be terminated for cause, in the determination of the compensation committee.

Non-Transferability of Awards. Awards under the 2014 Omnibus Plan may not be transferred other than by the laws of descent and distribution, unless, for awards other than ISOs, otherwise provided by our compensation committee.

Recovery of Compensation. Our compensation committee may cancel, rescind, withhold or otherwise limit or restrict any award at any time under the 2014 Omnibus Plan if the participant is not in compliance with the provisions of the 2014 Omnibus Plan or any award thereunder or if the participant breaches any agreement with us with respect to non-competition, non-solicitation or confidentiality. Our compensation committee also may recover any award or payments or gain in respect of any award under the 2014 Omnibus Plan in accordance with any applicable company clawback or recoupment policy, or as otherwise required by applicable law or applicable stock exchange listing standards.

Certain Transactions; Certain Adjustments. In the event of a consolidation, merger or similar transaction or series of related transactions, including a sale or other disposition of shares of our common stock, in which our company is not the surviving corporation or that results in the acquisition of all or substantially all of our then outstanding shares of common stock by a single person or entity or by a group of persons and/or entities acting in concert, a sale of all or substantially all of our assets or our dissolution or liquidation, our compensation committee may, among other things, provide for the continuation or assumption of outstanding awards, for new grants in substitution of outstanding awards, for the accelerated vesting or delivery of shares under awards or for a cash-out of outstanding awards, in each case on such terms and with such restrictions as it deems appropriate. Except as our compensation committee may otherwise determine, awards not assumed in connection with such a transaction will terminate automatically and, in the case of outstanding restricted stock, will be forfeited automatically upon the consummation of such covered transaction.

In the event of a stock dividend, stock split or combination of shares, including a reverse stock split, recapitalization or other change in our capital structure that constitutes an equity restructuring within the meaning of FASB ASC Topic 718, our compensation committee will make appropriate adjustments to the maximum number of shares of our common stock that may be delivered under, and the ISO and individual share limits included in, the 2014 Omnibus Plan, and will also make appropriate adjustments to the number and kind of shares or securities subject to awards, the exercise prices of such awards or any other terms of awards affected by such change. Our compensation committee will also make the types of adjustments described above to take into account distributions and other events other than those listed above if it determines that such adjustments are appropriate to avoid distortion in the operation of the 2014 Omnibus Plan.

Amendment; Termination. Our compensation committee will be able to amend the 2014 Omnibus Plan or outstanding awards, or terminate the 2014 Omnibus Plan as to future grants of awards, except that our compensation committee will not be able to alter the terms of an award if it would affect materially and adversely a participant’s rights under the award without the participant’s consent (unless expressly provided in the 2014

 

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Omnibus Plan or the right to alter the terms of an award was expressly reserved by our compensation committee at the time the award was granted). Shareholder approval will be required for any amendment to the 2014 Omnibus Plan to the extent such approval is required by law, including applicable stock exchange requirements.

ATD Corporation Cash Incentive Plan

In connection with this offering, our board of directors intends to adopt the ATD Corporation Cash Incentive Plan, or the Cash Incentive Plan. Starting with our 2015 fiscal year, annual cash award opportunities for our named executive officers and other key employees will be granted under the Cash Incentive Plan. The following summary describes what we anticipate to be the material terms of the Cash Incentive Plan. This summary is not a complete description of all provisions of the Cash Incentive Plan and is qualified in its entirety by reference to the Cash Incentive Plan, a form of which will be filed as an exhibit to the registration statement of which this prospectus is a part.

Administration. The Cash Incentive Plan will be administered by our compensation committee. Our compensation committee has authority to interpret the Cash Incentive Plan and awards granted under it, to determine eligibility for awards and to do all things necessary to administer the Cash Incentive Plan. Any interpretation or decision by our compensation committee will be final and conclusive on all participants.

Participants; Individual Limit. Our executive officers and other key employees will be selected from time to time by our compensation committee to participate in the Cash Incentive Plan. The maximum payment to any participant pursuant to an award intended to qualify as performance-based compensation under Section 162(m) of the Code under the Cash Incentive Plan in any fiscal year will in no event exceed $        .

Awards. With respect to each award granted under the Cash Incentive Plan, our compensation committee will establish the performance criteria applicable to the award, the amount or amounts payable if the performance criteria are achieved, and such other terms and conditions as the compensation committee deems appropriate. The Cash Incentive Plan permits the grant of awards that are intended to qualify as exempt performance-based compensation under Section 162(m) of the Code, to the extent applicable, as well as awards that are not intended to so qualify. Any awards that are intended to qualify as performance-based compensation will be administered in accordance with the requirements of Section 162(m), to the extent applicable. Awards under the Cash Incentive Plan will not be required to comply with the provisions of the plan applicable to performance-based compensation under Section 162(m) if they are eligible for exemption from such provisions by reason of the transition relief for newly-public companies under Section 162(m).

Performance Criteria. Awards under the Cash Incentive Plan will be made based on, and subject to achieving, performance criteria established by our compensation committee, which may be applied to a participant or participants on an individual basis, to a business unit or division, or to the company as a whole. Performance criteria for awards intended to qualify as performance-based compensation for purposes of Section 162(m), to the extent applicable, are limited to the objectively determinable measures of performance relating to any or any combination of the following (measured either absolutely or by reference to an index or indices or the performance of one or more companies and determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business, project or geographical basis or in combinations thereof): sales; revenues; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation, or amortization or equity expense, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital, capital employed or assets; one or more operating ratios; operating income or profit, including on an after tax basis; borrowing levels, leverage ratios or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; sales of particular products or services; customer acquisition or retention; acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; or recapitalizations, restructurings, financings (issuance of debt or equity) or refinancings.

To the extent consistent with the requirements of Section 162(m), to the extent applicable, our compensation committee may establish, by the deadline that otherwise applies to the establishment of the terms

 

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of an award intended to qualify as exempt performance-based compensation under Section 162(m), that one or more of the performance criteria applicable to such award be adjusted in an objectively determinable manner to reflect events (for example, the impact of charges for restructurings, discontinued operations, mergers, acquisitions, extraordinary items, and other unusual or non-recurring items, and the cumulative effects of tax or accounting changes, each as defined by U.S. generally accepted accounting principles) occurring during the performance period of such award that affect the applicable performance criteria.

Payment under an Award. A participant will be entitled to payment under an award only if all conditions to payment have been satisfied in accordance with the Cash Incentive Plan and the terms of the award. Our compensation committee will determine the payment date or dates for awards under the Cash Incentive Plan. Following the close of the performance period, our compensation committee will determine (and, to the extent required by Section 162(m), certify) whether and to what extent the applicable performance criteria have been satisfied. Our compensation committee will then determine the actual payment, if any, under each award. Our compensation committee has the sole and absolute discretion to reduce the actual payment to be made under any award. Our compensation committee may permit a participant to defer payment of an award subject to the requirements of applicable law.

Recovery of Compensation. Awards under the Cash Incentive Plan will be subject to forfeiture, termination and rescission, and a participant who receives a payment pursuant to the Cash Incentive Plan will be obligated to return such payment to us, to the extent provided by our compensation committee in connection with a breach by the participant of an award agreement under the Cash Incentive Plan or any non-competition, non-solicitation, confidentiality or similar covenant or agreement with our company or an overpayment of incentive compensation due to inaccurate financial data. Our compensation committee also may recover any award or payments under any award under the Cash Incentive Plan in accordance with any applicable company clawback or recoupment policy, or as otherwise required by applicable law or applicable stock exchange listing standards.

Amendment; Termination. Our compensation committee may amend the Cash Incentive Plan at any time, provided that any amendment will be approved by our shareholders if required by Section 162(m). Following the expiration of any post-initial public offering transition relief set forth in the regulations under Section 162(m), the material terms of the Cash Incentive Plan, including the performance criteria described above, shall be subject to the re-approval of the shareholders of the Company every five years in accordance with the requirements of Section 162(m). Our compensation committee may terminate the Cash Incentive Plan at any time.

2010 Plan

The following is a description of the material terms of the 2010 Plan (as amended and restated on April 28, 2014). This summary is not a complete description of all provisions of the 2010 Plan and is qualified in its entirety by reference to the 2010 Plan, which is filed as an exhibit to the registration statement of which this prospectus is a part. Upon adoption of the 2014 Omnibus Plan, we will no longer make awards under the 2010 Plan.

Plan administration. The 2010 Plan is administered by our board of directors, which has the authority to, among other things, determine eligible persons to whom grants of stock options will be made, determine the time or times when grants shall be made and the number of shares of common stock subject to each grant, prescribe the forms of and the terms and conditions of any instrument evidencing a grant, adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable for the administration of the 2010 Plan, construe and interpret the 2010 Plan, and the instruments evidencing grants, and to make all other determinations necessary or advisable for the administration of the 2010 Plan.

Authorized shares. Subject to adjustment under the terms of the 2010 Plan, the maximum number of shares of our common stock that may be delivered in satisfaction of stock options granted under the 2010 Plan is 54,433,333. As of June 1, 2014, stock options with respect to 54,045,336 shares have been granted under this plan.

 

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Eligibility. Our board of directors selects participants from among those key executives and other employees, directors, service providers or consultants of the Company or its affiliates.

Types of awards; vesting. Only stock options may be granted under the 2010 Plan. Unless otherwise determined by our board of directors, 50% of each award will be subject to a time-based vesting schedule and 50% of the award will be subject to a performance-based vesting schedule. All options, whether vested or not, expire on the tenth anniversary of their grant unless they are earlier terminated.

Termination of employment or service. Upon a termination of employment or service all then unvested options that will be forfeited without consideration; however, in the event of a termination of a participant’s employment or other service relationship by us without “cause” or by the participant for “good reason” (each, as defined in the 2010 Plan) within the two-year period following a change in control of the Company, all time-based options held by the participant will immediately vest and become exercisable. Unless otherwise provided in an option agreement, vested options will remain exercisable for one year following a participant’s death or disability, 90 days following the termination of a participant’s employment or other service relationship by us without cause or by the participant resignation for good reason, and 30 days following a termination of a participant’s employment or other service relationship by the participant other than for good reason. If a participant’s service is terminated for cause, all options requiring exercise (whether or not vested) will terminate on the commencement of business on the date of such termination.

Transferability. Stock options granted under the 2010 Plan may not be transferred except through will or by the laws of descent and distribution, or, subject to compliance with applicable laws, to a trust or custodianship created by the participant the beneficiaries of which are the participant’s spouse or lineal descendants (by blood or adoption) with prior written approval by our board of directors.

Corporate transactions. Unless otherwise provided in an option agreement, in the event of a dissolution or liquidation the company, a sale of substantially all of our assets, a merger or consolidation in which the company is not the surviving corporation, or a merger or consolidation in which the company is the surviving corporation but stockholders receive securities of another corporation and/or other property (including cash), our board of directors may provide for new grants in substitution of outstanding awards or for the cancellation of any awards immediately prior to the event for cash consideration equal to the spread on the options. In the event of a merger or consolidation in which the Company is the surviving corporation (except when stockholders receive securities of another corporation), holders of options shall be treated as though they held the same number of shares of common stock that are subject to such options; however, if as result of the transaction stockholders of the company continue to hold their shares and are not entitled to any additional or other consideration, the options shall not be affected by the transaction.

Adjustment. Subject to any required action by stockholders of the Company, in the event of any increase or decrease in the number of issued shares of our common stock resulting from a subdivision or consolidation of the shares of common stock or any other increase or decrease in the number of shares of common stock that is effected without receipt of consideration by us, our board of directors will make adjustments as it deems appropriate to prevent the enlargement or dilution or rights with respect to the number of shares of common stock available for grant under the 2010 Plan, the number of shares of common stock subject to options, and the exercise price of options. In the event of any other change in capitalization or corporate change not described in this paragraph or above under “Corporate transactions,” or if the stock of an affiliate of the Company is publicly traded, our board of directors shall make such adjustments as it deems appropriate in the number, kind of shares subject to outstanding options, and exercise price of outstanding options to prevent a dilution or enlargement of rights.

Amendment. Our board of directors may amend the 2010 Plan or outstanding awards, except that such an amendment may not impair or adversely affect a participant’s rights under the award without the participant’s written consent. Our board of directors may not grant any awards under the plan on or after the August 30, 2020.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Agreements with TPG and Management

In connection with the Merger, we entered into various agreements with TPG and members of our management. These include a stockholders agreement and a registration rights agreement with the TPG Funds and certain co-investors, a transaction and monitoring fee letter with a management company affiliated with TPG, and an indemnification agreement with TPG, as well as a management stockholders’ agreement. These and related arrangements are described below.

Transaction and Monitoring Fee Letter

Pursuant to our transaction and monitoring fee letter agreement with a management company affiliated with TPG, we retained such management company to provide certain management, consulting and financial services to us, when and as requested by us. We agreed to pay such management company a monitoring fee equal to 2% of Adjusted EBITDA (as defined in the indenture that governed our Senior Secured Notes). The monitoring fee is payable in quarterly installments in arrears at the end of each fiscal quarter. From time to time we also pay additional fees to such management company in connection with equity financing and acquisition transactions, among other things, in an amount equal to 1% of the total transaction value of each such transaction. In connection with this offering, such management company will be entitled to receive, on its request and in lieu of any continuing payment of the monitoring fee, an aggregate termination fee of $12.5 million. We paid such management company a total of $5.8 million, $7.4 million and $4.6 million in aggregate fees, respectively, in fiscal years 2013, 2012 and 2011. We also paid $15.2 million in aggregate fees to such management company in the first six months of 2014, which includes a $13.5 million transaction fee following the end of the first quarter in connection with the acquisitions of Terry’s Tire and Hercules.

Stockholders Agreement

Our stockholders agreement with the TPG Funds and certain co-investors contains agreements among the parties with respect to the election of directors, preemptive rights, rights of first refusal and first offer upon disposition of shares, permitted transferees, tag along rights, drag along rights and actions requiring the approval of stockholders. In connection with this offering, these provisions will be terminated and we will enter into an amended and restated stockholders agreement with the TPG Funds pursuant to which we will be required to take all necessary action to cause the board of directors and its committees to include individuals designated by the TPG Funds in the slate of nominees recommended by the board of directors for election by our stockholders. These nomination rights are described in this prospectus in the sections titled “Management—Board Composition and Director Independence” and “Management—Board Committees.” Our amended and restated stockholders agreement also provides that we will obtain customary director indemnity insurance and enter into indemnification agreements with the TPG Funds’ director designees, and we expect to enter into indemnification agreements with each of our directors generally providing for indemnification in connection with their service to us or on our behalf.

Registration Rights Agreement

Our registration rights agreement with the TPG Funds and certain co-investors provides the TPG Funds with demand registration rights in respect of any shares of common stock it holds, subject to certain conditions. In addition, in the event that we register additional shares of common stock for sale to the public following the completion of this offering, we will be required to give notice of such registration to the parties thereto, and, subject to certain limitations, include shares of common stock held by them in such registration. The co-investors have similar piggyback rights in the event we register shares of common stock held by the TPG Funds for sale to the public following the completion of this offering. The agreement includes customary indemnification provisions in favor of the TPG Funds and the co-investors, any person who is or might be deemed a control person (within the meaning of the Securities Act and the Exchange Act) and related parties against certain losses and liabilities (including reasonable costs of investigation and legal expenses) arising out of or based upon any filing or other disclosure made by us under the securities laws relating to any such registration.

 

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Indemnification Agreement with TPG

Pursuant to our indemnification agreement with TPG, including the TPG Funds and their respective affiliates, we agree to indemnify TPG against liabilities, costs and expenses incurred by TPG arising out of or in connection with securities offerings, including liabilities under the securities laws, actions or failures to act by us or our affiliates generally, or the performance by the management company affiliated with TPG of services under the transaction and monitoring fee agreement described above.

Management Stockholders Agreement

We are party to a stockholders agreement with certain members of management who were employed by us at the time of the Merger and other members of management have joined the agreement since the Merger. This agreement provides for certain Company call rights with respect to shares held by management stockholders, drag along rights, tag along rights, lock-up restrictions and registration rights. In connection with this offering, other than with respect to lock-up restrictions and registration rights, the material provisions of this agreement will terminate in accordance with their terms.

Related Party Transactions Policy

In connection with this offering, we have adopted a policy with respect to the review, approval and ratification of related party transactions. Under the policy, our audit committee is responsible for reviewing and approving related party transactions. In the course of its review and approval of related party transactions, our audit committee will consider the relevant facts and circumstances to decide whether to approve such transactions. Related party transactions must be approved or ratified by the audit committee based on full information about the proposed transaction and the related party’s interest.

We did not have a written policy regarding the review and approval of related party transactions immediately prior to this offering. Nevertheless, with respect to such transactions, it was our policy for our board of directors to consider the nature of and business reason for such transactions, how the terms of such transactions compared to those which might be obtained from unaffiliated third parties and whether such transactions were otherwise fair to and in the best interests of, or not contrary to, our best interests.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information with respect to the beneficial ownership of our common stock as of June 1, 2014 for (a) each person, or group of affiliated persons, known by us to own beneficially more than 5% of our outstanding shares of common stock, (b) each member of our board of directors, (c) each of our named executive officers, (d) all of our directors and executive officers as a group, and (e) each other selling stockholder.

Beneficial ownership is determined in accordance with SEC rules. The information is not necessarily indicative of beneficial ownership for any other purpose. In general, under these rules a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or investment power with respect to such security. A person is also deemed to be a beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days. To our knowledge, except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by that person.

The percentage of shares beneficially owned is computed on the basis of 767,501,736 shares of our common stock outstanding as of June 1, 2014. Shares of our common stock that a person has the right to acquire within 60 days of June 1, 2014 are deemed outstanding for purposes of computing the percentage ownership of such person’s holdings, but are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group. Unless otherwise indicated below, the address for each beneficial owner listed is c/o ATD Corporation, 12200 Herbert Wayne Court, Suite 150, Huntersville, North Carolina 28078.

The TPG Funds are affiliates of a broker-dealer and affiliates of the TPG Funds indirectly own interests in other broker-dealers. Each TPG Fund has represented that: (1) such TPG Fund has acquired its shares of the Company’s common stock in the ordinary course of business; and (2) at the time of acquisition of the Company’s shares of common stock being registered for resale, such TPG Fund had no agreements or understandings, directly or indirectly, with any person to distribute such shares. The TPG Funds may be deemed to be underwriters within the meaning of the Securities Act with respect to the shares of the Company’s common stock they are offering.

 

Name and Address of beneficial
owners

 

Shares beneficially
owned prior
to this offering

   

Number of
shares being
offered

 

Number of
shares subject
to option

 

Shares
beneficially
owned after this
offering
(without option)

 

Shares
beneficially
owned after this
offering
(with option)

 

Number

   

Percent

       

Number

 

Percent

 

Number

 

Percent

5% stockholders:

               

TPG Funds (1)

    720,734,992        93.9            

Directors and named executive officers:

               

William E. Berry (2)

    9,183,844        1.2            

Jason T. Yaudes (3)

    1,312,589        *               

J. Michael Gaither (4)

    3,914,572        *               

David L. Dyckman (5)

    4,189,131        *               

Phillip E. Marrett (6)

    3,854,772        *               

W. James Farrell (7)

    1,293,860        *               

Gary Kusin (8)

    793,860        *               

James Micali (9)

    543,860        *               

David Krantz (10)

    293,860        *               

Kevin Burns (11)

    —          —                 

Peter McGoohan (12)

    —          —                 

All executive officers and directors as a group (11 persons) (13)

    21,563,075        2.8            

 

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* Represents less than one percent or one share, as applicable.

 

(1) Shares shown as beneficially owned by the TPG Funds include the following: (a) 360,367,496 shares of common stock held by TPG Accelerate V, L.P., a Delaware limited partnership, whose general partner is TPG Advisors V, Inc., a Delaware corporation; and (b) 360,367,496 shares of common stock held by TPG Accelerate VI, L.P., a Delaware limited partnership (together with TPG Accelerate V, L.P., the “TPG Funds”), whose general partner is TPG Advisors VI, Inc., a Delaware corporation. David Bonderman and James G. Coulter are officers and sole stockholders of each of TPG Advisors V, Inc. and TPG Advisors VI, Inc. and share voting and dispositive power with respect to, and therefore may be deemed to be the beneficial owners of, the shares held by the TPG Funds. The address of each of TPG Advisors V, Inc., TPG Advisors VI, Inc. and Messrs. Bonderman and Coulter is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.

 

(2) Shares shown as beneficially owned by William E. Berry include: (i) 6,564,144 shares underlying stock options held directly by Mr. Berry that are currently exercisable, (ii) 392,955 shares held by the Trust FBO Meredith Elaine Berry U/A, a trust established for the benefit of Mr. Berry’s minor daughter, and (iii) 392,955 shares held by the Trust FBO Michael Dolan Berry U/A, a trust established for the benefit of Mr. Berry’s minor son. Mr. Berry’s wife, Marianne Dolan Berry, is the trustee of each trust and has sole investment and dispositive power over the shares held by the trusts. Mr. Berry disclaims beneficial ownership of such shares.

 

(3) Shares shown as beneficially owned by Jason T. Yaudes include 1,255,090 shares underlying stock options that are currently exercisable.

 

(4) Shares shown as beneficially owned by J. Michael Gaither include 3,282,073 shares underlying stock options that are currently exercisable.

 

(5) Shares shown as beneficially owned by David L. Dyckman include 3,692,331 shares underlying stock options that are currently exercisable.

 

(6) Shares shown as beneficially owned by Phillip E. Marrett include 3,282,073 shares underlying stock options that are currently exercisable.

 

(7) Shares shown as beneficially owned by W. James Farrell include 200,000 shares underlying stock options that are currently exercisable.

 

(8) Shares shown as beneficially owned by Gary Kusin include 200,000 shares underlying stock options that are currently exercisable.

 

(9) Shares shown as beneficially owned by James Micali include 200,000 shares underlying stock options that are currently exercisable.

 

(10) Shares shown as beneficially owned by David Krantz include 200,000 shares underlying stock options that are currently exercisable.

 

(11) Kevin Burns is a TPG Partner. Mr. Burns has no voting or investment power over and disclaims beneficial ownership of the shares held by the TPG Funds. The address of Mr. Burns is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.

 

(12) Peter McGoohan is a TPG Vice President. Mr. McGoohan has no voting or investment power over and disclaims beneficial ownership of the shares held by the TPG Funds. The address of Mr. McGoohan is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.

 

(13) Includes 15,631,136 shares underlying stock options that are currently exercisable.

 

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DESCRIPTION OF INDEBTEDNESS

We summarize below the principal terms of the agreements that govern our existing indebtedness. We refer you to the exhibits to the registration statement of which this prospectus forms a part for copies of agreements governing the indebtedness described below.

ABL Facility

On January 31, 2014, in connection with the Hercules acquisition, we entered into the Second Amendment to the Credit Agreement which provides for (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to the borrowing base under the U.S. ABL Facility and (ii) Canadian revolving credit commitments of $125.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to the borrowing base under the Canadian ABL Facility and the ABL Facility. In addition, the Credit Agreement provides the U.S. borrowers under the agreement with a first-in last out facility, the U.S. FILO Facility, in an aggregate principal amount of up to $80.0 million, subject to a borrowing base specific thereto and the Canadian borrowers under the agreement with a first-in last out facility, the Canadian FILO Facility, in an aggregate principal amount of up to $15.0 million, subject to a borrowing base specific thereto. The U.S. ABL Facility provides for revolving loans available to ATDI, its 100% owned subsidiary Am-Pac Tire Dist. Inc., Hercules and any other U.S. subsidiary that we designate in the future in accordance with the terms of the agreement. The Canadian ABL Facility provides for revolving loans available to TriCan, RTD and WTD and any other Canadian subsidiaries that we designate in the future in accordance with the terms of the agreement. Provided that no default or event of default then exists 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 (up to $50.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The maturity date for the ABL Facility is November 16, 2017. The maturity date for the FILO Facility is January 31, 2017.

As of July 5, 2014, we had $641.6 million outstanding under the U.S. ABL Facility. In addition, we had certain letters of credit outstanding in the aggregate amount of $10.0 million, leaving $198.4 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at July 5, 2014 was $53.1 million, leaving $70.8 million available for additional borrowings. As of July 5, 2014, the outstanding balance of the U.S. FILO Facility was $80.0 million and the outstanding balance of the Canadian FILO Facility was $10.3 million.

Borrowings under the U.S. 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 2.0% as of July 5, 2014 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 1.0% as of July 5, 2014. The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting through its Canada branch) as its “base rate,” (2) the federal funds rate effective plus 1/2 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of July 5, 2014, (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate,” (2) the sum of 1/2 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates Service for a 30 day interest period, plus an applicable margin of 1.0% as of July 5, 2014, (c) a rate of interest per annum equal

 

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to the average rate applicable to Canadian Dollar bankers’ acceptances having an identical or comparable term as the proposed loan amount displayed and identified as such on the display referred to as the “CDOR Page” of Reuters Monitor Money Rates Service as at approximately 10:00 a.m. Toronto time on such day, plus an applicable margin of 2.0% as of July 5, 2014 or (d) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 2.0% as of July 5, 2014. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the U.S. FILO 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 3.5% as of July 5, 2014 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 2.5% as of July 5, 2014. The applicable margins under the U.S. FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian FILO Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting through its Canada branch) as its “base rate,” (2) the federal funds rate effective plus 1/2 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 2.5% as of July 5, 2014, (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate,” (2) the sum of 1/2 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates Service for a 30 day interest period, plus an applicable margin of 2.5% as of July 5, 2014, (c) a rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances having an identical or comparable term as the proposed loan amount displayed and identified as such on the display referred to as the “CDOR Page” of Reuters Monitor Money Rates Service as at approximately 10:00 a.m. Toronto time on such day, plus an applicable margin of 3.5% as of July 5, 2014 or (d) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 3.5% as of July 5, 2014. The applicable margins under the Canadian FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

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

 

    85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, applicable.

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

 

    5% of eligible accounts receivable of the U.S or Canadian. loan parties, as applicable; plus

 

    10.0% of the net orderly liquidation value of the eligible tire and non-tire inventory of the U.S. or Canadian loan parties, as applicable.

 

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All obligations under the U.S. ABL Facility and the U.S. FILO 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. The Canadian ABL Facility and the Canadian FILO Facility are unconditionally guaranteed by the U.S. loan parties, TriCan, RTD, WTD and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility and the U.S. FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility and the Canadian FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets of the U.S. loan parties and the Canadian loan parties and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.

The ABL Facility and the FILO Facility contain 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. The terms of the ABL Facility and the FILO Facility generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions requiring compliance with certain availability levels and fixed charge coverage ratios under the ABL Facility and other customary negotiated exceptions. If the amount available for additional borrowings under the ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the aggregate 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 July 5, 2014, our additional borrowing availability under the ABL Facility was above the required amount and we were therefore not subject to the additional covenants.

Senior Secured Term Loan

In connection with the acquisition of Terry’s Tire, on March 28, 2014, ATDI entered into a credit agreement that provided for the Initial Term Loan. The Initial Term Loan was issued at a discount of 0.25% which, combined with certain debt issuance costs paid at closing, resulted in net proceeds of approximately $290.9 million. The Initial Term Loan will accrete based on an effective interest rate of 6% to an aggregate accreted value of $300.0 million, the full principal amount at maturity. The net proceeds from the Initial Term Loan were used to finance a portion of the Terry’s Tire purchase price. The maturity date for the Initial Term Loan is June 1, 2018.

On June 16, 2014, ATDI amended the Initial Term Loan (the “Incremental Amendment”) to borrow an additional $340.0 million (the “Incremental Term Loan”) on the same terms as the Initial Term Loan. Pursuant to the Incremental Amendment, until August 15, 2014 ATDI also has the right to borrow up to an additional $80.0 million (the “Delayed Draw Term Loan” and collectively with the Initial Term Loan and the Incremental Term Loan, the “Term Loan”) on the same terms as the Initial Term Loan. The proceeds from the Incremental Term Loan, net of related debt issuance costs paid at closing, amounted to approximately $335.7 million, and were used, in part, to redeem all $250.0 million aggregate principal amounts of notes outstanding under ATDI’s Senior Secured Notes and related fees and expenses as more fully described below, and the remaining proceeds will be used for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions. We received the proceeds from the Delayed Draw Term Loan at the end of the second quarter of 2014. The maturity date for the Term Loan is June 1, 2018.

Borrowings under the Term Loan bear interest at a rate per annum equal to, at our option, initially, either (a) a Eurodollar rate determined by reference to LIBOR, plus an applicable margin of 4.75% at July 5, 2014 or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus 1/2 of 1%, (2) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans and (3) the one month Eurodollar rate plus 1.0%, plus an applicable margin of 3.75% as of July 5, 2014. The Eurodollar

 

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rate is subject to an interest rate floor of 1.0%. The applicable margins under the Term Loan are subject to a step down based on a consolidated net leverage ratio, as defined in the credit agreement for the Term Loan.

All obligations under the Term Loan are unconditionally guaranteed by Holdings and, subject to certain customary exceptions, all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material subsidiaries. Obligations under the Term Loan are secured by a first-priority lien on substantially all property, assets and capital stock of ATDI except accounts receivable, inventory and related intangible assets and a second-priority lien on all accounts receivable and related intangible assets.

The Term Loan contains customary covenants, including covenants that restrict our ability to incur additional debt, create 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, change the nature of our business or change our fiscal year. The terms of the Term Loan generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning January 1, 2014 and other customary negotiated exceptions.

We are required to make principal payments equal to 0.25% of the aggregate principal amount outstanding under the Term Loan on the last business day of each March, June, September, and December, commencing with the last business day of June 2014. In addition, subject to certain exceptions, we are required to repay the Term Loan in certain circumstances, including with 50% (which percentage will be reduced to 25% and 0%, as applicable, subject to attaining certain senior secured net leverage ratios) of our annual excess cash flow, as defined in the Term Loan agreement. The Term Loan also contains repayment provisions related to non-ordinary course asset or property sales when certain conditions are met, and related to the incurrence of debt that is not permitted under the credit agreement or incurred to refinance all or any portion of the Term Loan.

Senior Subordinated Notes

In connection with the consummation of the Hercules acquisition, on January 31, 2014, ATDI completed the sale to certain purchasers of the Additional Senior Subordinated Notes. The net proceeds to ATDI from the sale of the Additional Senior Subordinated Notes were approximately $221.1 million.

The Additional Senior Subordinated Notes were issued pursuant to the Seventh Supplemental Indenture to the Senior Subordinated Indenture. The Additional Senior Subordinated Notes have identical terms to the Initial Subordinated Notes, except the Additional Senior Subordinated Notes accrue interest from January 31, 2014. The Additional Senior Subordinated Notes and the Initial Subordinated Notes, as defined below, are treated as a single class of securities for all purposes under the Subordinated Indenture. However, the Additional Senior Subordinated Notes were issued with separate CUSIP numbers from the Initial Subordinated Notes and are not fungible for U.S. federal income tax purposes with the Initial Subordinated Notes. Interest on the Additional Senior Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2014. The Additional Senior Subordinated Notes will mature on June 1, 2018.

On May 28, 2010, ATDI issued $200.0 million in aggregate principal amount of Subordinated Notes due June 1, 2018, the Initial Subordinated Notes. Interest on the Initial 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 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 being redeemed if the redemption date occurs between June 1, 2013 and May 31, 2014, 102.0% of the principal amount being redeemed if the redemption date occurs between June 1, 2014 and May 31, 2015 and 100.0% of the principal amount being redeemed if the redemption date occurs thereafter.

 

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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 capital stock or repurchase or redeem ATDI’s capital stock; make certain loans, investments or other restricted payments; place restrictions on the ability of certain of ATDI’s subsidiaries to pay dividends or make other payments to ATDI; transfer or sell certain assets; guarantee indebtedness or incur certain 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. The terms of the Senior Subordinated Notes generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning April 4, 2010 and other customary negotiated exceptions.

 

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DESCRIPTION OF CAPITAL STOCK

General

Upon completion of this offering, our authorized capital stock will consist of              shares of common stock, par value $0.01 per share, and              shares of preferred stock, par value $0.01 per share. The following description of our capital stock is intended as a summary only and is qualified in its entirety by reference to our certificate of incorporation and bylaws to be in effect at the closing of this offering, which are filed as exhibits to the registration statement of which this prospectus forms a part.

Common Stock

Dividend rights. Subject to preferences that may apply to shares of preferred stock outstanding at the time, holders of outstanding shares of common stock will be entitled to receive dividends out of assets legally available at the times and in the amounts as the board of directors may determine from time to time. See “Dividend Policy.”

Voting rights. Each outstanding share of common stock will be entitled to one vote on all matters submitted to a vote of stockholders. Holders of shares of our common stock will have no cumulative voting rights.

Preemptive rights. Our common stock will not be entitled to preemptive or other similar subscription rights to purchase any of our securities.

Conversion or redemption rights. Our common stock will be neither convertible nor redeemable.

Liquidation rights. Upon our liquidation, the holders of our common stock will be entitled to receive pro rata our assets that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding.

Preferred Stock

Our board of directors may, without further action by our stockholders, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the designations, powers, preferences, privileges and relative participating, optional or special rights, as well as the qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of our common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of our liquidation before any payment is made to the holders of shares of our common stock. Under certain circumstances, the issuance of shares of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our securities or the removal of incumbent management. Upon the affirmative vote of a majority of the total number of directors then in office, our board of directors, without stockholder approval, may issue shares of preferred stock with voting and conversion rights which could adversely affect the holders of shares of our common stock and the market value of our common stock. Upon consummation of this offering, there will be no shares of preferred stock outstanding, and we have no present intention to issue any shares of preferred stock.

Anti-takeover Effects of our Certificate of Incorporation and our Bylaws

Our certificate of incorporation and our bylaws contain provisions that may delay, defer or discourage another party from acquiring control of us. We expect that these provisions will discourage coercive takeover practices or inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire

 

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control of us to first negotiate with the board of directors, which we believe may result in an improvement of the terms of any such acquisition in favor of our stockholders. However, they may also discourage acquisitions that some stockholders may favor.

These provisions include:

 

    Classified board. Our certificate of incorporation provides that our board of directors will be divided into three classes of directors. As a result, approximately one-third of our board of directors will be elected each year. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of our board. Following the closing of this offering, our board of directors will initially be composed of              members.

 

    Requirements for removal of directors. Following the date on which the TPG Funds no longer beneficially own a majority of our common stock, directors may only be removed for cause by the affirmative vote of the holders of at least 75% of the voting power of our outstanding shares of capital stock.

 

    Advance notice procedures. Our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at an annual meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given our secretary timely written notice, in proper form, of the stockholder’s intention to bring that business before the meeting. Although the bylaws do not give the board of directors the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, the bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of our company.

 

    Actions by written consent; special meetings of stockholders. Our certificate of incorporation provides that, following the date on which the TPG Funds no longer beneficially own a majority of our common stock, stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. Our certificate of incorporation also provides that, except as otherwise required by law, special meetings of the stockholders can only be called by or at the direction of the chairman of the board, a majority of the board of directors, or, until the date on which the TPG Funds no longer beneficially own a majority of our common stock, by the secretary at the request of the holders of 50% or more of our outstanding shares of common stock.

 

    Supermajority approval requirements. Following the date on which the TPG Funds no longer beneficially own a majority of our common stock, certain amendments to our certificate of incorporation and shareholder amendments to our bylaws will require the affirmative vote of at least 75% of the voting power of the outstanding shares of our capital stock.

 

    Authorized but unissued shares. Our authorized but unissued shares of preferred stock will be available for future issuance without stockholder approval. The existence of authorized but unissued shares of preferred stock could render more difficult or discourage an attempt to obtain control of a majority of our common stock by means of a proxy contest, tender offer, merger or otherwise.

 

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    Business combinations with interested stockholders. We have elected in our certificate of incorporation not to be subject to Section 203 of the DGCL, an antitakeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s voting stock for a period of three years following the date the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. While we will not be subject to any anti-takeover effects of Section 203, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that investment funds affiliated with TPG will not be deemed to be an “interested stockholder,” regardless of the percentage of our voting stock owned by investment funds affiliated with TPG, and accordingly will not be subject to such restrictions.

Exclusive Jurisdiction for Certain Actions

Our certificate of incorporation requires, to the fullest extent permitted by law, that derivative actions brought in the name of the Company, actions against directors, officers and employees for breach of a fiduciary duty and other similar actions, may be brought only in specified courts in the State of Delaware. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers. See “Risk Factors—Our certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.”

Litigation Costs

Our bylaws require, except to the extent prohibited by the DGCL, that in all derivative actions brought in the name of the Company, actions against directors, officers and employees for breach of a fiduciary duty and other similar actions, the initiating party shall reimburse the Company and any officer, director or other employee for all fees, costs and expenses incurred in connection with such action if such initiating party does not substantially achieve the full remedy sought. Although we believe this provision benefits us by discouraging meritless lawsuits against the Company and our directors, officers and employees, the provision may have the effect of discouraging lawsuits that could benefit the Company. See “Risk Factors—Our bylaws provide that if a claiming party brings certain actions against us and is not successful on the merits then they will be obligated to pay our litigation costs, which could have the effect of discouraging litigation, including claims brought by our stockholders.”

Corporate Opportunities

Our certificate of incorporation provides that we renounce any interest or expectancy in the business opportunities of TPG and of its officers, directors, agents, stockholders, members, partners, affiliates and subsidiaries and each such party shall not have any obligation to offer us those opportunities unless presented to one of our directors or officers in his or her capacity as a director or officer (and there shall be no restriction on such parties using the general knowledge and understanding of the Company or our industry to consider or pursue other opportunities or to make investment, voting, monitoring, governance or other decisions relating to other entities or securities).

Limitations on Liability and Indemnification of Directors and Officers

Our certificate of incorporation limits the liability of our directors to the fullest extent permitted by the DGCL and our bylaws require that we will indemnify them to the fullest extent permitted by law. We expect to enter into customary indemnification agreements with each of our directors that provide them, in general, with

 

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customary indemnification in connection with their service to us or on our behalf. We also maintain officers’ and directors’ liability insurance that insures against liabilities that our officers and directors may incur in such capacities.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

Listing

We have applied to list our common stock on the NYSE under the symbol “ATD.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

Before this offering, there has been no public market for our common stock. As described below, only a limited number of shares currently outstanding will be available for sale immediately after this offering due to contractual and legal restrictions on resale. Nevertheless, future sales of substantial amounts of our common stock, including shares issued upon the exercise of outstanding options or warrants, in the public market after this offering, or the perception that those sales may occur, could cause the prevailing market price for our common stock to fall or impair our ability to raise capital through sales of our equity securities.

Upon the closing of this offering, we will have outstanding              shares of our common stock, after giving effect to the issuance of              shares of our common stock in this offering, assuming no exercise by the underwriters of their option to purchase additional shares and no exercise of options outstanding as of                     , 2014.

Of the shares that will be outstanding immediately after the closing of this offering, we expect that the              shares to be sold in this offering will be freely tradable without restriction under the Securities Act unless purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Shares purchased by our affiliates may not be resold except pursuant to an effective registration statement or an exemption from registration, including the safe harbor under Rule 144 of the Securities Act described below. In addition, following this offering,              shares of common stock issuable pursuant to awards granted under certain of our equity plans that are covered by a registration statement on Form S-8 will be freely tradable in the public market, subject to certain contractual and legal restrictions described below.

The remaining              shares of our common stock outstanding after this offering will be “restricted securities,” as that term is defined in Rule 144 of the Securities Act, and we expect that substantially all of these restricted securities will be subject to the lock-up agreements described below. These restricted securities may be sold in the public market only if the sale is registered or pursuant to an exemption from registration, such as the safe harbor provided by Rule 144.

Lock-up Agreements

We and each of our directors, executive officers and certain other stockholders, who collectively own              shares of our common stock following this offering, have agreed that, without the prior written consent of certain of the underwriters, we and they will not, subject to limited exceptions, directly or indirectly sell or dispose of any shares of common stock or any securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days after the date of this prospectus, unless extended pursuant to its terms. The lock-up restrictions and specified exceptions are described in more detail under “Underwriting (Conflicts of Interest).”

Rule 144

In general, under Rule 144, beginning 90 days after the date of this prospectus, any person who is not our affiliate and has held their shares for at least six months, including the holding period of any prior owner other than one of our affiliates, may sell shares without restriction, subject to the availability of current public information about us. In addition, under Rule 144, any person who is not our affiliate and has not been our affiliate at any time during the preceding three months and has held their shares for at least one year, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell an unlimited number of shares immediately upon the closing of this offering without regard to whether current public information about us is available.

Beginning 90 days after the date of this prospectus, a person who is our affiliate or who was our affiliate at any time during the preceding three months and who has beneficially owned restricted securities for at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell a

 

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number of shares within any three-month period that does not exceed the greater of: (i) 1% of the number of shares of our common stock outstanding, which will equal approximately              shares immediately after this offering; and (ii) the average weekly trading volume of our common stock on the NYSE during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

Sales under Rule 144 by our affiliates are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us.

Rule 701

In general, under Rule 701 under the Securities Act, beginning 90 days after we become subject to the public company reporting requirements of the Exchange Act, any of our employees, directors, officers, consultants or advisors who acquired shares of common stock from us in connection with a written compensatory stock or option plan or other written agreement in compliance with Rule 701 is entitled to sell such shares in reliance on Rule 144 but without compliance with certain of the requirements contained in Rule 144. Accordingly, subject to any applicable lock-up agreements, beginning 90 days after we become subject to the public company reporting requirements of the Exchange Act, under Rule 701 persons who are not our affiliates may resell those shares without complying with the minimum holding period or public information requirements of Rule 144, and persons who are our affiliates may resell those shares without compliance with Rule 144’s minimum holding period requirements.

Equity Incentive Plans

Following this offering, we intend to file with the SEC a registration statement on Form S-8 under the Securities Act covering the shares of common stock that are subject to outstanding options and other awards issuable pursuant to our equity incentive plans. Shares covered by such registration statement will be available for sale in the open market following its effective date, subject to certain Rule 144 limitations applicable to affiliates and the terms of lock-up agreements applicable to those shares.

Registration Rights

Subject to the lock-up agreements described above, certain holders of our common stock may demand that we register the sale of their shares under the Securities Act or, if we file another registration statement under the Securities Act other than a Form S-8 covering securities issuable under our equity plans or on Form S-4, may elect to include their shares of common stock in such registration. Following such registered sales, the shares will be freely tradable without restriction under the Securities Act, unless held by our affiliates. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.”

 

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR

NON-U.S. HOLDERS

The following is a summary of material U.S. federal income and estate tax considerations relating to the purchase, ownership and disposition of shares of our common stock issued pursuant to this offering by Non-U.S. Holders (defined below). This summary does not purport to be a complete analysis of all the potential tax considerations relevant to Non-U.S. Holders of shares of our common stock. This summary is based upon the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), the Treasury regulations promulgated or proposed thereunder and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change or differing interpretations at any time, possibly with retroactive effect.

This summary assumes that shares of our common stock are held by a Non-U.S. Holder as “capital assets” within the meaning of Section 1221 of the Internal Revenue Code (generally, property held for investment). This summary does not purport to deal with all aspects of U.S. federal income and estate taxation that might be relevant to particular Non-U.S. Holders in light of their particular investment circumstances or status, nor does it address specific tax considerations that may be relevant to particular persons who are subject to special treatment under U.S. federal income tax laws (including, for example, financial institutions, broker-dealers, insurance companies, partnerships or other pass-through entities, certain U.S. expatriates or former long-term residents of the United States, tax-exempt organizations, pension plans, “controlled foreign corporations,” “passive foreign investment companies,” corporations that accumulate earnings to avoid U.S. federal income tax, persons in special situations, such as those who have elected to mark securities to market or those who hold shares of our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment, persons that have a “functional currency” other than the U.S. dollar, or holders subject to the alternative minimum tax or the 3.8% tax on net investment income). In addition, except as explicitly addressed herein with respect to estate tax, this summary does not address certain estate and any gift tax considerations or considerations arising under the tax laws of any state, local or non-U.S. jurisdiction.

For purposes of this summary, a “Non-U.S. Holder” means a beneficial owner of shares of our common stock that for U.S. federal income tax purposes, is an individual, corporation, estate or trust other than:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation, or any other organization taxable as a corporation for U.S. federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

    an estate, the income of which is included in gross income for U.S. federal income tax purposes regardless of its source; or

 

    a trust if (1) a U.S. court is able to exercise primary supervision over the trust’s administration and one or more United States persons (as defined in the Internal Revenue Code) have the authority to control all of the trust’s substantial decisions or (2) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.

A modified definition of Non-U.S. Holder applies for U.S. federal estate tax purposes (as discussed below).

If an entity that is classified as a partnership for U.S. federal income tax purposes holds shares of our common stock, the tax treatment of persons treated as its partners for U.S. federal income tax purposes will generally depend upon the status of the partner and the activities of the partnership. Partnerships and other

 

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entities that are classified as partnerships for U.S. federal income tax purposes and persons holding our common stock through a partnership or other entity classified as a partnership for U.S. federal income tax purposes are urged to consult their own tax advisors.

There can be no assurance that the Internal Revenue Service (“IRS”) will not challenge one or more of the tax consequences described herein, and we have not obtained, nor do we intend to obtain, a ruling from the IRS or an opinion of counsel with respect to the U.S. federal income or estate tax consequences to a Non-U.S. Holder of the purchase, ownership or disposition of shares of our common stock.

THIS SUMMARY IS NOT INTENDED TO BE TAX ADVICE. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME AND ESTATE TAXATION AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF OUR COMMON STOCK, AS WELL AS THE APPLICATION OF STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX LAWS.

Distributions on Shares of our Common Stock

As discussed under “Dividend Policy” above, we do not currently anticipate paying cash dividends on shares of our common stock in the foreseeable future. In the event that we do make a distribution of cash or property with respect to shares of our common stock, any such distributions generally will constitute dividends for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits as determined under U.S. federal income tax principles, and will be subject to withholding as described in the next paragraph below. If a distribution exceeds our current or accumulated earnings and profits, the excess will be treated as a tax-free return of the Non-U.S. Holder’s investment, up to such holder’s adjusted tax basis in its shares of our common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “—Gain on Sale, Exchange or other Taxable Disposition of our Common Stock.” Any distribution described in this paragraph would also be subject to the discussion below in “—Additional Withholding and Information Reporting Requirements for Shares of our Common Stock Held by or through Non-U.S. Entities.”

Any dividends paid to a Non-U.S. Holder with respect to shares of our common stock generally will be subject to a 30% U.S. federal withholding tax unless such Non-U.S. Holder provides us or our agent, as the case may be, with an appropriate IRS Form W-8, such as:

 

    IRS Form W-8BEN (or successor form) or IRS Form W-8BEN-E (or successor form) certifying, under penalties of perjury, that such Non-U.S. Holder is entitled to a reduction in withholding under an applicable income tax treaty; or

 

    IRS Form W-8ECI (or successor form) certifying, under penalties of perjury, that a dividend paid on shares of our common stock is not subject to withholding tax because it is effectively connected with conduct of a trade or business in the United States of the Non-U.S. Holder (in which case such dividend generally will be subject to regular graduated U.S. federal income tax rates on a net income basis as described below).

The certifications described above must be provided to us or our agent prior to the payment of dividends and must be updated periodically. The certification also may require a Non-U.S. Holder that provides an IRS form or that claims treaty benefits to provide its U.S. taxpayer identification number. Special certification and other requirements apply in the case of certain Non-U.S. Holders that are intermediaries or pass-through entities for U.S. federal income tax purposes.

Each Non-U.S. Holder is urged to consult its own tax advisor about the specific methods for satisfying these requirements. A claim for exemption will not be valid if the person receiving the applicable form has actual knowledge or reason to know that the statements on the form are false.

 

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If dividends are effectively connected with the conduct of a trade or business in the United States of the Non-U.S. Holder (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base maintained by such Non-U.S. Holder in the United States), the Non-U.S. Holder, although exempt from the withholding tax described above (provided that the certifications described above are satisfied), will generally be subject to U.S. federal income tax on such dividends on a net income basis in the same manner as if it were a resident of the United States. In addition, if such Non-U.S. Holder is taxable as a corporation for U.S. federal income tax purposes, such Non-U.S. Holder may be subject to an additional “branch profits tax” equal to 30% of its effectively connected earnings and profits for the taxable year, unless an applicable income tax treaty provides otherwise.

Non-U.S. Holders that do not timely provide us or our agent with the required certification, but which are eligible for a reduced rate of U.S. federal withholding tax pursuant to an applicable income tax treaty may obtain a refund or credit of any excess amount withheld by timely filing an appropriate claim for refund with the IRS.

Gain on Sale, Exchange or Other Taxable Disposition of Shares of our Common Stock

Subject to the discussion below under “—Additional Withholding and Information Reporting Requirements for Shares of our Common Stock Held by or through Non-U.S. Entities,” in general, a Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax on any gain realized upon such holder’s sale, exchange or other disposition of shares of our common stock unless (i) such Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition, and certain other conditions are met, (ii) we are or have been a “United States real property holding corporation,” as defined in the Internal Revenue Code (a “USRPHC”), at any time within the shorter of the five-year period preceding the disposition and the Non-U.S. Holder’s holding period with respect to the applicable shares of our common stock (the “relevant period”), or (iii) such gain is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base maintained by such Non-U.S. Holder in the United States).

If the first exception applies, the Non-U.S. Holder generally will be subject to U.S. federal income tax at a rate of 30% (unless an applicable income tax treaty provides otherwise) on the amount by which such Non-U.S. Holder’s capital gains allocable to U.S. sources exceed capital losses allocable to U.S. sources during the taxable year of the disposition.

With respect to the second exception above, although there can be no assurance, we believe we are not, and we do not currently anticipate becoming, a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of other business assets, there can be no assurance that we are not currently or will not become a USRPHC in the future. Generally, a corporation is a USRPHC only if the fair market value of its United States real property interests (as defined in the Internal Revenue Code) equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus certain other assets used or held for use in a trade or business. Even if we are or become a USRPHC, a Non-U.S. Holder would not be subject to U.S. federal income tax on a sale, exchange or other taxable disposition of our common stock by reason of our status as a USRPHC so long as (a) our common stock is regularly traded on an established securities market (within the meaning of Internal Revenue Code Section 897(c)(3)) during the calendar year in which such sale, exchange or other taxable disposition of our common stock occurs and (b) such Non-U.S. Holder does not own and is not deemed to own (directly, indirectly or constructively) more than 5% of our common stock at any time during the relevant period. If we are a USRPHC and the requirements of (a) or (b) are not met, gain on the disposition of shares of our common stock generally will be taxed in the same manner as gain that is effectively connected with the conduct of a U.S. trade or business, except that the “branch profits tax” will not apply. Prospective investors are urged to consult their own tax advisors regarding the possible consequences to them if we are, or were to become, a USRPHC.

 

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If the third exception applies, the Non-U.S. Holder generally will be subject to U.S federal income tax on a net income basis with respect to such gain in the same manner as if such holder were a resident of the United States, unless otherwise provided in an applicable income tax treaty, and a Non-U.S. Holder that is a corporation for U.S federal income tax purposes may also be subject to a “branch profits tax” on its effectively connected earnings and profits at a rate of 30%, unless an applicable income tax treaty provides otherwise.

Additional Withholding and Information Reporting Requirements for Shares of our Common Stock Held by or through Non-U.S. Entities

Legislation enacted in March 2010 and related Treasury guidance (commonly referred to as “FATCA”) generally will impose a U.S. federal withholding tax of 30% on payments to certain non-U.S. entities (including certain intermediaries), including dividends on and the gross proceeds from a sale or other disposition of our common stock unless such persons comply with a complicated U.S. information reporting, disclosures and certification regime. This new regime requires, among other things, a broad class of persons to enter into agreements with the IRS to obtain, disclose and report information about their investors and account holders. This new regime and its requirements are different from and in addition to the certification requirements described elsewhere in this discussion. As currently proposed, the FATCA withholding rules would apply to certain payments, including dividend payments on our common stock, if any, paid after June 30, 2014, and gross proceeds from the sale or other dispositions of our common stock paid after December 31, 2016. Prospective investors should consult their own tax advisors regarding the possible impact of these rules on their investment in our common stock, and the entities through which they hold our common stock, including, without limitation, the process and deadlines for meeting the applicable requirements to prevent the imposition of this 30% withholding tax under FATCA.

Backup Withholding and Information Reporting

We must report annually to the IRS and to each Non-U.S. Holder the gross amount of the distributions on shares of our common stock paid to such holder and the tax withheld, if any, with respect to such distributions. These information reporting requirements apply even if withholding was not required. In addition to the requirements described above under “—Additional Withholding and Information Reporting Requirements for Shares of our Common Stock Held by or through Non-U.S. Entities,” a Non-U.S. Holder may have to comply with specific certification procedures to establish that the holder is not a United States person (as defined in the Internal Revenue Code) or otherwise establish an exemption in order to avoid backup withholding at the applicable rate with respect to dividends on our common stock. Dividends paid to Non-U.S. Holders subject to the U.S. federal withholding tax, as described above In “—Distributions on Shares of our Common Stock,” generally will be exempt from U.S. backup withholding.

Information reporting and backup withholding will generally apply to the payment of the proceeds of a disposition of shares of our common stock by a Non-U.S. Holder effected by or through the U.S. office of any broker, U.S. or non-U.S., unless the holder certifies that it is not a United States person (as defined in the Internal Revenue Code) and satisfies certain other requirements, or otherwise establishes an exemption. For information reporting purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker, and dispositions otherwise effected through a non-U.S. office generally will not be subject to information reporting. Generally, backup withholding will not apply to a payment of disposition proceeds to a Non-U.S. Holder where the transaction is effected through a non-U.S. office of a U.S. broker or non-U.S. office of a non-U.S broker. Prospective investors are urged to consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.

Copies of information returns may be made available to the tax authorities of the country in which the Non-U.S. Holder resides or is incorporated, under the provisions of a specific treaty or agreement.

 

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Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment made to a Non-U.S. Holder can be refunded or credited against such Non-U.S. Holder’s U.S. federal income tax liability, if any, provided that an appropriate claim is timely filed with the IRS.

Federal estate tax

Shares of our common stock held (or treated as held) by an individual who is not a U.S. citizen or resident (as defined for U.S. federal estate tax purposes) at the time of such individual’s death will be included in such individual’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

 

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UNDERWRITING (CONFLICTS OF INTEREST)

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc. and Goldman, Sachs & Co. are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us, the selling stockholders and the underwriters, we and the selling stockholders have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us and the selling stockholders, the number of shares of common stock set forth opposite its name below.

 

Underwriter

  

Number

of Shares

Merrill Lynch, Pierce, Fenner & Smith
Incorporated

  

Deutsche Bank Securities Inc

  

Goldman, Sachs & Co.

  

Barclays Capital Inc. 

  

J.P. Morgan Securities LLC

  

UBS Securities LLC

  

TPG Capital BD, LLC

  

RBC Capital Markets, LLC

  

SunTrust Robinson Humphrey, Inc.

  
  

 

Total

  

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the underwriting agreement may be terminated.

We and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Commissions and Discounts

The representatives have advised us and the selling stockholders that the underwriters propose initially to offer the shares to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $         per share. After the initial offering, the public offering price, concession or any other term of the offering may be changed. Sales of shares made outside of the United States may be made by affiliates of the underwriters.

The following table shows the public offering price, underwriting discount and proceeds before expenses to us and the selling stockholders. The information assumes either no exercise or full exercise by the underwriters of their option to purchase additional shares.

 

    

Per Share

  

Without Option

  

With Option

Public offering price

   $    $    $

Underwriting discount

   $    $    $

Proceeds, before expenses, to ATD

   $    $    $

Proceeds, before expenses, to the selling stockholders

   $    $    $

 

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The expenses of the offering, not including the underwriting discount, are estimated at $         and are payable by us.

Option to Purchase Additional Shares

We and the selling stockholders have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to          additional shares at the public offering price, less the underwriting discount. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriter’s initial amount reflected in the above table.

No Sales of Similar Securities

We and the selling stockholders, our executive officers and directors and our other existing security holders have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 180 days after the date of this prospectus without first obtaining the written consent of certain of the underwriters. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly

 

    offer, pledge, sell or contract to sell any common stock,

 

    sell any option or contract to purchase any common stock,

 

    purchase any option or contract to sell any common stock,

 

    grant any option, right or warrant for the sale of any common stock,

 

    lend or otherwise dispose of or transfer any common stock,

 

    request or demand that we file a registration statement related to the common stock, or

 

    enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.

This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. In the event that either (x) during the last 17 days of the lock-up period referred to above, we issue an earnings release or material news or a material event relating to us occurs or (y) prior to the expiration of the lock-up period, we announce that we will release earnings results or become aware that material news or a material event will occur during the 16-day period beginning on the last day of the lock-up period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

New York Stock Exchange Listing

We expect the shares to be approved for listing on the NYSE under the symbol “ATD.” In order to meet the requirements for listing on that exchange, the underwriters have undertaken to sell a minimum number of shares to a minimum number of beneficial owners as required by that exchange.

 

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Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us, the selling stockholders and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are

 

    the valuation multiples of publicly traded companies that the representatives believe to be comparable to us,

 

    our financial information,

 

    the history of, and the prospects for, our company and the industry in which we compete,

 

    an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues,

 

    the present state of our development,

 

    the information set forth in this prospectus and otherwise available to the representatives,

 

    the general condition of the securities markets at the time of the offering,

 

    the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours, and

 

    other factors deemed relevant by the underwriters, the selling stockholders and us.

An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

In connection with the offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. “Covered” short sales are sales made in an amount not greater than the underwriters’ option to purchase additional shares described above. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the option granted to them. “Naked” short sales are sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of the offering.

 

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The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on                     , in the over-the-counter market or otherwise.

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Electronic Distribution

In connection with the offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail.

Conflict of Interest

Affiliates of TPG Capital BD, LLC, an underwriter of this offering, own in excess of 10% of our issued and outstanding common stock. Therefore, a “conflict of interest” is deemed to exist under FINRA Rule 5121(f)(5)(B). In addition, because the TPG Funds are affiliates of TPG Capital BD, LLC and, as selling stockholders, will receive more than 5% of the net proceeds of this offering, a “conflict of interest” is also deemed to exist under FINRA Rule 5121(f)(5)(C)(ii). Accordingly, this offering will be made in compliance with the applicable provisions of FINRA Rule 5121. In accordance with FINRA Rule 5121(c), no sales of the shares will be made to any discretionary account over which TPG Capital BD, LLC exercises discretion without the prior specific written approval of the account holder. However, no “qualified independent underwriter” is required because the underwriters primarily responsible for managing this offering are free of any “conflict of interest” as that term is defined in the rule.

Other Relationships

Bank of America, N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, acts as the Administrative Agent, Collateral Agent and a lender under the credit agreement governing our ABL Facility and FILO Facility and the Administrative Agent, Sole Lead Arranger, Sole Bookrunner and a lender under our Term Loan. Barclays Bank PLC, an affiliate of Barclays Capital Inc., SunTrust Bank, an affiliate of SunTrust Robinson Humphrey, Inc., Royal Bank of Canada, an affiliate of RBC Capital Markets, LLC, and UBS AG, Stamford Branch, an affiliate of UBS Securities LLC, have all provided commitments under the credit agreement governing our ABL Facility and FILO Facility.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Certain of the underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to us and to persons and entities with relationships with us, for which they received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively traded securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for

 

159


their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of ours (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with us. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.

Sales Outside of the United States

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

Notice to Prospective Investors in the European Economic Area

In relation to each Member State of the European Economic Area (each, a “Relevant Member State”), no offer of shares may be made to the public in that Relevant Member State other than:

 

  A. to any legal entity which is a qualified investor as defined in the Prospectus Directive:

 

  B. to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives; or

 

  C. in any other circumstances falling within Article 3(2) of the Prospectus Directive,

provided that no such offer of shares shall require the Company or the representatives to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

Each person in a Relevant Member State who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed that it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive. In the case of any shares being offered to a financial intermediary as that term is used in Article 3(2) of the Prospectus Directive, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares to the public other than their offer or resale in a Relevant Member State to qualified investors as so defined or in circumstances in which the prior consent of the representatives has been obtained to each such proposed offer or resale.

The Company, the representatives and their affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgements and agreements.

 

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This prospectus has been prepared on the basis that any offer of shares in any Relevant Member State will be made pursuant to an exemption under the Prospectus Directive from the requirement to publish a prospectus for offers of shares. Accordingly any person making or intending to make an offer in that Relevant Member State of shares which are the subject of the offering contemplated in this prospectus may only do so in circumstances in which no obligation arises for the Company or any of the underwriters to publish a prospectus pursuant to Article 3 of the Prospectus Directive in relation to such offer. Neither the Company nor the underwriters have authorized, nor do they authorize, the making of any offer of shares in circumstances in which an obligation arises for the Company or the underwriters to publish a prospectus for such offer.

For the purpose of the above provisions, the expression “an offer to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in the Relevant Member State by any measure implementing the Prospectus Directive in the Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member States) and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

Notice to Prospective Investors in the United Kingdom

In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). This document must not be acted on or relied on in the United Kingdom by persons who are not relevant persons. In the United Kingdom, any investment or investment activity to which this document relates is only available to, and will be engaged in with, relevant persons.

Notice to Prospective Investors in Switzerland

The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering or marketing material relating to the offering, the Company, the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (“CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.

Notice to Prospective Investors in the Dubai International Financial Centre

This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (“DFSA”). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt

 

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Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.

Notice to Prospective Investors in Australia

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (“ASIC”), in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the “Corporations Act”), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

Any offer in Australia of the shares may only be made to persons (the “Exempt Investors”) who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.

The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.

This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

Notice to Prospective Investors in Hong Kong

The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the shares has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

Notice to Prospective Investors in Japan

The shares have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) and, accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese Person or to others for re-offering or resale, directly or indirectly, in

 

162


Japan or to any Japanese Person, except in compliance with all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in effect at the relevant time. For the purposes of this paragraph, “Japanese Person” shall mean any person resident in Japan, including any corporation or other entity organized under the laws of Japan.

Notice to Prospective Investors in Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

 

  (a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

  (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares pursuant to an offer made under Section 275 of the SFA except:

 

  (a) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

  (b) where no consideration is or will be given for the transfer;

 

  (c) where the transfer is by operation of law;

 

  (d) as specified in Section 276(7) of the SFA; or

 

  (e) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

 

163


LEGAL MATTERS

The validity of the issuance of our common stock offered in this prospectus will be passed upon for us by Ropes & Gray LLP, Boston, Massachusetts. Ropes & Gray LLP and some of its attorneys are limited partners of RGIP, LP, which is an investor in certain investment funds affiliated with TPG and sometimes a co-investor with such funds. RGIP, LP directly or indirectly owns less than 1% of our outstanding shares of common stock. The underwriters have been represented by Cravath, Swaine & Moore LLP, New York, New York.

EXPERTS

The consolidated financial statements of the Company and its subsidiaries as of December 28, 2013 and December 29, 2012 and for each of the three years in the period ended December 28, 2013 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of TTT Holdings, Inc. and its subsidiaries as of December 31, 2013 and December 31, 2012 and for each of the two years in the period ended December 31, 2013, included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of TTT Holdings, Inc. and its subsidiaries as of December 31, 2012 and December 31, 2011 and for each of the two years in the period ended December 31, 2012 have been so included in reliance on the reports of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of The Hercules Tire & Rubber Company and its subsidiaries as of October 31, 2013 and 2012, for the years then ended, and the consolidated schedule of adjusted EBITDA of The Hercules Tire & Rubber Company included in this prospectus have been so included in reliance on the reports of Plante & Moran, PLLC, an independent public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of Regional Tire Distributors Inc. and its subsidiaries as of January 31, 2013 and January 31, 2012 and for each of the two years in the period ended January 31, 2013 included in this prospectus have been so included in reliance on the report of Deloitte LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting.

The financial statements of Triwest Trading (Canada) Ltd. as of December 31, 2011, December 31, 2010 and January 1, 2010 and for the years ended December 31, 2011, December 31, 2010 and December 31, 2009 included in this prospectus have been so included in reliance on the reports of Kouri Berezan Heinrichs, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

The financial statements of Trail Tire Distributors Ltd. as of February 28, 2014 and February 28, 2013 and for the years ended February 28, 2014 and February 28, 2013 included in this prospectus have been so included in reliance on the reports of Collins Barrow Edmonton LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting.

The financial statements of Extreme Wheel Distributors Ltd. as of February 28, 2014 and February 28, 2013 and for the years ended February 28, 2014 and February 28, 2013 included in this prospectus have been so included in reliance on the reports of Collins Barrow Edmonton LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting.

 

164


The financial statements of Kirks Tire Ltd. as of January 31, 2014, January 31, 2013 and January 31, 2012 and for the years ended January 31, 2014, January 31, 2013 and January 31, 2012 included in this prospectus have been so included in reliance on the reports of Collins Barrow Edmonton LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting.

The financial statements of Regional Tire Distributors (Edmonton) Inc. as of February 28, 2014, February 28, 2013 and February 29, 2012 and for the years ended February 28, 2014, February 28, 2013 and February 29, 2012 included in this prospectus have been so included in reliance on the reports of Collins Barrow Edmonton LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting.

The financial statements of Regional Tire Distributors (Calgary) Inc. as of February 28, 2014, February 28, 2013 and February 29, 2012 and for the years ended February 28, 2014, February 28, 2013 and February 29, 2012 included in this prospectus have been so included in reliance on the reports of Collins Barrow Edmonton LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information with respect to us and the common stock offered hereby, please refer to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street N.E., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The SEC’s website address is www.sec.gov.

Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, we will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and website of the SEC referred to above.

 

165


Index to Consolidated Financial Statements

and Financial Statement Schedules

 

    

PAGE

 

ATD Corporation

 

  

Audited Consolidated Financial Statements

  

Report of Independent Registered Public Accounting Firm

     F-5   

Audited Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012

     F-6   

Audited Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December  28, 2013, December 29, 2012 and December 31, 2011

     F-7   

Audited Consolidated Statements of Stockholders’ Equity for the fiscal years ended December  28, 2013, December 29, 2012 and December 31, 2011

     F-8   

Audited Consolidated Statements of Cash Flows for the fiscal years ended December 28, 2013,  December 29, 2012 and December 31, 2011

     F-9   

Notes to Audited Consolidated Financial Statements

     F-10   

Schedule II—Valuation and Qualifying Accounts for the Fiscal Years ended December 28, 2013, December 29, 2012 and December 31, 2011

     F-50   

Unaudited Condensed Consolidated Financial Statements

  

Unaudited Condensed Consolidated Balance Sheets as of July 5, 2014 and December 28, 2013

     F-52   

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the quarters and six months ended July 5, 2014 and June 29, 2013

     F-53   

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended July 5, 2014

     F-54   

Unaudited Condensed Consolidated Statements of Cash Flows for the quarters and six months ended July  5, 2014 and June 29, 2013

     F-55   

Notes to Unaudited Condensed Consolidated Financial Statements

     F-56   

Trail Tire Distributors Ltd.

 

Audited Financial Statements

  

Independent Auditors’ Report

     F-84   

Audited Balance Sheets as of February 28, 2014 and 2013

     F-85   

Audited Statements of Operations for the years ended February 28, 2014 and 2013

     F-86   

Audited Statements of Retained Earnings for the years ended February 28, 2014 and 2013

     F-87   

Audited Statements of Cash Flows for the years ended February 28, 2014 and 2013

     F-88   

Notes to Audited Financial Statements

     F-89   

Extreme Wheel Distributors Ltd.

 

Audited Financial Statements

  

Independent Auditors’ Report

     F-99   

Audited Balance Sheets as of February 28, 2014 and 2013

     F-100   

Audited Statements of Operations for the years ended February 28, 2014 and 2013

     F-101   

Audited Statements of Retained Earnings for the years ended February 28, 2014 and 2013

     F-102   

Audited Statements of Cash Flows for the years ended February 28, 2014 and 2013

     F-103   

Notes to Audited Financial Statements

     F-104   

 

F-1


     PAGE  

Kirks Tire Ltd.

 

  

Audited Financial Statements

  

Independent Auditors’ Report

     F-113   

Audited Balance Sheets as of January 31, 2014, 2013 and 2012

     F-114   

Audited Statements of Operations for the years ended January 31, 2014, 2013 and 2012

     F-115   

Audited Statements of Retained Earnings for the years ended January 31, 2014, 2013 and 2012

     F-116   

Audited Statements of Cash Flows for the years ended January 31, 2014, 2013 and 2012

     F-117   

Notes to Audited Financial Statements

     F-118   

Regional Tire Distributors (Edmonton) Inc.

 

Audited Financial Statements

  

Independent Auditors’ Report

     F-132   

Audited Balance Sheets as of February 28, 2014 and 2013 and February 29, 2012

     F-133   

Audited Statements of Operations for the years ended February 28, 2014 and 2013 and February  29, 2012

     F-134   

Audited Statements of Retained Earnings for the years ended February 28, 2014 and 2013 and February  29, 2012

     F-135   

Audited Statements of Cash Flows for the years ended February 28, 2014 and 2013 and February  29, 2012

     F-136   

Notes to Audited Financial Statements

     F-137   

Regional Tire Distributors (Calgary) Inc.

 

Audited Financial Statements

  

Independent Auditors’ Report

     F-160   

Audited Balance Sheets as of February 28, 2014 and 2013 and February 29, 2012

     F-161   

Audited Statements of Operations for the years ended February 28, 2014 and 2013 and February  29, 2012

     F-162   

Audited Statements of Retained Earnings for the years ended February  28, 2014 and 2013 and February 29, 2012

     F-163   

Audited Statements of Cash Flows for the years ended February 28, 2014 and 2013 and February  29, 2012

     F-164   

Notes to Audited Financial Statements

     F-165   

TTT Holdings, Inc. (1)

 

Audited Consolidated Financial Statements

 

Independent Auditor’s Report

    F-177   

Audited Consolidated Balance Sheets as of December 31, 2013 and 2012

    F-178   

Audited Consolidated Statements of Operations for the years ended December 31, 2013 and 2012

    F-179   

Audited Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2013 and 2012

    F-180   

Audited Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012

    F-181   

Notes to Audited Consolidated Financial Statements

    F-182   

Independent Auditor’s Report

    F-198   

Audited Consolidated Balance Sheets as of December 31, 2012 and 2011

    F-199   

Audited Consolidated Statements of Operations for the years ended December 31, 2012 and 2011

    F-200   

Audited Consolidated Statements of Stockholders’ Equity for the years ended December  31, 2012 and 2011

    F-201   

Audited Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011

    F-202   

Notes to Audited Consolidated Financial Statements

    F-203   

 

(1) TTT Holdings, Inc. has no significant assets or operations other than its ownership of Terry’s Tire Town Holdings, Inc. The operations of Terry’s Tire Town Holdings, Inc. constitutes the operations of TTT Holdings, Inc.

 

F-2


    

PAGE

 

The Hercules Tire & Rubber Company

 

  

Audited Consolidated Financial Statements

  

Independent Auditor’s Report

     F-220   

Audited Consolidated Balance Sheets as of October 31, 2013 and 2012

     F-221   

Audited Consolidated Statements of Operations and Comprehensive Income for the years ended October  31, 2013 and 2012

     F-222   

Audited Consolidated Statements of Stockholders’ Equity for the years ended October 31, 2013 and 2012

     F-223   

Audited Consolidated Statements of Cash Flows for the years ended October 31, 2013 and 2012

     F-224   

Notes to Audited Consolidated Financial Statements

     F-225   

Independent Auditor’s Report on Additional Information

     F-235   

Audited Consolidated Schedule of Adjusted EBITDA

     F-236   

Regional Tire Distributors Inc.

 

Audited Consolidated Financial Statements

  

Independent Auditor’s Report

     F-238   

Audited Consolidated Statements of Income and Comprehensive Income for the years ended January  31, 2013 and 2012

     F-239   

Audited Consolidated Balance Sheets as of January 31, 2013 and 2012

     F-240   

Audited Consolidated Statements of Cash Flows for the years ended January 31, 2013 and 2012

     F-241   

Audited Consolidated Statements of Stockholders’ Equity for the years ended January 31, 2013 and  2012

     F-242   

Notes to Audited Consolidated Financial Statements

     F-243   

Triwest Trading (Canada) Ltd.

 

Audited Consolidated Financial Statements

  

Independent Auditor’s Report

     F-257   

Audited Consolidated Balance Sheets as of December 31, 2011, 2010 and 2009

     F-258   

Audited Consolidated Statements of Income for the years ended December 31, 2011, 2010 and 2009

     F-259   

Audited Consolidated Statements of Retained Earnings for the years ended December 31, 2011, 2010 and 2009

     F-260   

Audited Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

     F-261   

Notes to Audited Consolidated Financial Statements

     F-262   
Unaudited Consolidated Financial Statements   

Balance Sheets as of September 30, 2012 and December 31, 2011

     F-269   

Statements of Income for the nine months ended September 30, 2012 and September 30, 2011

     F-270   

Statement of Retained Earnings for the nine month period ended September 30, 2012

     F-271   

Statements of Cash Flows for the nine months ended September 30, 2012 and September 30, 2011

     F-272   

Notes to Financial Statements

     F-273   

 

F-3


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

    

Page

 

ATD Corporation—Consolidated Financial Statements

  

Report of Independent Registered Public Accounting Firm

     F-5   

Consolidated Balance Sheets as of December 28, 2013 and December 29, 2012

     F-6   

Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011

     F-7   

Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011

     F-8   

Consolidated Statements of Cash Flows for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011

     F-9   

Notes to Consolidated Financial Statements

     F-10   

Schedule II—Valuation and Qualifying Accounts for the Fiscal Years ended December 28, 2013, December 29, 2012 and December 31, 2011

     F-50   

 

F-4


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To ATD Corporation and Subsidiaries:

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of ATD Corporation and its subsidiaries at December 28, 2013 and December 29, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2013 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 16(b) 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

June 16, 2014

 

F-5


ATD CORPORATION

CONSOLIDATED BALANCE SHEETS

 

In thousands, except share amounts

  

December 28,
2013

   

December 29,
2012

 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 35,760      $ 34,700   

Accounts receivable, net of allowance for doubtful accounts of $2,169 and $950 in fiscal 2013 and 2012, respectively

     305,247        301,303   

Inventories

     772,733        721,672   

Deferred income taxes

     15,719        16,458   

Income tax receivable

     369        369   

Assets held for sale

     910        7,151   

Other current assets

     19,684        20,695   
  

 

 

   

 

 

 

Total current assets

     1,150,422        1,102,348   
  

 

 

   

 

 

 

Property and equipment, net

     147,856        129,882   

Goodwill

     504,333        483,143   

Other intangible assets, net

     713,294        738,698   

Other assets

     25,750        32,766   
  

 

 

   

 

 

 

Total assets

   $ 2,541,655      $ 2,486,837   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 563,691      $ 502,221   

Accrued expenses

     45,116        42,988   

Current maturities of long-term debt

     564        493   
  

 

 

   

 

 

 

Total current liabilities

     609,371        545,702   
  

 

 

   

 

 

 

Long-term debt

     966,436        950,711   

Deferred income taxes

     268,432        283,009   

Other liabilities

     17,362        14,662   

Commitments and contingencies (See Note 13)

    

Stockholders’ equity:

    

Common stock, par value $.01 per share; 2,000,000,000 shares authorized; 734,168,402 shares issued and outstanding

     7,342        7,342   

Additional paid-in capital

     751,630        748,996   

Accumulated earnings (deficit)

     (69,818     (63,442

Accumulated other comprehensive income (loss)

     (9,100     (143
  

 

 

   

 

 

 

Total stockholders’ equity

     680,054        692,753   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,541,655      $ 2,486,837   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-6


ATD CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

In thousands

  

Fiscal Year
Ended
December 28,
2013

   

Fiscal Year
Ended
December 29,
2012

   

Fiscal Year
Ended
December 31,
2011

 

Net sales

   $ 3,839,269      $ 3,455,864      $ 3,050,240   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

     3,188,409        2,887,421        2,535,020   

Selling, general and administrative expenses

     569,234        499,112        432,636   

Management fees

     5,753        7,446        4,624   

Transaction expenses

     6,719        5,246        3,946   
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     69,154        56,639        74,014   

Other income (expense):

      

Interest expense

     (74,316     (72,910     (67,572

Other, net

     (5,196     (3,895     (2,110
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

     (10,358     (20,166     4,332   

Income tax provision (benefit)

     (3,982     (5,965     4,464   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (6,376   $ (14,201   $ (132
  

 

 

   

 

 

   

 

 

 

Net Income (loss) per share:

      

Basic

   $ (0.01   $ (0.02   $ (0.00
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.01   $ (0.02   $ (0.00
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

      

Foreign currency translation

   $ (9,131   $ (344   $ —     

Unrealized gain (loss) on rabbi trust assets, net of tax

     174        138        (158
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (8,957     (206     (158
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (15,333   $ (14,407   $ (290
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-7


ATD CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

   

Total
Stockholders’

Equity

   

Common Stock

   

Additional
Paid-In

Capital

   

Accumulated
Earnings

(Deficit)

   

Accumulated
Other
Comprehensive

(Loss) Income

 

In thousands, except share amounts

   

Shares

   

Amount

       

Balance, January 1, 2011

  $ 638,649        683,830,902      $ 6,838      $ 680,699      $ (49,109   $ 221   

Net income (loss)

    (132     —          —          —          (132     —     

Unrealized gain (loss) on rabbi trust assets, net of tax of $0.0 million

    (158     —          —          —          —          (158

Equity contributions

    500        500,000        5        495        —          —     

Repurchase of common stock

    (200     (200,500     (2     (198     —          —     

Stock-based compensation

    4,114        —          —          4,114        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

    642,773        684,130,402        6,841        685,110        (49,241     63   

Net income (loss)

    (14,201     —          —          —          (14,201     —     

Unrealized gain (loss) on rabbi trust assets, net of tax of $0.1 million

    138        —          —          —          —          138   

Foreign currency translation

    (344             (344

Equity contributions

    60,038        50,038,000        501        59,537        —          —     

Stock-based compensation

    4,349        —          —          4,349        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 29, 2012

    692,753        734,168,402        7,342        748,996        (63,442     (143

Net income (loss)

    (6,376     —          —          —          (6,376     —     

Unrealized gain (loss) on rabbi trust assets, net of tax of $0.1 million

    174        —          —          —          —          174   

Foreign currency translation

    (9,131             (9,131

Stock-based compensation

    2,634        —          —          2,634        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 28, 2013

  $ 680,054        734,168,402        7,342      $ 751,630      $ (69,818   $ (9,100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-8


ATD CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

In thousands

  

Fiscal Year
Ended
December 28,
2013

   

Fiscal Year
Ended
December 29,
2012

   

Fiscal Year
Ended
December 31,
2011

 

Cash flows from operating activities:

      

Net income (loss)

   $ (6,376   $ (14,201   $ (132

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation and amortization of intangibles

     105,458        89,167        78,071   

Amortization of other assets

     4,456        7,487        4,758   

Provision (benefit) for deferred income taxes

     (25,694     (12,166     (6,173

Provision for doubtful accounts

     2,237        1,996        1,911   

Non-cash inventory step-up amortization

     5,379        4,074        —     

Stock-based compensation

     2,634        4,349        4,114   

Other, net

     3,292        2,601        1,286   

Change in operating assets and liabilities:

      

Accounts receivable

     7,401        5,134        (47,363

Inventories

     (27,639     (32,170     (151,945

Income tax receivable

     644        1,232        8,045   

Other current assets

     1,160        (5,971     (1,729

Accounts payable and accrued expenses

     29,466        (38,107     19,232   

Other, net

     (1,436     (3,353     (774
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     100,982        10,072        (90,699
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Acquisitions, net of cash acquired

     (77,017     (115,334     (59,694

Purchase of property and equipment

     (47,127     (52,388     (31,044

Purchase of assets held for sale

     (2,239     (3,939     (2,993

Proceeds from sale of assets held for sale

     7,751        3,738        1,403   

Proceeds from sale of property and equipment

     197        102        79   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (118,435     (167,821     (92,249
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Borrowings from revolving credit facility

     2,973,584        3,333,642        2,760,364   

Repayments of revolving credit facility

     (2,955,576     (3,217,298     (2,577,380

Outstanding checks

     6,599        (1,754     9,981   

Payments of other long-term debt

     (503     (1,987     (822

Payments of deferred financing costs

     (1,106     (3,779     (5,880

Equity contribution

     —          60,000        —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     22,998        168,824        186,263   
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (4,485     (57     —     
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     1,060        11,018        3,315   

Cash and cash equivalents—beginning of period

     34,700        23,682        20,367   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 35,760      $ 34,700      $ 23,682   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

      

Cash payments for interest

   $ 68,179      $ 64,324      $ 61,732   

Cash (receipts) payments for taxes, net

   $ 23,740      $ 6,510      $ (8,101

Supplemental disclosures of noncash activities:

      

Capital expenditures financed by debt

   $ 128      $ 515      $ —     

See accompanying notes to consolidated financial statements.

 

F-9


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Company:

ATD Corporation (also referred to herein as “ATD Corp” and formerly Accelerate Parent Corp.) is a Delaware corporation that indirectly owns 100% of the issued and outstanding capital stock of American Tire Distributors Holdings, Inc. (“Holdings”), a Delaware corporation. Holdings owns 100% of the issued and outstanding capital stock of American Tire Distributors, Inc. (“ATDI”), a Delaware corporation. ATD Corp has no significant assets or operations other than its ownership of ATDI. The operations of ATDI and its subsidiaries constitute the operations of ATD Corp presented under accounting principles generally accepted in the United States. Unless the context otherwise requires, “Company” herein refers to ATD Corp and its consolidated subsidiaries. In June 2014, the Company changed its name from Accelerate Parent Corp. to ATD Corporation. On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, the Company was acquired by TPG Capital, L.P. (“TPG” or the “Sponsor”) and certain co-investors (the “Merger”).

The Company is primarily engaged in the wholesale distribution of tires, custom wheels and accessories, and related tire supplies and tools, representing 97.4% or $3,740.2 million, 2.0% or $76.3 million and 0.6% or $22.8 million, respectively, of our net sales. Operating as one operating and reportable segment through a network of 133 distribution centers, including three 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 72,000 customers (approximately 64,000 in the U.S. and 8,000 in Canada). The Company’s customer base is comprised primarily of independent tire dealers with the remainder of other customers representing various national and corporate accounts. The Company serves a majority of the contiguous United States as well as Canada. During fiscal 2013, the Company’s largest customer and top ten customers accounted for 3.1% and 10.9%, respectively, of its net sales.

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 fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 each contain operating results for 52 weeks. It should be noted that, prior to fiscal 2013, the Company and its TriCan Tire Distributors (“TriCan”) subsidiary had different year-end reporting dates. For fiscal 2012, TriCan had a calendar year-end reporting date of December 31. The impact from this difference on the consolidated financial statements was not material. TriCan converted to the Company’s fiscal year reporting date during fiscal 2013.

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 the Company 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. Certain changes in classification of amounts reported in prior years have been made to conform to the 2013 classification.

 

F-10


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of ATD Corp and all of its subsidiaries that are more than 50% owned and controlled. Partially-owned investments represent 20-50% ownership interests in investments where the Company demonstrates significant influence, but does not have a controlling financial interest. Partially-owned investments are accounted for under the equity method. The Company does not have any investments that are accounted for under the cost method of accounting. 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 the estimates are made, historical experience, risk of loss, general economic conditions and trends, and the assessment of the probable future outcome. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of comprehensive income (loss) in the period that they are determined.

Foreign currency translation

All foreign currency denominated balance sheet accounts are translated at year end exchange rates and revenue and expense accounts are translated at weighted average rates of exchange prevailing during the year. Gains and losses resulting from the translation of foreign currency are recorded in the accumulated other comprehensive income (loss) component of stockholder’s equity. Transactional foreign currency gains and losses are included in other expense, net in the accompanying consolidated statements of comprehensive income (loss).

Cash and Cash Equivalents

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

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 as well as past collection trends and general economic conditions.

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.

 

F-11


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 the related lease term. The range of useful lives used to depreciate property and equipment is as follows:

 

Buildings

     25 to 31 years   

Leasehold improvements

     2 to 10 years   

Machinery and equipment

     2 to 10 years   

Furniture and fixtures

     3 to 8 years   

Internal use software

     1 to 5 years   

Vehicles and other

     3 to 6 years   

Major expenditures for replacements and significant improvements that increase asset values and extend useful lives are capitalized. Repairs and maintenance expenditures that do not extend the useful life of the asset are charged to expense as incurred. 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 comprehensive income (loss).

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

Goodwill and intangible assets with indefinite useful lives 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.

 

F-12


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Customer list

     16 to 19 years   

Tradenames

     1 to 7 years   

Noncompete agreements

     1 to 5 years   

Favorable leases

     4 to 6 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

Deferred financing costs are expenditures associated with obtaining financings that are capitalized in the consolidated balance sheets and amortized over the term of the loans to which such costs relate. Amounts capitalized are recorded within other assets in the consolidated balance sheets and amortized to interest expense in the consolidated statements of comprehensive income (loss). At December 28, 2013, the unamortized balance of deferred financing costs was $16.3 million, which includes $1.1 million incurred to increase the borrowing capacity of the Company’s Canadian ABL Facility and FILO Facility during fiscal 2013 (See Note 9 for additional information). At December 29, 2012, the unamortized balance of deferred financing costs was $19.7 million. Amortization for fiscal 2013, fiscal 2012 and fiscal 2011 was $4.5 million, $7.5 million and $4.8 million, respectively. Amortization for fiscal 2012 included $2.8 million related to the write-off of deferred financing costs associated with a lender that is not participating in the new syndication group.

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 both workers’ compensation and auto insurance. 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 $9.0 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 as well as the Company’s historical claims experience.

 

F-13


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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. 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.

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.

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 our inventory, and our cost of goods sold when 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.

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.

 

F-14


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Shipping and Handling Fees and Costs

In accordance with current accounting standards, the Company determined that shipping fees shall be reported on a gross basis. As a result, all amounts billed to a customer in a sale transaction related to shipping fees represent revenues earned for the goods provided and therefore recorded within net sales in the consolidated statement of comprehensive income (loss). Handling costs include expenses incurred to store, move, and prepare products for shipment. The Company classifies these costs as selling, general and administrative expenses within the consolidated statement of comprehensive income (loss), and includes a portion of internal costs such as salaries and overhead related to these activities. For fiscal 2013, 2012 and 2011, the Company incurred $213.8 million, $171.1 million and $140.8 million, respectively, related to these expenses.

Income Taxes

The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision is computed using the asset and liability method of accounting, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In addition, the Company recognizes future tax benefits, such as net operating losses and tax credits, to the extent that realizing these benefits is considered in its judgment to be more likely than not. Deferred tax assets and liabilities are measured using currently enacted tax rates that apply to taxable income in effect for the years in which those tax items are expected to be realized or settled. The Company regularly reviews the recoverability of its deferred tax assets considering historic profitability, projected future taxable income, and timing of the reversals of existing temporary differences as well as the feasibility of our tax planning strategies. Where appropriate, a valuation allowance is recorded 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 to valuation allowances are recognized in earnings in the period such determination is made.

The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is more-likely-than-not that the position will be sustained upon examination. The tax impacts recognized in the financial statements from such positions are then measured based on the largest impact that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions as a component of the provision for income taxes.

Recent Accounting Pronouncements

In July 2012, the FASB issued Accounting Standards Update (“ASU”) No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” which amended the guidance on the annual impairment testing of indefinite-lived intangible assets other than goodwill. The amended guidance will allow a company the option to first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, based on the qualitative assessment, it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if a company concludes otherwise, quantitative impairment testing is not required. This new guidance will be effective for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company adopted this guidance on December 30, 2012 (the first day of its 2013 fiscal year); however, the Company performed its annual impairment test in the fourth quarter of 2013.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” which amended the guidance for reporting reclassifications out of accumulated other comprehensive income. The amended guidance requires an entity to report the effect of

 

F-15


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is entirely reclassified to net income, as required by U.S. GAAP. For other amounts, that are not required by U.S. GAAP to be entirely reclassified to net income, an entity is required to cross-reference other disclosures that will provide additional detail concerning these amounts. The amendments are effective for reporting periods beginning after December 15, 2012. The Company adopted this guidance on December 30, 2012 and its adoption did not have an effect on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exits.” ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The Company is currently assessing the impact, if any, on its consolidated financial statements.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning in fiscal year 2018 and, at that time the Company may adopt the new standard under the full retrospective method or the modified retrospective method. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial statements and disclosures.

3. Acquisitions:

2013 Acquisitions

On December 13, 2013, TriCan entered into a Share Purchase Agreement with Wholesale Tire Distributors Inc., a corporation formed under the laws of the Province of Ontario (“WTD”), Allan Bishop, an individual resident in the Province of Ontario (“Allan”) and The Bishop Company Inc., a corporation formed under the laws of the Province of Ontario (“BishopCo”) (Allan and BishopCo each, a “Seller” and collectively, the “Sellers”), pursuant to which TriCan agreed to acquire from the Sellers all of the issued and outstanding shares of WTD. WTD operated two distribution centers serving over 2,300 customers. The acquisition of WTD strengthened the Company’s market presence in the Southern Ontario region of Canada. The acquisition was completed on December 13, 2013 and was funded through cash on hand. The Company does not believe the acquisition of WTD is a material transaction, individually or when aggregated with the other non-material acquisition discussed herein, subject to the disclosures and supplemental pro forma information required by ASC 805—Business Combinations. As a result, the information is not presented.

The acquisition of WTD 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

 

F-16


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. A majority of the net assets acquired relate to a customer list intangible asset, which had an acquisition date fair value of $4.4 million. The Company utilized the excess earnings method, a derivation of the income approach, to determine the fair value of the customer list intangible asset. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of 16 years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Company’s historical experience in renewing and extending similar customer relationships. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $1.1 million. The premium in the purchase price paid for the acquisition of WTD reflects the anticipated realization of operational and cost synergies. As additional information is obtained about these assets and liabilities within the measurement period, the Company expects to refine its estimates of fair value to allocate the purchase price more accurately.

On August 30, 2013, the Company entered into a Stock Purchase Agreement with Tire Distributors, Inc. (“TDI”) to acquire 100% of the outstanding capital stock of TDI. TDI operated one distribution center serving over 1,700 customers across Maryland and northeastern Virginia. The acquisition was completed on August 30, 2013 and was funded through the Company’s ABL Facility. The Company does not believe the acquisition of TDI is a material transaction, individually or when aggregated with the other non-material acquisition discussed herein, subject to the disclosures and supplemental pro forma information required by ASC 805—Business Combinations. As a result, the information is not presented.

The acquisition of TDI 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. A majority of the net assets acquired relate to a customer list intangible asset, which had an acquisition date fair value of $3.4 million. The Company utilized the excess earnings method, a derivation of the income approach, to determine the fair value of the customer list intangible asset. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of 16 years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Company’s historical experience in renewing and extending similar customer relationships. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $2.4 million. The premium in the purchase price paid for the acquisition of TDI reflects the anticipated realization of operational and cost synergies.

On March 22, 2013, TriCan and ATDI entered into a Share Purchase Agreement with Regional Tire Holdings Inc., a corporation formed under the laws of the Province of Ontario (“Holdco”), Regional Tire Distributors Inc. (“RTD”), a corporation formed under the laws of the Province of Ontario and a 100% owned subsidiary of Holdco, and the shareholders of Holdco, pursuant to which TriCan agreed to acquire from the shareholders of Holdco all of the issued and outstanding shares of Holdco for a purchase price of $62.5 million. Holdco has no significant assets or operations, other than its ownership of RTD. The operations of RTD constitute the operations of Holdco. RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada. The acquisition of RTD significantly expanded the Company’s presence in the Ontario and Atlantic Provinces of Canada and complements the Company’s current operations in Canada.

 

F-17


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The acquisition of RTD was completed on April 30, 2013 for aggregate cash consideration of approximately $64.9 million (the “Adjusted Purchase Price”) which includes initial working capital adjustments. The acquisition of RTD was funded by borrowings under the Company’s ABL Facility and FILO Facility, as more fully described in Note 9. The Adjusted Purchase Price was subject to certain post-closing adjustments, including, but not limited to, the finalization of working capital adjustments. Of the $64.9 million Adjusted Purchase Price, $6.3 million is held in escrow pending the resolution of the post-closing adjustments and other escrow release conditions in accordance with the terms of the purchase agreement and escrow agreement. During third quarter 2013, the Company and the shareholders of Holdco agreed on the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment increased the Adjusted Purchase Price by $1.0 million to $65.9 million with a corresponding increase to goodwill of $1.0 million.

The acquisition of RTD was recorded using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As a result, the Adjusted 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 Adjusted Purchase Price is a follows:

 

In thousands

      

Cash

   $ 904   

Accounts receivable

     10,093   

Inventory

     21,685   

Other current assets

     998   

Property and equipment

     1,050   

Intangible assets

     42,990   

Other assets

     52   
  

 

 

 

Total assets acquired

     77,772   

Debt

     —     

Accounts payable

     7,817   

Accrued and other liabilities

     12,740   

Deferred income taxes

     11,692   
  

 

 

 

Total liabilities assumed

     32,249   

Net assets acquired

     45,523   

Goodwill

     20,375   
  

 

 

 

Purchase price

   $ 65,898   
  

 

 

 

The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $20.4 million. The premium in the purchase price paid for the acquisition of RTD primarily relates to growth opportunities from expanding the Company’s distribution footprint into Eastern Canada and through operating synergies available via the consolidation of certain distribution centers in Eastern Canada.

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. Inventory was recorded at fair value, based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.

 

F-18


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

In thousands

  

Estimated
Useful
Life

    

Estimated
Fair
Value

 

Customer list

     16 years       $ 40,720   

Tradenames

     5 years         1,900   

Favorable leases

     4 years         370   
     

 

 

 

Total

      $ 42,990   
     

 

 

 

The Company determined the fair value of the intangible assets acquired based on a third-party valuation report. The independent third party valuation firm utilized the excess earnings method, a derivation of the income approach, to determine the fair value of the customer list intangible asset. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of 16 years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Company’s historical experience in renewing and extending similar customer relationships.

RTD contributed net sales of approximately $143.4 million to the Company for the period from May 1, 2013 to December 28, 2013. Net income contributed by RTD since the acquisition date was approximately $4.0 million which included non-cash amortization of the inventory step-up of $2.7 million and non-cash amortization expense on acquired intangible assets of $4.9 million.

2012 Acquisitions

On November 30, 2012, ATDI and ATD Acquisition Co. V Inc. (“Canada Acquisition”), a newly-formed direct 100% owned Canadian subsidiary of ATDI, entered into a Share Purchase Agreement with 1278104 Alberta Inc. (“Seller”), Triwest Trading (Canada) Ltd., a 100% owned subsidiary of Seller (“Triwest”) and certain shareholders of Seller pursuant to which Canada Acquisition agreed to acquire from Seller all of the issued and outstanding common shares of Triwest along with an outstanding loan owed to Seller by Triwest for approximately $97.5 million, subject to certain post-closing adjustments, including, but not limited to, working capital adjustments. Of the $97.5 million purchase price, $15.0 million is held in escrow pending the resolution of the post-closing adjustments and other escrow release conditions in accordance with the terms of the purchase agreement and escrow agreement. As a result of the acquisition, Triwest became a direct 100% owned subsidiary of Canada Acquisition. Triwest (dba: TriCan Tire Distributors, or “TriCan”) is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada with distribution centers stretching across the country. The acquisition of TriCan expanded the Company’s footprint and distribution services into Canada for the first time. During second quarter 2013, the Company and the Seller agreed on the post-closing working capital adjustment in accordance with the purchase agreement. This adjustment reduced the purchase price by $3.4 million to $94.1 million with a corresponding decrease to goodwill of $3.4 million.

 

F-19


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The acquisition of TriCan was completed on November 30, 2012 and funded through the Company’s ABL Facility. The acquisition of TriCan was recorded using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As a result, the total 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

      

Cash

   $ 1,344   

Accounts receivable

     35,518   

Inventory

     45,445   

Other current assets

     495   

Property and equipment

     1,191   

Intangible assets

     49,940   

Other assets

     755   
  

 

 

 

Total assets acquired

     134,688   

Debt

     —     

Accounts payable

     37,576   

Accrued and other liabilities

     14,609   

Deferred income taxes

     13,003   

Other liabilities

     475   
  

 

 

 

Total liabilities assumed

     65,663   

Net assets acquired

     69,025   

Goodwill

     25,044   
  

 

 

 

Purchase price

   $ 94,069   
  

 

 

 

The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $25.0 million. The premium in the purchase price paid for the acquisition of TriCan primarily relates to growth opportunities from expanding the Company’s distribution footprint into Canada.

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. Inventory was recorded at fair value, based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose 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 followings:

 

In thousands

  

Estimated
Useful
Life

    

Estimated
Fair
Value

 

Customer list

     16 years       $ 44,621   

Tradenames

     7 years         4,958   

Favorable leases

     6 years         361   
     

 

 

 

Total

      $ 49,940   
     

 

 

 

 

F-20


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company determined the fair value of the intangible assets acquired based on a third-party valuation report. The independent third party valuation firm utilized the excess earnings method, a derivation of the income approach, to determine the fair value of the customer list intangible asset. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of 16 years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Company’s historical experience in renewing and extending similar customer relationships.

The following unaudited pro forma supplementary data for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 gives effect to the acquisition of RTD as if it had occurred on January 1, 2012 (the first day of the Company’s 2012 fiscal year) and gives effect to the acquisition of TriCan as if it had occurred on January 2, 2011 (the first day of the Company’s 2011 fiscal year). 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 TriCan and RTD acquisitions been consummated on the date assumed and does not project the Company’s results of operations for any future date.

 

    

Pro Forma

 

In thousands

  

Fiscal Year

Ended

December 28,

2013

   

Fiscal Year
Ended
December 29,
2012

   

Fiscal Year
Ended
December 31,
2011

 

Net sales

   $ 3,873,469      $ 3,767,037      $ 3,234,331   

Net income (loss)

     (9,026     (9,144     5,347   

Net income (loss) per share—basic

   $ (0.01   $ (0.01   $ 0.01   

Net income (loss) per share—diluted

   $ (0.01   $ (0.01   $ 0.01   

The pro forma supplementary data for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 includes $1.9 million, $11.7 million and $5.9 million, respectively, as an adjustment to historical amortization expense as a result of acquired intangible assets.

On May 24, 2012, the Company entered into a Stock Purchase Agreement with Firestone of Denham Springs, Inc. d/b/a Consolidated Tire & Oil (“CTO”) to acquire 100% of the outstanding capital stock of CTO. CTO operated three distribution centers in Baton Rouge, Slidell and Lafayette, Louisiana serving over 500 customers. The acquisition was completed on May 24, 2012 and was funded through the Company’s ABL Facility. The Company does not believe the acquisition of CTO is a material transaction subject to the disclosures and supplemental pro forma information required by ASC 805—Business Combinations. As a result, the information is not presented.

The acquisition of CTO 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. A majority of the net assets acquired relate to a customer list intangible asset, which had an acquisition date fair value of $15.9 million. The Company determined the fair value of the intangible assets acquired based on a third-party valuation report. The independent third party valuation firm utilized the excess earnings method, a derivation of the income approach, to determine the fair value of the customer list intangible asset. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of 16 years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Company’s historical experience in renewing and extending similar customer relationships. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $10.1 million. The premium in the purchase price paid for the acquisition of CTO reflects the anticipated realization of operational and cost synergies.

 

F-21


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2011 Acquisition

On April 15, 2011, the Company entered into a Stock Purchase Agreement with the Bowlus Service Company d/b/a North Central Tire (“NCT”) to acquire 100% of the outstanding capital stock of NCT. NCT operated three distribution centers in Canton, Ohio, Cincinnati, Ohio and Rochester, New York, serving over 2,700 customers. The acquisition was completed on April 29, 2011 and was funded through the Company’s ABL Facility. The Company does not believe the acquisition of NCT is a material transaction subject to the disclosures and supplemental pro forma information required by ASC 805—Business Combinations. As a result, the information is not presented.

The acquisition of NCT 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. A majority of the net assets acquired relates to a customer list intangible asset, which had an acquisition date fair value of $38.2 million. The Company determined the fair value of the intangible assets acquired based on a third-party valuation report. The independent third party valuation firm utilized the excess earnings method, a derivation of the income approach, to determine the fair value of the customer list intangible asset. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of 19 years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Company’s historical experience in renewing and extending similar customer relationships. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $27.0 million. The premium in the purchase price paid for the acquisition of NCT reflects the anticipated realization of significant operational and cost synergies. The purchase of NCT expanded the Company’s market position in Ohio and Western New York.

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 and FILO Facility. See Note 9 for further information.

As a result of the TriCan, RTD, TDI and WTD acquisitions, the carrying value of the acquired inventory was increased by $6.3 million, $2.7 million, $0.2 million and $0.5 million, respectively, to adjust to estimated fair value in accordance with the accounting guidance for business combinations. The step-up in inventory value is amortized into cost of goods sold over the period of the Company’s normal inventory turns, which approximates two months. Amortization of the inventory step-up included in cost of goods sold in the accompanying consolidated statements of comprehensive income (loss) for the fiscal years ended December 28, 2013 and December 29, 2012 was $5.4 million and $4.1 million, respectively.

5. Assets Held for Sale:

In accordance with current accounting standards, the Company classifies assets as held for sale in the period in which all held for sale criteria is met. Assets held for sale are reported at the lower of their carrying amount or fair value less cost to sell and are no longer depreciated. At December 28, 2013, assets held for sale

 

F-22


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

totaled $0.9 million, of which $0.5 million were residential properties that were acquired as part of employee relocation packages. The Company is actively marketing these properties and anticipates that they will be sold within a twelve-month period from the date in which they are classified as held for sale.

As part of the Am-Pac Tire Dist., Inc. (“Am-Pac”) acquisition in 2008, the Company acquired a distribution center in California which contained office space that served as Am-Pac’s headquarters. The facility was used as a warehouse within the Company’s distribution operations until its activities were absorbed into nearby existing locations during 2011. During the first quarter of 2013, the Company determined that the carrying value of the facility exceeded its fair value due to current market conditions. As a result, the Company recorded a $0.5 million adjustment related to the fair value of this facility. During the third quarter of 2013, the Company received $3.9 million in cash for the sale of this facility. The carrying value of the facility was $4.0 million. Accordingly, the Company has recognized a pre-tax loss on the sale of this facility of $0.1 million within the accompanying consolidated statement of comprehensive income (loss).

On February 1, 2012, the Company reacquired one of three facilities originally included in a sale-leaseback transaction completed in 2002 that had an initial lease term of 20 years, followed by two 10 year renewal options. The facility was used as a distribution center within the Company’s operations until its activities were relocated to an expanded location during the second quarter of 2012. As a result, the Company classified the facility as held for sale during the third quarter of 2012 when the appropriate criteria was met. During the third quarter of 2013, the Company determined that the carrying value of this facility exceeded its fair value due to current market conditions. As a result, the Company recorded a $0.3 million adjustment related to the fair value of this facility which reduced the carrying value to $1.5 million. In October 2013, the Company received $1.5 million in cash for the sale of this facility.

During third quarter 2013, the Company classified a facility located in Georgia as held for sale. The facility was previously used as a distribution center within the Company’s operations until its activities were relocated to an expanded facility. During the fourth quarter of 2013, the Company determined that the carrying value of this facility exceeded its fair value due to current market conditions. As a result, the Company recorded a $0.3 million adjustment related to the fair value of this facility. As of December 28, 2013, the carrying value of this facility was $0.4 million. The Company is actively marketing this property and anticipates that it will be sold within a twelve-month period.

6. Property and Equipment:

The following table represents the major classes of property and equipment at December 28, 2013 and December 29, 2012:

 

In thousands

  

December 28,
2013

   

December 29,
2012

 

Land

   $ 1,665      $ 2,108   

Buildings and leasehold improvements

     22,811        21,554   

Machinery and equipment

     27,515        21,745   

Furniture and fixtures

     46,459        39,863   

Software

     117,607        88,021   

Vehicles and other

     3,111        3,649   
  

 

 

   

 

 

 

Total property and equipment

     219,168        176,940   

Less—Accumulated depreciation

     (71,312     (47,058
  

 

 

   

 

 

 

Property and equipment, net

   $ 147,856      $ 129,882   
  

 

 

   

 

 

 

 

F-23


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Depreciation expense was $29.5 million for the fiscal year ended December 28, 2013, $23.1 million for the fiscal year ended December 29, 2012 and $16.5 million for the fiscal year ended December 31, 2011. Depreciation expense is classified in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income (loss).

Included in the above table within Land and Buildings and leasehold improvements are assets under capital leases related to the sale and leaseback of two of the Company’s owned facilities (see Note 9). The net book value of these assets at December 28, 2013 and December 29 2012 was $6.9 million and $7.2 million, respectively. Accumulated depreciation was $1.1 million and $0.8 million for the respective periods. Depreciation expense was $0.3 million, $0.2 million and $0.3 million for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011.

7. Goodwill:

The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired. Once the final valuation has been performed for each acquisition, adjustments may be recorded. 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.

The changes in the carrying amount of goodwill are as follows:

 

In thousands

  

December 28,
2013

   

December 29,
2012

 

Beginning balance

   $ 483,143      $ 446,787   

Purchase accounting adjustments

     (1,349     —     

Acquisitions

     25,408        36,457   

Currency translation

     (2,869     (101
  

 

 

   

 

 

 

Ending balance

   $ 504,333      $ 483,143   
  

 

 

   

 

 

 

As of December 28, 2013, the Company has recorded goodwill of $504.3 million, of which approximately $26 million of net goodwill is deductible for income tax purposes in future periods. The balance primarily relates to the acquisition of the Company by TPG on May 28, 2010, in which $418.6 million was recorded as goodwill. The Company does not have any accumulated goodwill impairment losses.

On December 13, 2013, TriCan entered into a Share Purchase Agreement to acquire all of the issued and outstanding common shares of WTD. The acquisition was funded through cash on hand. The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, the Company recorded $1.1 million as goodwill. See Note 3 for additional information.

On August 30, 2013, the Company entered into a Stock Purchase Agreement to acquire 100% of the outstanding capital stock of TDI. The acquisition was funded through the Company’s ABL Facility. 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. During fourth quarter 2013, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement which increased goodwill by $0.5 million. In addition, the Company adjusted the fair market value of certain working capital items during fourth quarter 2013. These adjustments increased goodwill by $0.2 million to $2.4 million at December 28, 2013. See Note 3 for additional information.

 

F-24


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On April 30, 2013, TriCan completed the acquisition of RTD pursuant to a Share Purchase Agreement entered into on March 22, 2013. The acquisition was funded through the Company’s ABL Facility and FILO Facility. 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. During third quarter 2013, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment increased goodwill by $1.0 million to $20.4 million at December 28, 2013. See Note 3 for additional information.

In addition, the Company acquired the inventory and accounts receivable of a small Canadian distributor in February 2013. The purchase price was allocated to the assets acquired based on their estimated fair market value, which resulted in an increase to goodwill of $1.6 million.

On November 30, 2012, ATDI and Canada Acquisition entered into a Share Purchase Agreement to acquire all of the issued and outstanding common shares of TriCan. The acquisition was completed on November 30, 2012 and was funded through the Company’s ABL Facility. 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. During fiscal 2013, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement which decreased goodwill by $3.4 million. In addition, the Company adjusted the fair market value of certain working capital items during fiscal 2013. These adjustments increased goodwill by $1.4 million to $25.0 million at December 28, 2013. See Note 3 for additional information.

On May 24, 2012, the Company entered into a Stock Purchase Agreement to acquire 100% of the outstanding capital stock of CTO. The acquisition was completed on May 24, 2012 and was funded through the Company’s ABL Facility. 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. During fiscal 2013, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment increase goodwill by $0.6 million to $10.1 million at December 28, 2013. See Note 3 for additional information.

8. Intangible Assets:

Indefinite-lived intangible assets 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. All other intangible assets with finite lives are being amortized on a straight-line basis or accelerated basis over periods ranging from one to nineteen years.

The following table sets forth the gross amount and accumulated amortization of the Company’s intangible assets at December 28, 2013 and December 29, 2012:

 

    

December 28, 2013

    

December 29, 2012

 

In thousands

  

Gross
Amount

    

Accumulated
Amortization

    

Gross
Amount

    

Accumulated
Amortization

 

Customer lists

   $ 677,062       $ 226,614       $ 632,589       $ 156,249   

Noncompete agreements

     12,007         6,400         7,898         2,841   

Favorable leases

     688         119         360         5   

Tradenames

     10,531         3,754         9,043         1,990   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total finite-lived intangible assets

     700,288         236,887         649,890         161,085   

Tradenames (indefinite-lived)

     249,893         —           249,893         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 950,181       $ 236,887       $ 899,783       $ 161,085   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

F-25


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

At December 28, 2013, the Company had $713.3 million of intangible assets. The balance primarily relates to the Merger on May 28, 2010, in which $781.3 million was recorded as intangible assets. As part of the preliminary purchase price allocation of WTD, the Company allocated $4.4 million to a finite-lived customer list intangible asset with a useful life of sixteen years. As part of the purchase price allocation of TDI, the Company allocated $3.4 million to a finite-lived customer list intangible asset with a useful life of sixteen years. As part of the purchase price allocation of RTD, the Company allocated $40.7 million to a finite-lived customer list intangible asset with a useful life of sixteen years, $1.9 million to a finite-lived tradename with a useful life of five years and $0.4 million to a finite-lived favorable leases intangible asset with a useful life of four years. As part of the purchase price allocation of TriCan, the Company allocated $44.6 million to a finite-lived customer list intangible asset with a useful life of sixteen years, $4.9 million to a finite-lived tradename with a useful life of seven years and $0.4 million to a finite-lived favorable leases intangible asset with a useful life of six years. In connection with the acquisition of CTO on May 24, 2012, the Company allocated $15.9 million to a finite-lived customer list intangible asset with a useful life of sixteen years. During 2011, the Company allocated $43.4 million to finite-lived intangible assets, including $38.2 million associated with a customer list as well as $5.2 million associated with a noncompete agreement, in connection with the acquisition of NCT. These intangible assets had a useful life of nineteen years and five years, respectively. See Note 3 for additional information.

Amortization of intangible assets was $76.2 million in fiscal 2013, $66.2 million in fiscal 2012 and $61.8 million in fiscal 2011. Estimated amortization expense on existing intangible assets is expected to approximate $73.2 million in 2014, $62.7 million in 2015, $52.9 million in 2016, $46.2 million in 2017 and $39.6 million in 2018.

9. Long-term Debt:

The following table presents the Company’s long-term debt at December 28, 2013 and at December 29, 2012:

 

In thousands

  

December 28,
2013

   

December 29,
2012

 

U.S. ABL Facility

   $ 417,066      $ 478,616   

Canadian ABL Facility

     36,424        10,976   

FILO Facility

     51,863        —     

Senior Subordinated Notes

     200,000        200,000   

Senior Secured Notes

     248,219        247,802   

Capital lease obligations

     12,330        12,469   

Other

     1,098        1,341   
  

 

 

   

 

 

 

Total debt

     967,000        951,204   

Less—Current maturities

     (564     (493
  

 

 

   

 

 

 

Long-term debt

   $ 966,436      $ 950,711   
  

 

 

   

 

 

 

The fair value of the Senior Secured Notes was $265.0 million at December 28, 2013 and December 29, 2012 and is based upon quoted market values (Level 1). The fair value of the Senior Subordinated Notes was $212.0 million at December 28, 2013 and December 29, 2012 and is based upon quoted prices for similar liabilities (Level 2).

 

F-26


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Aggregate maturities of long-term debt at December 28, 2013, are as follows:

 

In thousands

      

2014

   $ 564   

2015

     507   

2016

     554   

2017

     754,183   

2018

     200,595   

Thereafter

     10,597   
  

 

 

 

Total

   $ 967,000   
  

 

 

 

ABL Facility

See Note 18 regarding recent amendment to the Sixth Amended and Restated Credit Agreement.

Our Sixth Amended and Restated Credit Agreement (as amended, our “Credit Agreement”) provides for (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to U.S. borrowing base availability (the “U.S. ABL Facility”) and (ii) Canadian revolving credit commitments of $100.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to Canadian borrowing base availability (the “Canadian ABL Facility” and, collectively with the U.S. ABL Facility, the “ABL Facility”). In addition, the Credit Agreement provides the U.S. borrowers under the agreement with a first-in last-out facility (the “FILO Facility”) in an aggregate principal amount of up to $60.0 million, subject to a borrowing base specific thereto. The U.S. ABL Facility provides for revolving loans available to ATDI, its 100% owned subsidiary Am-Pac Tire Dist. Inc. and any other U.S. subsidiary that the Company designates in the future in accordance with the terms of the agreement. The Canadian ABL Facility provides for revolving loans available to TriCan, RTD and WTD and any other Canadian subsidiaries that the Company designates in the future in accordance with the terms of the agreement. Provided that no default or event of default then exists or would arise therefrom, the Company has the option to request that the ABL Facility be increased by an amount not to exceed $200.0 million (up to $50.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks with respect to the lenders providing commitments for such increase. The maturity date for the ABL Facility is November 16, 2017, provided that if on March 1, 2017, either (i) more than $50.0 million in aggregate principal amount of ATDI’s Senior Secured Notes remains outstanding or (ii) any principal amount of ATDI’s Senior Secured Notes remains outstanding with a scheduled maturity date which is earlier than 91 days after November 16, 2017 and excess availability under the ABL Facility is less than 12.5% of the aggregate revolving commitments, then the maturity date will be March 1, 2017. The maturity date for the FILO Facility is October 30, 2014. See Note 18 for additional information regarding the amendment to the FILO Facility and the new maturity date.

At December 28, 2013, the Company had $417.1 million outstanding under the U.S. ABL Facility. In addition, the Company had certain letters of credit outstanding in the aggregate amount of $8.1 million, leaving $236.1 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at December 28, 2013 was $36.4 million, leaving $41.2 million available for additional borrowings. As of December 28, 2013, the outstanding balance of the FILO Facility was $51.9 million and was classified as long-term debt on the consolidated balance sheet as the FILO Facility was refinanced on a long-term basis on January 31, 2014. See Note 18 for additional information.

Borrowings under the U.S. ABL Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve

 

F-27


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

requirements, plus an applicable margin of 2.0% as of December 28, 2013 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  12 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of December 28, 2013. The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to either (a) a Canadian base rate determined by reference to the highest of (1) the base rate as published by Bank of America, N.A. (acting through its Canada branch) as its “base rate”, (2) the federal funds rate effective plus  12 of 1% per annum and (3) the one month-LIBOR rate plus 1.0% per annum, plus an applicable margin of 1.0% as of December 28, 2013 or (b) a Canadian prime rate determined by reference to the highest of (1) the prime rate as published by Bank of America, N.A. (acting through its Canada branch) as its “prime rate”, (2) the sum of  12 of 1% plus the Canadian overnight rate and (3) the sum of 1% plus the rate of interest per annum equal to the average rate applicable to Canadian Dollar bankers’ acceptances as published by Reuters Monitor Money Rates Service for a 30 day interest period, plus an applicable margin of 1.0% as of December 28, 2013. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the FILO Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) an Adjusted LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin of 3.5% as of December 28, 2013 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  12 of 1% and (3) the one month-Adjusted LIBOR rate plus 1.0% per annum, plus an applicable margin of 2.5% as of December 28, 2013. The applicable margins under the FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

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

 

    85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 70% of the lesser of cost or fair market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable, and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, applicable.

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

 

    5% of eligible accounts receivable of the U.S. loan parties, as applicable; plus

 

    7.5% of the net orderly liquidation value of the eligible tire and non-tire inventory of the U.S. loan parties, as applicable.

 

F-28


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

All obligations under the U.S. ABL Facility and the FILO 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 and TDI. The Canadian ABL Facility is unconditionally guaranteed by the U.S. loan parties, TriCan, RTD, WTD and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility and the FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.

The ABL Facility and the FILO Facility contain customary covenants, including covenants that restricts the Company’s 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 the Company’s fiscal year. The terms of the ABL Facility and FILO Facility generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions requiring compliance with certain availability levels and fixed charge coverage ratios under the ABL Facility and other customary negotiated exceptions. As of December 28, 2013, the Company was in compliance with these covenants. If the amount available for additional borrowings under the ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the aggregate borrowing base and (b) $25.0 million, then the Company would be subject to an additional covenant requiring them to meet a fixed charge coverage ratio of 1.0 to 1.0. As of December 28, 2013, the Company’s additional borrowing availability under the ABL Facility was above the required amount and the Company was therefore not subject to the additional covenants.

Senior Secured Notes

On May 28, 2010, 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 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.

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 and TDI, 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

 

F-29


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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. As of December 28, 2013, the Company was in compliance with these covenants.

Senior Subordinated Notes

See Note 18 regarding a recent amendment to the Senior Subordinated Indenture and the issuance of additional Senior Subordinated Notes.

On May 28, 2010, ATDI issued Senior Subordinated Notes due June 1, 2018 (“Senior Subordinated Notes”) in an aggregate principal amount of $200.0 million. The Senior Subordinated Notes bear interest at a fixed rate of 11.50% per annum. 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 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.

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 and TDI, 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. The terms of the Senior Subordinated Notes generally restrict distributions or the payment of dividends in respect of our stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning April 4, 2010 and other customary negotiated exceptions. As of December 28, 2013, the Company was in compliance with these covenants.

Capital Lease Obligations

At December 31, 2011, the Company had a capital lease obligation of $14.1 million, which related to the 2002 sale and subsequent leaseback of three of its owned facilities. Due to continuing involvement with the properties, the Company accounted for the transaction as a direct financing lease and recorded the cash received as a financing obligation. The transaction had an initial lease term of 20 years, followed by two 10 year renewal options. No gain or loss was recognized as a result of the initial sales transaction.

On February 1, 2012, the Company reacquired one of the three facilities included in the 2002 sale-leaseback transaction for $1.5 million. Accordingly, the original lease was amended to extend the lease term on

 

F-30


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

the two remaining facilities by 5 years as well as to adjust the future lease payments over the remaining 15 years. Per current accounting guidance, the change in the debt terms was not considered substantial. As a result, the Company treated the amendment as a debt modification for accounting purposes and therefore, reduced the financing obligation by the purchase price. Cash payments to the lessor are allocated between interest expense and amortization of the financing obligation. At the end of the lease term, the Company will recognize the sale of the remaining facilities; however, no gain or loss will be recognized as the financing obligation will equal the expected carrying value of the facilities. At December 28, 2013, the outstanding balance of the financing obligation was $12.2 million.

10. Derivative Instruments:

In the normal course of business, the Company is exposed to the risk associated with exposure to fluctuations in interest rates on its variable rate debt. These fluctuations can increase the cost of financing, investing and operating the business. The Company has used derivative financial instruments to help manage this risk and reduce the impacts of these exposures and not for trading or other speculative purposes. All derivatives are recognized on the consolidated balance sheet at their fair value as either assets or liabilities. Changes in the fair value of contracts that qualify for hedge accounting treatment are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in net income (loss) in the statement of comprehensive income (loss) at the time earnings are affected by the hedged transaction. For other derivatives, changes in the fair value of the contract are recognized immediately in net income (loss) in the statement of comprehensive income (loss).

On September 4, 2013, the Company entered into a spot interest rate swap and two forward-starting interest rate swaps (collectively the “3Q 2013 Swaps”) each of which are used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The spot interest rate swap in place covers a notional amount of $100.0 million at a fixed interest rate of 1.145% and expires in September 2016. The forward-starting interest rate swaps in place cover an aggregate notional amount of $100.0 million, of which $50.0 million becomes effective in September 2014 at a fixed interest rate of 1.464% and will expire in September 2016 and $50.0 million becomes effective in September 2015 at a fixed interest rate of 1.942% and will expire in September 2016. The counterparty to each swap is a major financial institution. The 3Q 2013 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in net income (loss) in the consolidated statement of comprehensive income (loss).

On August 1, 2012, the Company entered into two interest rate swap agreements (“3Q 2012 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.00 million, with each $50.0 million contract having a fixed rate of 0.655% and expiring in June 2016. The counterparty to each swap is a major financial institution. The 3Q 2012 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in net income (loss) in the consolidated statement of comprehensive income (loss).

On September 23, 2011, the Company entered into two interest rate swap agreements (“3Q 2011 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.0 million, of which $50.0 million is at a fixed rate of 0.74% and will expire in September 2014 and $50.0 million is at a fixed rate of 1.0% and will expire in September 2015. The counterpart to each swap is a major financial institution. The 3Q 2011 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in net income (loss) in the consolidated statement of comprehensive income (loss).

 

F-31


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

On February 24, 2011, the Company entered into two interest rate swap agreements (“1Q 2011 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place covered an aggregate notional amount of $75.0 million, of which $25.0 million was at a fixed interest rate of 0.585% and expired in February 2012. The remaining swap covered an aggregate notional amount of $50.0 million at a fixed interest rate of 1.105% and expired in February 2013. The counterparty to each swap was a major financial institution. Neither swap met the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract were recognized in net income (loss) in the consolidated statement of comprehensive income (loss).

The following table presents the fair values of the Company’s derivative instruments included within the consolidated balance sheets as of December 28, 2013 and December 29, 2012:

 

           

Liability Derivatives

 

In thousands

  

Balance Sheet
Location

    

December 28,
2013

    

December 29,
2012

 

Derivatives not designated as hedges:

        

1Q 2011 swap—$50 million notional

     Accrued expenses       $ —         $ 149   

3Q 2011 swaps—$100 million notional

     Accrued expenses         792         1,314   

3Q 2012 swaps—$100 million notional

     Accrued expenses         280         750   

3Q 2013 swaps—$200 million notional

     Accrued expenses         1,880         —     
     

 

 

    

 

 

 

Total

      $ 2,952       $ 2,213   
     

 

 

    

 

 

 

The pre-tax effect of the Company’s derivative instruments on the consolidated statement of comprehensive income (loss) was as follows:

 

           

(Gain) Loss Recognized

 

In thousands

  

Location of
(Gain) Loss
Recognized

    

Fiscal Year
Ended
December 28,
2013

   

Fiscal Year
Ended
December 29,
2012

   

Fiscal Year
Ended
December 31,
2011

 

Derivatives not designated as hedges:

         

1Q 2011 swap—$50 million notional

     Interest Expense       $ (149   $ (154   $ 303   

1Q 2011 swap—$25 million notional

     Interest Expense         —          (12     12   

3Q 2011 swaps—$100 million notional

     Interest Expense         (522     764        551   

3Q 2012 swaps—$100 million notional

     Interest Expense         (470     750        —     

3Q 2013 swaps—$200 million notional

     Interest Expense         1,880        —          —     
     

 

 

   

 

 

   

 

 

 

Total

      $ 739      $ 1,348      $ 866   
     

 

 

   

 

 

   

 

 

 

11. Fair Value of Financial Instruments:

The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:

 

    Level 1—Inputs based on quoted prices in active markets for identical assets or liabilities.

 

    Level 2—Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

 

F-32


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

    Level 3—Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities, therefore requiring an entity to develop its own assumptions.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following table presents the fair value and hierarchy levels for the Company’s assets and liabilities, which are measured at fair value on a recurring basis as of December 28, 2013:

 

    

Fair Value Measurements

 

In thousands

  

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets:

           

Benefit trust assets

   $ 3,412       $ 3,412       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,412       $ 3,412       $ —         $ —     

Liabilities:

           

Derivative instruments

   $ 2,952       $ —         $ 2,952       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,952       $ —         $ 2,952       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

ASC 820—Fair Value Measurements and Disclosures defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines fair value of its financial assets and liabilities using the following methodologies:

 

    Benefit trust assets—These assets include money market and mutual funds that are the underlying for deferred compensation plan assets, held in a rabbi trust. The fair value of the assets is based on observable market prices quoted in readily accessible and observable markets.

 

    Derivative instruments—These instruments consist of interest rate swaps. The fair value is based upon quoted prices for similar instruments from a financial institution that is counterparty to the transaction.

The fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these instruments. The methodologies used by the Company to determine the fair value of its financial assets and liabilities on a recurring basis at December 28, 2013 are the same as those used at December 29, 2012. As a result, there have been no transfers between Level 1and Level 2 categories.

12. Employee Benefits:

The Company accounts for stock-based compensation awards in accordance with ASC 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. The Company’s stock-based compensation plans include programs for stock options and restricted stock units.

 

F-33


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Stock Options

In August 2010, the Company adopted a Management Equity Incentive Plan (the “2010 Plan”), pursuant to which the Company will grant options to selected employees and directors of the Company. The 2010 Plan, which includes both time-based and performance-based awards, was amended on February 15, 2013 by the board of directors of the Company to increase the maximum number of shares of common stock for which stock options may be granted under the 2010 Plan, from 48.6 million to 52.1 million. In addition to the increase in the maximum number of shares, on February 15, 2013 the board of directors of the Company approved the issuance of stock options to certain members of management. The approved options are for the purchase of up to 3.5 million shares of common stock, have an exercise price of $1.20 per share, and vest over a three to five-year vesting period. As of December 28, 2013, the Company has 2.5 million shares available for future incentive awards. See Note 18 regarding a recent amendment to the 2010 Plan and the issuance of stock options subsequent to the year ended December 28, 2013.

Changes in options outstanding under the 2010 Plan are as follows:

 

    

Options
Outstanding

   

Weighted
Average
Exercise Price

    

Options
Exercisable

    

Weighted
Average
Exercise Price

 

January 1, 2011

     44,448,000        1.00         —           —     

Granted

     1,900,000        1.00         n/a         n/a   

Cancelled

     (1,749,600     1.00         n/a         n/a   
  

 

 

   

 

 

    

 

 

    

 

 

 

December 31, 2011

     44,598,400      $ 1.00         8,710,401       $ 1.00   

Granted

     2,277,600        1.14         n/a         n/a   

Exercised

     (38,000     1.00         n/a         n/a   

Cancelled

     (156,400     1.00         n/a         n/a   
  

 

 

   

 

 

    

 

 

    

 

 

 

December 29, 2012

     46,681,600      $ 1.01         17,594,936       $ 1.00   

Granted

     3,500,002        1.20         n/a         n/a   

Exercised

     —          —           n/a         n/a   

Cancelled

     (665,099     1.01         n/a         n/a   
  

 

 

   

 

 

    

 

 

    

 

 

 

December 28, 2013

     49,516,503      $ 1.02         27,794,844       $ 1.01   
  

 

 

   

 

 

    

 

 

    

 

 

 

As of December 28, 2013, the aggregate intrinsic value of options outstanding and options exercisable was $23.7 million and $13.6 million, respectively. The aggregate intrinsic value is based on the estimated fair value of the Company’s common stock of $1.50 as of December 28, 2013. The total intrinsic value of options exercised during the year ended December 29, 2012 was less than $0.1 million. No options were exercised during the years ended December 28, 2013 and December 31, 2011. The total fair value of shares vested during the years ended December 28, 2013, December 29, 2012 and December 31, 2011 was $5.2 million, $4.1 million and $3.9 million, respectively.

Options granted under the 2010 Plan expire no later than 10 years from the date of grant and vest based on the passage of time and/or the achievement of certain performance targets in equal installments over three or five years. The weighted-average remaining contractual term for options outstanding and exercisable at December 28, 2013 was 6.9 years and 6.8 years, respectively. The fair value of each of the Company’s time-based stock option awards is expensed on a straight-line basis over the requisite service period, which is generally the three or five-year vesting period of the options. However, for options granted with performance target requirements, compensation expense is recognized when it is probable that both the performance target will be achieved and the requisite service period is satisfied. At December 28, 2013 unrecognized compensation expense related to non-vested options granted under the 2010 Plan totaled $7.6 million and the weighted-average period over which this expense will be recognized is 1.3 years.

 

F-34


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The weighted average fair value of the stock options granted during the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011 was $0.54, $0.50 and $0.44, respectively, using the Black-Scholes option pricing model. The following weighted average assumptions were used:

 

    

Fiscal Year Ended

 
    

December 28,
2013

   

December 29,
2012

   

December 31,
2011

 

Risk-free interest rate

     1.38     1.48     2.41

Dividend yield

     —          —          —     

Expected life

     6.0 years        6.5 years        6.4 years   

Volatility

     45.39     42.81     40.75

As the Company does not have sufficient historical volatility data for the Company’s own common stock, the stock price volatility utilized in the fair value calculation is based on the Company’s peer group in the industry in which it does business. The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Because the Company does not have relevant data available regarding the expected life of the award, the expected life of the award is derived from the Simplified Method as allowed under SAB Topic 14.

Restricted Stock Units (RSUs)

In October 2010, the Company adopted the Non-Employee Director Restricted Stock Plan (the “2010 RSU Plan”), pursuant to which the Company will grant restricted stock units to non-employee directors of the Company. Upon vesting, these awards entitle the holder to receive one share of common stock for each restricted stock unit granted. The 2010 RSU Plan provides that a maximum of 0.8 million shares of common stock of the Company may be granted to non-employee directors of the Company, of which 0.3 million remain available at December 28, 2013 for future incentive awards. See Note 18 regarding the issuance of RSU’s subsequent to the year ended December 28, 2013.

The following table summarizes RSU activity under the 2010 RSU Plan:

 

    

Number
of Shares

   

Weighted
Average
Exercise Price

 

Outstanding and unvested at January 1, 2011

     150,000      $ 1.00   

Granted

     100,000        1.00   

Vested

     (75,000     1.00   

Cancelled

     —          —     
  

 

 

   

 

 

 

Outstanding and unvested at December 31, 2011

     175,000      $ 1.00   

Granted

     219,298        1.14   

Vested

     (125,000     1.00   

Cancelled

     —          —     
  

 

 

   

 

 

 

Outstanding and unvested at December 29, 2012

     269,298      $ 1.11   

Granted

     —          —     

Vested

     (159,649     1.10   

Cancelled

     (21,930     1.14   
  

 

 

   

 

 

 

Outstanding and unvested at December 28, 2013

     87,719      $ 1.14   
  

 

 

   

 

 

 

The fair value of each of the RSU awards is measured as the grant-date price of the common stock and is expensed on a straight- line basis over the requisite service period, which is generally the two year vesting period. At December 28, 2013, the Company has recognized all compensation expense related to non-vested RSUs granted under the 2010 RSU Plan as all outstanding and unvested RSUs at December 28, 2013 will vest at the beginning of fiscal 2014.

 

F-35


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Compensation Expense

Stock-based compensation expense is included in selling general and administrative expenses within the accompanying consolidated statement of comprehensive income (loss). The amount of compensation expense recognized during a period is based on the portion of the granted awards that are expected to vest. Ultimately, the total expense recognized over the vesting period will equal the fair value of the awards as of the grant date that actually vest. The following table summarizes the compensation expense recognized:

 

    

Fiscal Year Ended

 

In thousands

  

December 28,
2013

    

December 29,
2012

    

December 31,
2011

 

Stock Options

   $ 2,524       $ 4,118       $ 3,999   

Restricted Stock Units

     110         231         115   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,634       $ 4,349       $ 4,114   
  

 

 

    

 

 

    

 

 

 

Deferred Compensation Plan

The Company has a deferred compensation plan for its top executives and divisional employees covered by the executive bonus plan to encourage each participant to promote the long-term interests of the Company. Each participant is allowed to defer portions of their annual salary as well as bonuses received into the plan. In addition to employee deferrals, the Company makes contributions on behalf of its top executives and certain of the divisional employees in varying amounts. The plan provides that an employee who becomes a participant on or before November 23, 1998, shall be fully vested in all amounts credited to such participant’s account. An employee who becomes a participant after November 23, 1998 shall be at all times fully vested in elective deferrals into such participant’s account and, as to contributions made by the Company, shall vest at a rate of twenty percent (20%) per year as long as such participant is an employee on January 1 of each year. The deferred compensation plan may be altered and amended by the Company’s Board of Directors.

At December 28, 2013, the Company’s obligation related to its deferred compensation plan was $3.4 million, recorded in the consolidated balance sheet within other non-current liabilities. At December 29, 2012, the Company’s obligation related to its deferred compensation plan was $2.7 million. The Company provides for funding of the obligation through a Rabbi Trust, which holds various investments, including mutual funds and money market funds. Amounts related to the Rabbi Trust were $3.4 million and $2.7 million at December 28, 2013 and December 29, 2012, respectively, and are recorded in the consolidated balance sheets within other non-current assets. Contributions made by the Company on behalf of its employees were less than $0.1 million during fiscal 2013, 2012 and 2011.

401(k) Plans

The Company maintains a qualified profit sharing and 401(k) plan for eligible employees. All accounts are funded based on employee contributions to the plan, with the limits of such contributions determined by the Board of Directors. Effective January 1, 2002, the benefit formula for all participants was determined to be a match of 50% of participant contributions, up to 6% of their compensation. The plan also provides for contributions in such amounts as the Board of Directors may annually determine for the profit sharing portion of the plan. Employees vest in the 401(k) match and profit sharing contribution over a 5-year period.

The Company match of participant contributions is recorded within selling, general and administrative expense. For the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, the Company contributed $2.8 million, $2.0 million and $2.1 million, respectively.

 

F-36


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13. Commitments and Contingencies:

Leases

The Company leases land, buildings, equipment and vehicles under various noncancellable operating leases, which expire between 2014 and 2027. Future minimum lease commitments, net of sublease income, at December 28, 2013 are as follows:

 

In thousands

      

2014

   $ 88,941   

2015

     79,087   

2016

     68,646   

2017

     60,772   

2018

     51,786   

Thereafter

     175,115   
  

 

 

 

Total

   $ 524,347   
  

 

 

 

The Company’s rent expense, net of sublease income, under these operating leases was $92.9 million in fiscal 2013, $75.1 million in fiscal 2012 and $59.1 million in fiscal 2011.

On March 27, 2002, the Company completed an agreement for the sale and leaseback of three of its owned facilities. On February 1, 2012, the Company reacquired one of the three facilities included in the 2002 sale-leaseback transaction. Accordingly, the original lease was amended to extend the lease term on the two remaining facilities by 5 years as well as to adjust the future lease payments over the remaining 15 years. The Company reports this transaction as a capital lease using direct financing lease accounting. As such, the Company has a capital lease obligation of $12.2 million at December 28, 2013. See Note 9 for more information on this capital lease. Obligations under the Company’s other capital leases are not material.

The Company remains liable as a guarantor on certain leases related to Winston Tire Company. As of December 28, 2013, the Company’s total obligations, as guarantor on these leases, are approximately $2.0 million extending over five years. However, the Company has secured assignments or sublease agreements for the vast majority of these commitments with contractually assigned or subleased rentals of approximately $1.8 million. A provision has been made for the net present value of the estimated shortfall.

Legal and Tax Proceedings

The Company is involved from time to time in various lawsuits, including class action lawsuits as well as various audits and reviews regarding its federal, state and local tax filings, arising out of the ordinary conduct of its business. Management does not expect that any of these matters will have a material adverse effect on the Company’s business or financial condition. As to tax filings, the Company believes that the various tax filings have been made in a timely fashion and in accordance with applicable federal, state, foregin and local tax code requirements. Additionally, the Company believes that it has adequately provided for any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves if events so dictate in accordance with FASB authoritative guidance. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in accordance with the accounting standards for income taxes. See Note 14 for further description of the accounting standards for income taxes and the related impacts.

 

F-37


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

14. Income Taxes:

The Company’s income (loss) from operations before income taxes was taxed within the following jurisdictions:

 

    

Fiscal Year Ended

 

In thousands

  

December 28,
2013

   

December 29,
2012

   

December 31,
2011

 

United States

   $ (11,168   $ (15,621   $ 4,474   

Foreign

     866        (4,403     —     
  

 

 

   

 

 

   

 

 

 

Total

     (10,302     (20,024     4,474   
  

 

 

   

 

 

   

 

 

 

The Company’s income tax provision (benefit) consisted of the following components:

 

    

Fiscal Year Ended

 

In thousands

  

December 28,
2013

   

December 29,
2012

   

December 31,
2011

 

Federal:

      

Current provision (benefit)

   $ 13,721      $ 4,986      $ 6,937   

Deferred provision (benefit)

     (17,989     (9,675     (5,679
  

 

 

   

 

 

   

 

 

 

Total

     (4,268     (4,689     1,258   

State:

      

Current provision (benefit)

     3,700        1,876        3,263   

Deferred provision (benefit)

     (3,604     (2,009     (57
  

 

 

   

 

 

   

 

 

 

Total

     96        (133     3,206   
  

 

 

   

 

 

   

 

 

 

Foreign:

      

Current provision (benefit)

     1,963        49        —     

Deferred provision (benefit)

     (1,773     (1,192     —     
  

 

 

   

 

 

   

 

 

 

Total

     190        (1,143     —     
  

 

 

   

 

 

   

 

 

 

Total provision (benefit)

   $ (3,982   $ (5,965   $ 4,464   
  

 

 

   

 

 

   

 

 

 

The provision (benefit) for income taxes differs from the amount of income taxes computed by applying the applicable U.S. statutory federal income tax rate of 35% to pretax income (loss), as a result of the following differences:

 

   

Fiscal Year Ended

 

In thousands

 

December 28,

2013

   

December 29,

2012

   

December 31,

2011

 

Income tax provision (benefit) computed at the federal statutory rate

  $ (3,666   $ (7,057   $ 1,516   

State income taxes, net of federal income tax benefit

    698        (86     607   

Benefit of lower foreign rate

    (84     395        —     

Increase in state effective tax rate

    —          —          2,167   

Permanent differences

    647        437        505   

Debt issuance costs

    (244     (221     (200

Non-deductible transaction costs

    566        430        —     

Tax settlements and other adjustments to uncertain tax positions (1)

    (1,542     (2     (376

Increase (decrease) in valuation allowance

    (281     132        245   

Other

    (76     7        —     
 

 

 

   

 

 

   

 

 

 

Income tax provision (benefit)

  $ (3,982   $ (5,965   $ 4,464   
 

 

 

   

 

 

   

 

 

 

 

F-38


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 (1) The amount for the year ended December 28, 2013 reflects the lapse of uncertain tax positions for three tax years due to the settlement of an IRS audit during the year.

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes and (b) operating loss and tax credit carry-forwards. As of December 28, 2013 and December 29, 2012, amounts related to deferred income taxes have been classified in the accompanying consolidated balance sheet as follows:

 

In thousands

  

December 28,

2013

   

December 29,

2012

 

Deferred tax assets (liabilities):

    

Current

   $ 15,719      $ 16,458   

Noncurrent

     (268,432     (283,009
  

 

 

   

 

 

 

Total

   $ (252,713   $ (266,551
  

 

 

   

 

 

 

The tax effects of the significant temporary differences that comprise deferred tax assets and liabilities at December 28, 2013 and December 29, 2012 for the Company are as follows:

 

In thousands

  

December 28,

2013

   

December 29,

2012

 

Deferred tax assets:

    

Accrued expenses and liabilities

   $ 8,686      $ 8,491   

Net operating loss carry-forwards

     1,232        2,062   

Employee benefits

     9,622        7,594   

Inventory cost capitalization

     6,359        7,633   

Other assets

     (925     954   

Other

     5,215        5,534   
  

 

 

   

 

 

 

Gross deferred tax assets

     30,189        32,268   

Less: Deferred tax valuation allowances

     (750     (762
  

 

 

   

 

 

 

Net deferred tax assets

     29,439        31,506   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Depreciation and amortization of intangibles

     (280,888     (296,929

Other

     (1,264     (1,128
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (282,152     (298,057
  

 

 

   

 

 

 

Net deferred tax assets (liabilities)

   $ (252,713   $ (266,551
  

 

 

   

 

 

 

As part of the acquisition of the Company by TPG, the Company generated substantial tax deductions relating to the exercise of stock options and payments made for transaction expenses. At December 28, 2013, the balance of this acquired non-current deferred tax asset is $5.9 million, which represents the anticipated tax benefits that the Company expects to achieve in future years from such deductions. The remaining net deferred tax liability primarily relates to the expected future tax liability associated with the non-deductible, identified, intangible assets that were recorded during the Merger less existing tax deductible intangibles, assuming an effective tax rate of 39.6%. It is the Company’s intention to indefinitely reinvest all undistributed earnings of non-U.S. subsidiaries. As these earnings are considered permanently reinvested, no provisions for U.S. federal or state income taxes are required under ASC 740-30. Determination of the amount of unrecognized U.S. federal and state deferred tax liabilities on these unremitted earnings is not practicable.

 

F-39


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Management regularly reviews the recoverability of deferred tax assets, and where appropriate, establishes a valuation allowance against them. The Company concluded that certain deferred tax assets related to certain capital losses do not meet the requirement of being more likely than not that they will be realized. As a result, the Company established a valuation allowance against them.

At December 28, 2013, the Company had $1.6 million of NOLs available for federal tax purposes as well as $14.2 million available for state tax purposes. The NOLs are available to offset taxable income in future years and expire between 2014 and 2029. While the Company has generated net losses during the last two years, the Company expects to generate taxable income in future years based on its long-term expected profitability as well as significant unfavorable tax adjustments related to non-deductible, identified intangible assets. Therefore, the Company expects to utilize these NOLs prior to their expiration date.

At December 28, 2013, the Company had unrecognized tax benefits of $0.7 million, of which $0.4 million is included within accrued expenses and $0.3 million is included within other liabilities within the accompanying consolidated balance sheet. The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate is $0.2 million as of December 28, 2013. In addition, $0.5 million related to temporary timing differences.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

In thousands

  

December 28,
2013

   

December 29,
2012

    

December 31,
2011

 

Beginning balance

   $ 1,953      $ 1,815       $ 2,181   

(Reductions) additions based on tax positions related to the current year, net

     (688     138         (366

Settlements

     —          —           —     

Reductions for lapse in statute of limitations

     (559     —           —     
  

 

 

   

 

 

    

 

 

 

Ending balance

   $ 706      $ 1,953       $ 1,815   
  

 

 

   

 

 

    

 

 

 

During the next 12 months, management does not believe it is reasonably possible that there will be a significant change in the Company’s uncertain tax benefits.

While the Company believes that it has adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than the Company’s accrued position. Accordingly, additional provisions of federal and state-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved.

The Company files federal income tax returns, as well as multiple state jurisdiction tax returns. The tax years 2010—2012 remain open to examination by the Internal Revenue Service. The tax years 2010—2012 remain open to examination by other major taxing jurisdictions to which the Company is subject (primarily Canada and other state and local jurisdictions).

In September 2013, the Internal Revenue Service released final Tangible Property Regulations (the “Final Regulations”). The Final Regulations provide guidance on applying Section 263(a) of the Code to amounts paid to acquire, produce or improve tangible property, as well as rules for materials and supplies (Code Section 162). These regulations contain certain changes from the temporary and proposed tangible property regulations that were issued on December 27, 2011. The Final Regulations are generally effective for taxable years beginning on or after January 1, 2014. In addition, taxpayers are permitted to early adopt the Final Regulations for taxable years beginning on or after January 1, 2012. The Company does not expect the Final Regulations to have a material effect on its results of operations. The Company is currently evaluating the impact on its financial condition.

 

F-40


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

15. Stockholders’ Equity

See Note 18 regarding recent equity contribution received from TPG and certain co-investors.

In connection with the Merger on May 28, 2010, TPG and certain co-investors contributed $675.4 million through the purchase of the Company’s common stock. Subsequent to May 28, 2010, certain members of the Company’s management and certain board members purchased common stock in the Company. At December 28, 2013 and December 29, 2012, these amounts totaled $8.7 million. Accordingly, the Company recorded the basis in these shares in additional paid-in capital.

On November 30, 2012, TPG and certain co-investors contributed $60.0 million through the purchase of 50.0 million shares of the Company’s common stock. The proceeds from this equity contribution were used to fund a portion of the purchase price for the acquisition of TriCan. Accordingly, the Company recorded the basis in these shares in additional paid-in capital. See Note 3 for additional information on the TriCan acquisition.

Common Stock

The Company is authorized to issue up to 2,000,000,000 shares of common stock, par value $0.01 per share. At December 28, 2013 and December 29, 2012, 734,168,402 shares of common stock were issued and outstanding.

Accumulated Other Comprehensive Income (Loss)

The Company maintains a deferred compensation plan for certain eligible employees, in which the obligation is funded through a Rabbi Trust. Unrealized gains and losses on Rabbi Trust assets are recorded net of tax in accumulated other comprehensive income (loss) and amounted to a gain of $0.2 and $0.1 million at December 28, 2013 and December 29, 2012, respectively.

In addition, gains and losses resulting from the translation of foreign currency are recorded in accumulated other comprehensive income (loss) and amounted to a loss of $9.1 million and $0.3 million at December 28, 2013 and December 29, 2012, respectively.

16. Related Party Transaction:

Upon the closing of the Merger, the Company entered into a transaction and monitoring fee letter agreement with TPG pursuant to which the Company retained TPG to provide certain management, consulting, and financial services to the Company, when and as requested by the Company. The Company agreed to pay TPG a monitoring fee equal to 2.0% of adjusted earnings before interest, taxes, depreciation, amortization and other adjustments (“Adjusted EBITDA”). The monitoring fee is payable in quarterly installments in arrears at the end of each fiscal quarter. In the event of an initial public offering, sale of all or substantially all of the Company’s assets or a change of control transaction, TPG is entitled to receive, on its request and in lieu of any continuing payment of the monitoring fee, an aggregate termination fee of $12.5 million. For the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, the Company recorded $5.8 million, $7.4 million and $4.6 million, respectively in expense related to the monitoring fee for fiscal years 2013, 2012 and 2011 which is included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income (loss).

 

F-41


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

17. Geographic Area Information:

The following table presents net sales and long-lived assets by geographic area. Net sales by country were determined based on the location of the selling subsidiary. Long-lived assets consisted of property and equipment, net

 

    

Fiscal Year Ended

 

In thousands

  

December 28,

2013

    

December 29,

2012

    

December 31,

2011

 

Net sales to external customers:

        

United States

   $ 3,499,770         3,443,781         3,050,240   

Canada

     339,499         12,083         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,839,269       $ 3,455,864       $ 3,050,240   
  

 

 

    

 

 

    

 

 

 

 

    

Fiscal Year Ended

 

In thousands

  

December 28,
2013

    

December 29,
2012

 

Long-lived assets:

     

United States

   $ 141,055         128,724   

Canada

     6,801         1,158   
  

 

 

    

 

 

 

Total

   $ 147,856       $ 129,882   
  

 

 

    

 

 

 

18. Earnings per share:

Basic earnings per share is calculated using the Company’s weighted-average outstanding common shares. Diluted earnings per share is calculated using the Company’s weighted-average outstanding common shares including the dilutive effect of stock options and restricted stock units as determined under the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share for the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011:

 

In thousands, except per share data

  

Fiscal
Year
Ended
December
28, 2013

   

Fiscal
Year
Ended
December
29, 2012

   

Fiscal
Year
Ended
December
31, 2011

 

Basic earnings per share calculation:

      

Net income (loss)

   $ (6,376   $ (14,201   $ (132

Weighted average common shares outstanding

     734,168        688,300        684,172   

Net income (loss) per share—basic

   $ (0.01   $ (0.02   $ (0.00
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share calculation:

      

Net income (loss)

   $ (6,376   $ (14,201   $ (132

Weighted average common shares outstanding

     734,168        688,300        684,172   

Effect of dilutive securities:

      

Stock Options (1)

     —          —          —     

Restricted Stock Units (2)

     —          —          —     

Diluted weighted average common shares outstanding

     734,168        688,300        684,172   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share—diluted

   $ (0.01   $ (0.02   $ (0.00
  

 

 

   

 

 

   

 

 

 

 

F-42


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

(1) Options to purchase 49,517, 46,682 and 44,598 shares of common stock during the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

 

(2) Shares of common stock issuable upon the vesting of restricted stock units of 447, 469 and 250 during the fiscal years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively, were outstanding but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

19. Subsequent Event:

We have evaluated subsequent events for recognition through March 7, 2014, the original issuance date of our subsidiary American Tire Distributors Holdings, Inc.’s financial statements. Subsequent events have been evaluated for disclosure through June 16, 2014, the date of reissuance.

Kipling Acquisition

On January 17, 2014, TriCan entered into an Asset Purchase Agreement with Kipling Tire Co. LTD., a corporation governed by the laws of the Province of Ontario (“Kipling”), pursuant to which TriCan agreed to acquire the wholesale distribution business of Kipling. Kipling has operated as a retail-wholesale business since 1982. Kipling’s wholesale business distributes tires from its Etobicoke facilities to approximately 400 retail customers in Southern Ontario. Kipling’s retail operations were not acquired by TriCan and will continue to operate under its current ownership. This acquisition will further strengthen TriCan’s presence in the Southern Ontario region of Canada. The acquisition was completed on January 17, 2014 and was funded through the Company’s Canadian ABL Facility. The Company does not believe the acquisition of Kipling is a material transaction subject to the disclosures and supplemental pro forma information required by ASC 805—Business Combinations. As a result, the information is not presented.

Hercules Acquisition

On January 31, 2014, pursuant to an Agreement and Plan of Merger, dated January 24, 2014 (the “Merger Agreement”), among ATD Merger Sub II LLC (“Merger Sub”), an indirect wholly-owned subsidiary of Holdings, ATDI, Hercules Tire Holdings LLC, a Delaware limited liability company (“Hercules Holdings”), the equityholders of Hercules Holdings (each a “Seller” and, collectively the “Sellers”) and the Sellers’ Representative, Merger Sub merged with and into Hercules Holdings, with Hercules Holdings being the surviving entity (the “Merger”). As a result of the Merger, Hercules Holdings became an indirect 100% owned subsidiary of Holdings. Hercules Holdings owns all of the capital stock of The Hercules Tire & Rubber Company, a Connecticut corporation (“Hercules”). Hercules Holdings has no material assets or operations other than its ownership of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing and selling replacement tires for passenger cars, trucks, and certain off road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. Hercules operated 15 distribution centers in the United States, 6 distribution centers in Canada and one warehouse in northern China. Hercules also markets the Hercules brand, which is one of the most sought-after proprietary tire brands in the industry. The acquisition of Hercules will strengthen the Company’s presence in major markets such as California, Texas and Florida in addition to increasing its presence in Canada. Additionally, Hercules’ strong logistics and sourcing capabilities, including a long-standing presence in China, will also allow the Company to capitalize on the growing import market, as well as, providing the ability to expand the international sales of the

 

F-43


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Hercules brand. Finally, this acquisition, will allow the Company to be a brand marketer of the Hercules brand which today has a 2% market share of the passenger and light truck market in North America and a 3% share of highway truck tires in North America.

The acquisition closed for an aggregate purchase price of approximately $319.3 million (the “Hercules Closing Purchase Price”), consisting of net cash consideration of $310.4 million, contingent consideration of $3.5 million and non-cash consideration for debt assumed of $5.4 million. The Hercules Closing Purchase Price includes an estimate for initial working capital adjustments. The Merger Agreement provides for the payment of up to $6.5 million in additional consideration contingent upon the occurrence of certain post-closing events (to the extent payable, the “Hercules Additional Purchase Price” and, collectively with the Hercules Closing Purchase Price, the “Hercules Purchase Price”). The cash consideration paid for the Merger was funded by a combination of the issuance of additional Senior Subordinated Notes, as more fully described below, an equity contribution of $50.0 million from Holdings’ indirect parent, and borrowings under the Company’s credit agreement. The Hercules Closing Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

The Merger was recorded during the quarter ended April 5, 2014 using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As a result, the Hercules Closing Purchase Price has been preliminarily 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 preliminary allocation of the Hercules Closing Purchase Price is as follows:

 

In thousands

      

Cash

   $ 12,187   

Accounts receivable

     61,610   

Inventory

     156,652   

Other current assets

     5,064   

Property and equipment

     29,970   

Intangible assets

     155,704   
  

 

 

 

Total assets acquired

     421,187   

Accounts payable

     95,616   

Accrued and other liabilities

     6,154   

Deferred income taxes

     69,872   

Other liabilities

     2,325   
  

 

 

 

Total liabilities assumed

     173,967   

Net assets acquired

     247,220   

Goodwill

     72,082   
  

 

 

 

Purchase price

   $ 319,302   
  

 

 

 

The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill for the Company’s quarter ended April 5, 2014, and amounted to $72.1 million. The premium in the purchase price for the Merger primarily relates to growth opportunities associated with the Hercules brand and the anticipated realization of operational and cost synergies.

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. Inventory was recorded at fair value, based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.

 

F-44


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company recorded intangible assets during the quarter ended April 5, 2014 based on their estimated fair value which consisted of the following:

 

In thousands

  

Estimated

Useful

Life

    

Estimated

Fair

Value

 

Customer list

     18 years       $ 147,216   

Trade names

     15 years         8,488   
     

 

 

 

Total

      $ 155,704   
     

 

 

 

The Company determined the fair value of the intangible assets acquired based on a third-party valuation report. The independent third party valuation firm utilized the excess earnings method, a derivation of the income approach, to determine the fair value of the customer list intangible asset. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of 18 years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Company’s historical experience in renewing and extending similar customer relationships and future expectations for renewing and extending similar existing customer relationships and represents the number of years over which the Company expects the customer relationships to economically contribute to the business. This estimate is based on the year in which 95.0% of the annual discounted cash flows were captured in the value of the customer list intangible asset.

Terry’s Tire Acquisition

On March 28, 2014, ATDI completed its acquisition of Terry’s Tire Town Holdings, Inc., an Ohio corporation (“Terry’s Tire” and such acquisition, the “Terry’s Tire Acquisition”). The Terry’s Tire Acquisition was completed pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”) entered into on February 17, 2014 between ATDI and TTT Holdings, Inc., a Delaware corporation. Terry’s Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the internet. Terry’s Tire operated 10 distribution centers spanning from Virginia to Maine and in Ohio. The acquisition of Terry’s Tire will enhance the Company’s market position in these areas and aligns very well with their distribution centers, especially the new distribution centers opened by the Company over the past two years in the Northeast and Ohio.

The Terry’s Tire acquisition closed for an aggregate purchase price of approximately $378.1 million (the “Terry’s Tire Purchase Price”), consisting of cash consideration of approximately $363.4 million, contingent consideration of $12.5 million and non-cash consideration for debt assumed of $2.2 million. The cash consideration paid for the Terry’s Tire Acquisition included estimated working capital adjustments and a portion of consideration contingent on certain events achieved prior to closing. The Terry’s Tire Purchase Price was funded by a combination of borrowings under a new senior secured term loan facility, as more fully described below, and borrowings of approximately $72.5 million under the Company’s existing U.S. ABL Facility. The Terry’s Tire Purchase Price is subject to certain post-closing adjustments, including but not limited to, working capital adjustments. Of the $363.4 million in cash consideration, $41.4 million is held in escrow pending the resolution of the post-closing adjustments and other escrow release conditions in accordance with the terms of the Stock Purchase Agreement and escrow agreement.

 

F-45


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The acquisition of Terry’s Tire was recorded during the quarter ended April 5, 2014 using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As of the date of these financial statements, the Company is in the process of finalizing intangible asset valuations as well as continuing to evaluate the initial purchase price allocation. Accordingly, management has used its best estimates in the allocation of the purchase price to assets acquired and liabilities assumed based on the estimated preliminary fair market value of such assets and liabilities at the date of acquisition. As additional information is obtained about these assets and liabilities within the measurement period, the Company expects to refine its estimates of fair value to allocate the purchase price more accurately. The preliminary allocation of the Terry’s Tire Purchase Price is as follows:

 

In thousands

      

Cash

   $ 7,238   

Accounts receivable

     42,515   

Inventory

     101,328   

Assets held for sale

     3,321   

Other current assets

     2,203   

Deferred income taxes

     4,947   

Property and equipment

     7,072   

Intangible asset

     201,000   

Other assets

     541   
  

 

 

 

Total assets acquired

     370,165   

Accounts payable

     78,488   

Accrued and other liabilities

     3,470   

Liabilities held for sale

     436   
  

 

 

 

Total liabilities assumed

     82,394   

Net assets acquired

     287,771   

Goodwill

     90,280   
  

 

 

 

Purchase price

   $ 378,051   
  

 

 

 

The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill for the Company’s quarter ended April 5, 2014, and amounted to $90.3 million. The premium in the purchase price paid for the acquisition of Terry’s Tire primarily reflects the anticipated realization of operational and cost synergies.

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. Inventory was recorded at fair value, based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.

During the quarter ended April 5, 2014, the Company recorded a finite-lived customer list intangible asset based on its estimated fair value of $201.0 million. The Company determined the fair value of the intangible assets acquired based on a third-party valuation report. The independent third party valuation firm utilized the excess earnings method, a derivation of the income approach, to determine the fair value of the customer list intangible asset. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of 18 years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the

 

F-46


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Company’s historical experience in renewing and extending similar customer relationships and future expectations for renewing and extending similar existing customer relationships and represents the number of years over which the Company expects the customer relationships to economically contribute to the business. This estimate is based on the year in which 95.0% of the annual discounted cash flows were captured in the value of the customer list intangible asset. The estimated useful life of the customer list intangible asset is based on the Company’s internal estimates to be finalized when the third-party intangible asset valuations are completed.

As part of the acquisition of Terry’s Tire, the Company acquired Terry’s Tire’s commercial and retread businesses. As the Company’s core business does not include commercial and retread operations, the Company decided that it would divest of these businesses. As it is management’s intention to divest the commercial and retread businesses during fiscal 2014 and as all held for sale criteria has been met, the related assets and liabilities of the commercial and retread businesses were classified as held for sale at the acquisition date. As part of the preliminary purchase price allocation, the estimated fair value of the assets held for sale was $3.3 million, including $2.5 million in current assets and net property and equipment of $0.8 million. The estimated fair value of the liabilities held for sale was $0.4 million of which the entire amount related to current liabilities. As additional information is obtained about these assets and liabilities within the measurement period, the Company expects to refine its estimate of the fair values related to these assets and liabilities.

Amendment of Senior Subordinated Indenture

On January 31, 2014, ATDI entered into the Sixth Supplemental Indenture (the “Sixth Supplemental Indenture”) with The Bank of New York Mellon Trust company, N.A., as trustee (the “Trustee”) and the guarantors party thereto (the “Guarantors”) to the Subordinated Notes Indenture, dated as of May 28, 2010, among ATDI, the guarantors party thereto and the Trustee (as amended and supplemented from time to time, the “Subordinated Indenture”) relating to the $200.0 million aggregate principal amount of 11.50% Senior Subordinated Notes due 2018 of ATDI initially issued on May 28, 2010 (the “Initial Subordinated Notes”). ATDI received consents from a 100% of the holders of the Initial Subordinated Notes and accepted such consents. The amendments included in the Sixth Supplemental Indenture provide for ATDI’s ability to incur additional senior debt under the Subordinated Indenture under certain circumstances.

Subordinated Notes Offering

In connection with the consummation of the Hercules Merger, on January 31, 2014, ATDI completed the sale to certain purchasers of $225.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the “Additional Subordinated Notes”). The net proceeds to ATDI from the sale of the Additional Subordinated Notes was approximately $221.1 million.

The Additional Subordinated Notes were issued pursuant to the Seventh Supplemental Indenture, dated as of January 31, 2014, among ATDI, the Guarantors and the Trustee (the “Seventh Supplemental Indenture”) to the Senior Subordinated Indenture. The Additional Subordinated Notes have identical terms to the Initial Subordinated Notes, except the Additional Subordinated Notes will accrue interest from January 31, 2014. The Additional Subordinated Notes and the Initial Subordinated Notes will be treated as a single class of securities for all purposes under the Subordinated Indenture. However, the Additional Subordinated Notes will be issued with separate CUSIP numbers from the Initial Subordinated Notes and will not be fungible for U.S. federal income tax purposes with the Initial Subordinated Notes.

Interest on the Additional Subordinated Notes will be paid semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2014. The Additional Subordinated Notes will mature on June 1, 2018. The Additional 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 rate 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 on June 1, 2015 or thereafter.

 

F-47


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Credit Agreement Amendment

Also in connection with the Hercules Merger, on January 31, 2014, the Company entered into the Second Amendment to Sixth Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment (1) increases the aggregate principal amount available under the Canadian ABL Facility from $100.0 million to $125.0 million, subject to the Canadian borrowing base, (2) increases the aggregate principal amount available under the U.S. first-in last-out facility (the “U.S. FILO Facility”) from $60.0 million to $80.0 million, subject to the borrowing base specific thereto as modified by the Second Amendment (3) extends the maturity date for the U.S. FILO Facility to 36 months from January 31, 2014, (4) increases the inventory advance rate under the U.S. FILO Facility borrowing base from 7.5% to 10.0% of net orderly liquidation value, and (5) provides the Canadian Borrowers under the agreement with a new first-in last-out facility (the “Canadian FILO Facility”) in an aggregate principal amount of up to $15.0 million, subject to a borrowing base specific thereto. The Canadian FILO borrowing base at any time equals the sum (subject to certain reserves and other adjustments) of (i) 5% of eligible accounts receivable of the Canadian loan parties, as applicable; plus (ii) 10.0% of the net orderly liquidation value of the eligible tire and non-tire inventory of the Canadian loan parties, as applicable. The maturity date for the Canadian FILO Facility is the date that is 36 months from January 31, 2014. Hercules, and certain of its subsidiaries, was made a party to, and its equity interests were pledged as collateral under, the Sixth Amended and Restated Credit Agreement upon closing of the Merger. The Second Amendment also made certain other changes to the Sixth Amended and Restated Credit Agreement. The Second Amendment did not change the maturity dates of the U.S. ABL Facility or the Canadian ABL Facility or the material terms under which either facility may be accelerated or the U.S. ABL Facility may be increased. Approximately $40.4 million, net of cash received in the Merger, was drawn under the U.S. ABL Facility to finance a portion of the Hercules Closing Purchase Price. Immediately following the closing of the Merger, $5.6 million was drawn on the Canadian FILO Facility with a corresponding decrease to the Canadian ABL Facility.

Senior Secured Term Loan

In connection with the acquisition of Terry’s Tire, on March 28, 2014, ATDI entered into a credit agreement that provided for a senior secured term loan facility in the aggregate principal amount of $300.0 million (the “Term Loan”). The Term Loan was issued at a discount of 0.25% which, combined with certain debt issuance costs paid at closing, resulted in net proceeds of approximately $290.9 million. The Term Loan will accrete based on an effective interest rate of 6% to an aggregate accreted value of $300.0 million, the full principal amount at maturity. The net proceeds from the Term Loan were used to finance a portion of the Terry’s Tire Purchase Price. The maturity date for the Term Loan is June 1, 2018.

Borrowings under the Term Loan bear interest at a rate per annum equal to, at the Company’s option, initially, either (a) a Eurodollar rate determined by reference to LIBOR, plus an applicable margin of 4.75% or (b) a base rate determined by reference to the highest of (1) the federal funds rate plus  12 of 1%, (2) the prime commercial lending rate published by the Bank of America, N.A. as its “prime rate” for commercial loans and (3) the one month Eurodollar rate plus 1.0%, plus an applicable margin of 3.75%. The Eurodollar rate is subject to an interest rate floor of 1.0%. The applicable margins under the Term Loan are subject to a step down based on a consolidated net leverage ratio, as defined in the agreement.

All obligations under the Term Loan are unconditionally guaranteed by Holdings and, subject to certain customary exceptions, all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material subsidiaries. Obligations under the Term Loan are secured by a first-priority lien on substantially all property, assets and capital stock of ATDI except accounts receivable, inventory and related intangible assets and a second-priority lien on all accounts receivable and related intangible assets.

 

F-48


ATD CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Term Loan contains customary covenants, including covenants that restrict the Company’s ability to incur additional debt, create 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, change the nature of the Company’s business or change the Company’s fiscal year.

Subject to certain exceptions, the Company is required to repay the Term Loan in certain circumstances, including with 50% (which percentage will be reduced to 25% and 0%, as applicable, subject to attaining certain senior secured net leverage ratios) of its annual excess cash flow, as defined in the Term Loan agreement. The Term Loan also contains repayments provision related to non-ordinary course asset or property sales when certain conditions are met, and related to the incurrence of debt that is not permitted under the agreement.

Amendment of Management Equity Incentive Plan and Issuance of Stock Options and Restricted Stock Units

On April 28, 2014, the board of directors of the Company amended the Management Equity Incentive Plan, or the 2010 Plan, to increase the maximum number of shares of common stock of the Company for which stock options may be granted under the 2010 Plan from 52.1 million to 54.4 million. In addition to the increase in the maximum number of shares, on April 28, 2014 the board of directors of the Company approved the issuance of stock options to certain members of management and the issuance of restricted stock units to the non-employee directors of the Company. The approved stock options are for the purchase of up to 4.5 million shares of common stock, have an exercise price of $1.50 per share and vest over a two-year vesting period. The approved restricted stock units are for the issuance of up to 0.1 million shares of common stock, have a grant date fair value of $1.50 per share and vest over a two-year vesting period.

On June 16, 2014, the Company amended its credit agreement relating to its senior secured term loan facility to borrow an additional $340 million on the same terms as our existing Term Loan. Pursuant to the amendment, until August 15, 2014, the Company also has the right to borrow up to an additional $80 million on the same terms as its existing Term Loan. The proceeds from these additional borrowings were or will be used to redeem all amounts outstanding under the Company’s Senior Secured Notes and pay related fees and expenses, as well as for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions.

 

F-49


SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

For the Fiscal Years ended December 28, 2013, December 29, 2012 and December 31, 2011

 

           

Additions

                    

In thousands

  

Balance
Beginning
of Year

    

Charged

to Costs
and Expenses

   

Charged
to Other
Accounts

    

Deductions

   

Currency
Translation

   

Balance
End of Year

 

2013

              

Allowance for doubtful accounts

   $ 950       $ 1,795      $ —         $ (491 ) (1)    $ (85   $ 2,169   

Acquisition exit cost reserves (2)

     1,839         636        —           (1,094     (171     1,210   

Inventory reserves

     410         611        —           (616     (262     143   

Sales returns and allowances

     2,167         1,485        —           (753     (55     2,844   

Valuation allowance on deferred tax assets

     762         —          —           (12     —          750   

2012

              

Allowance for doubtful accounts

   $ 696       $ 1,996      $ —         $ (1,740 ) (1)    $ (2   $ 950   

Acquisition exit cost reserves (2)

     3,865         528        —           (2,549     (5     1,839   

Inventory reserves

     514         419        —           (502     (21     410   

Sales returns and allowances

     1,982         2,224        —           (2,036     (3     2,167   

Valuation allowance on deferred tax assets

     840         —          —           (78     —          762   

2011

              

Allowance for doubtful accounts

   $ 340       $ 1,911      $ —         $ (1,555 ) (1)    $ —        $ 696   

Acquisition exit cost reserves (2)

     6,975         (498     —           (2,612     —          3,865   

Inventory reserves

     192         480        —           (158     —          514   

Sales returns and allowances

     29         2,996        —           (1,043     —          1,982   

Valuation allowance on deferred tax assets

     596         244        —           —          —          840   

 

(1) Accounts written off during the year, net of recoveries.
(2) Amounts represent facilities closing cost of acquired distribution centers due to existing distribution centers being located in close proximity to the acquired distribution facilities.

 

F-50


ATD CORPORATION

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INDEX

 

    

Page

 

Condensed Consolidated Balance Sheets—As of July 5, 2014 and December 28, 2013

     F-52   

Condensed Consolidated Statements of Comprehensive Income (Loss)—For the quarters and six months ended July 5, 2014 and June 29, 2013

     F-53   

Condensed Consolidated Statement of Stockholders’ Equity —For the six months ended July  5, 2014

     F-54   

Condensed Consolidated Statements of Cash Flows—For the six months ended July  5, 2014 and June 29, 2013

     F-55   

Notes to Condensed Consolidated Financial Statements

     F-56 – F-82   

 

F-51


ATD Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

 

In thousands, except share amounts

  

July 5,

2014

   

December 28,

2013

 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 27,533      $ 35,760   

Accounts receivable, net

     457,560        305,247   

Inventories

     1,109,606        772,733   

Income tax receivable

     27,113        369   

Deferred income taxes

     18,923        15,719   

Assets held for sale

     5,529        910   

Other current assets

     35,110        19,684   
  

 

 

   

 

 

 

Total current assets

     1,681,374        1,150,422   
  

 

 

   

 

 

 

Property and equipment, net

     202,756        147,856   

Goodwill

     706,134        504,333   

Other intangible assets, net

     1,122,374        713,294   

Other assets

     35,328        25,750   
  

 

 

   

 

 

 

Total assets

   $ 3,747,966      $ 2,541,655   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 739,706      $ 563,691   

Accrued expenses

     71,597        45,116   

Liabilities held for sale

     426        —     

Current maturities of long-term debt

     10,120        564   
  

 

 

   

 

 

 

Total current liabilities

     821,849        609,371   
  

 

 

   

 

 

 

Long-term debt

     1,934,177        966,436   

Deferred income taxes

     319,222        268,432   

Other liabilities

     23,659        17,362   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, par value $.01 per share; 2,000,000,000 shares authorized; 768,082,437 and 734,168,402 shares, respectively, issued and outstanding

     7,681        7,342   

Additional paid-in capital

     803,278        751,630   

Accumulated earnings (deficit)

     (153,378     (69,818

Accumulated other comprehensive income (loss)

     (8,522     (9,100
  

 

 

   

 

 

 

Total stockholders’ equity

     649,059        680,054   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,747,966      $ 2,541,655   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

F-52


ATD Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

In thousands, except per share amounts

  

Quarter
Ended
July 5,

2014

   

Quarter
Ended
June 29,
2013

   

Six Months
Ended
July 5,

2014

   

Six Months
Ended
June 29,
2013

 

Net sales

   $ 1,267,582      $ 955,075      $ 2,343,051      $ 1,795,053   

Cost of goods sold, excluding depreciation included in selling, general and administrative expenses below

     1,063,376        802,492        1,980,690        1,510,648   

Selling, general and administrative expenses

     204,003        137,312        381,313        272,825   

Management fees

     14,967        1,255        15,575        2,246   

Transaction expenses

     15,490        2,266        20,176        3,289   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (30,254     11,750        (54,703     6,045   

Other income (expense):

        

Interest expense

     (32,223     (17,387     (56,622     (34,627

Loss on extinguishment of debt

     (17,113     —          (17,113     —     

Other, net

     3,752        (1,935     1,950        (2,908
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (75,838     (7,572     (126,488     (31,490

Income tax provision (benefit)

     (26,370     (1,735     (42,976     (9,362
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (49,468     (5,837     (83,512     (22,128

Income (loss) from discontinued operations, net of tax

     (48     —          (48     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (49,516   $ (5,837   $ (83,560   $ (22,128
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

        

Basic

   $ (0.06   $ (0.01   $ (0.11   $ (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.06   $ (0.01   $ (0.11   $ (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Unrealized gain (loss) on rabbi trust assets, net of tax tax of $40, $34, $37, $77, respectively

   $ 45      $ 52      $ 57      $ 119   

Foreign currency translation

     5,762        (5,431     521        (7,242
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     5,807        (5,379     578        (7,123
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (43,709   $ (11,216   $ (82,982   $ (29,251
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

F-53


ATD Corporation

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

In thousands, except share amounts

 

Total

Stockholders’

Equity

         

Additional

Paid-In

Capital

   

Accumulated

Earnings

(Deficit)

   

Accumulated

Other

Comprehensive

(Loss) Income

 
         
   

Common Stock

       
    Shares     Amount        

Balance, December 28, 2013

  $ 680,054        734,168,402      $ 7,342      $ 751,630      $ (69,818   $ (9,100

Net income (loss)

    (83,560     —          —          —          (83,560     —     

Unrealized gain (loss) on rabbi trust assets, net of tax

    57        —          —          —          —          57   

Foreign currency translation

    521        —          —          —          —          521   

Equity contribution

    50,000        33,333,334        333        49,667       

Issuance of restricted stock

    —          133,333        1        (1    

Correction of previously issued restricted stock

    —          447,368        5        (5    

Stock-based compensation expense

    1,987        —          —          1,987        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, July 5, 2014

  $ 649,059        768,082,437      $ 7,681      $ 803,278      $ (153,378   $ (8,522
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

F-54


ATD Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

In thousands

  

Six Months
Ended

July 5,

2014

   

Six Months
Ended
June 29,
2013

 

Cash flows from operating activities:

    

Net income (loss)

   $ (83,560   $ (22,128

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Income (loss) from discontinued operations, net of tax

     48        —     

Loss on extinguishment of debt

     17,113        —     

Call premium and interest paid on redemption of Senior Secured Notes

     (16,303     —     

Depreciation and amortization

     66,013        51,140   

Amortization of other assets

     2,959        2,131   

Provision (benefit) for deferred income taxes

     (12,357     (12,632

Non-cash inventory step-up amortization

     31,640        4,907   

Provision for doubtful accounts

     1,207        1,223   

Stock-based compensation

     1,987        1,452   

Other, net

     1,500        (868

Change in operating assets and liabilities (excluding impact from acquisitions):

    

Accounts receivable

     (38,303     4,976   

Inventories

     (100,057     (11,127

Income tax receivable

     (26,652     644   

Other current assets

     (8,141     2,931   

Accounts payable and accrued expenses

     (8,974     6,364   

Other, net

     4,335        20   
  

 

 

   

 

 

 

Net cash provided by (used in) continuing operating activities

     (167,545     29,033   
  

 

 

   

 

 

 

Net cash provided by (used in) discontinued operations

     350        —     
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (167,195     29,033   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions, net of cash acquired

     (822,166     (64,844

Purchase of property and equipment

     (34,241     (23,848

Purchase of assets held for sale

     (28     (875

Proceeds from sale of property and equipment

     228        64   

Proceeds from sale of assets held for sale

     784        971   
  

 

 

   

 

 

 

Net cash provided by (used in) continuing investing activities

     (855,423     (88,532
  

 

 

   

 

 

 

Net cash provided by (used in) discontinued investing activities

     —          —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (855,423     (88,532
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings from revolving credit facility

     2,532,401        1,476,178   

Repayments of revolving credit facility

     (2,252,811     (1,404,157

Outstanding checks

     9,208        (7,765

Payments of deferred financing costs

     (15,796     (1,067

Payments of other long-term debt

     (3,057     (189

Payment for Senior Secured Notes redemption

     (246,900     —     

Proceeds from issuance of long-term debt

     940,313        —     

Equity contribution

     50,000        —     
  

 

 

   

 

 

 

Net cash provided by (used in) continuing financing activities

     1,013,358        63,000   
  

 

 

   

 

 

 

Net cash provided by (used in) discontinued financing activities

     —          —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,013,358        63,000   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     1,033        (2,548

Net increase (decrease) in cash and cash equivalents

     (8,227     953   

Cash and cash equivalents—beginning of period

     35,760        34,700   
  

 

 

   

 

 

 

Cash and cash equivalents—end of period

   $ 27,533      $ 35,653   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash payments for interest

   $ 58,025      $ 33,036   

Cash payments (receipts) for taxes, net

   $ 3,817      $ 2,464   

See accompanying notes to condensed consolidated financial statements.

 

F-55


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Business:

ATD Corporation (also referred to herein as “ATD Corp” and formerly Accelerate Parent Corp.) is a Delaware corporation that indirectly owns 100% of the issued and outstanding capital stock of American Tire Distributors Holdings, Inc. (“Holdings”), a Delaware corporation. Holdings owns 100% of the issued and outstanding capital stock of American Tire Distributors, Inc. (“ATDI”), a Delaware corporation. ATD Corp has no significant assets or operations other than its ownership of ATDI. The operations of ATDI and its subsidiaries constitute the operations of ATD Corp presented under accounting principles generally accepted in the United States. ATDI is primarily engaged in the wholesale distribution of tires, custom wheels and accessories, and related tire supplies and tools. Its customer base is comprised primarily of independent tire dealers with the remainder of other customers representing various national and corporate accounts. ATDI serves a majority of the contiguous United States, as well as Canada, through one operating and reportable segment. Unless the context otherwise requires, “Company” herein refers to ATD Corp and its consolidated subsidiaries. In June 2014, the Company changed its name from Accelerate Parent Corp. to ATD Corporation. On May 28, 2010, pursuant to an Agreement and Plan of Merger, dated as of April 20, 2010, the Company was acquired by TPG Capital, L.P. (“TPG” or the “Sponsor”) and certain co-investors (the “TPG Merger”).

2. Basis of Presentation:

The accompanying condensed consolidated financial statements reflect the consolidated operations of the Company 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 condensed consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated unaudited results for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the fiscal year ended December 28, 2013.

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, and the associated 14-week quarter, will not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarters ended July 5, 2014 and June 29, 2013 each contain operating results for 13 weeks. The six months ended July 5, 2014 contains 27 weeks while the six months ended June 29, 2013 contains 26 weeks. It should be noted that the Company and its recently acquired subsidiaries, Hercules, Terry’s Tire, Trail Tire, Extreme Wheel, Kirks Tire, RTD Edmonton and RTD Calgary, all as defined below, have different quarter-end reporting dates. Each of these acquired subsidiaries has a June 30 quarter-end reporting date. There were no significant changes to the business subsequent to their fiscal period ends that would have a material impact on the condensed consolidated balance sheet or condensed consolidated statement of comprehensive income (loss) as of and for the quarter and six months ended July 5, 2014.

3. Recent Accounting Pronouncements:

In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. The Company adopted this guidance on December 29, 2013 (the first day of its 2014 fiscal year) and its adoption did not have a material impact on the Company’s consolidated financial statements.

 

F-56


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” (“ASU 2014-08”). Under ASU 2014-08, only disposals representing a strategic shift in operations that have a major effect on the company’s operations and financial results should be presented as discontinued operations. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU 2014-08 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. However, ASU 2014-08 should not be applied to a component that is classified as held for sale before the effective date even if the component is disposed of after the effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statement previously issued. The Company is currently assessing the impact, if any, on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning in fiscal year 2018 and, at that time the Company may adopt the new standard under the full retrospective method or the modified retrospective method. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-08 will have on the Company’s consolidated financial statements and disclosures.

4. Acquisitions:

2014 Acquisitions

On June 27, 2014, TriCan Tire Distributors Inc. (“TriCan”), an indirect wholly-owned subsidiary of Holdings, entered into and closed an Asset Purchase Agreement (the “Trail Tire Purchase Agreement”) with Trail Tire Distributors Ltd., a corporation formed under the laws of the Province of Alberta (“Trail Tire”) and the shareholders and principals of Trail Tire, pursuant to which TriCan agreed to acquire the wholesale distribution business of Trail Tire. Trail Tire is a wholesale distributor of tires, tire parts, tire accessories and related equipment in Canada. The acquisition of Trail Tire will further strengthen TriCan’s presence in the Alberta Province of Canada and complements TriCan’s current operations in Canada.

The Trail Tire acquisition closed for aggregate cash consideration of approximately $20.8 million (the “Trail Tire Purchase Price”). The aggregate cash consideration was funded through borrowings under the Company’s existing ABL credit facility. The Trail Tire Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the “Extreme Purchase Agreement”) with Extreme Wheel Distributors Ltd., a corporation formed under the laws of the Province of Alberta (“Extreme”), and the shareholder and principal of Extreme, pursuant to which TriCan agreed to acquire

 

F-57


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

the wholesale distribution business of Extreme. Extreme is a wholesale distributor of wheels and related accessories in Canada. The acquisition of Extreme will further strengthen TriCan’s presence in the Alberta Province of Canada and complements TriCan’s current operations in Canada.

The Extreme acquisition closed for aggregate cash consideration of approximately $6.5 million (the “Extreme Purchase Price”). The aggregate cash consideration was funded through borrowings under the Company’s existing ABL credit facility. The Extreme Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the “Kirks Tire Purchase Agreement”) with Kirks Tire Ltd., a corporation formed under the laws of the Province of Alberta (“Kirks Tire”), and the shareholders and principals of Kirks Tire, pursuant to which TriCan agreed to acquire the wholesale distribution business of Kirks Tire. Kirks Tire is engaged in (i) the wholesale distribution of tires, tire parts, tire accessories and related equipment and (ii) the retail sale and installation of tires, tire parts, and tire accessories and the manufacturing and sale of retread tires. Kirks Tire’s retail operations were not acquired by TriCan and will continue to operate under its current ownership. The acquisition of the wholesale distribution business of Kirks Tire will further strengthen TriCan’s presence in the Alberta Province of Canada and complements TriCan’s current operations in Canada.

The Kirks Tire acquisition closed for aggregate cash consideration of approximately $73.0 million (the “Kirks Tire Purchase Price”). The Kirks Tire Purchase Price was funded through borrowings under the Company’s existing ABL credit facility. The Kirks Tire Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the “RTD Edmonton Purchase Agreement”) with Regional Tire Distributors (Edmonton) Inc. (“RTD Edmonton”), a corporation formed under the laws of the Province of Alberta, and the shareholders and principals of RTD Edmonton, pursuant to which TriCan agreed to acquire the wholesale distribution business of RTD Edmonton. RTD Edmonton is a wholesale distributor of tires, tire parts, tire accessories and related equipment. The acquisition of RTD Edmonton will further strengthen TriCan’s presence in the Alberta Province of Canada and complements TriCan’s current operations in Canada.

The RTD Edmonton acquisition closed for aggregate cash consideration of approximately $31.9 million (the “RTD Edmonton Purchase Price”). The RTD Edmonton Purchase Price was funded through borrowings under the Company’s existing ABL credit facility. The RTD Edmonton Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On June 27, 2014, TriCan entered into and closed an Asset Purchase Agreement (the “RTD Calgary Purchase Agreement”) with Regional Tire Distributors (Calgary) Inc. (“RTD Calgary”), a corporation formed under the laws of the Province of Alberta, and the shareholders and principals of RTD Calgary, pursuant to which TriCan agreed to acquire the wholesale distribution business of RTD Calgary. RTD Calgary is a wholesale distributor of tires, tire parts, tire accessories and related equipment. The acquisition of RTD Calgary will further strengthen TriCan’s presence in the Alberta Province of Canada and complements TriCan’s current operations in Canada.

The RTD Calgary acquisition closed for aggregate cash consideration of approximately $20.7 million (the “RTD Calgary Purchase Price”). The RTD Calgary Purchase Price was funded by borrowings under the Company’s existing ABL credit facility. The RTD Calgary Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

 

F-58


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On March 28, 2014, ATDI completed its acquisition of Terry’s Tire Town Holdings, Inc., an Ohio corporation (“Terry’s Tire” and such acquisition, the “Terry’s Tire Acquisition”). The Terry’s Tire Acquisition was completed pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”) entered into on February 17, 2014 between ATDI and TTT Holdings, Inc., a Delaware corporation. Terry’s Tire and its subsidiaries are engaged in the business of purchasing, marketing, distributing and selling tires, wheels and related tire and wheel accessories on a wholesale basis to tire dealers, wholesale distributors, retail chains, automotive dealers and others, retreading tires and selling retread and other commercial tires through commercial outlets to end users and selling tires directly to consumers via the internet. Terry’s Tire operated 10 distribution centers spanning from Virginia to Maine and in Ohio. The acquisition of Terry’s Tire will enhance the Company’s market position in these areas and aligns very well with their distribution centers, especially the new distribution centers opened by the Company over the past two years in the Northeast and Ohio.

The Terry’s Tire acquisition closed for an aggregate purchase price of approximately $372.7 million (the “Terry’s Tire Purchase Price”), consisting of cash consideration of approximately $358.0 million, contingent consideration of $12.5 million and non-cash consideration for debt assumed of $2.2 million. The cash consideration paid for the Terry’s Tire Acquisition included estimated working capital adjustments and a portion of consideration contingent on certain events achieved prior to closing. During second quarter 2014, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment decreased the Terry’s Tire Purchase Price by $5.4 million to $372.7 million with a corresponding decrease to goodwill of $5.4 million. The Terry’s Tire Purchase Price was funded by a combination of borrowings under a new senior secured term loan facility, as more fully described in Note 9, and borrowings of approximately $72.5 million under Holdings’ existing U.S. ABL Facility. The Terry’s Tire Purchase Price is subject to certain post-closing adjustments, including but not limited to, working capital adjustments. Of the $358.0 million in cash consideration, $41.4 million is held in escrow pending the resolution of the post-closing adjustments and other escrow release conditions in accordance with the terms of the Stock Purchase Agreement and escrow agreement.

On January 31, 2014, pursuant to an Agreement and Plan of Merger, dated January 24, 2014 (the “Merger Agreement”), among ATD Merger Sub II LLC (“Merger Sub”), an indirect wholly-owned subsidiary of Holdings, ATDI, Hercules Tire Holdings LLC, a Delaware limited liability company (“Hercules Holdings”), the equityholders of Hercules Holdings (each a “Seller” and, collectively the “Sellers”) and the Sellers’ Representative, Merger Sub merged with and into Hercules Holdings, with Hercules Holdings being the surviving entity (the “Merger”). As a result of the Merger, Hercules Holdings became an indirect 100% owned subsidiary of Holdings. Hercules Holdings owns all of the capital stock of The Hercules Tire & Rubber Company, a Connecticut corporation (“Hercules”). Hercules Holdings has no material assets or operations other than its ownership of Hercules. Hercules is engaged in the business of purchasing, marketing, distributing and selling after-market replacement tires for passenger cars, trucks, and certain off road vehicles to tire dealers, wholesale distributors, retail distributors and others in the United States, Canada and internationally. Hercules operated 15 distribution centers in the United States, 6 distribution centers in Canada and one warehouse in northern China. Hercules also markets the Hercules brand, which is one of the most sought-after proprietary tire brands in the industry. The acquisition of Hercules will strengthen the Company’s presence in major markets such as California, Texas and Florida in addition to increasing its presence in Canada. Additionally, Hercules’ strong logistics and sourcing capabilities, including a long-standing presence in China, will also allow the Company to capitalize on the growing import market, as well as, providing the ability to expand the international sales of the Hercules brand. Finally, this acquisition, will allow the Company to be a brand marketer of the Hercules brand which today has a 2% market share of the passenger and light truck market in North America and a 3% share of highway truck tires in North America.

 

F-59


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The Merger closed for an aggregate purchase price of approximately $318.9 million (the “Hercules Closing Purchase Price”), consisting of net cash consideration of $310.0 million, contingent consideration of $3.5 million and non-cash consideration for debt assumed of $5.4 million. The Hercules Closing Purchase Price includes an estimate for initial working capital adjustments. During second quarter 2014, the Company finalized the post-closing working capital adjustments in accordance with the Merger Agreement. This adjustment decreased the Hercules Closing Purchase Price by $0.4 million to $318.9 million with a corresponding decrease to goodwill of $0.4 million. The Merger Agreement provides for the payment of up to $6.5 million in additional consideration contingent upon the occurrence of certain post-closing events (to the extent payable, the “Hercules Additional Purchase Price” and, collectively with the Hercules Closing Purchase Price, the “Hercules Purchase Price”). The cash consideration paid for the Merger was funded by a combination of the issuance of additional Senior Subordinated Notes, as more fully described in Note 9, an equity contribution of $50.0 million from Holdings’ indirect parent, as more fully described in Note 14 and borrowings under Holdings’ credit agreement, as more fully described in Note 9. The Hercules Closing Purchase Price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

On January 17, 2014, TriCan entered into an Asset Purchase Agreement with Kipling Tire Co. LTD., a corporation governed by the laws of the Province of Ontario (“Kipling”), pursuant to which TriCan agreed to acquire the wholesale distribution business of Kipling. Kipling has operated as a retail-wholesale business since 1982. Kipling’s wholesale business distributes tires from its Etobicoke facilities to approximately 400 retail customers in Southern Ontario. Kipling’s retail operations were not acquired by TriCan and will continue to operate under its current ownership. This acquisition will further strengthen TriCan’s presence in the Southern Ontario region of Canada. The acquisition was completed on January 17, 2014 and was funded through the Company’s Canadian ABL Facility. The Company does not believe the acquisition of Kipling is a material transaction subject to the disclosures and supplemental pro forma information required by ASC 805—Business Combinations. As a result, the information is not presented.

 

F-60


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The acquisitions of Trail Tire, Extreme, Kirks Tire, RTD Edmonton, RTD Calgary, Terry’s Tire and Hercules (collectively the “2014 Acquisitions”) were recorded using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As of the date of these financial statements, the Company is in the process of finalizing intangible asset valuations as well as continuing to evaluate the initial purchase price allocation for each of the 2014 Acquisitions with the exception of Hercules. Accordingly, management has used its best estimates in the allocation of the purchase price to assets acquired and liabilities assumed based on the estimated preliminary fair market value of such assets and liabilities at the date of each acquisition. As additional information is obtained about these assets and liabilities within the measurement period, the Company expects to refine its estimates of fair value to allocate the purchase price for the 2014 Acquisitions, with the exception of Hercules, more accurately. As of July 5, 2014, the purchase price allocation for Hercules is final. The preliminary allocation of the purchase price for each of the 2014 Acquisitions is as follows:

 

In thousands

 

Terry’s
Tire

   

Hercules

   

Trail
Tire

   

Extreme

   

Kirks
Tire

   

RTD
Edmonton

   

RTD
Calgary

   

Total

 

Cash

  $ 7,431      $ 12,187      $ —        $ —        $ —        $ —        $ —        $ 19,618   

Accounts receivable

    39,772        61,193        5,571        987        5,315        1,164        1,924        115,926   

Inventory

    92,445        153,644        6,587        1,320        5,929        2,622        5,911        268,458   

Assets held for sale

    5,819        —          —          —          —          —          —          5,819   

Other current assets

    2,222        5,064        —          —          —          —          —          7,286   

Deferred income taxes

    4,947        —          124        —          —          —          —          5,071   

Property and equipment

    7,072        29,970        323        32        —          6        556        37,959   

Intangible assets

    186,161        155,704        14,703        4,369        52,818        23,286        13,556        450,597   

Other assets

    289        —          —          —          —          —          —          289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets acquired

    346,158        417,762        27,308        6,708        64,062        27,078        21,947        911,023   

Accounts payable

    80,771        95,616        7,025        891        —          1,549        1,802        186,532   

Accrued and other liabilities

    3,904        6,154        —          —          —          —          —          11,180   

Liabilities held for sale

    319        —          —          —          —          —          —          319   

Deferred income taxes

    —          68,516        —          —          —          —          —          68,516   

Other liabilities

    —          2,325        468        —          47        —          —          2,840   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities assumed

    84,994        172,611        7,493        891        47        1,549        1,802        269,387   

Net assets acquired

    261,164        245,151        19,815        5,817        64,015        25,529        20,145        641,636   

Goodwill

    111,492        73,708        948        685        8,975        6,382        526        202,716   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchase price

  $ 372,656      $ 318,859      $ 20,763      $ 6,502      $ 72,990      $ 31,911      $ 20,671      $ 844,352   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill. The premium in the purchase price paid for the 2014 Acquisitions primarily reflects growth opportunities from expanding the Company’s distribution footprint into Western Canada and through the anticipated realization of operational and cost synergies. In addition, growth opportunities associated with the Hercules® brand also contributed to the premium in the purchase price paid for the Hercules acquisition.

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. Inventory was recorded at fair value, based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.

 

F-61


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

In thousands

  

Terry’s
Tire

    

Hercules

    

Trail
Tire

    

Extreme

    

Kirks
Tire

    

RTD
Edmonton

    

RTD
Calgary

    

Total

 

Customer list (1)

   $ 185,776       $ 147,216       $ 14,703       $ 4,369       $ 52,818       $ 23,286       $ 13,556       $ 441,724   

Tradenames (2)

     —           8,488         —           —           —           —           —           8,488   

Favorable leases (3)

     385         —           —           —           —           —           —           385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 186,161       $ 155,704       $ 14,703       $ 4,369       $ 52,818       $ 23,286       $ 13,556       $ 450,597   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Estimated useful lives range from sixteen to eighteen years.

 

(2) Esimated useful life is fifteen years

 

(3) Esimated useful lives range from four to five years.

The Company utilized the excess earnings method, a derivation of the income approach, as well as the assistance of a third-party valuation report for certain acquisitions, to determine the fair value of the customer list intangible assets. The excess earnings method estimates the discounted net earnings attributable to the customer relationships that were acquired after considering items such as possible customer attrition. Based on the length and trend of projected cash flows, an estimated useful life of eighteen years was determined. The length of the projected cash flow period was determined by how quickly the customer relationships attrit based on the Company’s historical experience in renewing and extending similar customer relationships and future expectations for renewing and extending similar existing customer relationships and represents the number of years over which the Company expects the customer relationships to economically contribute to the business. This estimate is based on the year in which 95.0% of the annual discounted cash flows were captured in the value of the customer list intangible asset. As of the date of this report, the Company is in the process of obtaining third-party valuations for the fair value of the intangible assets acquired from Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary. Accordingly, the preliminary allocation for these acquisitions reflects management’s best estimate of fair value using the excess earnings method.

As part of the acquisition of Terry’s Tire, the Company acquired Terry’s Tire’s commercial and retread businesses. As the Company’s core business does not include commercial and retread operations, the Company decided that it would divest of these businesses. As it is management’s intention to divest the commercial and retread businesses during fiscal 2014 and as all held for sale criteria has been met, the related assets, including the allocation of purchase price, and the related liabilities of the commercial and retread businesses are classified as held for sale within the accompanying condensed consolidated balance sheet. As part of the preliminary purchase price allocation, the estimated fair value of the assets held for sale was $5.8 million, including $4.5 million in current assets, net property and equipment of $0.8 million and goodwill of $0.5 million. The estimated fair value of the liabilities held for sale was $0.3 million of which the entire amount related to current liabilities. As additional information is obtained about these assets and liabilities within the measurement period, the Company expects to refine its estimate of the fair values related to these assets and liabilities.

The 2014 Acquisitions contributed net sales of approximately $265.5 million to the Company for the six months ended July 5, 2014. Net loss contributed by the 2014 Acquisitions during the six months ended July 5, 2014 was approximately $25.9 million which included non-cash amortization of the inventory step-up of $31.6 million and non-cash amortization expense on acquired intangible assets of $11.5 million.

2013 Acquisitions

On December 13, 2013, TriCan entered into a Share Purchase Agreement with Wholesale Tire Distributors Inc., a corporation formed under the laws of the Province of Ontario (“WTD”), Allan Bishop, an

 

F-62


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

individual resident in the Province of Ontario (“Allan”) and The Bishop Company Inc., a corporation formed under the laws of the Province of Ontario (“BishopCo”) (Allan and BishopCo each, a “Seller” and collectively, the “Sellers”), pursuant to which TriCan agreed to acquire from the Sellers all of the issued and outstanding shares of WTD. WTD operated two distribution centers serving over 2,300 customers. The acquisition of WTD strengthened the Company’s market presence in the Southern Ontario region of Canada. The acquisition was completed on December 13, 2013 and was funded through cash on hand. The Company does not believe the acquisition of WTD is a material transaction, individually or when aggregated with the other non-material acquisitions discussed herein, subject to the disclosures and supplemental pro forma information required by ASC 805—Business Combinations. As a result, the information is not presented.

The acquisition of WTD 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. A majority of the net assets acquired relate to a customer list intangible asset, which had an acquisition date fair value of $4.4 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $1.2 million. The premium in the purchase price paid for the acquisition of WTD reflects the anticipated realization of operational and cost synergies.

On August 30, 2013, the Company entered into a Stock Purchase Agreement with Tire Distributors, Inc. (“TDI”) to acquire 100% of the outstanding capital stock of TDI. TDI operated one distribution center serving over 1,700 customers across Maryland and northeastern Virginia. The acquisition was completed on August 30, 2013 and was funded through the Company’s ABL Facility. The Company does not believe the acquisition of TDI is a material transaction, individually or when aggregated with the other non-material acquisitions discussed herein, subject to the disclosures and supplemental pro forma information required by ASC 805—Business Combinations. As a result, the information is not presented.

The acquisition of TDI 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. A majority of the net assets acquired relate to a customer list intangible asset, which had an acquisition date fair value of $3.4 million. The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $2.4 million. The premium in the purchase price paid for the acquisition of TDI reflects the anticipated realization of operational and cost synergies.

On March 22, 2013, TriCan and ATDI entered into a Share Purchase Agreement with Regional Tire Holdings Inc., a corporation formed under the laws of the Province of Ontario (“Holdco”), Regional Tire Distributors Inc. (“RTD”), a corporation formed under the laws of the Province of Ontario and a 100% owned subsidiary of Holdco, and the shareholders of Holdco, pursuant to which TriCan agreed to acquire from the shareholders of Holdco all of the issued and outstanding shares of Holdco for a purchase price of $62.5 million. Holdco has no significant assets or operations other than its ownership of RTD. The operations of RTD constitute the operations of Holdco. RTD is a wholesale distributor of tires, tire parts, tire accessories and related equipment in the Ontario and Atlantic provinces of Canada. The acquisition of RTD significantly expanded the Company’s presence in the Ontario and Atlantic Provinces of Canada and complemented the Company’s current operations in Canada.

The acquisition of RTD was completed on April 30, 2013 for aggregate cash consideration of approximately $64.9 million (the “Adjusted Purchase Price”) which includes initial working capital adjustments.

 

F-63


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The acquisition of RTD was funded by borrowings under the Company’s ABL Facility and FILO Facility, as more fully described in Note 9. The Adjusted Purchase Price was subject to certain post-closing adjustments, including, but not limited to, the finalization of working capital adjustments. Of the $64.9 million Adjusted Purchase Price, $6.3 million is held in escrow pending the resolution of the post-closing adjustments and other escrow release conditions in accordance with the terms of the purchase agreement and escrow agreement. During third quarter 2013, the Company and the shareholders of Holdco agreed on the post-closing working capital adjustments in accordance with the purchase agreement. This adjustment increased the Adjusted Purchase Price by $1.0 million to $65.9 million with a corresponding increase to goodwill of $1.0 million.

The acquisition of RTD was recorded using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interest. As a result, the Adjusted 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 Adjusted Purchase Price is as follows:

 

In thousands

      

Cash

   $ 904   

Accounts receivable

     10,093   

Inventory

     21,685   

Other current assets

     998   

Property and equipment

     1,050   

Intangible assets

     42,990   

Other assets

     52   
  

 

 

 

Total assets acquired

     77,772   

Debt

     —     

Accounts payable

     7,817   

Accrued and other liabilities

     12,740   

Deferred income taxes

     11,692   
  

 

 

 

Total liabilities assumed

     32,249   

Net assets acquired

     45,523   

Goodwill

     20,375   
  

 

 

 

Purchase price

   $ 65,898   
  

 

 

 

The excess of the purchase price over the amounts allocated to identifiable assets and liabilities is included in goodwill, and amounted to $20.4 million. The premium in the purchase price paid for the acquisition of RTD primarily relates to growth opportunities from expanding the Company’s distribution footprint into Eastern Canada and through operating synergies available via the consolidation of certain distribution centers in Eastern Canada.

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. Inventory was recorded at fair value, based on computation which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.

 

F-64


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

In thousands

  

Estimated
Useful
Life

    

Estimated
Fair
Value

 

Customer list

     16 years       $ 40,720   

Tradenames

     5 years         1,900   

Favorable leases

     4 years         370   
     

 

 

 

Total

      $ 42,990   
     

 

 

 

The following unaudited pro forma supplementary data gives effect to the 2014 Acquisitions as if these transactions had occurred on December 30, 2012 (the first day of the Company’s 2013 fiscal year) and gives effect to the acquisition of RTD as if this transaction had occurred on January 1, 2012 (the first day of the Company’s 2012 fiscal year). 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 2014 Acquisitions and the RTD acquisition been consummated on the date assumed or of the Company’s results of operations for any future date.

 

    

Pro Forma

 

In thousands

  

Quarter
Ended
July 5,

2014

   

Quarter
Ended
June 29,

2013

   

Six Months
Ended
July 5,

2014

   

Six Months
Ended
June 29,

2013

 

Net sales

   $ 1,304,618      $ 1,283,844      $ 2,552,328      $ 2,433,185   

Net income (loss)

     (35,532     (18,707     (78,948     (49,666

Net income (loss) per share—basic

   $ (0.05   $ (0.03   $ (0.10   $ (0.07

Net income (loss) per share—diluted

   $ (0.05 )   $ (0.03 )   $ (0.10 )   $ (0.07

The pro forma supplementary data for the quarters ended July 5, 2014 and June 29, 2013 includes $3.9 million and $11.1 million, respectively, as an increase to historical amortization expense as a result of acquired intangible assets while the six months ended July 5, 2014 and June 29, 2013 includes $13.1 million and $22.6 million, respectively. In addition, the pro forma supplementary data for the quarters ended July 5, 2014 and June 29, 2013 includes $1.3 million and $9.6 million, respectively, as an increase to historical interest expense as a result of the issuance of the additional Senior Subordinated Notes and the new senior secured term loan facility, as more fully described in Note 9, while the six months ended July 5, 2014 and June 29, 2013 includes $6.9 million and $19.7 million, respectively. For the quarter and six months ended July 5, 2014, the Company has included a reduction in non-recurring historical transaction expenses of $10.7 million and $42.9 million, respectively. These transaction expenses were incurred prior to the acquisition of Hercules and Terry’s Tire and they are directly related to the acquisitions and are non-recurring. Additionally, for the quarter and six months ended July 5, 2014, the Company has included a reduction in historical cost of goods sold of $12.5 million and $31.5 million, respectively. The reduction in cost of goods sold relates to the elimination of the non-cash amortization of the inventory step-up recorded in connection with the Hercules and Terry’s Tire acquisitions as this amortization is directly related to the acquisitions and non-recurring.

5. Inventories:

Inventories consist primarily of automotive tires, custom wheels and accessories and tire supplies and tools. Reported amounts are valued at the lower of cost, determined on the first-in, first-out (“FIFO”) method, or

 

F-65


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 and the FILO Facility. See Note 9 for further information.

As a result of the TriCan acquisition in November 2012, the RTD, TDI and WTD acquisitions in fiscal 2013 and the 2014 Acquisitions, the carrying value of the acquired inventory was increased by $6.3 million, $2.7 million, $0.2 million, $0.5 million, and $34.4 million, respectively, to adjust to estimated fair value in accordance with the accounting guidance for business combinations. The step-up in inventory value for each acquisition was amortized into cost of goods sold over the period of the Company’s normal inventory turns, which approximates two months. Amortization of the inventory step-up included in cost of goods sold in the accompanying condensed consolidated statements of comprehensive income (loss) for the quarter and six months ended July 5, 2014 was $12.5 million and $31.6 million, respectively, while amortization for the quarter and six months ended June 29, 2013 was $2.7 million and $4.9 million, respectively.

6. Assets Held for Sale:

In accordance with current accounting standards, the Company classifies assets as held for sale in the period in which all held for sale criteria is met. Assets held for sale are reported at the lower of their carrying amount or fair value less cost to sell and are no longer depreciated. During third quarter 2013, the Company classified a facility located in Georgia as held for sale. The facility was previously used as a distribution center within the Company’s operations until its activities were relocated to an expanded facility. During the quarter ended July 5, 2014, the Company received $0.4 million in cash for the sale of this facility.

As part of the Terry’s Tire acquisition, the Company acquired Terry’s Tire’s commercial and retread businesses. See Note 4 for additional information regarding this acquisition. As it is management’s intention to divest the commercial and retread businesses during fiscal 2014 and as all held for sale criteria has been met, the related assets and liabilities of the commercial and retread businesses are classified as held for sale within the accompanying condensed consolidated balance sheet. As of July 5, 2014, the carrying value of the assets held for sale for these businesses was $5.5 million, including $4.2 million in current assets, net property and equipment of $0.8 million and goodwill of $0.5 million.

7. Goodwill:

The Company records as goodwill the excess of the purchase price over the fair value of the net assets acquired. Once the final valuation has been performed for each acquisition, adjustments may be recorded. 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.

The changes in the carrying amount of goodwill are as follows:

 

In thousands

      

Balance, December 28, 2013

   $ 504,333   

Purchase accounting adjustments

     128   

Acquisitions

     202,716   

Currency translation

     (1,043
  

 

 

 

Balance, July 5, 2014

   $ 706,134   
  

 

 

 

 

F-66


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

At July 5, 2014, the Company has recorded goodwill of $706.1 million, of which approximately $125.7 million of net goodwill is deductible for income tax purposes in future periods. The balance primarily relates to the TPG Merger on May 28, 2010, in which $418.6 million was recorded as goodwill. The Company does not have any accumulated goodwill impairment losses.

On June 27, 2014, TriCan completed its acquisition of the wholesale distribution businesses of Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary. The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, the Company recorded $0.9 million, $0.7 million, $9.0 million, $6.4 million and $0.5 million, respectively, as goodwill. See Note 4 for additional information.

On March 28, 2014, ATDI completed its acquisition of Terry’s Tire pursuant to a Stock Purchase Agreement entered into on February 17, 2014. The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. As a result, the Company recorded $111.5 million as goodwill. See Note 4 for additional information.

On January 31, 2014, the Company completed its acquisition of Hercules pursuant to an Agreement and Plan of Merger dated January 24, 2014. The purchase price has been preliminarily allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of acquisition. During second quarter 2014, the Company finalized the post-closing working capital adjustments in accordance with the Merger Agreement. This adjustment decreased goodwill by $0.4 million to $73.7 million at July 5, 2014. See Note 4 for additional information.

On December 13, 2013, TriCan entered into a share Purchase Agreement to acquire all of the issued and outstanding common shares of WTD. The acquisition was funded through cash on hand. 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. During first quarter 2014, the Company finalized the post-closing working capital adjustments in accordance with the purchase agreement. This increased goodwill by $0.1 million to a total of $1.2 million at July 5, 2014. See Note 4 for additional information.

8. Intangible Assets:

Indefinite-lived intangible assets 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. All other intangible assets with finite lives are being amortized on a straight-line or accelerated basis over periods ranging from one to nineteen years.

 

F-67


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table sets forth the gross amount and accumulated amortization of the Company’s intangible assets at July 5, 2014 and December 28, 2013:

 

    

July 5,

2014

    

December 28,

2013

 

In thousands

  

Gross
Amount

    

Accumulated
Amortization

    

Gross
Amount

    

Accumulated
Amortization

 

Customer lists

   $ 1,124,662      $ 272,779      $ 677,062      $ 226,614   

Noncompete agreements

     13,878        8,235        12,007        6,400   

Favorable leases

     1,074        210        688        119   

Tradenames

     19,026        4,935        10,531        3,754   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total finite-lived intangible assets

     1,158,640        286,159        700,288        236,887   

Tradenames (indefinite-lived)

     249,893        —           249,893        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 1,408,533      $ 286,159      $ 950,181      $ 236,887   
  

 

 

    

 

 

    

 

 

    

 

 

 

At July 5, 2014, the Company had $1,122.4 million of intangible assets. The balance primarily relates to the TPG Merger on May 28, 2010, in which $781.3 million was recorded as intangible assets. As part of the preliminary purchase price allocation of Trail Tire, Extreme, Kirks Tire, RTD Edmonton and RTD Calgary, the Company allocated $14.7 million, $4.4 million, $52.8 million, $23.3 million and $13.6 million, respectively, to a finite-lived customer list intangible asset with a useful life of sixteen years. As part of the preliminary purchase price allocation of Terry’s Tire, the Company allocated $185.8 million to a finite-lived customer list intangible asset with a useful life of eighteen years and $0.4 million to a favorable leases intangible asset with a useful life of five years. As part of the preliminary purchase price allocation of Hercules, the Company allocated $147.2 million to a finite-lived customer list intangible asset with a useful life of eighteen years and $8.5 million to a finite-lived tradename with a useful life of fifteen years. As part of the purchase price allocation of WTD, the Company allocated $4.4 million to a finite-lived customer list intangible asset with a useful life of sixteen years. As part of the purchase price allocation of TDI, the Company allocated $3.4 million to a finite-lived customer list intangible asset with a useful life of sixteen years. As part of the purchase price allocation of RTD, the Company allocated $40.7 million to a finite-lived customer list intangible asset with a useful life of sixteen years, $1.9 million to a finite-lived tradename with a useful life of five years and $0.4 million to a finite-lived favorable leases intangible asset with a useful life of four years.

Intangible asset amortization expense was $27.7 million and $19.0 million for the quarters ended July 5, 2014 and June 29, 2013 respectively. For the six months ended July 5, 2014 and June 29, 2013, intangible asset amortization expense was $49.0 million and $36.6 million, respectively. Estimated amortization expense on existing intangible assets is expected to approximate $59.5 million for the remaining six months of 2014 and approximately $126.2 million in 2015, $107.8 million in 2016, $93.2 million in 2017 and $79.9 million in 2018.

 

F-68


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

9. Long-term Debt:

The following table presents the Company’s long-term debt at July 5, 2014 and at December 28, 2013:

 

In thousands

  

July 5,

2014

   

December 28,

2013

 

U.S. ABL Facility

   $ 641,639      $ 417,066   

Canadian ABL Facility

     53,165        36,424   

U.S. FILO Facility

     80,000        51,863   

Canadian FILO Facility

     10,266        —     

Term Loan

     717,693        —     

Senior Secured Notes

     —          248,219   

Senior Subordinated Notes

     421,361        200,000   

Capital lease obligations

     12,577        12,330   

Other

     7,596        1,098   
  

 

 

   

 

 

 

Total debt

     1,944,297        967,000   

Less—Current maturities

     (10,120     (564
  

 

 

   

 

 

 

Long-term debt

   $ 1,934,177      $ 966,436   
  

 

 

   

 

 

 

The fair value of the Senior Subordinated Notes was $431.5 million at July 5, 2014 and $212.0 million at December 28, 2013 and was estimated using a discounted cash flow analysis with significant inputs that are not observable (Level 3) as there are no quoted prices in active markets for these notes. The fair value of the Term Loan was $718.1 million at July 5, 2014 and was estimated using a discounted cash flow analysis with significant inputs that are not observable (Level 3). The discount rate used in the fair value analysis for the Term Loan was based on borrowing rates available to the Company for debt with the same remaining maturity.

ABL Facility

On January 31, 2014, in connection with the Hercules acquisition, the Company entered into the Second Amendment to Sixth Amended and Restated Credit Agreement (“Credit Agreement”), which provides for (i) U.S. revolving credit commitments of $850.0 million (of which up to $50.0 million can be utilized in the form of commercial and standby letters of credit), subject to U.S. borrowing base availability (the “U.S. ABL Facility”) and (ii) Canadian revolving credit commitments of $125.0 million (of which up to $10.0 million can be utilized in the form of commercial and standby letters of credit), subject to Canadian borrowing base availability (the “Canadian ABL Facility” and, collectively with the U.S. ABL Facility, the “ABL Facility”). In addition, the Credit Agreement provides (i) the U.S. borrowers under the agreement with a first-in last-out facility (the “U.S. FILO Facility”) in the aggregate principal amount of up to $80.0 million, subject to a borrowing base specific thereto and (ii) the Canadian borrowers under the agreement with a first-in last-out facility (the “Canadian FILO Facility” and collectively with the U.S. FILO Facility, the “FILO Facility”) in an aggregate principal amount of up to $15.0 million, subject to a borrowing base specific thereto. The U.S. ABL Facility is available to ATDI, Am-Pac Tire Dist. Inc., Hercules and any other U.S. subsidiary that the Company designates in the future in accordance with the terms of the agreement. The Canadian ABL Facility is available to TriCan and any other Canadian subsidiaries that the Company designates in the future in accordance with the terms of the agreement. Provided that no default or event of default then exists or would arise therefrom, the Company has the option to request that the ABL Facility be increased by an amount not to exceed $175.0 million (up to $25.0 million of which may be allocated to the Canadian ABL Facility), subject to certain rights of the administrative agent, swingline lender and issuing banks providing commitments for such increase. The maturity date for the ABL

 

F-69


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Facility is November 16, 2017. The maturity date for the FILO Facility is January 31, 2017. During the six months ended July 5, 2014, the Company paid $0.7 million in debt issuance costs related to the ABL Facility and FILO Facility.

As of July 5, 2014, the Company had $641.6 million outstanding under the U.S. ABL Facility. In addition, the Company had certain letters of credit outstanding in the aggregate amount of $10.0 million, leaving $198.4 million available for additional borrowings under the U.S. ABL Facility. The outstanding balance of the Canadian ABL Facility at July 5, 2014 was $53.1 million, leaving $70.8 million available for additional borrowings. As of July 5, 2014, the outstanding balance of the U.S. FILO Facility was $80.0 million and the outstanding balance of the Canadian FILO Facility was $10.3 million.

Borrowings under the U.S. ABL Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) 200 basis points over an adjusted LIBOR rate or (b) 100 basis points over an alternative base rate (the higher of the prime rate, the federal funds rate plus 50 basis points and one month-adjusted LIBOR rate plus 100 basis points). The applicable margins under the U.S. ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian ABL Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) 100 basis points over an alternative Canadian base rate (the higher of the base rate as published by Bank of America, N.A., acting through its Canada branch, the federal funds rate plus 50 basis points and one month-LIBOR plus 100 basis points), (b) 100 basis points over a Canadian prime rate determined in accordance with the Canadian ABL Facility, (c) 200 basis points over a rate determined by reference to the average rate applicable to Canadian Dollar bankers’ acceptances having an identical or comparable term as the proposed loan amount or (d) 200 basis points over an adjusted LIBOR rate. The applicable margins under the Canadian ABL Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the U.S. FILO Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) 350 basis points over an adjusted LIBOR rate or (b) 250 basis points over an alternative base rate (the higher of the prime rate, the federal funds rate plus 50 basis points and one month-adjusted LIBOR plus 100 basis points. The applicable margins under the U.S. FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

Borrowings under the Canadian FILO Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) 250 basis points over an alternative Canadian base rate (the higher of the base rate as published by Bank of America, N.A., acting through its Canada branch, the federal funds rate plus 50 basis points and one month-LIBOR plus 100 basis points), (b) 250 basis points over a Canadian prime rate determined in accordance with the Canadian ABL Facility, (c) 350 basis points over a rate determined by reference to the average rate applicable to Canadian Dollar bankers’ acceptances having an identical or comparable term as the proposed loan amount or (d) 350 basis points over an adjusted LIBOR rate. The applicable margins under the Canadian FILO Facility are subject to step ups and step downs based on average excess borrowing availability under the ABL Facility.

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

 

    85% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus

 

    The lesser of (a) 70% of the lesser of cost or market value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable and (b) 85% of the net orderly liquidation value of eligible tire inventory of the U.S. or Canadian loan parties, as applicable; plus

 

F-70


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

    The lesser of (a) 50% of the lower of cost or market value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable and (b) 85% of the net orderly liquidation value of eligible non-tire inventory of the U.S. or Canadian loan parties, as applicable.

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

 

    5% of eligible accounts receivable of the U.S. or Canadian loan parties, as applicable; plus

 

    10% of the net orderly liquidation value of the eligible tire and non-tire inventory of the U.S. or Canadian loan parties, as applicable.

All obligations under the U.S. ABL Facility and the U.S. FILO 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. The Canadian ABL Facility and the Canadian FILO Facility are unconditionally guaranteed by the U.S. loan parties, TriCan and any future, direct and indirect, wholly-owned, material restricted Canadian subsidiaries. Obligations under the U.S. ABL Facility and the U.S. FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets and a second-priority lien on substantially all other assets of the U.S. loan parties, subject to certain exceptions. Obligations under the Canadian ABL Facility and the Canadian FILO Facility are secured by a first-priority lien on inventory, accounts receivable and related assets of the U.S. loan parties and the Canadian loan parties and a second-priority lien on substantially all other assets of the U.S. loan parties and the Canadian loan parties, subject to certain exceptions.

The ABL Facility and FILO Facility contain customary covenants, including covenants that restricts the Company’s 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 the Company’s fiscal year. The terms of the ABL Facility and FILO Facility generally restrict distributions or the payment of dividends in respect of the Company’s stock subject to certain exceptions requiring compliance with certain availability levels and fixed charge coverage ratios under the ABL Facility and other customary negotiated exceptions. As of July 5, 2014, the Company was in compliance with these covenants. If the amount available for additional borrowings under the ABL Facility is less than the greater of (a) 10.0% of the lesser of (x) the aggregate commitments under the ABL Facility and (y) the aggregate borrowing base and (b) $25.0 million, then the Company would be subject to an additional covenant requiring them to meet a fixed charge coverage ratio of 1.0 to 1.0. As of July 5, 2014, the Company’s additional borrowing availability under the ABL Facility was above the required amount and the Company was therefore not subject to the additional covenants.

Senior Secured Term Loan

In connection with the acquisition of Terry’s Tire, on March 28, 2014, ATDI entered into a credit agreement that provided for a senior secured term loan facility in the aggregate principal amount of $300.0 million (the “Initial Term Loan”). The Initial Term Loan was issued at a discount of 0.25% which, combined with certain debt issuance costs paid at closing, resulted in net proceeds of approximately $290.9 million. The Initial Term Loan will accrete based on an effective interest rate of 6% to an aggregate accreted value of $300.0 million, the full principal amount at maturity. The net proceeds from the Initial Term Loan were used to finance a portion of the Terry’s Tire Purchase Price.

On June 16, 2014, ATDI amended the Initial Term Loan (the “Incremental Amendment”) to borrow an additional $340.0 million (the “Incremental Term Loan”) on the same terms as the Initial Term Loan. Pursuant to

 

F-71


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

the Incremental Amendment, until August 15, 2014 ATDI also has the right to borrow up to an additional $80.0 million (the “Delayed Draw Term Loan” and collectively with the Initial Term Loan and the Incremental Term Loan, the “Term Loan”) on the same terms as the Initial Term Loan. The proceeds from the Incremental Term Loan, net of related debt issuance costs paid at closing, amounted to approximately $335.7 million, and were used, in part, to redeem all $250.0 million aggregate principal amounts of notes outstanding under ATDI’s Senior Secured Notes and related fees and expenses as more fully described below, and the remaining proceeds will be used for working capital requirements and other general corporate purposes, including the financing of potential future acquisitions. The Company received the proceeds from the Delayed Draw Term Loan at the end of the second quarter of 2014. The maturity date for the Term Loan is June 1, 2018. During the six months ended July 5, 2014, the Company paid $13.8 million in debt issuance cost related to the Term Loan.

Borrowings under the Term Loan bear interest at a rate per annum equal to, at the Company’s option, either (a) a Eurodollar rate determined by reference to LIBOR, plus an applicable margin of 475 basis points or (b) 375 basis points over an alternative base rate determined by reference of the higher of the federal funds rate plus 50 basis points, the prime rate and 100 basis points over the one month Eurodollar rate. The Eurodollar rate is subject to an interest rate floor of 100 basis points. The applicable margins under the Term Loan are subject to a step down based on a consolidated net leverage ratio, as defined in the agreement.

All obligations under the Term Loan are unconditionally guaranteed by Holdings and, subject to certain customary exceptions, all of ATDI’s existing and future, direct and indirect, wholly-owned domestic material subsidiaries. Obligations under the Term Loan are secured by a first-priority lien on substantially all property, assets and capital stock of ATDI except accounts receivable, inventory and related intangible assets and a second-priority lien on all accounts receivable and related intangible assets.

The Term Loan contains customary covenants, including covenants that restrict the Company’s ability to incur additional debt, create 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, change the nature of the Company’s business or change the Company’s fiscal year. The terms of the Term Loan generally restrict distributions or the payment of dividends in respect to the Company’s stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning January 1, 2014 and other customary negotiated exceptions. As of July 5, 2014, the Company was in compliance with these covenants.

The Company is required to make principal payments equal to 0.25% of the aggregate principal amount outstanding under the Term Loan on the last business day of each March, June, September and December, commencing with the last business day of June 2014. In addition, subject to certain exceptions, the Company is required to repay the Term Loan in certain circumstances, including with 50% (which percentage will be reduced to 25% and 0%, as applicable, subject to attaining certain senior secured net leverage ratios) of its annual excess cash flow, as defined in the Term Loan agreement. The Term Loan also contains repayments provision related to non-ordinary course asset or property sales when certain conditions are met, and related to the incurrence of debt that is not permitted under the agreement.

Senior Secured Notes

On May 16, 2014, ATDI delivered a Notice of Full Redemption, providing for the redemption of all $250.0 million aggregate principal amount of the 9.75% Senior Secured Notes (“Senior Secured Notes”) on June 16, 2014 (the “Redemption Date”) at a price equal to 104.875% of the principal amount of the Senior

 

F-72


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Secured Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the Redemption Date (the “Redemption Price”). On June 16, 2014, using proceeds from the Incremental Term Loan, the Senior Secured Notes were redeemed for a Redemption Price of $263.2 million.

Senior Subordinated Notes

On May 28, 2010, ATDI issued $200.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the “Initial Subordinated Notes”). Interest on the Initial Subordinated Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2010.

In connection with the consummation of the Hercules acquisition, on January 31, 2014, ATDI completed the sale to certain purchasers of an additional $225.0 million in aggregate principal amount of its 11.50% Senior Subordinated Notes due 2018 (the “Additional Subordinated Notes” and, collectively with the Initial Subordinated Notes, the “Senior Subordinated Notes”). The Additional Subordinated Notes were issued at a discount from their principal amount at maturity and generated net proceeds of approximately $221.1 million. The Additional Subordinated Notes will accrete based on an effective interest rate of 12% to an aggregate accreted value of $225.0 million, the full principal amount at maturity. During the six months ended July 5, 2014, the Company paid $1.2 million in debt issuance cost related to the Additional Subordinated Notes.

The Additional Subordinated Notes have identical terms to the Initial Subordinated Notes except the Additional Subordinated Notes will accrue interest from January 31, 2014. The Additional Subordinated Notes and the Initial Subordinated Notes are treated as a single class of securities for all purposes under the indenture. The Senior Subordinated Notes will mature on June 1, 2018.

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 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.

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. The terms of the Senior Subordinated Notes generally restrict distributions or the payment of dividends in respect of the Company’s stock subject to certain exceptions such as the amount of 50% of net income (reduced by 100% of net losses) for the period beginning April 4, 2010 and other customary negotiated exceptions. As of July 5, 2014, the Company was in compliance with these covenants.

 

F-73


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

10. Derivative Instruments:

In the normal course of business, the Company is exposed to the risk associated with exposure to fluctuations in interest rates on our variable rate debt. These fluctuations can increase the cost of financing, investing and operating the business. The Company has used derivative financial instruments to help manage this risk and reduce the impacts of these exposures and not for trading or other speculative purposes. All derivatives are recognized on the condensed consolidated balance sheet at their fair value as either assets or liabilities. Changes in the fair value of contracts that qualify for hedge accounting treatment are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in the statement of comprehensive income (loss) at the time earnings are affected by the hedged transaction. For other derivatives, changes in the fair value of the contract are recognized immediately in net income (loss) in the statement of comprehensive income (loss).

On September 4, 2013, the Company entered into a spot interest rate swap and two forward-starting interest rate swaps (collectively the “3Q 2013 Swaps”) each of which are used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The spot interest rate swap in place covers a notional amount of $100.0 million at a fixed interest rate of 1.145% and expires in September 2016. The forward-starting interest rate swaps in place cover an aggregate notional amount of $100.0 million, of which $50.0 million becomes effective in September 2014 at a fixed interest rate of 1.464% and will expire in September 2016 and $50.0 million becomes effective in September 2015 at a fixed interest rate of 1.942% and will expire in September 2016. The counterparty to each swap is a major financial institution. The 3Q 2013 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in net income (loss) in the condensed consolidated statement of comprehensive income (loss).

On August 1, 2012, the Company entered into two interest rate swap agreements (“3Q 2012 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.0 million, with each $50.0 million contract having a fixed rate of 0.655% and expiring in June 2016. The counterparty to each swap is a major financial institution. The 3Q 2012 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in net income (loss) in the condensed consolidated statement of comprehensive income (loss).

On September 23, 2011, the Company entered into two interest rate swap agreements (“3Q 2011 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place cover an aggregate notional amount of $100.0 million, of which $50.0 million is at a fixed rate of 0.74% and will expire in September 2014 and $50.0 million is at a fixed rate of 1.0% and will expire in September 2015. The counterparty to each swap is a major financial institution. The 3Q 2011 Swaps do not meet the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract is recognized in net income (loss) in the condensed consolidated statement of comprehensive income (loss).

On February 24, 2011, the Company entered into two interest rate swap agreements (“1Q 2011 Swaps”) used to hedge a portion of the Company’s exposure to changes in its variable interest rate debt. The swaps in place covered an aggregate notional amount of $75.0 million, of which $25.0 million was at a fixed interest rate of 0.585% and expired in February 2012. The remaining swap covered an aggregate notional amount of $50.0 million at a fixed interest rate of 1.105% and expired in February 2013. The counterparty to each swap was a major financial institution. Neither swap met the criteria to qualify for hedge accounting treatment; therefore, changes in the fair value of each contract were recognized in net income (loss) in the condensed consolidated statement of comprehensive income (loss).

 

F-74


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following tables present the fair values of the Company’s derivative instruments included within the condensed consolidated balance sheets as of July 5, 2014 and December 28, 2013:

 

           

Liability Derivatives

 

In thousands

  

Balance Sheet
Location

    

July 5,
2014

    

December 28,
2013

 

Derivatives not designated as hedges:

        

3Q 2011 swaps—$100 million notional

     Accrued expenses       $ 547      $ 792   

3Q 2012 swaps—$100 million notional

     Accrued expenses         310        280   

3Q 2013 swaps—$200 million notional

     Accrued expenses         1,941        1,880   
     

 

 

    

 

 

 

Total

      $ 2,798      $ 2,952   
     

 

 

    

 

 

 

The pre-tax effect of the Company’s derivative instruments on the condensed consolidated statement of comprehensive income (loss) was as follows:

 

           

(Gain) Loss Recognized

 

In thousands

  

Location of
(Gain) Loss

Recognized

    

Quarter
Ended
July 5,
2014

   

Quarter
Ended
June 29,
2013

   

Six Months
Ended
July 5,
2014

   

Six Months
Ended
June 29,
2013

 

Derivatives not designated as hedges:

           

1Q 2011 swap—$50 million notional

     Interest Expense       $ —        $ —        $ —        $ (149

3Q 2011 swaps—$100 million notional

     Interest Expense         (158     (246     (245     (402

3Q 2012 swaps—$100 million notional

     Interest Expense         (18     (670     30        (801

3Q 2013 swaps—$200 million notional

     Interest Expense         26        —          61        —     
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ (150   $ (916   $ (154   $ (1,352
     

 

 

   

 

 

   

 

 

   

 

 

 

11. Fair Value of Financial Instruments:

The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:

 

    Level 1 Inputs—Inputs based on quoted prices in active markets for identical assets or liabilities.

 

    Level 2 Inputs—Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

 

    Level 3 Inputs —Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities, therefore requiring an entity to develop its own assumptions.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

F-75


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents the fair value and hierarchy levels for the Company’s assets and liabilities, which are measured at fair value on a recurring basis as of July 5, 2014:

 

    

Fair Value Measurements

 

In thousands

  

Total

    

Level 1

    

Level 2

    

Level 3

 

Assets:

           

Benefit trust assets

   $ 3,530       $ 3,530       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,530       $ 3,530       $ —         $ —     

Liabilities:

           

Contingent consideration

   $ 16,000       $ —         $ —         $ 16,000   

Derivative instruments

     2,798         —           2,798         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,798       $ —         $ 2,798       $ 16,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

ASC 820—Fair Value Measurements and Disclosures defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines fair value of its financial assets and liabilities using the following methodologies:

 

    Benefit trust assets —These assets include money market and mutual funds that are the underlying for deferred compensation plan assets, held in a rabbi trust. The fair value of the assets is based on observable market prices quoted in readily accessible and observable markets.

 

    Contingent consideration—As part of the preliminary purchase price allocation of Terry’s Tire and Hercules, the Company recorded $12.5 million and $3.5 million, respectively, in contingent consideration. The fair value was estimated using a discounted cash flow technique with significant inputs that are not observable, including discount rates and probability-weighted cash flows and represents management’s best estimate of the amounts to be paid. The contingent consideration includes $12.3 million related to the retention of certain key members of management as employees of the Company and $3.7 million related to securing the rights to continue to distribute certain tire brands previously distributed by Terry’s Tire and Hercules. The Company believes the probable outcome could range from approximately $8.0 million to $16.0 million. The recorded contingent consideration is included in Accrued Expenses in the condensed consolidated balance sheet as of July 5, 2014.

 

    Derivative instruments—These instruments consist of interest rate swaps. The fair value is based upon quoted prices for similar instruments from a financial institution that is counterparty to the transaction.

The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values due to the short-term nature of these instruments. The methodologies used by the Company to determine the fair value of its financial assets and liabilities at July 5, 2014 are the same as those used at December 28, 2013. As a result, there have been no transfers between Level 1 and Level 2 categories.

12. Stock-Based Compensation:

The Company accounts for stock-based compensation awards in accordance with ASC 718—Compensation, which requires a fair-value based method for measuring the value of stock-based compensation. Fair value is measured once at the date of grant and is not adjusted for subsequent changes. The Company’s stock-based compensation plans include programs for stock options and restricted stock awards.

 

F-76


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Stock Options

In August 2010, the Company adopted a Management Equity Incentive Plan (the “2010 Plan”), pursuant to which the Company will grant options to selected employees and directors of the Company. The 2010 Plan, which includes both time-based and performance-based awards, was amended on April 28, 2014 by the board of directors of the Company to increase the maximum number of shares of common stock for which stock options may be granted under the 2010 Plan from 52.1 million to 54.4 million. In addition to the increase in the maximum number of shares, on April 28, 2014, the board of directors of the Company approved the issuance of stock options to certain members of management. The approved options are for the purchase of up to 4.5 million shares of common stock, have an exercise price of $1.50 per share and vest over a two-year vesting period. As of July 5, 2014, the Company has 0.3 million shares available for future incentive awards.

Changes in options outstanding under the 2010 Plan are as follows:

 

    

Number
of Shares

    

Weighted
Average
Exercise Price

 

Outstanding—December 28, 2013

     49,516,503       $ 1.02   

Granted

     4,528,833         1.50   

Exercised

     —           —     

Cancelled

     —           —     
  

 

 

    

 

 

 

Outstanding—July 5, 2014

     54,045,336       $ 1.06   
  

 

 

    

 

 

 

Exercisable—July 5, 2014

     34,080,079       $ 1.03   
  

 

 

    

 

 

 

As of July 5, 2014, the aggregate intrinsic value of options outstanding and options exercisable was $23.7 million and $16.0 million, respectively. The aggregate intrinsic value is based on the estimated fair value of the Company’s common stock of $1.50 as of July 5, 2014. The total fair value of shares vested during the six months ended July 5, 2014 was $6.3 million. No options were exercised during the six months ended July 5, 2014.

Options granted under the 2010 Plan expire no later than 10 years from the date of grant and vest based on the passage of time and/or the achievement of certain performance targets in equal installments over two, three or five years. The weighted-average remaining contractual term for options outstanding and exercisable at July 5, 2014 was 6.7 years and 6.5 years, respectively. The fair value of each of the Company’s time-based stock option awards is expensed on a straight-line basis over the requisite service period, which is generally the two, three or five-year vesting period of the options. However, for options granted with performance target requirements, compensation expense is recognized when it is probable that both the performance target will be achieved and the requisite service period is satisfied. At July 5, 2014, unrecognized compensation expense related to non-vested options granted under the 2010 Plan totaled $8.7 million and the weighted-average period over which this expense will be recognized is 0.9 years.

 

F-77


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The weighted average fair value of stock options granted during the six months ended July 5, 2014 and June 29, 2013 was $0.68 and $0.54 using the Black-Scholes option pricing model. The following weighted average assumptions were used:

 

    

Six Months
Ended
July 5,
2014

   

Six Months
Ended
June 29,
2013

 

Risk-free interest rate

     1.73     1.38

Dividend yield

     —          —     

Expected life

     5.8 years        6.0 years   

Volatility

     46.49     45.39

As the Company does not have sufficient historical volatility data for the Company’s own common stock, the stock price volatility utilized in the fair value calculation is based on the Company’s peer group in the industry in which it does business. The risk-free interest rate is based on the yield-curve of a zero-coupon U.S. Treasury bond on the date the award is granted with a maturity equal to the expected term of the award. Because the Company does not have relevant data available regarding the expected life of the award, the expected life is derived from the Simplified Method as allowed under SAB Topic 14.

Restricted Stock

In October 2010, the Company adopted the Non-Employee Director Restricted Stock Plan (the “2010 Restricted Stock Plan”), pursuant to which the Company will grant restricted stock to non-employee directors of the Company. These awards entitle the holder to receive one share of common stock for each restricted stock award granted. The 2010 Restricted Stock Plan provides that a maximum of 0.8 million shares of common stock of the Company may be granted to non-employee directors of the Company, of which 0.2 million remain available at July 5, 2014 for future incentive awards. On April 28, 2014, the board of directors of the Company approved the issuance of restricted stock to the non-employee directors of the Company. The approved restricted stock awards were for the issuance of up to 0.1 million shares of common stock, have a grant date fair value of $1.50 per share and vest over a two-year vesting period.

The following table summarizes restricted stock activity under the 2010 Restricted Stock Plan for the six months ended July 5, 2014:

 

    

Number
of Shares

   

Weighted
Average
Exercise Price

 

Outstanding and unvested at December 28, 2013

     87,719      $ 1.14   

Granted

     133,333        1.50   

Vested

     (87,719     1.14   

Cancelled

     —          —     
  

 

 

   

 

 

 

Outstanding and unvested at July 5, 2014

     133,333      $ 1.50   
  

 

 

   

 

 

 

The fair value of each of the restricted stock awards is measured as the grant-date price of the common stock and is expensed on a straight-line basis over the requisite service period, which is generally the two-year vesting period. At July 5, 2014, unrecognized compensation expense related to non-vested restricted stock awards granted under the 2010 Restricted Stock Plan totaled $0.2 million and the weighted-average period over which this expense will be recognized is 1.5 years.

 

F-78


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Compensation Expense

Stock-based compensation expense is included in selling, general and administrative expenses within the condensed consolidated statement of comprehensive income (loss). The amount of compensation expense recognized during a period is based on the portion of the granted awards that are expected to vest. Ultimately, the total expense recognized over the vesting period will equal the fair value of the awards as of the grant date that actually vest. The following table summarizes the compensation expense recognized:

 

In thousands

  

Quarter
Ended
July 5,
2014

    

Quarter
Ended
June 29,
2013

    

Six Months
Ended
July 5,
2014

    

Six Months
Ended
June 29,
2013

 

Stock Options

   $ 1,394       $ 753       $ 1,962       $ 1,379   

Restricted Stock

     25         31         25         73   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,419       $ 784       $ 1,987       $ 1,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Income Taxes:

The tax provision for the six months ended July 5, 2014, was calculated on a national jurisdiction basis. The Company accounts for its provision for income taxes in accordance with ASC 740—Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the respective interim period. However, the authoritative guidance allows the use of the discrete method when, in certain situations, the actual interim period effective tax rate provides a better estimate of the income tax provision. For the six months ended July 5, 2014, the discrete method was used to calculate the Company’s U.S. and Canadian interim tax expense as management determined that it provided a more reliable estimate of year-to-date income tax expense.

Based on the reported loss before income taxes for the six months ended July 5, 2014, the Company had an income tax benefit of $43.0 million, consisting of a $41.0 million U.S. tax benefit and a $2.0 million foreign tax benefit, and an effective tax benefit rate under the discrete method of 34.0%. For the six months ended June 29, 2013, the Company had an income tax benefit of $9.4 million, consisting of a $7.4 million U.S. tax benefit and a $2.0 million foreign tax benefit, and an effective tax benefit rate of 29.7%. The effective rate of the year-to-date tax benefit is lower than the statutory income tax rate primarily due to earnings in a foreign jurisdiction taxed at rates lower than the statutory U.S. federal rate and non-deductible transaction costs which lowered the effective tax rate by 0.5% and 0.5%, respectively.

At July 5, 2014, the Company has a net deferred tax liability of $300.3 million, of which, $18.9 million was recorded as a current deferred tax asset and $319.2 million was recorded as a non-current deferred tax liability. The net deferred tax liability primarily relates to the expected future tax liability associated with the non-deductible, identified, intangible assets that were recorded during the TPG Merger, assuming an effective tax rate of 39.6%. It is the Company’s intention to indefinitely reinvest all undistributed earnings of non-U.S. subsidiaries.

At July 5, 2014, the Company had unrecognized tax benefits of $0.6 million, of which $0.6 million is included within other liabilities within the accompanying condensed consolidated balance sheet. The total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate is $0.1 million as of July 5, 2014. In addition, $0.5 million is related to temporary timing differences. During the next 12 months, management does not believe that it is reasonably possible that any of the unrecognized tax benefits will be recognized.

While the Company believes that it has adequately provided for all tax positions, amounts asserted by taxing authorities could be greater than the Company’s accrued position. Accordingly, additional provisions of

 

F-79


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

federal and state-related matters could be recorded in the future as revised estimates are made or the underlying matters are settled or otherwise resolved. The Company files federal income tax returns, as well as multiple state jurisdiction tax returns. The tax years 2010 – 2012 remain open to examination by the Internal Revenue Service. The tax years 2009 – 2012 remain open to examination by other major taxing jurisdictions to which the Company is subject (primarily Canada and other state and local jurisdictions).

In September 2013, the Internal Revenue Service released final Tangible Property Regulations (the “Final Regulations”). The Final Regulations provide guidance on applying Section 263(a) of the Code to amounts paid to acquire, produce or improve tangible property, as well as rules for materials and supplies (Code Section 162). These regulations contain certain changes from the temporary and proposed tangible property regulations that were issued on December 27, 2011. The Final Regulations are generally effective for taxable years beginning on or after January 1, 2014. During 2012, the Company filed a change in tax methodology related to a section of the Final Regulations, specifically the methodology for repairs and maintenance deductions. The Company does not expect any additional adjustments related to the Final Regulations.

14. Stockholders’ Equity:

On January 31, 2014, TPG and certain co-investors contributed $50.0 million through the purchase of 33.3 million shares of the Company’s common stock. The proceeds from this equity contribution were used to fund a portion of the Hercules Closing Purchase Price. Accordingly, the Company recorded the basis in these shares in additional paid-in capital. During the quarter ended July 5, 2014, the Company corrected an error in its presentation of restricted stock awards to reflect such awards as being issued and outstanding common stock. Under the terms of the 2010 Restricted Stock Plan, such awards are considered outstanding shares on the date of grant. This correction resulted in an increase of 447,368 shares to the number of issued and outstanding shares as of July 5, 2014. This error has no impact on the basic and diluted earnings per share calculation for any of the Company’s previously issued consolidated financial statements or the current year consolidated financial statements.

15. Commitments and Contingencies:

The Company is involved from time to time in various lawsuits, including class action lawsuits as well as various audits and reviews regarding its federal, state and local tax filings, arising out of the ordinary conduct of its business. Management does not expect that any of these matters will have a material adverse effect on the Company’s business or financial condition. As to tax filings, the Company believes that the various tax filings have been made in a timely fashion and in accordance with applicable federal, state and local tax code requirements. Additionally, the Company believes that it has adequately provided for any reasonably foreseeable resolution of any tax disputes, but will adjust its reserves if events so dictate in accordance with FASB authoritative guidance. To the extent that the ultimate results differ from the original or adjusted estimates of the Company, the effect will be recorded in accordance with the accounting standards for income taxes.

Guaranteed Lease Obligations

The Company remains liable as a guarantor on certain leases related to the Winston Tire Company, which was sold in 2001. As of July 5, 2014, the Company’s total obligations are $1.6 million extending over five years. However, the Company has secured assignments or sublease agreements for the vast majority of these commitments with contractual assigned or subleased rentals of $1.4 million. A provision has been made for the net present value of the estimated shortfall.

16. Discontinued Operations:

As part of the acquisition of Terry’s Tire, the Company acquired Terry’s Tire’s commercial and retread businesses. As the Company’s core business does not include commercial and retread operations, the Company

 

F-80


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

decided that it would divest of these businesses. As it is management’s intention to divest the commercial and retread businesses during fiscal 2014 and as all held for sale criteria has been met, the related assets and liabilities of the commercial and retread businesses are classified as held for sale within the accompanying condensed consolidated balance sheet. As of July 5, 2014, the amount classified as assets held for sale was $5.5 million, consisting of $4.2 million in current assets, net property and equipment of $0.8 million and goodwill of $0.5 million. The amount classified as liabilities held for sale was $0.4 million as of July 5, 2014 of which the entire amount related to current liabilities.

The Company has reflected the results of Terry’s Tire’s commercial and retread businesses as discontinued operations in the accompanying condensed consolidated statement of comprehensive income (loss) for the quarter and six months ended July 5, 2014. The components of income (loss) from discontinued operations, net of tax for the quarter and six months ended July 5, 2014 were as follows:

 

In thousands

  

Quarter Ended
July 5, 2014

   

Six Months Ended
July 5, 2014

 

Net sales

   $ 5,418      $ 5,418   
  

 

 

   

 

 

 

Income (loss) from operations before income taxes

   $ (74   $ (74

Income tax provision (benefit)

     (26     (26
  

 

 

   

 

 

 

Income (loss) from discontinued operations, net of tax

   $ (48   $ (48
  

 

 

   

 

 

 

17. Earnings per share:

Basic earnings per share is calculated using the Company’s weighted-average outstanding common shares. Diluted earnings per share is calculated using the Company’s weighted-average outstanding common shares including the dilutive effect of stock options and restricted stock awards as determined under the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share for the quarters and six months ended July 5, 2014 and June 29, 2013:

 

    

Quarter Ended
July 5, 2014

   

Quarter Ended
June 29, 2013

   

Six Months Ended
July 5, 2014

   

Six Months Ended
June 29, 2013

 

Basic earnings per share calculation:

        

Net income (loss)

   $ (49,516   $ (5,837   $ (83,560   $ (22,128

Weighted average common shares outstanding

     767,949        734,168        761,951        734,168   

Net income (loss) per share—basic

   $ (0.06   $ (0.01   $ (0.11   $ (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share calculation:

        

Net income (loss)

   $ (49,516   $ (5,837   $ (83,560   $ (22,128

Weighted average common shares outstanding

     767,949        734,168        761,951        734,168   

Effect of dilutive securities:

        

Stock Options (1)

     —          —          —          —     

Restricted Stock Units (2)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     767,949        734,168        761,951        734,168   

Net income (loss) per share—diulted

   $ (0.06   $ (0.01   $ (0.11   $ (0.03
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-81


ATD Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

(1) Options to purchase 54,045 shares of common stock during both the quarter and six months ended July 5, 2014 and 50,182 shares during both the quarter and six months ended June 29, 2013, were outstanding but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

 

(2) Unvested restricted stock awards of 133,333 for both the quarter and six months ended July 5, 2014 and 109,649 for both the quarter and six months ended June 29, 2013 were outstanding but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

18. Subsequent Event:

On July 31, 2014, the Company completed a transaction to sell the commercial and retread businesses acquired as part of the Terry’s Tire acquisition for a purchase price of approximately $3.9 million. Subsequent events were evaluated for recognition and disclosure through August 15, 2014, the date these financial statements were issued.

 

F-82


Trail Tire Distributors LTD.

Index

February 28, 2014 and 2013

 

    Page  

Independent Auditors’ Report

    F-84   

Financial Statements

 

Balance Sheets

    F-85   

Statements of Operations

    F-86   

Statements of Retained Earnings

    F-87   

Statements of Cash Flows

    F-88   

Notes to Financial Statements

    F-89   

 

F-83


LOGO

 

    Collins Barrow Edmonton LLP
 

INDEPENDENT AUDITORS’ REPORT

  2380 Commerce Place
    10155—102 Street N.W.
    Edmonton, Alberta
    T5J 4G8 Canada
   

 

T.  780.428.1522

To the Shareholders of Trail Tire Distributors Ltd.   F.  780.425.8189
 

 

www.collinsbarrow.com

We have audited the accompanying financial statements of Trail Tire Distributors Ltd., which comprise the balance sheets as of February 28, 2014 and February 28, 2013, and the related statements of operations, retained earnings and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian Accounting Standards for Private Enterprises; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trail Tire Distributors Ltd. as of February 28, 2014 and February 28, 2013, and the results of their operations and their cash flows for the years then ended in accordance with Canadian Accounting Standards for Private Enterprises.

Basis of Accounting

As more fully described in Note 2 to the financial statements, the Company’s policy is to prepare its financial statements on the basis of Canadian Accounting Standards for Private Enterprises which differ from accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to that matter. Information relating to the nature and effect of such differences is presented in note 14 to the financial statements.

 

Edmonton, Alberta

   /s/ Collins Barrow Edmonton LLP
June 20, 2014 except for Note 14 (footnotes (a), (c) and (d)) which are as of August 18, 2014    Chartered Accountants

 

This office is independently owned and operated by Collins Barrow Edmonton LLP   LOGO
The Collins Barrow trademarks are used under License.  

 

F-84


TRAIL TIRE DISTRIBUTORS LTD.

Balance Sheets

As at February 28, 2014 and February 28, 2013

 

    

February 28,
2014

    

February 28,
2013

 

ASSETS

     

Current Assets

     

Cash

   $ 1,876,070       $ 2,928,693   

Accounts receivable (Note 4)

     3,716,217         4,340,454   

Goods and Services Tax recoverable

     88,812         40,340   

Inventories (Note 5)

     4,748,358         6,217,267   

Prepaid expenses and deposits

     46,418         42,013   

Income taxes receivable

     310,383         —     
  

 

 

    

 

 

 
     10,786,258         13,568,767   

Loans receivable from related parties (Note 6)

     5,962,211         3,600,739   

Property and equipment (Note 7)

     413,431         362,557   
  

 

 

    

 

 

 
   $ 17,161,900       $ 17,532,063   
  

 

 

    

 

 

 

LIABILITIES

     

Current Liabilities

     

Accounts payable and accrued liabilities (Note 6)

   $ 5,132,908       $ 5,881,151   

Income taxes payable

     —           904,005   

Management remuneration payable

     93,500         694,000   
  

 

 

    

 

 

 
     5,226,408         7,479,156   

Shareholders’ loans (Note 9)

     5,122,943         5,122,943   
  

 

 

    

 

 

 
     10,349,351         12,602,099   
  

 

 

    

 

 

 

SHAREHOLDERS’ EQUITY

     

Share capital (Note 10)

     100         100   

Retained earnings

     6,812,449         4,929,864   
  

 

 

    

 

 

 
     6,812,549         4,929,964   
  

 

 

    

 

 

 
   $ 17,161,900       $ 17,532,063   
  

 

 

    

 

 

 
Commitments and Contingency (Note 12)      

See accompanying notes

 

F-85


TRAIL TIRE DISTRIBUTORS LTD.

Statements of Operations

For the Years Ended February 28, 2014 and February 28, 2013

 

    

2014

    

2013

 

Sales (Note 6)

   $ 45,087,534       $ 43,754,191   

Cost of sales (Note 6)

     37,654,546         34,686,365   
  

 

 

    

 

 

 

Gross profit

     7,432,988         9,067,826   
  

 

 

    

 

 

 

Expenses

     

Wages and benefits

     2,986,639         2,871,471   

Rent (Note 6)

     729,138         606,123   

Interest and bank charges

     219,525         205,414   

Telephone and utilities

     191,718         139,875   

Automotive

     179,943         236,845   

Office

     158,723         131,597   

Amortization

     119,040         146,385   

Repairs and maintenance

     115,737         98,408   

Insurance

     69,880         79,578   

Management salaries

     50,750         694,000   

Travel

     47,171         46,793   

Professional fees

     43,350         25,266   

Property taxes

     39,812         21,413   

Shop supplies

     26,407         53,186   

Advertising and promotion (Note 6)

     13,711         77,477   

Dues and memberships

     7,369         6,281   

Bad debt expense

     2,125         13,318   
  

 

 

    

 

 

 
     5,001,038         5,453,430   
  

 

 

    

 

 

 

Income before other revenue (expenses) and income taxes

     2,431,950         3,614,396   

Other revenue (expenses)

     

Foreign exchange gain

     19         2,143   

Interest income

     33,043         78,465   

Gain (loss) on sale of equipment

     938         (15,427

Rental income

     42,288         85,180   
  

 

 

    

 

 

 
     76,288         150,361   
  

 

 

    

 

 

 

Income before income taxes

     2,508,238         3,764,757   

Income taxes expense

     625,653         932,369   
  

 

 

    

 

 

 

Net income

   $ 1,882,585       $ 2,832,388   
  

 

 

    

 

 

 

See accompanying notes

 

F-86


TRAIL TIRE DISTRIBUTORS LTD.

Statements of Retained Earnings

For the Years Ended February 28, 2014 and February 28, 2013

 

    

2014

    

2013

 

Balance, beginning of year

   $ 4,929,864       $ 2,097,476   

Net income

     1,882,585         2,832,388   
  

 

 

    

 

 

 

Balance, end of year

   $ 6,812,449       $ 4,929,864   
  

 

 

    

 

 

 

 

 

 

See accompanying notes

 

F-87


TRAIL TIRE DISTRIBUTORS LTD.

Statements of Cash Flows

For the Years Ended February 28, 2014 and February 28, 2013

 

    

2014

   

2013

 

Cash provided by (used in):

    

Operating Activities

    

Net income

   $ 1,882,585      $ 2,832,388   

Items not affecting cash

    

Amortization

     119,040        146,385   

(Gain) loss on sale of equipment

     (938     15,427   

Change in non-cash working capital items (Note 11)

     (522,862     745,287   
  

 

 

   

 

 

 
     1,477,825        3,739,487   
  

 

 

   

 

 

 

Investing Activities

    

Advances to related parties

     (2,387,027     (1,895,580

Repayments from related parties

     25,555        —     

Advances to shareholders

     —          (13,640

Purchase of equipment

     (179,676     (202,544

Proceeds on disposal of equipment

     10,700        22,360   
  

 

 

   

 

 

 
     (2,530,448     (2,089,404
  

 

 

   

 

 

 

(Decrease) increase in cash

     (1,052,623     1,650,083   

Cash, beginning of year

     2,928,693        1,278,610   
  

 

 

   

 

 

 

Cash, end of year

   $ 1,876,070      $ 2,928,693   
  

 

 

   

 

 

 

See accompanying notes

 

F-88


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

1. Nature of operations

The Company was incorporated under the Alberta Business Corporations Act on November 24, 2003 and operates a wholesale tire distribution business.

2. Change in accounting policy

Effective March 1, 2012 the company changed its accounting policy for income taxes from the taxes payable method to the future income taxes method. The change in accounting policy was applied retrospectively. The impact of the change in accounting policy did not result in any changes to the opening retained earnings of 2013 nor did it result in the recognition of a future tax asset or future tax liability as at February 29, 2012.

3. Summary of significant accounting policies

Basis of presentation

These financial statements are prepared in accordance with accounting standards for private enterprises, which is a basis of accounting generally accepted in Canada for entities that are privately held.

Revenue recognition

Revenue is recognized when the goods have been delivered, the services have been completed, the transaction has been accepted by the customer and collection is reasonably assured. The Company reports its revenue net of returns, sales discounts and volume rebates to customers.

Interest revenue is recognized on an annual basis as it is earned.

Rental revenue earned under a lease agreement is recognized as revenue over the term of the underlying lease. All rent increases based on escalation clauses in lease agreements are accounted for on a straight-line basis over the term of the respective leases. Property taxes, other operating cost recoveries, and other incidental income are recognized on an accrual basis.

Vendor Rebates and Allowances

The Company participates in various purchase rebate programs with its major tire vendors including early payment incentives and volume purchase rebates based on defined levels of purchase volume. These arrangements enable the Company to earn rebates that reduce the cost of merchandise purchased. Vendor rebates and allowances are accrued as earned. Vendor rebates and allowances earned are initially recorded as a reduction in the cost of merchandise inventories and are included in operations (as a reduction of cost of goods sold) in the period the related product is sold.

Allowance for doubtful accounts

The allowance for doubtful accounts reflects management’s best estimate of losses on the accounts receivable balances. The company maintains an allowance for doubtful accounts that is estimated based on a variety of factors including accounts receivable aging, historical experience and other currently available information, including events such as customer bankruptcy and current economic conditions. Interest is charged on overdue account receivable balances. A provision is recorded in the period in which the receivable is deemed uncollectible.

 

F-89


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

Inventories

Inventories are valued at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition including volume rebates and allowances from vendors. The cost of inventories is determined using the first-in, first-out (FIFO) method. Net realizable value is the estimated selling price in the ordinary course of business, less costs necessary to complete the sale. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand.

Property and equipment

Property and equipment are recorded at cost less accumulated amortization.

Amortization is calculated at the following annual rates:

 

Automotive   -   30% declining balance basis
Office equipment   -   20% declining balance basis
Leasehold improvements   -   5 year straight-line basis
Computer equipment   -   30% declining balance basis
Computer software   -   100% declining balance basis
Manufacturing equipment   -   50% straight-line basis
Shop equipment   -   20% declining balance basis

Property and equipment are tested for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted cash flows expected from its use and eventual disposal. In such a case, an impaired loss must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value.

Income taxes

The Company uses the future income taxes method to account for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Translation of Foreign Currency

Monetary assets and liabilities of the Company are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Revenue and expense items are translated at rates of exchange in effect at the respective transaction months. The resulting exchange gains or losses are included in net earnings. Non-monetary assets and liabilities, arising from transactions denominated in foreign currencies, are translated at rates of exchange in effect at the date of the transaction.

Use of estimates

The preparation of financial statements in conformity with Accounting Standards for Private Enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities

 

F-90


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more subjective estimates included in these financial statements are the determination of allowance for doubtful accounts receivable, valuation of inventory and estimated useful lives of property and equipment for purposes of calculating amortization. Actual results could differ from those estimates.

Financial Instruments

Measurement of financial instruments

The company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost, except for equity instruments that are quoted in an active market, which are measured at fair value. Changes in fair value are recognized in net income.

Financial assets measured at amortized cost include cash, accounts receivable and loans receivable from related parties.

Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, management remuneration payable and shareholders’ loans.

Impairment

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income.

Transaction costs

Transaction costs relating to financial instruments that are measured subsequently at fair value are recognized in operations in the year in which they are incurred. For instruments that are subsequently measured at amortized cost, the amount initially recognized is adjusted for transaction costs directly attributable to the origination, acquisition, issuance or assumption.

4. Accounts Receivable

Accounts receivable consists of the following:

 

    

2014

   

2013

 

Accounts receivable—Trade

   $ 3,752,062      $ 4,401,224   

Warranty receivable

     56,430        31,126   

Allowance for doubtful accounts

     (92,275     (91,896
  

 

 

   

 

 

 
   $ 3,716,217      $ 4,340,454   
  

 

 

   

 

 

 

 

F-91


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

5. Inventories

Inventories consist of the following:

 

    

2014

    

2013

 

Tires

   $ 4,736,085       $ 6,198,642   

Parts

     8,010         8,764   

Other

     4,263         9.861   
  

 

 

    

 

 

 
   $ 4,748,358       $ 6,217,267   
  

 

 

    

 

 

 

At the fiscal year end, inventory included volume rebates and allowances of $nil (February 28, 2013—$nil).

Cost of sales reported on the statement of operations include $37,674,546 (February 28, 2013—$34,686,365) of inventories recognized as an expense during the year.

6. Loans Receivable from Related Parties and Related Party Transactions

Loans Receivable from Related Parties

Loans receivable from related parties are as follows:

 

    

2014

    

2013

 

Trail Tire Services Ltd.

   $ 32,051       $ 31,457   

Extreme Wheel Distributors Ltd.

     234,994         77,450   

Regional Tire Distributors (Edmonton) Inc.

     3,584,288         1,475,597   

Tirecraft Western Canada Ltd.

     472,548         497,102   

1470242 Alberta Ltd.

     755,791         755,791   

1694352 Alberta Ltd.

     213,743         213,743   

Trail Tire (Kingsway) Ltd.

     548,598         549,599   

Tire Storage Direct (Edmonton) Ltd.

     26,355         —     

Integra Tire Canada Ltd.

     93,843         —     
  

 

 

    

 

 

 
   $ 5,962,211       $ 3,600,739   
  

 

 

    

 

 

 

Loans receivable from the companies noted above are unsecured, non-interest bearing and have no stated terms of repayment. The relationship between Trail Tire Distributors Ltd. and each of these companies is as follows:

Tirecraft Western Canada Ltd., Integra Tire Canada Ltd. and Tire Storage Direct (Edmonton) Ltd. are indirectly owned by a director of Trail Tire Distributors Ltd.

Extreme Wheel Distributors Ltd. is controlled by an immediate family member of a director of Trail Tire Distributors Ltd.

Regional Tire Distributors (Edmonton) Inc. (formerly known as North Alta Tire Distributors Ltd.) is partially owned by a director of Trail Tire Distributors Ltd.

1470242 Alberta Ltd., 1694352 Alberta Ltd. and Trail Tire (Kingsway) Ltd. are companies controlled by a director of Trail Tire Distributors Ltd.

 

F-92


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

Trail Tire Services Ltd. is controlled by a close family member of the directors of Trail Tire Distributors Ltd.

As the loans receivable have no stated terms of repayment and are not expected to be repaid within the next fiscal year, they have been classified as long term assets.

Related Party Transactions

Sales to related parties are as follows:

 

    

2014

    

2013

 

Extreme Wheels Distributors Ltd.

   $ 102,844       $ 142,206   

Regional Tire Distributors (Edmonton) Inc.

     88,701         265,241   

Trail Tire (Kingsway) Ltd.

     353,551         277,777   

Trail Tire Services Ltd.

     911,000         1,065,402   
  

 

 

    

 

 

 
   $ 1,456,096       $ 1,750,626   
  

 

 

    

 

 

 

Included in accounts receivable are the following balances receivable from related parties as at the fiscal year-end:

 

    

2014

    

2013

 

Extreme Wheels Distributors Ltd.

   $ 6,255       $ 3,614   

Tirecraft (Fort Road) Centre

     43,534         10,927   

Regional Tire Distributors (Edmonton) Inc.

     242,157         381,745   

Trail Tire (Kingsway) Ltd.

     59,035         40,722   
  

 

 

    

 

 

 
   $ 350,981       $ 437,008   
  

 

 

    

 

 

 

Purchases from related parties are as follows:

 

    

2014

    

2013

 

Extreme Wheels Distributors Ltd.

   $ —         $ 15,998   

Regional Tire Distributors (Edmonton) Inc.

     223,912         2,585,228   

Trail Tire (Kingsway) Ltd.

     555,351         230,415   
  

 

 

    

 

 

 
   $ 779,263       $ 2,831,641   
  

 

 

    

 

 

 

Included in the rent expense are lease payments to 1470242 Alberta Ltd., a company that is controlled by a director of the Company, which amounted to $420,000 for the 2014 fiscal year (February 28, 2013—$420,000).

Payments made for marketing services to Tirecraft Western Canada Ltd, a company in which a director of the Company has indirect ownership, was $nil for the 2014 fiscal year (February 28, 2013—$266,832).

 

F-93


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

Included in accounts payable and accrued liabilities are the following balances payable to the related parties as at the fiscal year-end:

 

    

2014

    

2013

 

Extreme Wheels Distributors Ltd.

   $ 1,626       $ 549   

Tirecraft Western Canada

     80,306         7,870   

Regional Tire Distributors (Edmonton) Inc.

     294,547         256,070   

Trail Tire Services Ltd.

     373         2,589   

Trail Tire (Kingsway) Ltd.

     1,362         2,264   
  

 

 

    

 

 

 
   $ 378,214       $ 269,342   
  

 

 

    

 

 

 

The related party transactions are in the normal course of operations and have been reported in these financial statements at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

7. Property and Equipment

 

    

2014

 
    

Cost

    

Accumulated

Amortization

    

Net

 

Automotive

   $ 435,058       $ 273,119       $ 161,939   

Office equipment

     77,132         36,438         40,694   

Leasehold improvements

     46,856         42,170         4,686   

Computer equipment

     92,729         57,483         35,246   

Computer software

     72,923         72,923         —     

Manufacturing equipment

     69,303         69,303         —     

Shop equipment

     368,654         197,788         170,866   
  

 

 

    

 

 

    

 

 

 
   $ 1,162,655       $ 749,224       $ 413,431   
  

 

 

    

 

 

    

 

 

 

 

    

2013

 
    

Cost

    

Accumulated

Amortization

    

Net

 

Automotive

   $ 444,809       $ 272,422       $ 172,387   

Office equipment

     61,928         28,166         33,762   

Leasehold improvements

     46,856         32,799         14,057   

Computer equipment

     78,572         45,412         33,160   

Computer software

     72,923         72,923         —     

Manufacturing equipment

     69,303         69,303         —     

Shop equipment

     280,816         171,625         109,191   
  

 

 

    

 

 

    

 

 

 
   $ 1,055,207       $ 692,650       $ 362,557   
  

 

 

    

 

 

    

 

 

 

8. Operating Line of Credit

The Company has an operating line of credit bearing interest at prime plus 1.40%, limited to the lesser of $250,000 (increased to $750,000 for the period March 1 to September 30 each year) and 75% of accounts receivable, and is secured by a general security agreement covering a first ranking security interest in all assets of the Company. As at February 28, 2014 and 2013 no amounts were outstanding on the operating line of credit.

 

F-94


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

9. Shareholders’ Loans

Shareholders’ loans at February 28, 2014 which includes amounts outstanding at February 28, 2013 are unsecured, non-interest bearing, and are due March 1, 2015.

10. Share Capital

 

Authorized:

Unlimited number of Class A, B and C common voting shares

 

    

2014

    

2013

 

Issued:

     

100 Class A common shares

   $ 100       $ 100   
  

 

 

    

 

 

 

11. Non-cash Working Capital Items

Non-cash working capital items related to operations are as follows:

 

    

2014

   

2013

 

Accounts receivable

   $ 624,237      $ (322,039

Inventories

     1,468,909        (629,693

Prepaid expenses and deposits

     (4,405     2,653   

Goods and Services Tax receivable

     (48,472     62,628   

Income taxes receivable

     (310,383     4,422   

Accounts payable and accrued liabilities

     (748,243     1,122,081   

Income taxes payable

     (904,005     (398,770

Management remuneration payable

     (600,500     904,005   
  

 

 

   

 

 

 
   $ (522,862   $ 745,287   
  

 

 

   

 

 

 

12. Commitments and Contingency

The Company has entered into various operating leases for its office and warehouse premises as follows:

 

Location

  

Expiration date

Main office/Warehouse—11771 167 Street

   September 30, 2014

Warehouse—16305 117 Avenue

   October 31, 2014

Warehouse—11612 163 Street

   December 31, 2014

The required lease payments under the various leases are due as follows:

 

2015

   $ 521,756   
  

 

 

 

The Company has provided a corporate guarantee related to term loan financing obtained by 1470242 Alberta Ltd., a company that is controlled by a director of the Company. The Company has guaranteed the full amount of the loan maturing June 15, 2014 with an outstanding balance of $3,228,752 as at February 28, 2014 (February 28, 2013—$3,490,352). The guarantee is supported by a general security agreement secured by a floating charge on all of the Company’s fixed assets.

 

F-95


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

Under the current credit facility the Company is required to maintain minimum working capital and debt service coverage ratios. As at February 28, 2014 and 2013 the Company was in compliance with these covenants.

The Company has provided a corporate guarantee related to term loan financing obtained by 1694352 Alberta Ltd., a company that is controlled by a director of the Company. The Company has guaranteed the full amount of the loan maturing September 15, 2017 with an outstanding balance of $972,194 as at February 28, 2014 (February 28, 2013—$1,019,750). The guarantee is supported by a general security agreement secured by a floating charge on all of the Company’s fixed assets.

Under the current credit facility the Company is required to maintain minimum working capital and debt service coverage ratios. As at February 28, 2014 and 2013 the Company was in compliance with these covenants.

13. Financial Instruments

Credit Risk

The Company is susceptible to credit risk on its accounts receivable and mitigates this risk through an extensive credit evaluation process.

Interest Rate Risk

The Company’s operating line of credit bears interest based at prime and, accordingly, exposes the Company to interest rate risk through fluctuation in the prime rate. As at February 28, 2014 and 2013 there was no amount due on the operating line of credit.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to this risk mainly in respect to its accounts payable and accrued liabilities and its management remunerations payable. At February 28, 2014 the company had a working capital balance of $5,559,850 (February 28, 2013—$6,089,611)

Foreign Currency Risk

Currency risk is the risk to the Company’s earnings that arises from fluctuations of foreign exchange rates and the degree of volatility of these rates. The Company is susceptible to foreign currency risk on its US dollar cash balance in the amount of $5,829 as at February 28, 2014 (February 28, 2013—$64,018).

14. Canadian Accounting Standards for Private Enterprises and US GAAP Reconciliation

The financial statements of the Company have been prepared in accordance with Canadian Accounting Standards for Private Enterprises. The material differences between the accounting policies used by the Company under Canadian Accounting Standards for Private Enterprises and US GAAP are disclosed below.

a) Income Taxes

Under US GAAP, the Company recognizes a tax benefit if it is more likely than not that a tax position taken or expected to be taken in a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50 per cent likely of being realized upon settlement. The difference

 

F-96


TRAIL TIRE DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to this guidance represents an unrecognized tax benefit. An unrecognized tax benefit is disclosed as a long-term liability unless the Corporation anticipates a payment or receipt within one year in respect of the position. As a result of implementing these provisions there was no material impact on the Company’s financial statements.

Under US GAAP the Company is required to calculate and record corporate income taxes based on enacted corporate income tax rates. Under the Canadian Accounting Standards for Private Enterprises, the Company had calculated and recognized corporate income taxes using substantively enacted corporate income tax rates. For the company, enacted and substantively enacted corporate tax rates are the same; as a result no differences to calculated and recognized corporate income taxes arise. There are no material differences between the Company’s statutory income tax rate and the effective tax rate.

b) Variable interest entities

The Company has performed a review of the entities with which it conducts business and has concluded that there are no entities that are required to be consolidated or variable interests that are required to be disclosed under the requirements of ASC Topic 810, Consolidation of Variable Interest Entities.

c) Comprehensive Income

US GAAP requires the presentation of a Statement of Comprehensive Income. The Company has no items that would cause such presentation to differ from the amounts presented as Net Income in the accompanying financials statements.

d) Cash Flows From Financing Activities

The Company did not have any cash flows from financing activities and therefore this caption does not appear on the Statements of Cash Flows.

 

F-97


Extreme Wheel Distributors LTD.

Index

February 28, 2014 and 2013

 

    Page  

Independent Auditors’ Report

    F-99   

Financial Statements

 

Balance Sheets

    F-100   

Statements of Operations

    F-101   

Statements of Retained Earnings

    F-102   

Statements of Cash Flows

    F-103   

Notes to Financial Statements

    F-104   

 

F-98


LOGO

 

  INDEPENDENT AUDITORS’ REPORT  

Collins Barrow Edmonton LLP

2380 Commerce Place

10155—102 Street N.W.

Edmonton, Alberta

T5J 4G8 Canada

 

T.  780.428.1522

 

To the Shareholder of Extreme Wheel Distributors Ltd.

  F.  780.425.8189
 

www.collinsbarrow.com

 

We have audited the accompanying financial statements of Extreme Wheel Distributors Ltd., which comprise the balance sheets as of February 28, 2014 and February 28, 2013, and the related statements of operations, retained earnings and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian Accounting Standards for Private Enterprises; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Extreme Wheel Distributors Ltd. as of February 28, 2014 and February 28, 2013, and the results of their operations and their cash flows for the years then ended in accordance with Canadian Accounting Standards for Private Enterprises.

Basis of Accounting

As more fully described in Note 2 to the financial statements, the Company’s policy is to prepare its financial statements on the basis of Canadian Accounting Standards for Private Enterprises which differ from accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to that matter. Information relating to the nature and effect of such differences is presented in note 12 to the financial statements.

 

Edmonton, Alberta

   /s/ Collins Barrow Edmonton LLP
June 20, 2014 except for Note 12 (footnotes (a) and (c)) which are as of August 18, 2014    Chartered Accountants

 

This office is independently owned and operated by Collins Barrow Edmonton LLP

The Collins Barrow trademarks are used under License.

  LOGO

 

F-99


EXTREME WHEEL DISTRIBUTORS LTD.

Balance Sheets

As at February 28, 2014 and February 28, 2013

 

    

February 28,
2014

    

February 28,
2013

 

ASSETS

     

Current Assets

     

Cash

   $ 1,264,965       $ 931,656   

Accounts receivable (Note 3)

     487,572         376,209   

Shareholder’s advance (Note 7)

     125,000         —     

Inventories (Note 4)

     1,308,687         1,000,224   

Goods and Services Tax recoverable

     9,249         1,517   

Prepaid expenses

     5,431         4,705   
  

 

 

    

 

 

 
     3,200,904         2,314,311   

Loan receivable from related party (Note 5)

     130,000         130,000   

Property and equipment (Note 6)

     34,343         45,158   

Investment (Note 8)

     50,858         50,858   
  

 

 

    

 

 

 
   $ 3,416,105       $ 2,540,327   
  

 

 

    

 

 

 

LIABILITIES

     

Current Liabilities

     

Accounts payable and accrued liabilities

   $ 406,083       $ 252,738   

Management remuneration payable

     188,307         314,276   

Income taxes payable

     111,636         14,300   
  

 

 

    

 

 

 
     706,026         581,314   

Loans payable to related parties (Note 5)

     567,689         525,526   
  

 

 

    

 

 

 
     1,273,715         1,106,840   
  

 

 

    

 

 

 

SHAREHOLDER’S EQUITY

     

Share capital (Note 9)

     100         100   

Retained earnings

     2,142,290         1,433,387   
  

 

 

    

 

 

 
     2,142,390         1,433,487   
  

 

 

    

 

 

 
   $ 3,416,105       $ 2,540,327   
  

 

 

    

 

 

 

 

See accompanying notes

 

F-100


EXTREME WHEEL DISTRIBUTORS LTD.

Statements of Operations

For the Years Ended February 28, 2014 and February 28, 2013

 

    

2014

    

2013

 

Sales (Note 5)

   $ 7,678,243       $ 6,168,369   

Cost of sales (Note 5)

     5,978,940         4,580,901   
  

 

 

    

 

 

 

Gross profit

     1,699,303         1,587,468   
  

 

 

    

 

 

 

Expenses

     

Wages and benefits

     513,475         465,680   

Rent (Note 5)

     110,400         110,400   

Bank charges and processing fees

     38,371         33,850   

Professional fees

     35,816         34,308   

Advertising and promotion

     31,237         18,132   

Automotive and travel

     31,069         29,019   

Repairs and maintenance

     18,794         20,113   

Office and shop supplies

     14,727         21,342   

Insurance and licenses

     11,396         9,420   

Amortization

     10,815         13,122   

Management salaries

     7,000         324,000   

Bad debt expense

     6,956         17,413   

Utilities

     5,005         5,149   
  

 

 

    

 

 

 
     835,061         1,101,948   
  

 

 

    

 

 

 

Income before other revenue (expenses) and income taxes

     864,242         485,520   

Other revenue (expenses)

     

Foreign exchange gain

     —           (118

Interest income

     10,302         5,084   
  

 

 

    

 

 

 
     10,302         4,966   
  

 

 

    

 

 

 

Income before income taxes

     874,544         490,486   

Income taxes expense

     165,641         68,728   
  

 

 

    

 

 

 

Net income

   $ 708,903       $ 421,758   
  

 

 

    

 

 

 

 

See accompanying notes

 

F-101


EXTREME WHEEL DISTRIBUTORS LTD.

Statements of Retained Earnings

For the Years Ended February 28, 2014 and February 28, 2013

 

    

2014

    

2013

 

Balance, beginning of year

   $ 1,433,387       $ 1,011,629   

Net income

     708,903         421,758   
  

 

 

    

 

 

 

Balance, end of year

   $ 2,142,290       $ 1,433,387   
  

 

 

    

 

 

 

See accompanying notes

 

F-102


EXTREME WHEEL DISTRIBUTORS LTD.

Statements of Cash Flows

For the Years Ended February 28, 2014 and February 28, 2013

 

    

2014

   

2013

 

Cash provided by (used in):

    

Operating Activities

    

Net income

   $ 708,903      $ 421,758   

Item not affecting cash

    

Amortization

     10,815        13,122   

Change in non-cash working capital items (Note 10)

     (303,572     (121,860
  

 

 

   

 

 

 
     416,146        313,020   
  

 

 

   

 

 

 

Investing Activities

    

Purchase of equipment

     —          (3,597

Advance to shareholder

     (125,000     —     

Repayment from shareholder

     —          12,600   

Advance to related party

     —          (130,000
  

 

 

   

 

 

 
     (125,000     (120,997
  

 

 

   

 

 

 

Financing Activities

    

Advances from related parties

     162,163        86,483   

Repayment to related party

     (120,000     (120,000
  

 

 

   

 

 

 
     42,163        (33,517
  

 

 

   

 

 

 

Increase in cash

     333,309        158,506   

Cash, beginning of year

     931,656        773,150   
  

 

 

   

 

 

 

Cash, end of year

   $ 1,264,965      $ 931,656   
  

 

 

   

 

 

 

 

 

See accompanying notes

 

F-103


EXTREME WHEEL DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

1. Nature of Activities

The Company was incorporated under the Alberta Business Corporations Act on June 27, 2007 and commenced operations as a wholesale wheel business.

2. Summary of Significant Accounting Policies

Basis of Accounting

These financial statements are prepared in accordance with accounting standards for private enterprises, which is a basis of accounting generally accepted in Canada for entities that are privately held.

Revenue Recognition

Revenue is recognized when the goods have been delivered, the services have been completed, the transaction has been accepted by the customer and collection is reasonably assured. The Company reports its revenue net of returns, sales discounts and rebates to customers.

Interest revenue is recognized on an annual basis as it is earned.

Vendor Rebates and Allowances

Vendor rebates and allowances earned are initially recorded as a reduction in the cost of inventories and are included in operations (as a reduction of cost of goods sold) in the period the related product is sold.

Allowance for doubtful accounts

The allowance for doubtful accounts reflects management’s best estimate of losses on the accounts receivable balances. The company maintains an allowance for doubtful accounts that is estimated based on a variety of factors including accounts receivable aging, historical experience and other currently available information, including events such as customer bankruptcy and current economic conditions. Interest is charged on overdue accounts receivable balances. A provision is recorded in the period in which the receivable is deemed uncollectible.

Inventories

Inventories are valued at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition including volume rebates and allowances from vendors. The cost of inventories is determined using the first-in, first-out (FIFO) method. Net realizable value is the estimated selling price in the ordinary course of business, less costs necessary to complete the sale. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand.

 

F-104


EXTREME WHEEL DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

Property and equipment

Property and equipment are recorded at cost less accumulated amortization.

Amortization is calculated at the following annual rates:

 

Automotive    -    30% declining balance basis
Office equipment    -    20% declining balance basis
Leasehold improvements    -    5 year straight-line basis
Computer equipment    -    30% declining balance basis
Shop equipment    -    20% declining balance basis

Property and equipment are tested for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted cash flows expected from its use and eventual disposal. In such a case, an impaired loss must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value.

Investments

The company accounts for its investment using the cost method. The carrying value of the investment is reviewed annually and written down below cost if there is a loss of value.

Income taxes

The Company uses the future income taxes method to account for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Translation of Foreign Currency Transactions

Monetary assets and liabilities of the Company are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Revenue and expense items are translated at rates of exchange in effect at the respective transaction months. The resulting exchange gains or losses are included in net earnings. Non-monetary assets and liabilities, arising from transactions denominated in foreign currencies, are translated at rates of exchange in effect at the date of the transaction.

Use of estimates

The preparation of financial statements in conformity with Accounting Standards for Private Enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more subjective estimates included in these financial statements are the determination of allowance for doubtful accounts receivable and valuation of inventory. Actual results could differ from those estimates.

 

F-105


EXTREME WHEEL DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

Financial Instruments

Measurement of financial instruments

The company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost, except for equity instruments that are quoted in an active market, which are measured at fair value. Changes in fair value are recognized in net income.

Financial assets measured at amortized cost include cash, accounts receivable, shareholder’s advance and loan receivable from related party.

Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, management remuneration payable and loans payable to related parties.

Impairment

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. A previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income.

Transaction costs

Transaction costs relating to financial instruments that are measured subsequently at fair value are recognized in operations in the year in which they are incurred. For instruments that are subsequently measured at amortized cost, the amount initially recognized is adjusted for transaction costs directly attributable to the origination, acquisition, issuance or assumption.

3. Accounts Receivable

Accounts receivable consist of the following:

    

2014

    

2013

 

Accounts receivable—trade

   $ 487,572       $ 384,768   

Allowance for doubtful accounts

     —           (8,559
  

 

 

    

 

 

 
   $ 487,572       $ 376,209   
  

 

 

    

 

 

 

4. Inventories

Inventories consist of the following:

 

    

2014

    

2013

 

Tires

   $ 34,781       $ 25,338   

Parts and accessories

     160,761         137,304   

Custom wheels

     1,113,145         837,582   
  

 

 

    

 

 

 
   $ 1,308,687       $ 1,000,224   
  

 

 

    

 

 

 

 

F-106


EXTREME WHEEL DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

Cost of sales reported on the statement of operations include $5,978,940 (February 28, 2013—$4,580,901) of inventories recognized as an expense during the year.

5. Loans Receivable from/Payable to Related Parties and Related Party Transactions

Loans Receivable from/Payable to Related Parties

a) Loan receivable from related party is as follows:

 

    

2014

    

2013

 

1694352 Alberta Ltd.

   $ 130,000       $ 130,000   
  

 

 

    

 

 

 

Loan receivable from 1694352 Alberta Ltd. is due from a company controlled by an immediate family member of the director of Extreme Wheel Ltd., is unsecured, non-interest bearing and has no stated terms of repayment.

As the loan receivable has no set repayment terms and the balance is not expected to be repaid within the year, it has been classified as a long term asset.

b) Loans payable to related parties are as follows:

 

    

2014

    

2013

 

Trail Tire Services Ltd.

   $ 314,037       $ 434,037   

Regional Tire Distributors (Edmonton) Inc.

     17,367         12,924   

Tirecraft Western Canada Ltd.

     1,291         1,115   

Trail Tire Distributors Ltd.

     234,994         77,450   
  

 

 

    

 

 

 
   $ 567,689       $ 525,526   
  

 

 

    

 

 

 

Loans payable to the companies noted above are unsecured, non-interest bearing and have no stated terms of repayment. The relationship between Extreme Wheel Distributors Ltd. and each of these companies is as follows:

Tirecraft Western Canada Ltd. is indirectly jointly controlled by an immediate family member of the director of Extreme Wheel Distributors Ltd.

Trail Tire Distributors Ltd. is owned by close family members of the sole shareholder of Extreme Wheel Distributors Ltd.

Trail Tire Services Ltd. is controlled by a close family member of the spouse of the sole shareholder of Extreme Wheel Distributors Ltd.

Regional Tire Distributors (Edmonton) Inc. (formerly known as North Alta Tire Distributors Ltd.) is partially owned by a close family member of the director of the Company.

As the related parties have agreed in writing not to demand repayment of any portion of the loan balances prior to March 1, 2015, the loans have been classified as long term liabilities.

 

F-107


EXTREME WHEEL DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

Related Party Transactions

Sales to related parties are as follows:

 

    

2014

    

2013

 

Trail Tire Distributors Ltd.

   $ —         $ 15,998   

Regional Tire Distributors (Edmonton) Inc.

     1,973         3,812   

Trail Tire (Kingsway) Ltd.

     54,808         30,695   

Tirecraft (Fort Road) Centre

     91,408         54,246   
  

 

 

    

 

 

 
   $ 148,189       $ 104,751   
  

 

 

    

 

 

 

Included in accounts receivable are the following balances receivable from related parties as at the fiscal year-end:

 

    

2014

    

2013

 

Trail Tire Distributors Ltd.

   $ 1,626       $ 549   

Regional Tire Distributors (Edmonton) Inc.

     —           855   

Trail Tire (Kingsway) Ltd.

     927         412   
  

 

 

    

 

 

 
   $ 2,553       $ 1,816   
  

 

 

    

 

 

 

Purchases from related parties are as follows:

 

    

2014

    

2013

 

Trail Tire Distributors Ltd.

   $ 102,844       $ 142,206   

Regional Tire Distributors (Edmonton) Inc.

     9,164         329   
  

 

 

    

 

 

 
   $ 112,008       $ 142,535   
  

 

 

    

 

 

 

Included in rent expense are lease payments paid to 1470242 Alberta Ltd., a company controlled by an immediate family member of the sole shareholder of the company, which amounted to $110,400 for the 2014 fiscal year (February 28, 2013—$110,400).

Included in accounts payable and accrued liabilities are the following balances payable to the related parties as at the fiscal year-end:

 

    

2014

    

2013

 

Tirecraft Western Canada Ltd.

   $ 1,551       $ 390   

Regional Tire Distributors (Edmonton) Inc.

     2,731         72   

Trail Tire Distributors Ltd.

     6,255         3,614   
  

 

 

    

 

 

 
   $ 10,537       $ 4,076   
  

 

 

    

 

 

 

The related party transactions are in the normal course of operations and have been reported in these financial statements at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

 

F-108


EXTREME WHEEL DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

6. Property and equipment

 

           

2014

        
    

Cost

    

Accumulated
Amortization

    

Net

 

Automotive

   $ 10,620       $ 9,103       $ 1,517   

Office equipment

     10,250         6,924         3,326   

Leasehold improvements

     11,190         10,285         905   

Computer equipment

     15,608         14,965         643   

Shop equipment

     71,373         43,421         27,952   
  

 

 

    

 

 

    

 

 

 
   $ 119,041       $ 84,698       $ 34,343   
  

 

 

    

 

 

    

 

 

 
           

2013

        
    

Cost

    

Accumulated
Amortization

    

Net

 

Automotive

   $ 10,620       $ 8,453       $ 2,167   

Office equipment

     10,250         6,093         4,157   

Leasehold improvements

     11,190         8,260         2,930   

Computer equipment

     15,608         14,688         920   

Shop equipment

     71,373         36,389         34,984   
  

 

 

    

 

 

    

 

 

 
   $ 119,041       $ 73,883       $ 45,158   
  

 

 

    

 

 

    

 

 

 

7. Shareholder’s advance

Shareholder’s advance at February 28, 2014 is unsecured, non-interest bearing, and will be repaid within the 2015 fiscal year. As such, the advance has been classified as a current asset.

8. Investment

The Company accounts for its portfolio investment in TireWare Inc. at cost. TireWare Inc. is a non-public company based in the United States of America.

9. Share Capital

 

Authorized:      

Unlimited number of Class A common shares

     

Unlimited number of Class B common shares

     

Unlimited number of Class C common shares

     

1,000,000 Class D preferred shares without nominal or par value

     
    

2014

    

2013

 

Issued:

     

100 Class A common shares

   $ 100       $ 100   
  

 

 

    

 

 

 

 

F-109


EXTREME WHEEL DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

10. Non-cash Working Capital Items

Non-cash working capital items related to operations are as follows:

 

    

2014

   

2013

 

Accounts receivable

   $ (111,363   $ 79,751   

Goods and Services Tax recoverable

     (7,732     (1,517

Inventories

     (308,463     (102,325

Prepaid expenses

     (726     (288

Accounts payable and accrued liabilities

     153,345        39,264   

Income taxes payable

     97,336        3,979   

Management remuneration payable

     (125,969     (140,724
  

 

 

   

 

 

 
   $ (303,572   $ (121,860
  

 

 

   

 

 

 

11. Financial Instruments

Credit Risk

Credit risk arises from the potential that a counter party will fail to perform its obligations. The Company is susceptible to concentration of credit risk on its accounts receivable and mitigates this risk through an extensive credit evaluation process.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to this risk mainly in respect to its accounts payable and accrued liabilities and its management remuneration payable. At February 28, 2014 the company had working capital of $2,494,878 (February 28, 2013—$1,732,997)

Foreign Currency Risk

Currency risk is the risk to the Company’s earnings that arises from fluctuations of foreign exchange rates and the degree of volatility of these rates. The Company is susceptible to foreign currency risk on its US dollar cash balance in the amount of $5,812 as at February 28, 2014 (February 28, 2013—$102,054).

12. Canadian Accounting Standards for Private Enterprises and US GAAP Reconciliation

The financial statements of the Company have been prepared in accordance with Canadian Accounting Standards for Private Enterprises. The material differences between the accounting policies used by the Company under Canadian Accounting Standards for Private Enterprises and US GAAP are disclosed below.

a) Income Taxes

Under US GAAP, the Company recognizes a tax benefit if it is more likely than not that a tax position taken or expected to be taken in a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50 per cent likely of being realized upon settlement.

 

F-110


EXTREME WHEEL DISTRIBUTORS LTD.

Notes to the Financial Statements

February 28, 2014 and February 28, 2013

 

The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to this guidance represents an unrecognized tax benefit. An unrecognized tax benefit is disclosed as a long-term liability unless the Corporation anticipates a payment or receipt within one year in respect of the position. As a result of implementing these provisions there was no material impact on the Company’s financial statements.

Under US GAAP the Company is required to calculate and record corporate income taxes based on enacted corporate income tax rates. Under the Canadian Accounting Standards for Private Enterprises, the Company had calculated and recognized corporate income taxes using substantively enacted corporate income tax rates. For the company, enacted and substantively enacted corporate tax rates are the same; as a result no differences to calculated and recognized corporate income taxes arise. There are no material differences between the Company’s statutory income tax rate and the effective tax rate.

b) Variable interest entities

The Company has performed a review of the entities with which it conducts business and has concluded that there are no entities that are required to be consolidated or variable interest that are required to be disclosed under the requirements of ASC Topic 810, Consolidation of Variable Interest Entities.

c) Comprehensive Income

US GAAP requires the presentation of a Statement of Comprehensive Income. The Company has no items that would cause such presentation to differ from the amounts presented as Net Income in the accompanying financials statements.

 

F-111


Kirks Tire LTD.

Index

January 31, 2014, 2013 and 2012

 

    Page  

Independent Auditors’ Report

    F-113   

Financial Statements

 

Balance Sheets

    F-114   

Statements of Operations

    F-115   

Statements of Retained Earnings

    F-116   

Statements of Cash Flows

    F-118   

Notes to Financial Statements

    F-117   

 

F-112


LOGO

 

    Collins Barrow Edmonton LLP
 

INDEPENDENT AUDITORS’ REPORT

  2380 Commerce Place
    10155—102 Street N.W.
    Edmonton, Alberta
    T5J 4G8 Canada
   

 

T.  780.428.1522

To the Shareholders of Kirks Tire Ltd.   F.  780.425.8189
 

 

www.collinsbarrow.com

Report on the Financial Statements

We have audited the accompanying financial statements of Kirks Tire Ltd., which comprise the balance sheets as of January 31, 2014, January 31, 2013 and January 31, 2012, and the related statements of operations, retained earnings and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian Accounting Standards for Private Enterprises; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kirk’s Tire Ltd. as of January 31, 2014, January 31, 2013 and January 31, 2012, and the results of their operations and their cash flows for the years then ended in accordance with Canadian Accounting Standards for Private Enterprises.

Basis of Accounting

As more fully described in Note 2 to the financial statements, the Company’s policy is to prepare its financial statements on the basis of Canadian Accounting Standards for Private Enterprises which differ from accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to that matter. Information relating to the nature and effect of such differences is presented in note 12 to the financial statements.

 

Edmonton, Alberta

   /s/ Collins Barrow Edmonton LLP
June 25, 2014 except for Note 12 (footnotes (a) and (d)) which are as of August 18, 2014    Chartered Accountants

 

This office is independently owned and operated by Collins Barrow Edmonton LLP

The Collins Barrow trademarks are used under License.

   LOGO

 

F-113


KIRKS TIRE LTD.

Balance Sheets

As at January 31, 2014, January 31, 2013 and January 31, 2012

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

ASSETS

        

Current Assets

        

Cash

   $ 3,335,664       $ 3,003,972       $ 3,057,437   

Accounts receivable (Note 3 and Note 5)

     8,454,030         5,657,716         6,093,789   

Goods and Services Tax receivable

     30,156         192,088         185,262   

Inventories (Note 4)

     5,756,489         8,980,481         7,860,693   

Prepaid expenses

     50,967         58,841         60,793   

Income taxes receivable

     —           —           248,218   
  

 

 

    

 

 

    

 

 

 
     17,627,306         17,893,098         17,506,192   

Loans receivable from related parties (Note 5)

     3,811,861         12,509,058         10,778,106   

Equipment (Note 7)

     336,379         323,768         312,941   

Investment

     100         100         100   
  

 

 

    

 

 

    

 

 

 
   $ 21,775,646       $ 30,726,024       $ 28,597,339   
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

Current Liabilities

        

Accounts payable and accrued liabilities (Note 5)

   $ 2,629,854       $ 7,202,232       $ 5,960,249   

Income taxes payable

     953,942         1,286,971         —     

Management remuneration payable

     —           1,735,000         5,299,650   
  

 

 

    

 

 

    

 

 

 
     3,583,796         10,224,203         11,259,899   

Loans payable to related parties (Note 5)

     3,877,762         1,881,243         3,681,345   

Shareholders’ loans (Note 6)

     2,614,082         3,660,734         4,903,868   
  

 

 

    

 

 

    

 

 

 
     10,075,640         15,766,180         19,845,112   
  

 

 

    

 

 

    

 

 

 

SHAREHOLDERS’ EQUITY

        

Commons shares (Note 8)

     150         150         150   

Preferred shares (Note 8)

     588,608         588,608         588,608   

Contributed surplus

     1,894,789         1,894,789         1,894,789   

Retained earnings

     9,216,459         12,476,297         6,268,680   
  

 

 

    

 

 

    

 

 

 
     11,700,006         14,959,844         8,752,227   
  

 

 

    

 

 

    

 

 

 
   $ 21,775,646       $ 30,726,024       $ 28,597,339   
  

 

 

    

 

 

    

 

 

 
Commitments and Contingency (Note 10)         

See accompanying notes

 

F-114


KIRKS TIRE LTD.

Statements of Operations

For the Years Ended January 31, 2014, January 31, 2013 and January 31, 2012

 

    

January 31,
2014

   

January 31,
2013

    

January 31,
2012

 

Sales (Note 5)

   $ 65,868,923      $ 61,086,565       $ 52,603,139   

Cost of sales (Note 5)

     50,720,892        48,665,083         43,159,770   
  

 

 

   

 

 

    

 

 

 

Gross profit

     15,148,031        12,421,482         9,443,369   
  

 

 

   

 

 

    

 

 

 

Expenses

       

Wages and benefits

     1,497,033        1,278,658         1,142,440   

Automotive

     222,339        164,902         165,594   

Administrative

     178,056        50,011         825   

Repairs and maintenance

     142,723        68,195         61,987   

Utilities

     119,314        112,658         112,914   

Rent (Note 5)

     115,800        115,800         115,800   

Interest and bank charges

     105,882        68,494         65,399   

Office

     105,271        86,787         69,148   

Amortization

     100,476        95,861         117,442   

Advertising and promotion

     82,966        71,317         60,625   

Property taxes

     67,098        63,554         60,376   

Shop supplies

     62,537        25,629         20,660   

Travel

     54,695        38,004         39,015   

Insurance

     50,876        52,697         41,941   

Telephone

     39,274        52,130         40,565   

Dues and memberships

     12,394        8,871         8,059   

Professional fees

     1,548        15,071         5,588   

Bad debt expense (recovery)

     (35,881     104,573         771,702   

Management salaries

     —          1,735,000         5,299,650   
  

 

 

   

 

 

    

 

 

 
     2,922,401        4,208,212         8,199,730   
  

 

 

   

 

 

    

 

 

 

Income before other revenue and income taxes

     12,225,630        8,213,270         1,243,639   

Other revenue

       

Interest income

     55,229        54,562         45,019   

Gain on sale of equipment

     36,327        6,542         6,399   
  

 

 

   

 

 

    

 

 

 

Income before income taxes

     12,317,186        8,274,374         1,295,057   

Income taxes expense

     3,077,024        2,066,757         343,804   
  

 

 

   

 

 

    

 

 

 

Net income

   $ 9,240,162      $ 6,207,617       $ 951,253   
  

 

 

   

 

 

    

 

 

 

See accompanying notes

 

F-115


KIRKS TIRE LTD.

Statements of Retained Earnings

For the Years Ended January 31, 2014, January 31, 2013 and January 31, 2012

 

    

January 31,
2014

   

January 31,
2013

    

January 31,
2012

 

Balance, beginning of year

   $ 12,476,297      $ 6,268,680       $ 5,317,427   

Net income

     9,240,162        6,207,617         951,253   

Dividends paid

     (12,500,000     —           —     
  

 

 

   

 

 

    

 

 

 

Balance, end of year

   $ 9,216,459      $ 12,476,297       $ 6,268,680   
  

 

 

   

 

 

    

 

 

 

See accompanying notes

 

F-116


KIRKS TIRE LTD.

Statements of Cash Flows

For the Years Ended January 31, 2014, January 31, 2013 and January 31, 2012

 

    

January 31,
2014

   

January 31,
2013

   

January 31,
2012

 

Cash provided by (used in):

      

Operating Activities

      

Net income

   $ 9,240,162      $ 6,207,617      $ 951,253   

Items not affecting cash

      

Amortization

     100,476        95,861        117,442   

Gain on sale of equipment

     (36,327     (6,542     (6,399
  

 

 

   

 

 

   

 

 

 
     9,304,311        6,296,936        1,062,296   

Change in non-cash working capital items (Note 9)

     (6,042,923     (1,476,067     143,010   
  

 

 

   

 

 

   

 

 

 
     3,261,388        4,820,869        1,205,306   
  

 

 

   

 

 

   

 

 

 

Investing Activities

      

Purchase of equipment

     (154,534     (193,798     (157,166

Proceeds on disposal of equipment

     77,774        93,652        27,416   

Advances to related parties

     (3,807,320     (8,705,534     (5,087,723

Repayments from related parties

     12,504,518        6,974,582        5,567,412   
  

 

 

   

 

 

   

 

 

 
     8,620,438        (1,831,098     349,939   
  

 

 

   

 

 

   

 

 

 

Financing Activities

      

Repayments to shareholders

     (15,580,910     (1,269,568     —     

Advances from shareholders

     2,034,258        26,433        790,967   

Advances from related parties

     3,866,554        1,324,990        3,114,163   

Repayments to related parties

     (1,870,036     (3,125,091     (3,454,708
  

 

 

   

 

 

   

 

 

 
     (11,550,134     (3,043,236     450,422   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash

     331,692        (53,465     2,005,667   

Cash, beginning of year

     3,003,972        3,057,437        1,051,770   
  

 

 

   

 

 

   

 

 

 

Cash, end of year

   $ 3,335,664      $ 3,003,972      $ 3,057,437   
  

 

 

   

 

 

   

 

 

 

See accompanying notes

 

F-117


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

1. Nature of operations

The Company was incorporated under the Alberta Business Corporations Act on January 30, 1990 and operates a tire distribution sales and service business.

2. Summary of significant accounting policies

Basis of presentation

These financial statements are prepared in accordance and in compliance with Canadian accounting standards for private enterprises (“ASPE”), as issued by the Canadian Institute of Chartered Accountants (“CICA”).

Revenue recognition

Revenue is recognized when the goods have been delivered, the services have been completed, the transaction has been accepted by the customer and collection is reasonably assured. The Company reports its revenue net of returns, sales discounts and volume rebates to customers.

Interest revenue is recognized on an annual basis as it is earned.

Translation of Foreign Currency

Monetary assets and liabilities of the Company are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Revenue and expense items are translated at rates of exchange in effect at the respective transaction months. The resulting exchange gains or losses are included in net earnings. Non-monetary assets and liabilities, arising from transactions denominated in foreign currencies, are translated at rates of exchange in effect at the date of the transaction.

Foreign Currency Contracts

The Company may enter into foreign currency forward contracts to reduce exposure to foreign currency fluctuations. The contracts are measured at fair value and the resulting gains or losses, that would be realized if the position was sold before the valuation dates, are recorded as unrealized gains or losses.

Vendor Rebates and Allowances

The Company participates in various purchase rebate programs with its major tire vendors including early payment incentives and volume purchase rebates based on defined levels of purchase volume. These arrangements enable the Company to earn rebates that reduce the cost of merchandise purchased. Vendor rebates and allowances are accrued as earned. Vendor rebates and allowances earned are initially recorded as a reduction in the cost of merchandise inventories and are included in operations (as a reduction of cost of goods sold) in the period the related product is sold.

Allowance for doubtful accounts

The allowance for doubtful accounts reflects management’s best estimate of losses on the accounts receivable balances. The company maintains an allowance for doubtful accounts that is estimated based on a

 

F-118


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

variety of factors including accounts receivable aging, historical experience and other currently available information, including events such as customer bankruptcy and current economic conditions. Interest is charged on overdue account receivable balances. A provision is recorded in the period in which the receivable is deemed uncollectible.

Inventories

Inventories are valued at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition including volume rebates and allowances from vendors. The cost of inventories is determined using the first-in, first-out (FIFO) method. Net realizable value is the estimated selling price in the ordinary course of business, less costs necessary to complete the sale. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand.

Equipment

Property and equipment are recorded at cost less accumulated amortization.

Amortization is calculated at the following annual rates:

 

Automotive

    -       30% declining balance basis

Computer equipment

    -       55% declining balance basis

Manufacturing equipment

    -       30% straight-line basis

Shop equipment

    -       20% declining balance basis

Property and equipment are tested for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted cash flows expected from its use and eventual disposal. In such a case, an impaired loss must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value.

Investments

The company accounts for its investments using the cost method. The carrying value of each investment is reviewed annually and written down below cost if there is a loss of value.

Income taxes

The Company uses the future income taxes method to account for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Future income taxes have not been recorded as they are considered insignificant.

Use of estimates

The preparation of these financial statements in conformity with Canadian Accounting Standards for Private Enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and

 

F-119


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

the reported amounts of revenues and expenses during the reporting period. Significant estimates included in the financial statements are the valuation of accounts receivable, valuation of inventory, and the estimated useful life of long-lived assets for purposes of calculating amortization. Actual results could differ from those estimates.

Financial Instruments

Measurement of financial instruments

The company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost, except for equity instruments that are quoted in an active market, which are measured at fair value. Changes in fair value are recognized in net income.

Financial assets measured at amortized cost include cash, accounts receivable and loans receivable from related parties.

Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, management remuneration payable, loans payable to related parties and shareholders’ loans.

Impairment

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income.

Transaction costs

The Company recognizes its transaction costs in net income in the period incurred. However, the carrying amount of the financial instruments that will not be subsequently measured at fair value is reflected in the transaction costs that are directly attributable to their origination, issuance or assumptions.

3. Accounts Receivable

Accounts Receivable consists of the following:

 

    

January 31,
2014

   

January 31,
2013

   

January 31,
2012

 

Accounts Receivable—Trade

   $ 9,979,368      $ 7,328,758        7,660,258   

Allowance for Doubtful Accounts

     (1,525,338     (1,671,042     (1,566,469
  

 

 

   

 

 

   

 

 

 
   $ 8,454,030      $ 5,657,716      $ 6,093,789   
  

 

 

   

 

 

   

 

 

 

4. Inventories

Inventory consists of the following:

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

Tires

   $ 5,736,837       $ 8,970,484       $ 7,856,484   

Parts

     19,652         9,997         4,209   
  

 

 

    

 

 

    

 

 

 
   $ 5,756,489       $ 8,980,481       $ 7,860,693   
  

 

 

    

 

 

    

 

 

 

 

F-120


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

At the fiscal year end, inventory included volume rebates and allowances of $ 595,000 (January 31, 2013—$1,093,336, January 31, 2012—$898,381).

Cost of sales reported on the statement of operations include $50,720,892 (January 31, 2013—$48,665,083, January 31, 2012—$43,159,770) of inventories recognized as an expense during the year.

5. Loans Receivable from/Payable to Related Parties and Related Party Transactions

Loans receivable from related parties are as follows:

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

Integra Tire & Auto Centres Canada Ltd.

   $ 48,503       $ —         $ —     

Kirk Tire Distributors Ltd.

     22,843         —           1,008   

Pask Technology Group Inc.

     93,878         4,541         —     

Regional Tire Distributors (Manitoba) Inc.

     3,646,637         —           —     

Tirecraft Edmonton Truck Centre Ltd.

     —           4,037,756         858,110   

Regional Tire Distributors (Vernon) Inc.

     —           1,029,582         795,422   

Ranger Tire Inc.

     —           752,997         752,998   

Regional Tire Distributors (Saskatchewan) Inc.

     —           3,467,827         326,019   

Regional Tire Distributors (Victoria) Inc.

     —           554,592         277,842   

TCBC Holdings Inc.

     —           235,357         —     

Regional Tire Distributors (Edmonton) Inc.

     —           711,308         2,365,960   

Ward Tires, Inc.

     —           1,565,774         40,965   

KDW Enterprises Ltd.

     —           149,324         40,860   

Kirk’s Tire (Edmonton) Ltd.

     —           —           50,000   

Treads West Retreading Inc.

     —           —           1,340,501   

Tirecraft Canada Ltd.

     —           —           21,000   

Elrich Calgary Corp.

     —           —           314,671   

L&K Tire Inc.

     —           —           1,530,169   

Regional Tire Distributors (Calgary) Inc.

     —           —           1,848,046   

1494974 Alberta Ltd.

     —           —           180,000   

VLK Properties Ltd.

     —           —           34,535   
  

 

 

    

 

 

    

 

 

 
   $ 3,811,861       $ 12,509,058       $ 10,778,106   
  

 

 

    

 

 

    

 

 

 

Loans receivable from the companies noted above are unsecured, non-interest bearing and have no stated terms of repayment. As the loans receivable have no stated terms of repayment and are not expected to be repaid within the next year, they have been classified as long term assets.

 

F-121


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

Loans payable to related parties are as follows:

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

Regional Tire Distributors (Saskatchewan) Inc.

   $ 107,560       $ —         $ —     

Regional Tire Distributors (Edmonton) Inc.

     3,750,000         —           400,000   

Regional Tire Distributors (Calgary) Inc.

     4,593         286,353         —     

Kirk’s Tire (Red Deer) Ltd.

     5,080         17,840         7,233   

Kirk’s Mid-Way Tire Ltd.

     9,347         20,151         125,236   

Kirk’s Tire (Cardston) Ltd.

     1,066         2,160         —     

Kirk’s Taber Ltd.

     116         39         800,015   

Elrich Calgary Corp.

     —           927,007         —     

Son Tirecraft Burnaby Inc.

     —           91,237         —     

Ward Tires, Inc.

     —           34,304         34,304   

Kirk’s Tire (Edmonton) Ltd.

     —           309         —     

590545 Alberta Ltd.

     —           500,000         500,000   

Kirk’s Tire (Brooks) Ltd.

     —           1,843         4,277   

TCBC Holdings Inc.

     —           —           31,736   

Regional Tire Distributors (Langley) Inc.

     —           —           478,544   

767021 Alberta Ltd.

     —           —           1,300,000   
  

 

 

    

 

 

    

 

 

 
   $ 3,877,762       $ 1,881,243       $ 3,681,345   
  

 

 

    

 

 

    

 

 

 

Loans payable to the companies noted above are unsecured, non-interest bearing and have no stated terms of repayment. As the related parties have agreed in writing not to demand repayment of any portion of the loan balances prior to February 1, 2015, the loans have been classified as long term liabilities.

 

F-122


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

Included in accounts receivable are the following balances payable to the related parties as at the fiscal year-end:

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

Ward Tires, Inc.

   $ 262,051       $ 84,157       $ 1,663   

Ranger Tire Inc.

     8,393         183,089         2,152,394   

Trail Tire Distributors Ltd.

     860,172         —           449,910   

Elrich Calgary Corp.

     69,403         273         —     

Integra Tire & Auto Centres Canada Ltd.

     209,159         —           —     

Pask Technology Group Inc.

     41         —           —     

Pasta Fresco

     1,170         —           —     

TCBC Holdings Inc.

     474,032         —           —     

B&K Vehicles Inc.

     296         —           —     

Commercial Tire Inc.

     2,240         11,988         356   

Oasis Sales & Service Ltd.

     1,105         —           —     

1299068 Alberta Ltd.

     28,828         —           232,481   

KDW Enterprises Ltd.

     173,560         118,928         53,280   

CAJM Holdings Ltd.

     10,659         4,224         655   

Treads West Retreading Inc.

     3,224         462         —     

Tirecraft Lloydminster Truck Centre Inc.

     3,032         1,425         754   

Kirk’s AdminCo Ltd.

     960         6,000         —     

Kirk’s Tire (Cardston) Ltd.

     139,428         98,452         116,950   

Kirk’s Tire (Red Deer) Ltd.

     33,035         117,219         87,394   

Kirk’s Tire (Brooks) Ltd.

     58,017         191,556         96,868   

Kirk’s Taber Ltd.

     247,468         204,682         200,671   

Kirk’s Tire (Edmonton) Ltd.

     35,981         64,383         9,325   

Kirk’s Mid-Way Tire Ltd.

     520,009         432,240         643,536   

Regional Tire Distributors (Edmonton) Inc.

     48,891         —           169,817   

Regional Tire Distributors (Vernon) Inc.

     532,480         121,723         38,956   

Regional Tire Distributors (Calgary) Inc.

     97,974         95,353         238,722   

Regional Tire Distributors (Langley) Inc.

     47,608         88,169         90,654   

Regional Tire Distributors (Victoria) Inc.

     451,817         —           59,317   

L&K Tire Inc.

     —           64,765         —     

Kirk Tire Distributors Ltd.

     —           7,234         —     

Regional Tire Distributors (Saskatchewan) Inc.

     —           63,898         195,227   

Kirk’s Tire (Calgary) Ltd.

     —           —           174   

Tirecraft Aldergrove

     —           —           1,394   

Extreme Wheel Distributors Ltd.

     —           —           5   

590545 Alberta Ltd.

     —           —           311   
  

 

 

    

 

 

    

 

 

 
   $ 4,321,033       $ 1,960,220       $ 4,840,814   
  

 

 

    

 

 

    

 

 

 

 

F-123


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

Included in accounts payable and accrued liabilities are the following balances payable to the related parties as at the fiscal year-end:

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

Ward Tires, Inc.

   $ 1,475       $ 41,715       $ 340,350   

Ranger Tire Inc.

     111,959         37,698         81,876   

Extreme Wheel Distributors Ltd.

     5,737         495         4,860   

Trail Tire Distributors Ltd.

     16,996         16,914         18,998   

Elrich Calgary Corp.

     9,743         410,635         410,710   

Pask Technology Group Inc.

     474         386         224   

590545 Alberta Ltd.

     7,875         56,868         —     

L&K Tire Inc.

     73,368         3,482         —     

B&K Vehicles Inc.

     9,560         —           —     

KDW Enterprises Ltd.

     26,904         46,768         182,576   

Son Tirecraft Burnaby Inc.

     4,779         —           —     

Tirecraft Edmonton Truck Centre Ltd.

     403,536         9,794         39,581   

Kirk Tire Distributors Ltd.

     269         —           —     

Kirk’s AdminCo Ltd.

     138         223         351   

Kirk’s Tire (Cardston) Ltd.

     34         1,497         76   

Kirk’s Tire (Red Deer) Ltd.

     68,651         60,165         43,812   

Kirk’s Tire (Brooks) Ltd.

     24,044         11,826         93,838   

Kirk’s Taber Ltd.

     22,236         39,395         58,539   

Kirk’s Tire (Edmonton) Ltd.

     11,167         4,453         8,801   

Tirecraft of Calgary

     11,624         54,453         38,238   

TCBC Holdings Inc.

     17,893         —           7,179   

Tirecraft Western Canada Ltd.

     14,678         10,584         85,516   

Kirk’s Mid-Way Tire Ltd.

     49,516         24,738         140,064   

BJK Holdings Ltd.

     570,900         268,138         795,601   

Regional Tire Distributors (Edmonton) Inc.

     8,462         840,739         24,588   

Regional Tire Distributors (Vernon) Inc.

     25,756         —           —     

Regional Tire Distributors (Saskatchewan) Inc.

     72,196         —           —     

Regional Tire Distributors (Calgary) Inc.

     110,146         476,564         39,371   

Regional Tire Distributors (Langley) Inc.

     35,780         888,248         3,592   

Treads West Retreading Inc.

     —           921         4,125   

Commercial Tire Inc.

     —           —           53,090   

Kirk’s Tire (Calgary) Ltd.

     —           320         9,159   

Regional Tire Distributors (Victoria) Inc.

     —           16,171         —     

Tirecraft Canada Ltd.

     —           —           29,536   
  

 

 

    

 

 

    

 

 

 
   $ 1,715,896       $ 3,323,190       $ 2,514,651   
  

 

 

    

 

 

    

 

 

 

 

F-124


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

The following summarizes the Company’s related party transactions included in sales:

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

1299068 Alberta Ltd

   $ 6,324,015       $ 8,815,582       $ 8,118,225   

Commercial Tire Inc.

     157,087         145,642         195,884   

Integra Tire & Auto Centres Canada Ltd.

     144,679         —           —     

KDW Enterprises Ltd.

     1,200,006         684,485         328,218   

Kirk’s Tire (Brooks) Ltd.

     2,377,544         2,126,831         1,910,220   

Kirk’s Tire (Cardston) Ltd.

     1,298,124         1,215,298         1,172,879   

Kirk’s Tire (Edmonton) Ltd.

     1,049,189         637,086         776,834   

Kirk’s Mid-Way Tire Ltd.

     5,607,725         5,730,464         5,471,719   

Kirk’s Tire (Red Deer) Ltd.

     1,750,172         1,906,419         1,896,594   

Kirk’s Taber Ltd.

     2,713,119         2,914,555         2,261,559   

L&K Tire Inc.

     500         —           —     

Oasis Sales & Service Ltd.

     785         —           —     

Regional Tire Distributors (Calgary) Inc.

     4,104,982         2,642,510         2,259,935   

Regional Tire Distributors (Edmonton) Inc.

     648,512         770,468         1,195,376   

Regional Tire Distributors (Langley) Inc.

     1,374,047         834,921         999,544   

Regional Tire Distributors (Manitoba) Inc.

     263,195         —           —     

Regional Tire Distributors (Saskatchewan) Inc.

     770,928         937,043         322,559   

Regional Tire Distributors (Vernon) Inc.

     1,799,215         1,763,106         1,790,672   

Regional Tire Distributors (Victoria) Inc.

     328,150         279,913         90,879   

TCBC Holdings Inc.

     1,645,316         —           1,632,830   

Tirecraft Lloydminster Truck Centre Inc.

     575,076         465,064         346,711   

Tirecraft Nisku Inc.

     26,972         6,546         7,387   

Trail Tire Distributors Ltd.

     8,193,227         7,023,218         5,452,383   

Tirecraft Aldergrove

     —           1,838,785         1,244   

590545 Alberta Ltd.

     —           1,088         —     

Tirecraft Richmond

     —           2,584         —     
  

 

 

    

 

 

    

 

 

 
   $ 42,352,565       $ 40,741,608       $ 36,231,652   
  

 

 

    

 

 

    

 

 

 

The following summarizes the Company’s related party transactions included in cost of sales and expenses:

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

Pask Technology Group Inc.

   $ 5,483       $ 5,391       $ 5,705   

Kirk’s Adminco Ltd.

     3,057         3,212         7,262   

BJK Holdings Ltd.

     880,585         —           —     

W.R. Kirk Holdings Ltd.

     115,800         115,800         115,800   

590545 Alberta Ltd.

     94,500         306,256         398,921   

Commercial Tire Inc.

     —           142,328         —     
  

 

 

    

 

 

    

 

 

 
   $ 1,099,425       $ 572,987       $ 527,688   
  

 

 

    

 

 

    

 

 

 

Related party expenses to Pask Technology Inc. and Kirk’s Adminco Ltd. have been included in office expense. Related party expenses to 590545 Alberta Ltd., Commercial Tire Inc. and BJK Holdings Ltd. have been included in cost of sales. Related party expenses to W.R. Kirk Holdings Ltd. have been included in rent expense.

 

F-125


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

The following summarizes all the Company’s volume bonuses received and rebilled to related and unrelated parties:

 

    

January 31,
2014

    

January 31,
2013

   

January 31,
2012

 

Volume bonuses received

   $ 9,737,286       $ 7,776,280      $ 6,492,767   

Volume bonuses rebilled:

       

Integra Tire & Auto Centres Canada Ltd.

     285,339         —          —     

KDW Enterprises Ltd.

     152,840         —          151,800   

Kirk’s Tire (Edmonton) Ltd.

     3,561         —          —     

Regional Tire Distributors (Calgary) Inc.

     1,119,087         828,223        187,075   

Regional Tire Distributors (Edmonton) Inc.

     2,308,423         1,403,495        698,113   

Regional Tire Distributors (Langley) Inc.

     905,479         594,365        918,436   

Regional Tire Distributors (Manitoba) Inc.

     399,332         —          —     

Regional Tire Distributors (Saskatchewan) Inc.

     387,357         578,995        —     

Regional Tire Distributors (Vernon) Inc.

     348,608         265,248        123,304   

Regional Tire Distributors (Victoria) Inc.

     206,559         146,091        330   

TCBC Holdings Inc.

     4,835         —          —     

Tirecraft Edmonton Truck Centre Ltd.

     101,363         277,568        98,347   

Tirecraft of Calgary

     1,350         342,950        —     

Ranger Tire Inc.

     16,646         —          —     

Kamloops Tire Ltd.

     885         —          —     

Tiresmith Inc.

     55,254         60,622        64,589   

Ward Tires, Inc.

     5,370         127,334        318,447   

BJK Holdings Ltd.

     —           3,708,798        1,318,201   

Commercial Tire Inc.

     —           51,342        100,785   

Elrich Calgary Corp.

     —           —          182,645   

L&K Tire Inc.

     —           —          1,731,416   

Trail Tire Distributors Ltd.

     —           —          6,467   

OK Tire 99 Street

     —           —          136,000   

Tirecraft Canada Ltd.

     —           (145,976     83,396   

Tirecraft Western Canada Ltd.

     —           (110,517     254,976   
  

 

 

    

 

 

   

 

 

 
     6,302,288         8,128,538        6,374,327   
  

 

 

    

 

 

   

 

 

 

Volume bonuses recognized as income (expense)

   $ 3,434,998       $ (352,258   $ 118,440   
  

 

 

    

 

 

   

 

 

 

Companies not directly related to Kirk’s Tire Ltd. that received volume bonuses are Ranger Tire Inc., Kamloops Tire Ltd., Tiresmith Inc., Ward Tires, Inc., Trail Tire Distributors Ltd. and OK Tire 99 Street.

The relationship between Kirk’s Tire Ltd. and each of the companies above is as follows:

The following companies are jointly controlled by a director of Kirk’s Tire Ltd.: KDW Enterprises Ltd., Kirk’s Tire (Edmonton) Ltd., L&K Tire Inc., Kirk’s Tire (Brooks) Ltd., Regional Tire Distributors (Langley) Inc., Commercial Tire Inc., Kirk’s AdminCo Ltd., Tirecraft Western Canada Ltd., Tirecraft Nisku Inc., BJK Holdings Ltd., W.R. Kirk Holdings Ltd., Tirecraft Edmonton Truck Centre Ltd., TCBC Holdings Inc., Regional Tire Distributors (Edmonton) Inc., Elrich Calgary Corp., Regional Tire Distributors (Calgary) Inc., 1494974 Alberta Ltd., VLK Properties Ltd., Kirk’s Tire (Red Deer) Ltd., 590545 Alberta Ltd., 767021 Alberta Ltd., B&K Vehicles Inc., 1299068 Alberta Ltd., Tirecraft Lloydminster Truck Centre Inc., Tirecraft Aldergrove, and Tirecraft Richmond.

 

F-126


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

The following companies are significantly influenced by a director of Kirk’s Tire Ltd.: Integra Tire & Auto Centres Canada Ltd., Regional Tire Distributors (Manitoba) Inc., Regional Tire Distributors (Saskatchewan) Inc., Regional Tire Distributors (Victoria) Inc., Regional Tire Distributors (Vernon) Inc., Tirecraft Canada Ltd., Kirk’s Mid-Way Tire Ltd., Kirk’s Tire (Cardston) Ltd., Kirk’s Taber Ltd., and Son Tirecraft Burnaby Inc.

The following companies are indirectly owned by a director of Kirk’s Tire Ltd.: Pask Technology Group Inc., Pasta Fresco, Oasis Sales & Service Ltd., CAJM Holdings Ltd., and BJK Holdings Ltd.

Kirk Tire Distributors Ltd. is owned by a close family member of a director of Kirk’s Tire Ltd.

The following companies are related to Kirk’s Tire Ltd. as the directors of the companies share joint ownership with Kirk’s Tire Ltd. companies listed above: Ranger Tire Inc., Ward Tires, Inc., Treads West Retreading Inc., Trail Tire Distributors Ltd., Extreme Wheel Distributors Ltd., OK Tire 99th Street, Kirk’s Tire (Calgary) Ltd., Tirecraft of Calgary, Kamloops Tire Ltd. and Tiresmith Inc.

These transactions are in the normal course of operations and have been reported in these financial statements at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

6. Shareholders’ Loans

Shareholders’ loans at January 31, 2014 which includes amounts outstanding at January 31, 2013 and January 31, 2012 are unsecured, non-interest bearing, and are due February 1, 2015.

7. Equipment

 

    

January 31, 2014

 
    

Cost

    

Accumulated

Amortization

    

Net

 

Automotive

   $ 484,048       $ 258,778       $ 225,270   

Computer equipment

     60,170         51,929         8,241   

Manufacturing equipment

     435,923         431,628         4,295   

Shop equipment

     394,031         295,458         98,573   
  

 

 

    

 

 

    

 

 

 
   $ 1,374,172       $ 1,037,793       $ 336,379   
  

 

 

    

 

 

    

 

 

 

 

    

January 31, 2013

 
    

Cost

    

Accumulated

Amortization

    

Net

 

Automotive

   $ 474,436       $ 292,152       $ 182,284   

Computer equipment

     60,170         41,857         18,313   

Manufacturing equipment

     435,923         429,787         6,136   

Shop equipment

     388,536         271,501         117,035   
  

 

 

    

 

 

    

 

 

 
   $ 1,359,065       $ 1,035,297       $ 323,768   
  

 

 

    

 

 

    

 

 

 

 

F-127


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

    

January 31, 2012

 
    

Cost

    

Accumulated

Amortization

    

Net

 

Automotive

   $ 488,610       $ 314,904       $ 173,706   

Computer equipment

     66,600         19,474         47,126   

Manufacturing equipment

     435,923         427,158         8,765   

Shop equipment

     332,581         249,237         83,344   
  

 

 

    

 

 

    

 

 

 
   $ 1,323,714       $ 1,010,773       $ 312,941   
  

 

 

    

 

 

    

 

 

 

8. Share Capital

 

Authorized:

Unlimited number of Class “A”, “B”, “C” and “D” common voting shares

Unlimited number of Class “E”, “F”, “G” and “H” common non-voting shares

Unlimited number of Class “I” Preferred voting shares redeemable or retractable at $6,534.47 per share, entitled to non-cumulative annual dividends in an amount not to exceed 15% of redemption amount of the shares

Unlimited number of Class “J” Preferred non-voting shares redeemable or retractable at $1,000.00 per share, entitled to non-cumulative annual dividends in an amount not to exceed 15% of redemption amount of the shares

 

    

January 31,
2014

    

January 31,
2013

    

January 31,
2012

 

Issued:

        

1,500 Class A common shares

   $ 150       $ 150       $ 150   
  

 

 

    

 

 

    

 

 

 

   380 Class I preferred shares

     588,308         588,308         588,308   

5,900 Class J preferred shares

     300         300         300   
  

 

 

    

 

 

    

 

 

 
     588,608         588,608         588,608   
  

 

 

    

 

 

    

 

 

 
   $ 588,758       $ 588,758       $ 588,758   
  

 

 

    

 

 

    

 

 

 

9. Non-cash Working Capital Items

Non-cash working capital items related to operations are as follows:

 

    

January 31,
2014

   

January 31,
2013

   

January 31,
2012

 

Accounts receivable

   $ (2,796,314   $ 436,073      $ (3,958,562

Goods and Services Tax receivable

     161,932        (6,826     3,296   

Inventories

     3,223,992        (1,119,788     (730,348

Prepaid expenses

     7,874        1,952        (22,958

Accounts payable and accrued liabilities

     (4,572,378     1,241,983        4,275,113   

Income taxes payable/receivable

     (333,029     1,535,189        (223,181

Management remuneration payable

     (1,735,000     (3,564,650     799,650   
  

 

 

   

 

 

   

 

 

 
   $ (6,042,923   $ (1,476,067   $ 143,010   
  

 

 

   

 

 

   

 

 

 

 

F-128


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

10. Commitments and Contingency

The Company has provided a continuing guarantee limited to $600,000 to 1707588 Alberta Ltd., a company indirectly owned by a director of Kirk’s Tire Ltd., along with two other companies to assist in the purchase of 134 acres of residential development land.

The Company provides continuing guarantees without limit for the purchase of inventory from Michelin and Cooper Tire made by its related parties.

11. Financial Instruments

Credit Risk

The Company is susceptible to credit risk on its accounts receivable and mitigates this risk through an extensive credit evaluation process.

The Company is susceptible to concentration of credit risk as its accounts receivable consists of 51% from related parties (January 31, 2013—35%, January 31, 2012—79%) and revenue consists of 64% from related parties (January 31, 2013—66%, January 31, 2012—69%).

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to this risk mainly in respect to its accounts payable and accrued liabilities and its management remunerations payable. At January 31, 2014 the company had a working capital balance of $14,043,510 (January 31, 2013—$7,668,895, January 31, 2012—$6,246,293).

Foreign Currency Risk

Currency risk is the risk to the Company’s earnings that arises from fluctuations of foreign exchange rates and the degree of volatility of these rates. The Company is susceptible to foreign currency risk on its US dollar cash balance in the amount of $418,984 as at January 31, 2014 (January 31, 2013—$405,552, January 31, 2012—$618,371). The Company mitigates this risk through the use of foreign currency futures contracts.

12. Canadian Accounting Standards for Private Enterprises and US GAAP Reconciliation

The financial statements of the Company have been prepared in accordance with Canadian Accounting Standards for Private Enterprises. The material differences between the accounting policies used by the Company under Canadian Accounting Standards for Private Enterprises and US GAAP are disclosed below.

a) Income Taxes

Under US GAAP, the Company recognizes a tax benefit if it is more likely than not that a tax position taken or expected to be taken in a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50 per cent likely of being realized upon settlement. The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to this guidance represents an unrecognized tax benefit. An unrecognized tax benefit is disclosed as a long-term liability unless the Corporation anticipates a payment or receipt within one year in respect of the position.

 

F-129


KIRKS TIRE LTD.

Notes to the Financial Statements

January 31, 2014, January 31, 2013 and January 31, 2012

 

Under US GAAP the Company is required to calculate and record corporate income taxes based on enacted corporate income tax rates. Under the Canadian Accounting Standards for Private Enterprises, the Company had calculated and recognized corporate income taxes using substantively enacted corporate income tax rates. For the Company, enacted and substantively enacted corporate tax rates are the same; as a result no differences to calculated and recognized corporate income taxes arise. There are no material differences between the Company’s statutory income tax rate and the effective tax rate.

b) Variable interest entities

The Company has performed a review of the entities with which it conducts business and has concluded that there are no entities that are required to be consolidated or variable interests that are required to be disclosed under the requirements of ASC Topic 810, Consolidation of Variable Interest Entities.

c) Preferred shares

Under US GAAP, the Company recognizes preferred shares at stated capital value as part of equity if there is not an unconditional obligation for the Company to redeem the shares by transferring an asset on a specified or determinable date or upon an event that is certain to occur. For the Company, there is no unconditional obligation for the preferred shares to be redeemed at the option of the holder at January 31, 2012, January 31, 2013 and January 31, 2014, therefore the stated value of the preferred shares has been reported as an equity component.

d) Comprehensive Income

US GAAP requires the presentation of a Statement of Comprehensive Income. The Company has no items that would cause such presentation to differ from the amounts presented as Net Income in the accompanying financials statements.

 

F-130


Regional Tire Distributors (Edmonton) Inc.

Index

February 28, 2014 and 2013 and February 29, 2012

 

    Page  

Independent Auditors’ Report

    F-132   

Financial Statements

 

Balance Sheets

    F-133   

Statements of Operations

    F-134   

Statements of Retained Earnings

    F-135   

Statements of Cash Flows

    F-136   

Notes to Financial Statements

    F-137   

 

F-131


LOGO

 

    Collins Barrow Edmonton LLP
 

INDEPENDENT AUDITORS’ REPORT

  2380 Commerce Place
    10155—102 Street N.W.
    Edmonton, Alberta
    T5J 4G8 Canada
   

 

T.  780.428.1522

To the Shareholders of Regional Tire Distributors (Edmonton) Inc.   F.  780.425.8189
 

 

www.collinsbarrow.com

We have audited the accompanying financial statements of Regional Tire Distributors (Edmonton) Inc., which comprise the balance sheets as of February 28, 2014, February 28, 2013 and February 29, 2012, and the related statements of operations, retained earnings and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian Accounting Standards for Private Enterprises; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Regional Tire Distributors (Edmonton) Inc. as of February 28, 2014, February 28, 2013 and February 29, 2012, and the results of their operations and their cash flows for the years then ended in accordance with Canadian Accounting Standards for Private Enterprises.

Basis of Accounting

As more fully described in Note 2 to the financial statements, the Company’s policy is to prepare its financial statements on the basis of Canadian Accounting Standards for Private Enterprises which differ from accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to that matter. Information relating to the nature and effect of such differences is presented in note 11 to the financial statements.

 

Edmonton, Alberta

   /s/ Collins Barrow Edmonton LLP
June 25, 2014 except for Note 11 (footnotes (b)   

and (c)) which are as of July 25, 2014 and Notes 11 (footnotes (a) and (d)) and 12 which are as of August 18, 2014

   Chartered Accountants

 

This office is independently owned and operated by Collins Barrow Edmonton LLP   LOGO
The Collins Barrow trademarks are used under License.  

 

F-132


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Balance Sheets

As at February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,

2014

    

February 28,

2013

    

February 29,

2012

 
        

ASSETS

        

Current Assets

        

Cash

   $ 616,007       $ 190,917       $ 769,834   

Accounts receivable (Note 3)

     1,156,243         907,255         1,559,453   

Goods and Services Tax receivable

     —           149,806         190   

Income taxes receivable

     40,047         —           —     

Dividend receivable

     109,081         —           —     

Inventories (Note 4)

     2,178,797         3,448,221         2,227,471   

Prepaid expenses

     5,513         6,403         5,260   
  

 

 

    

 

 

    

 

 

 
     4,105,688         4,702,602         4,562,208   

Loans receivable from related parties (Note 5)

     11,728,951         3,012,874         1,099,391   

Equipment (Note 6)

     5,953         7,463         9,359   

Investments

     625         175         175   
  

 

 

    

 

 

    

 

 

 
   $ 15,841,217       $ 7,723,114       $ 5,671,133   
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

Current Liabilities

        

Accounts payable and accrued liabilities

   $ 1,108,673       $ 843,924       $ 1,623,197   

Income taxes payable

     —           380,473         5,955   

Goods and Services Tax payable

     46,289         —           —     

Management remuneration payable

     —           30,000         600,000   
  

 

 

    

 

 

    

 

 

 
     1,154,962         1,254,397         2,229,152   

Loans payable to related parties (Note 5)

     3,584,288         2,633,845         922,428   

Shareholders’ loan (Note 7)

     6,232,700         500,000         600,000   
  

 

 

    

 

 

    

 

 

 
     10,971,950         4,388,242         3,751,580   
  

 

 

    

 

 

    

 

 

 

SHAREHOLDERS’ EQUITY

        

Share capital (Note 8)

     100         100         100   

Retained earnings

     4,869,167         3,334,772         1,919,453   
  

 

 

    

 

 

    

 

 

 
     4,869,267         3,334,872         1,919,553   
  

 

 

    

 

 

    

 

 

 
   $ 15,841,217       $ 7,723,114       $ 5,671,133   
  

 

 

    

 

 

    

 

 

 

See accompanying notes

 

F-133


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Statements of Operations

For the Years Ended February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,

2014

   

February 28,

2013

    

February 29,

2012

 
       

Sales (Note 5)

   $ 19,504,654      $ 18,455,516       $ 18,315,246   

Cost of sales (Note 5)

     14,371,030        15,547,112         15,991,709   
  

 

 

   

 

 

    

 

 

 

Gross profit

     5,133,624        2,908,404         2,323,537   
  

 

 

   

 

 

    

 

 

 

Expenses

       

Wages and benefits

     532,308        498,127         347,259   

Office

     389,063        145,229         282,178   

Rent (Note 5)

     228,401        219,750         159,500   

Professional fees

     137,722        954         2,740   

Management salaries

     55,250        10,000         610,000   

Automotive

     43,138        38,460         24,275   

Interest and bank charges

     41,303        45,540         33,607   

Advertising and promotion

     38,458        44,003         66,261   

Insurance

     18,054        15,969         12,473   

Travel

     15,303        18,022         2,829   

Bad debt expense

     11,504        33,342         697   

Property taxes

     7,625        208         441   

Telephone and utilities

     2,791        2,738         2,540   

Repairs and maintenance

     2,204        1,320         2,776   

Amortization

     1,510        1,896         3,274   

Shop supplies

     1,458        609         85   

Dues and memberships

     —          100         100   
  

 

 

   

 

 

    

 

 

 
     1,526,092        1,076,267         1,551,035   
  

 

 

   

 

 

    

 

 

 

Income before other revenue (expenses) and income taxes

     3,607,532        1,832,137         772,502   

Other revenue (expenses)

       

Dividend income

     109,081        —           —     

Interest income

     22,735        27,700         18,118   

Impairment of advances to related party

     (1,800,000     —           —     
  

 

 

   

 

 

    

 

 

 

Income before income taxes

     1,939,348        1,859,837         790,620   

Income taxes expense

     404,953        444,518         69,387   
  

 

 

   

 

 

    

 

 

 

Net income

   $ 1,534,395      $ 1,415,319       $ 721,233   
  

 

 

   

 

 

    

 

 

 

See accompanying notes

 

F-134


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Statements of Retained Earnings

For the Years Ended February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,

2014

    

February 28,

2013

    

February 29,

2012

 
        

Balance, beginning of year

   $ 3,334,772       $ 1,919,453       $ 1,198,220   

Net income

     1,534,395         1,415,319         721,233   
  

 

 

    

 

 

    

 

 

 

Balance, end of year

   $ 4,869,167       $ 3,334,772       $ 1,919,453   
  

 

 

    

 

 

    

 

 

 

See accompanying notes

 

F-135


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Statements of Cash Flows

For the Years Ended February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,

2014

   

February 28,

2013

   

February 29,

2012

 
      

Cash provided by (used in):

      

Operating Activities

      

Net income

   $ 1,534,395      $ 1,415,319      $ 721,233   

Items not affecting cash

      

Amortization

     1,510        1,896        3,274   

Impairment of advances to related party

     1,800,000        —          —     

Change in non-cash working capital items (Note 9)

     922,569        (1,694,065     (478,452
  

 

 

   

 

 

   

 

 

 
     4,258,474        (276,850     246,055   
  

 

 

   

 

 

   

 

 

 

Investing Activities

      

Investment in other companies

     (450     —          (75

Purchase of equipment

     —          —          (633

Advances to related parties

     (10,516,178     (2,085,895     (1,000,392

Repayments from related parties

     100        1,099,000        311,659   
  

 

 

   

 

 

   

 

 

 
     (10,516,528     (986,895     (689,441
  

 

 

   

 

 

   

 

 

 

Financing Activities

      

Advances from related parties

     2,108,692        784,828        690,769   

Repayments to related parties

     (1,158,248     —          (72,100

Advances from shareholder

     5,732,700        —          500,000   

Repayment to shareholder

     —          (100,000     —     
  

 

 

   

 

 

   

 

 

 
     6,683,144        684,828        1,118,669   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash

     425,090        (578,917     675,283   

Cash, beginning of year

     190,917        769,834        94,551   
  

 

 

   

 

 

   

 

 

 

Cash, end of year

   $ 616,007      $ 190,917      $ 769,834   
  

 

 

   

 

 

   

 

 

 

See accompanying notes

 

F-136


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

1. Nature of operations

The Company was incorporated under the Alberta Business Corporations Act on December 3, 2004 and operates a wholesale tire distribution business, which fully commenced operations in the fiscal year ended February 28, 2009 as North Alta Tire Limited and subsequently changed its name to Regional Tire Distributors (Edmonton) Inc.

2. Summary of significant accounting policies

Basis of presentation

These financial statements are prepared in accordance with Canadian accounting standards for private enterprises.

Revenue recognition

Revenue is recognized when the goods have been delivered, the services have been completed, the transaction has been accepted by the customer and collection is reasonably assured. The Company reports its revenue net of returns, sales discounts and volume rebates to customers.

Interest revenue is recognized on an annual basis as it is earned.

Vendor rebates and allowances

The Company participates in various purchase rebate programs with its major tire vendors including early payment incentives and volume purchase rebates based on defined levels of purchase volume. These arrangements enable the Company to earn rebates that reduce the cost of merchandise purchased. Vendor rebates and allowances are accrued as earned. Vendor rebates and allowances earned are initially recorded as a reduction in the cost of merchandise inventories and are included in operations (as a reduction of cost of goods sold) in the period the related product is sold. Accordingly, the amount of vendor rebates included in operations in any year could include rebates earned in a prior year.

Allowance for doubtful accounts

The allowance for doubtful accounts reflects management’s best estimate of losses on the accounts receivable balances. The company maintains an allowance for doubtful accounts that is estimated based on a variety of factors including accounts receivable aging, historical experience and other currently available information, including events such as customer bankruptcy and current economic conditions. Interest is charged on overdue account receivable balances. A provision is recorded in the period in which the receivable is deemed uncollectible.

Inventories

Inventories are valued at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition including volume rebates and allowances from vendors. The cost of inventories is determined using the first-in, first-out (FIFO) method. Net realizable value is the estimated selling price in the ordinary course of business, less costs necessary to complete the sale. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand.

 

F-137


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

Equipment

Equipment is recorded at cost less accumulated amortization.

Amortization is calculated at the following annual rates:

 

Office equipment

   -  20% declining balance basis

Computer equipment

   -  30% declining balance basis

Shop equipment

   -  20% declining balance basis

Equipment is tested for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted cash flows expected from its use and eventual disposal. In such a case, an impaired loss must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value.

Investments

The company accounts for its investments using the cost method. The carrying value of each investment is reviewed annually and written down below cost if there is a loss of value.

Income taxes

The Company uses the future income taxes method to account for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Future income tax assets are recognized only to the extent it is more likely than not that the asset will be realized.

Use of estimates

The preparation of financial statements in conformity with Accounting Standards for Private Enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more subjective estimates included in these financial statements are the determination of allowance for doubtful accounts receivable, valuation of inventory and the recognition of vendor rebates and allowance. Actual results could differ from those estimates.

Financial Instruments

Measurement of financial instruments

The company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions.

The Company subsequently measures all its financial assets and financial liabilities at amortized cost, except for equity instruments that are quoted in an active market, which are measured at fair value. Changes in fair value are recognized in net income.

 

F-138


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

Financial assets measured at amortized cost include cash, accounts receivable, dividend receivable and loans receivable from related parties.

Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, management remuneration payable, loans payable to related parties and shareholders’ loan.

Impairment

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income.

Transaction costs

Transaction costs relating to financial instruments that are measured subsequently at fair value are recognized in operations in the year in which they are incurred. For instruments that are subsequently measured at amortized cost, the amount initially recognized is adjusted for transaction costs directly attributable to the origination, acquisition, issuance or assumption.

3. Accounts Receivable

Accounts Receivable consists of the following:

 

    

February 28,
2014

   

February 28,
2013

   

February 29,
2012

 

Accounts receivable—Trade

   $ 1,221,786      $ 964,752      $ 1,319,446   

Warranty receivable

     49,739        47,385        314,820   

Allowance for Doubtful Accounts

     (115,282     (104,882     (74,813
  

 

 

   

 

 

   

 

 

 
   $ 1,156,243      $ 907,255      $ 1,559,453   
  

 

 

   

 

 

   

 

 

 

4. Inventories

Inventories consist of the following:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Tires

   $ 2,177,365       $ 3,447,166       $ 2,227,471   

Parts

     1,432         1,055         —     
  

 

 

    

 

 

    

 

 

 
   $ 2,178,797       $ 3,448,221       $ 2,227,471   
  

 

 

    

 

 

    

 

 

 

Cost of sales reported on the statement of operations include $14,371,030 (February 28, 2013—$15,547,112; February 29, 2012—$15,991,709) of inventories recognized as an expense during the year.

Inventories are net of volume rebates in the amount of $56,179 (February 28, 2013—$197,268; February 29, 2012—$29,087)

 

F-139


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

5. Loans Receivable from/Payable to Related Parties and Related Party Transactions

Loans receivable from related parties are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Kirks Tire Ltd.

   $ 3,750,000       $ —         $ —     

Tirecraft Western Canada Ltd.

     139,949         —           —     

Extreme Wheel Distributors Ltd.

     17,367         12,924         441   

1773503 Alberta Ltd.

     2,499,900         —           —     

Tirecraft Canada Ltd.

     —           —           99,000   

Regional Tire Distributors (Saskatchewan) Inc.

     4,676,167         2,499,950         999,950   

Regional Tire Distributors (Manitoba) Inc.

     499,900         500,000         —     

Tire Storage Direct (Edmonton) Ltd.

     30,818         —           —     

Integra Tire & Auto Centres Canada Ltd.

     114,850         —           —     
  

 

 

    

 

 

    

 

 

 
   $ 11,728,951       $ 3,012,874       $ 1,099,391   
  

 

 

    

 

 

    

 

 

 

Loans receivable from the companies noted above are unsecured, non-interest bearing and have no stated terms of repayment. The relationship between Regional Tire Distributors (Edmonton) Inc. and each of these companies is as follows:

Kirks Tire Ltd. is indirectly owned by a director of Regional Tire Distributors (Edmonton) Inc.

Tirecraft Western Canada Ltd., Tire Storage Direct (Edmonton) Ltd. and 1773503 Alberta Ltd. are wholly owned by Regional Tire Distributors (Edmonton) Inc.

Extreme Wheel Distributors Ltd. is controlled by a close family member of a director of Regional Tire Distributors (Edmonton) Inc.

Regional Tire Distributors (Manitoba) Inc. and Integra Tire & Auto Centres Canada Ltd. are companies in which Regional Tire Distributors (Edmonton) Inc. has significant influence.

Tirecraft Canada Ltd. is indirectly owned by a director of Regional Tire Distributors (Edmonton) Inc.

Regional Tire Distributors (Saskatchewan) Inc. is owned by the directors of Regional Tire Distributors (Edmonton) Inc.

As the loans receivable have no stated terms of repayment and are not expected to be repaid within the next year, and accordingly have been classified as long term assets.

Loans payable to related parties are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Tirecraft Western Canada Ltd.

   $ —         $ 158,248       $ 231,659   

Kirks Tire Ltd.

     —           1,000,000         —     

Trail Tire Distributors Ltd.

     3,584,288         1,475,597         690,769   
  

 

 

    

 

 

    

 

 

 
   $ 3,584,288       $ 2,633,845       $ 922,428   
  

 

 

    

 

 

    

 

 

 

 

F-140


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

Loans payable to the companies noted above are unsecured, non-interest bearing and have no stated terms of repayment. The relationship between Regional Tire Distributors (Edmonton) Inc. and each of these companies is as follows:

Tirecraft Western Canada Ltd. is wholly owned by Regional Tire Distributors (Edmonton) Inc.

Kirks Tire Ltd. is indirectly owned by a director of Regional Tire Distributors (Edmonton) Inc.

Trail Tire Distributors Ltd. is jointly controlled by a director of Regional Tire Distributors (Edmonton) Inc.

As the related parties have agreed in writing not to demand repayment of any portion of the loan balances prior to March 1, 2015, the loans have been classified as long term liabilities.

Sales to related parties are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Regional Tire Distributors (Calgary) Inc.

   $ 743,230       $ 123,978       $ 142,204   

Kirks Tire (Lethbridge) Ltd.

     11,741         3,771         —     

Kirks Tire (Edmonton) Ltd.

     59,442         62,786         88,523   

Kirks Tire (Red Deer) Ltd.

     86,029         61,090         79,087   

Regional Tire Distributors (Langley) Inc.

     38,021         4,571         2,596   

Regional Tire Distributors (Vernon) Inc.

     59,804         16,666         1,352   

Regional Tire Distributors (Victoria) Inc.

     6,724         23,592         —     

Regional Tire Distributors (Winnipeg) Inc.

     112,164         1,803         —     

Tirecraft Edmonton Truck Centre Inc.

     336,054         285,546         519,443   

Tirecraft Lloydminster Truck Centre Inc.

     429,157         416,794         370,678   

Trail Tire Distributors Ltd.

     223,912         2,585,228         72,677   

Extreme Wheel Distributors Ltd.

     9,164         329         —     

Trail Tire (Kingsway) Ltd.

     64,690         23,205         —     
  

 

 

    

 

 

    

 

 

 
   $ 2,180,132       $ 3,609,359       $ 1,276,560   
  

 

 

    

 

 

    

 

 

 

Included in accounts receivable are the following balances receivable from related parties as at the fiscal year-end:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Regional Tire Distributors (Calgary) Inc.

   $ 6,990       $ 5,907       $ 3,205   

Kirks Tire (Lethbridge) Ltd.

     4,135         10,558         7,093   

Kirks Tire (Edmonton) Ltd.

     2,321         1,976         2,523   

Kirks Tire (Red Deer) Ltd.

     2,321         1,160         6,714   

Regional Tire Distributors (Vernon) Inc.

     5,911         2,856         —     

Regional Tire Distributors (Victoria) Inc.

     2,635         1,562         —     

Regional Tire Distributors (Winnipeg) Inc.

     11,686         1,893         —     

Tirecraft Edmonton Truck Centre Inc.

     20,877         14,315         51,881   

Tirecraft Lloydminster Truck Centre Inc.

     11,224         38,867         43,133   

Trail Tire Distributors Ltd.

     294,547         256,070         28,102   

Extreme Wheel Distributors Ltd.

     2,731         72         —     

Trail Tire (Kingsway) Ltd.

     2,497         1,386         —     
  

 

 

    

 

 

    

 

 

 
   $ 367,875       $ 336,622       $ 142,651   
  

 

 

    

 

 

    

 

 

 

 

F-141


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

Regional Tire Distributors (Calgary) Inc. is a company in which Regional Tire Distributors (Edmonton) Inc. has significant, non-controlling interests.

A director of Regional Tire Distributors (Edmonton) Inc. has indirect interests in KDW Enterprises Ltd., Kirks Tire (Lethbridge) Ltd., Kirks Tire (Edmonton) Ltd., Kirks Tire (Red Deer) Ltd., Regional Tire Distributors (Vernon) Inc., Regional Tire Distributors (Victoria) Inc., Regional Tire Distributors (Langley) Inc., Regional Tire Distributors (Winnipeg) Inc., Tirecraft Lloydminster Truck Centre Inc. and Tirecraft Edmonton Truck Centre Inc.

Trail Tire (Kingsway) Ltd. is controlled by a director of Regional Tire Distributors (Edmonton) Inc.

Purchases from related parties are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Kirks Tire Ltd.

   $ 1,103,450       $ 1,040,771       $ 1,778,657   

KDW Enterprises Ltd.

     534,721         994,156         1,099,098   

Regional Tire Distributors (Calgary) Inc.

     75,372         181,406         151,258   

Trail Tire Distributors Ltd.

     88,701         265,241         252,697   

Extreme Wheel Distributors Ltd.

     1,973         3,812         4,190   
  

 

 

    

 

 

    

 

 

 
   $ 1,804,217       $ 2,485,386       $ 3,285,900   
  

 

 

    

 

 

    

 

 

 

Included in the rent expense are lease payments to 1470242 Alberta Ltd., a company controlled by a director of the Company, which amounted to $174,000 for the 2014 fiscal year (February 28, 2013—$219,750; February 29, 2012—$159,500).

Included in accounts payable and accrued liabilities are the following balances payable to the related parties as at the fiscal year-end:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Trail Tire Distributors Ltd.

   $ 242,157       $ 381,745       $ 1,130,048   

Kirks Tire Ltd.

     209,092         188,472         8,158   

KDW Enterprises Ltd.

     534,465         598,227         729,999   

Regional Tire Distributors (Calgary) Inc.

     13,135         7,537         11,371   

Extreme Wheel Distributors Ltd.

     —           855         151   
  

 

 

    

 

 

    

 

 

 
   $ 998,849       $ 1,176,836       $ 1,879,727   
  

 

 

    

 

 

    

 

 

 

These transactions are in the normal course of operations and have been reported in these financial statements at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

6. Equipment

 

    

February 28, 2014

 
    

Cost

    

Accumulated

Amortization

    

Net

 

Office equipment

   $ 5,947       $ 3,872       $ 2,075   

Computer equipment

     789         670         119   

Shop equipment

     11,985         8,226         3,759   
  

 

 

    

 

 

    

 

 

 
   $ 18,721       $ 12,768       $ 5,953   
  

 

 

    

 

 

    

 

 

 

 

F-142


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28, 2013

 
    

Cost

    

Accumulated

Amortization

    

Net

 

Office equipment

   $ 5,947       $ 3,353       $ 2,594   

Computer equipment

     789         618         171   

Shop equipment

     11,985         7,287         4,698   
  

 

 

    

 

 

    

 

 

 
   $ 18,721       $ 11,258       $ 7,463   
  

 

 

    

 

 

    

 

 

 

 

    

February 29, 2012

 
    

Cost

    

Accumulated
Amortization

    

Net

 

Office equipment

   $ 5,947       $ 2,704       $ 3,243   

Computer equipment

     789         546         243   

Shop equipment

     11,985         6,112         5,873   
  

 

 

    

 

 

    

 

 

 
   $ 18,721       $ 9,362       $ 9,359   
  

 

 

    

 

 

    

 

 

 

7. Shareholders’ Loan

Shareholders’ loan at February 28, 2014 includes amounts outstanding at February 28, 2013 and February 29, 2012 are unsecured, non-interest bearing, and are due March 1, 2015.

8. Share Capital

 

Authorized:

Unlimited number of Class “A” common voting shares

Unlimited number of Class “B” and “C” common non-voting shares

1,000,000 Class “D” Preferred redeemable voting shares

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Issued:

        

100 Class A common shares

   $ 100       $ 100       $ 100   
  

 

 

    

 

 

    

 

 

 

9. Non-cash Working Capital Items

Non-cash working capital items related to operations are as follows:

 

    

February 28,
2014

   

February 28,
2013

   

February 29,
2012

 

Accounts receivable

   $ (248,988   $ 652,198      $ (734,470

Goods and Services Tax receivable

     149,806        (149,616     (190

Income taxes receivable

     (40,047     —          —     

Dividend receivable

     (109,081     —          —     

Inventories

     1,269,424        (1,220,750     (673,551

Prepaid expenses and deposits

     890        (1,143     (2,322

Accounts payable and accrued liabilities

     264,749        (779,272     344,490   

Income taxes payable

     (380,473     374,518        4,521   

Goods and Services Tax payable

     46,289        —          (16,930

Management remuneration payable

     (30,000     (570,000     600,000   
  

 

 

   

 

 

   

 

 

 
   $ 922,569      $ (1,694,065   $ (478,452
  

 

 

   

 

 

   

 

 

 

 

F-143


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

10. Financial Instruments

Credit Risk

The Company is susceptible to credit risk on its accounts receivable and mitigates this risk through an extensive credit evaluation process.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to this risk mainly in respect to its accounts payable and accrued liabilities and its management remunerations payable. At February 28, 2014 the company had a working capital balance of $2,950,726 (February 28, 2013—$3,448,205; February 29, 2012—$2,333,056).

Interest Rate Risk

Interest rate risk refers to adverse consequences of interest rate changes on the Company’s cash flows and financial position. Management does not believe the Company is exposed to significant interest rate risk.

11. Canadian Accounting Standards for Private Enterprises and US GAAP Reconciliation

The financial statements of the Company have been prepared in accordance with Canadian Accounting Standards for Private Enterprises (“ASPE”). The material differences between the accounting policies used by the Company under ASPE and US GAAP are disclosed below.

a) Income Taxes

The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to this guidance represents an unrecognized tax benefit. An unrecognized tax benefit is disclosed as a long-term liability unless the Corporation anticipates a payment or receipt within one year in respect of the position. As a result of implementing these provisions there was no material impact on the Company’s financial statements.

Under US GAAP the Company is required to calculate and record corporate income taxes based on enacted corporate income tax rates. Under the Canadian Accounting Standards for Private Enterprises, the Company had calculated and recognized corporate income taxes using substantively enacted corporate income tax rates. For the company, enacted and substantively enacted corporate tax rates are the same; as a result no differences to calculated and recognized corporate income taxes arise. There are no material differences between the Company’s statutory income tax rate and the effective tax rate.

b) Variable interest entities

The Company has performed a review of the entities with which it conducts business and has concluded that there are no entities that are required to be consolidated or variable interest that are required to be disclosed under the requirements of ASC Topic 810, Consolidation of Variable Interest Entities.

c) Wholly owned subsidiaries and investments subject to significant influence

US GAAP requires the consolidation of subsidiaries, whereas under ASPE the Company elected to record the investment in subsidiaries on the cost method. The Company’s wholly owned subsidiaries include Tirecraft Western Canada Ltd., 1773503 Alberta Ltd., and Tire Storage Direct (Edmonton) Ltd.

 

F-144


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

The Company also has significantly influence investments in Regional Tire Distributors (Calgary) Inc., Regional Tire Distributors Manitoba (6631208 Manitoba Ltd.), Integra Tire and Auto Centres Canada, and Regional Tire Distributors (Saskatchewan) Inc. Under US GAAP, significantly influenced investments are required to be accounted for using the equity method, whereby the investment is initially recorded at cost, and adjusted to recognize the Company’s share of after tax earnings or losses, and reduced by dividends received, however under ASPE the Company elected to record the significantly influenced investments on the cost method. The accompanying financial information includes consolidated financial statements which reflect the equity method of accounting for these investments and condensed financial statements for each investee company.

The following financial information presents the financial statement as at February 28, 2014, February 28, 2013 and February 29, 2012 on a consolidated basis.

d) Comprehensive Income

US GAAP requires the presentation of a Statement of Comprehensive Income. The Company has no items that would cause such presentation to differ from the amounts presented as Net Income in the accompanying financials statements.

 

F-145


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2014 Consolidated Balance Sheet

 

    

Regional Tire
Distributors
(Edmonton)

Inc.

    

Tirecraft
Western
Canada Ltd.

    

1773503

Alberta Ltd.

    

Tire Storage
Direct
(Edmonton)

Ltd.

    

Adjustments
and

Eliminations

   

Consolidated

 
     (i)                                    

ASSETS

                

Current Assets

                

Cash

   $ 616,007       $ 464,293       $ —         $ 88,845       $ —        $ 1,169,145   

Accounts receivable

     1,156,243         600,238         196,875         8,624         —          1,961,980   

Goods and Services Tax receivable

     —           —           —           46         —          46   

Income taxes receivable

     40,047         —           —           —           —          40,047   

Dividend receivable

     109,081         —           —           —           —          109,081   

Inventories

     2,178,797         34,757         —           —           —          2,213,554   

Prepaid expenses

     5,513            —           —           —          5,513   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     4,105,688         1,099,288         196,875         97,515         —          5,499,366   

Loans receivable from related parties

     11,090,841         3,581         —           —           (2,670,667     8,423,755   

Equipment

     5,953         3,985         2,403,425         7,051         —          2,420,414   

Investments

     1,157,017         —              —           (300     1,156,717   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 16,359,499       $ 1,106,854       $ 2,600,300       $ 104,566       $ (2,670,967   $ 17,500,252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES

                

Current Liabilities

                

Accounts payable and accrued liabilities

   $ 1,108,673       $ 40,784       $ —         $ 2,099       $ —        $ 1,151,556   

Income taxes payable

     —           95,924         22,731         11,299         —          129,954   

Goods and Services Tax payable

     46,289         18         9,375         —           —          55,682   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     1,154,962         136,726         32,106         13,398           1,337,192   

Loans payable to related parties

     3,584,288         568,306         —           26,355         —          4,178,949   

Shareholder loan

     6,232,700         139,949         2,499,900         30,818         (2,670,667     6,232,700   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     10,971,950         844,981         2,532,006         70,571         (2,670,667     11,748,841   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

                

Share capital

     100         100         100         100         (300     100   

Retained earnings

     5,387,449         261,773         68,194         33,895         —          5,751,311   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     5,387,549         261,873         68,294         33,995         (300     5,751,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 16,359,499       $ 1,106,854       $ 2,600,300       $ 104,566       $ (2,670,967   $ 17,500,252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(i) Represents the balance sheet as prepared under Canadian Accounting Standards for Private Enterprises adjusted for the Company’s accumulated share of earnings and losses in significantly influenced investments of $518,282 as required by the equity method of accounting for investments.

 

F-146


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2014 Consolidated Statement of Operations

 

    

Regional Tire
Distributors
(Edmonton)

Inc.

   

Tirecraft
Western
Canada Ltd.

    

1773503

Alberta
Ltd.

    

Tire Storage
Direct
(Edmonton)

Ltd.

    

Adjustments
and

Eliminations

   

Consolidated

 
     (i)                                   

Sales

   $ 19,504,654      $ 1,917,645       $ 187,500       $ 87,820       $ (72,989   $ 21,624,630   

Cost of sales

     14,371,030        761,025         —           3,900         (72,989     15,062,966   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     5,133,624        1,156,620         187,500         83,920         —          6,561,664   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Expenses

               

Wages and benefits

     532,308        292,634         —           —           —          824,942   

Management salaries

     55,250        27,500         —           —           —          82,750   

Rent

     228,401        —           —           20,717         —          249,118   

Automotive

     43,138        49,191         —           —           —          92,329   

Interest and bank charges

     41,303        —           —           74         —          41,377   

Amortization

     1,510        443         96,575         1,244         —          99,772   

Telephone and utilities

     2,791        2,564         —           —           —          5,355   

Office

     389,063        120,828         —           7,925         —          517,816   

Repairs and maintenance

     2,204        —           —           —           —          2,204   

Insurance

     18,054        1,966         —           1,219         —          21,239   

Advertising and promotion

     38,458        98,411         —           2,274         —          139,143   

Shop supplies

     1,458        —           —           1,050         —          2,508   

Travel

     15,303        39,076         —           10         —          54,389   

Professional fees

     137,722        81,016         —           761         —          219,499   

Property taxes

     7,625        214         —           3,497         —          11,336   

Bad debt expense

     11,504        46,352         —           —           —          57,856   

Dues and memberships

     —          7,499         —           —           —          7,499   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     1,526,092        767,694         96,575         38,771         —          2,429,132   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before other revenue (expenses) and income taxes

     3,607,532        388,926         90,925         45,149         —          4,132,532   

Other revenue

               

Dividend income

     109,081        —           —           —           —          109,081   

Interest income

     22,735        1,727         —           45         —          24,507   

Share of investee income

     159,164        —           —           —           —          159,164   

Impairment of advances to related party

     (1,800,000     —           —           —           —          (1,800,000
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     2,098,512        390,653         90,925         45,194         —          2,625,284   

Income taxes expense

     404,953        95,924         22,731         11,299         —          534,907   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 1,693,559      $ 294,729       $ 68,194       $ 33,895       $ —        $ 2,090,377   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(i) Represents the statement of operations of the Company under Canadian Accounting Standards for Private Enterprises adjusted for the Company’s share of the earnings and losses in significantly influenced investments of $159,164.

 

F-147


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2014 Consolidated Statement of Retained Earnings

 

    

Regional Tire
Distributors
(Edmonton)

Inc.

    

Tirecraft
Western
Canada
Ltd.

   

1773503

Alberta Ltd.

    

Tire Storage
Direct
(Edmonton)

Ltd.

    

Adjustments
and

Eliminations

    

Consolidated

 

Balance, beginning of year

   $ 3,693,890       $ (32,956   $ —         $ —         $ —         $ 3,660,934   

Net income

     1,693,559         294,729        68,194         33,895         —           2,090,377   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of year

   $ 5,387,449       $ 261,773      $ 68,194       $ 33,895       $ —         $ 5,751,311   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

2014 Consolidated Statement of Cash Flows

 

   

Regional Tire

Distributors

(Edmonton)

Inc.

   

Tirecraft

Western

Canada

Ltd.

   

1773503

Alberta Ltd.

   

Tire Storage

Direct

(Edmonton)

Ltd.

   

Adjustments

and

Eliminations

   

Consolidated

 

Cash provided by (used in):

           

Operating Activities

           

Net income

  $ 1,693,559      $ 294,729      $ 68,194      $ 33,895      $ —        $ 2,090,377   

Items not affecting cash Amortization

    1,510        443        96,575        1,244        —          99,772   

Share of investee income

    (159,164     —          —          —          —          (159,164

Impairment of advances to related party

    1,800,000        —          —          —          —          1,800,000   

Change in non-cash working capital items

    922,569        (100,220     (164,769     4,728        —          662,308   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    4,258,474        194,952        —          39,867        —          4,493,293   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing Activities

           

Investment in other companies

    (450     —          —          —          200        (250

Purchase of equipment

    —          (4,428     (2,500,000     (8,295     —          (2,512,723

Advances to related parties

    (10,516,178     (1,352     —          —          2,670,667        (7,846,863

Repayments from related parties

    100        —          —          —          —          100   

Repayments from Shareholder

    —          158,248        —          —          —          158,248   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (10,516,528     152,468        (2,500,000     (8,295     2,670,867        (10,201,488
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

           

Advances from related parties

    2,108,692        22,000        —          26,355        —          2,157,047   

Repayments to related parties

    (1,158,248     (95,796     —          —          —          (1,254,044

Advances from shareholder

    5,732,700        139,949        2,500,000        30,918        (2,670,867     5,732,700   

Repayment to shareholder

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    6,683,144        66,153        2,500,000        57,273        (2,670,867     6,635,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash

    425,090        413,573        —          88,845        —          927,508   

Cash, beginning of year

    190,917        50,720        —          —          —          241,637   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of year

  $ 616,007      $ 464,293      $ —        $ 88,845      $ —        $ 1,169,145   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-148


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2013 Consolidated Balance Sheet

 

    

Regional Tire

Distributors

(Edmonton)

Inc.

    

Tirecraft

Western

Canada

Ltd.

   

Adjustments

and

Eliminations

   

Consolidated

 
     (i)                     

ASSETS

         

Current Assets

         

Cash

   $ 190,917       $ 50,720      $ —        $ 241,637   

Accounts receivable

     907,255         478,639        —          1,385,894   

Goods and Services Tax receivable

     149,806         2,948        —          152,754   

Inventories

     3,448,221         20,826        —          3,469,047   

Prepaid expenses

     6,403         —          —          6,403   
  

 

 

    

 

 

   

 

 

   

 

 

 
     4,702,602         553,133        —          5,255,735   

Loans receivable from related parties

     2,824,549         2,229        —          2,826,778   

Equipment

     7,463         —          —          7,463   

Shareholder advance

     —           158,248        (158,248     —     

Investments

     547,618         —          (100     547,518   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 8,082,232       $ 713,610      $ (158,348   $ 8,637,494   
  

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES

         

Current Liabilities

         

Accounts payable and accrued liabilities

   $ 843,924       $ 94,364      $ —        $ 938,288   

Income taxes payable

     380,473         —          —          380,473   

Goods and Services Tax payable

     —           —          —          —     

Management remuneration payable

     30,000         10,000        —          40,000   
  

 

 

    

 

 

   

 

 

   

 

 

 
     1,254,397         104,364        —          1,358,761   

Loans payable to related parties

     2,633,845         642,102        (158,248     3,117,699   

Shareholder loan

     500,000         —          —          500,000   
  

 

 

    

 

 

   

 

 

   

 

 

 
     4,388,242         746,466        (158,248     4,976,460   
  

 

 

    

 

 

   

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

         

Share capital

     100         100        (100     100   

Retained earnings

     3,693,890         (32,956     —          3,660,934   
  

 

 

    

 

 

   

 

 

   

 

 

 
     3,693,990         (32,856     (100     3,661,034   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 8,082,232       $ 713,610      $ (158,348   $ 8,637,494   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(i) Represents the balance sheet as prepared under Canadian Accounting Standards for Private Enterprises adjusted for the Company’s accumulated share of earnings and losses in significantly influenced investments of $359,118 as required by the equity method of accounting for investments.

 

F-149


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2013 Consolidated Statement of Operations

 

    

Regional Tire

Distributors

(Edmonton)

Inc.

    

Tirecraft

Western

Canada

Ltd.

   

Adjustments

and

Eliminations

   

Consolidated

 
     (i)                     

Sales

   $ 18,455,516       $ 793,126      $ (74,124   $ 19,174,518   

Cost of sales

     15,547,112         261,427        (74,124     15,734,415   
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     2,908,404         531,699        —          3,440,103   
  

 

 

    

 

 

   

 

 

   

 

 

 

Expenses

         

Wages and benefits

     498,127         165,243        —          663,370   

Management salaries

     10,000         20,000        —          30,000   

Rent

     219,750         —          —          219,750   

Automotive

     38,460         33,504        —          71,964   

Interest and bank charges

     45,540         —          —          45,540   

Amortization

     1,896         —          —          1,896   

Telephone and utilities

     2,738         1,392        —          4,130   

Office

     145,229         297,283        (70,000     372,512   

Repairs and maintenance

     1,320         —          —          1,320   

Insurance

     15,969         1,928        —          17,897   

Advertising and promotion

     44,003         21,280        —          65,283   

Shop supplies

     609         109        —          718   

Travel

     18,022         39,213        —          57,235   

Professional fees

     954         24,843        —          25,797   

Property taxes

     208         208        —          416   

Bad debt expense

     33,342         —          —          33,342   

Dues and memberships

     100         7,399        —          7,499   
  

 

 

    

 

 

   

 

 

   

 

 

 
     1,076,267         612,402        (70,000     1,618,669   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before other revenue and income taxes

     1,832,137         (80,703     70,000        1,821,434   

Other revenue

         

Interest income

     27,700         695        —          28,395   

Share of investee income

     174,036         —          —          174,036   

Administrative service revenue

     —           70,000        (70,000     —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,033,873         (10,008     —          2,023,865   

Income taxes expense

     444,518         —          —          444,518   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 1,589,355       $ (10,008   $ —        $ 1,579,347   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(i) Represents the statement of operations of the Company under Canadian Accounting Standards for Private Enterprises adjusted for the Company’s share of earnings and losses in significantly influenced investments of $174,036.

 

F-150


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2013 Consolidated Statement of Retained Earnings

 

    

Regional Tire
Distributors
(Edmonton)
Inc.

    

Tirecraft
Western
Canada
Ltd.

   

Adjustments
and
Eliminations

    

Consolidated

 

Balance, beginning of year

   $ 2,104,535       $ (22,948   $ —         $ 2,081,587   

Net income

     1,589,355         (10,008     —           1,579,347   
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of year

   $ 3,693,890       $ (32,956   $ —         $ 3,660,934   
  

 

 

    

 

 

   

 

 

    

 

 

 

2013 Consolidated Statement of Cash Flows

 

    

Regional Tire
Distributors
(Edmonton)
Inc.

   

Tirecraft
Western
Canada
Ltd.

   

Adjustments
and
Eliminations

   

Consolidated

 

Cash provided by (used in):

        

Operating Activities

        

Net income

   $ 1,589,355      $ (10,008   $ —        $ 1,579,347   

Items not affecting cash

        

Amortization

     1,896        —          —          1,896   

Share of Investee income

     (174,036     —          —          (174,036

Change in non-cash working capital items

     (1,694,065     (270,841     —          (1,964,906
  

 

 

   

 

 

   

 

 

   

 

 

 
     (276,850     (280,849     —          (557,699
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing Activities

        

Investment in other companies

     —          —          —          —     

Purchase of equipment

     —          —          —          —     

Advances to related parties

     (2,085,895     (1,144     73,411        (2,013,628

Repayments from related parties

     1,099,000        —          —          1,099,000   

Repayment from Shareholder

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (986,895     (1,144     73,411        (914,628
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

        

Advances from related parties

     784,828        242,991        —          1,027,819   

Repayment to related parties

     —          (5,000     —          (5,000

Advances from shareholder

     —          73,411        (73,411     —     

Repayment to shareholder

     (100,000     —          —          (100,000
  

 

 

   

 

 

   

 

 

   

 

 

 
     684,828        311,402        (73,411     922,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash

     (578,917     29,409        —          (549,508

Cash, beginning of year

     769,834        21,311        —          791,145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of year

   $ 190,917      $ 50,720      $ —        $ 241,637   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-151


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2012 Consolidated Balance Sheet

 

    

Regional Tire
Distributors
(Edmonton)
Inc.

    

Tirecraft
Western
Canada
Ltd.

   

Adjustments
and
Eliminations

   

Consolidated

 
     (i)                     

ASSETS

         

Current Assets

         

Cash

   $ 769,834       $ 21,311      $ —        $ 791,145   

Accounts receivable

     1,559,453         134,423        —          1,693,876   

Goods and Services Tax receivable

     190         4,348        —          4,538   

Inventories

     2,227,471         3,676        —          2,231,147   

Prepaid expenses

     5,260         176        —          5,436   
  

 

 

    

 

 

   

 

 

   

 

 

 
     4,562,208         163,934        —          4,726,142   

Loans receivable from related parties

     1,099,391         1,085        —          1,100,476   

Equipment

     9,359         —          —          9,359   

Shareholder advance

     —           231,659        (231,659     —     

Investments

     185,257         —          (100     185,157   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 5,856,215       $ 396,678      $ (231,759   $ 6,021,134   
  

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES

         

Current Liabilities

         

Accounts payable and accrued liabilities

   $ 1,623,197       $ 15,415      $ —        $ 1,638,612   

Income taxes payable

     5,955         —          —          5,955   

Goods and Services Tax payable

     —           —          —          —     

Management remuneration payable

     600,000         —          —          600,000   
  

 

 

    

 

 

   

 

 

   

 

 

 
     2,229,152         15,415        —          2,244,567   

Loans payable to related parties

     922,428         404,111        (231,659     1,094,880   

Shareholder loan

     600,000         —          —          600,000   
  

 

 

    

 

 

   

 

 

   

 

 

 
     3,751,580         419,526        (231,659     3,939,447   
  

 

 

    

 

 

   

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

         

Share capital

     100         100        (100     100   

Retained earnings (losses)

     2,104,535         (22,948     —          2,081,587   
  

 

 

    

 

 

   

 

 

   

 

 

 
     2,104,635         (22,848     (100     2,081,687   
  

 

 

    

 

 

   

 

 

   

 

 

 
   $ 5,856,215       $ 396,678      $ (231,759   $ 6,021,134   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(i) Represents the balance sheet as prepared under Canadian Accounting Standards for Private Enterprises adjusted for the Company’s accumulated share of earnings and losses in significantly influenced investments of $185,082 required by the equity method of accounting for investments.

 

F-152


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2012 Consolidated Statement of Operations

 

    

Regional Tire
Distributors
(Edmonton)
Inc.

    

Tirecraft
Western
Canada
Ltd.

   

Adjustments
and
Eliminations

   

Consolidated

 
     (i)                     

Sales

   $ 18,315,246       $ 399,118      $ (55,948   $ 18,658,416   

Cost of sales

     15,991,709         16,026        (55,948     15,951,787   
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     2,323,537         383,092        —          2,706,629   
  

 

 

    

 

 

   

 

 

   

 

 

 

Expenses

         

Wages and benefits

     347,259         351,038        —          698,297   

Management salaries

     610,000         —          —          610,000   

Rent

     159,500         —          —          159,500   

Automotive

     24,275         36,443        —          60,718   

Interest and bank charges

     33,607         99        —          33,706   

Amortization

     3,274         —          —          3,274   

Telephone and utilities

     2,540         1,834        —          4,374   

Office

     282,178         13,975        (240,000     56,153   

Repairs and maintenance

     2,776         —          —          2,776   

Insurance

     12,473         1,267        —          13,740   

Advertising and promotion

     66,261         170,072        —          236,333   

Shop supplies

     85         358        —          443   

Travel

     2,829         27,031        —          29,860   

Professional fees

     2,740         26,824        —          29,564   

Property taxes

     441         441        —          882   

Bad debt expense

     697         3,617        —          4,314   

Dues and memberships

     100         6,208        —          6,308   
  

 

 

    

 

 

   

 

 

   

 

 

 
     1,551,035         639,207        (240,000     1,950,242   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before other revenue and income taxes

     772,502         (256,115     240,000        756,387   

Other revenue

         

Interest income

     18,118         1,076        —          19,194   

Share of investee income

     185,082         —          —          185,082   

Administrative service revenue

     —           240,000        (240,000     —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     975,702         (15,039     —          960,663   

Income taxes expense

     69,387         —          —          69,387   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 906,315       $ (15,039   $ —        $ 891,276   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(i) Represents the statement of operations of the Company under Canadian Accounting Standards for Private Enterprises adjusted for the Company’s share of the earnings in significantly influenced investments of $185,082.

 

F-153


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

2012 Consolidated Statement of Retained Earnings

 

    

Regional Tire
Distributors
(Edmonton)
Inc.

    

Tirecraft
Western
Canada
Ltd.

   

Adjustments
and
Eliminations

    

Consolidated

 

Balance, beginning of year

   $ 1,198,220       $ (7,909   $ —         $ 1,190,311   

Net income

     906,315         (15,039     —           891,276   
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of year

   $ 2,104,535       $ (22,948   $ —         $ 2,081,587   
  

 

 

    

 

 

   

 

 

    

 

 

 

2012 Consolidated Statement of Cash Flows

 

    

Regional Tire
Distributors
(Edmonton)
Inc.

   

Tirecraft
Western
Canada
Ltd.

   

Adjustments
and
Eliminations

   

Consolidated

 

Cash provided by (used in):

        

Operating Activities

        

Net income

   $ 906,315      $ (15,039   $ —        $ 891,276   

Items not affecting cash

        

Amortization

     3,274        —          —          3,274   

Share of Investee income

     (185,082     —          —          (185,082

Change in non-cash working capital items

     (478,452     105,269        —          (373,183
  

 

 

   

 

 

   

 

 

   

 

 

 
     246,055        90,230        —          336,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing Activities

        

Investment in other companies

     (75     —          —          (75

Purchase of equipment

     (633     —          —          (633

Advances to related parties

     (1,000,392     (499     —          (1,000,891

Repayments from related parties

     311,659        —          —          311,659   

Advances to shareholder

     —          (231,659     231,659        —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     (689,441     (232,158     231,659        (689,940
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

        

Advances from related parties

     690,769        157,912        (231,659     617,022   

Repayment to related parties

     (72,100     (10,000     —          (82,100

Advances from shareholder

     500,000        —          —          500,000   

Repayment to shareholder

     —          (8,000     —          (8,000
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,118,669        139,912        (231,659     1,026,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash

     675,283        (2,016     —          673,267   

Cash, beginning of year

     94,551        23,327        —          117,878   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash, end of year

   $ 769,834      $ 21,311      $ —        $ 791,145   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

F-154


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

The Company holds a 25% interest in Regional Tire Distributors (Calgary) Inc. The Condensed Financial Statements of Regional Tire Distributors (Calgary) Inc. is as follows:

 

Balance Sheets

  

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Current Assets

   $ 8,986,008       $ 7,307,723       $ 7,327,776   

Long Term Assets

     2,320,654         686,852         697,596   
  

 

 

    

 

 

    

 

 

 
     11,306,662         7,994,575         8,025,372   
  

 

 

    

 

 

    

 

 

 

Current Liabilities

     1,646,195         1,046,550         1,338,278   

Long Term Liabilities

     3,671,703         2,182,086         3,370,599   

Shareholders’ Equity

     5,988,764         4,765,939         3,316,495   
  

 

 

    

 

 

    

 

 

 
   $ 11,306,662       $ 7,994,575       $ 8,025,372   
  

 

 

    

 

 

    

 

 

 

 

Statements of Operations

  

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Sales

   $ 25,592,573       $ 19,961,625       $ 16,589,405   

Cost of sales

     20,463,834         15,726,623         12,987,392   
  

 

 

    

 

 

    

 

 

 

Gross profit

     5,128,739         4,235,002         3,602,013   

Operating expenses

     3,558,310         2,435,191         3,149,754   
  

 

 

    

 

 

    

 

 

 

Income before other revenue and income taxes

     1,570,429         1,799,811         452,259   

Other revenue

     183,674         174,550         144,079   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,754,103         1,974,361         596,338   

Income taxes

     462,218         524,917         69,931   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,291,885       $ 1,449,444       $ 526,407   
  

 

 

    

 

 

    

 

 

 

The Company holds a 50% interest in Regional Tire Distributors (Saskatchewan) Inc. The Condensed Financial Statements of Regional Tire Distributors (Saskatchewan) Inc. is as follows:

 

Balance Sheets

  

February 28,

2014

   

February 28,

2013

   

February 29,

2012

 
      

Current Assets

   $ 5,226,861      $ 6,047,177      $ 3,871,475   

Long Term Assets

     229,942        272,472        331,016   
  

 

 

   

 

 

   

 

 

 
     5,456,803        6,319,649        4,202,491   
  

 

 

   

 

 

   

 

 

 

Current Liabilities

     3,626,064        3,589,339        2,595,531   

Long Term Liabilities

     2,999,900        2,999,900        1,499,900   

Shareholders’ Equity

     (1,169,161     (269,590     107,060   
  

 

 

   

 

 

   

 

 

 
   $ 5,456,803      $ 6,319,649      $ 4,202,491   
  

 

 

   

 

 

   

 

 

 

 

F-155


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

Statements of Operations

  

February 28,

2014

   

February 28,

2013

   

February 29,

2012

 
      

Sales

   $ 12,854,683      $ 11,999,083      $ 4,571,939   

Cost of sales

     11,144,551        9,310,716        3,381,476   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,710,132        2,688,367        1,190,463   

Operating expenses

     2,609,703        3,065,017        1,083,503   
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (899,571     (376,650     106,960   

Income taxes

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (899,571   $ (376,650   $ 106,960   
  

 

 

   

 

 

   

 

 

 

The Company holds a 50% interest in Regional Tire Distributors Manitoba (6631208 Manitoba Ltd.). The Condensed Financial Statements of Regional Tire Distributors Manitoba (6631208 Manitoba Ltd.) is as follows:

 

Balance Sheet

  

February 28,
2014

 

Current Assets

   $ 5,962,347   

Long Term Assets

     290,041   
  

 

 

 
     6,252,388   
  

 

 

 

Current Liabilities

     597,291   

Long Term Liabilities

     5,517,124   

Shareholders’ Equity

     137,973   
  

 

 

 
     $6,252,388   
  

 

 

 

 

Statement of Operations

  

February 28,
2014

 

Sales

   $ 15,171,112   

Cost of sales

     12,079,184   
  

 

 

 

Gross profit

     3,091,928   

Operating expenses

     2,613,663   
  

 

 

 

Income before other revenue and income taxes

     478,265   

Other revenue

     3,306   
  

 

 

 

Income before income taxes

     481,571   

Income taxes

     45,246   
  

 

 

 

Net income

   $ 436,325   
  

 

 

 

 

F-156


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

The Company holds a 50% interest in Integra Tire and Auto Centres Canada Ltd. The Condensed Financial Integra Tire and Auto Centres Canada Ltd. is as follows:

 

Balance Sheet

  

February 28,
2014

 

Current Assets

   $ 1,141,492   

Long Term Assets

     —     
  

 

 

 
     1,141,492   
  

 

 

 

Current Liabilities

     674,453   

Long Term Liabilities

     331,208   

Shareholders’ Equity

     135,831   
  

 

 

 
     $1,141,492   
  

 

 

 

 

Statement of Operations

  

February 28,
2014

 

Sales

   $ 3,382,315   

Cost of sales

     2,895,607   
  

 

 

 

Gross profit

     486,708   

Operating expenses

     312,260   
  

 

 

 

Income before other revenue and income taxes

     174,448   

Other revenue

     6,393   
  

 

 

 

Income before income taxes

     180,841   

Income taxes

     45,210   
  

 

 

 

Net income

   $ 135,631   
  

 

 

 

d) Reconciliation of net income per ASPE and US GAAP

 

    

February 28,
2014

    

February 28,
2013

   

February 29,
2012

 

Net income, as reported in statement of operations under ASPE

   $ 1,534,395       $ 1,415,319      $ 721,233   

Adjustments

       

Income from entities consolidated under

       

US GAAP:

       

Tirecraft Western Canada Ltd.

     294,729         (10,008     (15,039

1773503 Alberta Ltd.

     68,194         —          —     

Tire Storage Direct (Edmonton) Ltd.

     33,895         —          —     

Share of income from significantly influenced investees

     159,164         174,036        185,082   
  

 

 

    

 

 

   

 

 

 

Net income per US GAAP

   $ 2,090,377       $ 1,579,347      $ 891,276   
  

 

 

    

 

 

   

 

 

 

 

F-157


REGIONAL TIRE DISTRIBUTORS (EDMONTON) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

12. Correction of an Error

Subsequent to the release of the financial statements on June 25, 2014 management changed its assessment of the probability of realizing the future tax asset resulting from the impairment of the loan receivable and has determined that it does not meet the requirements for recognition of the deferred income tax asset and has made some adjustments to the tax provision. As a result of the change in the assessment by management the following changes have been made to the financial statements for the fiscal year ended February 28, 2014.

 

    

Previously
Reported

    

Adjustment
Increase
(Decrease)

   

Restated
Balance

 

Income taxes receivable

   $ —         $ 40,047      $ 40,047   

Future income tax asset

     807,660         (807,660     —     

Income taxes payable

     409,953         (409,953     —     

Current income tax expense

     854,953         (450,000     404,953   

Future income tax recovery

     327,600         (327,600     —     

Net income

     1,411,995         122,400        1,534,395   

Retained earnings

     5,226,827         (357,660     4,869,167   

 

F-158


Regional Tire Distributors (Calgary) Inc.

Index

February 28, 2014 and 2013 and February 29, 2012

 

    Page  

Independent Auditors’ Report

    F-160   

Financial Statements

 

Balance Sheets

    F-161   

Statements of Operations

    F-162   

Statements of Retained Earnings

    F-163   

Statements of Cash Flows

    F-164   

Notes to Financial Statements

    F-165   

 

F-159


LOGO

 

    Collins Barrow Edmonton LLP
 

INDEPENDENT AUDITORS’ REPORT

  2380 Commerce Place
    10155—102 Street N.W.
    Edmonton, Alberta
    T5J 4G8 Canada
   

 

T.  780.428.1522

    F.  780.425.8189
To the Shareholders of Regional Tire Distributors (Calgary) Inc.  

 

www.collinsbarrow.com

 

Report on the Financial Statements

We have audited the accompanying financial statements of Regional Tire Distributors (Calgary) Inc., which comprise the balance sheets as of February 28, 2014, February 28, 2013 and February 29, 2012, and the related statements of operations, retained earnings and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Accounting Standards for Private Enterprises; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Regional Tire Distributors (Calgary) Inc. as of February 28, 2014, February 28, 2013 and February 29, 2012, and the results of their operations and their cash flows for the years then ended in accordance with Canadian Accounting Standards for Private Enterprises.

Basis of Accounting

As more fully described in Note 2 to the financial statements, the Company’s policy is to prepare its financial statements on the basis of Canadian Accounting Standards for Private Enterprises which differ from accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to that matter. Information relating to the nature and effect of such differences is presented in note 14 to the financial statements.

 

Edmonton, Alberta

   /s/ Collins Barrow Edmonton LLP
June 25, 2014 except for Note 14 (footnotes (a) and (d)) which are as of August 18, 2014    Chartered Accountants

 

This office is independently owned and operated by Collins Barrow Edmonton LLP   LOGO
The Collins Barrow trademarks are used under License.  

 

F-160


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Balance Sheets

As at February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

ASSETS

        

Current Assets

        

Cash

   $ 521,350       $ 162,529       $ 374,494   

Accounts receivable (Note 3)

     2,003,962         1,838,295         2,044,799   

Goods and Services Tax receivable

     115,753         44,931         116,969   

Inventories (Note 4)

     6,223,543         5,250,280         4,776,357   

Prepaid expenses

     57,618         11,688         15,157   

Income taxes receivable

     63,782         —           —     
  

 

 

    

 

 

    

 

 

 
     8,986,008         7,307,723         7,327,776   

Due from corporate shareholder (Note 5)

     13,135         7,537         11,371   

Loans receivable from related parties (Note 6)

     107,236         62,034         39,557   

Property and equipment (Note 7)

     627,322         617,281         646,668   

Goodwill (Note 13)

     1,572,961         —           —     
  

 

 

    

 

 

    

 

 

 
   $ 11,306,662       $ 7,994,575       $ 8,025,372   
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

Current Liabilities

        

Accounts payable and accrued liabilities

   $ 555,251       $ 522,633       $ 349,163   

Income taxes payable

     —           469,917         14,115   

Management remuneration payable

     770,000         54,000         975,000   

Current portion of contingent liabilities (Note 13)

     320,944         —           —     
  

 

 

    

 

 

    

 

 

 
     1,646,195         1,046,550         1,338,278   

Due to corporate shareholders (Note 5)

     76,050         113,181         73,205   

Shareholder’s loan (Note 8)

     1,152,568         1,075,000         —     

Loans payable to related parties (Note 6)

     1,691,068         993,905         3,297,394   

Contingent liabilities (Note 13)

     752,017         —           —     
  

 

 

    

 

 

    

 

 

 
     5,317,898         3,228,636         4,708,877   
  

 

 

    

 

 

    

 

 

 

SHAREHOLDERS’ EQUITY

        

Common shares (Note 9)

     100         100         100   

Preferred shares (Note 9)

     197         200         200   

Retained earnings

     5,988,467         4,765,639         3,316,195   
  

 

 

    

 

 

    

 

 

 
     5,988,764         4,765,939         3,316,495   
  

 

 

    

 

 

    

 

 

 
   $ 11,306,662       $ 7,994,575       $ 8,025,372   
  

 

 

    

 

 

    

 

 

 
Commitment and Contingency (Note 11)         

See accompanying notes

 

F-161


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Statements of Operations

For the Years Ended February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Sales (Note 6)

   $ 25,592,573       $ 19,961,625       $ 16,589,405   

Cost of sales (Note 6)

     20,463,834         15,726,623         12,987,392   
  

 

 

    

 

 

    

 

 

 

Gross profit

     5,128,739         4,235,002         3,602,013   
  

 

 

    

 

 

    

 

 

 

Expenses

        

Wages and benefits

     1,157,144         924,909         768,228   

Management bonus

     700,000         —           975,000   

Rent (Note 6)

     558,657         526,980         457,250   

Amortization

     203,659         162,146         91,897   

Automotive

     185,929         152,488         125,964   

Management fees (Note 6)

     180,000         180,000         180,000   

Interest and bank charges

     113,893         72,078         63,703   

Property taxes

     101,761         106,471         112,937   

Professional fees (Note 6)

     67,835         7,681         12,608   

Utilities

     66,868         41,618         63,411   

Computer expenses (Note 6)

     56,107         37,571         26,912   

Repairs and maintenance

     39,579         34,082         28,847   

Bad debt expense

     32,260         77,546         160,772   

Telephone

     25,235         18,299         14,867   

Insurance

     23,767         23,189         26,681   

Office

     20,008         16,642         22,438   

Advertising and promotion

     17,186         44,185         15,007   

Meals and entertainment

     8,254         9,181         2,834   

Dues and memberships

     168         125         398   
  

 

 

    

 

 

    

 

 

 
     3,558,310         2,435,191         3,149,754   
  

 

 

    

 

 

    

 

 

 

Income before other revenue and income taxes

     1,570,429         1,799,811         452,259   

Other revenue

        

Rental income

     152,340         152,340         126,950   

Interest income

     31,334         22,210         17,129   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,754,103         1,974,361         596,338   

Income taxes expense

     462,218         524,917         69,931   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 1,291,885       $ 1,449,444       $ 526,407   
  

 

 

    

 

 

    

 

 

 

See accompanying notes

 

F-162


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Statements of Retained Earnings

For the Years Ended February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,
2014

   

February 28,
2013

    

February 29,
2012

 

Balance, beginning of year

   $ 4,765,639      $ 3,316,195       $ 3,036,598   

Net income

     1,291,885        1,449,444         526,407   

Redemption of preferred shares (Note 9)

     (69,057     —           (246,810
  

 

 

   

 

 

    

 

 

 

Balance, end of year

   $ 5,988,467      $ 4,765,639       $ 3,316,195   
  

 

 

   

 

 

    

 

 

 

See accompanying notes

 

F-163


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Statements of Cash Flows

For the Years Ended February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,
2014

   

February 28,
2013

   

February 29,
2012

 

Cash provided by (used in):

      

Operating Activities

      

Net income

   $ 1,291,885      $ 1,449,444      $ 526,407   

Items not affecting cash

      

Amortization

     203,659        162,146        91,897   
  

 

 

   

 

 

   

 

 

 
     1,495,544        1,611,590        618,304   

Change in non-cash working capital items (Note 10)

     (280,072     437,360        (5,417,523
  

 

 

   

 

 

   

 

 

 
     1,215,472        2,048,950        (4,799,219
  

 

 

   

 

 

   

 

 

 

Investing Activities

      

Purchase of equipment

     (138,700     (132,759     (493,938

Advances to corporate shareholder

     (5,598     —          (11,371

Repayments from corporate shareholder

     —          3,834        —     

Advances to related parties

     (64,965     (27,656     (39,557

Repayments from related parties

     19,763        5,179        —     

Assets purchased (Note 13)

     (1,335,691     —          —     
  

 

 

   

 

 

   

 

 

 
     (1,525,191     (151,402     (544,866
  

 

 

   

 

 

   

 

 

 

Financing Activities

      

Advances from corporate shareholders

     70,143        109,976        3,205   

Repayments to corporate shareholders

     (107,274     (70,000     —     

Advances from shareholder

     77,568        1,075,000        —     

Advances from related parties

     1,305,003        605,888        2,518,813   

Repayments to related parties

     (607,840     (3,830,377     —     

Redemption of preferred shares

     (69,060     —          (246,870

Issuance of shares

     —          —          100   
  

 

 

   

 

 

   

 

 

 
     668,540        (2,109,513     2,275,248   
  

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash

     358,821        (211,965     (3,068,837

Cash, beginning of year

     162,529        374,494        3,443,331   
  

 

 

   

 

 

   

 

 

 

Cash, end of year

   $ 521,350      $ 162,529      $ 374,494   
  

 

 

   

 

 

   

 

 

 

See accompanying notes

 

F-164


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

1. Nature of operations

The Company was incorporated under the Alberta Business Corporations Act on October 26, 1987 and operated a wholesale tire distribution business under its original name as South Alta Tire Distributors Ltd. The company changed its name to Regional Tire Distributors (Calgary) Inc. on October 5, 2010.

2. Summary of significant accounting policies

Basis of presentation

These financial statements are prepared in accordance with Canadian accounting standards for private enterprises.

Revenue recognition

Revenue is recognized when the goods have been delivered, the services have been completed, the transaction has been accepted by the customer and collection is reasonably assured. The Company reports its revenue net of returns, sales discounts and rebates to customers.

Interest revenue is recognized on an annual basis as it is earned.

Rental revenue earned under a lease agreement is recognized as revenue over the term of the underlying lease. All rent increases based on escalation clauses in lease agreements are accounted for on a straight-line basis over the term of the respective leases. Property taxes, other operating cost recoveries, and other incidental income are recognized on an accrual basis.

Vendor Rebates and Allowances

The Company participates in various purchase rebate programs with its major tire vendors including early payment incentives and volume purchase rebates based on defined levels of purchase volume. These arrangements enable the Company to earn rebates that reduce the cost of merchandise purchased. Vendor rebates and allowances are accrued as earned. Vendor rebates and allowances earned are initially recorded as a reduction in the cost of merchandise inventories and are included in operations (as a reduction of cost of goods sold) in the period the related product is sold. Accordingly, the amount of vendor rebates included in operations in any year could include rebates earned in a prior year.

Allowance for doubtful accounts

The allowance for doubtful accounts reflects management’s best estimate of losses on the accounts receivable balances. The company maintains an allowance for doubtful accounts that is estimated based on a variety of factors including accounts receivable aging, historical experience and other currently available information, including events such as customer bankruptcy and current economic conditions. Interest is charged on overdue account receivable balances. A provision is recorded in the period in which the receivable is deemed uncollectible.

Inventories

Inventories are valued at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition

 

F-165


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

including volume rebates and allowances from vendors. The cost of inventories is determined using the first-in, first-out (FIFO) method. Net realizable value is the estimated selling price in the ordinary course of business, less costs necessary to complete the sale. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on purchases in the recent past and/or expected future demand.

Property and equipment

Property and equipment are recorded at cost less accumulated amortization.

Amortization is calculated at the following annual rates:

 

Office equipment

   - 20% declining balance basis

Computer equipment

   - 30%-100% declining balance basis

Shop equipment

   - 20% declining balance basis

Automotive equipment

   - 30% declining balance basis

Leasehold improvement

   - 5 year straight line basis

Fencing

   - 10% declining balance basis

Property and equipment are tested for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable when it exceeds the sum of the undiscounted cash flows expected from its use and eventual disposal. In such a case, an impaired loss must be recognized and is equivalent to the excess of the carrying amount of a long-lived asset over its fair value.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is allocated as of the date of the business combination to the Company’s reporting units that are expected to benefit from the synergies of the business combination.

Goodwill is tested for impairment whenever events or changes in circumstances indicate that it might be impaired. The impairment test consists of a comparison of the fair value of the reporting unit to which goodwill is assigned with its carrying amount. Any impairment loss in the carrying amount compared with the fair value is charged to income in the year in which the loss is recognized.

Income taxes

The Company uses the future income taxes method to account for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Contingent liabilities

A contingent liability is recognized when the Company has a present obligation as a result of a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle the

 

F-166


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

obligation, and when a reliable estimate can be made of the amount of the obligation. A contingent liability is discounted using a current pre-tax rate that reflects the risks specific to the liability and is re-measured at fair value at each reporting date.

Use of estimates

The preparation of financial statements in conformity with Accounting Standards for Private Enterprises requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more subjective estimates included in these financial statements are the determination of allowance for doubtful accounts receivable, valuation of inventory, estimated useful lives of property and equipment for purposes of calculating amortization and valuation of contingent liabilities. Actual results could differ from those estimates.

Financial Instruments

Measurement of financial instruments

The company initially measures its financial assets and liabilities at fair value, except for certain non-arm’s length transactions. The Company subsequently measures all its financial assets and financial liabilities at amortized cost. Changes in fair value are recognized in net income.

Financial assets measured at amortized cost include cash, accounts receivable, due from corporate shareholder and loans receivable from related parties.

Financial liabilities measured at amortized cost include accounts payable and accrued liabilities, management remuneration payable, due to corporate shareholders, shareholder’s loan and loans payable to related parties.

Impairment

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write-down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income.

Transaction costs

Transaction costs relating to financial instruments that are measured subsequently at fair value are recognized in operations in the year in which they are incurred. For instruments that are subsequently measured at amortized cost, the amount initially recognized is adjusted for transaction costs directly attributable to the origination, acquisition, issuance or assumption.

 

F-167


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

3. Accounts Receivable

Accounts receivable consists of the following:

 

    

February 28,
2014

   

February 28,
2013

   

February 29,
2012

 

Trade receivable

   $ 2,325,091      $ 2,138,210      $ 2,289,971   

Allowance for doubtful accounts

     (321,129     (299,915     (245,172
  

 

 

   

 

 

   

 

 

 
   $ 2,003,962      $ 1,838,295      $ 2,044,799   
  

 

 

   

 

 

   

 

 

 

4. Inventories

Inventories consist of the following:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Tires

   $ 6,149,119       $ 5,183,560       $ 4,719,657   

Wheel

     74,424         66,720         56,700   
  

 

 

    

 

 

    

 

 

 
   $ 6,223,543       $ 5,250,280       $ 4,776,357   
  

 

 

    

 

 

    

 

 

 

As at February 28, 2014 year end, inventory included volume rebates and allowances in the amount of $168,422 (February 28, 2013—$352,660; February 29, 2012—$390,461).

Cost of sales reported on the statement of operations include $20,463,834 (February 28, 2013—$15,726,623 February 29, 2012—$12,987,392) of inventories recognized as an expense during the year.

5. Due from/Due to Corporate Shareholders

Due from corporate shareholder are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Regional Tire Distributors (Edmonton) Inc. (ownership 25%)

   $ 13,135         7,537         11,371   
  

 

 

    

 

 

    

 

 

 
   $ 13,135       $ 7,537       $ 11,371   
  

 

 

    

 

 

    

 

 

 

Due from corporate shareholder is unsecured, non-interest bearing and has no stated terms of repayment.

As the loan to corporate shareholder has no stated terms of repayment and is not expected to be repaid within the next year, it has been classified as a long term asset.

Due to corporate shareholders are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

673889 Alberta Ltd. (ownership 25%)

   $ 69,060       $ —         $ 70,000   

Regional Tire Distributors (Edmonton) Inc. (ownership 25%)

     6,990         5,907         3,205   

L & K Tire Inc. (ownership 25%)

     —           107,274         —     
  

 

 

    

 

 

    

 

 

 
   $ 76,050       $ 113,181       $ 73,205   
  

 

 

    

 

 

    

 

 

 

 

F-168


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

Due to corporate shareholders are unsecured, non-interest bearing and have no stated terms of repayment.

As the corporate shareholders have agreed in writing not to demand repayment of any portion of the loan balances prior to March 1, 2015, the loans have been classified as long term liabilities.

6. Loans Receivable from/Payable to Related Parties and Related Party Transactions

Loans receivable from related parties are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Kirk’s Tire (Brooks) Ltd.

   $ 26,229       $ 17,552       $ 9,389   

Kirk’s Tire (Calgary) Ltd.

     —           —           5,179   

Kirk’s Tire (Red Deer) Ltd.

     3,798         9,513         6,136   

Kirk’s Tire Ltd.

     18,185         21,517         17,163   

Regional Tire Distributors (Langley) Inc.

     265         10,981         1,690   

Regional Tire Distributors (Victoria) Inc.

     2,958         2,286         —     

Regional Tire Distributors (Vernon) Inc.

     3,073         185         —     

Regional Tire Distributors (Manitoba) Inc.

     9,912         —           —     

Tirecraft Lloydminster Truck Centre Inc.

     2,816         —           —     

Darren Vasseur

     40,000         —           —     
  

 

 

    

 

 

    

 

 

 
   $ 107,236       $ 62,034       $ 39,557   
  

 

 

    

 

 

    

 

 

 

Loans receivable from the parties noted above are unsecured, non-interest bearing and have no stated terms of repayment. The relationship between Regional Tire Distributors (Calgary) Inc. and each of these parties is as follows:

Kirk’s Tire (Brooks) Ltd., Kirk’s Tire (Red Deer) Ltd., Regional Tire Distributors (Langley) Inc., Regional Tire Distributors (Victoria) Inc., Regional Tire Distributors (Vernon) Inc., Regional Tire Distributors (Manitoba) Inc. and Tirecraft Lloydminster Truck Centre Inc. are significantly influenced by a director of Regional Tire Distributors (Calgary) Inc.

Kirk’s Tire Ltd. is a company controlled by a director of Regional Tire Distributors (Calgary) Inc.

Kirk’s Tire (Calgary) Ltd. is controlled by an immediate family member of a director of Regional Tire Distributors (Calgary) Inc.

Darren Vasseur is a director of Regional Tire Distributors (Calgary) Inc.

As the loans receivable have no stated terms of repayment and are not expected to be repaid within the next year, they have been classified as long term assets.

 

F-169


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

Loans payable to related parties are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

VLK Properties Inc.

   $ 48,616       $ 51,871       $ 175,818   

KDW Enterprises Ltd.

     128,288         24,863         69,061   

Kirk’s Adminco Ltd.

     16,275         18,803         18,165   

Kirk’s Tire (Calgary) Ltd.

     —           —           55   

Kirk’s Tire Ltd.

     1,328,429         895,457         1,696,738   

Pask Technology Group Inc.

     1,037         781         684   

Regional Tire Distributors (Langley) Inc.

     5,984         1,247         —     

Regional Tire Distributors (Vernon) Inc.

     5,606         883         —     

Tirecraft Western Canada Ltd.

     156,833         —           —     

Ward Tire

     —           —           300,000   

Doug Vasseur

     —           —           410,936   

Karen Vasseur

     —           —           436,684   

Darren Vasseur

     —           —           189,253   
  

 

 

    

 

 

    

 

 

 
   $ 1,691,068       $ 993,905       $ 3,297,394   
  

 

 

    

 

 

    

 

 

 

Loans payable to the parties noted above are unsecured, non-interest bearing and have no stated terms of repayment, except Kirk’s Tire Ltd. which is secured by inventory. The relationship between Regional Tire Distributors (Calgary) Inc. and each of these parties is as follows:

KDW Enterprise Ltd., Kirk’s Adminco Ltd., Pask Technology Group Inc., Regional Tire Distributors (Langley) Ltd. and Regional Tire Distributors (Vernon) Ltd. are significantly influenced by a director of Regional Tire Distributors (Calgary) Inc.

Kirk’s Tire Ltd. is a company controlled by a director of Regional Tire Distributors (Calgary) Inc.

VLK Properties Inc. is under common control.

Tirecraft Western Canada Ltd. is a company wholly owned by one of the shareholders of Regional Tire Distributors (Calgary) Inc.

Kirk’s Tire (Calgary) Ltd. is indirectly controlled by an immediate family member of a director of Regional Tire Distributors (Calgary) Inc.

Ward Tire is under common ownership of Regional Tire Distributors (Calgary).

Darren Vasseur is a director of Regional Tire Distributors (Calgary) Inc. Doug Vasseur and Karen Vasseur are immediate family members of the director.

As the related parties have agreed in writing not to demand repayment of any portion of the loan balances prior to March 1, 2015, the loans have been classified as long term liabilities.

 

F-170


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

Sales to related parties are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Kirk’s Tire (Brooks) Ltd.

   $ 287,835       $ 261,323       $ 195,857   

Kirk’s Tire (Calgary) Ltd.

     —           —           139,154   

Kirk’s Tire (Red Deer) Ltd.

     166,990         132,304         171,813   

KDW Enterprises Ltd.

     793         335         —     

Regional Tire Distributors (Edmonton) Inc.

     75,372         181,406         151,258   

Regional Tire Distributors (Langley) Inc.

     32,717         10,056         —     

Regional Tire Distributors (Victoria) Inc.

     41,933         17,830         —     

Regional Tire Distributors (Vernon) Inc.

     34,240         24,688         1,543   

Regional Tire Distributors (Manitoba) Inc.

     193,240         —           —     

Tirecraft Lloydminster Truck Centre Inc.

     22,070         1,678         1,364   
  

 

 

    

 

 

    

 

 

 
   $ 855,190       $ 629,620       $ 660,989   
  

 

 

    

 

 

    

 

 

 

Inventory purchases from related parties are as follows:

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Kirk’s Tire (Brooks) Ltd.

   $ —         $ —         $ 551   

Kirk’s Tire (Red Deer) Ltd.

     604         —           380   

Kirk’s Tire Ltd.

     3,516,716         2,727,411         2,837,377   

KDW Enterprises Ltd.

     707,495         842,185         861,060   

L&K Tire Inc.

     101         126,999         24,881   

Regional Tire Distributors (Edmonton) Inc.

     743,230         123,978         142,204   

Regional Tire Distributors (Langley) Inc.

     201,431         24,207         1,968   

Regional Tire Distributors (Vernon) Inc.

     85,109         5,131         487   

Regional Tire Distributors (Manitoba) Inc.

     5,769         —           —     
  

 

 

    

 

 

    

 

 

 
   $ 5,260,455       $ 3,849,911       $ 3,868,908   
  

 

 

    

 

 

    

 

 

 

Included in the rent expense are lease payments to VLK Properties Inc., a company under common control, which amounted to $526,980 for the 2014 fiscal year (February 28, 2013—$526,980; February 29, 2012—$457,250)

Included in the management fees expense are administrative services fee paid to Kirk’s Adminco Ltd., a company under common control, which amounted to $180,000 for the 2014 fiscal year (February 28, 2013—$180,000; February 29, 2012—$180,000).

Included in computer expenses are information technology services payments to Pask Technology Group Inc., a company related through a common director of Regional Tire Distributors (Calgary) Inc., which amounted to $15,300 for the 2014 fiscal year (February 28, 2013—$9,944; February 29, 2012—$5,922)

Included in cost of sales are advertising expense payments to Tirecraft Western Canada Ltd., a company related through a common director of Regional Tire Distributors (Calgary) Inc., which amounted to $156,833 for the 2014 fiscal year (February 28, 2013—$nil; February 29, 2012—$nil).

Included in the professional fees expense is an amount of $30,000 paid to BJK Holdings Ltd., a 25% shareholder of Regional Tire Distributors (Calgary) Inc., related to negotiation services provided to the Company regarding the purchase of assets from Harper’s Tire (1931) Ltd.

 

F-171


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

These transactions are in the normal course of operations and have been reported in these financial statements at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

7. Property and Equipment

 

    

February 28, 2014

 
    

Cost

    

Accumulated
Amortization

    

Net

 

Office equipment

   $ 18,171       $ 11,662       $ 6,509   

Computer equipment

     36,057         17,646         18,411   

Shop equipment

     140,375         49,745         90,630   

Automotive equipment

     524,771         323,056         201,715   

Leasehold improvements

     598,367         293,753         304,614   

Fencing

     7,859         2,416         5,443   
  

 

 

    

 

 

    

 

 

 
   $ 1,325,600       $ 698,278       $ 627,322   
  

 

 

    

 

 

    

 

 

 

 

    

February 28, 2013

 
    

Cost

    

Accumulated
Amortization

    

Net

 

Office equipment

   $ 13,071       $ 10,672       $ 2,399   

Computer equipment

     10,662         10,662         —     

Shop equipment

     78,125         34,869         43,256   

Automotive equipment

     403,816         262,525         141,291   

Leasehold improvements

     598,367         174,080         424,287   

Fencing

     7,859         1,811         6,048   
  

 

 

    

 

 

    

 

 

 
   $ 1,111,900       $ 494,619       $ 617,281   
  

 

 

    

 

 

    

 

 

 

 

    

February 29, 2012

 
    

Cost

    

Accumulated
Amortization

    

Net

 

Office equipment

   $ 13,071       $ 10,072       $ 2,999   

Computer equipment

     10,662         10,407         255   

Shop equipment

     74,175         24,549         49,626   

Automotive equipment

     302,157         229,184         72,973   

Leasehold improvements

     571,217         57,121         514,096   

Fencing

     7,859         1,140         6,719   
  

 

 

    

 

 

    

 

 

 
   $ 979,141       $ 332,473       $ 646,668   
  

 

 

    

 

 

    

 

 

 

8. Shareholder’s loan

Shareholder’s loan at February 28, 2014 which includes amounts outstanding at February 28, 2013 are unsecured, non-interest bearing, and are due March 1, 2015.

9. Share Capital

 

Authorized:     

Unlimited number of Class “A” through “D” common voting shares

Unlimited number of Class “E” through “H” common non-voting shares

Unlimited number of Class “I” through “L” preferred redeemable non-voting shares

Unlimited number of Class “M” through “P” preferred redeemable voting shares

 

F-172


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

    

February 28,
2014

    

February 28,
2013

    

February 29,
2012

 

Issued:

        

25          Class A common shares

   $ 25       $ 25       $ 25   

25          Class B common shares

     25         25         25   

25          Class C common shares

     25         25         25   

25          Class D common shares

     25         25         25   
  

 

 

    

 

 

    

 

 

 
     100         100         100   
  

 

 

    

 

 

    

 

 

 

2,000     Class I preferred shares

     —           200         200   

1,973     Class I preferred shares

     197         —           —     
  

 

 

    

 

 

    

 

 

 
     197         200         200   
  

 

 

    

 

 

    

 

 

 
   $ 297       $ 300       $ 300   
  

 

 

    

 

 

    

 

 

 

Class I preferred shares issued have redemption value of $2,557.76 per share.

On December 31, 2013, the Company redeemed 27 Class I preferred shares with a paid up capital of $0.10 and a redemption amount of $69,060. The excess of the redemption value over the paid up capital amount of $69,057 is recorded as a reduction of retained earnings.

On November 29, 2011, the Company redeemed 60 Class E preferred shares with a paid up capital of $1.00 and a redemption amount of $246,870. The excess of the redemption value over the paid up capital amount of $246,810 was recorded as a reduction of retained earnings. The existing share certificate was cancelled.

10. Non-cash Working Capital Items

Non-cash working capital items related to operations are as follows:

 

    

February 28,
2014

   

February 28,
2013

   

February 29,
2012

 

Accounts receivable

   $ (165,667   $ 206,504      $ (1,351,839

Goods and Services Tax receivable

     (70,822     72,038        (117,099

Inventories

     (240,572     (473,923     (3,721,491

Prepaid expenses

     (17,930     3,469        (7,014

Income taxes receivable

     (63,782     —          —     

Accounts payable and accrued liabilities

     32,618        173,470        (220,027

Income taxes payable

     (469,917     455,802        (53

Management remuneration payable

     716,000        —          —     
  

 

 

   

 

 

   

 

 

 
   $ (280,072   $ 437,360      $ (5,417,523
  

 

 

   

 

 

   

 

 

 

11. Commitment and Contingency

Commitment

The Company has entered into an operating lease for its premises expiring March 30, 2016.

 

F-173


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

The required payments in future fiscal periods are as follows:

 

2015

   $ 113,944   

2016

     113,944   

2017

     9,495   
  

 

 

 
   $ 237,383   
  

 

 

 

Contingency

On January 1, 2014, the Company entered into a consultation agreement with the former owners of Harper’s Tire (1931) Ltd. (Harper) (Note 13). Pursuant to the agreement, Harper has agreed to provide certain consulting and marketing services in favour of the Company for a period of five years in exchange for fees equal to 50% of the Company’s pre-tax profits generated from products sold by the Company to Harper’s previous customers. The amount of the fee is to be determined by the end of each calendar year.

12. Financial Instruments

Credit Risk

The Company is susceptible to credit risk on its accounts receivable and mitigates this risk through an extensive credit evaluation process.

Liquidity Risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company is exposed to this risk mainly in respect to its accounts payable and accrued liabilities and its management remunerations payable. As at February 28, 2014, the Company has a working capital balance of $7,339,813 (February 28, 2013—$6,261,173; February 29, 2012—$5,989,498)

Interest Rate Risk

Interest rate risk refers to adverse consequences of interest rate changes on the Company’s cash flows and financial position. Management does not believe the Company is exposed to significant interest rate risk.

13. Asset Purchase

On January 1, 2014, the Company acquired assets from Harper’s Tire (1931) Ltd. The aggregate adjusted purchase price was $2,408,652 and was allocated to the assets acquired based on their fair market value as follows:

 

Inventories

   $ 732,691   

Lease deposits

     28,000   

Property and equipment

     75,000   

Goodwill

     1,572,961   
  

 

 

 

Total assets acquired

   $ 2,408,652   
  

 

 

 

Total consideration for the acquisition consists of the following:

  

Cash payment

   $ 1,335,691   

Contingent consideration

     1,072,961   
  

 

 

 
   $ 2,408,652   
  

 

 

 

 

F-174


REGIONAL TIRE DISTRIBUTORS (CALGARY) INC.

Notes to the Financial Statements

February 28, 2014, February 28, 2013 and February 29, 2012

 

14. Canadian Accounting Standards for Private Enterprises and US GAAP Reconciliation

The financial statements of the Company have been prepared in accordance with Canadian Accounting Standards for Private Enterprises. The material differences between the accounting policies used by the Company under Canadian Accounting Standards for Private Enterprises and US GAAP are disclosed below.

a) Income Taxes

Under US GAAP, the Company recognizes a tax benefit if it is more likely than not that a tax position taken or expected to be taken in a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50 per cent likely of being realized upon settlement. The difference between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to this guidance represents an unrecognized tax benefit. An unrecognized tax benefit is disclosed as a long-term liability unless the Company anticipates a payment or receipt within one year in respect of the position. As a result of implementing these provisions there was no material impact on the Company’s financial statements.

Under US GAAP the Company is required to calculate and record corporate income taxes based on enacted corporate income tax rates. Under ASPE, the Company had calculated and recognized corporate income taxes using substantively enacted corporate income tax rates. For the Company, enacted and substantively enacted corporate tax rates are the same; as a result no differences to calculated and recognized corporate income taxes arise. There are no material differences between the Company’s statutory income tax rate and the effective tax rate.

b) Variable Interest Entities

The Company has performed a review of the entities with which it conducts business and has concluded that there are no entities that are required to be consolidated or variable interests that are required to be disclosed under the requirements of ASC Topic 810, Consolidation of Variable Interest Entities.

c) Preferred shares

Under US GAAP, the Company recognizes preferred shares at stated capital value as part of equity if there is not an unconditional obligation for the Company to redeem the shares by transferring an asset on a specified or determinable date or upon an event that is certain to occur. For the Company, there is no unconditional obligation for the preferred shares to be redeemed at the option of the holder at January 31, 2012, January 31, 2013 and January 31, 2014, therefore the stated value of the preferred shares has been reported as an equity component.

d) Comprehensive Income

US GAAP requires the presentation of a Statement of Comprehensive Income. The Company has no items that would cause such presentation to differ from the amounts presented as Net Income in the accompanying financials statements.

 

F-175


TTT Holdings, Inc. and Subsidiaries

Index

December 31, 2013 and 2012

 

    

Page(s)

 

Independent Auditor’s Report

     F-177   

Consolidated Financial Statements

  

Balance Sheets

     F-178   

Statements of Operations

     F-179   

Statements of Stockholders’ Equity and Mezzanine Equity

     F-180   

Statements of Cash Flows

     F-181   

Notes to Financial Statements

     F-182 – F-196   

 

F-176


Independent Auditor’s Report

To the Board of Directors of

TTT Holdings, Inc. and Subsidiaries

We have audited the accompanying consolidated financial statements of TTT Holdings, Inc. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations, of stockholders’ equity and mezzanine equity and of cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TTT Holdings, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ PricewaterhouseCoopers, LLP

Columbus, Ohio

February 28, 2014, except for Note 15, as to which the date is June 16, 2014

 

F-177


TTT Holdings, Inc. and Subsidiaries

Balance Sheets

December 31, 2013 and 2012

 

    

2013

   

2012

 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 4,390,410      $ 2,704,505   

Accounts receivable

     49,574,217        65,949,428   

Other receivables

     15,320,631        19,021,928   

Inventories

     92,525,287        105,494,221   

Prepaid expenses and other

     2,273,479        2,355,902   
  

 

 

   

 

 

 

Total current assets

     164,084,024        195,525,984   

Notes receivable, net of allowance for doubtful accounts of $116,139 and $269,420, respectively

     250,675        130,795   

Property and equipment, net

     8,217,527        7,074,576   

Intangible assets, net

     86,935,863        97,087,731   

Goodwill

     44,395,930        44,395,930   

Other noncurrent assets

     894,789        1,291,987   
  

 

 

   

 

 

 

Total assets

   $ 304,778,808      $ 345,507,003   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 115,810,618      $ 159,766,404   

Accrued liabilities

     8,796,813        5,827,556   

Fair value of interest rate swap

     779,412        1,341,780   

Short-term note payable

     1,406,762        —     

Current maturities of long-term debt and capital lease obligations

     7,005,747        7,676,809   
  

 

 

   

 

 

 

Total current liabilities

     133,799,352        174,612,549   

Long-term debt and capital lease obligations

     91,479,118        83,192,672   
  

 

 

   

 

 

 

Total liabilities

     225,278,470        257,805,221   
  

 

 

   

 

 

 

Commitments and contingencies

    

Mezzanine equity

    

Redeemable common stock; $.001 par value:

8,326 shares issued and outstanding

     8,875,516        14,212,482   

Stockholders’ equity

    

Common stock, $.001 par value per share; 150,000 voting and 15,000 nonvoting shares authorized, 76,569 and 71,569 voting shares issued and outstanding at December 31, 2013 and 2012, respectively

     77        72   

Additional paid-in capital

     83,627,822        74,651,789   

Note receivable from stockholder

     (787,091     (775,166

Accumulated deficit

     (12,215,986     (387,395

Noncontrolling interest

     —          —     
  

 

 

   

 

 

 

Total stockholders’ equity

     70,624,822        73,489,300   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 304,778,808      $ 345,507,003   
  

 

 

   

 

 

 

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

 

F-178


TTT Holdings, Inc. and Subsidiaries

Statements of Operations

Years Ended December 31, 2013 and 2012

 

    

2013

   

2012

 

Net sales

   $ 502,193,896      $ 570,042,650   

Cost of goods sold

     420,952,410        481,747,063   
  

 

 

   

 

 

 

Gross profit

     81,241,486        88,295,587   

Operating expenses

     83,232,641        79,195,149   
  

 

 

   

 

 

 

Operating (loss) income

     (1,991,155     9,100,438   

Interest expense, net

     9,852,960        9,202,654   
  

 

 

   

 

 

 

Loss before income taxes

     (11,844,115     (102,216

Income tax (benefit) expense

     (15,524     182,357   
  

 

 

   

 

 

 

Net loss

     (11,828,591     (284,573

Net income attributable to the noncontrolling interest

     —          102,822   
  

 

 

   

 

 

 

Net loss attributable to TTT Holdings, Inc. stockholders

   $ (11,828,591   $ (387,395
  

 

 

   

 

 

 

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

 

F-179


TTT Holdings, Inc. and Subsidiaries

Statements of Stockholders’ Equity and Mezzanine Equity

Years Ended December 31, 2013 and 2012

 

               

Stockholders’ Equity

               

Mezzanine Equity

 
               

Additional

Paid-In

Capital

   

Note
Receivable

from

Stockholder

   

Accumulated

Earnings

(Deficit)

   

Noncontrolling

Interest

   

Total

Stockholders’

Equity

   

Redeemable

Common Stock

 
   

Common Stock

             
   

Shares

   

Amount

             

Shares

   

Amount

 

Balances at December 31, 2011

    71,569      $ 72      $ 79,591,310      $ (763,199   $ —        $ 397,409      $ 79,225,592        8,326      $ 11,406,620    

Net income (loss)

    —          —          —          —          (387,395     102,822        (284,573    

Interest earned on note receivable from stockholder

    —          —          —          (11,967     —          —          (11,967    

Stock based compensation

    —          —          418,006        —          —          —          418,006       

Dividends

    —          —          (2,551,665     —          —          (500,231     (3,051,896    

Adjustments to redeemable common stock fair value measurement

    —          —          (2,805,862     —          —          —          (2,805,862     —          2,805,862    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012

    71,569        72        74,651,789        (775,166     (387,395     —          73,489,300        8,326        14,212,482    

Net loss

    —          —          —          —          (11,828,591     —          (11,828,591    

Interest earned on note receivable from stockholder

    —          —          —          (11,925     —          —          (11,925    

Stock based compensation

    —          —          538,010        —          —          —          538,010       

Settlement of stock options

    —          —          (150,000     —          —          —          (150,000    

Distributions

    —          —          (1,748,938     —          —          —          (1,748,938    

Issuance of common stock

    5,000        5        4,999,995        —          —            5,000,000       

Adjustments to redeemable common stock fair value measurement

    —          —          5,336,966        —          —          —          5,336,966        —          (5,336,966)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2013

    76,569      $ 77      $ 83,627,822      $ (787,091   $ (12,215,986   $ —        $ 70,624,822        8,326      $ 8,875,516    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

F-180


TTT Holdings, Inc. and Subsidiaries

Statements of Cash Flows

Years Ended December 31, 2013 and 2012

 

   

2013

   

2012

 

Cash flows from operating activities

   

Net loss

  $ (11,828,591   $ (284,573

Adjustments to reconcile net loss to net cash (used in) provided by operating activities

   

Depreciation and amortization

    11,979,180        11,510,415   

Noncash stock compensation

    538,010        418,006   

Amortization of deferred financing costs

    238,435        238,710   

Amortization of discount on subordinated loan

    140,306        165,816   

Amortization of deferred rent expense

    439,485        611,078   

Unrealized loss on interest rate swap

    (562,368     (224,525

Interest paid-in-kind

    746,325        739,349   

Interest earned on note receivable from stockholder

    (11,925     (11,967

Loss on sale of assets

    85,557        —     

Changes in assets and liabilities, net of acquisitions

   

Accounts receivable

    16,375,211        1,631,166   

Other receivables

    3,701,297        (269,864

Inventories

    12,968,934        (6,938,498

Notes receivable

    (119,880     93,695   

Prepaid expenses and other assets

    106,448        (1,247,222

Accounts payable

    (44,080,064     6,937,441   

Accrued liabilities

    2,529,772        (81,165
 

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (6,753,868     13,287,862   
 

 

 

   

 

 

 

Cash flows from investing activities

   

Purchase of property and equipment

    (1,133,333     (3,204,868

Proceeds from settlement from prior acquisition

    —          4,075,010   

Acquisition of business, net of cash acquired

    —          (2,267,338
 

 

 

   

 

 

 

Net cash used in investing activities

    (1,133,333     (1,397,196
 

 

 

   

 

 

 

Cash flows from financing activities

   

Proceeds from issuance of common stock

    5,000,000        —     

Payment of financing costs

    (154,525     —     

Distributions to stockholders

    (1,748,938     (3,051,896

Settlement of stock options

    (150,000     —     

Borrowings from revolving loan

    213,462,463        234,276,642   

Repayments on revolving loan

    (200,242,465     (241,497,733

Proceeds from short-term and long-term debt

    2,106,464        —     

Payments on short-term and long-term debt and capital lease obligations

    (8,699,893     (6,448,989
 

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    9,573,106        (16,721,976
 

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    1,685,905        (4,831,310

Cash and cash equivalents at beginning of year

    2,704,505        7,535,815   
 

 

 

   

 

 

 

Cash and cash equivalents at end of year

  $ 4,390,410      $ 2,704,505   
 

 

 

   

 

 

 

Supplemental disclosure of cash flow information

   

Cash paid for interest

  $ 6,085,236      $ 8,316,273   

Noncash investing and financing activities

   

Purchase of software with vendor financing

  $ 1,478,255      $ —     

Capital lease obligations

    319,954        —     

Purchase of property and equipment in accounts payable

    124,278        —     

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

 

F-181


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

1. Description of Business

TTT Holdings, Inc. (“Holdings”) is incorporated in Delaware as an S-Corporation. Terry’s Tire Town Holdings, Inc. (“TTT”), its wholly owned subsidiary, is incorporated in Ohio as an S-corporation. Through its operating subsidiaries, TTT’s primary operations are as a wholesale distributor of tires and accessories throughout the eastern half of the United States. During 2011, TTT formed Summit Tire Northeast, LLC (“Summit”) to acquire the assets of Summit Tire of Massachusetts, Inc., a wholesale tire distributor with operations focused in the New England area and TTT directly acquired the stock of Englewood Tire Wholesale, Inc. (“Englewood”), a wholesale tire distributor with operations focused primarily in the Greater New York, New Jersey and Connecticut area. Holdings has no significant assets or operations other than its ownership of TTT. The operations of TTT constitutes the operations of Holdings.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Holdings, TTT and each of TTT’s wholly owned subsidiaries and entities controlled by TTT but not wholly-owned (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Noncontrolling interests represent the portion of equity the Company does not own in the controlled entities included in the financial statements. The Company identifies its noncontrolling interests separately within the equity section on the consolidated balance sheet. The amounts of consolidated net earnings attributable to the Company and to the noncontrolling interests are presented separately on the Company’s consolidated statement of operations. The Company dissolved its noncontrolling interests in 2012.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates include the Company’s valuation of doubtful accounts receivable, valuation of inventory reserves, valuation of goodwill, share-based compensation, the fair value of derivative instruments, the fair value of purchased assets and liabilities, including intangible assets and related useful lives assigned to such assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments purchased with an original maturity of three months or less which are not subject to withdrawal restrictions or penalties to be cash and cash equivalents. Such investments are carried at their cost, which approximates their estimated fair market value.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash and cash equivalents. The majority of cash and cash equivalents at December 31, 2013 and 2012 were deposited with large banking institutions. The Company maintains cash deposits in banks which, from time to time, exceed the amount of deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any potential credit loss is minimal.

 

F-182


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

Accounts Receivable

Trade receivables represent amounts due from product sales in the ordinary course of business. Accounts receivable are recorded at the invoiced amount and do not bear interest. Credit is extended based on an evaluation of customers’ financial condition, and trade receivables are generally not collateralized.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses for uncollected receivables. The Company determines the allowance based on customer risk, the length of time accounts are past due, and historical write-off experience. Account balances are charged to the allowance when it is probable the receivable will not be recovered. The total adjustment to reduce accounts receivable to the recoverable amount was $2,042,500 and $2,885,703 at December 31, 2013 and 2012, respectively.

Inventories

Inventories consist of products held for resale and are valued at the lower of cost or market, with cost determined by the last-in, first-out method (“LIFO”) for tire inventory and at moving average cost for non-tire inventory. The LIFO reserve was $202,520 and $4,576,974 at December 31, 2013 and 2012, respectively. The composition of inventory valued at LIFO and FIFO is as follows:

 

    

2013

    

2012

 

Inventory at LIFO (primarily tire inventory)

   $ 88,076,680       $ 101,192,482   

Inventory at FIFO (primarily nontire inventory)

     4,448,607         4,301,739   
  

 

 

    

 

 

 
   $ 92,525,287       $ 105,494,221   
  

 

 

    

 

 

 

During 2013, the combination of deflation and reduction in inventory quantities resulted in a liquidation of LIFO inventory carried at lower costs prevailing in prior years as compared with the cost of 2012 purchases, the effect of which decreased cost of goods sold and increased net income by approximately $4,374,000. The portion related to the change in cost in inventory compared to 2012 was approximately $537,000.

The above balances are presented net for slow-moving and obsolete inventory of $1,217,681 and $1,101,894 at December 31, 2013 and 2012, respectively.

Derivative Instruments

The Company’s interest rate risk management strategy uses derivative instruments to minimize cash flow risks caused by interest rate volatility associated with the Company’s variable rate debt. At December 31, 2013 and 2012, the derivative instruments used to meet the Company’s risk management objectives were interest rate swaps. The Company chose not to apply hedge accounting for its interest rate swap agreements. Accordingly, the interest rate swaps are carried at their fair value on the consolidated balance sheet, with changes in their fair value recognized in current earnings (see Note 12).

Deferred Financing Costs

Deferred financing costs are included in other noncurrent assets and represent the direct costs of establishing the Company’s term and revolving debt. Deferred financing costs are amortized to interest expense over the term of the related debt using the effective interest method for term commitments and the straight-line method for revolving commitments.

 

F-183


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred. Major renewals and improvements are capitalized. The cost and accumulated depreciation of disposed assets are eliminated from the accounts and resulting gain or loss is reflected in earnings. Leasehold improvements are amortized over the shorter of the lease term or useful life of the asset. Capital leases are amortized over the lease term. Depreciation and amortization is computed using the straight-line method over the following estimated useful lives:

 

Leasehold improvements

   5 – 25 years

Machinery and equipment

   7 years

Furniture and fixtures

   5 years

Vehicles

   5 years

Computer software and equipment

   3 years

Intangible Assets

Intangible assets consist of customer relationships and trade names. The intangible assets were determined to have finite lives. Amortization of finite-lived intangible assets is recorded to reflect the pattern of economic benefits based on projected revenues over their respective estimated useful lives. Intangible assets are amortized by the straight-line method over the estimated useful lives (customer relationships—11 to 13 years and trade names—3 to 18 years).

Impairment of Long-Lived Assets

The Company assesses the recoverability of property and equipment and amortizable intangible assets whenever events and circumstances indicate that the carrying value of the asset may not be recoverable from its future undiscounted cash flows. If it is determined an impairment has occurred, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value. No impairments were recorded for the years ended December 31, 2013 and 2012.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is assessed at least annually for impairment and between annual tests, if events or changes in circumstances indicate potential impairment exists, using a fair value-based approach. Any such impairment is recognized in the period identified. In evaluating goodwill for impairment, the Company identifies goodwill related to each of its reporting units. The Company has determined it operates in two reporting units: wholesale and commercial. For purposes of evaluating goodwill for impairment, assets and liabilities, including goodwill, were allocated to each reporting unit on the basis of relative fair value of each unit. No impairment of goodwill was recorded in the years ended December 31, 2013 and 2012.

Revenue Recognition

Sales are recognized when products are shipped or when title transfers to customers, if later, net of estimated returns and customer discounts.

 

F-184


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

Supplier Incentives

The Company receives monthly, quarterly and annual performance rebates from suppliers based on attaining certain purchase and/or sales goals. The Company receives other rebates from suppliers which are negotiated with suppliers and are not dependent on the Company meeting minimum purchase and/or sales goals. Suppliers’ rebates are recognized ratably based on the terms of the contracts or programs with each supplier and are recorded as a reduction of cost of goods sold. Supplier rebates are classified as a reduction of inventory when the incentive is part of a buying arrangement. Receivables from suppliers for rebates and incentives are included in other receivables in the consolidated balance sheet.

Shipping and Handling Costs

The Company includes in cost of goods sold the cost of tire and non-tire inventory sold. Warehousing and distribution costs, including costs associated with delivering product to customers are included in operating expenses. Total warehousing and distribution costs for the years ended December 31, 2013 and 2012 were approximately $39,148,000 and $37,992,000 respectively including approximately $14,619,000 and $14,842,000, respectively, related to shipping and handling.

Advertising Costs

Advertising costs are expensed when incurred as part of operating expenses. The Company receives reimbursements from vendors for advertising costs. Reimbursements for advertising expenditures are reported on a net basis within operating expenses. Reimbursements received in excess of the cost of advertising are reported within cost of goods sold. Net advertising costs were $127,301 and $180,924 for the years ended December 31, 2013 and 2012, respectively.

Stock-Based Compensation

The Company recognizes compensation expense for equity awards provided to employees in return for employee service. The Company issued both time vesting and performance-based stock options to certain employees. Time vesting options are measured at the fair value of the award at the grant date and are expensed on a straight-line basis over the service period. The performance-based options vest in tranches based on the Company meeting annual earnings targets and also contain a service requirement. Compensation expense for performance-based options is recorded over the relevant service period when it becomes probable that the contingent performance measures are expected to be met. Fair value is measured at the grant date and amortized on a graded vesting basis over the requisite service periods of the awards, which is generally the vesting period.

Income Taxes

There is no provision for federal and certain state income taxes in the consolidated financial statements of the Company, as an S-corporation is generally not subject to these taxes. Stockholders are individually subject to the income taxes on the Company’s results of operations and, accordingly, the Company pays distributions to the members to the extent needed to fund the stockholders’ tax obligations. Certain state and local jurisdictions do not recognize the flow-through status of an S-corporation and require minimum income tax expense. Accordingly, the Company has recognized a state and local income tax in the accompanying statement of operations for these jurisdictions.

 

F-185


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

3. Business Acquisitions

Kramer Tire

On May 13, 2012, the Company acquired substantially all of the assets associated with the wholesale distribution operations of two facilities located in Norfolk and Richmond, Virginia, from Monro Muffler Brake, Inc. The intent of the acquisition was to increase operations in the Mid-Atlantic market and reinforce relationships with Monro Muffler Brake, Inc.

The purchase price was $2,267,338 paid in cash. The purchase was accounted for on the acquisition method and the assets acquired and liabilities assumed have been recorded based on their respective fair values at the acquisition date. Goodwill of $255,285 was recorded for the excess of the purchase price over the fair value of net assets acquired. Transaction costs of $114,000 were expensed in the consolidated statement of operations for the year ended December 31, 2012.

The purchase price was allocated as follows:

 

Assets

  

Inventories

   $ 1,433,277   

Intangible assets

     656,088   

Goodwill

     255,285   

Other assets

     12,480   
  

 

 

 

Total assets acquired

     2,357,130   

Total liabilities assumed

     (89,792
  

 

 

 

Fair value of net assets acquired

   $ 2,267,338   
  

 

 

 

The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using Level 3 inputs in the fair value hierarchy (see Fair Value Measurements in Note 13). The most significant assumptions include estimated remaining useful life, expected revenue, survivor curve, and earnings before interest and tax margins. These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of management, and such variations may be significant to estimated values.

4. Property and Equipment

The components of property and equipment at December 31, 2013 and 2012 are as follows:

 

    

2013

   

2012

 

Leasehold improvements

   $ 1,742,972      $ 1,692,834   

Machinery and equipment

     4,946,917        4,003,548   

Furniture and fixtures

     1,116,456        927,334   

Vehicles

     1,096,924        776,635   

Computer software and equipment

     2,259,960        1,845,803   

Construction in progress

     1,673,928        638,321   
  

 

 

   

 

 

 
     12,837,157        9,884,475   

Less: Accumulated depreciation and amortization

     (4,619,630     (2,809,899
  

 

 

   

 

 

 

Property and equipment, net

   $ 8,217,527      $ 7,074,576   
  

 

 

   

 

 

 

 

F-186


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

There is approximately $320,000 and $0 of capital leases at December 31, 2013 and 2012 for vehicles, respectively. Associated accumulated depreciation was approximately $28,000 and $0 at December 31, 2013 and 2012, respectively.

Depreciation and amortization expense was $1,827,312 and $1,377,447 for the years ended December 31, 2013 and 2012.

 

5. Intangible Assets

Intangible assets consisted of the following as of December 31, 2013:

 

    

Cost

    

Accumulated
Amortization

   

Net

 

Customer relationships

   $ 79,319,088       $ (16,690,500   $ 62,628,588   

Trade names

     33,426,000         (9,118,725     24,307,275   
  

 

 

    

 

 

   

 

 

 
   $ 112,745,088       $ (25,809,225   $ 86,935,863   
  

 

 

    

 

 

   

 

 

 

Intangible assets consisted of the following as of December 31, 2012:

 

    

Cost

    

Accumulated
Amortization

   

Net

 

Customer relationships

   $ 79,319,088       $ (10,059,300   $ 69,259,788   

Tradenames

     33,426,000         (5,598,057     27,827,943   
  

 

 

    

 

 

   

 

 

 
   $ 112,745,088       $ (15,657,357   $ 97,087,731   
  

 

 

    

 

 

   

 

 

 

Amortization expense was $10,151,868 and $10,132,968 for the years ended December 31, 2013 and 2012, respectively.

The estimated future amortization of intangible assets is as follows:

 

2014

   $ 9,726,041   

2015

     8,155,763   

2016

     8,155,763   

2017

     8,155,763   

2018

     8,155,763   

Thereafter

     44,586,770   
  

 

 

 
   $ 86,935,863   
  

 

 

 

6. Goodwill

Activity related to goodwill for the years ended December 31, 2013 and 2012 was as follows:

 

Balance at December 31, 2011

   $ 44,140,645   

Additions to goodwill from acquisitions during 2012

     255,285   
  

 

 

 

Balance at December 31, 2012 and 2013

   $ 44,395,930   
  

 

 

 

There is no cumulative impairment to goodwill.

 

F-187


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

7. Other Noncurrent Assets

Other noncurrent assets consisted of the following at December 31, 2013 and 2012:

 

    

2013

   

2012

 

Deferred financing costs

   $ 1,197,662      $ 1,043,137   

Investment in American Car Care Centers

     —          285,316   

Deposits

     291,723        319,695   
  

 

 

   

 

 

 
     1,489,385        1,648,148   

Less: Accumulated amortization of deferred financing costs

     (594,596     (356,161
  

 

 

   

 

 

 

Total other noncurrent assets

   $ 894,789      $ 1,291,987   
  

 

 

   

 

 

 

Amortization of deferred financing costs was $238,435 and $238,710 for the years ended December 31, 2013 and 2012, respectively.

The estimated future amortization of deferred financing costs is as follows:

 

2014

   $ 223,208   

2015

     189,707   

2016

     147,087   

2017

     43,064   
  

 

 

 
   $ 603,066   
  

 

 

 

8. Accrued Liabilities

Accrued liabilities consisted of the following at December 31:

 

    

2013

    

2012

 

Salaries, wages, commissions, bonuses and related payroll taxes

   $ 2,926,809       $ 4,176,527   

Accrued interest

     3,391,403         179,050   

Other accrued liabilities

     2,478,601         1,471,979   
  

 

 

    

 

 

 
   $ 8,796,813       $ 5,827,556   
  

 

 

    

 

 

 

9. Short-Term Note Payable

During 2013, the company entered into a financing arrangement with a third party to fund commercial insurance prepayments. The amount financed was approximately $1,927,000 at an annual interest rate of 3.12%. Payments are made in equal monthly installments of $177,899 with final payment due on September 1, 2014. The remaining balance of this arrangement at December 31, 2013 is $1,406,762.

 

F-188


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

10. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consisted of the following at December 31:

 

    

2013

   

2012

 

Term loan

   $ 30,468,047      $ 38,035,718   

Revolving loan

     17,000,000        3,780,002   

Subordinated loan

     39,001,131        38,703,833   

Seller note

     11,082,428        10,632,877   

Capital leases

     301,945        —     

Other debt

     1,090,498        316,541   
  

 

 

   

 

 

 

Total

     98,944,049        91,468,971   

Less: Original issue discount on the subordinated loan

     (459,184     (599,490
  

 

 

   

 

 

 

Total

     98,484,865        90,869,481   

Less: Current maturities

     (7,005,747     (7,676,809
  

 

 

   

 

 

 

Total long-term debt and capital lease obligations

   $ 91,479,118      $ 83,192,672   
  

 

 

   

 

 

 

Term and Revolving Debt

On November 30, 2011, the Company entered into a credit agreement (the “Agreement”) consisting of revolving and term debt with a lender group. The Agreement, which was amended on March 29, 2013, is collateralized by substantially all of the Company’s assets, but subordinate to certain vendor senior collateral positions.

The revolving commitment, including outstanding letters of credit, is available up to the lesser of $45,000,000 or an agreed-upon percentage of the Company’s accounts receivable and inventory and has a maturity date of November 30, 2016. The Company is required to pay commitment fees up to 0.375% per annum on the unused portion of the revolving commitment.

In connection with one of the Company’s leased facilities, an outstanding letter of credit is open for $94,444, and expires on December 20, 2014.

The term debt requires monthly principal payments of $535,714 through November 30, 2016. The remaining outstanding principal is due on November 30, 2016. The Agreement also contains provisions which, under certain circumstances, require the Company to make prepayments of the term loan commitment beginning in 2012, based on excess cash flows as defined in the Agreement.

Interest on the revolving loan and term loan is payable monthly based on 30 day LIBOR plus a margin that fluctuates between 2.25% and 3.50% based on the Company’s leverage ratio, as defined in the Agreement. At December 31, 2013, the margin was 3.50% with a total rate of 3.67%. At December 31, 2012, the margin was 2.75% with a total rate of 2.96%.

During 2013, the Company was in default of certain covenants under the agreement and entered into Forbearance Agreements dated October 23, 2013 and December 30, 2013 (the “Forbearance Agreements”). Subsequent to December 31, 2013 the company entered into the Credit Agreement Amendment (see Note 19) and the Forbearance Agreements have terminated. The new Credit Agreement Amendment refinanced and replaced the revolving and term loans on a long-term basis, revised future covenant requirements, and waived all previous covenant violations. Therefore, the outstanding balance of the revolving and term loans were classified as long-term debt as of December 31, 2013, except for the portion due in 2014.

Subordinated Loan

On November 30, 2011, the Company entered into a subordinated credit agreement (the “Subordinated Loan”) with a lender. The Subordinated Loan, which was amended on March 29, 2013, consists of term debt which

 

F-189


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

is due in full on November 30, 2017. This term debt was issued at an original issue discount of $765,306. The Company amortizes the original issue discount over the life of the loan commitment using the effective interest method. The Subordinated Loan also contains provisions which, under certain circumstances, require the Company to make prepayments of the loan commitment beginning in 2013, based on excess cash flows as defined in the Subordinated Loan. The Subordinated Loan is unsecured and bears interest at 13.5%, of which at least 12% shall be payable in cash quarterly, through maturity. The remaining 1.5% may be paid in kind and added to the principal balance, at the Company’s option. During a portion of fiscal year 2013, the Company was in default of certain provisions under the Subordinated Loan. During the period of default, the Company was charged an incremental default interest rate of 2.00%. Subsequent to December 31, 2013, the Company entered into the Subordinated Credit Amendment (see Note 19) and is no longer in default under that agreement. The Subordinated Loan allows for optional prepayments at redemption prices ranging from 100% to 103%, based on the date of the redemption.

During a portion of fiscal year 2013, interest payments under the Subordinated Loan were accrued and not paid current. These amounts are included in accrued liabilities (see Note 8). The Credit Agreement Amendment allows for the current payments of interest on the subordinated loan and the repayment of accrued interest during fiscal year 2014.

The Agreement and the Subordinated Loan contain certain restrictive financial covenants, which specify minimum net worth requirements, maximum liabilities to earnings before income taxes, interest, depreciation and amortization (“EBITDA”) ratio and a minimum ratio of EBITDA to debt service cost, among others. The Company is also required to meet certain non-financial covenants, which include restrictions on indebtedness, liens and dividends.

Seller Note

The Company has a credit agreement with a former shareholder of the predecessor Company (the “Seller Note”) that matures on May 31, 2018. No principal payments are required to be made until the maturity date. The Seller Note bears interest at an annual rate of 13%, of which at least 10% is payable in cash on a quarterly basis, through maturity. The remaining 3% is considered paid-in-kind interest and is added to the principal balance. The Seller Note is subordinate to the Company’s other financing arrangements.

During a portion of 2013, interest payments under the Seller Note were accrued and not paid current. These amounts are included in accrued liabilities (see Note 8). The Credit Agreement Amendment allows for the current payments of interest on the Seller Note and the repayment of accrued interest during fiscal year 2014.

Other Debt

The Company’s other debt obligations primarily consist of vendor financing for ERP software. The obligation bears interest at an annual rate of 2% and equal quarterly payments are due until November 2015. At December 31, 2013, the outstanding balance for this obligation was approximately $1,075,000.

Aggregate annual maturities of long-term debt and capital lease obligations are as follows:

 

2014

   $ 7,005,747   

2015

     7,013,210   

2016

     34,654,724   

2017

     39,051,558   

2018

     11,140,548   

Thereafter

     78,262   
  

 

 

 
   $ 98,944,049   
  

 

 

 

 

F-190


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

11. Commitments and Contingencies

Leases

The Company leases certain warehouse facilities, office facilities and vehicles under both capital and operating leases expiring at various dates through November 2020. The leases require the Company to pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased facilities. The terms of certain warehouse and office facility leases call for minimum rents to increase each year. Accordingly, the Company has accounted for the rent expense under the straight-line method.

At December 31, 2013, future minimum lease payments for all leases and the present value of the net minimum lease payments for capital leases were as follows:

 

    

Operating Leases

    

Capital Leases

 
    

Total

    

Related
Parties

    

Total

 

2014

   $ 8,135,719       $ 2,113,788       $ 73,259   

2015

     6,387,041         2,002,124         73,259   

2016

     4,289,523         773,820         73,259   

2017

     3,960,236         773,820         73,259   

2018

     4,083,657         773,820         73,259   

Thereafter

     8,678,393         1,483,155         85,051   
  

 

 

    

 

 

    

 

 

 

Total minimum lease payments

   $ 35,534,569       $ 7,920,527         451,346   
  

 

 

    

 

 

    

Less: Amounts representing interest

           149,401   
        

 

 

 

Present value of net minimum lease payments

           301,945   

Less: Current maturities

           33,205   
        

 

 

 

Long-term obligations under capital leases

         $ 268,740   
        

 

 

 

Total rent expense charged to operations, including $2,234,788 and $2,245,788 to related parties, was $10,746,232 and $9,857,191 for the years ended December 31, 2013 and 2012, respectively.

Legal

Contingent liabilities arise in the ordinary course of the Company’s activities. Various legal actions, proceedings and claims may be instituted or asserted in the future against the Company. Litigation is subject to many uncertainties and it is possible that some of the legal proceedings and claims could be decided unfavorably to the Company. Based on information presently known, management does not believe any claims will have a material impact on the Company’s financial position or results of operation.

Vendor Liens

The Company has agreements with certain inventory suppliers whereby the Company’s accounts payable to these suppliers ($64,083,743 and $85,713,000 at December 31, 2013 and 2012, respectively) is collateralized by the Company’s inventory and accounts receivable. Their rights are senior to those of the debt holders (see Note 10).

Other

The Company has an unconditional obligation with a supplier for software maintenance services of approximately $416,000 in both 2014 and 2015.

 

F-191


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

12. Derivative Instruments

The Company has two separate interest rate swap agreements with a lender for the purpose of reducing certain exposures to interest rate fluctuations on the variable rate term debt. The notional amount of each of the swaps is $25,000,000. In accordance with the swap agreements, the Company pays a fixed rate of interest of 2.10% and 2.12% plus the applicable spread, and receives a floating rate of the lenders’ LIBOR rate plus the applicable spread. One of the swap agreements expires in November 2015 and the other swap agreement expires in January 2016.

At December 31, 2013 and 2012, the fair value of the interest rate swaps was $(779,412) and $(1,341,780). The resulting change in fair value was included as a decrease in interest expense, net and was $562,368 and $224,525 for the years ended December 31, 2013 and 2012, respectively.

13. Fair Value Measurements

The Company measures or monitors certain assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities in which fair value is the primary basis of accounting, mainly derivative instruments. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principle or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the fair value hierarchy, and when possible looks to active and observable markets to price identical assets and liabilities. If identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. The fair value hierarchy prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

Level 1

   Quoted prices in active markets for identical assets or liabilities.

Level 2

   Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

Level 3

   Unobservable inputs based on the Company’s own assumptions.

The following table summarizes the estimated fair value of the Company’s financial instruments as of December 31, 2013:

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Liabilities

           

Derivative instruments

   $ —         $ 779,412       $ —         $ 779,412   

Long-term debt

     —           —           98,484,865         98,484,865   

The following table summarizes the estimated fair value of the Company’s financial instruments as of December 31, 2012:

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Liabilities

           

Derivative instruments

   $ —         $ 1,341,780       $ —         $ 1,341,780   

Long-term debt

     —           —           90,869,481         90,869,481   

 

F-192


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

The fair value of the Company’s interest rate swaps are estimated using discounted cash flows that use market observable inputs of forward interest rate yield curves and a Company-specific risk adjusted discount rate. The fair value of long-term debt reflects the present value of future cash outflows relating to the obligation based on estimated credit market interest premiums and expected future interest rates.

The carrying amounts reported on the consolidated balance sheet for cash, accounts receivable, other receivables, accounts payable and accrued liabilities approximate their fair value due to the short maturity of those instruments.

14. Stockholders’ Equity

Common shares are entitled to one vote per share on all matters upon which stockholders have the right to vote under law or the Company’s Amended and Restated Stockholders Agreement (the “Stockholders Agreement”), which was amended on November 30, 2011.

On August 13, 2013, the stockholders of the Company entered into a Subscription Agreement (the “Subscription”) to acquire $20,000,000 of voting common stock at a price of $1,000 per share (a total of 20,000 shares), based on their pro-rata ownership position in the Company. On October 17, 2013, the stockholders purchased 5,000 shares under the Subscription in the amount of $5,000,000. As of December 31, 2013, there are 15,000 remaining shares available for purchase.

The Stockholders Agreement also provides for annual tax distributions on the taxable income allocated to each stockholder.

The Company is authorized to issue 15,000 non-voting shares, none of which are outstanding at December 31, 2013 or 2012.

15. Mezzanine Equity

Two stockholders have the right to require the Company to purchase up to approximately half of their respective common shares at a future date (the “Put Options”). The Put Options are exercisable at the option of the holder for a 90 day window beginning on November 23, 2015 and November 23, 2018 for one of the stockholders and November 30, 2016 and November 30, 2019 for the second stockholder. If the Put Options are exercised, the Company would purchase the put common shares at a price equal to the fair market value of the shares at the put option exercise date. As the Put Options are a redemption right which is outside the Company’s control, under Regulation S-X, the Company should have classified this redeemable common stock in the mezzanine equity section in the accompanying Balance Sheets at its redemption value, which is equal to fair value, and recorded changes in fair value to Additional paid-in capital since the Company has an accumulated deficit. The financial statements previously presented the redeemable common stock within Stockholders’ Equity. The 2013 and 2012 Balance Sheets and Statement of Stockholders’ Equity have been revised to correct the misstatement in presentation of the redeemable common stock as Mezzanine Equity. The impact of this revision is as follows and was not material to the current or prior year financial statements.

Total stockholders’ equity at December 31, 2013, 2012 and 2011 was reduced by $8,875,516, $14,212,482, and $11,406,620, respectively primarily reflecting a reduction in Additional paid-in capital, and Mezzanine Equity was increased at December 31, 2013, 2012, and 2011 by the same amounts. There was no effect on the statements of operations or cash flows for the years ended December 31, 2013 or 2012. The fair value of the common shares subject to the put options was calculated using a discounted cash flow model. The discounted cash flow valuation method uses assumptions, the most significant of which include: future revenue growth, future earnings before interest, taxes, depreciation and amortization, marginal tax rate, terminal value growth rate, weighted average cost of capital and discount rate.

 

F-193


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

16. Stock Based Compensation

The Company has 8,000 nonvoting common shares authorized for issuance under TTT Holdings Equity Incentive Plan (“Equity Incentive Plan”). As of December 31, 2013, the Equity Incentive Plan had 3,661 nonvoting common shares available for granting. The Equity Incentive Plan permits the grant of a variety of stock and stock-based awards, including restricted stock or stock options, as determined by the Company’s Board of Directors. To date, the Company has stock options which expire no later than ten years from the date of grant and will become exercisable as directed by the Board of Directors. The time vesting stock options generally vest in equal annual installments over a three-year period, while the performance based stock options vest in tranches based on the Company meeting annual earnings targets and also contain a service requirement.

Stock-based compensation expense was $538,010 and $418,006 during the years ended December 31, 2013 and 2012, respectively, which was recorded in operating expenses in the statement of operations. Of the total stock-based compensation expense recognized, $0 was related to performance-based options during both years ending December 31, 2013 and 2012, respectively. Stock-based compensation expense is based on the grant-date fair value. The fair value of stock option grants is estimated using the Black-Scholes option pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of comparable public companies for a period equal to the expected term. The risk-free interest rate is based on U.S. Treasury interest rates with a remaining term which approximates the expected life of the options assumed at the date of grant.

The weighted average assumptions used in the Black-Scholes option pricing model for options granted during 2013 are as follows:

 

Expected volatility

     46.81

Expected term (years)

     6.35   

Risk free interest rate

     3.03

Expected dividend yield

     0.00

The weighted average grant date fair value of options is as follows:

 

    

Shares

   

Weighted
Average
Grant Date
Fair Value

 

Nonvested at December 31, 2011

     3,301      $ 473   

Granted

     1,600        486   

Vested

     (791     458   

Forfeited

     (792     467   
  

 

 

   

Nonvested at December 31, 2012

     3,318        482   

Granted

     1,032        762   

Vested

     (960     612   

Forfeited

     (1,885     515   
  

 

 

   

Nonvested at December 31, 2013

     1,505        808   
  

 

 

   

 

F-194


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

A summary of option activity and changes during the periods is presented below:

 

    

Shares

   

Weighted
Average
Exercise
Price

    

Weighted
Average
Remaining
Contractual
Term (in years)

 

Outstanding at December 31, 2011

     4,751      $ 1,031         9.00   

Granted

     1,600        2,000      

Exercised

     —          —        

Forfeited

     (792     1,030      
  

 

 

      

Outstanding at December 31, 2012

     5,559        1,166         8.36   

Granted

     1,032        1,500      

Exercised

     —          —        

Forfeited

     (1,885     1,163      

Cancelled/Expired

     (367     1,068      
  

 

 

      

Outstanding at December 31, 2013

     4,339        1,255         7.61   
  

 

 

      

Vested and unvested expected to vest at December 31, 2013

     3,649        1,157         7.41   

Exercisable at December 31, 2013

     2,835        1,021         7.06   

There was $1,180,904 and $1,599,276 of total unrecognized compensation cost related to unvested stock options granted at December 31, 2013 and 2012, respectively. The cost is expected to be recognized through 2016. During 2013, the company settled outstanding vested stock options by paying fair value less exercise price of $150,000. These shares are included in “cancelled/expired” categories in the tables above.

17. Employee Benefit Plan

The Company maintains a 401(k) savings plan covering substantially all full-time employees. The Company matches 25% of each participating employee’s elective deferral amount. The Company’s expense related to this matching contribution totaled approximately $223,576 and $247,229 for the years ended December 31, 2013 and 2012, respectively. In addition, the Company has the option of making an annual discretionary profit-sharing contribution. No profit-sharing contribution was declared for the years ended December 31, 2013 and 2012.

18. Related Party Transactions

In accordance with a management services agreement dated November 23, 2010, the Company pays $600,000 annually to Robert D. Walter Company, an affiliate of the Company, for corporate support functions. On August 26, 2013, the agreement was amended to bear interest at 13% for unpaid balances. Management fee expense totaled $600,000 for the years ended December 31, 2013 and 2012, and is included in operating expenses in the consolidated statement of operations. During a portion of 2013, management fees under the management services agreement were accrued and not paid current. These amounts are included in accrued liabilities (see Note 8) and amounted to $154,928 and $0 as of December 31, 2013 and 2012, respectively. The Credit Agreement Amendment (see Note 19) allows for the current payment of these management fees during fiscal year 2014.

The Company has various building leases with two separate related parties. The terms of these lease agreement range from four to ten years from the rent commencement dates with varying renewal options.

 

 

F-195


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2013 and 2012

 

19. Subsequent Events

On January 28, 2014 the Company amended the term and revolving debt credit agreement (the “Credit Agreement Amendment”). The major amended terms of the Credit Agreement Amendment are as follows:

 

    A revolving credit commitment including outstanding letters of credit up to the lesser of $60,000,000 or an agreed-upon percentage of the Company’s accounts receivable and inventory. A portion of the revolving credit facility was used to repay in full the Company’s term loan.

 

    The maturity date is June 30, 2015.

 

    Interest is payable monthly based on the 30 day LIBOR plus a margin that fluctuates between 2.50% and 3.50% based on the Company’s leverage ratio, as defined in the Credit Agreement Amendment.

 

    A commitment fee of 0.25% per annum on the unused portion of the revolving commitment.

 

    Certain financial covenants are provided for, including a maximum senior funded debt to EBITDA ratio, and a minimum ratio of EBITDA to debt service costs and other fixed charges.

In connection with entering into the Credit Agreement Amendment, existing shareholders of the Company invested $12,500,000 of equity into the Company (see Note 14).

In connection with entering into the Credit Agreement Amendment, the Company also amended the subordinated loan credit agreement (the “Subordinated Credit Amendment”). The Subordinated Credit Amendment was amended to provide for financial covenants and other terms consistent with the Credit Agreement Amendment. In connection with entering into the Subordinated Credit Amendment, existing shareholders provided subordinated loans to the Company in the net amount of $7,500,000. These loans bear interest for the first 18 months at 14.5%, all of which is paid-in-kind and added to the principal balance. Thereafter, these loans bear interest at 13.5%, of which 12.0% is payable in cash quarterly and the remaining 1.5% will be paid-in-kind and added to the principal balance. These loans are due November 30, 2017.

On February 17, 2014, American Tire Distributors, Inc. entered into a Stock Purchase Agreement with the Company. The consummation of the Acquisition, which is subject to customary closing conditions is expected to occur by the end of first quarter or early in the second quarter of 2014. The Stock Purchase Agreement provides for the payment of aggregate cash consideration of $345,000,000 subject to certain customary pre-closing requirements, plus up to $20,000,000 in additional consideration contingent upon the occurrence of certain post-closing events. The closing purchase price is subject to certain post-closing adjustments, including, but not limited to, working capital adjustments.

The Company has considered subsequent events through February 28, 2014, the date on which the consolidated financial statements were available to be issued.

 

F-196


TTT Holdings, Inc. and Subsidiaries

Index

December 31, 2012 and 2011

 

    

Page(s)

 

Report of Independent Auditors

     F-198   

Consolidated Financial Statements

  

Balance Sheets

     F-199   

Statements of Operations

     F-200   

Statements of Stockholders’ Equity and Mezzanine Equity

     F-201   

Statements of Cash Flows

     F-202   

Notes to Financial Statements

     F-203 – F-218   

 

F-197


Independent Auditor’s Report

To the Board of Directors of

TTT Holdings, Inc. and Subsidiaries

We have audited the accompanying consolidated financial statements of TTT Holdings, Inc. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, of stockholders’ equity and mezzanine equity and of cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TTT Holdings, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ PricewaterhouseCoopers, LLP

Columbus, Ohio

April 30, 2013, except for Note 14, as to which the date is June 16, 2014

 

F-198


TTT Holdings, Inc. and Subsidiaries

Balance Sheets

December 31, 2012 and 2011

 

    

2012

   

2011

 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 2,704,505      $ 7,535,815   

Accounts receivable

     65,949,428        67,580,592   

Other receivables

     19,021,928        18,752,064   

Inventories

     105,494,221        97,122,446   

Prepaid expenses and other

     2,355,902        5,360,165   
  

 

 

   

 

 

 

Total current assets

     195,525,984        196,351,082   

Notes receivable, net of allowance for doubtful accounts of $269,420 and $273,750, respectively

     130,795        224,490   

Property and equipment, net

     7,074,576        5,209,083   

Intangible assets, net

     97,087,731        106,564,611   

Goodwill

     44,395,930        44,140,645   

Other noncurrent assets

     1,291,987        1,341,741   
  

 

 

   

 

 

 

Total assets

   $ 345,507,003      $ 353,831,652   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Account payable

   $ 159,766,404      $ 152,797,085   

Accrued liabilities

     5,827,556        5,201,654   

Fair value of interest rate swap

     1,341,780        1,566,305   

Current maturities of long-term debt

     7,676,809        6,765,533   
  

 

 

   

 

 

 

Total current liabilities

     174,612,549        166,330,577   

Long-term debt

     83,192,672        96,868,863   
  

 

 

   

 

 

 

Total liabilities

     257,805,221        263,199,440   
  

 

 

   

 

 

 

Commitments and contingencies

    

Mezzanine equity

    

Redeemable common stock; $.001 par value: 8,326 shares issued and outstanding

     14,212,482        11,406,620   

Stockholders’ equity

    

Common stock, $.001 par value per share; 150,000 voting and 15,000 nonvoting shares authorized, 71,569 voting shares issued and outstanding

     72        72   

Additional paid-in capital

     74,651,789        79,591,310   

Note receivable from stockholder

     (775,166     (763,199

Accumulated earnings

     (387,345     —     

Noncontrolling interest

     —          397,409   
  

 

 

   

 

 

 

Total stockholders’ equity

     73,489,300        79,225,592   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 345,507,003      $ 353,831,652   
  

 

 

   

 

 

 

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

 

F-199


TTT Holdings, Inc. and Subsidiaries

Statement of Operations

Years Ended December 31, 2012 and 2011

 

    

2012

   

2011

 

Net sales

   $ 570,042,650      $ 356,292,982   

Cost of goods sold

     481,747,063        301,404,493   
  

 

 

   

 

 

 

Gross profit

     88,295,587        54,888,489   

Operating expenses

     79,195,149        46,868,511   
  

 

 

   

 

 

 

Operating income

     9,100,438        8,019,978   

Interest expense, net

     9,202,654        4,882,576   
  

 

 

   

 

 

 

Income (loss) before income taxes

     (102,216     3,137,402   

Income tax expense

     182,357        141,469   
  

 

 

   

 

 

 

Net income (loss) from continuing operations

     (284,573     2,995,933   

Income from discontinued operations

     —          1,899,118   
  

 

 

   

 

 

 

Net income (loss)

     (284,573     4,895,051   

Net income attributable to the noncontrolling interest

     102,822        294,925   
  

 

 

   

 

 

 

Net income (loss) attributable to TTT Holdings, Inc. stockholders

   $ (387,395   $ 4,600,126   
  

 

 

   

 

 

 

Amounts attributable to TTT Holdings, Inc. stockholders

    

Income (loss) from continuing operations

   $ (387,395   $ 2,701,008   

Income from discontinued operations

     —          1,899,118   
  

 

 

   

 

 

 

Net income (loss)

   $ (387,395   $ 4,600,126   
  

 

 

   

 

 

 

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

 

F-200


TTT Holdings, Inc. and Subsidiaries

Statement of Stockholders’ Equity and Mezzanine Equity

Years Ended December 31, 2012 and 2011

 

   

TTT Holdings, Inc. Stockholders’ Equity

   

Mezzanine Equity

 
   

Common Stock

   

Additional
Paid-In

Capital

   

Note
Receivable
from

Stockholder

   

Accumulated
(Deficit)

Earnings

   

Noncontrolling

Interest

   

Total
Stockholders’
Equity

   

Redeemable Common
Stock

 
   

Shares

   

Amount

             

Shares

   

Amount

 

Balances at December 31, 2010

    50,589      $ 51      $ 50,590,224      $ (750,000   $ (1,686,092   $ 102,484      $ 48,256,667        5,590      $ 5,589,500   

Net income

    —          —          —          —          4,600,126        294,925        4,895,051       

Interest earned on note receivable from stockholder

    —          —          —          (13,199     —          —          (13,199    

Stock based compensation

    —          —          703,712        —          —          —          703,712       

Dividends

    —          —          —          —          (1,299,909     —          (1,299,909    

Issuance of redeemable common stock

    —          —          —          —          —          —          —          2,736        3,749,005   

Adjustments to redeemable common stock fair value measurement

        (453,990       (1,614,125       (2,068,115     —          2,068,115   

Issuance of common stock

    20,980        21        28,751,364        —          —          —          28,751,385       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2011

    71,569        72        79,591,310        (763,199     —          397,409        79,225,592        8,326        11,406,620   

Net income (loss)

    —          —          —          —          (387,395     102,822        (284,573    

Interest earned on note receivable from stockholder

    —          —          —          (11,967     —          —          (11,967    

Stock based compensation

    —          —          418,006        —          —          —          418,006       

Dividends

    —          —          (2,551,665     —          —          (500,231     (3,051,896    

Adjustments to Redeemable Common Stock fair value measurement

    —          —          (2,805,862     —          —          —          (2,805,862     —          2,805,862   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012

    71,569      $ 72      $ 74,651,789      $ (775,166   $ (387,395   $ —        $ 73,489,300        8,326      $ 14,212,482   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

F-201


TTT Holdings, Inc. and Subsidiaries

Statement of Cash Flows

Years Ended December 31, 2012 and 2011

 

    

2012

   

2011

 

Cash flows from operating activities

    

Net income (loss)

   $ (284,573   $ 4,895,051   

Adjustments to reconcile net income to net cash used in operating activities

    

Depreciation and amortization

     11,510,415        6,698,251   

Noncash stock compensation

     418,006        703,712   

Amortization of deferred financing costs

     238,710        117,451   

Amortization of discount on subordinated loan

     165,816        —     

Amortization of deferred rent expense

     611,078        —     

Unrealized (gain) loss on interest rate swap

     (224,525     825,076   

Interest paid-in-kind

     739,349        332,055   

Interest earned on note receivable from stockholder

     (11,967     (13,199

Gain on sale of business

     —          (1,827,692

Changes in assets and liabilities, net of acquisitions

    

Accounts receivable

     1,631,166        (7,928,310

Inventories

     (6,938,498     (33,658,656

Other receivables

     (269,864     (6,784,516

Notes receivable

     93,695        97,664   

Prepaid expenses and other assets

     (1,247,222     (663,376

Accounts payable

     6,937,441        30,903,075   

Accrued liabilities

     (81,165     1,515,317   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     13,287,862        (4,788,097
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchase of property and equipment

     (3,204,868     (2,414,669

Proceeds from sale of business

     —          4,840,861   

Proceeds from (payment of) settlement from prior acquisition

     4,075,010        (2,304,181

Acquisition of business, net of cash acquired

     (2,267,338     (91,872,539
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,397,196     (91,750,528
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from issuance of common stock

     —          25,000,390   

Payment of financing costs

     —          (771,261

Distributions to stockholders

     (3,051,896     (1,299,909

Borrowings from line of credit

     234,276,642        140,328,380   

Repayments on line of credit

     (241,497,733     (129,327,287

Proceeds from long-term debt

     —          61,369,868   

Payments on long-term debt

     (6,448,989     (4,299,375
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (16,721,976     91,000,806   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (4,831,310     (5,537,819

Cash and cash equivalents at beginning of year

     7,535,815        13,073,634   
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 2,704,505      $ 7,535,815   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid for interest

   $ 8,316,273      $ 3,761,923   

Noncash investing and financing activities

    

Issuance of common shares in conjunction with business acquisition

   $ —        $ 7,500,000   

Adjustment to purchase price for business acquisition

   $ —        $ 4,075,010   

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

 

F-202


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

1. Description of Business

TTT Holdings, Inc. (“Holdings”) is incorporated in Delaware as an S-Corporation. Terry’s Tire Town Holdings, Inc. (“TTT”), its wholly owned subsidiary, is incorporated in Ohio as an S-corporation. Through its operating subsidiaries, TTT’s primary operations are as a wholesale distributor of tires and accessories throughout the eastern half of the United States. During 2011, TTT formed Summit Tire Northeast, LLC (“Summit”) to acquire the assets of Summit Tire of Massachusetts, Inc., a wholesale tire distributor with operations focused in the New England area and TTT directly acquired the stock of Englewood Tire Wholesale, Inc. (“Englewood”), a wholesale tire distributor with operations focused primarily in the Greater New York, New Jersey and Connecticut area (See Note 3). TTT sold its retail division during 2011 to another automotive retail company (See Note 17). Holdings has no significant assets or operations other than its ownership of TTT. The operations of TTT constitutes the operations of Holdings.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Holdings, TTT and each of TTT’s wholly owned subsidiaries and entities controlled by TTT but not wholly-owned (collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Noncontrolling interests represent the portion of equity the Company does not own in the controlled entities included in the financial statements. The Company identifies its noncontrolling interests separately within the equity section on the consolidated balance sheet. The amounts of consolidated net earnings attributable to the Company and to the noncontrolling interests are presented separately on the Company’s consolidated statement of operations.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates include the Company’s valuation of doubtful accounts receivable, valuation of inventory reserves, valuation of goodwill, share-based compensation, the fair value of derivative instruments, the fair value of purchased assets and liabilities, including intangible assets and related useful lives assigned to such assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid financial instruments purchased with an original maturity of three months or less which are not subject to withdrawal restrictions or penalties to be cash and cash equivalents. Such investments are carried at their cost, which approximates their estimated fair market value.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash and cash equivalents. The majority of cash and cash equivalents at December 31, 2012 and 2011 were deposited with large banking institutions. The Company maintains cash deposits in banks which, from time to time, exceed the amount of deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any potential credit loss is minimal.

 

F-203


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

Accounts Receivable

Trade receivables represent amounts due from product sales in the ordinary course of business. Accounts receivable are recorded at the invoiced amount and do not bear interest. Credit is extended based on an evaluation of customers’ financial condition, and trade receivables are generally not collateralized.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses for uncollected receivables. The Company determines the allowance based on customer risk, the length of time accounts are past due, and historical write-off experience. Account balances are charged to the allowance when it is probable the receivable will not be recovered. The total adjustment to reduce accounts receivable to the recoverable amount was $2,885,703 and $3,496,273 at December 31, 2012 and 2011, respectively.

Inventories

Inventories consist of products held for resale and are valued at the lower of cost or market, with cost determined by the last-in, first-out method (“LIFO”) for tire inventory and at moving average cost for non-tire inventory. The LIFO reserve was $4,576,974 and $3,315,201 at December 31, 2012 and 2011, respectively. The composition of inventory valued at LIFO and FIFO is as follows:

 

    

2012

    

2011

 

Inventory at LIFO (primarily tire inventory)

   $ 101,192,482       $ 93,413,218   

Inventory at FIFO (primarily non-tire inventory)

     4,301,739         3,709,228   
  

 

 

    

 

 

 
   $ 105,494,221       $ 97,122,446   
  

 

 

    

 

 

 

The above balances are presented net for slow-moving and obsolete inventory of $1,101,894 and $887,022 at December 31, 2012 and 2011, respectively.

Derivative Instruments

The Company’s interest rate risk management strategy uses derivative instruments to minimize cash flow risks caused by interest rate volatility associated with the Company’s variable rate debt. At December 31, 2012 and 2011, the derivative instruments used to meet the Company’s risk management objectives were interest rate swaps. The Company chose not to apply hedge accounting for its interest rate swap agreements. Accordingly, the interest rate swaps are carried at their fair value on the consolidated balance sheet, with changes in their fair value recognized in current earnings (See Note 11).

Deferred Financing Costs

Deferred financing costs are included in other noncurrent assets and represent the direct costs of establishing the Company’s term and revolving debt. Deferred financing costs are amortized to interest expense over the term of the related debt using the effective interest method for term commitments and the straight-line method for revolving commitments.

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred. Major renewals and improvements are capitalized. The cost and accumulated

 

F-204


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

depreciation of disposed assets are eliminated from the accounts and resulting gain or loss is reflected in earnings. Leasehold improvements are amortized over the shorter of the lease term or useful life of the asset. Depreciation and amortization is computed using the straight-line method over the following estimated useful lives:

 

Leasehold improvements

   5 – 25 years

Machinery and equipment

   7 years

Furniture and fixtures

   5 years

Vehicles

   5 years

Computer software and equipment

   3 years

Intangible Assets

Intangible assets consist of customer relationships and trade names. The intangible assets were determined to have finite lives. Amortization of finite-lived intangible assets is recorded to reflect the pattern of economic benefits based on projected revenues over their respective estimated useful lives. Intangible assets are amortized by the straight-line method over the estimated useful lives (customer relationships—11 to 13 years and trade names—3 to 18 years).

Impairment of Long-Lived Assets

The Company assesses the recoverability of property and equipment and amortizable intangible assets whenever events and circumstances indicate that the carrying value of the asset may not be recoverable from its future undiscounted cash flows. If it is determined an impairment has occurred, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its estimated fair value. No impairments were recorded for the year ended December 31, 2012 and 2011.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is assessed at least annually for impairment and between annual tests, if events or changes in circumstances indicate potential impairment exists, using a fair value-based approach. Any such impairment is recognized in the period identified. In evaluating goodwill for impairment, the Company identifies goodwill related to each of its reporting units. The Company has determined it operates in two reporting units: wholesale and commercial. For purposes of evaluating goodwill for impairment, assets and liabilities, including goodwill, were allocated to each reporting unit on the basis of relative fair value of each unit. No impairment of goodwill was recorded in the years ended December 31, 2012 and 2011.

Revenue Recognition

Sales are recognized when products are shipped or when title transfers to customers, if later, net of estimated returns and customer discounts.

Supplier Incentives

The Company receives monthly, quarterly and annual performance rebates from suppliers based on attaining certain purchase and/or sales goals. The Company receives other rebates from suppliers which are negotiated with suppliers and are not dependent on the Company meeting minimum purchase and/or sales goals. Suppliers’ rebates are recognized ratably based on the terms of the contracts or programs with each supplier and

 

F-205


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

are recorded as a reduction of cost of goods sold. Supplier rebates are classified as a reduction of inventory when the incentive is part of buying arrangement. Receivables from suppliers for rebates and incentives are included in other receivables in the consolidated balance sheet.

Shipping and Handling Costs

The Company includes in cost of goods sold the cost of tire and non-tire inventory sold. Warehousing and distribution costs, including costs associated with delivering product to customers are included in operating expenses. Total warehousing and distribution costs for the years ended December 31, 2012 and 2011 were approximately $37,992,000 and $18,170,000, respectively including approximately $14,842,000 and $8,298,000, respectively, related to shipping and handling.

Advertising Costs

Advertising costs are expensed when incurred as part of operating expenses. The Company receives reimbursements from vendors for advertising costs. Reimbursements for advertising expenditures are reported on a net basis within operating expenses. Reimbursements received in excess of the cost of advertising are reported within cost of goods sold. Net advertising costs were $180,924 and $243,436 for the years ended December 31, 2012 and 2011, respectively.

Stock-Based Compensation

The Company recognizes compensation expense for equity awards provided to employees in return for employee service. The Company issued both time vesting and performance-based stock options to certain employees. Time vesting options are measured at the fair value of the award at the grant date and are expensed on a straight-line basis over the service period. The performance-based options vest in tranches based on the Company meeting annual earnings targets and also contain a service requirement. Compensation expense for performance-based options is recorded over the relevant service period when it becomes probable that the contingent performance measures are expected to be met. Fair value is measured at the grant date and amortized on a graded vesting basis over the requisite service periods of the awards, which is generally the vesting period.

Income Taxes

There is no provision for federal and certain state income taxes in the consolidated financial statements of the Company, as an S-corporation is generally not subject to these taxes. Stockholders are individually subject to the income taxes on the Company’s results of operations and, accordingly, the Company pays distributions to the members to the extent needed to fund the stockholders’ tax obligations. Certain state and local jurisdictions do not recognize the flow-through status of an S-corporation and require minimum income tax expense. Accordingly, the Company has recognized a state and local income tax in the accompanying statement of operations for these jurisdictions.

3. Business Acquisitions

Summit Tire Northeast, LLC

On February 28, 2011, the Company, through its newly formed subsidiary Summit Tire Northeast, LLC, acquired substantially all of the assets of Summit Tire of Massachusetts, Inc. Summit is in the business of wholesale distribution of tires and tire accessories throughout the New England area. The intent of the acquisition was to expand into a new geographic market consistent with the Company’s long-term growth strategy.

 

F-206


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

The purchase price was $16,202,421 paid in cash. The purchase was accounted for on the acquisition method and the assets acquired and liabilities assumed have been recorded based on their respective fair values at the acquisition date. Goodwill of $2,984,208 was recorded for the excess of the purchase price over the fair value of net assets acquired. Transaction costs of $279,317 were expensed in the consolidated statement of operations for the year ended December 31, 2011.

The purchase price was allocated as follows:

 

Assets

  

Accounts receivable

   $ 5,071,731   

Other receivables

     361,722   

Inventories

     7,895,119   

Property and equipment

     613,997   

Intangible assets

     9,350,000   

Goodwill

     2,984,208   

Other assets

     198,176   
  

 

 

 

Total assets acquired

     26,474,953   

Total liabilities assumed

     (10,272,532
  

 

 

 

Fair value of net assets acquired

   $ 16,202,421   
  

 

 

 

Englewood Tire Wholesale, Inc.

On November 30, 2011, the Company acquired 100% of the stock of Englewood Tire Wholesale, Inc. Englewood was in the business of wholesale distribution of tires and tire accessories throughout the Greater New York, New Jersey and Connecticut areas. The intent of the acquisition was to expand into a new geographic market consistent with the Company’s long-term growth strategy.

The purchase price was $80,045,976, comprised of $7,500,000 in common shares of TTT Holdings, Inc. and $72,545,976 in cash. The Company paid $76,620,986 in 2011 but then received $4,075,010 from the seller in March 2012 as a final purchase price adjustment.

The purchase was accounted for on the acquisition method and the assets acquired and liabilities assumed have been recorded based on their respective fair values at the acquisition date. Goodwill of $25,695,425 was recorded for the excess of the purchase price over the fair value of net assets acquired. Transaction costs of $923,355 were expensed in the consolidated statement of operations for the year ended December 31, 2011.

 

F-207


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

The purchase price was allocated as follows:

 

Assets

  

Cash

   $ 950,868   

Accounts receivable

     28,235,551   

Other receivables

     5,443,752   

Inventories

     26,321,184   

Property and equipment

     844,652   

Intangible assets

     48,900,000   

Goodwill

     25,695,425   

Other assets

     294,529   
  

 

 

 

Total assets acquired

     136,685,961   

Total liabilities assumed

     (56,639,985
  

 

 

 

Fair value of net assets acquired

   $ 80,045,976   
  

 

 

 

The purchase price allocation has been retrospectively adjusted to reflect information identified during the measurement period relating to facts and circumstances present at the acquisition date. Accounts receivable was decreased by $1,422,307 to reflect additional uncollectible accounts, inventory was decreased by $262,218 to reflect additional slow-moving items and liabilities were increased $113,411 to reflect cash discounts against payables previously estimated. These adjustments resulted in additional goodwill of $1,797,936.

Kramer Tire

On May 13, 2012, the Company acquired substantially all of the assets associated with the wholesale distribution operations of two facilities located in Norfolk and Richmond, Virginia, from Monro Muffler Brake, Inc. The intent of the acquisition was to increase operations in the Mid-Atlantic market and reinforce relationships with Monro Muffler Brake, Inc.

The purchase price was $2,267,338 paid in cash. The purchase was accounted for on the acquisition method and the assets acquired and liabilities assumed have been recorded based on their respective fair values at the acquisition date. Goodwill of $255,285 was recorded for the excess of the purchase price over the fair value of net assets acquired. Transaction costs of $114,000 were expensed in the consolidated statement of operations for the year ended December 31, 2012.

The purchase price was allocated as follows:

 

Assets

  

Inventories

   $ 1,433,277   

Intangible assets

     656,088   

Goodwill

     255,285   

Other assets

     12,480   
  

 

 

 

Total assets acquired

     2,357,130   

Total liabilities assumed

     (89,792
  

 

 

 

Fair value of net assets acquired

   $ 2,267,338   
  

 

 

 

The estimated fair value of net assets acquired, including the allocation of the fair value to identifiable assets and liabilities, was determined using Level 3 inputs in the fair value hierarchy (See Fair Value

 

F-208


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

Measurements in Note 12). The estimated fair value of identifiable intangible assets, consisting of customer relationships for Summit, Englewood and Kramer, and the Summit and Englewood trade names were determined using an income approach based on excess cash flow, relief of royalty and discounted cash flow methods. The discounted cash flow valuation method requires the use of assumptions, the most significant of which include: future revenue growth, future earnings before interest, taxes, depreciation and amortization, estimated synergies to be achieved by a market participant as a result of the business combination, marginal tax rate, terminal value growth rate, weighted average cost of capital and discount rate.

The excess earnings method used to value customer relationships requires the use of assumptions the most significant of which include: the remaining useful life, expected revenue, survivor curve, earnings before interest and tax margins, marginal tax rate, contributory asset charges, discount rate and tax amortization benefit. The most significant assumptions under the relief of royalty method include: estimated remaining useful life, expected revenue, royalty rate, tax rate, discount rate and tax amortization benefit. Management, with the assistance of a third party valuation specialist, has developed these assumptions on the basis of knowledge of the business and projected financial information of Summit, Englewood and Kramer. These assumptions may vary based on future events, perceptions of different market participants and other factors outside the control of management, and such variations may be significant to estimated values.

4. Property and Equipment

The components of property and equipment at December 31, 2012 and 2011 are as follows:

 

    

2012

   

2011

 

Leasehold improvements

   $ 1,692,834      $ 1,469,162   

Machinery and equipment

     4,003,548        2,424,632   

Furniture and fixtures

     927,334        354,462   

Vehicles

     776,635        549,274   

Computer software and equipment

     1,845,803        719,817   

Construction in progress

     638,321        1,130,959   
  

 

 

   

 

 

 
     9,884,475        6,648,306   

Less: Accumulated depreciation and amortization

     (2,809,899     (1,439,223
  

 

 

   

 

 

 

Property and equipment, net

   $ 7,074,576      $ 5,209,083   
  

 

 

   

 

 

 

Depreciation and amortization expense was $1,377,447 and $1,500,862 for the years ended December 31, 2012 and 2011.

5. Intangible Assets

Intangible assets consisted of the following as of December 31, 2012:

 

    

Cost

    

Accumulated
Amortization

   

Net

 

Customer relationships

   $ 79,319,088       $ (10,059,300   $ 69,259,788   

Trade names

     33,426,000         (5,598,057     27,827,943   
  

 

 

    

 

 

   

 

 

 
   $ 112,745,088       $ (15,657,357   $ 97,087,731   
  

 

 

    

 

 

   

 

 

 

 

F-209


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

Intangible assets consisted of the following as of December 31, 2011:

 

    

Cost

    

Accumulated
Amortization

   

Net

 

Customer relationships

   $ 78,663,000       $ (3,447,000   $ 75,216,000   

Trade names

     33,426,000         (2,077,389     31,348,611   
  

 

 

    

 

 

   

 

 

 
   $ 112,089,000       $ (5,524,389   $ 106,564,611   
  

 

 

    

 

 

   

 

 

 

Amortization expense was $10,132,968 and $5,197,389 for the years ended December 31, 2012 and 2011, respectively.

The estimated future amortization of intangible assets is as follows:

 

2013

   $ 10,152,430   

2014

     9,726,041   

2015

     8,155,763   

2016

     8,155,763   

2017

     8,155,763   

Thereafter

     52,741,971   
  

 

 

 
   $ 97,087,731   
  

 

 

 

6. Goodwill

Activity related to goodwill for the years ended December 31, 2012 and 2011 was as follows:

 

Balance at December 31, 2010

   $ 16,732,183   

Additions to goodwill from acquisitions during the period

     26,881,697   

Measurement period adjustments

     1,797,936   

Reductions to goodwill from the disposition of a reporting unit during the period

     (1,271,171
  

 

 

 

Balance at December 31, 2011

     44,140,645   

Additions to goodwill from acquisitions during the period

     255,285   
  

 

 

 

Balance at December 31, 2012

   $ 44,395,930   
  

 

 

 

There is no cumulative impairment to goodwill.

 

F-210


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

7. Other Noncurrent Assets

Other noncurrent assets consisted of the following at December 31, 2012 and 2011:

 

    

2012

   

2011

 

Deferred financing costs

   $ 1,043,137      $ 1,043,137   

Investment in American Car Care Centers

     285,316        245,875   

Deposits

     319,695        170,180   
  

 

 

   

 

 

 
     1,648,148        1,459,192   

Less: Accumulated amortization of deferred financing costs

     (356,161     (117,451
  

 

 

   

 

 

 

Total other noncurrent assets

   $ 1,291,987      $ 1,341,741   
  

 

 

   

 

 

 

Amortization of deferred financing costs was $238,710 and $117,451 for the years ended December 31, 2012 and 2011.

The estimated future amortization of deferred financing costs is as follows:

 

2013

   $ 209,421   

2014

     180,223   

2015

     151,024   

2016

     110,937   

2017

     35,371   
  

 

 

 
   $ 686,976   
  

 

 

 

8. Accrued Liabilities

Accrued liabilities consisted of the following at December 31:

 

    

2012

    

2011

 

Salaries, wages, commissions, bonuses and related payroll taxes

   $ 4,176,527       $ 3,184,742   

Other accrued liabilities

     1,651,029         2,016,912   
  

 

 

    

 

 

 
   $ 5,827,556       $ 5,201,654   
  

 

 

    

 

 

 

 

F-211


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

9. Debt

Debt consisted of the following at December 31:

 

    

2012

   

2011

 

Term loan

   $ 38,035,718      $ 44,464,286   

Revolving loan

     3,780,002        11,001,093   

Subordinated loan

     38,703,833        38,265,306   

Seller note

     10,632,877        10,332,055   

Other debt

     316,541        336,962   
  

 

 

   

 

 

 

Total

     91,468,971        104,399,702   

Less: Original issue discount on the subordinated loan

     (599,490     (765,306
  

 

 

   

 

 

 

Total

     90,869,481        103,634,396   

Less: Current maturities

     (7,676,809     (6,765,533
  

 

 

   

 

 

 

Total long-term debt

   $ 83,192,672      $ 96,868,863   
  

 

 

   

 

 

 

Term and Revolving Debt

On November 30, 2011, the Company entered into a credit agreement (the “Agreement”) consisting of revolving and term debt with a lender group. The Agreement is collateralized by substantially all of the Company’s assets.

The revolving commitment including outstanding letters of credit is available up to the lesser of $45,000,000 or an agreed-upon percentage of the Company’s accounts receivable and inventory and has a maturity date of November 30, 2016. The Company is required to pay commitment fees up to 0.375% per annum on the unused portion of the revolving commitment.

The total term loan commitment is $45,000,000 and requires monthly principal payments of $535,714 through November 30, 2016. The remaining outstanding principal is due on November 30, 2016. The Agreement also contains provisions which, under certain circumstances, require the Company to make prepayments of the term loan commitment beginning in 2012, based on excess cash flows as defined in the Agreement.

Interest on the revolving loan and term loan is payable monthly based on 30 day LIBOR plus a margin that fluctuates between 2.25% and 3.50% based on the Company’s leverage ratio, as defined in the Agreement. At December 31, 2012, the margin was 2.75% with a total rate of 2.96%. At December 31, 2011, the margin was 2.75% with a total rate of 3.05%.

Subordinated Loan

On November 30, 2011, the Company entered into a subordinated credit agreement (the “Subordinated Loan”) with a lender. The Subordinated Loan consists of term debt which is due in full on November 30, 2017. This term debt was issued at an original issue discount of $765,306. The Company amortizes the original issue discount over the life of the loan commitment using the effective interest method. The Subordinated Loan also contains provisions which, under certain circumstances, require the Company to make prepayments of the loan commitment beginning in 2013, based on excess cash flows as defined in the Subordinated Loan. The Subordinated Loan is unsecured and bears interest at 13.5%, of which at least 12% shall be payable in cash

 

F-212


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

quarterly, through maturity. The remaining 1.5% may be paid in kind and added to the principal balance, at the Company’s option. The Subordinated Loan allows for optional prepayments at redemption prices ranging from 100% to 103%, based on the date of the redemption.

The Subordinated Loan also allowed for a delayed draw term commitment of up to $28,061,224. The Company did not make any borrowings under the delayed draw term commitment which expired on November 30, 2012.

The Agreement and the Subordinated Loan contain certain restrictive financial covenants, which specify minimum net worth requirements, maximum liabilities to earnings before income taxes, interest, depreciation and amortization (“EBITDA”) ratio and a minimum ratio of EBITDA to debt service cost, among others. The Company is also required to meet certain non-financial covenants, which include restrictions on indebtedness, liens and dividends.

Seller Note

The Company has a credit agreement with a former shareholder of the predecessor Company (the “Seller Note”) that matures on May 31, 2018. No principal payments are required to be made until the maturity date. The Seller Note bears interest at an annual rate of 13%, of which at least 10% is payable in cash on a quarterly basis, through maturity. The remaining 3% is considered paid-in-kind interest and is added to the principal balance. The seller note is subordinate to the Company’s other financing arrangements.

Aggregate annual maturities of long-term debt are as follows:

 

2013

   $ 7,676,809   

2014

     6,428,568   

2015

     6,428,568   

2016

     21,598,316   

2017

     38,703,833   

Thereafter

     10,632,877   
  

 

 

 
   $ 91,468,971   
  

 

 

 

10. Commitments and Contingencies

Leases

The Company leases certain warehouse facilities, office facilities and vehicles under operating leases expiring at various dates through November 2020. The leases require the Company to pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased facilities. The terms of certain warehouse and office facility leases call for minimum rents to increase each year. Accordingly, the Company has accounted for the rent expense under the straight-line method.

 

F-213


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

At December 31, 2012, future minimum lease payments under operating leases are as follows:

 

    

Related
Parties

    

Third Parties

    

Total

 

2013

   $ 2,234,788       $ 7,907,068       $ 10,141,856   

2014

     2,113,788         6,624,546         8,738,334   

2015

     2,002,124         5,540,082         7,542,206   

2016

     773,820         3,699,037         4,472,857   

2017

     773,820         5,260,608         6,034,428   

Thereafter

     2,256,975         12,761,306         15,018,281   
  

 

 

    

 

 

    

 

 

 
   $ 10,155,315       $ 41,792,647       $ 51,947,962   
  

 

 

    

 

 

    

 

 

 

Total rent expense charged to operations, including $2,245,788 and $1,416,984 to related parties, was $9,857,191 and $5,389,072 for the years ended December 31, 2012 and 2011, respectively.

Legal

Contingent liabilities arise in the ordinary course of the Company’s activities. Various legal actions, proceedings and claims may be instituted or asserted in the future against the Company. Litigation is subject to many uncertainties and it is possible that some of the legal proceedings and claims could be decided unfavorably to the Company. Based on information presently known, management does not believe any claims will have a material impact on the Company’s financial position or results of operation.

11. Derivative Instruments

The Company has two separate interest rate swap agreements with a lender for the purpose of reducing certain exposures to interest rate fluctuations on the variable rate term debt. The notional amount of each of the swaps is $25,000,000. In accordance with the swap agreements, the Company pays a fixed rate of interest of 2.10% and 2.12% plus the applicable spread, and receives a floating rate of the lenders’ LIBOR rate plus the applicable spread. One of the swap agreements expires in November 2015 and the other swap agreement expires in January 2016.

At December 31, 2012 and 2011, the fair value of the interest rate swaps was ($1,341,780) and ($1,566,305). The resulting loss in their fair value from December 31, 2010 was included as an increase in interest expense, net and was $(224,525) and $825,076 for the years ended December 31, 2012 and 2011, respectively.

12. Fair Value Measurements

The Company measures or monitors certain assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities in which fair value is the primary basis of accounting, mainly derivative instruments. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principle or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the fair value hierarchy, and when possible looks to active and observable markets to price identical assets and liabilities. If identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets and liabilities. The fair value hierarchy prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

Level 1

   Quoted prices in active markets for identical assets or liabilities.

 

F-214


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

Level 2

   Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

Level 3

   Unobservable inputs based on the Company’s own assumptions.

The following table summarizes the estimated fair value of the Company’s financial instruments as of December 31, 2012:

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Liabilities

           

Derivative instruments

   $ —         $ 1,341,780       $ —         $ 1,341,780   

Long-term debt

     —           —           90,869,481         90,869,481   

The following table summarizes the estimated fair value of the Company’s financial instruments as of December 31, 2011:

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

Liabilities

           

Derivative instruments

   $ —         $ 1,566,305       $ —         $ 1,566,305   

Long-term debt

     —           —           103,634,396         103,634,396   

The fair value of the Company’s interest rate swaps are estimated using discounted cash flows that use market observable inputs of forward interest rate yield curves and a Company-specific risk adjusted discount rate. The fair value of long-term debt reflects the present value of future cash outflows relating to the obligation based on estimated credit market interest premiums and expected future interest rates.

The carrying amounts reported on the consolidated balance sheet for cash, accounts receivable, other receivables, accounts payable and other current liabilities approximate their fair value due to the short maturity of those instruments.

13. Stockholders’ Equity

On November 23, 2010, the Company issued 56,179 shares of common stock under the terms of the Stockholders Agreement of which 5,590 are redeemable. A total of 85,000 shares were originally authorized at November 23, 2010. On November 30, 2011, an additional 23,716 shares were issued of which 2,736 are redeemable. Of the 23,716 shares issued, 5,473 were issued as consideration for the purchase of Englewood. The total number of authorized shares was increased to 150,000 shares. Common shares are entitled to one vote per share and are entitled to vote on all matters upon which stockholders have the right to vote under law or the Company’s Amended and Restated Stockholders Agreement (the “Stockholders Agreement”) which was amended on November 30, 2011.

The Stockholders Agreement also provides for annual tax distributions on the taxable income allocated to each stockholder.

The Company is authorized to issue 15,000 non-voting shares, none of which are outstanding at December 31, 2012 or 2011.

14. Mezzanine Equity

Two stockholders have the right to require the Company to purchase up to approximately half of their respective common shares at a future date (the “Put Options”). The Put Options are exercisable at the option of

 

F-215


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

the holder for a 90 day window beginning on November 23, 2015 and November 23, 2018 for one of the stockholders and November 30, 2016 and November 30, 2019 for the second stockholder. If the Put Options are exercised, the Company would purchase the put common shares at a price equal to the fair market value of the shares at the put option exercise date. As the Put Options are a redemption right which is outside the Company’s control, under Regulation S-X, the Company should have classified this redeemable common stock in the mezzanine equity section in the accompanying Balance Sheets at its redemption value, which is equal to fair value, and recorded changes in fair value to Additional paid-in capital since the Company has an accumulated deficit. The financial statements previously presented the redeemable common stock within Stockholders’ Equity. The 2012 and 2011 Balance Sheets and Statement of Stockholders’ Equity have been revised to correct the misstatement in presentation of the redeemable common stock as Mezzanine Equity. The impact of this revision is as follows and was not material to the current or prior year financial statements.

Total stockholders’ equity at December 31, 2012, 2011 and 2010 was reduced by $14,212,482, $11,406,620, and $5,589,500, respectively primarily reflecting a reduction in Additional paid-in capital, and Mezzanine Equity was increased at December 31, 2012, 2011, and 2010 by the same amounts. Proceeds from the issuance of common stock were decreased and proceeds from the issuance of redeemable stock were increased by $3,749,005 within the presentation of cash flows from financing activities for the year ended December 31, 2011. There was no effect on the statements of operations for the years ended December 31, 2012 or 2011 and no effect on the statement of cash flow for the year ended December 31, 2012. The fair value of common shares subject to the put options at December 31, 2012 was calculated using a discounted cash flow model. The discounted cash flow valuation method uses assumptions, the most significant of which include: future revenue growth, future earnings before interest, taxes, depreciation and amortization, marginal tax rate, terminal value growth rate, weighted average cost of capital and discount rate. The fair value of common shares subject to the put options at December 31, 2011 was calculated by using the fair value of common stock issued in a recent market transaction.

Subsequent to the revision discussed above, the statement of cash flows was further revised to increase the proceeds from the issuance of common stock and decrease the proceeds from the issuance of redeemable common stock by $3,749,005. This revision had no effect on total cash flows from financing activities. During 2011, 18,243 common shares were issued for cash of $25,000,390. Additionally, 2,737 common shares and 2,736 redeemable common shares were issued as non-cash consideration in exchange for the acquisition of Englewood (see Note 3). The impact of this revision was not material to the previously issued financial statements.

15. Stock Based Compensation

In November 2010, the Board of Directors approved the TTT Holdings Equity Incentive Plan (“Equity Incentive Plan”). In November 2011, the Board of Directors increased the number of nonvoting common shares authorized for issuance under the Equity Incentive Plan to 8,000. As of December 31, 2012, the Equity Incentive Plan had 1,647 nonvoting common shares available for granting in the form of stock options. The Equity Incentive Plan permits the grant of a variety of stock and stock-based awards, including restricted stock or stock options, as determined by the Company’s Board of Directors. To date, the Company has stock options which expire no later than ten years from the date of grant and will become exercisable as directed by the Board of Directors. The time vesting stock options generally vest in equal annual installments over a three-year period, while the performance based stock options vest in tranches based on the Company meeting annual earnings targets and also contain a service requirement.

Stock-based compensation expense was $418,006 and $703,712 during the years ended December 31, 2012 and 2011, respectively, which was recorded in operating expenses in the statement of operations. Of the total stock-based compensation expense recognized, $0 and $327,950 related to performance-based options during the years ending December 31, 2012 and 2011, respectively. Stock-based compensation expense is based on the grant-date fair value. The fair value of stock option grants is estimated using the Black-Scholes option

 

F-216


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of comparable public companies for a period equal to the expected term. The risk-free interest rate is based on U.S. Treasury interest rates with a remaining term which approximates the expected life of the options assumed at the date of grant.

The weighted average assumptions used in the Black-Scholes option pricing model for options granted during 2012 are as follows:

 

Expected volatility

     46.22

Expected term (years)

     6.36   

Risk free interest rate

     1.80

Expected dividend yield

     0.00

The weighted average grant date fair value of options is as follows:

 

    

Shares

    

Weighted

Average

Grant Date

Fair Value

 

Nonvested at December 31, 2010

     4,352       $ 452   

Granted

     401         652   

Vested

     1,451         452   

Forfeited

     —           —     
  

 

 

    

Nonvested at December 31, 2011

     3,302         473   

Granted

     1,600         486   

Vested

     792         457   

Forfeited

     792         467   
  

 

 

    

Nonvested at December 31, 2012

     3,318       $ 482   
  

 

 

    

A summary of option activity as of December 31, 2012 and changes during the period is presented below:

 

    

Shares

    

Weighted

Average

Exercise

Price

    

Weighted

Average

Remaining

Contractual

Term (in years)

 

Outstanding at December 31, 2010

     4,352       $ 1,000      

Granted

     401       $ 1,370      

Exercised

     —           

Cancelled/Expired

     —           
  

 

 

       

Outstanding at December 31, 2011

     4,753       $ 1,031         9.00   

Granted

     1,600       $ 2,000      

Exercised

     —           

Cancelled/Expired

     —           
  

 

 

       

Outstanding at December 31, 2012

     6,353       $ 1,275         8.31   
  

 

 

       

Vested and unvested expected to vest at December 31, 2012

     5,561       $ 1,310         8.36   

Exercisable at December 31, 2012

     2,243       $ 1,011         7.94   

There was $1,599,276 and $1,515,325 of total unrecognized compensation cost related to unvested stock options granted at December 31, 2012 and 2011, respectively. The cost is expected to be recognized through 2016.

16. Employee Benefit Plan

The Company maintains a 401(k) savings plan covering substantially all full-time employees. The Company matches 25% of each participating employee’s elective deferral amount. The Company’s expense related

 

F-217


TTT Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2012 and 2011

 

to this matching contribution totaled approximately $247,229 and $140,873 for the years ended December 31, 2012 and 2011, respectively. In addition, the Company has the option of making an annual discretionary profit-sharing contribution. No profit-sharing contribution was declared for the year ended December 31, 2012.

17. Discontinued Operations

On October 9, 2011, the Company sold the retail division to a strategic buyer for approximately $4,900,000, less certain selling costs, in an asset acquisition agreement. The results of operations of the retail division have been presented as discontinued operations.

The major classes of assets and liabilities disposed of are as follows:

 

Inventories

   $ 785,066   

Property and equipment, net

     894,780   

Goodwill

     1,271,171   

Accrued liabilities

     62,152   
  

 

 

 
   $ 3,013,169   
  

 

 

 

The following is a summary of the operating results for the retail reporting unit for the year ended December 31, 2011:

 

Net sales

   $ 6,537,359   

Cost of good sold

     (3,594,830

Operating expenses

     (2,871,103

Gain on sale of division

     1,827,692   
  

 

 

 

Income from discontinued operations

   $ 1,899,118   
  

 

 

 

18. Related Party Transactions

In accordance with a management services agreement dated November 23, 2010, the Company pays $600,000 annually to Robert D. Walter Company, an affiliate of the Company, for corporate support functions. Management fee expense totaled $600,000 for the years ended December 31, 2012 and 2011, and is included in operating expenses in the consolidated statement of operations. There were no outstanding accounts payable at December 31, 2012 and 2011.

The Company has various building leases with two separate related parties. The terms of these lease agreement range from four to ten years from the rent commencement dates with varying renewal options.

Prior to their respective acquisitions, TTT, Englewood and Summit periodically made sales to one another. Total pre-acquisition sales between these companies totaled $972,268 for the year ended December 31, 2011.

19. Subsequent Events

In March 2013, the Company amended the term and revolving debt credit agreement and the subordinated loan credit agreement. These amendments modify the minimum net worth requirements, maximum liabilities to EBITDA ratio and the minimum ratio of EBITDA to debt service cost covenants and are now less restrictive.

The Company has considered subsequent events through April 30, 2013, the date on which the consolidated financial statements were available to be issued.

 

F-218


The Hercules Tire & Rubber Company and Subsidiaries

Contents

 

Report Letter

     F-220   

Consolidated Financial Statements

  

Balance Sheet

     F-221   

Statement of Operations and Comprehensive Income

     F-222   

Statement of Stockholders’ Equity

     F-223   

Statement of Cash Flows

     F-224   

Notes to Consolidated Financial Statements

     F-225 – F-234   

Additional Information

  

Report Letter

     F-235   

Consolidated Schedule of Adjusted EBITDA

     F-236   

 

F-219


Independent Auditor’s Report

To the Board of Directors

The Hercules Tire & Rubber

Company and Subsidiaries

We have audited the accompanying consolidated financial statements of The Hercules Tire & Rubber Company and Subsidiaries (the “Company”), which comprise the consolidated balance sheet as of October 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Hercules Tire & Rubber Company and Subsidiaries as of October 31, 2013 and 2012 and the results of their operations and their cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

/s/ Plante & Moran, PLLC

Toledo, OH

December 19, 2013

 

F-220


The Hercules Tire & Rubber Company and Subsidiaries

Consolidated Balance Sheet

 

    

October 31,
2013

    

October 31,
2012

 
Assets   

Current Assets

     

Cash

   $ 5,831,219       $ 7,813,040   

Accounts receivable—Net (Note 1)

     95,475,412         90,929,981   

Inventory—Finished goods (Note 1)

     135,268,064         134,767,138   

Prepaid expenses and other current assets:

     

Prepaid expenses and deposits

     4,193,836         2,681,764   

Refundable taxes

     258,001         1,166,050   

Deferred tax assets (Note 7)

     4,054,000         3,867,000   
  

 

 

    

 

 

 

Total current assets

     245,080,532         241,224,973   

Property and Equipment—Net (Note 2)

     24,969,328         25,178,057   

Goodwill (Note 15)

     703,529         650,701   

Intangible Assets—Net (Note 3)

     6,324,008         6,799,004   

Other Assets—Other noncurrent assets

     3,791,691         4,816,677   
  

 

 

    

 

 

 

Total assets

   $ 280,869,088       $ 278,669,412   
  

 

 

    

 

 

 
Liabilities and Stockholders’ Equity   

Current Liabilities

     

Trade accounts payable

   $ 96,582,099       $ 94,606,284   

Accounts payable settlement arrangements (Note 4)

     5,657,190         8,372,049   

Bank line of credit (Note 5)

     97,379,524         93,800,000   

Current portion of long-term debt (Note 6)

     4,570,000         4,738,284   

Accrued and other current liabilities:

     

Taxes payable

     89,000         2,482,000   

Accrued compensation

     2,438,449         2,549,105   

Other accrued liabilities

     13,931,772         12,117,846   
  

 

 

    

 

 

 

Total current liabilities

     220,648,034         218,665,568   

Long-term Debt—Net of current portion (Note 6)

     8,615,000         13,185,000   

Other Long-term Liabilities—Deferred tax liabilities (Note 7)

     4,761,000         6,239,000   

Stockholders’ Equity

     46,845,054         40,579,844   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 280,869,088       $ 278,669,412   
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

F-221


The Hercules Tire & Rubber Company and Subsidiaries

Consolidated Statement of Operations and Comprehensive Income

 

    

Year Ended

 
    

October 31,
2013

   

October 31,
2012

 

Net Sales

   $ 602,921,274      $ 593,833,304   

Cost of Sales

     496,067,862        490,181,208   
  

 

 

   

 

 

 

Gross Profit

     106,853,412        103,652,096   

Operating Expenses

    

General and administrative expenses

     44,074,099        41,714,850   

Selling and marketing

     19,144,367        18,575,837   

Delivery expense

     19,857,509        19,836,367   

Depreciation and amortization

     6,635,544        6,300,784   
  

 

 

   

 

 

 

Total operating expenses

     89,711,519        86,427,838   
  

 

 

   

 

 

 

Operating Income

     17,141,893        17,224,258   

Nonoperating Income (Expenses)

    

Interest income

     303,810        172,579   

Loss on disposal of fixed assets

     (204,421     (57,927

Foreign exchange loss

     (2,075,289     (377,180

Other income (expense)

     327,197        (130,975

Interest expense

     (6,699,610     (6,596,842
  

 

 

   

 

 

 

Total nonoperating expenses

     (8,348,313     (6,990,345
  

 

 

   

 

 

 

Income—Before income taxes

     8,793,580        10,233,913   

Income Tax Expense (Note 7)

     (3,209,000     (4,031,000
  

 

 

   

 

 

 

Net Income

     5,584,580        6,202,913   

Other Comprehensive Income—Net of tax

    

Foreign currency translation adjustment

     361,295        13,809   

Cash flow hedge

     169,125        171,372   
  

 

 

   

 

 

 

Total other comprehensive income

     530,420        185,181   
  

 

 

   

 

 

 

Comprehensive Income

   $ 6,115,000      $ 6,388,094   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

F-222


The Hercules Tire & Rubber Company and Subsidiaries

Consolidated Statement of Stockholders’ Equity

 

    

Common

Stock

    

Accumulated
Deficit

   

Accumulated

Other
Comprehensive

Loss

   

Total

 

Balance—October 31, 2011

   $ 57,136,697       $ (22,004,406   $ (1,095,856   $ 34,036,435   

Net income

     —           6,202,913        —          6,202,913   

Other comprehensive income

     —           —          185,181        185,181   

Stock options (Note 9)

     155,315         —          —          155,315   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance—October 31, 2012

     57,292,012         (15,801,493     (910,675     40,579,844   

Net income

     —           5,584,580        —          5,584,580   

Other comprehensive income

     —           —          530,420        530,420   

Stock options (Note 9)

     150,210         —          —          150,210   
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance—October 31, 2013

   $ 57,442,222       $ (10,216,913   $ (380,255   $ 46,845,054   
  

 

 

    

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

F-223


The Hercules Tire & Rubber Company and Subsidiaries

Consolidated Statement of Cash Flows

 

    

Year Ended

 
    

October 31,
2013

   

October 31,
2012

 

Cash Flows from Operating Activities

  

Net income

   $ 5,584,580      $ 6,202,913   

Adjustments to reconcile net income to net cash from operating activities:

  

Depreciation and amortization

     6,635,544        6,300,784   

Loss on disposal of property and equipment

     204,421        57,927   

Stock-based compensation expense

     2,050,204        1,455,315   

Deferred income tax (recovery) expense

     (1,665,000     623,000   

Changes in operating assets and liabilities which (used) provided cash, net of effects of business acquisition:

  

Accounts receivable

     (4,390,428     (11,917,439

Inventory

     (1,630,884     (11,500,911

Prepaid expenses and other assets

     (616,137     (634,356

Accounts payable

     3,719,227        (74,659

Accrued and other liabilities

     (1,733,697     2,100,206   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     8,157,830        (7,387,220

Cash Flows from Investing Activities

  

Purchase of property and equipment

     (5,467,604     (6,426,089

Proceeds from disposition of property and equipment

     57,263        46,992   

Cash paid for business acquisition

     —          (3,468,257
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,410,341     (9,847,354

Cash Flows from Financing Activities

  

Net borrowings from (payments on) accounts payable settlement arrangements

     (2,714,859     2,437,491   

Net borrowings from line of credit agreement

     3,936,135        18,965,432   

Payments on debt

     (4,738,284     (3,813,378
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (3,517,008     17,589,545   

Effect of Exchange Rate Changes on Cash

     (1,212,302     (20,017
  

 

 

   

 

 

 

Net (Decrease) Increase in Cash

     (1,981,821     334,954   

Cash—Beginning of year

     7,813,040        7,478,086   
  

 

 

   

 

 

 

Cash—End of year

   $ 5,831,219      $ 7,813,040   
  

 

 

   

 

 

 

Supplemental Cash Flow Information—Cash paid for

  

Interest

   $ 6,696,381      $ 6,652,097   

Taxes

     5,783,393        4,319,082   

See Notes to Consolidated Financial Statements.

 

F-224


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

Note 1—Nature of Business and Significant Accounting Policies

The Hercules Tire & Rubber Company and Subsidiaries (the “Company”) is a leading marketer of replacement tires in the U.S., Canada, and globally. The Company offers an extensive selection of passenger, ultra-high performance, light truck, medium truck, trailer, off-the-road, industrial, and specialty tires manufactured by its worldwide supplier network. In addition to its Hercules flag brand, the Company also markets the controlled brands of Ironman and Avalanche. The Company is also a major distributor of many select manufacturer brands throughout the Company’s global distribution network.

The Company is headquartered in Findlay, Ohio and operates 21 regional wholesale distribution operations throughout North America. Current locations reside in Arizona, California, Colorado, Ohio, Texas, Illinois, Florida, Oregon, Washington, Ontario (Canada), British Columbia (Canada), Montreal (Canada), and New Brunswick (Canada) using the names TDW (Tire Dealers Warehouse) or Hercules Tire Canada. The Company operates on an international basis in the U.S., Canada, and China under the name Hercules Tire International. The international organization’s presence includes warehouse operations in Qingdao (China), Ontario (Canada), Ohio, and Florida with representative offices in Guangzhou (China), Ontario (Canada), and Florida.

Principles of Consolidation—The consolidated financial statements include the accounts of The Hercules Tire & Rubber Company and its wholly owned subsidiary, Hercules Tire Company of Canada, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Receivables—In the course of extending credit to its customers, the Company occasionally requires notes receivable or security interests in inventory and other property, mortgages, personal guarantees, and other collateral. The allowance for doubtful accounts is determined by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, and the customer’s current obligation to pay the Company. The Company writes off accounts receivable against the allowance when they become uncollectible, and payments subsequently received are credited to bad debt recoveries. The Company’s allowance for doubtful accounts was approximately $1,561,000 and $1,540,000 as of October 31, 2013 and 2012, respectively.

Revenue Recognition—Revenue from the sale of the Company’s products is recognized once the risk and rewards of ownership have transferred to the customers, which, in most cases, coincide with shipment of the products. For other cases involving export sales, the title transfers when the products are delivered to the port of embarkation or when they are received at the port of the country of destination. Late payment charges are assessed for invoices not paid by the due date. Such charges are recognized in income when collected. Cash discounts are treated as a reduction to sales and are provided for based on historical experience and current estimates.

Inventory—Inventory is stated at the lower of cost or market, with cost determined on the first-in, first-out (FIFO) method. Inventory includes product, duty, freight, and other direct costs.

 

F-225


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

Property and Equipment—Property and equipment are recorded at cost. Depreciation and amortization are provided over the estimated useful lives, ranging from 3 to 40 years, of the various classes of assets using the straight-line method. Costs of maintenance and repairs are charged to expense when incurred.

Goodwill—The recorded amounts of goodwill from prior business combinations are based on management’s best estimates of the fair values of assets acquired and liabilities assumed at the date of acquisition. Goodwill is not amortized, but rather is assessed at least on an annual basis for impairment.

Impairment of Long-lived Assets—When indicators of impairment are present, management evaluates the net carrying value of long-lived assets by considering estimated future cash flows from both use and disposal of the assets. No impairment charges were recognized in 2013 and 2012.

Intangible Assets—Indefinite-lived intangible assets, consisting of trademarks, are carried at historical cost and are not amortized. Indefinite-lived intangible assets are reviewed for impairment annually as of October 31, or more frequently if impairment indicators exist. The impairment analysis compares the estimated fair value of these assets to the related carrying value and an impairment charge is recorded for any excess of carrying value over estimated fair value. The estimated fair value is based upon projected cash flows discounted at rates commensurate with the risks involved.

Acquired intangible assets subject to amortization are stated at cost and are amortized using the straight-line method over the estimated useful lives of the assets. Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.

Deferred Finance Charges—Deferred finance charges represent legal, consulting, and financial costs associated with debt financing (see Note 5) and are reported net of accumulated amortization, resulting in balances of approximately $480,000 and $1,318,000 at October 31, 2013 and 2012, respectively. Such charges are being amortized over the respective terms of the debt agreements. Amortization costs totaling approximately $833,000 and $775,000 for the years ended October 31, 2013 and 2012, respectively, related to deferred finance charges are included in general and administrative expenses.

Stock-based Compensation—The Company has adopted the fair value method of recording stock-based employee compensation as contained in accounting standards. As a result of adopting the fair value method, stock options and the incentive plan are expensed over the vesting period of the options/plan.

Income Taxes—A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between financial reporting and tax accounting.

Foreign Currency Translation—Assets and liabilities of the Company’s Canadian wholesale distribution division, Hercules Tire Company of Canada, Inc., are translated into U.S. dollars at the rate of exchange in effect at the close of the period. Income and expenses are translated at an average rate of exchange for the period. The aggregate effect of translating the consolidated financial statements is included in other comprehensive income.

Other Comprehensive Income (Loss)—Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as foreign currency translation adjustments and unrealized gains and losses on certain derivative instruments, are reported as a direct adjustment to the equity section of the consolidated balance sheet. Such items, along with net income, are considered components of comprehensive income (loss).

 

F-226


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

Included in accumulated other comprehensive income (loss) at October 31, 2013 and 2012 was approximately ($380,000) and ($742,000), respectively, related to the foreign currency translation adjustment. There was no interest rate swap cash flow hedge at October 31, 2013 and there was approximately ($169,000) related to the interest rate swap cash flow hedge at October 31, 2012.

The cash flow hedge recorded in other comprehensive income (loss) was $171,372 and $169,125, respectively, net of tax expense of $100,647 and $99,331, respectively, during the years ended October 31, 2013 and 2012.

During fiscal year 2013, the Company adopted new guidance related to the presentation of comprehensive income in the financial statements. Among other changes, the new guidance eliminated the prior option to only present comprehensive income in the statement of equity. The Company has elected to report comprehensive income in a single statement of operations and comprehensive income. The change in presentation has been applied retrospectively and the October 31, 2012 financial statements have been restated to conform to the new presentation method. Other than the change in presentation of comprehensive income and related disclosures, the new guidance did not have a material effect on the financial statements.

Shipping and Handling Costs—The Company records shipping and handling costs for the delivery of finished goods in operating expenses in the consolidated statement of operations and comprehensive income. Total shipping and handling costs for the years ended October 31, 2013 and 2012 were approximately $26,906,000 and $27,141,000, respectively.

Major Suppliers—During the year ended October 31, 2013, the Company’s three largest suppliers accounted for 22 percent, 21 percent, and 9 percent, respectively, of the Company’s tire purchases. During the year ended October 31, 2012, the Company’s three largest suppliers accounted for 25 percent, 19 percent, and 7 percent, respectively, of the Company’s tire purchases.

Subsequent Events—The consolidated financial statements and related disclosures include evaluation of events up through and including December 19, 2013, which is the date the consolidated financial statements were available to be issued.

Fair Value of Financial Instruments—The carrying amounts of the Company’s accounts receivable, accounts payable, line of credit, and bank note payable approximate their fair value due to either the short maturity of such instruments or the existence of variable interest rates that approximate prevailing market rates. The fair value of the interest rate swap generally reflects the estimated amount the Company would receive or pay to terminate the contract at the reporting date.

Reclassification—Certain 2012 amounts have been reclassified to conform to the 2013 presentation.

 

F-227


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

Note 2—Property and Equipment

Property and equipment are summarized as follows:

 

    

2013

    

2012

 

Land

   $ 1,630,642       $ 1,630,642   

Buildings and fixtures

     15,640,587         14,385,537   

Machinery and equipment

     7,533,901         7,018,988   

Tire molds

     25,019,437         22,377,127   

Computer equipment and software

     4,982,509         4,635,445   

Leasehold improvements

     2,186,096         1,844,766   

Construction in progress

     95,530         604,257   
  

 

 

    

 

 

 

Total cost

     57,088,702         52,496,762   

Accumulated depreciation

     32,119,374         27,318,705   
  

 

 

    

 

 

 

Net property and equipment

   $ 24,969,328       $ 25,178,057   
  

 

 

    

 

 

 

Depreciation expense was approximately $5,327,000 in 2013 and $4,845,000 in 2012.

At October 31, 2013 and 2012, the Company had net property and equipment of approximately $8,283,000 and $8,857,000, respectively, located in foreign jurisdictions.

Note 3—Acquired Intangible Assets

Intangible assets are summarized as follows as of October 31, 2013 and 2012:

 

    

2013

    

2012

 
    

Gross Carrying
Amount

    

Accumulated
Amortization

    

Gross Carrying
Amount

    

Accumulated
Amortization

 

Amortized intangible assets—Customer relationships

   $ 16,700,000       $ 16,075,992       $ 16,700,000       $ 15,600,996   
  

 

 

    

 

 

    

 

 

    

 

 

 

Unamortized intangible assets—Trademarks

   $ 5,700,000       $ —         $ 5,700,000       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Amortization expense for customer relationships approximated $475,000 and $680,000 for the years ended October 31, 2013 and 2012, respectively.

The customer relationships asset is being amortized over a period of nine years and estimated amortization expense for the next three years ending October 31 is as follows:

 

2014

   $ 318,000   

2015

     200,000   

2016

     106,008   
  

 

 

 

Total

   $ 624,008   
  

 

 

 

The Company evaluates its trademarks for impairment at least annually. No impairment charges were recognized in 2013 and 2012.

 

F-228


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

Note 4—Accounts Payable Settlement Arrangements

At October 31, 2013 and 2012, the Company had accounts payable settlement arrangements with a certain vendor and third-party intermediary of approximately $5,657,000 and $8,372,000, respectively. This arrangement provides that, at the vendor’s request, the third-party intermediary advances the amount of the scheduled payment to the vendor, less an appropropriate discount, before the scheduled payment date and the Company makes their payment to the third-party intermediary on the date stipulated with interest at LIBOR plus 3 percent in accordance with the commercial terms negotiated with its vendor. The Company records interest related to these arrangements as interest expense in the consolidated statement of operations and comprehensive income.

Note 5—Line of Credit

The Company has a revolving line of credit expiring in October 2015 that provides for total borrowing capacity of $142 million at October 31, 2013 and 2012. Aggregate outstanding borrowings are limited to a percentage of U.S. and Canadian trade accounts receivable and inventory. Outstanding Canadian and U.S. borrowings are limited to $25 million and $117 million, respectively in both 2013 and 2012. Borrowings accrue interest based on the prime rate, banker’s acceptance rate, or eurodollar rate, plus a rate spread, which is dependent on the Company’s leverage ratio as defined in the agreement. A commitment fee on the Company’s total unused borrowing capacity is paid quarterly. Unused availability, net of outstanding letters of credit, aggregated approximately $42,775,000 at October 31, 2013 and $46,355,000 at October 31, 2012.

Both the line of credit and the term loan described in Note 6 are collateralized by substantially all of the Company’s assets.

Note 6—Long-term Debt

Long-term debt at October 31 is as follows:

 

    

2013

    

2012

 

Bank term debt payable in quarterly installments of amounts ranging from $550,000 to $910,000 plus a payment of $1,430,000 due at maturity including interest based upon the prime rate or eurodollar rate plus rate spread, expires October 2015, collateralized by substantially all of the Company’s assets

   $ 7,800,000       $ 11,440,000   

Unsecured debt to former stockholders, various rates based on applicable adjusted federal long-term rates as published by the Internal Revenue Service at time of debt issuance and 5 percent at October 31, 2012.

     —           238,284   

Bonds payable for Findlay Distribution Center in monthly installments ranging between $108,000 and $112,000 including interest of 7.63 percent and 7.25 percent until maturity in October 2018 and collateralized by the facility and letter of credit reserves of $500,000 and $835,000

     5,385,000         6,245,000   
  

 

 

    

 

 

 

Total

     13,185,000         17,923,284   

Less current portion

     4,570,000         4,738,284   
  

 

 

    

 

 

 

Long-term portion

   $ 8,615,000       $ 13,185,000   
  

 

 

    

 

 

 

 

F-229


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

The balance of the above debt matures as follows:

 

2014

   $ 4,570,000   

2015

     5,155,000   

2016

     1,070,000   

2017

     1,155,000   

2018

     1,235,000   
  

 

 

 

Total

   $ 13,185,000   
  

 

 

 

Interest expense for the years ended October 31, 2013 and 2012 was approximately $6,700,000 and $6,597,000, respectively.

Under the agreements with the bank for both the term loan and line of credit described in Note 5, the Company is subject to various financial covenants, including fixed charge coverage, consolidated capital funds test, and minimum EBITDA test.

The Company follows current guidance relating to accounting for derivative instruments and hedging activities, which requires that all derivative instruments be reported on the consolidated balance sheet at fair value as either assets or liabilities and establishes criteria for designation and effectiveness of transactions entered into for hedging purposes.

In June 2010, the Company entered into an interest rate swap that fixed the rate on a notional amount of $45,000,000. The Company determined that the derivative instruments meet the criteria for cash flow hedge accounting. During fiscal year 2013 the interest rate swap contract expired. The fair value of the swap was approximately $268,000 of liability on October 31, 2012. The net change in fair value during fiscal year 2012 was recorded, net of income taxes, in other comprehensive income. There was no impact on net income for the year ended October 31, 2012 because the swap was an effective cash flow hedge.

Note 7—Income Taxes

The components of the income tax provision included in the consolidated statement of operations are all attributable to continuing operations and are detailed as follows:

 

    

2013

   

2012

 

U.S. federal

   $ 3,624,000      $ 2,017,000   

Foreign

     1,071,000        807,000   

State and local

     179,000        584,000   

Deferred income tax (recovery) expense

     (1,665,000     623,000   
  

 

 

   

 

 

 

Total income tax expense

   $ 3,209,000      $ 4,031,000   
  

 

 

   

 

 

 

During the years ended October 31, 2013 and 2012, the Company paid taxes of approximately $5,783,000 and $4,319,000, respectively.

 

F-230


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

The details of the net deferred tax liability are as follows:

 

    

2013

   

2012

 

Deferred tax assets:

    

Tax operating loss carryforwards

   $ 166,098      $ 166,116   

Allowances on inventories and receivables

     2,654,492        2,339,018   

Foreign tax credit

     —          39,854   

Accrued liabilities and other

     2,821,788        1,601,122   
  

 

 

   

 

 

 

Gross deferred tax assets

     5,642,378        4,146,110   

Deferred tax liabilities:

    

Property and equipment

     (3,481,393     (3,677,015

Intangible assets

     (2,391,165     (2,518,268

Other

     (476,820     (322,827
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (6,349,378     (6,518,110
  

 

 

   

 

 

 

Net deferred tax liability

   $ (707,000   $ (2,372,000
  

 

 

   

 

 

 

The Company has approximately $5,537,000 of state net operating loss carryforwards available to reduce future income taxes, expiring in 2014 through 2027.

The Company is not currently under examination by the U.S. Internal Revenue Service or any state or local tax authorities. The Company’s federal income tax returns for the years prior to October 31, 2010 are no longer subject to examination. The Company had an Internal Revenue Service audit through October 31, 2008. The Company also files in various states within the U.S., most notably California and Florida. The state tax returns prior to October 31, 2008 are no longer subject to examination.

The Company was under audit with the Canada Revenue Agency (CRA) during fiscal year 2012 for the 2009 and 2010 tax years. The CRA has completed its audit and has assessed an insignificant amount of taxes owed. The Company is in the process of appealing. The additional taxes, if any, are deemed insignificant by management.

Note 8—Capital Stock

Common stock consists of 1,500,000 authorized shares of no par value stock. As of October 31, 2013 and 2012, there were 1,034,172 shares issued and outstanding.

Note 9—Stock-based Compensation

The Management Stock Option Plan permits the grant of share options to employees for up to 123,596 shares of common stock. Option awards are generally granted with an exercise price equal to the fair value of the Company’s stock at the date of grant; those option awards generally vest based on four years of continuous service and have 10-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the plan).

Total compensation cost that has been charged against income for those plans was approximately $150,000 and $155,000 for 2013 and 2012, respectively.

 

F-231


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

The fair value of each option award is estimated on the date of grant using a Black—Scholes option valuation model that uses the weighted average assumptions noted in the following table. Expected volatility is based on historical volatility of the NASDAQ transportation index. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

    

2013

   

2012

 

Range of expected volatility

     32     34

Range of expected dividends

     0     0

Expected term (in years)

     5        5   

Risk-free rate

     1.01     0.88

A summary of option activity under the plan for the year ended October 31, 2013 is presented below:

 

Options

  

Number of

Shares

   

Weighted
Average
Exercise
Price

    

Weighted
Average
Remaining
Contractual
Term (in
years)

 

Outstanding at November 1, 2011

     104,899      $ 61.69         5.4   

Granted

     4,500        93.96         9.0   

Outstanding at November 1, 2012

     109,399        63.02         4.6   

Granted

     19,000        75.67         9.3   

Forfeited or expired

     (6,750     61.12         7.4   
  

 

 

      

Outstanding at October 31, 2013

     121,649        64.89         4.0   
  

 

 

      

As of October 31, 2013, there was approximately $487,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted average period of 1.9 years. As of October 31, 2013 and 2012, there were no options exercised. As of October 31, 2013, there are 76,639 options fully vested.

The Company has an incentive plan that provides an incentive payment at the time of a change of control. The benefits vest over four years and were fully vested as of October 31, 2013. At October 31, 2013 and 2012, a liability of $3,200,000 and $1,300,000, respectively has been recorded based on the fair value of the incentive plan. Compensation expense of $1,900,000 and $1,300,000 has been recorded for 2013 and 2012, respectively, related to the incentive plan.

Note 10—Related Party Transactions

Management Fees—For the years ended October 31, 2013 and 2012, the Company incurred expenses and management fees payable to an affiliate of one of the stockholders of $1,000,014 and $505,897, respectively.

Note 11—Operating Leases

The Company leases certain buildings, equipment, and land for use in operations. Rental expense under all operating leases was approximately $13,030,000 and $12,376,000 for the years ended October 31, 2013 and 2012, respectively. Certain leases provide for renewals at the Company’s option at the end of the initial lease term.

 

F-232


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

Future minimum annual commitments under these operating leases are as follows:

 

Years Ending

October 31

  

Amount

 

2014

   $ 9,313,854   

2015

     8,695,265   

2016

     6,356,289   

2017

     3,532,766   

2018

     2,172,756   

Thereafter

     1,898,221   
  

 

 

 

Total

   $ 31,969,151   
  

 

 

 

Note 12—Retirement Plans

The Company sponsors a 401(k) plan for substantially all employees. The plan provides for the Company to make a matching contribution. Contributions to the plan approximated $939,000 and $912,000 for the years ended October 31, 2013 and 2012, respectively.

Note 13—Contingencies

The Company is a party to various lawsuits and claims arising in the normal course of business, including certain claims pertaining to product liability matters that name the Company as co-defendant along with the manufacturer. In most of these cases, the manufacturer has assumed defense of the claim on behalf of the named defendants. Management believes that the ultimate resolution of pending lawsuits and claims will not have a material adverse effect on the consolidated financial statements of the Company.

Note 14—Fair Value Measurements

Accounting standards require certain assets and liabilities be reported at fair value in the consolidated financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the valuation techniques and inputs used to measure fair value.

In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.

In instances whereby inputs used to measure fair value fall into different levels of the fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

 

F-233


The Hercules Tire & Rubber Company and Subsidiaries

Notes to Consolidated Financial Statements

October 31, 2013 and 2012

 

The Company measures interest rate swaps at fair value on a recurring basis. The fair value of interest rate swaps is based primarily on Level 2 inputs as described above.

Note 15—Business Combination

On November 9, 2011, the Company purchased certain assets and assumed certain liabilities of a Canadian tire distributor located in Ville Sainte-Catherine in the Province of Quebec (the “Montreal location”). The primary reason for the acquisition was to expand the Company’s distribution operations by adding the Montreal location. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and the Montreal location. The agreed-upon price was $3,545,614; however, subsequent to the asset purchase, final adjustments to the consideration resulted in a decrease to the purchase price of approximately $177,000. The transaction was financed through the Company’s line of credit.

The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed translated to U.S. dollars:

 

Accounts receivable

   $ 1,847,405   

Inventory

     3,043,422   

Prepaids

     28,758   

Property, plant, and equipment

     357,499   

Other assets

     289,585   

Accounts payable

     (2,623,411

Accrued liabilities

     (168,844
  

 

 

 

Total identifiable net assets

     2,774,414   

Goodwill

     636,270   
  

 

 

 

Total

   $ 3,410,684   
  

 

 

 

The difference between the goodwill amount in the schedule above and the goodwill reported on the consolidated balance sheet is due to foreign currency translation.

 

F-234


Independent Auditor’s Report on Additional Information

To the Board of Directors

The Hercules Tire & Rubber

Company and Subsidiaries

We have audited the consolidated financial statements of The Hercules Tire & Rubber Company and Subsidiaries as of and for the years ended October 31, 2013 and 2012. Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidated schedule of adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA) is presented for the purpose of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.

/s/ Plante & Moran, PLLC

December 19, 2013

 

F-235


The Hercules Tire & Rubber Company and Subsidiaries

Consolidated Schedule of Adjusted EBITDA

 

    

Year Ended October 31

 
    

2013

    

2012

 

Net income

   $ 5,584,580       $ 6,202,913   

Interest expense

     6,699,610         6,596,842   

Income tax expense

     3,209,000         4,031,000   

Depreciation expense

     5,327,346         4,845,363   

Amortization—Intangible assets

     474,996         680,004   

Amortization—Debt issue costs

     833,202         775,417   

Management fees and expenses

     1,000,014         505,897   

Noncash compensation expense

     2,050,204         1,455,315   

Loss on sale of fixed assets

     204,421         57,927   

Foreign exchange loss

     2,075,289         377,180   
  

 

 

    

 

 

 

Adjusted earnings before interest, taxes, depreciation, and amortization (ADJUSTED EBITDA)

   $ 27,458,662       $ 25,527,858   
  

 

 

    

 

 

 

Adjusted EBITDA includes adjustments for items not typically included in EBITDA such as management fees and expenses, non-cash compensation expense, loss on sale of fixed assets and foreign exchange loss, as presented above.

 

F-236


Regional Tire Distributors Inc.

January 31, 2013 and 2012

Table of contents

 

Independent Auditor’s Report

     F-238   

Consolidated statements of income and comprehensive income

     F-239   

Consolidated balance sheets

     F-240   

Consolidated statements of cash flows

     F-241   

Consolidated statements of stockholders’ equity

     F-242   

Notes to the consolidated financial statements

     F-243 – F-256   

 

F-237


   Deloitte LLP
   1005 Skyview Drive
   Suite 200
   Burlington ON L7P 5B1
   Canada
   Tel: 905-315-6770
   Fax: 905-315-6700
   www.deloitte.ca

Independent Auditor’s Report

To the shareholders of

Regional Tire Distributors Inc.

We have audited the accompanying consolidated financial statements of Regional Tire Distributors Inc. (the “Company”), which comprise the consolidated balance sheets as of January 31, 2013 and 2012, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the years in the two year period ended January 31, 2013, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Regional Tire Distributors as of January 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the two year period ending January 31, 2013 in accordance with accounting principles generally accepted in the United States of America.

/s/ Deloitte LLP

Chartered Professional Accountants, Chartered Accountants

Licensed Public Accountants

April 25, 2013

 

F-238


Regional Tire Distributors Inc.

Consolidated statements of income and comprehensive income

years ended January 31, 2013 and 2012

(Presented in United States Dollars)

 

    

2013

   

2012

 
     $     $  

Revenue

     113,573,723        77,049,240   

Cost of sales

     89,280,458        60,739,542   
  

 

 

   

 

 

 

Gross margin

     24,293,265        16,309,698   
  

 

 

   

 

 

 

Selling, general and administrative expenses

     17,126,775        11,836,524   

Depreciation and amortization

     520,913        119,849   
  

 

 

   

 

 

 
     17,647,688        11,956,373   
  

 

 

   

 

 

 

Operating income

     6,645,577        4,353,325   
  

 

 

   

 

 

 

Other income (expense)

    

Gain on acquisition (Note 16)

     2,033,068        —     

Interest expense

     (290,276     (37,559

Equity accounted income (Note 7)

     106,621        429,439   

Management fee income

     115,201        82,866   

Other income

     151,723        28,116   
  

 

 

   

 

 

 
     2,116,337        502,862   
  

 

 

   

 

 

 

Income before income taxes

     8,761,914        4,856,187   

Income tax expense (recovery) (Note 15)

    

Deferred

     (52,410     —     

Current

     1,855,519        1,187,407   
  

 

 

   

 

 

 

Net income

     6,958,805        3,668,780   
  

 

 

   

 

 

 

Net income attributable to non-controlling interest

     94,442        —     

Net income attributable to stockholders

     6,864,363        3,668,780   
  

 

 

   

 

 

 

Net income

     6,958,805        3,668,780   
  

 

 

   

 

 

 

Other comprehensive (loss) income

    

Foreign currency translation adjustment

     (17,867     (38,938
  

 

 

   

 

 

 

Comprehensive income

     6,940,938        3,629,842   
  

 

 

   

 

 

 

Comprehensive income attributable to non-controlling interest

     93,191        —     

Comprehensive income attributable to stockholders

     6,847,747        3,629,842   
  

 

 

   

 

 

 

Comprehensive income

     6,940,938        3,629,842   
  

 

 

   

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of this consolidated financial statement.

 

F-239


Regional Tire Distributors Inc.

Consolidated balance sheets

as at January 31, 2013 and 2012

(Presented in United States Dollars)

 

    

2013

    

2012

 
     $      $  

Assets

     

Current assets

     

Cash

     759,898         3,863,970   

Accounts receivable (Note 3)

     7,369,355         4,870,362   

Income taxes receivable

     —           238,534   

Inventories (Note 4)

     20,257,556         10,343,466   

Current portion of note receivable (Note 5)

     109,757         219,107   

Due from related companies (Note 6)

     172,244         1,040,042   

Prepaid expenses and deposits

     502,791         106,547   
  

 

 

    

 

 

 
     29,171,601         20,682,028   

Note receivable (Note 5)

     —           109,553   

Investments in affiliates (Note 7)

     60,361         1,030,436   

Property, plant and equipment (Note 8)

     993,416         548,035   

Intangible assets (Note 9)

     7,253,577         —     

Goodwill (Note 16)

     2,728,656         —     
  

 

 

    

 

 

 
     40,207,611         22,370,052   
  

 

 

    

 

 

 

Liabilities

     

Current liabilities

     

Bank indebtedness (Note 10)

     2,461,136         —     

Accounts payable and accrued liabilities

     14,458,562         11,750,038   

Income taxes payable

     490,597         —     

Deferred revenue

     89,063         177,796   

Due to related companies (Note 6)

     138,631         120,154   

Current portion of long-term debt (Note 11)

     1,839,259         —     
  

 

 

    

 

 

 
     19,477,248         12,047,988   

Deferred income taxes (Note 15)

     1,931,374         —     

Long-term debt (Note 11)

     2,048,796         —     
  

 

 

    

 

 

 
     23,457,418         12,047,988   
  

 

 

    

 

 

 

Stockholders’ equity

     

Share capital (Note 12)

     1,490,610         1,490,610   

Accumulated other comprehensive income

     397,779         414,395   

Retained earnings

     14,279,222         8,417,059   
  

 

 

    

 

 

 

Total equity attributable to stockholders

     16,167,611         10,322,064   

Non-controlling interest

     582,582         —     
  

 

 

    

 

 

 

Total equity

     16,750,193         10,322,064   
  

 

 

    

 

 

 
     40,207,611         22,370,052   
  

 

 

    

 

 

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of this consolidated financial statement.

 

F-240


Regional Tire Distributors Inc.

Consolidated statements of cash flows

years ended January 31, 2013 and 2012

(Presented in United States Dollars)

 

    

2013

   

2012

 
     $     $  

Operating activities

    

Net income

     6,958,805        3,668,780   

Items not affecting cash

    

Depreciation and amortization

     520,913        119,849   

Equity accounted income (Note 7)

     (106,621     (429,439

Gain on acquisition (Note 16)

     (2,033,068     —     

Deferred income taxes

     (52,410     —     

Changes in non-cash operating working capital items

    

Accounts receivable

     (175,742     87,161   

Inventory

     (360,603     (3,105,133

Prepaid expenses and deposits

     (289,830     81,313   

Accounts payable and accrued liabilities

     (3,848,121     1,903,589   

Deferred revenue

     (89,456     —     

Income taxes

     646,650        (214,297
  

 

 

   

 

 

 
     1,170,517        2,111,823   
  

 

 

   

 

 

 

Investing activities

    

Acquisition of property, plant and equipment

     (323,960     (458,541

Advances to related parties

     (1,028,324     (564,049

Proceeds received from related parties

     —          121,813   

Proceeds received from note receivable

     220,484        —     

Acquisition of intangible assets

     (100,220     —     

Acquisition of subsidiary (Note 16)

     (4,993,000     —     
  

 

 

   

 

 

 
     (6,225,020     (900,777
  

 

 

   

 

 

 

Financing activities

    

Dividends paid

     (1,021,209     (1,514,550

Proceeds from bank indebtedness

     (57,559     —     

Proceeds from long-term debt

     3,507,700        —     

Repayment of long-term debt

     (471,034     —     
  

 

 

   

 

 

 
     1,957,898        (1,514,550
  

 

 

   

 

 

 

Effect of foreign exchange rate changes on cash

     (7,467     4,198   
  

 

 

   

 

 

 

Change in cash during the year

     (3,104,072     (299,306

Cash, beginning of the year

     3,863,970        4,163,276   
  

 

 

   

 

 

 

Cash, end of the year

     759,898        3,863,970   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Income taxes paid

     1,440,690        1,426,096   
  

 

 

   

 

 

 

Interest paid

     132,110        26,170   
  

 

 

   

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of this consolidated financial statement.

 

F-241


Regional Tire Distributors Inc.

Consolidated statements of stockholders’ equity

years ended January 31, 2013 and 2012

(Presented in United States Dollars)

 

   

Common shares

   

Accumulated
other
comprehensive
income

   

Retained
earnings

   

Total

equity
attributable
to
stockholders

   

Non-
controlling
interest

   

Total

equity

 
    #     $     $     $     $     $     $  

Balance, January 31, 2011

    1,500,000        1,490,610        453,333        6,262,829        8,206,772        —          8,206,772   

Net income

    —          —          —          3,668,780        3,668,780        —          3,668,780   

Other comprehensive loss

    —          —          (38,938     —          (38,938     —          (38,938
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    —          —          (38,938     3,668,780        3,629,842        —          3,629,842   

Dividends

    —          —          —          (1,514,550     (1,514,550     —          (1,514,550
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 31, 2012

    1,500,000        1,490,610        414,395        8,417,059        10,322,064        —          10,322,064   

Non-controlling interest acquired
(Note 16)

    —          —          —          —          —          508,400        508,400   

Net income

    —          —          —          6,864,363        6,864,363        94,442        6,958,805   

Other comprehensive loss

    —          —          (16,616     —          (16,616     (1,251     (17,867
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    —          —          397,779        6,864,363        6,847,747        93,191        6,940,938   

Dividends

    —          —          —          (1,002,200     (1,002,200     (19,009     (1,021,209
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 31, 2013

    1,500,000        1,490,610        397,779        14,279,222        16,167,611        582,582        16,750,193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes to the consolidated financial statements are an integral part of this consolidated financial statement.

 

F-242


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

1. Nature of business

Regional Tire Distributors Inc. (“Company”) was incorporated on July 21, 2008 under the laws of the Province of Ontario, Canada and commenced active operations in September of 2008. The Company, based in Burlington, Ontario, Canada, is a wholesale distributor of tires and services to retail tire locations across Canada including independent service garages, automotive car dealers and large national customers.

2. Significant accounting policies

Basis of preparation

These consolidated financial statements are prepared in United States (“US”) dollars and in accordance with accounting principles generally accepted in the United States of America (“GAAP”). A summary of significant accounting policies consistently applied in the preparation of the consolidated financial statements are outlined below.

Basis of consolidation

These consolidated financial statements include the financial statements of Regional Tire Distributors Inc., its wholly-owned subsidiary JAB Holdings Ltd. and its majority owned subsidiary Regional Tire Distributors (Atlantic) Inc. The Company does not have any variable interests in variable interest entities. All intercompany accounts and transactions have been eliminated during 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. Significant estimates include inventory obsolescence reserves, allowance for doubtful accounts, returns and rebates, valuation of long lived assets, purchase price allocations in business combinations and deferred taxes. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of comprehensive income in the period that they are determined.

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 the creditworthiness of specific customers and past experience of write offs.

Inventories

Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method, or net realizable value and consist primarily of automotive tires, wheels, tubes and wheel accessories. 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.

 

F-243


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

Investments in affiliates

The Company holds equity investments in affiliates for which it does not have a controlling financial interest, but has the ability to exercise significant influence over the operating and financial policies of the investee. These investments are accounted for under the equity method of accounting wherein the Company records its’ proportionate share of the investees’ income or loss in its consolidated financial statements.

Investments are evaluated for impairment when facts or circumstances indicate that the fair value of the investment is less than its carrying value. Impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (1) nature of the investment; (2) cause and duration of the impairment; (3) extent to which fair value is less than cost; (4) financial conditions and near term prospects of the issuers; and (5) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Company, liabilities incurred by the Company to the former owners of the acquiree and the equity interests issued by the Company in exchange for control of the acquiree.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value. The Corporation measures goodwill as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a bargain purchase gain is recognized immediately in profit or loss.

The Company has measured the non-controlling interest at its fair value on the acquisition date.

Transaction costs, other than those associated with the issuance of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.

Income taxes

The Company accounts for income taxes in accordance with FASB Accounting Standard Codification (“ASC”) Topic 740, “Income Taxes” (“ASC Topic 740”). ASC Topic 740 requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The measurement of a deferred tax asset is adjusted by a valuation allowance, if necessary, to recognize tax benefits only to the extent that, based on available evidence, it is more likely than not that they will be realized. In determining the valuation allowance, the Company considers factors by taxing jurisdiction, including estimated taxable income, history of losses for tax purposes, tax planning strategies and the likelihood of success of tax filing positions, among others. A change to any of these factors could impact the estimated valuation allowance and income tax expense.

 

 

F-244


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is more-likely-than-not that the position will be sustained upon examination. The tax impacts recognized in the financial statements from such positions are then measured based on the largest impact that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions as a component of the provision for income taxes.

Foreign currency

The Canadian dollar is the currency in which a substantial amount of the Company’s transactions are denominated and is the functional currency of the Company. Monetary assets and liabilities denominated in currencies other than the Canadian dollar are translated into Canadian dollars at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the Canadian dollar during the year are converted into Canadian dollar at the applicable rates of exchange prevailing on the transaction date. Transaction gains and losses are recognized in the consolidated statements of comprehensive income.

The Company has chosen to present its financial statements in United States Dollars. The financial statements are translated to the United States dollar presentation currency at the end of the reporting period. Assets and liabilities are translated at the January 31 rates of exchange. Income and expenses are translated at rates prevailing at the date of the transaction. The Company has used average exchange rates to approximate the rates prevailing at the date of the transactions. All exchange gains and losses are recognized as a separate component of stockholders’ equity.

Financial instruments

Financial instruments are comprised of cash, accounts receivable, due to/from related parties, note receivable, bank indebtedness, accounts payable and accrued liabilities and long-term debt. The estimated fair values of cash, accounts receivable, due to/from related parties, note receivable, bank indebtedness, accounts payable and accrued liabilities are approximate to book values because of their short-term maturities. The long-term debt approximates carrying value as it bears interests at variable rates. All financial instruments are measured at amortized cost.

Interest rate risk

The Company is subject to interest rate risk due to changes to the prime rate since the majority of its borrowings bear variable interest rates. A change in the interest rate of plus or minus one percent as at January 31, 2013 would result in a $54,844 decrease or increase in net income before income taxes. The Company does not use derivative instruments to manage this risk.

Liquidity risk

The Company’s objective is to have sufficient liquidity to meet its liabilities when due. The Company monitors its cash balances and cash flows generated from operations to meet its requirements. As at January 31, 2013 and January 31, 2012, the most significant financial liabilities relate to bank indebtedness, accounts payable and accrued liabilities, due to related parties, and long-term debt.

 

F-245


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

Credit risk

The Company provides credit to its customers in the normal course of its operations. It carries out, on a continuing basis, credit checks on its customers and maintains provisions for contingent credit losses. The Company’s maximum exposure to credit risk is represented by the carrying value of financial assets on the consolidated balance sheets.

Property, plant and equipment

Property, plant 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 declining-balance 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 the related lease term. The depreciation rates used to depreciate property, plant and equipment is as follows:

 

Vehicles

   30% declining-balance

Computer equipment

   30% declining-balance

Office equipment

   20% declining-balance

Warehouse equipment

   20% declining-balance

Leasehold improvements

   Over the term of the lease

Impairment of long-lived assets

The Company evaluates the carrying value of definite life long-lived assets such as property, plant and equipment and intangible assets, whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying value. Measurement of the impairment loss is based on the present value of the expected future cash flows.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets of acquired businesses and is tested for impairment annually and whenever an event or circumstance occurs that indicates that goodwill might be impaired. When the carrying amount of a reporting unit, including goodwill, exceeds its fair value, a goodwill impairment loss is recognized in net earnings in an amount equal to the excess.

Intangible assets

Intangible assets are comprised of customer relationships and a tradename acquired through the business acquisition of Regional Tire Distributors (Atlantic) Inc.

Amortization is provided using the following methods and annual rates:

 

Customer relationships    12 years straight line

Tradename

   7 years straight line

 

F-246


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

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. 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.

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.

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 our inventory, and our cost of goods sold when product is sold.

3. Accounts receivable

 

    

2013

   

2012

 
     $     $  

Accounts receivable

     7,684,285        5,160,144   

Less: allowance for doubtful accounts

     (314,930     (289,782
  

 

 

   

 

 

 
     7,369,355        4,870,362   
  

 

 

   

 

 

 

Bad debt expense was $13,129 for the year ended January 31, 2013 (2012—$142,364).

4. Inventories

 

    

2013

    

2012

 
     $      $  

Tire inventories

     19,932,030         9,713,102   

Wheel inventories

     247,503         578,992   

Parts

     78,023         51,372   
  

 

 

    

 

 

 
     20,257,556         10,343,466   
  

 

 

    

 

 

 

 

F-247


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

5. Note receivable

 

    

2013

    

2012

 
     $      $  

Note receivable

     109,757         328,660   

Less: current portion

     109,757         219,107   
  

 

 

    

 

 

 

Long term portion

     —           109,553   
  

 

 

    

 

 

 

The amount is due from one of the Company’s landlords and relates to reimbursable costs for tenant improvements. As set out in the premise rental agreement, the Company is entitled to a total allowance of $329,271 ($330,000 Canadian dollars) for partial reimbursement of actual costs incurred relating to tenant improvements upon completion of a statutory declaration. The amount is payable in three installments of $109,757 ($110,000 Canadian dollars) with the final installment due on June 1, 2013.

6. Related party transactions

The following balances are due from related parties:

 

    

2013

    

2012

 
     $      $  

Regional Tire Distributors (Atlantic) Inc., demand promissory note, secured by a general pledge of all assets, non-interest bearing, payable on demand

     —           782,636   

Tirecraft Eastern Canada Limited, demand promissory note, secured by a general pledge of all assets, non-interest bearing payable on demand

     —           49,747   

Tire Hotel Inc., promissory note, unsecured, non-interest bearing, repayable on demand

     —           109,363   

Trade receivable balances due from related parties

     172,244         98,296   
  

 

 

    

 

 

 
     172,244         1,040,042   
  

 

 

    

 

 

 

The following balances are due to related parties:

 

    

2013

    

2012

 
     $      $  

Non-controlling interest, demand promissory note, secured by a general pledge of all assets, non-interest bearing, payable on demand

     48,886         —     

Trade payable and accrual balances due to related parties

     89,745         120,154   
  

 

 

    

 

 

 
     138,631         120,154   
  

 

 

    

 

 

 

 

F-248


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

During the year, the Company entered into the following transactions with related parties:

 

    

2013

    

2012

 
     $      $  

Management fees paid

     271,003         275,006   

Management fees paid (Atlantic)

     56,987         129,155   

Revenue from related parties

     4,632,486         4,838,502   

Revenue from related parties (Atlantic)

     1,486,565         3,989,355   

Purchases from related parties (Atlantic)

     8,045         6,057   

Rebate commissions paid

     843,029         693,334   

Rebate commissions paid (Atlantic)

     124,083         193,175   

The transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. The companies above are owned and controlled by a shareholder of the Company or Atlantic or are related due to common control and ownership.

7. Investments

Investment in Regional Tire Distributors (Atlantic) Inc.

On December 2, 2009 the Company acquired 38% of Regional Tire Distributors (Atlantic) Inc. (“Atlantic”) for $4. On August 3, 2012, the Company acquired an additional 55% of Atlantic. See note 16 for details of the acquisition. The following table shows the change in the investment.

 

    

2013

   

2012

 
     $     $  

Beginning balance

     989,119        591,359   

Share of comprehensive income

     87,619        404,685   

Acquisition of control

     (1,071,632     —     

Foreign exchange adjustment

     (5,106     (6,925
  

 

 

   

 

 

 

Ending balance

     —          989,119   
  

 

 

   

 

 

 

Summarized balance sheet information of Atlantic is as follows:

 

    

2013

    

2012

 
     $      $  

Current assets

     —           6,947,488   

Non-current assets

     —           441,219   

Current liabilities

     —           4,957,817   

Non-current liabilities

     —           —     

Summarized statement of operation information of Atlantic is as follows:

 

    

2013*

    

2012

 
     $      $  

Revenue

     13,789,205         26,155,597   

Expenses

     13,726,820         25,439,225   
  

 

 

    

 

 

 

Net income

     62,385         716,372   
  

 

 

    

 

 

 

 

* —period ending August 2, 2012

 

F-249


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

Investment in Tire Hotel Inc.

The Company holds a 50% equity interest in Tire Hotel Inc. The following is a summary of the changes in the investment. The following table shows the change in the investment.

 

    

2013

   

2012

 
     $     $  

Beginning balance

     41,317        16,891   

Share of comprehensive income

     19,052        24,804   

Foreign exchange adjustment

     (8     (378
  

 

 

   

 

 

 

Ending balance

     60,361        41,317   
  

 

 

   

 

 

 

Total investment balance

 

    

2013

    

2012

 
     $      $  

Regional Tire Distributors (Atlantic) Inc.

     —           989,119   

Tire Hotel Inc.

     60,361         41,317   
  

 

 

    

 

 

 

Total investment

     60,361         1,030,436   
  

 

 

    

 

 

 

Equity accounted income

 

    

2013

   

2012

 
     $     $  

Regional Tire Distributors (Atlantic) Inc.

     87,619        404,685   

Tire Hotel Inc.

     19,052        24,804   

Tirecraft Eastern Canada Ltd.

     (50     (50
  

 

 

   

 

 

 

Total investment

     106,621        429,439   
  

 

 

   

 

 

 

8. Property, plant and equipment

 

    

2013

 
    

Cost

    

Accumulated
amortization

    

Net book
value

 
     $      $      $  

Vehicles

     14,462         8,402         6,060   

Computer equipment

     134,426         70,044         64,382   

Office equipment

     70,270         34,225         36,045   

Warehouse equipment

     864,144         246,035         618,109   

Leasehold improvements

     404,545         135,725         268,820   
  

 

 

    

 

 

    

 

 

 
     1,487,847         494,431         993,416   
  

 

 

    

 

 

    

 

 

 

 

F-250


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

    

2012

 
    

Cost

    

Accumulated
amortization

    

Net book
value

 
     $      $      $  

Vehicles

     13,190         5,356         7,834   

Computer equipment

     66,637         34,568         32,069   

Office equipment

     64,053         23,215         40,838   

Warehouse equipment

     413,147         102,947         310,200   

Leasehold improvements

     213,917         56,823         157,094   
  

 

 

    

 

 

    

 

 

 
     770,944         222,909         548,035   
  

 

 

    

 

 

    

 

 

 

Depreciation expense for the year ended January 31, 2013 was $189,829 (2012—$119,849).

9. Intangible assets

 

    

2013

 
    

Cost

    

Accumulated

amortization

    

Net book

value

 
     $      $      $  

Customer relationships

     6,984,530         286,865         6,697,665   

Tradename

     598,674         42,762         555,912   
  

 

 

    

 

 

    

 

 

 
     7,583,204         329,627         7,253,577   
  

 

 

    

 

 

    

 

 

 

The weighted average life of intangible assets is 11.6 years.

Amortization expense for the year ended January 31, 2013 was $331,084 (2012). The estimated aggregate amortization expense of intangible assets, as of January 31, 2013, in each of the next five years is expected to be as follows:

 

     $  

2014

     667,569   

2015

     667,569   

2016

     667,569   

2017

     667,569   

2018

     667,569   

10. Bank indebtedness

 

    

2013

    

2012

 
     $      $  

Regional Tire Distributors (Atlantic) Inc.:

     

Royal Bank of Canada, variable rate loan bearing interest at prime plus 1.0%. Balance is payable on demand.

     2,461,136         —     
  

 

 

    

 

 

 
     2,461,136         —     
  

 

 

    

 

 

 

 

F-251


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

Regional Tire Distributors Inc.

The Company has a revolving demand facility of $4,589,834 ($4,600,000 Canadian dollars) of which $nil was drawn upon at January 31, 2013 (2012—$nil). The revolving facility bears interest at prime plus 0.95%. Borrowings under the facility cannot exceed 75% of accounts receivable less potential prior ranking claims. This facility is secured by a first ranking security interest in all personal property of the Company and a $3,492,265 ($3,500,000 Canadian dollars) guarantee and postponement of claim by Regional Tire Distributors (Atlantic) Inc.

Regional Tire Distributors (Atlantic) Inc.

Regional Tire Distributors (Atlantic) Inc. has a revolving demand facility of $2,993,370 ($3,000,000 Canadian dollars) of which $2,461,136 was drawn upon at January 31, 2013 and another revolving demand facility of $1,746,133 ($1,750,000 Canadian dollars) of which $nil was drawn upon at January 31, 2013. The latter facility is available June 30 to December 20 of each year. The revolving facilities bear interest at prime plus 1.0%. Borrowings under the facility cannot exceed the aggregate of 75% of accounts receivable less potential prior ranking claims and 50% of the lesser of cost or net realizable value of unencumbered inventory to a maximum of $1,995,580 ($2,000, 000 Canadian dollars) increasing to $2,993,370 ($3,000,000 Canadian dollars) for the period of June 30th to December 20th inclusive in each year. These facilities are secured by a first ranking security interest in all personal property of the Regional Tire Distributors (Atlantic) Inc.

 

11. Long-term debt

 

    

2013

    

2012

 
     $      $  

Regional Tire Distributors Inc.:

     

Royal Bank of Canada, variable rate loan bearing interest at prime plus 1.0%. Balance is repayable in monthly installments of $234,481 ($235,000 Canadian dollars) in December through May of each year.

     3,023,304         —     

Regional Tire Distributors (Atlantic) Inc.:

     

Promissory note bearing no interest. Repayable in annual installments of $432,375 ($433,333 Canadian dollars). Balance matures on April 30, 2013.

     864,751         —     
  

 

 

    

 

 

 
     3,888,055         —     

Current portion

     1,839,259         —     
  

 

 

    

 

 

 
     2,048,796         —     
  

 

 

    

 

 

 

Regional Tire Distributors Inc.

The Company has a non-revolving term facility of $3,492,265 ($3,500,000 Canadian dollars), at a rate of prime plus 1%, of which $3,023,304 ($3,030,000 Canadian dollars) has been drawn upon at January 31, 2013 (2012—$nil). The Company is required to make monthly payments on this facility of $234,481 ($235,000 Canadian dollars) in December through May of each year.

The term facility is repayable in full within 30 months of the original drawdown of the facility in August, 2012.

 

F-252


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

This facility is secured by a first ranking security interest in all personal property of the Company and a $3,492,265 ($3,500,000 Canadian dollars) guarantee and postponement of claim by Regional Tire Distributors (Atlantic) Inc.

Principal payments of long-term debt are as follows:

 

     $  

2014

     1,839,259   

2015

     2,048,796   
  

 

 

 
     3,888,055   
  

 

 

 

12. Share capital

 

Authorized , unlimited number

     

Common shares

     

Class A common shares

     

Class B common shares

     

Class A special shares

     

Class B special shares

     

Class C special shares

     

Issued

     
     2013      2012  
     $      $  

1,500,000 common shares

     1,490,610         1,490,610   

 

13. Financial instruments

The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:

 

    Level 1—Inputs based on quoted prices in active markets for identical assets or liabilities.

 

    Level 2—Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

 

    Level 3—Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities, therefore requiring an entity to develop its own assumptions.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company has no assets measured at fair value.

 

F-253


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

14. Commitments

The Company is committed to the leases of vehicles, equipment and building premises in Ontario, Nova Scotia and Newfoundland. Future lease payments aggregate $5,446,908 and include the following amounts payable over the next five years:

 

     $  

2014

     1,566,178   

2015

     1,437,047   

2016

     1,168,871   

2017

     1,015,607   

2018

     259,205   
  

 

 

 
     5,446,908   
  

 

 

 

Rental expense was $1,745,021 for the year ended January 31, 2013 (2012—1,408,845).

15. Income taxes

A reconciliation comparing income taxes calculated at the Canadian statutory rate to the amount provided in the consolidated financial statements is as follows:

 

    

2013

   

2012

 
     $     $  

Combined federal and provincial statutory income tax rate

     26.7     26.7
  

 

 

   

 

 

 

Income before income taxes

     8,761,914        4,856,187   
  

 

 

   

 

 

 

Expected income tax provision

     2,339,431        1,296,602   

Increase (decrease) resulting from:

    

Effect of items that are not taxable

     31,745        5,987   

Excess of capital cost allowance for income tax purposes over capital asset amortization for accounting purposes

     63,695        6,159   

Non-taxable gain on acquisition

     (520,885     —     

Non-taxable investment equity pickup

     (27,317     (114,457

Other

     (83,560     (6,884
  

 

 

   

 

 

 
     1,803,109        1,187,407   
  

 

 

   

 

 

 

Deferred income tax recovery

     (52,410     —     

Current income tax expense

     1,855,519        1,187,407   
  

 

 

   

 

 

 

Total

     1,803,109        1,187,407   
  

 

 

   

 

 

 

 

F-254


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

An analysis of the deferred income tax liability is as follows:

 

    

2013

    

2012

 
     $      $  

Deferred tax liabilities:

     

Intangible assets

     1,924,253         —     

Property, plant and equipment

     7,121         —     
  

 

 

    

 

 

 
     1,931,374         —     
  

 

 

    

 

 

 

16. Acquisition of Regional Tire Distributors (Atlantic) Inc.

On August 3, 2012, the Company acquired an additional 55% share ownership in Atlantic bringing the total share ownership to 93%. Atlantic is a wholesale tire distributor in Eastern Canada. The total purchase price was $4,993,000 ($5,000,000 Canadian dollars). There were also acquisition-related costs incurred of $92,211 ($92,340 Canadian dollars). This acquisition was completed in order to increase the Company’s presence in eastern Canada.

As discussed in Note 7, the Company held a 38% interest in Atlantic prior to the acquisition. This share investment was accounted for under the equity method. The Company recognized a gain before income taxes of $2,033,068 as a result of measuring at fair value its equity investment in Atlantic before the business combination. The fair value of the equity investment was determined by the implied purchase price of Atlantic based on the $5,000,000 Canadian dollar purchase price for 55% of Atlantic less a 10% minority discount resulting in a fair value of $3,104,700 ($3,109,100 Canadian dollars).

The allocation of the purchase price for accounting purposes was as follows:

 

     $  

Accounts receivable (net of allowance for doubtful accounts of $80,449)

     2,316,856   

Inventories

     9,543,602   

Prepaid expenses

     107,578   

Property, plant and equipment

     310,769   

Customer relationships

     6,890,300   

Tradename

     599,200   

Bank indebtedness

     (2,520,486

Accounts payable and accrued liabilities

     (6,523,176

Note payable

     (1,913,337

Long-term debt (including current portion)

     (865,453

Income taxes payable

     (85,839

Deferred tax liabilities

     (1,984,718
  

 

 

 

Total identifiable net assets

     5,875,296   

Goodwill

     2,730,804   
  

 

 

 

Total

     8,606,100   
  

 

 

 

Total cash consideration paid to vendor

     4,993,000   

Fair value of previously held equity interest

     3,104,700   

Fair value of non-controlling interest

     508,400   
  

 

 

 

Total

     8,606,100   
  

 

 

 

 

F-255


Regional Tire Distributors Inc.

Notes to the consolidated financial statements

January 31, 2013 and 2012

(Presented in United States Dollars)

 

The goodwill on the acquisition arose as a result of the value of the assembled workforce and the combined strategic value to our growth plan. The goodwill arising from the acquisition is not deductible for tax purposes.

The revenue and net earnings of the acquiree since the acquisition date included in the consolidated statement of income and comprehensive income for the period ending January 31, 2013 was $22,839,194 and $1,349,166 respectively.

The revenue and net earnings for the Company and Atlantic combined for the year ending January 31, 2013 as though the acquisition date for the business combination was February 1, 2012, would have been $127,298,611 and $6,768,349 respectively. The net earnings have been adjusted for the pro forma amortization of intangible assets of $331,084.

The purchase agreement contains a clause that if within five years of the closing date, the Company enters into an agreement to sell the shares of Atlantic, directly or indirectly, and if the transaction is successfully completed, the Company is required to pay additional consideration to the seller. The payment is determined based on a predetermined formula mainly driven by the increase in value of Atlantic in the subsequent purchase. The Company has determined the fair value of this subsequent payment clause on August 3, 2012 to be nominal.

17. Subsequent events

On March 22, 2013, the Company entered into a purchase and sale agreement with TriCan Tire Distributors Inc. to sell 100% of the common shares of the Company. The transaction is expected to close April 30, 2013. Events have been evaluated to April 25, 2013, which is the date the financial statements are issued.

 

F-256


 

INDEPENDENT AUDITOR’S REPORT

 

 

To the Shareholder of Triwest Trading (Canada) Ltd.

Report on the Financial Statements

We have audited the accompanying financial statements of Triwest Trading (Canada) Ltd., which comprise the balance sheets as at December 31, 2011, December 31, 2010 and January 1, 2010 and the statements of income, retained earnings and cash flows for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for private enterprises, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of Triwest Trading (Canada) Ltd. as at December 31, 2011, December 31, 2010 and January 1, 2010, and the results of its operations and its cash flows for the years ended December 31, 2011, December 31, 2010 and December 31, 2009 in accordance with Canadian accounting standards for private enterprises.

/s/ Kouri Berezan Heinrichs

Edmonton, Alberta

January 7, 2013

Chartered Accountants

 

F-257


TRIWEST TRADING (CANADA) LTD.

Balance Sheet

December 31, 2011

(In Canadian Dollars)

 

    

December 31,
2011

    

December 31,

2010

    

January 1,

2010 and
December 31,

2009

 

ASSETS

        

CURRENT:

        

Accounts receivable (Note 4)

   $ 23,098,940       $ 19,751,076       $ 16,452,887   

Inventory

     38,396,801         26,537,290         17,475,387   

Prepaid expenses and sundry assets

     371,507         318,607         214,964   
  

 

 

    

 

 

    

 

 

 
     61,867,248         46,606,973         34,143,238   

PROPERTY, PLANT AND EQUIPMENT (Note 5)

     1,042,459         694,735         568,798   

LONG TERM INVESTMENTS (Note 6)

     53,631         53,631         53,631   
  

 

 

    

 

 

    

 

 

 
   $ 62,963,338       $ 47,355,339       $ 34,765,667   
  

 

 

    

 

 

    

 

 

 

LIABILITIES

        

CURRENT:

        

Bank indebtedness (Note 7)

   $ 12,930,771       $ 9,047,206       $ 3,756,128   

Accounts payable and accrued liabilities

     22,105,364         18,482,230         14,866,476   

Income taxes payable

     860,052         645,025         1,528,049   

Current portion of long term debt (Note 8)

     613,307         600,000         600,000   

Current portion of promissory note (Note 10)

     —           381,465         381,465   
  

 

 

    

 

 

    

 

 

 
     36,509,494         29,155,926         21,132,118   
  

 

 

    

 

 

    

 

 

 

LONG TERM DEBT (Note 8)

     1,004,665         1,500,000         2,100,000   

DUE TO SHAREHOLDER (Note 9)

     19,448,580         11,868,580         7,410,925   

PROMISSORY NOTE (Note 10)

     —           —           381,465   
  

 

 

    

 

 

    

 

 

 
     56,962,739         42,524,506         31,024,508   
  

 

 

    

 

 

    

 

 

 

SHAREHOLDER’S EQUITY

        

Share capital (Note 11)

     100         100         100   

Retained earnings

     6,000,499         4,830,733         3,741,059   
  

 

 

    

 

 

    

 

 

 
     6,000,599         4,830,833         3,741,159   
  

 

 

    

 

 

    

 

 

 
   $ 62,963,338       $ 47,355,339       $ 34,765,667   
  

 

 

    

 

 

    

 

 

 

CONTINGENT LIABILITY (Note 12)     LEASE COMMITMENTS (Note 13)     SUBSEQUENT EVENTS (Note 14)

 

F-258


TRIWEST TRADING (CANADA) LTD.

Statements of Income

Years Ended December 31, 2011, 2010 and 2009

(In Canadian Dollars)

 

    

2011

    

2010

    

2009

 

SALES

   $ 181,777,897       $ 138,411,203       $ 102,100,454   

COST OF SALES

     147,632,991         112,834,960         83,641,770   

EXPENSES

        

Advertising and promotion

     325,299         215,957         189,759   

Amortization

     298,721         212,709         184,493   

Automotive

     370,820         328,302         332,735   

Bad debts

     348,494         789,716         535,280   

Business taxes, licenses and memberships

     295,279         279,564         237,853   

Insurance

     324,899         291,493         225,974   

Interest and bank charges (Note 9)

     2,519,749         1,038,512         607,357   

Interest on long term debt

     269,869         369,425         182,502   

Office

     538,943         623,912         441,156   

Professional fees

     78,238         51,964         105,383   

Rent

     3,797,834         2,986,407         1,998,584   

Repairs and maintenance

     336,782         222,964         183,107   

Salaries and benefits

     11,491,002         9,157,519         6,365,256   

Shipping and warehouse

     263,278         179,543         138,473   

Sub-contracts

     84,371         30,328         61,245   

Travel

     927,025         509,164         717,966   

Utilities

     578,217         510,947         393,854   
  

 

 

    

 

 

    

 

 

 
     22,848,820         17,798,426         12,900,977   
  

 

 

    

 

 

    

 

 

 

INCOME FROM OPERATIONS

     11,296,086         7,777,817         5,557,707   

OTHER INCOME

        

Gain (loss) on disposal of equipment

     2,171         175         (3,730
  

 

 

    

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     11,298,257         7,777,992         5,553,977   

INCOME TAX EXPENSE

     3,128,491         2,288,318         1,608,616   
  

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 8,169,766       $ 5,489,674       $ 3,945,361   
  

 

 

    

 

 

    

 

 

 

 

F-259


TRIWEST TRADING (CANADA) LTD.

Statement of Retained Earnings

Years ended December 31, 2011, 2010 and 2009

(In Canadian Dollars)

 

    

2011

   

2010

   

2009

 

RETAINED EARNINGS—BEGINNING OF YEAR

   $ 4,830,733      $ 3,741,059      $ 2,795,698   

NET INCOME FOR THE YEAR

     8,169,766        5,489,674        3,945,361   
  

 

 

   

 

 

   

 

 

 
     13,000,499        9,230,733        6,741,059   

DIVIDENDS

     (7,000,000     (4,400,000     (3,000,000
  

 

 

   

 

 

   

 

 

 

RETAINED EARNINGS—END OF YEAR

   $ 6,000,499      $ 4,830,733      $ 3,741,059   
  

 

 

   

 

 

   

 

 

 

 

F-260


TRIWEST TRADING (CANADA) LTD.

Statements of Cash Flows

Years Ended December 31, 2011, 2010 and 2009

(In Canadian Dollars)

 

    

2011

   

2010

   

2009

 

OPERATING ACTIVITIES

      

Net income

   $ 8,169,766      $ 5,489,674      $ 3,945,361   

Amortization

     298,721        212,709        184,493   

Loss (gain) on disposal of equipment

     (2,171     (175     3,730   

Accounts receivable

     (3,347,864     (3,298,189     (6,931,196

Inventory

     (11,859,511     (9,061,903     (7,133,290

Accounts payable and accrued liabilities

     3,623,132        3,615,754        6,239,274   

Income taxes

     215,027        (883,024     919,165   

Prepaid expenses and sundry assets

     (52,900     (103,643     (132,028
  

 

 

   

 

 

   

 

 

 

Cash flow used by operating activities

     (2,955,800     (4,028,797     (2,904,491
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Purchase of equipment

     (670,573     (346,347     (400,606

Proceeds on disposal of equipment

     26,301        7,875        9,924   
  

 

 

   

 

 

   

 

 

 

Cash flow used by investing activities

     (644,272     (338,472     (390,682
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Dividends paid

     (7,000,000     (4,400,000     (3,000,000

Bank indebtedness

     3,883,565        5,291,078        (906,753

Advances from shareholder

     7,580,000        4,457,656        4,828,391   

Proceeds from long term financing

     121,136        —          3,000,000   

Repayment of long term debt

     (603,164     (600,000     (300,000

Repayment of promissory note

     (381,465     (381,465     (326,465
  

 

 

   

 

 

   

 

 

 

Cash flow from financing activities

     3,600,072        4,367,269        3,295,173   
  

 

 

   

 

 

   

 

 

 

INCREASE IN CASH FLOW

                              

Cash—beginning of year

     —          —          —     
  

 

 

   

 

 

   

 

 

 

CASH—END OF YEAR

   $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

 

 

F-261


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

Year Ended December 31, 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of accounting

These financial statements have been prepared in accordance with Canadian accounting standards for private enterprises. Any measurement differences between these standards and U.S. Generally Accepted Accounting Principles as they apply to Triwest are not material.

Measurement uncertainty

The financial statements have been prepared by management in accordance with Canadian accounting standards for private enterprises. The precise value of many assets and liabilities is dependent on future events. As a result, the preparation of financial statements for a period involves the use of approximations which have been made using careful judgment. Actual results could differ from those approximations. The financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below.

Financial instruments

Measurement of financial instruments

The entity initially measures its financial assets and liabilities at fair value, except for certain non arm’s length transactions. The entity subsequently measures all its financial assets and financial liabilities at amortized cost. Financial assets measured at amortized cost include accounts receivable and long term investments. Financial liabilities measured at amortized cost include the bank indebtedness, accounts payable and accrued liabilities, long term debt, promissory note and due to shareholder.

Impairment

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income.

Transaction costs

The entity recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.

Inventory

Inventory is valued at the lower of cost and net realizable value with cost being determined on the first in first out cost basis.

Supplier rebates and discounts are recognized when the vendor has applied them to the company’s account.

 

F-262


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

Year Ended December 31, 2011

 

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated amortization. Property, plant and equipment are amortized over their estimated useful lives at the following rates and methods:

 

Warehouse equipment

   20%    declining balance method

Motor vehicles

   30%    declining balance method

Computer equipment

   30%    declining balance method

Office equipment

   20%    declining balance method

Leasehold improvements

   5 years    straight line method

Long term investments

Long term investments are stated at cost. The investments are reduced to reflect any permanent impairment in value.

Future income taxes

Income taxes are reported using the future income tax method. Current income tax expense is the estimated income taxes payable for the current year after any refunds or the use of losses incurred in previous years. Future income taxes reflect:

 

    the temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for tax purposes;

 

    the benefit of unutilized tax losses that will more likely than not be realized and carried forward to future years to reduce income taxes.

Future income taxes are estimated using the rates enacted by tax law and those substantively enacted for the years in which future income tax assets are likely to be realized, or future income tax liabilities settled. The effect of a change in tax rates on future income tax assets and liabilities is included in earnings in the period when the change is substantively enacted.

Foreign currency translation

Assets, liabilities, revenues and expenses have been translated to the currency of Canada using the following exchange rates:

 

  i. Cash, accounts receivable and accounts payable and accrued liabilities—at the rate in effect on the balance sheet date;

 

  ii. Inventory—at the average rate in effect during the period; and

 

  iii. Revenues and expenses—at the average rate in effect during the period.

Gains and losses on translation are included in income.

 

F-263


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

Year Ended December 31, 2011

 

Revenue recognition

Sales are recognized when the products are shipped and title passes to the customer.

2. FIRST TIME ADOPTION OF CANADIAN ACCOUNTING STANDARDS FOR PRIVATE ENTERPRISES

During the year the company adopted Canadian accounting standards for private enterprises. These financial statements are the first prepared in accordance with these standards. The adoption of these standards did not require restatement of the balance sheet, income statement or opening retained earnings as there were no accounting changes.

3. FINANCIAL INSTRUMENTS

The company is exposed to various risks through its financial instruments. The following analysis provides a measure of the company’s risk exposure and concentrations at the balance sheet date.

Credit Risk

Credit risk arises from the potential that a counter party will fail to perform its obligations. The company is exposed to credit risk from customers. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific accounts, historical trends and other information. The company has a significant number of customers which minimizes concentration of credit risk.

Currency Risk

Currency risk is the risk to the company’s earnings that arise from fluctuations of foreign exchange rates and the degree of volatility of these rates. The company is exposed to foreign currency exchange risks on cash and accounts payable held in U.S. dollars because it purchases inventory in U.S. dollars. This risk is mitigated by the company maintaining a U.S. dollar bank account and purchasing futures regarding U.S. cash.

Interest Rate Risk

Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. In seeking to minimize the risks from interest rate fluctuations, the company manages exposure through its normal operating and financing activities. The company is exposed to interest rate risk primarily through fluctuations in the bank’s prime rate on its operating line of credit as reported in Note 7.

Commodity Risk

The company is exposed to fluctuations in commodity prices for fuel and oil which impact freight costs. Commodity prices are affected by many factors including supply, demand and the Canadian to U.S. dollar exchange rate. The company had no financial hedges or price commodity contracts in place at year end.

Liquidity Risk

The company’s exposure to liquidity risk is dependent on the sale of inventory, collection of accounts receivable, purchasing commitments and obligations or raising of funds to meet commitments and sustain operations. The company controls liquidity risk by management of working capital, cash flows and the availability of borrowing facilities.

 

F-264


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

Year Ended December 31, 2011

 

4. ACCOUNTS RECEIVABLE

 

    

2011

   

2010

   

2009

 

Accounts receivable

   $ 24,415,820      $ 21,117,246      $ 17,272,544   

Allowance for doubtful accounts

     (1,316,880     (1,366,170     (819,657
  

 

 

   

 

 

   

 

 

 
   $ 23,098,940      $ 19,751,076      $ 16,452,887   
  

 

 

   

 

 

   

 

 

 

5. PROPERTY, PLANT AND EQUIPMENT

 

    

Cost

    

Accumulated
amortization

    

2011 net
book value

 

Warehouse equipment

   $ 1,052,357       $ 421,160       $ 631,197   

Motor vehicles

     285,411         209,002         76,409   

Computer equipment

     650,747         548,158         102,589   

Office equipment

     163,986         116,076         47,910   

Leasehold improvements

     301,877         117,523         184,354   
  

 

 

    

 

 

    

 

 

 
   $ 2,454,378       $ 1,411,919       $ 1,042,459   
  

 

 

    

 

 

    

 

 

 

 

    

Cost

    

Accumulated
amortization

    

2010 net
book value

 

Warehouse equipment

   $ 707,357       $ 266,881       $ 440,476   

Motor vehicles

     236,582         180,920         55,662   

Computer equipment

     602,135         504,186         97,949   

Office equipment

     138,972         104,098         34,874   

Leasehold improvements

     132,473         66,699         65,774   
  

 

 

    

 

 

    

 

 

 
   $ 1,817,519       $ 1,122,784       $ 694,735   
  

 

 

    

 

 

    

 

 

 

 

    

Cost

    

Accumulated
amortization

    

2009 net
book value

 

Warehouse equipment

   $ 444,921       $ 159,070       $ 285,851   

Motor vehicles

     224,832         157,063         67,769   

Computer equipment

     601,059         462,209         138,850   

Office equipment

     118,841         95,378         23,463   

Leasehold improvements

     93,070         40,205         52,865   
  

 

 

    

 

 

    

 

 

 
   $ 1,482,723       $ 913,925       $ 568,798   
  

 

 

    

 

 

    

 

 

 

6. LONG TERM INVESTMENTS

The investment consists of shares and debentures in a U.S. private company which acts as a buying group for the purchase of tires by wholesale distributors. The investment does not represent a significant influence in the company and accordingly is recorded at cost. Interest is paid annually on the debentures at a rate of 9%. The purchase of the debenture is a requirement of utilizing the purchasing services of the buying group. The debentures are redeemable at the option of the issuer at any time at an amount equal to the issue price plus any accrued interest. No changes in the investment occurred during the year and the current market value is unavailable.

 

F-265


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

Year Ended December 31, 2011

 

7. BANK INDEBTEDNESS

The company has an authorized line of credit in the amount of $25,000,000 (2010—$20,000,000 and 2009—$10,000,000) renewed annually. The line of credit bears interest at bank prime rate plus 1.25%, is secured by a general security agreement, a general assignment of book debts, inventory, assignment of insurance and assignments and postponements by Fab Five Ltd., 1274942 Alberta Ltd. and 1279156 Alberta Inc.

The company is required to meet certain financial covenants under its lending agreement with the bank. The company is in compliance with these covenants.

8. LONG TERM DEBT

 

    

2011

   

2010

   

2009

 

BDC loan, bearing interest at 14.7% per annum, payable in monthly payments of $50,000 plus interest, due May 15, 2014

   $ 1,500,000      $ 2,100,000      $ 2,700,000   

Morguard Investments loan, bearing interest at 8% per annum, payable in monthly blended payments of $1,855, due November 1, 2018, secured by specific equipment with a net book value of $85,760

     117,972        —          —     
  

 

 

   

 

 

   

 

 

 
     1,617,972        2,100,000        2,700,000   

Amounts payable within one year

     (613,307     (600,000     (600,000
  

 

 

   

 

 

   

 

 

 
   $ 1,004,665      $ 1,500,000      $ 2,100,000   
  

 

 

   

 

 

   

 

 

 

Principal repayment terms are approximately:

 

2012

   $ 613,307   

2013

     614,411   

2014

     315,607   

2015

     16,902   

2016

     18,305   

Thereafter

     39,440   
  

 

 

 
   $ 1,617,972   
  

 

 

 

The BDC loan is secured by a general security agreement, an assignment and postponement of loans to the shareholder, personal guarantees from two directors for the full amount of the loan, an assignment of a life insurance policy on one of the directors and an assignment of all after acquired intangible and tangible assets relating to the company’s operations in the province of Quebec. The guarantees are provided without charge.

The company is required to meet certain financial covenants under its lending agreement with the BDC. The company was in compliance with these covenants.

9. DUE TO SHAREHOLDER

The amount due to shareholder bears interest at 12% per annum, has no fixed terms of repayment and is unsecured. The shareholder has agreed to provide twelve months written notice prior to calling the loan balance, and accordingly all has been classified as long term. During the year interest was paid on the shareholder loan in the amount of $2,133,220 (2010—$1,022,894 and 2009—$505,438).

 

F-266


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

Year Ended December 31, 2011

 

10. PROMISSORY NOTE

The promissory note is non-interest bearing and is secured by a general security agreement covering all of the assets of the company. The balance was repaid in 2011.

11. SHARE CAPITAL

Authorized:

Unlimited         Common voting shares

Unlimited         Non-voting, redeemable, retractable preferred shares

 

Issued   

2011

    

2010

    

2009

 

10,000 Common shares

   $ 100       $ 100       $ 100   

12. CONTINGENT LIABILITY

The bank provides letters of credit to guarantee the vendor payables for imported inventory. These letters of credit are limited to $4,000,000 and are secured by the same items listed in Note 7. As of December 31, 2011 the company has utilized $361,527 (2010—$92,854 and 2009—$290,140) of the available limit.

13. LEASE COMMITMENTS

The company has several long term leases with respect to its premises. The leases contain renewal options and provide for payment of utilities, property taxes and maintenance costs. Future minimum lease payments as at December 31, 2011 are as follows:

 

2012

   $ 2,470,797   

2013

     2,381,098   

2014

     2,297,746   

2015

     2,136,780   

2016

     1,249,699   

Thereafter

     2,231,858   
  

 

 

 
   $ 12,767,978   
  

 

 

 

14. SUBSEQUENT EVENTS

Subsequent to year end the company finalized a lease agreement with a company related through common ownership. The company has agreed to lease premises in Quebec City for monthly payments of $24,250 plus operating costs and relevant sales tax until June 30, 2015 and then $27,556 plus operating costs and relevant sales tax until the expiry of the agreement on June 30, 2020. This lease is not reflected in Note 13 above.

On November 20, 2012, the company’s term loan with BDC as described in Note 8 was paid in full. The principal outstanding on that date was $950,000 and bonus interest and early payout penalty paid in accordance with the terms of the loan was $839,807.

 

F-267


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

Year Ended December 31, 2011

 

On November 30, 2012, the common shares of the company were purchased by ATD Acquisition Co. V Inc. (“Canada Acquisition”), a newly formed direct wholly-owned Canadian subsidiary of American Tire Distributors, Inc. (“ATDI”), a direct wholly-owned subsidiary of American Tire Distributors Holdings, Inc. (“Holdings”). Proceeds of the sale included payment of all shareholder loans.

In connection with the acquisition on November 30, 2012, Holdings amended and restated its credit facility (as amended and restated, the “Sixth Amended and Restated Credit Agreement”) in order to provide for borrowings under the agreement by Canada Acquisition (the “Canadian Tranche”). The Canadian Tranche provides for revolving loans available only to Canada Acquisition in an aggregate amount equal to $60.0 million, subject to a Canadian borrowing base. The maturity date for the Canadian Tranche is November 16, 2017 or March 1, 2017 as determined by the outstanding aggregate principal amount of ATDI’s Senior Secured Notes on March 1, 2017. Holdings is a guarantor of Canada Acquisition’s obligations under the Canadian Tranche.

On November 30, 2012 the company ended its distribution relationship with one of its suppliers and paid all obligations due to the supplier totaling approximately $4.8 million.

15. RELATED PARTY TRANSACTIONS

Included in cost of sales is $3,686,543 (2010—$nil and 2009—$nil) of freight expense to a related company. Of this amount, $447,784 is included in accounts payable and accrued liabilities. This company is related by virtue of common shareholders. These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

16. COMPARATIVE FIGURES

Some of the comparative figures have been reclassified to conform to the current year presentation

 

F-268


TRIWEST TRADING (CANADA) LTD.

Balance Sheets

In Canadian Dollars

(Unaudited)

 

    

September 30,
2012

    

December 31,

2011

 

ASSETS

     

CURRENT:

     

Accounts receivable (Note 3)

   $ 24,089,088       $ 23,098,940   

Inventory

     72,690,650         38,396,801   

Prepaid expenses and sundry assets

     750,000         371,507   
  

 

 

    

 

 

 
     97,529,738         61,867,248   

PROPERTY, PLANT AND EQUIPMENT (Note 4)

     1,241,678         1,042,459   

LONG TERM INVESTMENTS (Note 5)

     53,631         53,631   
  

 

 

    

 

 

 
   $ 98,825,047       $ 62,963,338   
  

 

 

    

 

 

 

LIABILITIES

     

CURRENT:

     

Bank indebtedness (Note 6)

   $ 17,774,320       $ 12,930,771   

Accounts payable and accrued liabilities

     48,551,377         22,105,364   

Income taxes payable

     154,140         860,052   

Current portion of long term debt (Note 7)

     600,000         613,307   
  

 

 

    

 

 

 
     67,079,837         36,509,494   

LONG TERM DEBT (Note 7)

     450,000         1,004,665   

DUE TO SHAREHOLDER (Note 8)

     18,868,580         19,448,580   
     
  

 

 

    

 

 

 
     86,398,417         56,962,739   
  

 

 

    

 

 

 

SHAREHOLDER’S EQUITY

     

Share capital (Note 9)

     100         100   

Retained earnings

     12,426,530         6,000,499   
  

 

 

    

 

 

 
     12,426,630         6,000,599   
  

 

 

    

 

 

 
   $ 98,825,047       $ 62,963,338   
  

 

 

    

 

 

 

CONTINGENT LIABILITY (Note 10)

     

LEASE COMMITMENTS (Note 11)

     

SUBSEQUENT EVENTS (Note 13)

     

 

F-269


TRIWEST TRADING (CANADA) LTD.

Statements of Income

In Canadian Dollars

(Unaudited)

 

    

Nine Months
Ended
September 30,
2012

   

Nine Months
Ended
September 30,
2011

 

SALES

   $ 122,293,422      $ 108,962,669   

COST OF SALES

     97,352,124        88,296,456   

EXPENSES

    

Advertising and promotion

     291,665        167,219   

Amortization

     231,413        163,318   

Automotive

     243,596        268,628   

Bad Debts

     (291,836     70,384   

Business taxes, licenses and memberships

     202,610        239,102   

Insurance

     225,347        235,173   

Interest and bank charges (Note 8)

     2,069,602        1,496,431   

Interest on long term debt

     4,611        —     

Office

     402,567        385,276   

Professional fees

     55,442        25,418   

Rent

     3,068,723        2,811,932   

Repairs and maintenance

     225,626        235,003   

Salaries and benefits

     7,951,347        6,849,156   

Shipping and warehouse

     164,885        175,710   

Sub-contracts

     75,343        47,534   

Travel

     680,972        581,834   

Utilities

     435,991        424,424   
  

 

 

   

 

 

 
     16,037,904        14,176,542   
  

 

 

   

 

 

 

INCOME FROM OPERATIONS

     8,903,394        6,489,671   

OTHER INCOME

    

Gain (loss) on disposal of equipment

     22,127        (122
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     8,925,521        6,489,549   

INCOME TAX EXPENSE

     2,499,490        1,819,809   
  

 

 

   

 

 

 

NET INCOME

   $ 6,426,031      $ 4,669,740   
  

 

 

   

 

 

 

 

F-270


TRIWEST TRADING (CANADA) LTD.

Statement of Retained Earnings

In Canadian Dollars

(Unaudited)

 

    

2012

 

RETAINED EARNINGS—DECEMBER 31, 2011

   $ 6,000,499   

NET INCOME FOR THE NINE MONTHS OF 2012

     6,426,031   
  

 

 

 
     12,426,530   

DIVIDENDS

     —     
  

 

 

 

RETAINED EARNINGS—SEPTEMBER 30, 2012

   $ 12,426,530   
  

 

 

 

 

F-271


TRIWEST TRADING (CANADA) LTD.

Statements of Cash Flows

In Canadian Dollars

(Unaudited)

 

    

Nine Months
Ended
September 30,
2012

   

Nine Months
Ended
September 30,

2011

 

OPERATING ACTIVITIES

    

Net income

   $ 6,426,031      $ 4,669,740   

Amortization

     231,413        163,318   

(Gain) loss on disposal of equipment

     (22,127     122   

Accounts receivable

     (990,148     (3,284,955

Inventory

     (34,293,849     (35,588,117

Accounts payable and accrued liabilities

     26,446,013        27,128,041   

Income taxes

     (705,912     (521,987

Prepaid expenses and sundry assets

     (378,494     (78,955
  

 

 

   

 

 

 

Cash flow used by operating activities

     (3,287,073     (7,512,793
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Purchase of equipment

     (443,940     (403,066

Proceeds on disposal of equipment

     35,436        19,825   
  

 

 

   

 

 

 

Cash flow used by investing activities

     (408,504     (383,241
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Bank indebtedness

     4,843,549        8,346,034   

Repayment of shareholder loan

     (580,000     —     

Repayment of long term debt

     (567,972     (450,000
  

 

 

   

 

 

 

Cash flow from financing activities

     3,695,577        7,896,034   
  

 

 

   

 

 

 

INCREASE IN CASH FLOW

     —          —     

Cash—beginning of period

     —          —     
  

 

 

   

 

 

 

CASH—END OF PERIOD

   $ —        $ —     
  

 

 

   

 

 

 

 

F-272


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of accounting

These financial statements have been prepared in accordance with Canadian accounting standards for private enterprises (“Canadian GAAP”). Any measurement differences in accounting principles between Canadian GAAP and U.S. Generally Accepted Accounting Principles as they apply to Triwest are not material.

Measurement uncertainty

The financial statements have been prepared by management in accordance with Canadian accounting standards for private enterprises. The precise value of many assets and liabilities is dependent on future events. As a result, the preparation of financial statements for a period involves the use of approximations which have been made using careful judgment. Actual results could differ from those approximations. The financial statements have, in management’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below.

Financial instruments

Measurement of financial instruments

The entity initially measures its financial assets and liabilities at fair value, except for certain non arm’s length transactions. The entity subsequently measures all its financial assets and financial liabilities at amortized cost. Financial assets measured at amortized cost include accounts receivable and long term investments. Financial liabilities measured at amortized cost include the bank indebtedness, accounts payable and accrued liabilities, long term debt, and due to shareholder.

Impairment

Financial assets measured at cost are tested for impairment when there are indicators of impairment. The amount of the write down is recognized in net income. The previously recognized impairment loss may be reversed to the extent of the improvement, directly or by adjusting the allowance account, provided it is no greater than the amount that would have been reported at the date of the reversal had the impairment not been recognized previously. The amount of the reversal is recognized in net income.

Transaction costs

The entity recognizes its transaction costs in net income in the period incurred. However, financial instruments that will not be subsequently measured at fair value are adjusted by the transaction costs that are directly attributable to their origination, issuance or assumption.

Inventory

Inventory is valued at the lower of cost and net realizable value with cost being determined on the first in first out cost basis.

Supplier rebates and discounts are recognized when the vendor has applied them to the company’s account.

 

F-273


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

(Unaudited)

 

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated amortization. Property, plant and equipment are amortized over their estimated useful lives at the following rates and methods:

 

Warehouse equipment

     20%       declining balance method

Motor vehicles

     30%       declining balance method

Computer equipment

     30%       declining balance method

Office equipment

     20%       declining balance method

Leasehold improvements

     5 years       straight line method

Long term investments

Long term investments are stated at cost. The investments are reduced to reflect any permanent impairment in value.

Future income taxes

Income taxes are reported using the future income tax method. Current income tax expense is the estimated income taxes payable for the current year after any refunds or the use of losses incurred in previous years. Future income taxes reflect:

 

    the temporary differences between the carrying amounts of assets and liabilities for accounting purposes and the amounts used for tax purposes;

 

    the benefit of unutilized tax losses that will more likely than not be realized and carried forward to future years to reduce income taxes.

Future income taxes are estimated using the rates enacted by tax law and those substantively enacted for the years in which future income taxes assets are likely to be realized, or future income tax liabilities settled. The effect of a change in tax rates on future income tax assets and liabilities is included in earnings in the period when the change is substantively enacted.

Foreign currency translation

Assets, liabilities, revenues and expenses have been translated to the currency of Canada using the following exchange rates:

 

  i. Cash, accounts receivable and accounts payable and accrued liabilities—at the rate in effect on the balance sheet date;

 

  ii. Inventory—at the average rate in effect during the period; and

 

  iii. Revenues and expenses—at the average rate in effect during the period.

Gains and losses on translation are included in income.

Revenue recognition

Sales are recognized when the products are shipped and title passes to the customer.

 

F-274


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

(Unaudited)

 

2. FINANCIAL INSTRUMENTS

The company is exposed to various risks through its financial instruments. The following analysis provides a measure of the company’s risk exposure and concentrations at the balance sheet date.

Credit Risk

Credit risk arises from the potential that a counter party will fail to perform its obligations. The company is exposed to credit risk from customers. An allowance for doubtful accounts is established based upon factors surrounding the credit risk of specific accounts, historical trends and other information. The company has a significant number of customers which minimizes concentration of credit risk.

Currency Risk

Currency risk is the risk to the company’s earnings that arise from fluctuations of foreign exchange rates and the degree of volatility of these rates. The company is exposed to foreign currency exchange risks on cash and accounts payable held in U.S. dollars because it purchases inventory in U.S. dollars. This risk is mitigated by the company maintaining a U.S. dollar bank account and purchasing futures regarding U.S. cash.

Interest Rate Risk

Interest rate risk is the risk that the value of a financial instrument might be adversely affected by a change in the interest rates. In seeking to minimize the risks from interest rate fluctuations, the company manages exposure through its normal operating and financing activities. The company is exposed to interest rate risk primarily through fluctuations in the bank’s prime rate on its operating line of credit as reported in Note 7.

Commodity Risk

The company is exposed to fluctuations in commodity prices for fuel and oil which impact freight costs. Commodity prices are affected by many factors including supply, demand and the Canadian to U.S. dollar exchange rate. The company had no financial hedges or price commodity contracts in place at September 30, 2012.

Liquidity Risk

The company’s exposure to liquidity risk is dependent on the sale of inventory, collection of accounts receivable, purchasing commitments and obligations or raising of funds to meet commitments and sustain operations. The company controls liquidity risk by management of working capital, cash flows and the availability of borrowing facilities.

3. ACCOUNTS RECEIVABLE

 

    

September 30,
2012

   

December 31,
2011

 

Accounts receivable

   $ 24,908,081      $ 24,415,820   

Allowance for doubtful accounts

     (818,993     (1,316,880
  

 

 

   

 

 

 
   $ 24,089,088      $ 23,098,940   
  

 

 

   

 

 

 

 

F-275


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

(Unaudited)

 

4. PROPERTY, PLANT AND EQUIPMENT

 

    

September 30, 2012

 
    

Cost

    

Accumulated
amortization

    

Net
book value

 

Warehouse equipment

   $ 1,339,165       $ 542,954       $ 796,211   

Motor vehicles

     291,660         203,409         88,251   

Computer equipment

     650,747         568,114         82,633   

Office equipment

     174,503         124,460         50,043   

Leasehold improvements

     395,974         171,434         224,540   
  

 

 

    

 

 

    

 

 

 
   $ 2,852,049       $ 1,610,371       $ 1,241,678   
  

 

 

    

 

 

    

 

 

 
    

December 31, 2011

 
    

Cost

    

Accumulated
amortization

    

Net
book value

 

Warehouse equipment

   $ 1,052,357       $ 421,160       $ 631,197   

Motor vehicles

     285,411         209,002         76,409   

Computer equipment

     650,747         548,158         102,589   

Office equipment

     163,986         116,076         47,910   

Leasehold improvements

     301,877         117,523         184,354   
  

 

 

    

 

 

    

 

 

 
   $ 2,454,378       $ 1,411,919       $ 1,042,459   
  

 

 

    

 

 

    

 

 

 

5. LONG TERM INVESTMENTS

The investment consists of shares and debentures in a U.S. private company which acts as a buying group for the purchase of tires by wholesale distributors. The investment does not represent a significant influence in the company and accordingly is recorded at cost. Interest is paid annually on the debentures at a rate of 9%. The purchase of the debenture is a requirement of utilizing the purchasing services of the buying group. The debentures are redeemable at the option of the issuer at any time at an amount equal to the issue price plus any accrued interest. No changes in the investment occurred during the nine months ended September 30, 2012 and the current market value is unavailable.

6. BANK INDEBTEDNESS

The company has an authorized line of credit in the amount of $30,000,000 (2011—$25,000,000) renewed annually. The line of credit bears interest at bank prime rate plus 1.00%, is secured by a general security agreement, a general assignment of book debts, inventory, assignment of insurance and assignments and postponements by Fab Five Ltd., 1274942 Alberta Ltd. and 1279156 Alberta Inc.

The company is required to meet certain financial covenants under its lending agreement with the bank. The company is in compliance with these covenants.

 

F-276


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

(Unaudited)

 

7. LONG TERM DEBT

 

    

September 30,
2012

   

December 31,
2011

 

BDC loan, bearing interest at 14.7% per annum, payable in monthly payments of $50,000 plus interest, due May 15, 2014

   $ 1,050,000      $ 1,500,000   

Morguard Investments loan, bearing interest at 8% per annum, payable in monthly blended payments of $1,855, due November 1, 2018, secured by specific equipment with a net book value of $85,760

     —          117,972   
  

 

 

   

 

 

 
     1,050,000        1,617,972   

Amounts payable within one year

     (600,000     (613,307
  

 

 

   

 

 

 
     450,000        1,004,665   
  

 

 

   

 

 

 

Principal repayment terms are approximately:

 

2012 (remainder)

   $ 150,000   

2013

     600,000   

2014

     300,000   

2015

     —     

2016

     —     

Thereafter

     —     
  

 

 

 
   $ 1,050,000   
  

 

 

 

The BDC loan is secured by a general security agreement, an assignment and postponement of loans to the shareholder, personal guarantees from two directors for the full amount of the loan, an assignment of a life insurance policy on one of the directors and an assignment of all after acquired intangible and tangible assets relating to the company’s operations in the province of Quebec. The guarantees are provided without charge.

The company is required to meet certain financial covenants under its lending agreement with the BDC. The company was in compliance with these covenants.

The Morguard Investments loan was repaid in September 2012.

8. DUE TO SHAREHOLDER

The amount due to shareholder bears interest at 12% per annum, has no fixed terms of repayment and is unsecured. The shareholder has agreed to provide twelve months written notice prior to calling the loan balance, and accordingly all has been classified as long term. During the nine months ended September 30, 2012 and 2011, interest was paid on the shareholder loan in the amount of $1,794,879 and $1,164,915, respectively.

 

F-277


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

(Unaudited)

 

9. SHARE CAPITAL

Authorized:

Unlimited        Common voting shares

Unlimited        Non-voting, redeemable, retractable preferred shares

 

Issued

       

September 30,
2012

    

December 31,

2011

 

10,000

  

Common shares

   $ 100       $ 100   
     

 

 

    

 

 

 

10. CONTINGENT LIABILITY

The bank provides letters of credit to guarantee the vendor payables for imported inventory. These letters of credit are limited to $4,000,000 and are secured by the same items listed in Note 6. As of September 30, 2012 the company has utilized $151,934.

11. LEASE COMMITMENTS

The company has several long term operating leases with respect to its premises. The leases contain renewal options and provide for payment of utilities, property taxes and maintenance costs. Future minimum lease payments as at September 30, 2012 are as follows:

 

2012 ( remainder)

   $ 959,339   

2013

     3,205,984   

2014

     2,994,877   

2015

     2,724,050   

2016

     1,860,622   

Thereafter

     3,572,070   
  

 

 

 
   $ 15,316,942   
  

 

 

 

12. RELATED PARTY TRANSACTIONS

Included in cost of sales for the nine months ended September 30, 2012 is $3,332,976 ($2,231,904.96 for the nine months ended September 30, 2011) of freight expense to a related company. Of this amount, $276,160 is included in accounts payable and accrued liabilities at September 30, 2012. This company is related by virtue of common shareholders. These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

13. SUBSEQUENT EVENTS

On November 20, 2012, the company’s term loan with BDC as described in Note 7 was paid in full. The principal outstanding on that date was $950,000 and bonus interest and early payout penalty paid in accordance with the terms of the loan was $839,807.

On November 30, 2012, the common shares of the company were purchased by ATD Acquisition Co. V Inc. (“Canada Acquisition”), a newly formed direct wholly-owned Canadian subsidiary of American Tire Distributors, Inc. (“ATDI”), a direct wholly-owned subsidiary of American Tire Distributors Holdings, Inc. (“Holdings”). Proceeds of the sale included repayment of all shareholder loans.

 

F-278


TRIWEST TRADING (CANADA) LTD.

Notes to Financial Statements

(Unaudited)

 

In connection with the acquisition on November 30, 2012, Holdings amended and restated its credit facility (as amended and restated, the “Sixth Amended and Restated Credit Agreement”) in order to provide for borrowings under the agreement by Canada Acquisition (the “Canadian Tranche”). The Canadian Tranche provides for revolving loans available only to Canada Acquisition in an aggregate amount equal to $60.0 million, subject to a Canadian borrowing base. The maturity date for the Canadian Tranche is November 16, 2017 or March 1, 2017 as determined by the outstanding aggregate principal amount of ATDI’s Senior Secured Notes on March 1, 2017. Holdings is a guarantor of Canada Acquisition’s obligations under the Canadian Tranche.

On November 30, 2012 the company ended its distribution relationship with one of its suppliers and paid all obligations due to the supplier totaling approximately $4.8 million.

 

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LOGO


 

 

Through and including                     , 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in the Common Stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

             Shares

 

LOGO

ATD Corporation

Common Stock

 

 

P R O S P E C T U S

 

BofA Merrill Lynch

Deutsche Bank Securities

Goldman, Sachs & Co.

Barclays

J.P. Morgan

UBS Investment Bank

TPG Capital BD, LLC

RBC Capital Markets

SunTrust Robinson Humphrey

                    , 2014

 

 

 


PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the sale of common stock being registered. All amounts are estimates except for the SEC registration fee, the FINRA filing fee and the NYSE listing fee.

 

Item

  

Amount to be
paid

 

SEC registration fee

   $ 12,880   

FINRA filing fee

   $ 15,500   

NYSE listing fee

     *   

Blue sky fees and expenses

     *   

Printing and engraving expenses

     *   

Legal fees and expenses

     *   

Accounting fees and expenses

     *   

Transfer agent fees and expenses

     *   

Miscellaneous expenses

     *   
  

 

 

 

Total

   $ *   
  

 

 

 

 

* To be completed by amendment.

Item 14. Indemnification of Directors and Officers

Section 102(b)(7) of the General Corporation Law of the State of Delaware (the “DGCL”) enables a corporation to eliminate or limit the personal liability of a director for violations of the director’s fiduciary duty, except (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for liability of directors for unlawful payment of dividends or unlawful stock purchase or redemptions pursuant to Section 174 of the DGCL or (iv) for any transaction from which a director derived an improper personal benefit. Our certificate of incorporation includes a provision that eliminates the personal liability of directors for monetary damages for actions taken as a director to the fullest extent authorized by the DGCL.

Section 145(a) of the DGCL provides in relevant part that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that such person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another entity, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that such person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

Section 145(b) of the DGCL provides in relevant part that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or

 

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in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another entity, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

Our bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by law. Our bylaws also provide that the indemnification and advancement of expenses provided by, or granted pursuant to the bylaws, are not exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of directors or stockholders or otherwise. Section 145(f) of the DGCL further provides that a right to indemnification or to advancement of expenses arising under a provision of the certificate of incorporation shall not be eliminated or impaired by an amendment to such provision after the occurrence of the act or omission which is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought.

We have also entered into indemnification agreements with each of our directors. Such agreements generally provide for indemnification by reason of being our director, as the case may be. These agreements are in addition to the indemnification provided by our certificate of incorporation and bylaws.

The underwriting agreement provides that the underwriters are obligated, under certain circumstances, to indemnify our directors, officers and controlling persons against certain liabilities, including liabilities under the Securities Act. Please refer to the form of underwriting agreement filed as Exhibit 1.1 hereto.

In connection with our acquisition by investment funds affiliated with TPG Global, LLC (together with its affiliates, “TPG”), we entered into an indemnification agreement pursuant to which we agreed to indemnify TPG, including the TPG funds invested in us and their respective affiliates, against liabilities, costs and expenses incurred by TPG arising out of or in connection with securities offerings, including liabilities under the securities laws, actions or failures to act by us or our affiliates generally, or the performance by TPG of services under the transaction and monitoring fee agreement described above.

We also maintain officers’ and directors’ liability insurance that insures against liabilities that our officers and directors may incur in such capacities. Section 145(g) of the DGCL provides that a corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another entity, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under that section.

Item 15. Recent Sales of Unregistered Securities

In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act. No underwriters were involved in any of the following transactions.

 

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Equity Securities

During the year ended December 31, 2011, we issued to directors 100,000 shares of restricted stock. We also granted to certain eligible employees options to purchase 1,900,000 shares of our common stock at a weighted average exercise price of $1.00. These securities were issued without registration in reliance on the exemptions afforded by Section 4(a)(2) of the Securities Act and Rule 701 promulgated thereunder.

During the year ended December 29, 2012, we issued to directors 219,298 shares of restricted stock. We also granted to certain eligible employees options to purchase 2,277,600 shares of our common stock at a weighted average exercise price of $1.14. These securities were issued without registration in reliance on the exemptions afforded by Section 4(a)(2) of the Securities Act and Rule 701 promulgated thereunder. We also issued and sold 50,000,000 shares of common stock to investment funds affiliated with TPG and certain co-investors for aggregate consideration of $60.0 million without registration in reliance on the exemption afforded by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.

During the year ended December 28, 2013, we granted to certain eligible employees options to purchase 3,500,002 shares of our common stock at a weighted average exercise price of $1.20. These securities were issued without registration in reliance on the exemptions afforded by Section 4(a)(2) of the Securities Act and Rule 701 promulgated thereunder.

Since December 28, 2013, we have issued 133,333 shares of restricted stock. We have also granted to certain eligible employees options to purchase 4,528,833 shares of our common stock at a weighted average exercise price of $1.50. These securities were issued without registration in reliance on the exemptions afforded by Section 4(a)(2) of the Securities Act and Rules 506 and 701 promulgated thereunder. We have also issued and sold 33,333,333 shares of common stock to investment funds affiliated with TPG and certain co-investors for aggregate consideration of $50.0 million without registration in reliance on the exemption afforded by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.

Debt Securities

On January 31, 2014, American Tire Distributors, Inc. issued an aggregate principal amount of $225.0 million of 11.5% Senior Subordinated Notes (the “Additional Subordinated Notes”), which was issued in connection with the consummation of the acquisition of Hercules Tire Holdings LLC. Interest on the 11.5% Senior Subordinated notes is paid semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2014. The Additional Subordinated Notes will mature on June 1, 2018. The Additional 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 on June 1, 2015 or thereafter. The Additional Subordinated Notes were offered and sold to qualified institutional buyers pursuant to Rule 144A under the Securities Act or to non-U.S. investors outside the United States in compliance with Regulation S of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

See Exhibit Index following the signature page.

 

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(b) Financial Statement Schedules

See the “Index to Consolidated Financial Statements and Financial Statement Schedules” included in the prospectus, which forms a part of this registration statement.

Item 17. Undertakings

The undersigned Registrant hereby undertakes:

(1) That for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.

(2) That for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) For the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.

(4) The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

(5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the

 

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registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(6) To provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Huntersville, North Carolina on August 18, 2014.

 

ATD CORPORATION
By:   /s/ William E. Berry
Name:   William E. Berry
Title:   President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

/s/ William E. Berry

   
William E. Berry   Director, President and
Chief Executive Officer
(Principal Executive Officer)
  August 18, 2014

/s/ Jason T. Yaudes

   
Jason T. Yaudes   Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
  August 18, 2014

*

   
James M. Micali   Director   August 18, 2014

*

   
Kevin Burns   Director   August 18, 2014

*

   
Peter McGoohan   Director   August 18, 2014

*

   
W. James Farrell   Director   August 18, 2014

*

   
Gary M. Kusin   Director   August 18, 2014

*

   
David Krantz   Director   August 18, 2014

 

* By:  

/s/ J. Michael Gaither

  Attorney-in-fact

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Exhibit Title

  1.1*    Form of Underwriting Agreement.
  2.1    Share Purchase Agreement, dated as of November 30, 2012, by and among ATD Acquisition Co. V Inc., American Tire Distributors, Inc., as parent guarantor, 1278104 Alberta Inc., Triwest Trading (Canada) Ltd., and the shareholders of 1278104 Alberta Inc. party thereto (incorporated by reference to Exhibit 2.2 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed May 10, 2013).
  2.2    Share Purchase Agreement, dated as of March 22, 2013, by and among TriCan Tire Distributors Inc., American Tire Distributors, Inc., as parent guarantor, Regional Tire Holdings Inc., Regional Tire Distributors Inc., and the shareholders of Regional Tire Holdings Inc., and Regional Tire Distributors Inc. (incorporated by reference to Exhibit 2.1 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed May 10, 2013).
  2.3    Agreement and Plan of Merger, dated as of January 24, 2014, by and among ATD Merger Sub II LLC, American Tire Distributors, Inc., Hercules Tire Holdings LLC and the Equityholders of Hercules Tire Holdings LLC (incorporated by reference to Exhibit 2.1 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed on May 16, 2014).
  2.4    Stock Purchase Agreement, dated as of February 17, 2014, by and among American Tire Distributors, Inc. and TTT Holding, Inc. (incorporated by reference to Exhibit 2.1 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed on May 16, 2014).
  2.5    Asset Purchase Agreement, dated as of June 27, 2014, by and among Trican Tire Distributors Inc., Regional Tire Distributors (Calgary) Inc. and its shareholders and principals (incorporated by reference to Exhibit 2.3 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed August 15, 2014).
  2.6    Asset Purchase Agreement, dated as of June 27, 2014, by and among Trican Tire Distributors Inc., Regional Tire Distributors (Edmonton) Inc. and its shareholders and principals (incorporated by reference to Exhibit 2.4 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed August 15, 2014).
  2.7    Asset Purchase Agreement, dated as of June 27, 2014, by and among Trican Tire Distributors Inc., Kirks Tire Ltd. and its shareholders and principals (incorporated by reference to Exhibit 2.2 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed August 15, 2014).
  2.8    Asset Purchase Agreement, dated as of June 27, 2014, by and among Trican Tire Distributors Inc., Trail Tire Distributors Ltd. and its shareholders and principals (incorporated by reference to Exhibit 2.5 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed August 15, 2014).
  2.9    Asset Purchase Agreement, dated as of June 27, 2014, by and among Trican Tire Distributors Inc., Extreme Wheel Distributors Ltd. and its shareholder and principal (incorporated by reference to Exhibit 2.1 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed August 15, 2014).
  3.1    Restated Certificate of Incorporation of ATD Corporation.
  3.2    Amended and Restated Bylaws of ATD Corporation.
  4.1    Form of Stock Certificate.
  4.2    Senior Subordinated Notes Indenture, dated as of May 28, 2010 among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., as Subsidiary Guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee, in respect of the 11.50% Senior Subordinated Notes due 2018 (incorporated by reference to Exhibit 4.2 to American Tire Distributors Holdings, Inc.’s Form 8-K filed June 2, 2010).

 

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Exhibit
Number

  

Exhibit Title

  4.3    Form of 11.50% Senior Subordinated Notes due 2018 (included in Exhibit 4.2).
  4.4    Security Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc. American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc. and the Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.4 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
  4.5    Lien Subordination and Intercreditor Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., Bank of America, N.A. and the Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.5 to the American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
  4.6    Intercreditor and Collateral Agency Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc. and the Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit 4.6 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
  4.7    Registration Rights Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc. and Banc of America Securities LLC, Barclays Capital Inc., RBC Capital Markets Corporation and UBS Securities LLC (incorporated by reference to Exhibit 4.7 of American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
  4.8    Sixth Supplemental Indenture, dated as of January 31, 2014, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., Tire Wholesalers, Inc., and The Bank of New York Mellon Trust Company, N.A., as trustee, in respect of the 11.50% Senior Subordinated Notes due 2018 (incorporated by reference to Exhibit 4.1 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed on May 16, 2014).
  4.9    Seventh Supplemental Indenture, dated as of January 31, 2014, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., Tire Wholesalers, Inc., and The Bank of New York Mellon Trust Company, N.A., as trustee, in respect of the 11.50% Senior Subordinated Notes due 2018 (incorporated by reference to Exhibit 4.2 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed on May 16, 2014).
  4.10    Registration Rights Agreement, dated as of May 28, 2010, among ATD Corporation, TPG Accelerate V, L.P., TPG Accelerate VI, L.P. and the other stockholders party thereto.
  5.1*    Opinion of Ropes & Gray LLP.
10.1    Sixth Amended and Restated Credit Agreement, dated as of November 30, 2012, among American Tire Distributors, Inc., ATD Acquisition Co. V Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc., Firestone of Denham Springs, Inc., Tire Wholesalers, Inc., ATD Acquisition Co. IV, Lenders party thereto and Bank of America, N.A. as Administrative and Collateral Agent and Lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K filed March 11, 2013).
10.2    First Amendment to Sixth Amended and Restated Credit Agreement, dated as of March 22, 2013, among American Tire Distributors, Inc., TriCan Tire Distributors Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist, Inc., Tire Wholesalers, Inc., Lenders party thereto and Bank of America, N.A. as Administrative and Collateral Agent and Lender (incorporated by reference to Exhibits 10.1 and 10.2 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed May 10, 2013).
10.3    Second Amendment to Sixth Amended and Restated Credit Agreement, dated as of January 31, 2014, among American Tire Distributors, Inc., Am-Pac Tire Dist. Inc., Trican Tire Distributors Inc., American Tire Distributors Holdings, Inc., Tire Wholesalers, Inc., Lenders party thereto and Bank of America, N.A. as Administrative and Collateral Agent and Lender.

 

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Exhibit
Number

 

Exhibit Title

10.4   Amended and Restated Pledge and Security Agreement, dated as of May 28, 2010, among American Tire Distributors, Inc., American Tire Distributors Holdings, Inc., Am-Pac Tire Dist. Inc. and the Bank of New York Mellon trust Company, N.A. (incorporated by reference to Exhibit 10.3 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
10.5   Second Amended and Restated Pledge and Security Agreement, dated as of November 30, 2012, among American Tire Distributors, Inc., Am-Pac Tire Dist. Inc., American Tire Distributors Holdings, Inc., Tire Wholesalers, Inc., Firestone of Denham Springs, Inc., d/b/a Consolidated Tire and Oil, ATD Acquisition Co. IV. and Bank of America, N.A. (incorporated by reference to Exhibit 10.3 to American Tire Distributors Holdings, Inc.’s Annual Report on Form 10-K filed March 11, 2013).
10.6   Canadian Pledge and Security Agreement, dated as of November 30, 2012, among ATD Acquisition Co. V Inc., Triwest Trading (Canada) Ltd. and Bank of America, N.A. (incorporated by reference to Exhibit 10.4 to American Tire Distributors Holdings, Inc.’s Annual Report on Form 10-K filed March 11, 2013).
10.7   Credit Agreement, dated as of March 28, 2014, among American Tire Distributors Holdings, Inc., American Tire Distributors, Inc., the guarantors from time to time party thereto, Bank of America, N.A., as administrative agent, and each lender from time to time party thereto (incorporated by reference to Exhibit 10.2 to American Tire Distributors Holdings, Inc.’s Form 10-Q filed May 16, 2014).
10.8**   Security Agreement, dated as of March 28, 2014, among American Tire Distributors Holdings, Inc., American Tire Distributors, Inc., the subsidiary guarantors from time to time party thereto and Bank of America, N.A., as collateral agent.
10.9**   First Amendment to Credit Agreement, dated as of June 16, 2014, among American Tire Distributors Holdings, Inc., American Tire Distributors, Inc., the guarantors form time to time party thereto, Bank of America, N.A., as administrative agent, and each lender from time to time party thereto.
10.10**   Amended and Restated Management Equity Incentive Plan.
10.11   Form of Option Grant Agreement under the Amended and Restated Management Equity Incentive Plan for directors (incorporated by reference to Exhibit 10.5 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
10.12   Form of Option Grant Agreement under the Amended and Restated Management Equity Incentive Plan for certain employees (incorporated by reference to Exhibit 10.6 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010)
10.13   Non-Employee Director Restricted Stock Plan (incorporated by reference to Exhibit 10.7 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
10.14   Transaction and Monitoring Fee Letter Agreement, dated as of May 28, 2010, between American Tire Distributors, Inc. and TPG Capital, L.P. (incorporated by reference to Exhibit 10.9 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
10.15   Indemnification Agreement, dated as of May 28, 2010, among American Tire Distributors Holdings, Inc., American Tire Distributors, Inc., Am-Pac Tire Dist. Inc., Tire Pros Francorp and TPG Capital, L.P. (incorporated by reference to Exhibit 10.10 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
10.16   Executive Employment Agreement, dated as of March 31, 2005, between American Tire Distributors, Inc. and J. Michael Gaither (incorporated by reference to Exhibit 10.13 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).
10.17   Executive Employment Agreement, dated as of March 31, 2005, between American Tire Distributors, Inc. and Phillip E. Marrett (incorporated by reference to Exhibit 10.14 to American Tire Distributors Holdings, Inc.’s Registration Statement on Form S-4 filed December 20, 2010).

 

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Exhibit
Number

 

Exhibit Title

10.18   Executive Employment Agreement, dated as of December 6, 2005, between American Tire Distributors, Inc. and David L. Dyckman (incorporated by reference to Exhibit 10.34 to American Tire Distributors Holdings, Inc.’s Annual Report Form 10-K filed March 31, 2006).
10.19   Amended and Restated Employment Agreement, dated as of April 6, 2009, between American Tire Distributors, Inc. and William E. Berry (incorporated by reference to Exhibit 10.1 to American Tire Distributors Holdings, Inc.’s Form 8-K filed June 3, 2009).
10.20   Employment Agreement, dated as of January 23, 2012, between American Tire Distributors, Inc. and Jason T. Yaudes (incorporated by reference to Exhibit 10.1 to American Tire Distributors Holdings, Inc.’s Form 8-K filed January 23, 2012).
10.21   Management Stockholders Agreement, dated as of June 15, 2010, among ATD Corporation and the stockholders named therein (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-4 filed December 20, 2010).
10.22   Form of Amended and Restated Stockholders Agreement by and among ATD Corporation, TPG Accelerate V, L.P. and TPG Accelerate VI, L.P.
10.23   Form of Director Indemnification Agreement.
10.24*   Form of ATD Corporation 2014 Omnibus Incentive Plan.
10.25*   ATD Corporation Cash Incentive Plan.
21.1**   List of subsidiaries of ATD Corporation.
23.1   Consent of PricewaterhouseCoopers LLP.
23.2   Consent of PricewaterhouseCoopers LLP.
23.3   Consent of Plante & Moran, PLLC.
23.4   Consent of Deloitte LLP.
23.5   Consent of Kouri Berezan Heinrichs.
23.6   Consent of Collins Barrow Edmonton LLP.
23.7   Consent of Collins Barrow Edmonton LLP.
23.8   Consent of Collins Barrow Edmonton LLP.
23.9   Consent of Collins Barrow Edmonton LLP.
23.10   Consent of Collins Barrow Edmonton LLP.
23.11*   Consent of Ropes & Gray LLP (included in the opinion filed as Exhibit 5.1).
24.1**   Powers of Attorney.

 

* To be filed by amendment.
** Previously filed

 

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