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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 333-56013
ADVANCE STORES COMPANY, INCORPORATED
(Exact name of registrant as specified in its charter)
Virginia 54-0118110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5673 Airport Road 24012
Roanoke, Virginia (Zip Code)
(Address of Principal Executive Offices)
(540) 362-4911
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_] Not Applicable.
As of March 30, 2001, the registrant had outstanding 538 shares of Class
A Common Stock, par value $100 per share (the only class of common stock of the
registrant outstanding). The registrant's Class A Common Stock is not traded in
a public market.
Aggregate market value of the registrant's voting and nonvoting Class A Common
Stock. Not Applicable.
Documents Incorporated by Reference: None
- --------------------------------------------------------------------------------
PART I
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements
include without limitation the words "believes," "anticipates," "estimates,"
"intends," "expects" and words of similar import. All statements other than
statements of historical fact included in statements under "Item 1. Business,"
"Item 2. Properties," "Item 3. Legal Proceedings" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation" include
forward-looking information and may reflect certain judgements by management.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company or the automotive aftermarket industry to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These potential risks and uncertainties
include, but are not limited to, those identified in the "Risk Factors" section
of this Form 10-K located at the end of "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations". The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
Item 1. Business.
General
As of December 30, 2000, Advance Stores Company, Incorporated (the
"Company") operated 1,728 stores in 37 states, Puerto Rico and the Virgin
Islands operating under the "Advance Auto Parts" and "Western Auto" names (the
"Retail" segment). Advance Auto Parts is the second largest specialty retailer
of automotive parts, accessories and maintenance items in the United States, and
based on store count, the Company believes it is the largest retailer in a
majority of its markets. The Western Auto stores (the "Service Stores") included
in the Retail segment offer automotive parts, accessories and service as well as
home and garden merchandise. The Company also operates a wholesale distribution
network which includes distribution services of automotive parts and accessories
and home and garden merchandise to approximately 590 independently-owned dealer
stores in 48 states and one Company-owned retail store in California all
operating under the "Western Auto" trade name (the "Wholesale" segment). Since
fiscal 1999, the Company has derived over 90% of its total revenues from the
retail sale of automotive parts and accessories. For fiscal 1998 and prior
(before the Western Auto Supply Company Merger in November 1998), 100% of the
Company's total revenues were derived from the retail sale of automotive parts
and accessories.
The Company was formed in 1929. In the 1980s, the Company sharpened its
marketing focus to target sales of automotive parts and accessories to "do-it-
yourself" ("DIY") customers and accelerated its growth strategy. From the 1980s
through the present, the Company has grown significantly through new store
openings and strategic acquisitions. In 1996, the Company began to aggressively
expand its sales to "do-it-for-me" ("DIFM") customers by implementing a
commercial sales program ("Commercial Program") in the Retail segment. The
Commercial Program includes specific marketing to attract additional DIFM
customers and delivery of parts and accessories to third party automotive
service and repair providers in certain markets ("Commercial Delivery").
Recapitalization
In April 1998, Advance Holding Corporation, the Company's parent
("Holding"), consummated its recapitalization (the "Recapitalization"). See Note
14 to "Item 8. Financial Statements" for a detailed discussion of the
Recapitalization.
Western Merger
In November 1998, Holding completed a Plan of Merger (the "Western Merger")
with Sears, Roebuck and Co. ("Sears") to acquire Western Auto Supply Company
("Western"). As consideration in the Western Merger, the Company issued to Sears
11,474,606 shares of Common Stock of Holding (the "Holding Common Stock") and
paid Sears $185.0 million in cash. Certain existing stockholders of Holding
invested an additional $70.0 million in equity to fund a portion of the cash
purchase price, the remainder of which was funded through additional borrowings
under the Company's Credit Facility (the "Credit Facility") and cash on hand.
See Note 15 to "Item 8. Financial Statements" for further discussion of the
Western Merger.
1
The integration of Western included converting a net 545 Parts America
stores (the "Parts America Conversion") to Advance Auto Parts stores, adding a
net 39 Western Auto stores and supplying Western Auto dealer stores in 48
states. In addition, the Company consolidated duplicative facilities, integrated
certain administrative and support functions into its corporate headquarters,
separated or relocated certain employees and integrated the management
information systems of the combined companies.
Store Operations
Retail Operations
The Company's domestic stores are generally located in or adjacent to good
visibility, high traffic strip shopping centers. These stores generally range in
size from 5,000 to 10,000 square feet, averaging approximately 7,500 square
feet, and currently stock between 16,000 and 21,000 stock keeping units
("SKUs"). In addition, approximately 115,000 SKUs that are not stocked at the
store level are available on a next or same day basis to virtually all domestic
stores through the Company's PDQ(R) network. During fiscal 2000, the Company
initiated a Mini-PDQ(R) concept that utilizes existing space in certain stores
to ensure the availability of regional specific products to all stores in their
demographic market. On average, a Mini-PDQ(R) makes an additional 7,500 to
12,000 SKUs available on a same day basis in these markets.
Additionally, as of December 30, 2000, the Company had 1,209 of the total
Retail stores participating in Commercial Delivery. Commercial Delivery utilizes
store employees to take orders from commercial customers and deliver the orders
in designated vehicles assigned to the participating stores.
The Company's domestic stores are divided into three regions, which are
managed by Senior Vice Presidents who are supported by 10 Regional Vice
Presidents. Reporting to the Regional Vice Presidents are Division Managers who
have direct responsibilities for store operations. A typical division consists
of 14 to 18 stores. Depending on store size and sales volume, each store is
staffed by 8 to 30 employees under the leadership of a Store Manager. Stores are
generally open seven days a week from 8:00 a.m. to 8:00 p.m.
The Service Stores in Puerto Rico and the Virgin Islands comprise a fourth
region of the Retail segment and are managed by one Senior Vice President who is
supported by a Vice President, six District Managers, Store Managers and field
personnel. These stores average approximately 16,000 square feet and stock
approximately 21,000 SKUs of automotive and home and garden merchandise, and are
staffed with up to 60 employees depending on store size and sales volume. The
store hours are generally 7:00 a.m. to 8:00 p.m. seven days a week.
The Company's Retail segment stores are currently located as follows:
Number of Number of Number of
Location Stores as of Location Stores as of Location Stores as of
December 30, December 30, December 30,
2000 2000 2000
- ------------ ------------ -------------- ------------ -------------- -----------------
Alabama 60 Maine 7 Pennsylvania 124
Arkansas 19 Maryland 30 Puerto Rico 39
Colorado 15 Massachusetts 20 Rhode Island 3
Connecticut 24 Michigan 42 South Carolina 95
Delaware 5 Mississippi 22 South Dakota 6
Florida 25 Missouri 37 Tennessee 114
Georgia 130 Nebraska 16 Texas 41
Illinois 23 New Hampshire 3 Vermont 2
Iowa 25 New Jersey 17 Virgin Islands 2
Indiana 65 New York 95 Virginia 125
Kansas 26 North Carolina 165 West Virginia 61
Kentucky 62 Ohio 140 Wisconsin 16
Louisiana 23 Oklahoma 2 Wyoming 2
2
Wholesale Operations
The wholesale dealer operations are managed by one Senior Vice President, a
Vice President, a National Sales Manager, an Operations Manager and various
field and support personnel. The wholesale dealer operations consist of a
network of independently owned locations, which include associate, licensee,
sales center and franchise dealers. Associate, licensee and franchise stores
have rights to the use of the "Western Auto" name and certain services provided
by the Company. Sales centers only have the right to purchase certain products
from Western. The Company and Western also provide services to Wholesale through
various administrative and support functions chosen by each independent
location.
Purchasing and Merchandising
Merchandise is selected and purchased for all stores in the Retail and
Wholesale segments by personnel at the Company's corporate offices in Roanoke,
Virginia and Kansas City, Missouri. In fiscal 2000, the Company purchased from
over 200 vendors, with no single vendor accounting for 10% or more of purchases.
The Company's purchasing strategy involves negotiating multi-year agreements
with certain vendors. In connection with the Western Merger, the Company entered
into several long-term agreements that provide more favorable terms and pricing,
which will continue through the current term of the agreements, generally three
to five years.
The Company's merchandising objective related to automotive products is to
carry a broad selection of brand names in the Advance Auto Parts stores such as:
Fram-Bendix-Autolite, Fel-Pro, Federal-Mogul and AC Delco, that generate
customer traffic and appeal to the Company's commercial delivery customers.
Additionally, the Service Stores and the Wholesale segment carry home and garden
products by Whirlpool, Maytag, MTD Lawn Products, Electrolux Home Products and
automotive products by Michelin, Goodyear, General/Continental and Bridgestone
in addition to those products carried in the Advance Auto Parts stores. In
connection with the Western Merger, the Company reached agreements with Sears to
supply the Service Stores and the Wholesale segment with certain DieHard(R) and
Craftsman(R) brand products. In addition to such branded products, the Company
stocks a wide selection of high quality private label products that appeal to
value conscious customers. Sales of replacement parts account for approximately
60% of the Company's sales and generate higher gross profit margins than
maintenance items or general accessories. The Company determines its product mix
based on a merchandising program designed to identify the optimal inventory mix
at each individual store based on that store's historical and projected sales.
Warehouse and Distribution
The Company currently operates six distribution centers that service
Advance Auto Parts stores in the United States. The Company also operates a
separate distribution center in the United States that services the Service
Stores and the Wholesale segment.
All distribution centers are equipped with technologically advanced
material handling equipment, including carousels, "pick to light" systems, radio
frequency technology and automated sorting systems.
The Company offers approximately 25,000 SKUs on a next day basis to
substantially all of its domestic retail stores via its nine PDQ(R) warehouses.
Stores place orders to these facilities through an on-line ordering system, and
ordered parts are delivered to substantially all stores the next day through the
Company's dedicated PDQ(R) trucking fleet. In addition, the Company operates a
PDQ(R) warehouse that stocks approximately 90,000 SKUs of harder to find
automotive parts and accessories. This facility is known as the "Master PDQ(R)"
warehouse and utilizes existing PDQ(R) distribution infrastructure to provide
next day service to substantially all of the Advance Auto Parts stores. During
fiscal year 2000, the Company embarked on a new Mini PDQ(R) distribution concept
that utilizes store space to provide certain demographic markets with an
additional customized mix of approximately 7,500 to 12,000 SKUs. As of December
30, 2000, the Company operates four Mini PDQ(R) facilities and plans to open up
to six additional facilities in fiscal 2001.
3
The following table sets forth certain information relating to the
Company's main distribution facilities:
Opening Size
Distribution Facility Date Area Served (Sq. ft.)
- ----------------------------------- ------- ------------------------- ---------
Main Distribution Centers
Roanoke, Virginia...................................... 1988 Mid-Atlantic 440,000
Gadsden, Alabama....................................... 1994 South 240,000
Jeffersonville, Ohio................................... 1996 Mid West 383,000
Gastonia, North Carolina (1)........................... 1969 Service Stores, Wholesale 663,000
Dealer Network
Salina, Kansas (1)..................................... 1971 West 441,000
Delaware, Ohio (1)..................................... 1972 Northeast 510,000
Thomson, Georgia....................................... 1999 Southeast 383,000
PDQ(R) Warehouses
Salem, Virginia........................................ 1983 Mid-Atlantic 50,400
Smithfield, North Carolina............................. 1991 Southeast 42,000
Jeffersonville, Ohio (2)............................... 1996 Mid West 50,000
Thomson, Georgia (2)................................... 1998 South, Southeast 50,000
Goodlettesville, Tennessee............................. 1999 Central 41,900
Youngwood, Pennsylvania................................ 1999 East 49,000
Riverside, Missouri.................................... 1999 West 45,000
Guilderland Center, New York........................... 1999 Northeast 47,400
Temple, Texas (1)(3)................................... 1999 Southwest 100,000
Master PDQ(R) Warehouse
Andersonville, Tennessee............................... 1998 All 116,000
(1) The Company acquired these facilities in the Western Merger in November
1998.
(2) This facility is located within the main distribution center.
(3) Total capacity of this facility is approximately 550,000 square feet and
is held for sale at December 30, 2000.
Management Information Systems
Store Based Information Systems
The Company has store-based information systems located in its Advance Auto
Parts stores, which are designed to improve the efficiency of its operations and
enhance customer service, and are comprised of Point-of-Sale ("POS"), Electronic
Parts Catalogs ("EPC") and Store Level Inventory Management ("SLIM") systems.
These systems are tightly integrated in the store and interact with the
Company's corporate offices in Roanoke, Virginia via a frame relay
communications network. Together, these systems provide real time, comprehensive
information to store personnel, resulting in improved customer service and in-
stock availability.
Point-of-Sale: The POS system has improved store productivity and customer
service by streamlining store procedures. POS information is used to formulate
the Company's pricing, marketing and merchandising strategies as well as to
rapidly replenish inventory. Beginning in second quarter of fiscal 2001, the
Company will begin to install a new POS system in all stores. The system is
designed to improve customer check out time as well as decrease the amount of
time required to train new store associates. In addition, the new POS system
will provide additional customer purchase and warranty history, which may be
used for targeted marketing programs in the future.
Electronic Parts Catalog: The EPC system is a software based system that
identifies the application, location and availability of over 2 million
automotive parts and accessory applications. Additionally, the EPC system
enables sales associates to assist customers in parts selection and ordering
based on the year, model, engine type and application needed. The EPC system
displays an identified part, its inventory status, and its availability through
the PDQ(R) system, if the part is not available at the store. The EPC system
also displays related parts for sales associates to recommend to a customer,
which leads to increased average sales per customer. The integration of this
system with the POS system improves customer service by reducing time spent at
the cash register and fully automating the sales process between
4
the parts counter and the POS register. Additionally, this system allows sales
associates to order parts and accessories electronically from the Company's
PDQ(R) system with immediate confirmation of price, availability and delivery
schedule. Information about a customer's automobile can be entered into a
permanent customer database that can be accessed immediately whenever the
customer visits or telephones the store. In conjunction with the rollout of the
new POS system beginning in the second quarter of fiscal 2001, the Company will
also install a new EPC in its stores. This new catalog, which is fully
integrated with the new POS system, will provide store associates with
additional product information and easier parts lookup via search engines and
system navigation tools.
To ensure ongoing improvement of EPC information in all stores, the Company
has developed a corporate based EPC data management system that allows the
Company to reduce the cycle time for cataloging and delivering updated product
data to stores. This system also provides the capability of cataloging non-
application specific parts and additional product information such as technical
bulletins, images of parts and related diagrams of automobiles and expanded
related parts for the item being purchased. The new corporate based EPC data
management system will also be included in the rollout of the new point of sale
system beginning in second quarter of fiscal 2001.
Store Level Inventory Management System ("SLIM"): The SLIM system provides
real-time inventory tracking at the store level. With SLIM, store personnel can
check the quantity of on-hand inventory for any SKU, automatically process
returns and defective merchandise, designate SKUs for cycle counts and track
merchandise transfers. The Company is testing the effectiveness and viability of
radio frequency hand held devices in approximately 170 of its retail stores that
should increase inventory utilization and ensure the accuracy of inventory
movements.
Store IntraNet ("STORENET"): The STORENET provides all stores browser-based
access to additional corporate information. This provides store personnel access
to on-line training, operational manuals, store planograms, planning calendars
and financial information.
Communications Network: All Company locations in the United States
communicate via a frame relay network. The Puerto Rico and Virgin Island Service
Stores are supported via a satellite network. The frame relay network provides
adequate capacity to support the Company's growth strategy and future in-store
applications.
Financial Systems
The Company is in the process of transitioning its administrative software
to support key Financial and Human Resource functions to PeopleSoft, an
enterprise resource planning software. This transition will be completed in
phases during the second and third quarters of fiscal 2001. The new software
will bring about process improvements and efficiencies through the
implementation of improved business processes. It will also provide improved
reporting and access to information, and is intended to enable the Company to
sustain future growth with current staffing levels.
Logistics and Purchasing Information Systems
Distribution Center Management System ("DCMS"): DCMS provides real-time
inventory tracking throughout the stages of receiving, picking, shipping and
replenishment at the distribution center level. The DCMS, integrated with
material handling equipment, significantly reduces warehouse and distribution
costs while improving efficiency. All of the Company's logistic facilities
currently operate using this technology. As a result, the Company has the
capacity to service over 2,000 stores from its six retail distribution centers
that serve Advance Auto Parts stores and has the capability to support the
Service Stores and the Wholesale segment from its Gastonia distribution center.
E3 Replenishment System ("E3"): E3, which was implemented in 1994, monitors
the Company's distribution center and PDQ(R) warehouse inventory levels and
orders additional products when appropriate. In addition, the system tracks
sales trends by SKU, allowing the Company to adjust future orders to evolving
demand. The Company is currently implementing a store level replenishment
version of E3 and has converted approximately 430 stores as of December 30,
2000. The Company plans to have all stores converted by the end of third quarter
fiscal 2001.
Employees
As of December 30, 2000, the Company employed approximately 15,500 full-
time employees and 8,500 part-time employees. Approximately 83% of the Company's
workforce is employed in store level operations, 13% in distribution and 4% in
the Company's corporate offices in Roanoke, Virginia, and Kansas City, Missouri.
The Company has never experienced any labor disruption and believes that its
labor relations are good.
5
Competition
The Company competes in the automotive aftermarket industry, which consists
of replacement parts, maintenance items and accessories which, according to
industry estimates, generates approximately $90 billion in sales per year. The
Company competes for both DIY and DIFM customers. Although the number of
competitors and the level of competition vary by market area, both markets are
highly fragmented and generally very competitive. The Company competes primarily
with national and regional retail automotive parts chains (such as AutoZone,
Inc., Discount Auto Parts, Inc., O'Reilly Automotive, Inc. and The Pep Boys--
Manny, Moe & Jack), wholesalers or jobber stores (some of which are associated
with national automotive parts distributors or associations, such as NAPA),
independent operators, automobile dealers and mass merchandisers that carry
automotive replacement parts, maintenance items and accessories (such as Wal-
Mart Stores, Inc.). The Company believes that chains of automotive parts stores,
such as the Company, with multiple locations in regional markets, have
competitive advantages in customer service, marketing, inventory selection,
purchasing and distribution as compared to independent retailers and jobbers
that are not part of a chain or associated with other retailers or jobbers. The
principal competitive factors that affect the Company's business are store
location, customer service, product selection, availability, quality and price.
E-commerce
In January of fiscal 2000, the Company announced a joint venture with CSK
Auto, Inc. ("CSK") and Sequoia Capital to form PartsAmerica.com, Inc.
("PartsAmerica.com"). PartsAmerica.com is an e-commerce destination in the
automotive aftermarket that operates independently from its partners and
utilizes the Company's and CSK's existing logistic systems to support its web-
based operations. The Company has contributed the use of the "Parts America"
tradename to PartsAmerica.com under a royalty free license agreement and the use
of certain other assets. The Company is also party to a service agreement with
PartsAmerica.com that defines the wholesale sale of merchandise to
PartsAmerica.com and certain other services to be provided by the Company. The
Company began selling product to PartsAmerica.com during third quarter of fiscal
2000.
Tradenames, Service Marks and Trademarks
The Company owns and has registrations for the trade names "Advance Auto
Parts," "Western Auto" and "Parts America" and the trademark "PDQ(R)" with the
United States Patent and Trademark Office for use in connection with the
automotive parts retailing business. In addition, the Company owns and has
registered a number of trademarks with respect to its private label products.
The Company believes that its various tradenames, service marks and trademarks
are important to its merchandising strategy, but that its business is not
otherwise dependent on any particular service mark, tradename or trademark.
There are no infringing uses known by the Company that materially affect the use
of such marks.
Environmental Matters
The Company is subject to various federal, state and local laws and
governmental regulations relating to the operation of its business, including
those governing recycling of batteries and used lubricants and regarding
ownership and operation of real property. The Company handles hazardous
materials during its operations, and its customers may also use hazardous
materials on the Company's properties or bring hazardous materials or used oil
onto the Company's properties. The Company currently provides collection and
recycling programs for spent automotive batteries and used lubricants at certain
of its stores as a service to its customers pursuant to agreements with third
party vendors. Pursuant to these agreements, spent batteries and used lubricants
are collected by Company employees, deposited into vendor-supplied
containers/pallets and stored by the Company until collected by the third party
vendors for recycling or proper disposal. Persons who arrange for the disposal,
treatment or other handling of hazardous or toxic substances may be liable for
the costs of removal or remediation at any affected disposal, treatment or other
site affected by such substances.
The Company owns and leases real property. Under various environmental laws
and regulations, a current or previous owner or operator of real property may be
liable for the cost of removal or remediation of hazardous or toxic substances
on, under, or in such property. Such laws often impose joint and several
liability and may be imposed without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous or toxic
substances. Certain other environmental laws and common law principles also
could be used to impose liability for releases of hazardous materials into the
environment or work place, and third parties may seek recovery from owners
6
or operators of real properties for personal injury or property damage
associated with exposure to released hazardous substances. Compliance with such
laws and regulations has not had a material impact on its operations to date,
but there can be no assurance that future compliance with such laws and
regulations will not have a material adverse effect on the Company or its
operations. The Company believes it is currently in compliance with such laws
and regulations.
7
Item 2. Properties.
The following table sets forth certain information concerning the Company's
principal facilities:
Size Nature of
Primary Use Location (Sq. ft.) Occupancy
- ------------------------------------------------------ ---------------------------- --------- ---------
Corporate offices..................................... Roanoke, Virginia 49,000 Leased (1)
Corporate offices..................................... Kansas City, Missouri 12,500 Leased
Administrative offices................................ Roanoke, Virginia 40,000 Leased
Distribution center................................... Roanoke, Virginia 440,000 Leased (2)
Distribution center................................... Gadsden, Alabama 240,000 Owned
Distribution center................................... Salina, Kansas 441,000 Owned
Distribution center................................... Delaware, Ohio 510,000 Owned
Distribution center................................... Gastonia, North Carolina 663,000 Owned
Distribution center and regional PDQ(R) warehouses.... Jeffersonville, Ohio 383,000 Owned
Distribution center and regional PDQ(R) warehouses.... Thomson, Georgia 383,000 Leased (3)
Regional PDQ(R) Warehouse............................. Temple, Texas 100,000 Owned (4)
Regional PDQ(R) Warehouse............................. Salem, Virginia 50,400 Leased
Regional PDQ(R) Warehouse............................. Smithfield, North Carolina 42,000 Leased
Regional PDQ(R) Warehouse............................. Goodlettsville, Tennessee 41,900 Leased
Regional PDQ(R) Warehouse............................. Youngwood, Pennsylvania 49,000 Leased
Regional PDQ(R) Warehouse............................. Riverside, Missouri 45,000 Leased
Regional PDQ(R) Warehouse............................. Guilderland Center, New York 47,400 Leased
Master PDQ(R) Warehouse............................... Andersonville, Tennessee 116,000 Leased
(1) This facility is owned by Ki, L.C., a Virginia limited liability company
owned by two trusts for the benefit of a child and grandchild of Nicholas F.
Taubman. See "Item 13. Certain Relationships and Related Transactions."
(2) This facility is owned by Nicholas F. Taubman. See "Item 13. Certain
Relationships and Related Transactions."
(3) The construction of this facility was financed in fiscal 1997 by a $10.0
million IRB issuance from the Development Authority of McDuffie County of
the State of Georgia, from which the Company leases the facility. The
Company has an option to purchase this facility for $10.00 at the end of
five years or upon prepayment of the outstanding bonds.
(4) Total capacity of this facility is approximately 550,000 square feet and is
held for sale at December 30, 2000.
At December 30, 2000, 134 and 1,595 of the Company's stores were owned and
leased, respectively. The expiration dates (including renewal options) of the
store leases are summarized as follows:
Years Stores (1)
--------- ----------
2001-2002 40
2003-2007 163
2008-2012 317
2013-2022 967
2023-2032 85
2033-2048 23
(1) Of these stores, 23 are owned by affiliates of the Company. See "Item 13.
Certain Relationships and Related Transactions."
8
Item 3. Legal Proceedings.
In March 2000, the Company was notified that it has been named in a lawsuit
filed on behalf of independent retailers and jobbers against the Company and
others for various claims under the Robinson-Patman Act. The Company believes
these claims are without merit and intends to defend them vigorously; however,
the ultimate outcome of this matter can not be ascertained at this time.
In January 1999, the Company was notified by the United States
Environmental Protection Agency ("EPA") that Western may have potential
liability under the Comprehensive Environmental Response Compensation and
Liability Act relating to two battery salvage and recycling sites that were in
operation in the 1970s and 1980s. The EPA has indicated the total cleanup for
this site will be approximately $1.6 million. Management is continuing their
investigation of the EPA notification. An estimate of the range of liability is
not reasonably possible until technical studies are sufficiently completed and
the amount of potential indemnification from Sears, if any, is further
investigated. The ultimate exposure will also depend upon the participation of
other parties named in the notification who are believed to share in
responsibility. The Company believes the claim could be settled for an amount
not material to the Company's current financial position or future results of
operations.
In November 1997, Joe C. Proffitt, Jr. on behalf of himself and all others
in the states of Alabama, California, Georgia, Kentucky, Michigan, North
Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia and West Virginia who
purchased batteries from the Company from November 1, 1991 to November 5, 1997
filed a class action complaint and motion of class certification against the
Company in the circuit court for Jefferson County, Tennessee, alleging the sale
by the Company of used, old or out-of-warranty automotive batteries as new. The
complaint seeks compensatory and punitive damages. The Company believes it has
no liability for such claims and intends to defend them vigorously.
In addition to the above, the Company currently and from time to time is
involved in litigation incidental to the conduct of its business. The damages
claimed against the Company in some of these proceedings are substantial.
Although the amount of liability that may result from these matters cannot be
ascertained, the Company does not currently believe that, in the aggregate they
will result in liabilities material to the Company's consolidated financial
condition, future results of operations or cash flow.
Item 4. Submission of Matters to a Vote of Securityholders.
None.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no established public trading market for the Company's Common
Stock. All of the Common Stock of the Company is held by Holding.
In connection with the Recapitalization, the Company paid a cash dividend
to Holding in the amount of $183.0 million. In addition, in June 1998, the
Company paid a dividend to Holding in the amount of $150.0 million. The Company
expects to pay dividends to Holding in the future in order for Holding to redeem
its Senior Discount Debentures. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources" for a discussion of restrictions in the Company's debt instruments on
its ability to pay cash dividends.
Item 6. Selected Financial Data.
The following table sets forth selected consolidated statement of
operations, balance sheet and other operating data of the Company. The selected
consolidated financial data for each of the five fiscal years during the period
ended December 30, 2000 are derived from the audited financial statements of the
Company which have been audited by Arthur Andersen LLP. The data presented below
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto included herein, the other financial information
included herein and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations". The following financial data includes
certain expenses related to the merger integration and Parts America Conversion
incurred in fiscal 1998 and fiscal 1999 and certain private company expenses
that were eliminated in the Recapitalization. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
detailed discussion of these expenses.
Fiscal Year (1)
-----------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- ----------- ----------- -----------
(dollars in thousands)
Statement of Operations Data:
Net sales.................................................. $ 705,983 $ 848,108 $ 1,220,759 $ 2,206,945 $ 2,288,022
Cost of sales.............................................. 437,615 524,586 766,198 1,404,113 1,392,127
Selling, general and administrative expenses (2)........... 227,936 279,729 399,965 780,114 800,845
Expenses associated with the Recapitalization (3).......... - - 14,277 - -
Expenses associated with the restructuring in
conjunction with the Western Merger (4)................. - - 6,774 - -
Non-cash and other employee compensation (5) (6)........... 113 195 1,135 2,483 2,261
Operating income........................................... 40,319 43,598 32,410 20,235 92,789
Interest expense........................................... 6,221 7,732 29,517 53,844 56,519
Other, net................................................. (151) (824) 606 4,416 762
Income (loss) before income taxes.......................... 33,947 35,042 3,499 (29,193) 37,032
Income tax expense (benefit)............................... 13,735 14,670 1,887 (9,628) 13,861
Income (loss) before extraordinary item.................... 20,212 20,372 1,612 (19,565) 23,171
Extraordianary item, gain on debt extinguishment,
net of $1,759 income taxes.............................. - - - - 2,933
Net income (loss).......................................... 20,212 20,372 1,612 (19,565) 26,104
10
Fiscal Year (1)
-----------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- ----------- ----------- -----------
(dollars in thousands)
Other Data:
EBITDA (7).................................................... $ 57,818 $ 65,399 $ 62,374 $ 78,382 $ 159,615
EBITDAR (8)................................................... 96,423 113,697 130,648 191,302 280,611
Capital expenditures.......................................... 44,264 48,864 65,790 105,017 70,566
Percentage increase in comparable store net
sales (9).................................................. 2.1% 5.7% 7.8% 10.3% 4.4%
Commercial sales (10)......................................... 68,878 100,180 129,926 244,940 355,923
Net cash provided by (used in) operating
activities................................................. 21,575 41,679 37,897 (19,320) 103,788
Net cash used in investing activities......................... (44,121) (48,607) (423,675) (113,824) (64,940)
Net cash provided by (used in) financing
activities................................................. 15,193 7,443 412,551 121,501 (43,416)
Stores open at end of period.................................. 649 814 1,567 1,617 1,729
Balance Sheet Data:
Net working capital (11)...................................... $ 101,957 $ 113,136 $ 310,833 $ 356,312 $ 322,589
Total assets.................................................. 384,620 449,626 1,261,516 1,344,952 1,349,296
Total debt (including current maturities and bank overdrafts). 107,920 113,777 455,776 576,149 516,512
Stockholder's equity.......................................... 108,797 129,169 221,011 202,528 231,371
(1) The Company's fiscal year consists of 52 or 53 weeks ending on the Saturday
nearest to December 31. All fiscal years presented are 52 weeks except for
fiscal 1997, which consists of 53 weeks.
(2) Fiscal 1999 and fiscal 1998 amounts include certain merger integration and
Parts America Conversion expenses that total $41,034 and $7,788,
respectively. Fiscal 1997 amount includes an unusual medical claim that
exceeded the Company's stop loss insurance coverage. The Company increased
its stop loss coverage effective January 1, 1998 to a level that would
provide insurance coverage for a medical claim of this magnitude. The pre-
tax amount of this claim, net of related increased insurance costs, was
$882. In addition, amounts are included for all fiscal years for private
company expenses incurred prior to the Recapitalization that relate
primarily to compensation and benefits paid to the Company's Chairman that
were eliminated after the Recapitalization. These amounts are $2,482, $3,056
and $845 for fiscal 1996, fiscal 1997 and fiscal 1998, respectively. There
are no private company expenses in the fiscal 1999 or fiscal 2000 amounts.
(3) Represents expenses incurred in the Recapitalization related primarily to
bonuses paid to certain employees and professional services.
(4) Represents fiscal 1998 expenses primarily related to lease costs associated
with the 31 Advance Auto Parts stores closed in overlapping markets in
connection with the Western Merger.
(5) Represents interest component of net periodic postretirement benefit cost
related to the Company's unfunded post retirement benefit obligation.
(6) Represents non-cash compensation expenses related to stock options granted
to certain Company employees.
(7) EBITDA represents operating income plus depreciation and amortization
included in operating income. EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as a
substitute for net income as an indicator of operating performance or as an
alternative to cash flow (as measured by GAAP) as a measure of liquidity.
The Company has included it herein because management believes this
information is useful to investors as such measure provides additional
information with respect to the Company's ability to meet its future debt
service, capital expenditure and working capital requirements and, in
addition, certain covenants in the indenture and Credit Facility (See "Item
7.Management's Discussion and Analysis of Financial Condition and Results of
Operations") are based upon an EBITDA calculation. The Company's method for
calculating EBITDA may differ from similarly titled measures reported by
other companies. Management believes certain one time expenses, private
company expenses, Recapitalization expenses, non-cash and other employee
compensation expenses (see Note 5 & 6 above), restructuring expenses and
merger integration expenses should be eliminated from the EBITDA calculation
to evaluate the operating performance of the Company.
11
The following table reflects the effect of these items:
Fiscal Year (1)
--------------------------------------
1998 1999 2000
-------- --------- ---------
(dollars in thousands)
Other Data:
EBITDA................................................................. $ 62,374 $ 78,382 $ 159,615
Private company expenses (a)...................................... 845 - -
Recapitalization expenses (b)..................................... 14,277 - -
Non-cash and other employee compensation expenses
(see note 5 & 6 above)........................................... 1,135 2,483 2,261
Restructuring expenses (see note 4 above)......................... 6,774 - -
Merger integration expenses (c)................................... 7,788 41,034 -
-------- --------- ---------
EBITDA, as adjusted.................................................... $ 93,193 $ 121,899 $ 161,876
(a) Reflects management's estimate of expenses primarily related to
compensation and other benefits of the Company's Chairman, who prior to
the Recapitalization was Holding's principal stockholder, that were
eliminated after the Recapitalization.
(b) Represents non-recurring management bonuses and other expenses incurred
in connection with the Recapitalization.
(c) Represents certain expenses related to the merger integration and Parts
America Conversion. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(8) EBITDAR represents EBITDA plus operating lease expense. Because the
proportion of stores leased versus owned varies among industry competitors,
the Company believes that EBITDAR permits a meaningful comparison of
operating performance among industry competitors. The Company leases
substantially all of its stores.
(9) Comparable store net sales is calculated based on the change in net sales
starting once a store has been opened for thirteen complete accounting
periods (each period represents four weeks). Relocations are included in
comparable store net sales from the original date of opening. Additionally,
each converted Parts America store will be included in the comparable store
net sales calculation after thirteen complete accounting periods following
its physical conversion to an Advance Auto Parts store. The Company has not
included Service Stores in its comparable store net sales calculation, but
plans to in the future.
(10) Represents net sales from Advance Auto Parts stores and Parts America
stores after the store level management information system conversion ("MIS
Conversion") to commercial customers, both delivery and non-delivery sales.
(11) Net working capital represents total current assets less total current
liabilities.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements of the Company, the notes thereto and other data and information
appearing elsewhere in this Report on Form 10-K. The Company's fiscal year ends
on the Saturday nearest December 31. The Company's first quarter consists of 16
weeks, and the other three quarters consist of 12 weeks.
General
The Company's combined operations are conducted in two operating segments,
Retail and Wholesale. The Retail segment consists of the retail operations of
the Company operating under the "Advance Auto Parts" name in the United States
and "Western Auto" in Puerto Rico and the Virgin Islands. Wholesale consists of
the wholesale operations, including distribution services to independent dealers
and franchises throughout the United States and one Company-owned store in
California all operating under the "Western Auto" trade name.
During first quarter of 1998, Holding consummated a Recapitalization
through the sale of common stock, the issuance of debt, the redemption of common
and preferred stock and the repayments of notes payable and long-term debt. See
Note 14 to "Item 8. Financial Statements" for a detailed discussion of the
Recapitalization. Additionally, on November 2, 1998, Western Auto Supply Company
merged with a subsidiary of the Company. See "Item 1. Business" for a discussion
of the Western Merger.
The Western Merger has been accounted for under the purchase method of
accounting. Accordingly, the results of operations of Western for the periods
from November 2, 1998 are included in the accompanying
12
consolidated financial statements. The purchase price has been allocated to
assets acquired and liabilities assumed based on their respective fair values.
The final purchase price allocation resulted in total excess fair value over the
purchase price of $4.7 million and was allocated to non-current assets,
primarily property and equipment.
The Company has achieved benefits from the combination with Western through
improved product pricing and terms from vendors, consolidated advertising,
distribution and corporate support efficiencies, and the closure of certain
overlapping locations. Additionally, the Company continues to evaluate store
performance and identified 25 Advance Auto Parts stores during fiscal 2000 for
closure. The identification of these stores resulted in the Company adding $1.8
million in other exit costs to its restructuring reserves during fiscal 2000. As
of December 30, 2000, 20 of these stores have been closed.
Subsequent to December 30, 2000 but prior to this filing, the Company
signed a definitive agreement to purchase certain assets of Carport Auto Parts,
Inc ("Carport"). Carport operates 51 automotive retail parts stores in Alabama
and Mississippi, which carry products similar to those offered in the stores of
the Retail segment. The Company plans to account for this acquisition, which is
expected to close in the second quarter of fiscal 2001, under the purchase
method of accounting.
Results of Operations
The following tables set forth certain operating data for the Company
expressed in dollars and as a percentage of net sales for the periods indicated.
Fiscal Year Ended
---------------------------------------
January 2, January 1, December 30,
1999 2000 2000
---------- ---------- ------------
(dollars in thousands)
Statement of Operations Data:
Net sales..................................................... $1,220,759 $2,206,945 $2,288,022
Cost of sales................................................. 766,198 1,404,113 1,392,127
---------- ---------- ----------
Gross profit.................................................. 454,561 802,832 895,895
Selling, general and administrative expenses (1).............. 391,332 739,080 800,845
Expenses associated with the Recapitalization................. 14,277 - -
Expenses associated with the restructuring in
conjunction with the Western Merger........................ 6,774 - -
Expenses associated with merger integration................... 7,788 41,034 -
Expenses associated with private company...................... 845 - -
Non-cash and other employee compensation...................... 1,135 2,483 2,261
---------- ---------- ----------
Operating income.............................................. 32,410 20,235 92,789
Interest expense.............................................. (29,517) (53,844) (56,519)
Other, net.................................................... 606 4,416 762
Income tax expense (benefit).................................. 1,887 (9,628) 13,861
---------- ---------- ----------
Income (loss) before extraordinary item....................... 1,612 (19,565) 23,171
Extraordinary item, gain on debt extinguishment,
net of $1,759 income taxes................................. - - 2,933
---------- ---------- ----------
Net income (loss)............................................. $ 1,612 $ (19,565) $ 26,104
========== ========== ==========
13
Fiscal Year Ended
---------------------------------------
January 2, January 1, December 30,
1999 2000 2000
---------- ---------- ------------
Net sales..................................................... 100.0% 100.0% 100.0%
Cost of sales................................................. 62.8 63.6 60.8
----- ----- -----
Gross profit.................................................. 37.2 36.4 39.2
Selling, general and administrative expenses (1).............. 32.1 33.5 35.0
Expenses associated with the Recapitalization................. 1.2 - -
Expenses associated with the restructuring in
conjunction with the Western Merger........................ 0.5 - -
Expenses associated with merger integration................... 0.6 1.9 -
Expenses associated with private company...................... 0.1 - -
Non-cash and other employee compensation...................... 0.1 0.1 0.1
----- ----- -----
Operating income.............................................. 2.6 0.9 4.1
Interest expense.............................................. (2.4) (2.4) (2.5)
Other, net.................................................... 0.0 0.2 0.0
Income tax expense (benefit).................................. 0.1 (0.4) 0.6
----- ----- -----
Income (loss) before extraordinary item....................... 0.1 (0.9) 1.0
Extraordinary item, gain on debt extinguishment,
net of $1,759 income taxes................................. - - 0.1
----- ----- -----
Net income (loss)............................................. 0.1% (0.9)% 1.1%
===== ===== =====
(1) Selling, general and administrative expenses are as adjusted for certain
non-recurring and other items.
14
Net sales consist primarily of comparable store net sales, new store net
sales, Service Store net sales, net sales for Wholesale and finance charges on
installment sales. Comparable store net sales is calculated based on the change
in net sales starting once a store has been opened for thirteen complete
accounting periods (each period represents four weeks). Relocations are included
in comparable store net sales calculation from the original date of opening.
Additionally, each converted Parts America store has been included in the
comparable store net sales calculation after thirteen complete accounting
periods following the completion of its physical conversion to an Advance Auto
Parts store. The Company has not included the Service Stores in its comparable
store net sales calculation but does plan to in the future.
The Company's cost of sales includes merchandise costs and warehouse and
distribution expenses as well as service labor costs for the Service Stores.
Gross profit as a percentage of net sales may be affected by variations in
Company's product mix, price changes in response to competitive factors and
fluctuations in merchandise costs and vendor programs. The Company seeks to
avoid fluctuation in merchandise costs by entering into long-term purchasing
agreements with vendors in exchange for pricing certainty, but there can be no
assurance such measures will in fact mitigate the effect of fluctuations in
merchandise costs on gross profits.
Selling, general and administrative expenses are comprised of store
payroll, store occupancy, net advertising expenses, other store expenses and
general and administrative expenses, including salaries and related benefits of
corporate employees, administrative office expenses, professional expenses and
other related expenses.
Fiscal 2000 Compared to Fiscal 1999
Net sales for fiscal 2000 were $2,288.0 million, an increase of $81.1
million or 3.7% over net sales for fiscal 1999. Net sales for the Retail segment
increased $149.9 million or 7.5%. The net sales increase for the Retail segment
was due to an increase in the comparable store sales of 4.4% and contributions
from new stores opened within the last year. The comparable store sales increase
of 4.4% was primarily a result of growth in both the DIY and DIFM market
segments, as well as the continued maturation of new stores and the converted
Parts America stores. Net sales for the Wholesale segment decreased 33.1% or
$68.8 million due to a decline in the number of dealer stores serviced by the
Company and lower average sales to each dealer.
During fiscal 2000, the Company opened 140 new stores, relocated 10 stores
and closed 28 stores, bringing the total Retail segment stores to 1,728. The
Company has 1,209 stores participating in Commercial Delivery result of adding
115 net stores to the program during fiscal 2000. Additionally, as of December
30, 2000, the Company supplied approximately 590 independent dealers through the
wholesale dealer network and one Company-owned store in California.
Gross profit for fiscal 2000 was $895.9 million or 39.2% of net sales, as
compared to $802.8 million or 36.4% of net sales in fiscal 1999. The increase in
the gross profit percentage is reflective of the realization of certain
purchasing synergies, fewer product liquidations, lower inventory shrinkage and
freight costs and the continued decline in net sales of the lower margin
Wholesale segment. The higher shrinkage and freight costs in fiscal year 1999
were primarily related to merchandise conversions and product liquidations
resulting from the Western Merger. The gross profit for the Retail segment was
$873.1 million or 40.6% of net sales for fiscal 2000, as compared to $784.1
million or 39.2% of net sales for fiscal 1999. During the fourth quarter of
fiscal 2000, the Company recorded a gain as a reduction to cost of sales of $3.3
million related to a lawsuit against a supplier. The gain represents actual
damages incurred under an interim supply agreement with the supplier, which
provided for higher merchandise costs. Subsequent to the December 30, 2000, the
Company agreed to a cash settlement of $16.6 million from the supplier. The
remainder of the cash settlement over the originally recorded gain, less higher
product costs incurred under the interim supply agreement, will be recognized as
a reduction of cost of sales during first quarter of fiscal 2001.
Selling, general and administrative expenses, before integration expenses
and non-cash and other employee compensation, increased to $800.8 million or
35.0% of net sales for fiscal 2000, from $739.1 or 33.5% of net sales for fiscal
1999. The increase in selling, general and administrative expenses is primarily
attributable to the continued sales decline in the Wholesale segment, which
carries lower selling, general and administrative expenses as a percentage of
sales as compared to the Retail segment. Additionally, the Company has incurred
higher than expected medical claims as well as higher payroll, insurance and
depreciation expense, partially offset by a decrease in net advertising costs,
as a percentage of sales, as compared to fiscal 1999. The Company has made
certain investments in personnel and labor,
15
which it believes is critical to the Company's long-term success. The Company
expects this commitment to increase the productivity of store personnel, which
will positively impact store profitability and customer service. The increase in
depreciation expense is primarily related to the change in an accounting
estimate to reduce the depreciable lives of certain property and equipment on a
prospective basis.
EBITDA (operating income plus depreciation and amortization), as adjusted
for non-cash and other employee compensation and integration expenses (fiscal
1999 only), was $161.9 million in fiscal 2000 or 7.1% of net sales, as compared
to $121.9 million or 5.5% of net sales in fiscal 1999. EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
considered as a substitute for net income as an indicator of operating
performance or as an alternative to cash flow (as measured by GAAP) as a measure
of liquidity. Company's method for calculating EBITDA may differ from similarly
titled measures reported by other companies. Management believes certain one-
time expenses, expenses associated with merger integration and non-cash and
other employee compensation should be eliminated from the EBITDA calculation to
evaluate the operating performance of the Company.
Interest expense for fiscal 2000 was $56.5 million or 2.5% of net sales, as
compared to $53.8 million or 2.4% of net sales fiscal 1999. The increase in
interest expense was a result of an increase in interest rates over fiscal 1999
offset by a decrease in net outstanding borrowings. During fiscal 2000, the
Company repurchased $30.6 million of Senior Subordinated Notes on the open
market for $25.0 million. As a result of the early extinguishment of debt, the
Company expects to benefit from lower interest expense in the future.
The Company's effective income tax rate was 37.4% of pre-tax income for
fiscal 2000 and 33.0% of pre-tax loss for fiscal 1999. This increase is due to
the Company having pre-tax income in fiscal 2000 and pre-tax loss in fiscal 1999
and the resulting effect of permanent differences between book and tax reporting
treatment on total income tax expense (benefit). Due to uncertainties related to
the realization of deferred tax assets for certain net operating loss
carryforwards, the Company recognized additional valuation allowances of $0.9
million during fiscal 2000.
The Company recorded net income of $26.1 million on a consolidated basis
for fiscal 2000, as compared to a net loss of $19.6 million for fiscal 1999. In
addition to the items previously discussed, the Company also recorded an
extraordinary gain related to the early extinguishment of debt of $2.9 million,
net of $1.8 million provided for income taxes and $0.9 million for the write-off
of associated deferred debt issuance costs. As a percentage of sales, net income
for fiscal 2000 was 1.1% as compared to a net loss of 0.9% for fiscal 1999.
Fiscal 1999 Compared to Fiscal 1998
Fiscal 1999 results include a full fiscal year of the operations acquired
in the Western Merger as compared to fiscal 1998 results, which include Western
operating results from November 2, 1998.
Net sales for fiscal 1999 were $2,206.9 million, an increase of $986.2
million or 80.8% over net sales for fiscal 1998. Net sales for the Retail
segment increased $812.8 million or 68.5%. The net sales increase for the Retail
segment was a result of the Western Merger, opening of new stores and a 10.3%
increase in comparable store sales over fiscal 1998. The comparable store sales
increase was due to maturation of stores opened in 1997 and 1998, increased
product availability, continued growth in the commercial sales program and the
closure of Parts America and Advance Auto Parts stores in overlapping markets.
Net sales for the Wholesale segment increased $173.4 million due to the
inclusion of the Wholesale segment for all of fiscal 1999 after the Western
Merger in November 1998.
During fiscal 1999, the Company opened 99 new stores, reopened three closed
locations, relocated 13 stores and closed 52 stores in addition to the stores
closed due to relocations (33 of which were Parts America and Advance Auto Parts
stores in overlapping markets closed in connection with the Western Merger).
Also, the Company added 562 stores to Commercial Delivery, bringing the total to
1,094 stores. As of January 1, 2000, the Company operated 1,617 stores in 38
states, Puerto Rico and the Virgin Islands and supplied approximately 670
independent dealers through the wholesale dealer network.
Gross profit for fiscal 1999 was $802.8 million or 36.4% of net sales,
compared with $454.6 million or 37.2% of net sales, in fiscal 1998. The decrease
in the gross profit percentage resulted largely from the lower margins
associated with the Wholesale segment and certain non-recurring items such as
the liquidation of certain product lines and increased shrinkage primarily
associated with the Parts America Conversion. The decline in margins discussed
16
above was partially offset by better pricing from vendors in fiscal 1999
compared to fiscal 1998, due to vendor agreements entered into as a result of
the Western Merger. The better pricing will continue through the current term of
these vendor agreements, generally three to five years. The gross profit for the
Retail segment was $784.1 million or 39.2% for fiscal 1999, as compared to
$452.8 million or 38.2% of net sales for fiscal 1998.
Selling, general and administrative expenses, before expenses associated
with the Recapitalization, restructuring, merger integration, private company
and non-cash and other employee compensation, increased to $739.1 million or
33.5% of net sales in fiscal 1999 from $391.3 million or 32.1% of net sales in
fiscal 1998. The increase as a percentage of sales was due primarily to
increased costs realized by the Retail segment related to higher store labor, an
increase in advertising and costs associated with the Company's national
manager's conference.
EBITDA (operating income plus depreciation and amortization), as adjusted
for expenses associated with the Recapitalization, merger integration, private
company and non-cash and other employee compensation was $121.9 million for
fiscal 1999, or 5.5% of net sales, as compared to $93.2 million or 7.6% of net
sales for fiscal 1998. EBITDA is not intended to represent cash flow from
operations as defined by GAAP and should not be considered as a substitute for
net income as an indicator of operating performance or as an alternative to cash
flow (as measured by GAAP) as a measure of liquidity. Holding's method for
calculating EBITDA may differ from similarly titled measures reported by other
companies. Management believes certain one-time expenses, expenses associated
with the Recapitalization, merger integration, private company and non-cash and
other employee compensation should be eliminated from the EBITDA calculation to
evaluate the operating performance of the Company.
Interest expense in fiscal 1999 was $53.8 million compared to $29.5 million
in fiscal 1998. The increase in interest in 1999 was primarily due to the
additional debt incurred in the Western Merger, the increase in borrowings under
the Company's revolving and delayed draw credit facilities and higher interest
rates.
Other income in fiscal 1999 was $4.4 million compared to $0.6 million in
fiscal 1998. The increase in other income was primarily the result of the
Advance Stores segment recognizing the settlement of a dispute between the
Company and a vendor due to non-performance by the vendor under a supply
agreement.
Income tax benefit for fiscal 1999 was $9.6 million as compared to an
expense of $1.9 million in fiscal 1998, with effective tax rates of 33.0% and
53.9%, respectively. In fiscal 1999, the Company recognized federal and state
net operating loss carryforwards ("NOLs") of approximately $22.1 million. The
Company believes it will utilize these NOLs through a combination of the
reversal of temporary differences, projected future taxable income during the
NOL carryforward periods and available tax planning strategies. Due to
uncertainties related to the realization of deferred tax assets for certain
state NOLs, the Company recorded a valuation allowance of $0.6 million as of
January 1, 2000. The amount of deferred income tax assets realizable, however,
could change in the near future if estimates of future taxable income are
changed.
As a result of the above factors, the Company incurred a net loss of $19.6
million in fiscal 1999 as compared to net income of $1.6 million in fiscal 1998.
As a percentage of net sales, net loss for fiscal 1999 was 0.9% as compared to
net income of 0.1% for fiscal 1998.
Liquidity and Capital Resources
The Company believes it will have sufficient liquidity to fund its debt
service obligations, including indebtedness incurred in connection with the
Western Merger, and implement its growth strategy over the next twelve months.
As of December 30, 2000, the Company had outstanding indebtedness consisting of
$169.5 million of Senior Subordinated Notes (the "Senior Subordinated Notes"),
borrowings of $311.7 million under the Credit Facility, $10.0 million of
indebtedness under the McDuffie County Development Authority Taxable Industrial
Bonds ("IRB") and $0.8 million of other borrowings.
The Senior Subordinated Notes bear interest at a rate of 10.25%, payable
semiannually, and require no principal payments until maturity. The indenture
governing the Senior Subordinated Notes contains certain covenants that limit,
among other things, the ability of the Company and its restricted subsidiaries
to incur additional indebtedness and issue preferred stock, pay dividends or
certain other distributions, issue stock of subsidiaries, make certain
17
investments, repurchase stock and certain indebtedness, create or incur liens,
engage in transactions with affiliates, enter into new businesses, sell stock of
restricted subsidiaries and restrict the Company from engaging in certain
mergers or consolidations and sell assets. The $10.0 million principal amount
IRB bears interest at a variable rate and will require no principal payments
until maturity in November 2002.
The Company has access to a total of $462.5 million (net of scheduled
principal payments made through December 30, 2000) through the Credit Facility
in addition to its operating cash flow. The Credit Facility provides for (i) a
$123.5 million Tranche B term loan, which was made at the closing of the
Recapitalization; (ii) a revolver with maximum borrowings including letters of
credit of approximately $125.0 million, of which $15.0 million was borrowed and
$11.9 million was outstanding for stand-by letters of credit, at December 30,
2000, (iii) a $124.0 million delayed draw term loan of which $94.0 million was
borrowed at December 30, 2000 and (iv) a $90.0 million deferred term loan
facility which was drawn at the closing of the Western Merger. The term loan
facilities, other than the Tranche B term loan, will mature on the sixth
anniversary of initial borrowing, and the Tranche B term loan will mature on the
eighth anniversary of initial borrowing. Annual principal payments on the term
loan facilities prior to the sixth anniversary of initial borrowing will be
nominal; thereafter, required principal payments will be approximately $234.7
million in 2004, $60.0 million in 2005 and $28.6 million in 2006, assuming the
term loan facilities have been fully borrowed. The revolving loan facility will
mature on the sixth anniversary of initial borrowing. The interest rates under
the delayed draw facilities and the revolver are determined by reference to a
pricing grid that will provide for reductions in the applicable interest rate
margins based on the Company's trailing total debt to EBITDA ratio (as defined
in the Credit Facility). Based upon the Company's operating ratios at December
30, 2000, the margins were 1.75% and 0.75% for Eurodollar and base rate
borrowings, respectively. Additionally, at December 30, 2000, the margin under
the Tranche B term loan and the deferred term loan facility was 2.50% on a
Eurodollar rate and 1.50% on the base rate borrowings.
Borrowings under the Credit Facility are required to be prepaid, subject to
certain exceptions, with (a) 50% of defined excess cash flow, (b) 100% of the
net cash proceeds of all asset sales or other dispositions of property by the
Company and its subsidiaries (including certain insurance and condemnation
proceeds), subject to certain exceptions (including exceptions for (i)
reinvestment of certain asset sale proceeds within 270 days of such sale and
(ii) certain sale-leaseback transactions), (c) 100% of the net proceeds of
issuances of debt obligations of the Company and its subsidiaries and (d) 100%
of the net proceeds of issuance of equity of the Company and its subsidiaries.
Because increases in net working capital, capital expenditures and debt
repayments are deducted in calculating excess cash flow, the Company does not
anticipate that the prepayment obligation under the Credit Facility in respect
thereof will have a material effect on its operating strategy. With respect to
growth through acquisitions, the operation of this covenant may result in the
application of cash resources for prepayments which would require the Company to
secure additional equity or debt financing to fund an acquisition, but while no
assurance can be given, the Company does not anticipate that this would have a
material effect on its ability to finance acquisitions in the future. The
Company will be required to make a mandatory prepayment of $6.2 million for
fiscal 2000 in fiscal 2001.
The loans under the Credit Facility are secured by a first priority
security interest in substantially all tangible and intangible assets of the
Company. Amounts available to the Company under the Credit Facility are subject
to a borrowing base formula, which is based on certain percentages of the
Company's inventories, and certain debt covenants. As of December 30, 2000,
$118.3 million was available under these facilities. The Company intends to use
borrowings under the revolver and delayed draw term loans, as well as internally
generated funds, for store expansion and funding of working capital, including
funding of the restructuring program.
The Credit Facility contains covenants restricting the ability of the
Company and its subsidiaries to, among others things, (i) pay dividends on any
class of capital stock or make any payment to purchase, redeem, retire, acquire,
cancel or terminate capital stock, (ii) prepay, redeem, retire, acquire, cancel
or terminate debt, (iii) incur liens or engage in sale-leaseback transactions,
(iv) make loans, investments, advances or guarantees, (v) incur additional debt
(including hedging arrangements), (vi) make capital expenditures, (vii) engage
in mergers, acquisitions and asset sales, (viii) engage in transactions with
affiliates, (ix) enter into any agreement which restricts the ability to create
liens on property or assets or the ability of subsidiaries to pay dividends or
make payments on advances or loans to the Company or other subsidiaries, (x)
change the nature of the business conducted by the Company and its subsidiaries,
(xi) change the passive holding company status of Holding and (xii) amend
existing debt agreements or the Company's or Holding's certificate of
incorporation, by-laws or other organizational documents. The Company is also
required to comply with financial covenants in the Credit Facility with respect
to (a) limits on annual aggregate capital expenditures, (b) a maximum leverage
ratio, (c) a minimum interest coverage ratio and (d) a minimum retained cash
earnings test. The Company is generally prohibited from paying dividends
(including to Holding) except that as long as no defined event of default under
the Credit Facility then exists, the Company will be permitted to pay dividends
to Holding in an amount
18
sufficient to cover the cash interest due on the Debentures commencing October
15, 2003. The Company was in compliance with the above covenants under the
Credit Facility as of December 30, 2000.
The Company's primary capital requirements have been the funding of its
continued store expansion program, store relocations and remodels, inventory
requirements, the construction and upgrading of distribution centers, the
development and implementation of proprietary information systems and the
Western Merger. From fiscal 1996 through fiscal 2000, Company opened 581 stores,
opened seven new PDQ(R)s, opened four Mini-PDQ(R)'s, a Master PDQ(R), closed the
Western Merger, constructed two new distribution centers and expanded its
Roanoke distribution center. The Company has financed its growth through a
combination of internally generated funds, borrowings under the Credit Facility
and issuances of equity.
The Company's new Advance Auto Parts stores require capital expenditures of
approximately $120,000 per store and an inventory investment of approximately
$300,000 per store, a portion of which is held at a distribution facility. A
substantial portion of these inventories is financed through vendor payables.
Pre-opening expenses, consisting primarily of store set-up costs and training of
new store employees, average approximately $25,000 per store and are expensed
when incurred. The Company opened 140 new stores during fiscal 2000 and
anticipates opening up to 130 new stores through internal growth or strategic
acquistions in fiscal 2001.
Historically, the Company has negotiated extended payment terms from
suppliers to help finance inventory growth, and the Company believes that it
will be able to continue financing much of its inventory growth through such
extended payment terms. The Company anticipates that inventory levels will
continue to increase primarily as a result of new store openings and increased
SKU levels.
As a result of the Western Merger, the Company closed certain Advance Auto
Parts stores in overlapping markets with Parts America stores or stores not
meeting profitability objectives. As part of normal operations the Company
reviewed store performance, and decided to close additional stores not meeting
profitability objectives during fiscal 2000. The Western Merger also resulted in
restructuring reserves recorded in purchase accounting for the closure of
certain Parts America stores, severance and relocation costs and other facility
exit costs. As of December 30, 2000, these reserves had a remaining balance of
$10.6 million. The Company also assumed certain restructuring and deferred
compensation liabilities previously recorded by Western Auto Supply Company. At
December 30, 2000, the total liability for the restructuring and deferred
compensation plans was $3.1 million and $5.4 million, respectively, of which
$1.7 million and $1.5 million, respectively, is recorded as a current liability.
The classification for deferred compensation is determined by payment terms
elected by the employee, which can be changed upon 12 months' notice.
In fiscal 2000, net cash provided by operating activities was $103.8
million. This amount consisted of $26.1 million in net income, depreciation and
amortization of $66.8 million, amortization of deferred debt issuance costs of
$3.1 million and a decrease of $7.8 million in net working capital and other.
Net cash used for investing activities was $65.0 million and was comprised
primarily of net capital expenditures. Net cash used in financing activities was
$43.4 million and was comprised primarily of net repayments of long-term debts.
In fiscal 1999, net cash used in operating activities was $19.3 million.
This amount consisted of a $19.6 million net loss, offset by depreciation and
amortization of $58.1 million and amortization of deferred debt issuance costs
of $3.2 million, and an increase of $61.0 million in net working capital and
other requirements. Net cash used for investing activities was $113.8 million
and was comprised primarily of net capital expenditures of $101.9 million and
cash consideration of $13.0 million in the Western Merger. Net cash provided by
financing activities was $121.5 million and was comprised primarily of net
borrowings.
In fiscal 1998, net cash provided by operating activities was $37.9
million. This amount consisted of $1.6 million in net income, depreciation and
amortization of $30.0 million and amortization of deferred debt issuance costs
of $1.9 million, and a decrease of $4.4 million of net working capital and
other. Net cash used for investing activities was $423.7 million and was
comprised primarily of net capital expenditures of approximately $59.7 million,
cash consideration of approximately $171.0 million in the Western Merger and
$193.0 million for the purchase of Holding Common Stock related to the Western
Merger. Net cash provided by financing activities was $412.6 million and was
comprised primarily of net borrowings and issuance of equity.
19
Seasonality
The Company's business is somewhat seasonal in nature, with the highest
sales occurring in the spring and summer months. In addition, the Company's
business is affected by weather conditions. While unusually heavy precipitation
tends to soften sales as elective maintenance is deferred during such periods,
extremely hot and cold weather tends to enhance sales by causing parts to fail.
Risk Factors
Substantial Leverage and Debt Service Obligations
The Company has substantial indebtedness and debt service obligations. The
Company has entered into an indenture governing the Senior Subordinated Notes
(the "Senior Subordinated Notes Indenture") pursuant to which they borrowed
money in order to finance the Recapitalization, including refinancing the
existing outstanding indebtedness of Holding and the Company. As of December 30,
2000, (i) the Company and its subsidiaries had $1,117.9 million of liabilities
outstanding, including indebtedness under the Senior Subordinated Notes and the
Credit Facility, trade payables and other accrued liabilities, and (ii) the
Company had stockholder's equity of $231.4 million. In addition, the Company has
$128.1 million to borrow under the Credit Facility, which is limited to $118.3
million based on certain borrowing base formulas as of December 30, 2000.
The level of the Company's indebtedness may have important consequences to
the holders of the Senior Subordinated Notes, including: (i) the ability of the
Company to obtain additional debt financing in the future for acquisitions,
working capital and capital expenditures may be limited; (ii) a substantial
portion of the Company's cash flow must be dedicated to debt service and will
not be available for other purposes; (iii) the Company's level of indebtedness
could limit its flexibility in reacting to changes in its operating environment
and economic conditions generally and (iv) the covenants contained in the
Company's debt instruments, limit the Company's ability to, among other things,
borrow additional funds, dispose of assets or make investments.
In order to satisfy the Company's obligations under the Senior Subordinated
Notes, its operating leases, the Credit Facility, the IRB and certain other
indebtedness presently outstanding, the Company must generate substantial
operating cash flow. The ability of the Company to meet its respective debt
service and other obligations or to refinance any such obligation will depend on
the future performance of the Company, which will be subject to prevailing
economic conditions and to financial, business and other factors beyond the
control of the Company. While the Company believes it will be able to meet its
respective debt service and other obligations and to refinance such
indebtedness, there can be no assurances with respect thereto, including with
respect to the Company's ability to refinance borrowings under the Credit
Facility at the maturity of the obligations arising thereunder. Furthermore,
because the Credit Facility bears interest at floating rates, the Company's
financial performance and flexibility may be adversely affected by fluctuations
in interest rates.
Uncertainty Relating to Ability to Implement Growth Strategy
The Company has significantly increased its store count in the past five
fiscal years, from 536 stores at the end of fiscal 1995 to 1,729 Company-
operated stores included in the Retail and Wholesale segments at the end of
fiscal 2000. The Company intends to continue to expand its base of stores as
part of its growth strategy, both by opening new stores and by acquisition.
There can be no assurance that this strategy will be successful. The actual
number of new stores to be opened and their success will be dependent on a
number of factors, including, among other things, the ability of the Company to
manage such expansion and hire and train qualified sales associates, the
availability of suitable store locations and the negotiation of acceptable lease
terms for new locations. There can be no assurance that the Company will be able
to open and operate such stores on a timely or profitable basis or that opening
new stores in markets already served by the Company will not adversely affect
existing store profitability or comparable store sales. Furthermore, the success
of the Company's acquisition strategy will depend on the extent to which it is
able to acquire, successfully absorb and profitably manage additional
businesses, and no assurance can be given that the Company's strategy will
succeed.
Competition
The retail sale of automotive parts and accessories is highly competitive.
The Company competes primarily
20
with national and regional retail automotive parts chains, wholesalers or jobber
stores (some of which are associated with national automotive parts distributors
or associations), independent operators, automobile dealers that supply original
equipment manufacturer parts and mass merchandisers that carry automotive
replacement parts and accessories. Some of the Company's competitors are larger
and have greater financial, marketing and other resources than the Company. In
addition, some e-commerce companies have recently established internet sites
that sell automotive parts, products and services. If these internet sites are
successful and the Company is unable to effectively sell its parts, products and
services over the internet through PartsAmerica.com, the Company may lose market
share.
Dependence on Vendor Relationships
The Company's business is dependent upon developing and maintaining close
relationships with its vendors and upon its ability to purchase products from
these vendors on favorable price and other terms. A disruption of these vendor
relationships could have a material adverse effect on the Company's business.
Dependence on Certain Key Personnel
The Company is dependent upon the services and experience of its executive
officers and senior management team and there can be no assurance that the
Company's business would not be affected if one or more of these individuals
left the Company. The Company has entered into an employment agreement with
Lawrence P. Castellani, Chief Executive Officer, Jimmie L. Wade, President,
Chief Financial Officer and Secretary, David R. Reid, Executive Vice President
and Chief Operating Officer, Paul W. Klasing, Executive Vice President,
Merchandising and Marketing, Joe H. Vaughn, Jr., Senior Vice President, Human
Resources and Benefits and Shirley L. Stevens, Senior Vice President and Chief
Information Officer.
Economic and Weather Conditions
The Company's business is sensitive to the economic and weather conditions
of the regions in which it operates. In recent years, certain of these regions
have experienced economic recessions and extreme weather conditions. Temperature
extremes tend to enhance sales by causing a higher incidence of parts failure
and increasing sales of seasonal products. However, unusually inclement weather
can reduce sales by causing deferral of elective maintenance. No prediction can
be made as to future economic or weather conditions in the regions in which the
Company operates or the effect such conditions may have on the business or
results of operations of the Company.
21
Item 7A. Quantitative and Qualitative Disclosures About Market Risks.
The Company currently utilizes no material derivative financial instruments
that expose it to significant market risk. The Company is exposed to cash flow
and fair value risk due to changes in interest rates with respect to its long-
term debt. While the Company cannot predict the impact interest rate movements
will have on its debt, exposure to rate changes is managed through the use of
fixed and variable rate debt. The Company's future exposure to interest rate
risk decreased during fiscal 2000 due to decreased outstanding borrowings and
decreased interest rates.
The Company's fixed rate debt consists primarily of outstanding balances on
the Senior Subordinated Notes. The Company's variable rate debt relates to
borrowings under the Credit Facility and the IRB (see "Item 7. Management's
Discussion and Analysis and Results of Operations--Liquidity and Capital
Resources"). The Company's variable rate debt is primarily vulnerable to
movements in the LIBOR, Prime, Federal Funds and Base CD rates.
The table below presents principal cash flows and related weighted average
interest rates on the Company's long-term debt at December 30, 2000 by expected
maturity dates. Expected maturity dates approximate contract terms. Fair values
included herein have been determined based on quoted market prices. Weighted
average variable rates are based on implied forward rates in the yield curve at
December 30, 2000. Implied forward rates should not be considered a predictor of
actual future interest rates.
Fair
Fiscal Fiscal Fiscal Fiscal Fiscal Market
2001 2002 2003 2004 2005 Thereafter Total Value
--------- --------- ---------- ---------- --------- ---------- ---------- ----------
Long-term debt: (dollars in thousands)
Fixed rate......................... $ - $ - $ - $ - $ - $169,450 $ 169,450 $ 125,393
Weighted average
interest rate.................. - - - - - 11.3% 11.3%
Variable rate...................... $ 7,028 $14,000 $ 4,000 $ 219,668 $60,000 $ 28,588 $ 333,284 $ 333,284
Weighted average
interest rate.................. 7.5% 7.8% 8.0% 8.3% 8.6% 8.6% 7.9%
Item 8. Financial Statements.
See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
22
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information regarding the
directors and executive officers of the Company as of March 30, 2001:
Name Age Position
---- --- --------
Nicholas F. Taubman.................... 66 Chairman of the Board and Director of Holding and the Company
Garnett E. Smith....................... 61 Vice Chairman of the Board and Director of Holding and the Company
Lawrence P. Castellani................. 55 Chief Executive Officer and Director of Holding and the Company
Jimmie L. Wade......................... 46 President and Chief Financial Officer, Secretary of Holding and the
Company
David R. Reid.......................... 38 Executive Vice President and Chief Operating Officer of Holding and
the Company
Paul W. Klasing........................ 41 Executive Vice President, Merchandising and Marketing of Holding
and the Company
Jeffrey T. Gray........................ 36 Senior Vice President, Controller, Assistant Secretary of
Holding and the Company
Joe H. Vaughn, Jr...................... 40 Senior Vice President, Human Resources and Benefits
John M. Roth........................... 42 Director of Holding and the Company
Mark J. Doran.......................... 37 Director of Holding and the Company
Timothy C. Collins..................... 44 Director of Holding and the Company
Peter M. Starrett...................... 53 Director of Holding and the Company
Jeffrey N. Boyer....................... 42 Director of Holding and the Company
William L. Salter...................... 57 Director of Holding and the Company
Jeffrey B. Conner...................... 42 Director of Holding and the Company
Mr. Taubman, Chairman of the Board of Holding and the Company, joined
the Company in 1956. Mr. Taubman has served as Chairman of the Company since
January 1985 and as Chief Executive Officer of the Company from January 1985 to
July 1997. >From 1969 to 1984, Mr. Taubman served as President of the Company.
In addition, Mr. Taubman has served as Chairman of Holding since May 1992, the
year it was formed, as Chief Executive Officer of Holding from May 1992 to March
1998, and as Secretary and Treasurer of Holding from May 1992 to February 1998.
Mr. Smith, Vice Chairman of the Board of Holding and the Company, joined
the Company in November 1959. Mr. Smith was named Vice Chairman of the Board of
Holding and the Company in January 2000. Prior to that Mr. Smith served as
President and Chief Operating Officer of the Company from January 1985 until
July 1997 at which time he became Chief Executive Officer. Mr. Smith has also
served in numerous other positions including Executive Vice President and
General Manager, Vice President of Purchasing, Buyer and Store Manager. In
addition, Mr. Smith has served as President of Holding from May 1992 to October
1999, as Chief Operating Officer of Holding from May 1992 to March 1998, and as
Chief Executive Officer from March 1998 to January 2000.
Mr. Castellani, Chief Executive Officer and Director of Holding and the
Company, joined the Company in February 2000 and is responsible for overall
management and operations of the Company. Prior to joining the Company, Mr.
Castellani was President and Chief Executive Officer of Ahold Support Services
in Latin America from 1998 to 2000 and Chief Executive Officer of Tops Friendly
Markets from 1991 to 1998.
23
Mr. Wade, President, Chief Financial Officer and Secretary, joined the
Company in February 1994. Mr. Wade was named President in October 1999 and Chief
Financial Officer, Secretary in March 2000. Mr. Wade is responsible for finance,
logistics, information services and e-commerce. From 1987 to 1993, Mr. Wade was
Vice President, Finance and Operations, for S.H. Heironimus, and from 1979 to
1987, he was Vice President of Finance for American Motor Inns. Mr. Wade is a
certified public accountant.
Mr. Reid, Executive Vice President and Chief Operating Officer, joined
the Company in October 1984 and has held his current position since October
1999. Mr. Reid is responsible for all retail operations, commercial sales, store
development and construction. In addition, from March 1999 to October 1999, Mr.
Reid has served as the Chief Executive Officer of Western. >From 1994 to 1995,
Mr. Reid was Assistant Vice President, Store Support for the Company. Mr. Reid
has also served in training and store operations as Store Manager and Division
Manager.
Mr. Klasing, Executive Vice President, Merchandising and Marketing,
joined the Company in April 1995 and has held his current position since October
1999. Mr. Klasing is responsible for merchandising, marketing, quality control
and retail pricing. From 1981 to 1992, Mr. Klasing worked for Kragen Auto Parts
(now CSK Automotive) and from 1992 to 1995 for Montgomery Ward/Auto Express in
various positions.
Mr. Gray, Senior Vice President, Controller and Assistant Secretary
joined the Company in March 1994 and has held his current position since April
2000. Mr. Gray is responsible for accounting, treasury, budgeting, financial
analysis and risk management. From 1994 to 2000, Mr. Gray held several positions
within the Company, most recently as Vice President of Inventory Management.
From 1993 to 1994, Mr. Gray served as controller of Hollins University, and
from 1987 to 1993, Mr. Gray was employed by KPMG LLP. Mr. Gray is a certified
public accountant.
Mr. Vaughn, Senior Vice President, Human Resources and Benefits joined
the Company in May 1995 and has held his current position since November 1999.
Mr. Vaughn is responsible for human resources, employee benefits and payroll.
From 1983 to 1989, Mr. Vaughn worked for KPMG LLP, from 1989 to 1992, he worked
for Dominion Bank, and from 1992 to 1995, he worked for Ferguson Andrews &
Associates. Mr. Vaughn is a certified public accountant.
Mr. Roth, Director, became a member of the Board in connection with the
Recapitalization. Mr. Roth joined Freeman Spogli & Co. Incorporated ("Freeman
Spogli") in March 1988 and became a principal in March 1993. Mr. Roth is also a
director of AFC Enterprises, Inc. and Envirosource, Inc.
Mr. Doran, Director, became a member of the Board in connection with the
Recapitalization. Mr. Doran joined Freeman Spogli in 1988 and became a principal
in January 1998. Mr. Doran is also a director of AFC Enterprises, Inc. and
Century Maintenance Supply, Inc.
Mr. Collins, Director, became a member of the Board in connection with
the Recapitalization. Mr. Collins is Senior Managing Director and Chief
Executive Officer of Ripplewood Holdings L.L.C., a private investment firm
formed by him in October 1995. From February 1990 to October 1995, Mr. Collins
was a Senior Managing Director of the New York office of Onex Corporation, an
Ontario corporation listed on the Toronto and Montreal Stock Exchanges. Mr.
Collins is also a director of WRC Media, Inc. and the Strong Schafer Value Fund.
Mr. Starrett, Director, became a member of the Board in November 1998.
Since August 1998, Mr. Starrett has served as a consultant to Freeman Spogli.
Prior to August 1998, Mr. Starrett was President of Warner Bros. Studio Stores
Worldwide and had been employed by Warner Bros. since May 1990. Mr. Starrett is
also a director of AFC Enterprises, Inc., Guitar Center, Inc. and The Pantry,
Inc.
Mr. Boyer, Director, became a member of the Board in December 2000. Mr.
Boyer has been Senior Vice President and Chief Financial Officer of Sears since
January 2000. Prior to this appointment, Mr. Boyer held a variety of senior
level positions at Sears including Vice President of Finance for the Full Line
Stores and Corporate Controller. From 1995 to 1996, Mr. Boyer served as Vice
President of Business Development for the Pillsbury Company. From 1989 to 1995,
Mr. Boyer was employed by Kraft Foods, a unit of Philip Morris, where he held
positions of Vice President of Finance for General Foods and Vice President of
Financial Planning for Kraft General Foods.
Mr. Salter, Director, became a member of the Board in April 1999. Mr.
Salter is the retired President of the Specialty Retail Division of Sears. From
1995 to 1999, Mr. Salter served as President of the Home Stores and Hard Lines
division of Sears, and from 1993 to 1995 as the Vice President and General
Manager of the Home Appliances and Electronics Division of Sears.
24
Mr. Conner, Director, became a member of the Board in December 2000. Mr.
Conner has served as Vice President of Business Development for Sears since May
2000. From 1998 to 2000, Mr. Conner served as Vice President of Stores for Sears
Tire Group. Mr. Conner joined Sears in 1987 and held a number of strategic and
operational positions before becoming Vice President of Operations for Sears
Tire Group in 1997.
Directors of the Company and Holding are elected annually and hold
office until the next annual meeting of stockholders or until their successors
are duly elected and qualified.
Executive Officers are elected by, and serve at the discretion of, the
Board of Directors. The Company has entered into employment agreements with
certain of its executive officers. See "Item 11. Executive Employment
Contracts."
25
Item 11. Executive Compensation.
The following table sets forth information with respect to compensation
earned by the Chief Executive Officer, the four other most highly compensated
executives serving as officers at the end of the last completed fiscal year
(collectively, the "Executive Officers") and two additional executives, who
served as officers during the fiscal year and would have been included in the
top four if serving as such at the end of the fiscal year.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
------------------------------------------- --------------
Securities
Fiscal Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus (1) Compensation (2) Options/SARs Compensation (3)
- ------------------------------------------- -------- ---------- ------------- ---------------- -------------- ----------------
Lawrence P. Castellani................... 2000 $ 542,308 $ 75,000 $ - 1,050,000 $ -
Chief Executive Officer 1999 - 3,272,700 - - -
1998 - - - - -
Jimmie L. Wade........................... 2000 $ 265,865 $ 110,056 $ - 30,000 $ 6,336
President and Chief 1999 174,421 157,976 - 34,500 6,080
Financial Officer 1998 108,537 221,887 - 25,000 6,665
David R. Reid............................ 2000 $ 250,000 $ 83,250 $ - 25,000 $ 6,379
Executive Vice 1999 198,808 155,955 - 34,500 6,080
President and Chief 1998 108,131 208,464 - 25,000 5,320
Operating Officer
Paul W. Klasing.......................... 2000 $ 184,128 $ 77,087 $ - 18,000 $ 6,298
Executive Vice President, 1999 151,031 116,023 - 34,500 6,080
Merchandising and Marketing 1998 140,000 231,382 - 25,000 6,589
Jeffrey T. Gray.......................... 2000 $ 112,081 $ 34,031 $ - 8,000 $ 6,013
Senior Vice President, 1999 93,706 80,200 - 4,000 6,080
Controller 1998 81,504 139,849 - 10,500 6,687
Shirley L. Stevens....................... 2000 $ 172,782 $ 61,820 $ - 10,000 $ 6,302
Senior Vice President and Chief 1999 164,665 130,840 - 8,000 6,080
Information Officer 1998 150,800 231,242 - 25,000 6,982
Garnett E. Smith (4)..................... 2000 $ 280,758 $ 25,000 $ - 55,000 $ 6,000
Former Chief Executive 1999 507,965 220,408 - 417,500 8,000
Officer 1998 457,600 7,948,011 - 362,500 8,000
J. O'Neil Leftwich (5)................... 2000 $ 203,291 $ 18,000 $ - - $ 6,326
Former Senior Vice President and 1999 188,092 145,826 - 86,500 6,080
Chief Financial Officer, 1998 164,415 828,220 - 72,500 6,932
Secretary and Treasurer
(1) In connection with the Recapitalization, an aggregate of $11.5 million in
extraordinary bonuses were paid to senior employees in April 1998.
(2) While certain officers received perquisites, such perquisites do not exceed
the lesser of $50,000 or 10% of each officer's respective salary and bonus.
(3) Consists of matching contributions made by the Company under the Company's
401(k) savings plan.
(4) In January 2000, Mr. Smith became Vice Chairman of the Board of Holding and
the Company.
(5) As of December 30, 2000, Mr. Leftwich was no longer employed by the Company.
Executive Employment Contracts
Mr. Castellani was appointed Chief Executive Officer and began
employment with the Company on February 1, 2000 at which time he signed an
employment and non-competition agreement. Mr. Castellani signed an irrevocable
acceptance letter with the Company in December 1999 that obligated the Company
to pay Mr. Castellani a signing bonus of $3.3 million. The signing bonus of $3.3
million was accrued at January 1, 2000 and was paid in the first
26
quarter of fiscal 2000. Approximately $1.9 million of the bonus was used to
purchase shares of Holding common stock pursuant to a restricted stock
agreement, which limits the sale or transfer of rights to the stock during the
term of the contract. This portion of the bonus was deferred and will be
amortized over the two year term of the contract. The contract has an initial
term of two years, and renews automatically each year thereafter unless
terminated by the Company or Mr. Castellani. The contract provides for a base
salary of $600,000, subject to annual increases at the discretion of the Board
of Directors, and an annual cash bonus based on the Company's achievement of
performance targets established by the Board of Directors. In the event Mr.
Castellani is terminated without cause, or terminates his employment for "good
reason" as defined in the employment agreement, he will receive salary through
the later of the end of the term of employment or one year from the effective
date of termination, less any amounts earned in other employment. Mr. Castellani
has agreed not to compete with the Company, to preserve its confidential
information, not to recruit or employ employees of the Company to or in other
businesses, and not to solicit customers or suppliers of the Company for
competitors.
On April 15, 1998, Mr. Smith entered into an employment and
non-competition agreement with the Company. In January of fiscal 2000, Mr. Smith
was named Vice Chairman of Holding and the Company. The agreement has an initial
term of three years, and renews automatically each year thereafter unless
terminated by the Company or Mr. Smith. The agreement provides for a base salary
of $200,000, adjusted for his new responsibilities, effective April 1, 2000 and
is subject to annual increases at the discretion of the Board of Directors.
Additionally, Mr. Smith may earn annual cash bonuses based on the Company's
achievement of performance targets established by the Board of Directors. The
bonus to be paid upon achievement of targets will be consistent in amount with
the bonuses paid to Mr. Smith by the Company historically. In the event Mr.
Smith is terminated without cause, or terminates his employment for "good
reason" as defined in the employment agreement, he will receive salary through
the later of the end of the term of employment or one year from the effective
date of termination, less any amounts earned in other employment. Mr. Smith has
agreed not to compete with the Company, to preserve its confidential
information, not to recruit or employ employees of the Company to or in other
businesses, and not to solicit customers or suppliers of the Company for
competitors.
On April 15, 1998, Messrs. Reid, Wade, Klasing and Ms. Stevens entered
into employment agreements with the Company. The agreements provide that each
Executive Officer will receive a base salary of $110,000, $110,000, $140,000 and
$150,800 respectively, subject to annual increases at the discretion of the
Board of Directors. Such agreements contain severance provisions that provide
for base salary for the remainder of the term of the agreement upon termination
of employment or one year, unless the termination is due to death, disability or
retirement, by the Company for "cause" (as defined in the agreements) or by the
employee other than for "good reason" (as defined in the agreements), less any
amounts earned in other employment. The initial term of the employment
agreements is two years, after which the term of employment will extend from
year-to-year unless terminated by either the Company or the employee. Other
provisions require the Company to pay bonuses earned by the employee upon the
Company's achievement of earnings targets established by the Board of Directors,
and an agreement by the employee not to compete with the Company, to preserve
its confidential information, not to recruit or employ employees of the Company
to or in other businesses, and not to solicit customers or suppliers of the
Company for competitors.
Consulting Agreement
On April 15, 1998, Mr. Taubman entered into a consulting and
non-competition agreement with Holding and the Company. The agreement, which has
a term of three years, requires Holding or the Company to pay consulting fees in
an amount of $300,000 per annum, plus an annual bonus of at least $300,000 based
upon the achievement of targeted performance goals established by the Board of
Directors. In fiscal 2000, 1999 and 1998, Mr. Taubman earned $320,000, $400,000
and $708,222, respectively, pursuant to the consulting agreement. Mr. Taubman
has agreed not to compete with the Company, to preserve its confidential
information, not to recruit or employ employees of the Company to or in other
businesses, and not to solicit customers or suppliers of the Company for
competitors. Pursuant to the consulting agreement, Holding and Mr. Taubman have
entered into an indemnity agreement whereby Holding will indemnify Mr. Taubman
for actions taken as an officer or director of or consultant to Holding or the
Company to the fullest extent permitted by law. The amount of time Mr. Taubman
must devote to his consultation duties declines throughout the term of the
agreement. The Company has entered into indemnification agreements similar to
that with Mr. Taubman with five of its other directors.
27
Compensation of Directors
Directors of the Company receive no compensation as directors. Directors
are reimbursed for their reasonable expenses in attending meetings and
performing duties as directors.
Stock Subscription Plans
Holding has adopted Stock Subscription Plans (the "Stock Subscription
Plans") pursuant to which certain directors, officers and key employees of the
Company have purchased 820,450 shares, net of cancellations, of the outstanding
Holding Common Stock at the same price as Freeman Spogli's purchase of its
shares in the Recapitalization, or fair market value at the time of purchase.
Three Million Eight Hundred Ninety Six Thousand Dollars of the purchase price
for such shares has been paid by delivery of full recourse promissory notes
bearing interest at the prime rate and due five years from their inception,
secured by all of the stock each such individual owns in Holding. As of December
30, 2000, $2.4 million under these notes remained outstanding. Messrs. Smith,
Wade, Reid, Klasing, Gray and Ms. Stevens purchased 250,000 shares, 25,000
shares, 20,000 shares, 20,000 shares, 10,000 shares and 20,000 shares
respectively. For these individuals, $0, $75,000, $115,000, $110,000, $50,000
and $100,000 of their purchase price, respectively, was financed through the
delivery of promissory notes on the terms described above. As of March 30, 2001,
the outstanding balance on the promissory notes was $115,000, $110,000, $40,000
and $100,000 for each of Messrs. Reid, Klasing, Gray and Ms. Stevens,
respectively. The agreements entered into in connection with the Stock
Subscription Plans provide for restrictions on transferability, and acquired
shares are subject to a right of first refusal and a repurchase right at stated
prices in favor of Holding and co-sale rights in favor of the executive if
Freeman Spogli sells its shares to a third party. The agreements also include an
obligation to sell at the request of Freeman Spogli. These rights (but not the
restrictions on transferability) will terminate upon an initial public offering
by Holding of Holding Common Stock, as further defined in agreements entered
into under the Stock Subscription Plans.
Mr. Castellani entered into a stock subscription agreement under the
Stock Subscription Plan in fiscal 2000, pursuant to which he purchased 75,000
shares of Holding Common Stock. $900,000 of Mr. Castellani's purchase price was
financed through the delivery to the Company of a promissory note. As of March
30, 2001, the outstanding balance of the promissory note was $600,000.
Stock Option Plans
Holding has adopted stock option plans (the "Option Plans"), under which
Holding made initial grants of approximately 898,750 shares of Holding Common
Stock in April 1998. As of December 30, 2000, the Company has granted a total of
2,203,125 shares under the Option Plan. Each Option Plan participant has entered
into an option agreement (an "Option Agreement") with Holding. The Option Plans
and each outstanding option thereunder are subject to termination in the event
of a change in control of Holding or other extraordinary corporate transactions,
as more fully described in the Option Plans. In addition, all options granted
pursuant to the Option Plans will terminate 90 days after termination of
employment (unless termination was for cause, in which event an option will
terminate immediately) or 180 days in the event of termination due to death or
disability. Shares received upon exercise of options are subject to both a right
of first refusal and a repurchase right at stated prices in favor of Holding,
and co-sale rights in favor of the optionee. These rights will terminate upon an
initial public offering by Holding of its Common Stock, as further defined in
the Option Agreements. Shares received upon exercise of options, as well as all
outstanding options, are also subject to obligations to sell at the request of
Freeman Spogli. All options will terminate on the seventh anniversary of the
Option Agreement under which they were granted if not exercised prior thereto.
Three different types of options may be granted pursuant to the Option
Plans. Fixed Price Service Options vest over a three-year period in three equal
annual installments beginning one year from the date of grant. Performance
Options are earned in installments based upon satisfaction of certain
performance targets for the four-year period ending in fiscal 2001. Variable
Price Service Options will vest in equal annual installments over a two-year
period beginning in 2000, and have an exercise price that increases over time.
28
Option Grants
The following table sets forth information concerning Options granted in
fiscal 2000 to each of the Executive Officers.
Individual Grants Potential Realizable Value at
----------------------------------------------------- Assumed Annual Rates of Stock
% of Total Price Appreciation
Number of Options/ for Option Term
Securities SARs Fixed Price Options
Underlying Granted to Exercise or -----------------------------------------
Options/SARs Employees in Base Price Expiration
Name Granted # Fiscal Year ($/Sh)(1) Date 0% (2) 5% ($)(3) 10% ($)(3)
- ------------------------------ ------------- ------------ ------------ ---------- -------- -------------- -------------
Lawrence P. Castellani........ 350,000 (4) 26.2 $ 16.82 2/1/07 - $ 2,396,600 $ 5,585,098
Lawrence P. Castellani........ 350,000 (4) 26.2 20.00 2/1/07 - $ 2,849,703 $ 6,641,020
Lawrence P. Castellani........ 350,000 (4) 26.2 25.00 2/1/07 - $ 3,562,129 $ 8,301,275
Jimmie L. Wade................ 30,000 (5) 2.2 16.82 4/14/07 - 205,423 478,723
David R. Reid................. 25,000 (6) 1.9 16.82 4/14/07 171,186 398,936
Paul W. Klasing............... 18,000 (7) 1.3 16.82 4/14/07 - 123,254 287,324
Garnett E. Smith.............. 18,000 (8) 1.3 16.82 4/14/07 - 123,254 287,324
Shirley L. Stevens............ 10,000 (9) 0.7 16.82 4/14/07 - 68,474 159,574
Jeffrey T. Gray............... 8,000 (10) 0.5 16.82 4/14/07 - 54,779 127,659
(1) Represents the fair market value of the underlying shares of Common Stock
at the time of the grant as determined by Holding's Board of Directors.
(2) Unless the stock price increases, which will benefit all stockholders
commensurately, an Option holder will realize no gain.
(3) Represents the value of the shares of Common Stock issuable upon the
exercise of the Option, assuming the stated rates of price appreciation for
seven years, compounded annually, with the aggregate exercise price
deducted from the final appreciated value. The 5% and 10% rates are
established by the SEC as examples only and are not intended to forecast
future appreciation in the Common Stock price.
(4) Represents 350,000 Fixed Price Service Options.
(5) Represents 30,000 Fixed Price Service Options.
(6) Represents 25,000 Fixed Price Service Options.
(7) Represents 18,000 Fixed Price Service Options.
(8) Represents 18,000 Fixed Price Service Options.
(9) Represents 10,000 Fixed Price Service Options.
(10) Represents 8,000 Fixed Price Service Options.
29
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table sets forth information with respect to the Executive
Officers concerning option exercises for fiscal 2000 and exercisable and
unexercisable options held as of December 30, 2000.
Number of Securities
Underlying Value of
Options at In-the-Money Options at
December 30, 2000(#) December 30, 2000($)(a)(b)
------------------------------ ---------------------------------
Shares
Acquired on Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------- ----------- ------------- ----------- ------------- -------------- --------------
Lawrence P. Castellani....... - - - 1,050,000 $ - $ 1,813,000
Jimmie L. Wade............... - - 10,667 53,833 95,737 344,373
David R. Reid................ - - 10,667 48,833 95,737 323,473
Paul W. Klasing.............. - - 10,667 41,833 95,737 294,213
Garnett E. Smith............. - - 124,583 310,917 1,245,381 3,047,258
Shirley L. Stevens........... - - 10,167 32,833 93,647 256,593
Jeffrey T. Gray.............. - - 4,583 17,917 41,323 124,337
(a) There is no established public trading market for the Holding Common Stock.
Holding believes that the fair market value of the Holding Common Stock was
$21.00 per share as of December 30, 2000.
(b) Values for "in-the-money" outstanding options represent the positive spread
between the respective exercise prices of the outstanding options and the
fair market value underlying the Holding Common Stock of $21.00 as described
in note (a).
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors determines the
compensation of the Executive Officers. During fiscal 2000, Messrs. Roth, Salter
and Smith served on the Compensation Committee. Mr. Smith also served as an
officer of the Company during fiscal 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Not applicable.
30
Item 13. Certain Relationships and Related Transactions.
Affiliated Leases
The Company leases its Roanoke, Virginia distribution center, an office
and warehouse facility, two warehouses, 20 of its stores and three former stores
from Nicholas F. Taubman or members of his immediate family, and its corporate
headquarters from Ki, L.C., a Virginia limited liability company owned by two
trusts for the benefit of a child of Mr. Taubman. Rents for the affiliated
leases may be slightly higher than rents for non-affiliated leases, but the
Company does not believe the amount of such difference to be material. In
addition, certain terms of the affiliated leases may be more favorable to the
landlord than those contained in leases with non-affiliates, primarily terms
relating to the maintenance of the facilities. However, in connection with the
Recapitalization, certain other terms of the leases with affiliates (including
provisions relating to assignment, damage by casualty and default cure periods)
were amended so that they would be no less favorable to the Company than
non-affiliated leases. All affiliated leases are on a triple net basis. Lease
expense for leases with these affiliates has been $2.9 million for fiscal 1998
and $3.3 million for each of fiscal 1999 and 2000.
Three Western Auto Puerto Rico stores are on the premises of Sears
stores and the buildings are subleased from Sears. The rental rates were
established prior to the Western Merger by arm's-length negotiation between the
Company and Sears, and the Company believes that the rent and terms of the
subleases reflect market rates and terms at the time of the Western Merger.
During fiscal 2000 and 1999, the Company paid Sears approximately $660,000 and
$681,000, respectively for the use of these facilities.
Stockholders Agreement
Mr. Taubman and the Arthur Taubman Trust Dated July 13, 1964 (the
"Taubman Trust" and, together with Mr. Taubman, the "Continuing Stockholders"),
Freeman Spogli, Ripplewood Partners, L.P. and Ripplewood Advance Auto Parts
Employee Fund I L.L.C. (collectively, "Ripplewood"), WAH and Holding have
entered into an Amended and Restated Stockholders Agreement (the "Stockholders
Agreement"). Under the Stockholders Agreement, Freeman Spogli, Ripplewood, WAH
and the Continuing Stockholders have the right to purchase their pro rata share
of certain new issuances of securities, including capital stock by Holding.
Prior to April 15, 2001 (or if earlier, the date of an initial public offering),
any transfers of Holding Common Stock by any Continuing Stockholder and
Ripplewood are subject to rights of first offer in favor of Freeman Spogli and
WAH on a pro rata basis. Prior to an initial public offering, any transfers of
Holding Common Stock are subject to rights of first refusal in favor of (i)
Freeman Spogli and WAH on a pro rata basis, in the case of a transfer by
Ripplewood, (ii) WAH, in the case of a transfer by Freeman Spogli and (iii)
Freeman Spogli, in the case of a transfer by WAH. The Stockholders Agreement
further provides tag-along rights such that (i) upon transfers of Holding Common
Stock by Freeman Spogli (excluding transfers to affiliates of Freeman Spogli),
the Continuing Stockholders, Ripplewood and WAH will have the right to
participate in such sales on a pro rata basis, (ii) upon transfers of Holding
Common Stock by WAH (excluding transfers to affiliates of WAH), Freeman Spogli,
the Continuing Stockholders and Ripplewood will have the right to participate in
such sales on a pro rata basis and (iii) upon transfers of Holding Common Stock
by Ripplewood (excluding transfers to affiliates of Ripplewood), Freeman Spogli
will have the right to participate in such sales on a pro rata basis, and if
Freeman Spogli exercises such right, the Continuing Stockholders and WAH will
have the right to participate in such sales on a pro rata basis. In addition,
after April 1, 2000 if Freeman Spogli sells all of its holdings of Holding
Common Stock, Ripplewood and the Continuing Stockholders will be obligated to
sell all of their shares of Holding Common Stock at the request of Freeman
Spogli. Without the consent of the majority of the other stockholders, Sears
will not sell WAH to a third party so as to dispose of its indirect interest in
Holding.
The Stockholders Agreement further provides that the parties will vote
at each annual meeting of Holding to elect to the Board of Directors Mr.
Taubman, the Chief Executive Officer of Holding, three nominees of Freeman
Spogli, three nominees of WAH and one nominee of Ripplewood. Certain transfers
of Holding Common Stock by either Freeman Spogli or WAH will reduce the number
of directors such parties are entitled to nominate. Ripplewood has granted
Freeman Spogli an irrevocable proxy to vote Ripplewood's stock in Holding on all
matters, expiring upon an initial public offering of common stock by Holding,
but Freeman Spogli will nominate one director designated by Ripplewood. The
Ripplewood director will agree to vote with the Freeman Spogli directors on all
matters prior to an initial public offering of common stock by Holding. Pursuant
to the Stockholders Agreement, Mr. Taubman has certain approval rights with
respect to major corporate transactions.
31
Options Granted to the Continuing Stockholders
In connection with the Recapitalization, Holding entered into an Option
Agreement with Mr. Taubman and the Taubman Trust whereby each of them has been
granted immediately exercisable options to purchase 250,000 shares of Holding
Common Stock. The options have an initial exercise price of $10.00, with the
exercise price increasing by $2.00 on each anniversary of the Recapitalization.
Both the exercise price and the number of shares which may be purchased pursuant
to the options are subject to certain adjustments. The options will expire if
not exercised by the seventh anniversary of the Recapitalization. Shares
received upon exercise of all or any part of the option by the Continuing
Stockholders will be subject to the Stockholders Agreement.
Registration Rights Agreement
Pursuant to the Stockholders Agreement, Holding agreed, beginning 180
days after consummation of an initial public offering of common stock by
Holding, that upon the request of Freeman Spogli, WAH and the Continuing
Stockholders it will register under the Securities Act and applicable state
securities laws the sale of Holding Common Stock owned by Freeman Spogli, WAH
and the Continuing Stockholders subject to certain limitations. Holding has
granted unlimited piggy-back registration rights to Freeman Spogli, Ripplewood,
WAH and the Continuing Stockholders. Holding also granted three demand
registrations to each of Freeman Spogli and WAH, two demand registrations to the
Continuing Stockholders and one demand registration to Ripplewood. Holding
granted WAH the right, beginning 180 days after the consummation of an initial
public offering, to distribute its shares of Holding Common Stock to Sears'
stockholders. Holding's obligation is subject to certain limitations relating to
the minimum amount required for registration, the timing of registrations and
other similar matters. Holding is obligated to pay any registration expenses
incidental to such registrations, excluding underwriters' commissions and
discounts. Holding has agreed to indemnify Freeman Spogli, Ripplewood, WAH, the
Continuing Stockholders and the control person of any of the foregoing against
certain liabilities including liabilities under the Securities Act.
Management Equity Plans
See "Item 11. Executive Compensation--Stock Subscription Plans" and "--
Stock Option Plans."
Indemnification Agreements
In connection with the Recapitalization, the Company entered into
indemnification agreements with certain of the directors of the Company.
Certain Payments
In connection with the Recapitalization, a portion of the common stock
and all of the preferred stock of Holding were converted into the right to
receive in the aggregate approximately $351.0 million in cash and certain
options to purchase shares of Holding Common Stock. In addition, Freeman Spogli
and Ripplewood, stockholders of Holding, received collectively a $5.0 million
fee for arranging the financing, performing advisory and consulting services and
negotiating the Recapitalization, and Freeman Spogli, Ripplewood and the
Continuing Stockholders received collectively a $3.5 million fee for performing
similar services with respect to the Western Merger. In connection with the
Recapitalization, certain employees of the Company, including the Executive
Officers, received an aggregate of approximately $11.5 million in bonuses with
Mr. Smith receiving $7.0 million and Messrs. Reid, Wade and Klasing and Ms.
Stevens receiving $150,000 each.
Other Transactions with Sears
On November 2, 1998, Western Auto Supply Company merged into a
subsidiary of the Company. In the Western Auto Merger, WAH was issued 11,474,606
shares of Holding Common Stock, representing approximately 40.6% of the
outstanding Holding Common Stock. In connection with the Western Merger, WAH
became entitled, under the Stockholders Agreement described above, to nominate
three directors to the Board of Directors of Holding. At December 30, 2000,
Jeffrey N. Boyer, Jeffrey B. Conner and William L. Salter served on the Board of
Directors as WAH nominees.
32
In connection with the Western Merger, Western entered into agreements
with Sears in order to continue to obtain supplies of certain products bearing
trademarks owned by Sears for the store in the Wholesale segment and the Service
Stores for three years. Pursuant to these agreements, Western purchased directly
from the manufacturers approximately $9.2 million, $13.5 million and $6.0
million of these products in fiscal 2000, 1999 and fiscal 1998, respectively,
and the Company believes that Sears received fees in association with such
sales. The prices paid per unit for the products sold in the Western Auto stores
were determined prior to the Western Merger by arm's-length negotiation between
the Company and Sears.
In connection with the Western Merger, Western entered into agreements
with Sears and its affiliates whereby consumers can make retail purchases at the
Service Stores and the stores included in the Wholesale segment using the Sears
credit card and other Western Auto private label credit cards. The Sears
affiliates are paid a discount fee on each retail transaction that is
competitive with the fees paid by Western and the Company to third party credit
card providers such as Visa, MasterCard and American Express. Under this
agreement, Western incurred approximately $405,000, $348,000 and $657,000 in
discount fees in fiscal 2000, 1999 and fiscal 1998, respectively. In addition, a
portion of a Service Store and certain Western employees were leased to Sears
during fiscal 1999 and 1998, for use in Sears' administration of the credit card
program. The lease payments, which aggregated approximately $2.3 million and
$697,000 in fiscal 1999 and fiscal 1998, respectively, are intended to reimburse
the Company for its expense in connection with the facility and the employees.
The leasing arrangement was terminated prior to fiscal 2000.
In connection with the Western Merger, Sears provided certain services
to effect an orderly transition of Western Auto Supply Company from a subsidiary
of Sears to a subsidiary of the Company. Such services included payroll and
accounts payable. As of January 1, 2000, these services were completed and
transitioned to the Company. Pursuant to this arrangement, the Company incurred
$887,000 and $844,000 for services performed by Sears for the Company in fiscal
1999 and fiscal 1998, of which $844,000 was accrued at January 2, 1999. As of
January 1, 2000, all amounts under this arrangement had been paid.
During fiscal 1999, the Company signed an agreement with Sears Logistic
Systems ("SLS"), an affiliate of Sears, to provide the Company billing
administration services related to certain courier firms used by the Company.
SLS manages the invoice processing procedure and bills the Company for the
courier services provided by the outside firm plus a four-percent administration
fee. During fiscal 1999, the Company paid SLS approximately $62,000.
Under the terms of an insurance program established by a Sears
subsidiary on behalf of Western Auto Supply Company prior to the Western Merger,
with respect to certain insurable losses where the Company may otherwise have a
retention obligation or deductible under the applicable insurance policy
providing coverage, the Company will be entitled to be reimbursed by Sears for
its losses. No material payments were made under the insurance program in fiscal
1999 or fiscal 1998. The Company received approximately $1.5 million during
fiscal 2000 for a claim processed under the insurance program.
In connection with the Western Merger, Sears and the Company entered
into an agreement under which the Company may be given a priority position as a
local supplier to up to approximately 250 Sears Auto Centers or National Tire &
Battery ("NTB") Stores that are located near Company stores. Under this
agreement, upon request from a Sears Auto Center or NTB Store, the Company will
deliver parts and charge a price negotiated prior to the Western Merger between
the Company and Sears. In addition, if the volume of activity under this
agreement meets certain agreed-upon thresholds, Sears will receive rebates on
its purchases. The supply arrangement was phased in by the Company and Sears
during late fiscal 1998; therefore, no material purchases were made by Sears in
fiscal 1998. During fiscal 2000 and 1999, the Company sold $7.5 million and $5.3
million, respectively of merchandise to Sears under the supply agreement.
In connection with the Western Merger, Sears arranged to buy from the
Company certain products in bulk for its automotive centers, at cost plus a set
handling fee. In fiscal 1998, the Company shipped approximately $2.1 million in
products to Sears. During the first quarter of fiscal 1999, the Company made
final shipments to Sears under this arrangement of $530,000.
33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Report:
(1 & 2) Index to Consolidated Financial Statements and
Schedules:
Advance Stores Company, Incorporated and
Subsidiaries Consolidated Financial Statements:
Report of Independent Public Accountants--Arthur
Andersen LLP..................................... F-1
Consolidated Balance Sheets as of December 30, 2000
and January 1, 2000.............................. F-2
Consolidated Statements of Operations for the Years
Ended December 30, 2000, January 1, 2000 and
January 2, 1999.................................. F-3
Consolidated Statements of Changes in Stockholder's
Equity for the Years Ended December 30, 2000,
January 1, 2000 and January 2, 1999.............. F-4
Consolidated Statements of Cash Flows for the Years
Ended December 30, 2000, January 1, 2000 and
January 2, 1999.................................. F-5
Notes to Consolidated Financial Statements December
30, 2000, January 1, 2000 and January 2, 1999.... F-7
Schedule II -- Valuation and Qualifying Accounts.... II-1
(3) Exhibits:
Exhibit
Number Description
------ -----------
3.1(1) Articles of Incorporation of the Company, as
amended to date.
3.2(1) Bylaws of the Company, as amended to date.
4.1(1) Indenture dated as of April 15, 1998 among
the Company, LARALEV, INC., as guarantor, and
United States Trust Company of New York, as
Trustee, with respect to the 10.25% Senior
Subordinated Notes due 2008 (including the
form of 10.25% Senior Subordinated Note due
2008).
4.2(2) Supplemental Indenture dated as of November
2, 1998 between Western Auto and United
States Trust Company of New York, as trustee.
10.1(3) Amended and Restated Stockholders Agreement
dated November 2, 1998 among FS Equity
Partners IV, L.P., Ripplewood Partners, L.P.,
Ripplewood Advance Auto Parts Employee Fund I
L.L.C., Nicholas F. Taubman, The Arthur
Taubman Trust dated July 13, 1964, WA Holding
Co. and Holding (including the Terms of the
Registration Rights of Common Stock).
10.2(4) Amended and Restated Credit Agreement dated
as of October 19, 1998 among Holding, the
Registrant, the lenders party thereto, The
Chase Manhattan Bank ("Chase"), Chase
Securities Inc., DLJ Capital Funding, Inc.
and First Union National Bank.
10.3(5) Pledge Agreement dated as of April 15, 1998,
as amended and restated as of November 2,
1998, among the Registrant, Holding, the
Subsidiary Pledgors listed therein and Chase,
as collateral agent.
34
Exhibit
Number Description
------ -----------
10.4(6) Guarantee Agreement dated as of April 15, 1998, as
amended and restated as of November 2, 1998, among
Holding, the Subsidiary Guarantors listed therein
and Chase, as collateral agent.
10.5(7) Indemnity, Subrogation and Contribution Agreement
dated as of April 15, 1998, as amended and
restated as of November 2, 1998, among the
Registrant, Holding, the Guarantors listed therein
and Chase, as collateral agent.
10.6(8) Security Agreement dated as of April 15, 1998, as
amended and restated as of November 2, 1998, among
the Registrant, Holding, the Subsidiary Guarantors
listed therein and Chase, as collateral agent.
10.7(1) Lease Agreement dated as of March 16, 1995 between
Ki, L.C. and the Company for the Company's
headquarters located at 5673 Airport Road,
Roanoke, Virginia, as amended.
10.8(1) Lease Agreement dated as of January 1, 1997
between Nicholas F. Taubman and the Company for
the distribution center located at 1835 Blue Hills
Drive, N.E., Roanoke, Virginia, as amended.
10.9(1) Trust Indenture dated as of December 1, 1997 among
McDuffie County Development Authority, First Union
National Bank, as trustee, and Branch Banking and
Trust Company, as credit facility trustee,
relating to the $10,000,000 Taxable Industrial
Development Revenue Bonds (Advance Stores Company,
Incorporated Project) Series 1997 (the "IRB").
10.10(1) Lease Agreement dated as of December 1, 1997
between Development Authority of McDuffie County
and the Company relating to the IRB.
10.11(1) Letter of Credit and Reimbursement Agreement dated
as of December 1, 1997 among the Company, Holding
and First Union National Bank relating to the IRB.
10.12(1) Advance Holding Corporation 1998 Senior Executive
Stock Option Plan.
10.13(1) Form of Advance Holding Corporation 1998 Senior
Executive Stock Option Agreement.
10.14(1) Advance Holding Corporation 1998 Executive Stock
Option Plan.
10.15(1) Form of Advance Holding Corporation 1998 Stock
Option Agreement.
10.16(1) Advance Holding Corporation 1998 Senior Executive
Stock Subscription Plan.
10.17(1) Form of Advance Holding Corporation Senior
Executive Stock Subscription Agreement.
10.18(1) Advance Holding Corporation 1998 Employee Stock
Subscription Plan.
10.19(1) Form of Advance Holding Corporation Employee Stock
Subscription Agreement.
10.20(1) Form of Secured Promissory Note.
10.21(1) Form of Stock Pledge Agreement.
10.22(1) Form of Employment and Non-Competition Agreement
between Childs, Cox, Gearheart, Gerald, Gray,
Gregory, Hale, Helms, Jeter, Knighten, Kyle,
Livesay, McDaniel, Miley, Quinn, Richardson,
Smith, Turner and Williams and the Company (one-
year agreement).
10.23(1) Form of Employment and Non-Competition Agreement
between
35
Exhibit
Number Description
------ -----------
Bigoney, Buskirk, Felts, Fralin, Haan, Klasing,
Reid, Stevens, Vaughn, Wade, Weatherly and Wirth
and the Company (two-year agreement).
10.24(1) Form of Indemnity Agreement between certain
directors of Holding (other than Nicholas F.
Taubman) and Holding.
10.25(1) Form of Consulting and Non-Competition Agreement
among Nicholas F. Taubman, Holding and the
Company.
10.26(1) Indemnity Agreement dated as of April 15, 1998
between Nicholas F. Taubman and Holding.
10.27(1) Option Agreement dated as of April 15, 1998
between Nicholas F. Taubman and Holding.
10.28(1) Option Agreement dated as of April 15, 1998
between Arthur Taubman Trust dated July 13, 1968
and Holding.
10.29(1) Employment and Non-Competition Agreement among
Garnett E. Smith, Holding and the Company.
10.30(1) Form of Series B Debenture.
10.31(9) First Amendment dated as of June 30, 1999, to the
Credit Agreement dated as of April 15, 1998 as
amended and restated as of October 19, 1998, among
Holding, the Company, the lenders party thereto
and The Chase Manhattan Bank ("Chase"), as
administrative agent.
10.32(10) Supplement No. 1 dated as of June 30, 1999, to the
Guarantee Agreement dated as of April 15, 1998 as
amended and restated as of November 2, 1998, among
Holding, the Subsidiary Guarantors listed therein
and Chase, as collateral agent.
10.33(11) Supplement No. 1 dated as of June 30, 1999, to the
Pledge Agreement dated as of April 15, 1998 as
amended and restated as of November 2, 1998, among
the Company, Holding, the Subsidiary Pledgors
listed therein and Chase, as collateral agent
10.34(12) Supplement No. 1 dated as of June 30, 1999, to the
Security Agreement dated as of April 15, 1998 as
amended and restated as of November 2, 1998, among
the Company, Holding, the Subsidiary Guarantors
listed therein and Chase, as collateral agent.
10.35(13) Supplement No. 1 dated as of June 30, 1999, to the
indemnity, Subrogation and Contribution Agreement
dated as of April 15, 1998 as amended and restated
as of November 2, 1998 among the Company, Holding,
the Guarantors listed therein and Chase, as
collateral agent.
10.36(14) Employment and Noncompetition agreement dated as
of February 1, 2000, among the Company, Holding
and Lawrence P. Castellani
10.37(15) Senior Executive Stock Subscription Agreement
dated as of February 1, 2000, between Holding and
Lawrence P. Castellani
10.38(16) Restricted Stock Agreement dated as of February 1,
2000, between Holding and Lawrence P. Castellani
10.39(17) Second Amendment and Consent, dated as of December
1, 1999, to the Credit Agreement dated as of April
15, 1998, among Holding, the Company, lenders
party thereto and Chase, as Administrative Agent.
10.40(18) Third Amendment, dated as of February 11, 2000, to
the Credit Amendment dated as of April 15, 1998,
among Holding, the Company and Chase, a
Administrative Agents
21.1 Subsidiaries of the Company.
36
Exhibit
Number Description
------ -----------
24.1 Power of Attorney (contained in the
signature pages hereof).
---------------------------------
(1) Incorporated herein by reference to the
exhibit designated by the same number filed
with the Company's Registration Statement
on Form S-4 effective October 30, 1998
(File No. 333-56013).
(2) Incorporated herein by reference to the
exhibit designated as exhibit 4.3 filed
with the Company's Current Report on Form
8-K dated November 2, 1998.
(3) Incorporated herein by reference to the
exhibit designated as exhibit 10.31 filed
with the Company's Current Report on Form
8-K dated November 2, 1998.
(4) Incorporated herein by reference to the
exhibit designated as exhibit 10.32 filed
with the Company's Current Report on Form
8-K dated November 2, 1998.
(5) Incorporated herein by reference to the
exhibit designated as exhibit 10.33 filed
with the Company's Current Report on Form
8-K dated November 2, 1998.
(6) Incorporated herein by reference to the
exhibit designated as exhibit 10.34 filed
with the Company's Current Report on Form
8-K dated November 2, 1998.
(7) Incorporated herein by reference to the
exhibit designated as exhibit 10.35 filed
with the Company's Current Report on Form
8-K dated November 2, 1998.
(8) Incorporated herein by reference to the
exhibit designated as exhibit 10.36 filed
with the Company's Current Report on
Form 8-K dated November 2, 1998.
(9) Incorporated herein by reference to the
exhibit designated as exhibit 10.1 filed
with the Company's Current Report on Form
10-Q for the period ended July 17, 1999.
(10) Incorporated herein by reference to the
exhibit designated as exhibit 10.2 filed
with the Company's Current Report on Form
10-Q for the period ended July 17, 1999.
(11) Incorporated herein by reference to the
exhibit designated as exhibit 10.3 filed
with the Company's Current Report on Form
10-Q for the period ended July 17, 1999.
(12) Incorporated herein by reference to the
exhibit designated as exhibit 10.4 filed
with the Company's Current Report on Form
10-Q for the period ended July 17, 1999.
(13) Incorporated herein by reference to the
exhibit designated as exhibit 10.5 filed
with the Company's Current Report on Form
10-Q for the period ended July 17, 1999.
(14) Incorporated herein by reference to the
exhibit designated as exhibit 10.35 in the
Annual Report on Form 10-K filed by Advance
Holding Corporation for the year ended
January 1, 2000 (File No. 333-56031).
(15) Incorporated herein by reference to the
exhibit designated as exhibit 10.36 in the
Annual Report on Form 10-K filed by Advance
Holding Corporation for the year ended
January 1, 2000 (File No. 333-56031).
(16) Incorporated herein by reference to the
exhibit designated as exhibit 10.37 in the
Annual Report on Form 10-K filed by Advance
Holding Corporation for the year ended
January 1, 2000 (File No. 333-56031).
(17) Incorporated herein by reference to the
exhibit designated as exhibit 10.38 in the
Annual Report on Form 10-K filed by Advance
Holding Corporation for the year ended
January 1, 2000 (File No. 333-56031).
37
(18) Incorporated herein by reference to the
exhibit designated as exhibit 10.39 in the
Annual Report on Form 10-K filed by Advance
Holding Corporation for the year ended
January 1, 2000 (File No. 333-56031).
(4) Reports on Form 8-K.
None
38
Report of Independent Public Accountants
To the Board of Directors and Stockholder of
Advance Stores Company, Incorporated:
We have audited the accompanying consolidated balance sheets of Advance Stores
Company, Incorporated (a Virginia company) and subsidiaries (the Company), as
of December 30, 2000, and January 1, 2000, and the related consolidated
statements of operations, changes in stockholder's equity and cash flows for
each of the three years in the period ended December 30, 2000. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advance Stores Company,
Incorporated and subsidiaries as of December 30, 2000, and January 1, 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 30, 2000, in conformity with accounting principles
generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements and schedule is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audits of basic financial statements and, in our opinion, fairly
states in all material respects, the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina
March 2, 2001.
F-1
Advance Stores Company, Incorporated and Subsidiaries
Consolidated Balance Sheets - December 30, 2000 and January 1, 2000
(dollars in thousands, except per share data)
December 30, January 1,
Assets 2000 2000
------ ------------ -----------
Current assets:
Cash and cash equivalents $ 18,009 $ 22,577
Receivables, net 80,967 106,032
Inventories 788,914 749,447
Other current assets 10,274 9,752
----------- -----------
Total current assets 898,164 887,808
Property and equipment, net 410,960 402,476
Assets held for sale 25,077 29,694
Other assets, net 15,095 24,974
----------- -----------
$ 1,349,296 $ 1,344,952
=========== ===========
Liabilities and Stockholder's Equity
- ------------------------------------
Current liabilities:
Bank overdrafts $ 13,778 $ 12,182
Current portion of long-term debt 7,028 3,665
Accounts payable 387,852 341,188
Accrued expenses 124,123 148,289
Other current liabilities 42,794 26,172
----------- -----------
Total current liabilities 575,575 531,496
----------- -----------
Long-term debt 495,706 560,302
----------- -----------
Other long-term liabilities 46,644 50,626
----------- -----------
Commitments and contingencies
Stockholder's equity:
Common stock, Class A, voting, $100 par value; 5,000
shares authorized; 538 and 536 issued and outstanding 54 54
Additional paid-in capital 275,654 273,598
Other 2,460 1,777
Accumulated deficit (46,797) (72,901)
----------- -----------
Total stockholder's equity 231,371 202,528
----------- -----------
$ 1,349,296 $ 1,344,952
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-2
Advance Stores Company, Incorporated and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 30, 2000,
January 1, 2000, and January 2, 1999
(dollars in thousands)
2000 1999 1998
------------ ------------ ------------
Net sales $ 2,288,022 $ 2,206,945 $ 1,220,759
Cost of sales, including purchasing and warehousing costs 1,392,127 1,404,113 766,198
----------- ----------- -----------
Gross profit 895,895 802,832 454,561
Selling, general and administrative expenses 803,106 782,597 401,100
Expenses associated with the Recapitalization of the Parent - - 14,277
Expenses associated with restructuring in conjunction with
the Western Merger - - 6,774
----------- ----------- -----------
Operating income 92,789 20,235 32,410
Other (expense) income:
Interest expense (56,519) (53,844) (29,517)
Other, net 762 4,416 606
----------- ----------- -----------
Total other expense, net (55,757) (49,428) (28,911)
----------- ----------- -----------
Income (loss) before provision (benefit) for income taxes
and extraordinary item 37,032 (29,193) 3,499
Provision (benefit) for income taxes 13,861 (9,628) 1,887
----------- ----------- -----------
Income (loss) before extraordinary item 23,171 (19,565) 1,612
Extraordinary item, gain on debt extinguishment,
net of $1,759 income taxes 2,933 - -
----------- ----------- -----------
Net income (loss) $ 26,104 $ (19,565) $ 1,612
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
Advance Stores Company, Incorporated and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
For the Years Ended December 30, 2000,
January 1, 2000, and January 2, 1999
(dollars in thousands, except per share data)
Class A Retained
Common Stock Additional Earnings Total
----------------- Paid-in (Accumulated Stockholder's
Shares Amount Capital Other Deficit) Equity
-------- -------- --------- ------- ------------ -------------
Balance, January 3, 1998 273 $ 27 $ 940 $ - $ 128,202 $ 129,169
Dividend to parent - - - - (183,150) (183,150)
Issuance of Class A common
stock associated with Western Merger,
net of issuance costs of $575 263 27 262,399 - - 262,426
Other - - 10,259 695 - 10,954
Net income - - - - 1,612 1,612
-------- -------- --------- ------- ------------ -------------
Balance, January 2, 1999 536 54 273,598 695 (53,336) 221,011
Other - - - 1,082 - 1,082
Net income - - - - (19,565) (19,565)
-------- -------- --------- ------- ------------ -------------
Balance, January 1, 2000 536 54 273,598 1,777 (72,901) 202,528
Other 2 - 2,056 683 - 2,739
Net income - - - - 26,104 26,104
-------- -------- --------- ------- ------------ -------------
Balance, December 30, 2000 538 $ 54 $275,654 $ 2,460 $ (46,797) $ 231,371
======== ======== ========= ======= ============ =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
Advance Stores Company, Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 30, 2000,
January 1, 2000, and January 2, 1999
(dollars in thousands)
2000 1999 1998
-------- --------- --------
Cash flows from operating activities:
Net income (loss) $ 26,104 $ (19,565) $ 1,612
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 66,826 58,147 29,964
Amortization of stock option compensation 729 1,082 695
Amortization of deferred debt issuance costs 3,052 3,230 1,891
Amortization of interest on capital lease obligation 42 201 -
Extraordinary gain on extinguishment of debt, net of tax (2,933) - -
Net losses on sales of property and equipment 885 119 150
Impairment of assets held for sale 856 - -
Provision (benefit) for deferred income taxes 4,010 (9,657) (3,453)
Restructuring charge - - 6,774
Net decrease (increase) in:
Receivables, net 25,068 (7,834) 4,844
Inventories (39,467) (23,090) (99,653)
Other assets 12,595 (2,262) (3,036)
Net increase (decrease) in:
Accounts payable 46,664 (5,721) 55,329
Accrued expenses (33,185) (31,885) 33,943
Other liabilities (7,458) 17,915 8,837
-------- ---------- --------
Net cash provided by (used in) operating activities 103,788 (19,320) 37,897
-------- ---------- --------
Cash flows from investing activities:
Purchases of property and equipment (70,566) (105,017) (65,790)
Proceeds from sales of property and equipment and assets held for sale 5,626 3,130 6,073
Payment for purchase of Advance Holding Corporation Common Stock - - (193,003)
Western Merger, net of cash aquired - (13,028) (170,955)
Other - 1,091 -
-------- --------- --------
Net cash used in investing activities (64,940) (113,824) (423,675)
--------- --------- --------
Cash flows from financing activities:
Increase (decrease) in bank overdrafts 1,596 (8,068) 13,016
Net borrowings under notes payable 784 - -
Early extinguishment of debt (24,990) - -
Proceeds from issuance of long-term debt - - 581
Principal payments on long-term debt - - (97,117)
Borrowings under credit facilities 278,100 465,000 425,000
Payments on credit facilities (306,100) (339,500) -
Payment of debt issuance costs - (930) (20,786)
Contributed capital from Advance Holding Corporation - - 10,259
Dividend paid to Advance Holding Corporation - - (183,150)
Proceeds from issuance of Class A common stock 2,053 - 262,425
Other 5,141 4,999 2,323
-------- --------- --------
Net cash (used in) provided by financing activities (43,416) 121,501 412,551
-------- --------- --------
Net (decrease) increase in cash and cash equivalents (4,568) (11,643) 26,773
Cash and cash equivalents, beginning of year 22,577 34,220 7,447
-------- --------- --------
Cash and cash equivalents, end of year $ 18,009 $ 22,577 $ 34,220
======== ========= ========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-5
Advance Stores Company, Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 30, 2000,
January 1, 2000, and January 2, 1999
(dollars in thousands)
2000 1999 1998
---------- ---------- ----------
Supplemental cash flow information:
Interest paid $ 51,831 $ 46,264 $ 21,792
Income tax refunds (payments), net 6,175 (4,953) (6,540)
Noncash transaction:
Accrued purchases of property and equipment 9,299 543 -
Conversion of capital lease obligation 3,509
Forfeiture of stock options 46 562 -
Obligations under capital lease - 3,266 -
Debt issuance and acquisition costs accrued
at January 2, 1999 - - 3,597
Accrued credit card liability - Western Merger - - 10,000
========== ========== ==========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-6
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
1. Description of Business:
Advance Stores Company, Incorporated and Subsidiaries (the "Company"), a wholly
owned subsidiary of Advance Holding Corporation (the "Parent"), maintain two
operating segments within the United States, Puerto Rico and the Virgin Islands.
The Retail segment operates 1,728 retail stores under the "Advance Auto Parts"
and "Western Auto" trade names. The Advance Auto Parts stores offer automotive
replacement parts, accessories and maintenance items throughout the Eastern and
Midwest portions of the United States. The Western Auto stores, located in
Puerto Rico and the Virgin Islands, included in the Retail segment offer home
and garden merchandise in addition to automotive parts, accessories and service.
The Wholesale segment consists of the wholesale operations, including
distribution services to approximately 590 independent dealers located
throughout the United States, and one Company-owned store in California all
operating under the "Western Auto" trade name.
2. Summary of Significant Accounting Policies:
Accounting Period
The Company's fiscal year ends on the Saturday nearest the end of December.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. The Company also participates in a joint venture
in which it has less than a 50% ownership. The investment in the joint venture
is accounted for by the equity method. All significant intercompany balances 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 requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash, Cash Equivalents and Bank Overdrafts
Cash and cash equivalents consist of cash in banks and money market funds. Bank
overdrafts include net outstanding checks not yet presented to a bank for
settlement.
Allowances
The Company receives cooperative advertising allowances, rebates and various
other incentives from vendors that are recorded as a reduction of cost of sales
or selling, general and administrative expenses when earned. Cooperative
advertising revenue is earned as advertising expenditures are incurred. Rebates
and other incentives are earned based on purchases. Amounts received or
receivable from vendors that are not yet earned are reflected as deferred
revenue in the accompanying consolidated balance sheets. Management's estimate
of the portion of deferred revenue that will be realized within one year of the
balance sheet date has been included in other current liabilities in the
accompanying consolidated balance sheets. Total deferred revenue is $26,994 and
$25,015 at December 30, 2000 and January 1, 2000, respectively.
Preopening Expenses
Preopening expenses, which consist primarily of payroll and occupancy costs, are
expensed as incurred.
F-7
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense incurred
was approximately $53,658, $65,524, and $35,972 in fiscal 2000, 1999 and 1998,
respectively.
Warranty Costs
The Company's vendors are primarily responsible for warranty claims. Warranty
costs relating to merchandise and services sold under warranty, which are not
covered by vendors' warranties are estimated based on the Company's historical
experience and are recorded in the period the product is sold.
Revenue Recognition
The Company recognizes merchandise revenue at the point of sale to a retail
customer and point of shipment to a wholesale customer, while service revenue is
recognized upon performance of service. The majority of sales are made for cash;
however, the Company extends credit to certain commercial customers through a
third-party provider of private label credit cards. Receivables under the
private label credit card program are transferred to the third-party provider on
a limited recourse basis. The Company provides an allowance for doubtful
accounts on receivables sold with recourse based upon factors related to credit
risk of specific customers, historical trends and other information. Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," provides
that this arrangement be accounted for as a secured borrowing. Receivables under
the private label credit card and the related payable to the third-party
provider were $15,666 and $10,525 at December 30, 2000 and January 1, 2000,
respectively.
Change in Accounting Estimate
In July of fiscal 2000, the Company adopted a change in an accounting estimate
to reduce the depreciable lives of certain property and equipment on a
prospective basis. The effect on operations for fiscal 2000 was to increase
depreciation expense by $2,458. The Company expects to discontinue the
operations of the effected assets by the third quarter of fiscal 2001, at which
time they will be fully depreciated under the reduced useful lives.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
It requires companies to recognize all derivatives as either assets or
liabilities in their statement of financial position and measure those
instruments at fair value. In September 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which delayed the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Derivative Instruments and Certain
Hedging - an Amendment of SFAS No. 133," which amended the accounting and
reporting standards for certain risks related to normal purchases and sales,
interest and foreign currency transactions addressed by SFAS No. 133. The
Company adopted SFAS No. 133 on December 31, 2000 with no material impact on its
financial position or the results of its operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing Financial Assets and Extinguishment of Liabilities". This statement
replaces SFAS No. 125, but carries over most of the provisions of SFAS No. 125
without reconsideration. Management is currently analyzing the impact of
adopting SFAS No. 140, which will become effective for first quarter of fiscal
2001.
F-8
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Reclassifications
Certain items in the fiscal 1999 and fiscal 1998 financial statements have been
reclassified to conform with the fiscal 2000 presentation.
3. Restructuring Charges:
The Company's restructuring activities relate to the ongoing analysis of the
profitability of store locations and the settlement of restructuring activities
undertaken and assumed as a result of the Western Merger (see Note 15). The
Company recognizes a provision for future obligations at the time a decision is
made to close a facility, primarily store locations. The provision for closed
facilities includes the present value of the remaining lease obligations,
reduced by the present value of estimated revenues from subleases, and
management's estimate of future costs of insurance, property tax and common area
maintenance. The Company uses discount rates ranging from 6.5% to 7.7%.
During fiscal 2000, the Company closed five stores included in the fiscal 1999
restructuring activities and made the decision to close or relocate 25
additional stores not meeting profitability objectives, of which 20 have been
closed as of December 30, 2000.
A reconciliation of activity with respect to these restructuring accruals is as
follows:
Other
Exit
Severance Costs
----------- ---------
Restructuring reserves assumed
in Western Merger $ 1,092 $ 8,569
Restructuring provision for Advance store
exit costs and fixed asset write-downs - 6,774
Reserves utilized (410) (570)
------- --------
Balance, January 2, 1999 $ 682 $ 14,773
New provisions - 1,307
Change in estimates - (1,249)
Reserves utilized (664) (4,868)
------- --------
Balance, January 1, 2000 $ 18 $ 9,963
New provisions - 1,768
Change in estimates - (95)
Reserves utilized (18) (4,848)
------- --------
Balance, December 30, 2000 $ - $ 6,788
======= ========
Other exit cost liabilities will be settled over the remaining terms of the
underlying lease agreements.
As a result of the Western Merger, the Company established restructuring
reserves in connection with the decision to close certain Parts America stores,
to relocate certain Western administrative functions, to exit certain facility
leases and to terminate certain employees of Western. As of December 30, 2000,
all employees have been terminated and all leased stores have been closed.
F-9
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
A reconciliation of activity with respect to these restructuring accruals is as
follows:
Other
Exit
Severance Relocation Costs
----------- ------------ ---------
Recognized as liabilities assumed
in purchase accounting and
included in purchase price
allocation $ 8,000 $ 970 $ 14,384
Reserves utilized (262) (132) (652)
------- ------ --------
Balance at January 2, 1999 $ 7,738 $ 838 $ 13,732
Purchase accounting adjustments 3,630 (137) (1,833)
Reserves utilized (7,858) (701) (4,074)
------- ------ --------
Balance at January 1, 2000 $ 3,510 $ - $ 7,825
Change in estimates - - (1,261)
Reserves utilized (3,510) - (2,767)
------- ------ --------
Balance at December 30, 2000 $ - $ - $ 3,797
======= ====== ========
Other exit cost liabilities will be settled over the remaining terms of the
underlying lease agreements.
4. Receivables:
Receivables consist of the following:
December 30, January 1,
2000 2000
------------- -----------
Trade:
Wholesale $ 12,202 $ 22,221
Retail 15,666 10,525
Vendor 36,260 50,208
Installment (Note 16) 14,197 13,616
Related parties 4,143 12,559
Employees 389 349
Other 3,131 3,481
-------- ---------
Total receivables 85,988 112,959
Less: Allowance for doubtful accounts (5,021) (6,927)
-------- ---------
Receivables, net $ 80,967 $ 106,032
======== =========
F-10
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
5. Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out ("LIFO") method for approximately 90% and 89% of
inventories at December 30, 2000 and January 1, 2000, respectively, and the
first-in, first-out ("FIFO") method for remaining inventories. The Company
capitalizes certain purchasing and warehousing costs into inventory. Purchasing
and warehousing costs included in inventory, at FIFO, at December 30, 2000 and
January 1, 2000, were $56,305 and $49,252, respectively. Inventories consist of
the following:
December 30, January 1,
2000 2000
------------ -----------
Inventories at FIFO $ 779,376 $ 735,762
Adjustments to state inventories at LIFO 9,538 13,685
--------- ---------
Inventories at LIFO $ 788,914 $ 749,447
========= =========
Replacement cost approximated FIFO cost at December 30, 2000 and January 1,
2000.
6. Property and Equipment:
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Expenditures for maintenance and repairs are charged directly to
expense when incurred; major improvements are capitalized. When items are sold
or retired, the related cost and accumulated depreciation are removed from the
accounts, with any gain or loss reflected in the consolidated statements of
operations.
Depreciation of land improvements, buildings, furniture, fixtures and equipment,
and vehicles is provided over the estimated useful lives, which range from 2 to
40 years, of the respective assets using the straight-line method. Amortization
of building and leasehold improvements is provided over the shorter of the
estimated useful lives of the respective assets or the term of the lease using
the straight-line method.
Property and equipment consists of the following:
Estimated December 30, January 1,
Useful Lives 2000 2000
-------------- ------------ -----------
Land and land improvements 0 - 10 years $ 40,371 $ 40,927
Buildings 40 years 79,109 70,788
Building and leasehold improvements 10 - 40 years 84,658 76,605
Furniture, fixtures and equipment 3 - 12 years 357,642 331,238
Vehicles 2 - 10 years 30,506 27,555
Other 10,571 2,010
--------- ---------
602,857 549,123
Less - Accumulated depreciation and amortization (191,897) (146,647)
--------- ---------
Property and equipment, net $ 410,960 $ 402,476
========= =========
Effective January 3, 1999, the Company adopted the American Institute of
Certified Public Accountant's Statement of Position ("SOP") 98-1, "Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use". The
SOP requires companies to capitalize certain expenditures related to development
of or obtaining computer software for internal use. The adoption of the SOP
resulted in the Company capitalizing approximately $9,400 and $561 in costs
incurred during fiscal 2000 and fiscal 1999, respectively.
F-11
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
7. Assets Held for Sale
The Company applies SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which requires that
long-lived assets and certain identifiable intangible assets to be disposed of
be reported at the lower of the carrying amount or the fair market value less
selling costs. As of December 30, 2000 and January 1, 2000, the Company's assets
held for sale primarily consist of real property acquired in the Western Merger
of $25,077 and $29,694, respectively.
During fiscal 2000, the Company recorded an impairment of the value assigned to
a property held in the Wholesale segment. This facility consisted of excess
space not required by the Company's current needs, therefore, leading to the
Company's decision to dispose. The Company expects to dispose of this property
during fiscal 2001. The impairment charge of $856, included in operating income,
reduced the carrying value of the property to approximately $8,000.
8. Other Assets:
As of December 30, 2000 and January 1, 2000, other assets include deferred debt
issuance costs of $12,864 and $16,683, respectively (net of accumulated
amortization of $7,581 and $4,834, respectively), relating to the
Recapitalization (Note 14) and the Western Merger (Note 15). Such costs are
being amortized over the term of the related debt (6 years to 11 years). Other
assets also include the non-current portion of deferred income tax assets (Note
12).
9. Accrued Expenses:
Accrued expenses consist of the following:
December 30, January 1,
2000 2000
------------ -----------
Payroll and related benefits $ 25,507 $ 32,682
Restructuring 3,772 8,238
Warranty 18,962 19,780
Other 75,882 87,589
--------- ---------
Total accrued expenses $ 124,123 $ 148,289
========= =========
10. Other Long-Term Liabilities:
Other long-term liabilities consist of the following:
December 30, January 1,
2000 2000
------------ -----------
Other postretirement employee benefits $ 24,625 $ 26,587
Restructuring 6,813 13,078
Other 15,206 10,961
--------- ---------
Total other long-term liabilities $ 46,644 $ 50,626
========= =========
F-12
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
11. Long-term Debt:
Long-term debt consists of the following:
December 30, January 1,
2000 2000
------------- -----------
Senior Debt:
Deferred term loan at variable interest
rates (9.25% at December 30, 2000), due April 2004 $ 90,000 $ 90,000
Delayed draw facilities at variable interest rate
(8.47% at December 30, 2000), due April 2004 94,000 70,000
Revolving facility at variable interest rates
(8.50% at December 30, 2000), due April 2004 15,000 66,000
Tranche B facility at variable interest rates
(9.19% at December 30, 2000), due April 2006 123,500 124,500
McDuffie County Authority taxable industrial development
revenue bonds, issued December 31, 1997, interest due monthly at an
adjustable rate established by the Remarketing Agent (6.90% at December 30,
2000), principal due on November 1, 2002 10,000 10,000
Capital lease obligation - 3,467
Other 784 -
Subordinated debt:
Subordinated notes payable, interest due semi-annually
at 10.25%, due April 2008 169,450 200,000
--------- ---------
Total long-term debt 502,734 563,967
Less: Current portion of long-term debt (7,028) (3,665)
--------- ---------
Long-term debt, excluding current portion $ 495,706 $ 560,302
========= =========
Senior Debt:
The deferred term loan, delayed draw facilities, revolving facility and Tranche
B facility ("Credit Facility") are with a syndicate of banks. The Credit
Facility provides for the Company to borrow up to $462,500 in the form of senior
secured credit facilities, consisting of (i) $90,000 senior secured deferred
term loan, (ii) $49,000 senior secured delayed draw term loan facility (the
"Delayed Draw Facility I"), (iii) $75,000 senior secured delayed draw term loan
facility (the "Delayed Draw Facility II") and, together with the Delayed Draw
Facility I, (the "Delayed Draw Facilities"), (iv) a $123,500 Tranche B senior
secured term loan facility (the "Tranche B Facility") and (v) a $125,000 senior
secured revolving credit facility (the "Revolving Facility"). The Revolving
Facility has a letter of credit sub-limit of $25,000, of which $11,910 was
outstanding for stand-by letters of credit as of December 30, 2000. Amounts
available under the revolver, delayed draw term and deferred term loans are
subject to a borrowing base formula, which is based on certain percentages of
the Company's inventories and certain debt covenants. As of December 30, 2000,
$118,300 was available under these facilities.
F-13
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Borrowings under the Credit Facility are required to be prepaid, subject to
certain exceptions, with (a) 50% of the Excess Cash Flow (as defined), (b) the
net cash proceeds of all asset sales or other dispositions of property (as
defined), (c) the net proceeds of issuances of debt obligations and (d) the net
proceeds of issuance of equity securities. Excess Cash Flow is defined as the
excess of (A) the sum of the Company's, (i) consolidated net income (excluding
certain gains and losses and restricted payments made to its parent), (ii)
depreciation, amortization and other noncash charges, (iii) any decrease in Net
Working Capital (as defined), (iv) increases in the deferred revenues and (v)
proceeds of certain indebtedness incurred, less (B) the sum of (a) any noncash
gains, (b) any increases in Net Working Capital, (c) decreases in consolidated
deferred revenues, (d) capital expenditures and (e) repayments of indebtedness
(subject to certain exceptions). The Company was not required to make an Excess
Cash Flow prepayment for fiscal 1999 but will make a $6,244 mandatory prepayment
for fiscal 2000 in fiscal 2001.
The interest rates under the delayed draw facilities and the revolver are
determined by reference to a pricing grid that provides for reductions in the
applicable interest rate margins based on the Company's trailing total debt to
EBITDA ratio (as defined in the Credit Facility). Based upon the Company's
operating ratios at December 30, 2000, the margins were 1.75% and 0.75% for
Eurodollar and base rate borrowings, respectively. Additionally, at December 30,
2000, the margin under the Tranche B term loan and the deferred term loan
facility was 2.50% on a Eurodollar rate and 1.50% on the base rate borrowings. A
commitment fee of 0.50% per annum is charged on the unused portion of the Credit
Facility.
The Credit Facility is secured by all of the assets of the Company and contains
covenants restricting the ability of the Company and its subsidiaries to, among
others, (i) declare dividends or redeem or repurchase capital stock, (ii) make
loans and investments and (iii) engage in transactions with affiliates or the
Parent to change its passive holding company status. The Company is required to
comply with financial covenants with respect to (a) a maximum leverage ratio,
(b) a minimum interest coverage ratio, (c) a minimum retained cash earnings test
and (d) maximum limits on capital expenditures.
On December 31, 1997, the Company entered into an agreement with McDuffie County
Authority under which bond proceeds of $10,000 were issued to construct a
distribution center. Proceeds of the bond offering were fully expended during
fiscal 1999. These industrial development revenue bonds currently bear interest
at a variable rate, with a one-time option to convert to a fixed rate, and are
secured by a letter of credit.
Subordinated Debt:
The $169,450 Senior Subordinated Notes (the "Notes") are unsecured and are
subordinate in right of payment to all existing and future Senior Debt. The
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after April 15, 2003. In addition, at any time prior to April 15,
2001, the Company may redeem up to 35% of the initially outstanding aggregate
principal amount of the Notes at a redemption price equal to 110.25% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the date of redemption, with the net proceeds of one
or more equity offerings; provided that, in each case, at least 65% of the
initially outstanding aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of any such redemption; and
provided further, that such redemption shall occur within 90 days of the date of
the closing of such equity offering.
Upon the occurrence of a change of control, each holder of the Notes will have
the right to require the Company to repurchase all or any part of such holder's
Notes at an offering price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages, if any,
thereon to the date of purchase.
The Notes contain various non-financial restrictive covenants that limit, among
other things, the ability of the Company and its subsidiaries to issue preferred
stock, repurchase stock and incur certain indebtedness, engage in transactions
with affiliates, pay dividends or certain other distributions, make certain
investments and sell stock of subsidiaries.
F-14
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
During fiscal 2000, the Company repurchased on the open market $30,550 face
value of Notes at a price ranging from 81.5 to 82.5 percent of their face value.
Accordingly, the Company recorded a gain related to the extinguishment of this
debt of $2,933, net of $1,759 provided for income taxes and $868 for the write
off of the associated deferred debt issuance costs.
As of December 30, 2000, the Company was in compliance with the covenants of the
Credit Facility and the Notes. Substantially all of the net assets of the
Company are restricted at December 30, 2000.
The aggregate future annual maturities of long-term debt are as follows:
2001 $ 7,028
2002 14,000
2003 4,000
2004 219,668
2005 60,000
Thereafter 198,038
---------
$ 502,734
=========
12. Income Taxes:
Provision (benefit) for income taxes for fiscal 2000, fiscal 1999 and fiscal
1998 consists of the following:
Current Deferred Total
--------------- --------------- ----------
2000-
Federal $ 8,005 $ 3,897 $ 11,902
State 1,846 113 1,959
--------------- --------------- ----------
$ 9,851 $ 4,010 $ 13,861
=============== =============== ==========
1999-
Federal $ (1,934) $ (3,895) $ (5,829)
State 1,963 (5,762) (3,799)
--------------- --------------- ----------
$ 29 $ (9,657) $ (9,628)
=============== =============== ==========
1998-
Federal $ 3,858 $ (2,863) $ 995
State 1,482 (590) 892
--------------- --------------- ----------
$ 5,340 $ (3,453) $ 1,887
=============== =============== ==========
F-15
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
The provision for income taxes differed from the amount computed by applying the
federal statutory income tax rate due to:
2000 1999 1998
-------------- ---------- -----------
Pre-tax (loss) income at statutory U.S. federal
income tax rate $ 12,961 $ (10,218) $ 1,225
State income taxes, net of federal
income tax benefit 1,159 (2,469) 580
Changes in certain tax accounting methods - - (366)
Puerto Rico dividend withoholding tax - 150 120
Nondeductible expenses 631 740 391
Valuation allowance 914 596 -
Other, net (1,804) 1,573 (63)
-------------- ---------- -----------
$ 13,861 $ (9,628) $ 1,887
============== ========== ===========
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period-end, based on enacted tax laws and statutory
income tax rates applicable to the periods in which the differences are expected
to affect taxable income. Deferred income taxes reflect the net income tax
effect of temporary differences between the bases of assets and labilities for
financial reporting purposes and for income tax reporting purposes. Net deferred
income tax balances are comprised of the following:
December 30, January 1,
2000 2000
------------- -----------
Deferred income tax assets $ 49,193 $ 60,661
Deferred income tax liabilities (62,121) (54,731)
------------- -----------
Net deferred income tax (liabilities) assets $ (12,928) $ 5,930
============= ===========
Net deferred income tax assets of $8,792 were recorded in the purchase price
allocation of Western.
The Company incurred financial reporting and tax losses in 1999 primarily due to
integration and interest costs incurred as a result of the Western Merger and
the Recapitalization (See Notes 14 and 15). As of December 30, 2000, the Company
has cumulative net deferred income tax liabilities of $12,928. The gross
deferred income tax assets include federal and state net operating loss
carryforwards ("NOLs") of approximately $16,931. These NOLs may be used to
reduce future taxable income and expire periodically through fiscal year 2020.
The Company believes it will realize these tax benefits through a combination of
the reversal of temporary differences, projected future taxable income during
the NOL carryforward periods and available tax planning strategies. Due to
uncertainties related to the realization of deferred tax assets for NOLs in
various jurisdictions, the Company recorded a valuation allowance of $1,510 as
of December 30, 2000 and $596 as of January 1, 2000. The amount of deferred
income tax assets realizable, however, could change in the near future if
estimates of future taxable income are changed.
F-16
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Temporary differences which give rise to significant deferred income tax assets
(liabilities) are as follows:
December 30, January 1,
2000 2000
-------------- -----------
Current deferred income taxes-
Inventory valuation differences $ (36,051) $ (30,708)
Accrued medical and workers compensation 2,319 2,462
Accrued expenses not currently deductible for tax 16,392 26,778
Net operating loss carryforwards 7,124 4,000
-------------- -----------
Total current deferred income taxes $ (10,216) $ 2,532
============== ===========
Long-term deferred income taxes-
Property and equipment $ (24,571) $ (24,023)
Postretirement benefit obligation 8,254 8,580
Net operating loss carryforwards 9,807 18,090
Minimum tax credit carryforward (no expiration) 6,809 -
Valuation allowance (1,510) (596)
Other, net (1,501) 1,347
-------------- -----------
Total long-term deferred income taxes $ (2,712) $ 3,398
============== ===========
For federal and Virginia state income tax reporting purposes, the taxable income
of the Company is included in the consolidated income tax returns of the Parent.
Accordingly, any current and deferred federal and Virginia state income taxes,
computed on a separate company basis, are payable to or receivable from the
Parent.
The Parent currently has four years that are open to audit by the Internal
Revenue Service. In addition, various Parent and Company state and foreign
income tax returns for several years are open to audit. In management's opinion,
adequate reserves have been established and any amounts assessed will not have a
material effect on the Company's financial position or results of operations.
13. Lease Commitments:
The Company leases store locations, distribution centers, office space,
equipment and vehicles under lease arrangements, some of which are with related
parties.
At December 30, 2000, future minimum lease payments due under non-cancelable
operating leases are as follows:
Related
Other Parties Total
------------ ------------ ------------
2001 $ 115,631 $ 3,688 $ 119,319
2002 107,908 3,688 111,596
2003 97,119 3,496 100,615
2004 84,711 2,536 87,247
2005 76,686 2,239 78,925
Thereafter 228,300 2,211 230,511
------------ ------------ ------------
$ 710,355 $ 17,858 $ 728,213
============ ============ ============
(a) The Other and Related Party columns include stores closed as a result
of the Company's restructuring plans (See Note 3).
F-17
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
At December 30, 2000, future minimum sub-lease income to be received under non-
cancelable operating leases is $10,152.
Net rent expense for fiscal 2000, fiscal 1999 and fiscal 1998 was as follows:
2000 1999 1998
--------- --------- ---------
Minimum facility rentals $ 112,768 $ 103,807 $ 63,787
Contingent facility rentals 1,391 2,086 718
Equipment rentals 1,875 3,831 1,804
Vehicle rentals 6,709 4,281 2,391
--------- --------- ---------
122,743 114,005 68,700
Less: sub-lease income (1,747) (1,085) (426)
--------- --------- ---------
$ 120,996 $ 112,920 $ 68,274
========= ========= =========
Contingent facility rentals are determined on the basis of a percentage of sales
in excess of stipulated minimums for certain store facilities. Most of the
leases provide that the Company pay taxes, maintenance, insurance and certain
other expenses applicable to the leased premises and include options to renew.
Certain leases contain rent escalation clauses, which are recorded on a
straight-line basis. Management expects that, in the normal course of business,
leases that expire will be renewed or replaced by other leases.
Rental payments to related parties of approximately $3,921 in fiscal 2000,
$3,998 in fiscal 1999 and $2,984 in fiscal 1998 are included in net rent
expense.
14. Recapitalization:
On April 15, 1998, the Parent consummated its recapitalization pursuant to an
Agreement and Plan of Merger dated March 4, 1998 (the "Merger Agreement"). In
connection with the Merger Agreement, the Parent's Board of Directors authorized
a 12,500 to 1 split of the common stock and a change in the par value of the
common stock from $100 to $.01 per share.
Pursuant to the Merger Agreement, AHC Corporation ("AHC"), a corporation
controlled by an investment fund organized by Freeman Spogli & Co. Incorporated
("FS&Co."), merged into the Parent (the "Merger"), with the Parent as the
surviving corporation. In the Merger, a portion of the common stock and all of
the preferred stock of the Parent were converted into the right to receive in
the aggregate approximately $351,000 in cash and certain stock options (See Note
21). Certain shares representing approximately 14% of the outstanding Class A
common stock remained outstanding upon consummation of the Merger. Immediately
prior to the Merger, FS&Co. purchased approximately $80,500 of the common stock
of AHC which was converted in the Merger into approximately 64% of the Parent's
outstanding common stock and Ripplewood Partners, L.P. and its affiliates
("Ripplewood") purchased approximately $20,000 of the common stock of AHC which
was converted in the Merger into approximately 16% of the Parent's outstanding
common stock. In connection with the Merger, management purchased approximately
$8,000, or approximately 6%, of the Parent's outstanding common stock, a portion
of which resulted in stockholder subscription receivables.
The Merger, the retirement of certain notes payable and long-term debt,
borrowings under the Credit Facility, the Parent's issuance of the Debentures
and the issuance of the Notes collectively represent the "Recapitalization". The
Company has accounted for the Recapitalization for financial reporting purposes
as the issuance of debt, the repayment of intercompany debt to the Parent and as
a dividend to the Parent.
F-18
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
15. Western Merger:
On November 2, 1998, the Company consummated a Plan of Merger (the "Western
Merger") with Sears, Roebuck and Co. ("Sears"), to acquire Western (Western Auto
Supply Company), for $175,000 in cash and 11,474,606 shares of the Parent's
Common Stock. Additionally, the Company agreed to share losses incurred by Sears
as a result of the sale, or as a result of continuing the private label credit
card programs up to a maximum of $10,000 ("Credit Card Liability"). The Company
recorded the $10,000, which was paid in fiscal 1999, as additional purchase
price. In connection with the transaction, the Parent sold 4,161,712 shares of
common stock to certain stockholders for $70,000 and the Company borrowed
$90,000 under a new deferred term loan facility. The remainder of the $175,000
was funded through cash on hand. As of the transaction date, Sears owned
approximately 40.6% of the Parent's issued and outstanding common stock.
The Western Merger has been accounted for under the purchase method of
accounting. Accordingly, the results of operations of Western for the periods
from November 2, 1998 are included in the accompanying consolidated financial
statements. The purchase price has been allocated to assets acquired and
liabilities assumed based on their respective fair values. The final purchase
price allocation resulted in total excess fair value over the purchase price of
$4,667 and was allocated to non-current assets, primarily property and
equipment.
16. Installment Sales Program:
A subsidiary of the Company maintains an in-house finance program, which offers
financing to retail customers. Finance charges of $3,063, $2,662 and $376 on the
installment sales program are included in net sales in the accompanying
consolidated statements of operations for the years ended December 30, 2000,
January 1, 2000 and January 2, 1999, respectively. The cost of administering the
installment sales program is included in selling, general and administrative
expenses as a cost of operations.
17. Subsequent Event:
Subsequent to December 30, 2000 but prior to this filing, the Company signed a
definitive agreement to purchase certain assets of Carport Auto Parts, Inc.
("Carport"). Carport operates 51 automotive retail part stores in Alabama and
Mississippi, which carry products similar to those offered in the Advance Auto
Parts stores of the Retail segment. The Company plans to account for the
acquisition under the purchase method of accounting.
18. Contingencies:
In the case of all known contingencies, the Company accrues for an obligation
when it is probable and the amount is reasonably estimable. As facts concerning
contingencies become known to the Company, the Company reassesses its position
both with respect to gain contingencies and accrued liabilities and other
potential exposures. Estimates that are particularly sensitive to future change
include tax and legal matters, which are subject to change as events evolve and
as additional information becomes available during the administrative and
litigation process.
F-19
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
In October 2000, a vendor repudiated a long-term purchase agreement entered into
with the Company in January 2000. The Company filed suit against the vendor in
November of fiscal 2000. While legal remedies were being pursued, an interim
agreement was entered into to ensure the continuous supply of products. In its
suit, the Company attempted to recover monetary damages for the increased costs
charged by the vendor under the interim agreement, the increased costs to
acquire product from other sources, plus any consequential damages. Based on
consultation with the Company's legal counsel, management believed the purchase
agreement was entered into in good faith and it was highly probable that the
Company would prevail in its suit. Therefore, the Company recorded a gain of
$3,300, which represented actual damages incurred through December 30, 2000, as
a reduction of cost of sales in the accompanying statements of operations.
Related income taxes and legal fees of $1,300 were also recorded in the
accompanying consolidated statement of operations for the year ended December
30, 2000. On March 23, 2001, the Company agreed to a cash settlement of $16,600
from the vendor. The remainder of the cash settlement over the originally
recorded gain, less higher product costs incurred under the interim supply
agreement, related legal expenses and taxes, will be recognized during first
quarter of fiscal 2001.
In March 2000, the Company was notified it has been named in a lawsuit filed on
behalf of independent retailers and jobbers against the Company and others for
various claims under the Robinson-Patman Act. The suit is in preliminary stages.
The Company believes these claims are without merit and intends to defend them
vigorously; however, the ultimate outcome of this matter can not be ascertained
at this time.
In January 1999, the Company was notified by the United States Environmental
Protection Agency ("EPA") that Western Auto may have potential liability under
the Comprehensive Environmental Response Compensation and Liability Act relating
to two battery salvage and recycling sites that were in operation in the 1970's
and 1980's. The EPA has indicated the total cleanup for this site will be
approximately $1,600. Management is continuing their investigation of the EPA
notification. An estimate of the range of liability is not reasonably possible
until technical studies are sufficiently completed and the amount of potential
indemnification from Sears, if any, is further investigated. The ultimate
exposure will also depend upon the participation of other parties named in the
notification who are believed to share in responsibility. The Company believes
the claim could be settled for an amount not material to the Company's financial
position or results of operations.
Sears has agreed to indemnify the Company for certain litigation and
environmental matters of Western that existed as of the Western Merger date. The
Company has recorded a receivable from Sears of approximately $2,685, which is
included in the fair value of Western's assets (Note 15), relating to certain
environmental matters that had been accrued by Western as of the Western Merger
date. As of the Western Merger date, Sears has agreed to partially indemnify the
Company for up to 5 years for certain additional environmental matters that may
arise relating to the period prior to the Western Merger. The Company's maximum
exposure during the indemnification period for certain matters covered in the
Western Merger agreement is $3,750.
In November 1997 a plaintiff, on behalf of himself and others similarly
situated, filed a class action complaint and motion of class certification
against the Company in the circuit court for Jefferson County, Tennessee,
alleging misconduct in the sale of automobile batteries. The complaint seeks
compensatory and punitive damages. The Company believes it has no liability for
such claims and intends to defend them vigorously. In addition, three lawsuits
were filed against the Company on July 28, 1998, for wrongful death relating to
an automobile accident involving an employee of the Company. The Company
believes the financial exposure is covered by insurance.
The Company is also involved in various other claims and lawsuits arising in the
normal course of business. The damages claimed against the Company in some of
these proceedings are substantial. Although the final outcome of these legal
matters cannot be determined, based on the facts presently known, it is
management's opinion that the final outcome of such claims and lawsuits will not
have a material adverse effect on the Company's financial position or results of
operations.
The Company has certain periods open to examination by taxing authorities in
various states for sales and use tax. In management's opinion, adequate reserves
have been established and any amounts assessed will not have a material effect
on the Company's financial position or results of operations.
F-20
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
The Company is self-insured with respect to workers' compensation and health
care claims for eligible active employees. The Company maintains certain levels
of stop-loss insurance coverage for these claims through an independent
insurance provider. The cost of workers' compensation and general health care
claims is accrued based on actual claims reported plus an estimate for claims
incurred but not reported. These estimates are based on historical information
along with certain assumptions about future events, and are subject to change as
additional information comes available.
The Company has entered into employment agreements with certain employees that
provide severance pay benefits under certain circumstances after a change in
control of the Company or upon termination by the Company. The maximum
contingent liability under these employment agreements is approximately $4,740
and $4,400 at December 30, 2000 and January 1, 2000, respectively.
19. Related-party Transactions:
Rents for related-party leases may be slightly higher than rents for
non-affiliated leases, and certain terms of the related-party leases are more
favorable to the landlord than those contained in leases with non-affiliates.
Under the terms of a shared services agreement, Sears provided certain services
to the Company, including payroll and payable processing for Western, among
other services, through the third quarter of fiscal year 1999. The Company and
Sears have entered into agreements that provide for the Western stores to
continue to purchase and carry certain Sears branded products during periods
defined in the agreements. The Company is also a first-call supplier of certain
automotive products to certain Sears Automotive Group stores.
In connection with the Western Merger, Sears arranged to buy from the Company
certain products in bulk for its automotive centers through January 1999. These
amounts are included in net sales to Sears in the following table.
F-21
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
The following table presents the related party transactions with Sears for
fiscal 2000, 1999 and 1998 and as of December 30, 2000 and January 1, 2000:
Years Ended
-----------------------------------------
December 30, January 1, January 2,
2000 2000 1999
------------ ---------- ----------
Net sales to Sears $ 7,487 $ 5,326 $ 2,124
Shared services revenue - 2,286 697
Shared services expense - 887 844
Credit card fees expense 405 348 657
============ ========== ==========
December 30, January 1,
2000 2000
------------ ----------
Receivables from Sears $ 3,160 $ 6,625
Payables to Sears 1,321 4,304
============ ==========
The Company also enters into intercompany transactions with the Parent in the
normal course of its business. These transactions are primarily related to
intercompany loans and current and deferred income tax assets and liabilities.
As of December 30, 2000 and January 1, 2000, the Company had a net receivable
from its Parent of $603 and $5,912, respectively.
20. Benefit Plans:
401(k) Plan
The Company maintains a defined contribution employee benefit plan, which covers
substantially all employees after one year of service. The plan allows for
employee salary deferrals, which are matched at the Company's discretion.
Company contributions were $5,245 in fiscal 2000, $4,756 in fiscal 1999, and
$2,634 in fiscal 1998.
The Company also maintains a profit sharing plan covering Western employees that
was frozen prior to the Western Merger on November 2, 1998 (Note 15). This plan
covered all full-time employees who had completed one year of service and had
attained the age of 21 on the first day of each month. All employees covered
under this plan were included in the Company's plan on January 1, 1999.
Deferred Compensation
The Company maintains an unfunded deferred compensation plan established for
certain key employees of Western prior to the Western Merger (Note 15). The
Company assumed the plan liability of $15,253 through the Western Merger. The
plan was frozen at the date of the Western Merger. As of December 30, 2000 and
January 1, 2000, $5,359 and $8,504, respectively was accrued related to the
plan.
Postretirement Plan
The Company provides certain health care and life insurance benefits for
eligible retired employees. Employees retiring from the Company with 20
consecutive years of service after age 40 are eligible for these benefits,
subject to deductibles, co-payment provisions and other limitations.
F-22
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
The estimated cost of retiree health and life insurance benefits is recognized
over the years that the employees render service as required by SFAS No. 106,
"Employers Accounting for Postretirement Benefits Other Than Pensions." The
initial accumulated liability, measured as of January 1, 1995, the date the
Company adopted SFAS No. 106, is being recognized over a 20-year amortization
period.
In connection with the Western Merger, the Company assumed Western's benefit
obligation under its postretirement health care plan. This plan was merged into
the Company's plan effective July 1, 1999.
The Company maintains the existing plan and the assumed plan covering Western
employees. Financial information related to the plans was determined by the
Company's independent actuaries as of December 30, 2000 and January 1, 2000. The
following provides a reconciliation of the benefit obligation and the funded
status of the plan:
2000 1999
---------- -----------
Change in benefit obligation:
Benefit obligation at beginning of the year $ 22,095 $ 23,559
Service cost 451 336
Interest cost 1,532 1,401
Benefits paid (2,826) (1,843)
Actuarial loss (gain) 830 (1,358)
---------- -----------
Benefit obligation at end of the year 22,082 22,095
Change in plan assets:
Fair value of plan assets at beginning of the year - -
Employer contributions 2,826 1,843
Benefits paid (2,826) (1,843)
---------- -----------
Fair value of plan assets at end of year - -
Reconciliation of funded status:
Funded status (22,082) (22,095)
Unrecognized transition obligation 810 868
Unrecognized actuarial loss (gain)
530 (300)
---------- -----------
Accrued postretirement benefit cost $ (20,742) $ (21,527)
========== ===========
Net periodic postretirement benefit cost is as follows:
2000 1999 1998
---------- ----------- -----------
Service cost $ 451 $ 336 $ 240
Interest cost 1,532 1,401 440
Amortization of the transition obligation 58 58 58
Amortization of recognized net losses - 43 60
---------- ----------- -----------
$ 2,041 $ 1,838 $ 798
========== =========== ===========
The postretirement benefit obligation was computed using an assumed discount
rate of 7.5% and 6.5% in 2000 and 1999, respectively. The health care cost trend
rate was assumed to be 9.0% for 2000, 8.5% for 2001, 8.0% for 2002, 7.5% for
2003, 7.0% for 2004, 6.5% for 2005, and 5% to 6% for 2006 and thereafter.
F-23
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
If the health care cost were increased 1% for all future years, the accumulated
postretirement benefit obligation would have increased by $1,496 as of December
30, 2000. The effect of this change on the combined service and interest cost
would have been an increase of $130 for 2000.
If the health care cost were decreased 1% for all future years, the accumulated
postretirement benefit obligation would have decreased by $1,308 as of December
30, 2000. The effect of this change on the combined service and interest cost
would have been a decrease of $113 for 2000.
The Company reserves the right to change or terminate the benefits at any time.
The Company also continues to evaluate ways in which it can better manage these
benefits and control costs. Any changes in the plan or revisions to assumptions
that affect the amount of expected future benefits may have a significant impact
on the amount of the reported obligation and annual expense.
21. Stock Options:
The Company maintains a senior executive stock option plan and an executive
stock option plan (the "Option Plans") for key employees of the Company. The
Option Plans provide for the granting of non-qualified stock options of the
Parent's common stock. All options will terminate on the seventh anniversary of
the grant date. Shares authorized for grant under the senior executive and the
executive stock option plans are 1,650,000 and 1,240,000, respectively, at
December 30, 2000. Subsequent to December 30, 2000, an additional 250,000 shares
were authorized for grant under the senior executive stock option plan.
Three different types of options are granted pursuant to the Option Plans. Fixed
Price Service Options will vest over a three-year period in three equal
installments beginning on the first anniversary of the grant date. Performance
Options will be earned in installments based upon satisfaction of certain
performance targets for the four-year period ending in fiscal 2001. Variable
Price Service Options will vest in equal annual installments over a two-year
period beginning in 1999, and have an exercise price that increases over time.
As a result of the Recapitalization certain existing stockholders received stock
options to purchase up to 500,000 shares of common stock. The stock options are
fully vested, nonforfeitable and provide for a $10 per share exercise price,
increasing $2.00 per share annually, through the expiration date of April 2005.
The Company retained a reputable firm with expertise in valuing stock options to
determine the fair value of these options as of April 15, 1998 (the "valuation
date"). Based on their analysis, the fair value of the options was approximately
$300 in the aggregate. The value of the options as of the valuation date has
been reflected as additional consideration for the shares of common stock
repurchased in the Recapitalization.
F-24
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Total option activity was as follows:
2000 1999 1998
---------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Number of Average Number of Average Number of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Fixed Price Service Options
---------------------------
Outstanding at beginning of year 296,655 $ 14.79 104,580 $ 10.00 - $ -
Granted 1,335,500 19.80 230,000 16.82 104,580 10.00
Exercised - - - - - -
Forfeited (22,500) 14.55 (37,925) 13.90 - -
--------- -------------- --------- -------------- --------- --------------
Outstanding at end of year 1,609,655 $ 18.95 296,655 $ 14.79 104,580 $ 10.00
========= ============== ========= ============== ========= ==============
Variable Price Service Options
------------------------------
Outstanding at beginning of year 329,235 $ 15.00 397,085 $ 15.00 - $ -
Granted - - - - 397,085 15.00
Exercised - - - - - -
Forfeited (32,500) 15.00 (67,850) 15.00 - -
--------- -------------- --------- -------------- --------- --------------
Outstanding at end of year 296,735 $ 15.00 329,235 $ 15.00 397,085 $ 15.00
========= ============== ========= ============== ========= ==============
Performance Options
-------------------
Outstanding at beginning of year 329,235 $ 10.00 397,085 $ 10.00 - $ -
Granted - - - - 397,085 10.00
Exercised - - - - - -
Forfeited (32,500) 10.00 (67,850) 10.00 - -
--------- -------------- --------- -------------- --------- --------------
Outstanding at end of year 296,735 $ 10.00 329,235 $ 10.00 397,085 $ 10.00
========= ============== ========= ============== ========= ==============
Other Options
-------------
Outstanding at beginning of year 500,000 $ 12.00 500,000 $ 10.00 - $ -
Granted - - - - 500,000 10.00
Exercised - - - - - -
Forfeited - - - - - -
--------- -------------- --------- -------------- --------- --------------
Outstanding at end of year 500,000 $ 14.00 500,000 $ 12.00 500,000 $ 10.00
========= ============== ========= ============== ========= ==============
As of December 30, 2000, 118,270 of the Fixed Price Service Options, 148,368 of
the variable options and 500,000 of the other options were exercisable. Only the
500,000 of other options and 29,385 of the fixed options were exercisable at
January 1, 2000. The exercise price for the above options range from $10.00 per
share to $16.82 per share. The remaining weighted-average contractual life of
all options, excluding 1,050,000 of the options granted in fiscal 2000 is five
years. The 1,050,000 options have a weighted-average contractual life of six
years and five months for which none of the options are exercisable as of
December 30, 2000.
F-25
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for its employee stock options using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Under APB No. 25, compensation cost for
stock options is measured as the excess, if any, of the market price of the
Company's common stock at the measurement date over the exercise price.
Accordingly, the Company did not recognize compensation expense on the issuance
of its Fixed Price Service Options because the exercise price equaled the fair
market value of the underlying stock on the grant date. The fair market value of
the stock as of December 30, 2000 and January 1, 2000, as determined by the
Board of Directors, was $21.00 and $16.82, respectively. The excess of the fair
market value per share over the exercise price per share for the Performance
Options and Variable Price Service Options is recorded as outstanding stock
options and unamortized stock option compensation and is included in other
stockholders' equity. At December 30, 2000, outstanding stock options and
unamortized stock option compensation was $3,948 and $1,488, respectively. This
compensation is amortized to expense over the vesting periods. Compensation
expense related to these options of $729, $1,082 and $695 is included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations for the fiscal year ended December 30, 2000, January 1,
2000 and January 2, 1999, respectively.
The following information is presented as if the Company elected to account for
compensation cost related to the stock options using the fair value method as
prescribed by SFAS No. 123:
2000 1999 1998
------------ ------------ ----------
Net income (loss):
As reported $ 26,104 ($19,565) $1,612
Pro-forma 26,219 (19,081) 2,094
============ ============ ==========
For the above information, the fair value of each option granted in fiscal 2000
was estimated on the grant date using the Black-Scholes option-pricing model
with the following assumptions: (i) risk-free interest rate of 4.47% and 4.57%;
(ii) weighted-average expected life of options of two and three years and (iii)
expected dividend yield of zero. As permitted by SFAS No. 123 for companies with
non-public equity securities, the Company used the assumption of zero volatility
in valuing their options.
For the above information, the fair value of each option granted in fiscal 1999
was estimated on the grant date using the Black-Scholes option-pricing model
with the following assumptions: (i) risk-free interest rate of 5.19% and 5.27%;
(ii) weighted-average expected life of options of two and three years and (iii)
expected dividend yield of zero. As permitted by SFAS No. 123 for companies with
non-public equity securities, the Company used the assumption of zero volatility
in valuing their options.
For the above information, the fair value of each option granted in fiscal 1998
was estimated on the grant date using the Black-Scholes option-pricing model
with the following assumptions: (i) risk-free interest rate of 5.61%, 5.62% and
5.65%; (ii) weighted-average expected life of options of two, three and four
years and (iii) expected dividend yield of zero. As permitted by SFAS No. 123
for companies with non-public equity securities, the Company used the assumption
of zero volatility in valuing their options.
22. Fair Value of Financial Instruments:
The carrying amount of cash and cash equivalents, receivables, bank overdrafts,
accounts payable, borrowings secured by receivables and current portion of
long-term debt approximates fair value because of the short maturity of those
instruments. The carrying amount for variable rate long-term debt approximates
fair value for similar issues available to the Company. The fair value of all
fixed rate long-term debt was determined based on current market prices, which
approximated $125,393 and $170,000 at December 30, 2000 and January 1, 2000,
respectively.
F-26
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
23. Segment and Related Information:
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement requires entities to report
financial and descriptive information related to segments within the
organization.
The Company has the following operating segments: Retail and Wholesale. Retail
consists of the retail operations of the Company, operating under the trade name
"Advance Auto Parts" in the United States and "Western Auto" in Puerto Rico and
the Virgin Islands. Wholesale consists of the wholesale operations, including
distribution services to independent dealers, franchisees and one Company-owned
store in California all operating under the "Western Auto" trade name. The
California store location generates approximately 13% of the total Wholesale
segment revenues.
The financial information for fiscal 1999 and 1998 has been restated to reflect
the operating segments described above. Prior to January 1, 2000, management
received and used financial information at the Advance Stores and consolidated
Western levels. The Advance Stores segment consisted of the "Advance Auto Parts"
retail locations and the Western segment consisted of the "Western Auto" retail
locations and wholesale operations described above. The accounting policies of
the reportable segments are the same as those of the Company.
F-27
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
2000 Retail Wholesale (b) Totals
- -----------------------------------------------------------------------------------------------------------
Net sales (a) $ 2,148,904 $ 139,118 $ 2,288,022
Gross profit 873,119 22,776 895,895
Operating income 87,600 5,189 92,789
Net interest expense (49,976) (5,849) (55,825)
Income (loss) before provision
for income taxes (c) 37,345 (313) 37,032
Extraordinary item, gain on debt extinguishment,
net of $1,759 income taxes 2,933 - 2,933
Segment assets (c) 1,293,208 56,088 1,349,296
Depreciation and amortization 66,513 313 66,826
Capital expenditures 70,492 74 70,566
1999 (d)
- -----------------------------------------------------------------------------------------------------------
Net sales (a) $ 1,999,002 $ 207,943 $ 2,206,945
Gross profit 784,147 18,685 802,832
Operating income 24,588 (4,353) 20,235
Net interest (expense) income (50,789) (2,654) (53,443)
Income (loss) before provision
for income taxes (c) (26,200) (2,993) (29,193)
Segment assets (c) 1,250,654 94,298 1,344,952
Depreciation and amortization 53,280 4,867 58,147
Capital expenditures 96,989 8,028 105,017
1998 (d)
- -----------------------------------------------------------------------------------------------------------
Net sales (a) $ 1,186,167 $ 34,592 $ 1,220,759
Gross profit 452,817 1,744 454,561
Operating income 41,228 (8,818) 32,410
Net interest expense (28,310) 416 (27,894)
Income before provision
for income taxes (c) 11,901 (8,402) 3,499
Segment assets (c) 1,150,592 110,924 1,261,516
Depreciation and amortization 29,208 756 29,964
Capital expenditures 64,131 1,659 65,790
(a) For fiscal years 2000, 1999, and 1998, total net sales include approximately
$356,000, $245,000 and $130,000, respectively, related to revenues derived
from commercial sales.
(b) During fiscal 1999, certain assets, liabilities and the corresponding
activity related to the Parts America store operations and a distribution
center were transferred to the Retail segment through a dividend to Retail.
Additionally, throughout fiscal 2000, the Company transferred certain assets
to the Retail segment related to the Western Auto retail operations in
Puerto Rico and the Virgin Islands.
(c) Excludes investment in and equity in net earnings or losses of subsidiaries.
(d) Fiscal 1999 and 1998 results of operations do not reflect the allocation of
certain shared expenses to the Wholesale segment. During fiscal 2000,
Management adopted a method for allocating shared expenses.
F-28
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
24. Guarantor Subsidiaries:
The Company has wholly owned subsidiaries, LARALEV, INC., Advance Trucking
Corporation and Western (the "Guarantor Subsidiaries") that are guarantors of
the Company's subordinated notes, new term loan facility and revolving credit
facility. The guarantees are joint and several in addition to full and
unconditional. LARALEV, INC. holds certain trademarks, tradenames and other
intangible assets for which it receives royalty income from the Company. Advance
Trucking Corporation is a wholly owned subsidiary that holds substantially all
of the Company's inventory delivery vehicles. Advance Trucking Corporation
became a guarantor subsidiary in the second quarter of fiscal 1999. The
Guarantor Subsidiaries comprise all direct and indirect subsidiaries. Combined
condensed financial information for the guarantor subsidiaries is as follows:
F-29
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Consolidated
Advance Advance
Stores Guarantor Stores
December 30, 2000 Company Subsidiaries (a)(b) Eliminations Company
- -------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 14,258 $ 3,751 $ - $ 18,009
Receivables, net 48,741 31,623 603 80,967
Inventories 752,771 36,143 - 788,914
Other current assets 8,377 53,041 (51,144) 10,274
--------------- -------------------- --------------- --------------
Total current assets 824,147 124,558 (50,541) 898,164
Investment in subsidiaries 46,688 - (46,688) -
Property and equipment, net 380,555 30,405 - 410,960
Assets held for sale 6,463 18,614 - 25,077
Other assets, net 14,531 24,192 (23,628) 15,095
--------------- -------------------- --------------- ---------------
Total assets $ 1,272,384 $ 197,769 $ (120,857) $ 1,349,296
--------------- -------------------- --------------- ---------------
Current liabilties:
Bank overdrafts $ 12,907 $ 871 $ - $ 13,778
Current portion of long-term debt 7,028 6,244 (6,244) 7,028
Accounts payable 387,782 70 - 387,852
Accrued expenses 96,239 146,150 (118,266) 124,123
Other current liabilities 44,262 - (1,468) 42,794
--------------- -------------------- --------------- ---------------
Total current liabilities 548,218 153,335 (125,978) 575,575
Long-term debt 495,706 485,706 (485,706) 495,706
Transactions with affiliates (39,277) 9,538 29,739 -
Other long-term liabilities 36,366 23,091 (12,813) 46,644
Stockholder's equity
Common Stock 54 10 (10) 54
Additional paid in capital 275,654 (487,552) 487,552 275,654
Other 2,460 - - 2,460
(Accumulated Deficit) Retained Earnings (46,797) 13,641 (13,641) (46,797)
--------------- -------------------- --------------- ---------------
Total stockholder's equity 231,371 (473,901) 473,901 231,371
--------------- -------------------- --------------- ---------------
Total liabilities and
stockholder's equity $ 1,272,384 $ 197,769 $ (120,857) $ 1,349,296
=============== ==================== =============== ===============
F-30
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Consolidated
Advance Advance
Stores Guarantor Stores
January 1, 2000 Company Subsidiaries (a)(b) Eliminations Company
==============================================================================================================
Current assets:
Cash and cash equivalents $ 18,315 $ 4,262 $ - $ 22,577
Receivables, net 56,477 43,642 5,913 106,032
Inventories 718,322 31,125 - 749,447
Other current assets 5,835 43,996 (40,079) 9,752
----------- ------------ ----------- ------------
Total current assets 798,949 123,025 (34,166) 887,808
Investment in subsidiaries 42,167 - (42,167) -
Property and equipment, net 353,625 48,851 - 402,476
Assets held for sale 9,876 19,818 - 29,694
Other assets, net 26,747 17,385 (19,158) 24,974
----------- ------------ ----------- ------------
Total assets $1,231,364 $ 209,079 $ (95,491) $ 1,344,952
=========== ============ =========== ============
Current liabilities:
Bank overdrafts $ 10,976 $ 1,206 $ - $ 12,182
Current portion of long-term debt 3,665 2,000 (2,000) 3,665
Accounts payable 339,491 1,697 - 341,188
Accrued expenses 110,084 114,870 (76,665) 148,289
Other current liabilities 34,083 - (7,911) 26,172
----------- ------------ ----------- ------------
Total current liabilities 498,299 119,773 (86,576) 531,496
Long-term debt 560,302 548,500 (548,500) 560,302
Transactions with affiliates (55,269) 27,366 27,903 -
Other long-term liabilities 25,504 27,867 (2,745) 50,626
Stockholders' equity
Common Stock 54 10 (10) 54
Additional paid in capital 273,598 (533,310) 533,310 273,598
Other 1,777 - - 1,777
(Accumulated Deficit) Retained Earnings (72,901) 18,873 (18,873) (72,901)
----------- ------------ ----------- ------------
Total stockholder's equity 202,528 (514,427) 514,427 202,528
----------- ------------ ----------- ------------
Total liabilities and
stockholder's equity $1,231,364 $ 209,079 $ (95,491) $ 1,344,952
=========== ============ =========== ============
F-31
Advance Stores Company,Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30,2000,January 1,2000 and January 2,1999
(dollars in thousands)
Consolidated
Advance Advance
Stores Guarantor Stores
Year Ended December 30, 2000 Company Subsidiaries (a)(b) Eliminations Company
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,966,463 $ 334,069 $ (12,510) $ 2,288,022
Cost of sales, including purchasing and warehousing costs 1,149,311 242,816 - 1,392,127
------------- ------------------ ------------ ------------
Gross profit 817,152 91,253 (12,510) 895,895
Selling, general and administrative expenses 758,454 57,162 (12,510) 803,106
------------- ------------------ ------------ ------------
Operating income 58,698 34,091 - 92,789
Other (expense) income:
Interest expense (51,991) (56,519) 51,991 (56,519)
Equity in earnings of subsidiaries 18,981 - (18,981) -
Other, net 310 7,940 (7,488) 762
-------------- ------------------ ------------ ------------
Total other expense, net (32,700) (48,579) 25,522 (55,757)
Income (loss) before provision (benefit) for income taxes
and extraordinary item 25,998 (14,488) 25,522 37,032
Provision (benefit) for income taxes 2,827 (6,322) 17,356 13,861
------------- ------------------ ------------ ------------
Income (loss) before extraordinary item 23,171 (8,166) 8,166 23,171
Extraordinary item, gain on debt extinguishment,
net of $1,759 income taxes 2,933 2,933 (2,933) 2,933
------------- ------------------ ------------ ------------
Net income (loss) $ 26,104 $ (5,233) $ 5,233 $ 26,104
============= ================== ============ ============
Consolidated
Advance Advance
Stores Guarantor Stores
Year Ended January 1, 2000 Company Subsidiaries Eliminations Company
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,810,040 $ 407,899 $ (10,994) $ 2,206,945
Cost of sales, including purchasing and warehousing costs 1,093,499 310,614 - 1,404,113
------------- ------------------ ------------ ------------
Gross profit 716,541 97,285 (10,994) 802,832
Selling, general and administrative expenses 722,617 70,974 (10,994) 782,597
------------- ------------------ ------------ ------------
Operating (loss) income (6,076) 26,311 - 20,235
Other (expense) income:
Interest expense (55,762) (56,723) 58,641 (53,844)
Equity in earnings of subsidiaries 15,754 - (15,754) -
Other, net 599 8,616 (4,799) 4,416
------------- ------------------ ------------ ------------
Total other expense, net (39,409) (48,107) 38,088 (49,428)
Income (loss) before provision (benefit) for income taxes (45,485) (21,796) 38,088 (29,193)
Provision (benefit) for income taxes (25,920) (4,706) 20,998 (9,628)
------------- ------------------ ------------ ------------
Net income (loss) $ (19,565) $ (17,090) $ 17,090 $ (19,565)
============= ================== ============ ============
F-32
Consolidated
Advance Advance
Stores Guarantor Stores
Year Ended January 2, 1999 Company Subsidiaries (a)(b) Eliminations Company
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $ 1,042,434 $ 180,451 $ (2,126) $ 1,220,759
Cost of sales, including purchasing and warehousing costs 637,444 128,754 - 766,198
------------- ------------------ ------------ ------------
Gross profit 404,990 51,697 (2,126) 454,561
Selling, general and administrative expenses 372,933 30,293 (2,126) 401,100
Expenses associated with the Recapitalization of the Parent 14,277 - - 14,277
Expenses associated with restructuring in conjunction with
the Western Merger 6,774 - - 6,774
------------- ------------------ ------------ ------------
Operating income 11,006 21,404 - 32,410
Other (expense) income:
Interest expense (32,741) (27,946) 31,170 (29,517)
Equity in earnings of subsidiaries 15,251 - (15,251) -
Other, net 360 3,487 (3,241) 606
------------- ------------------ ------------ ------------
Total other expense, net (17,130) (24,459) 12,678 (28,911)
Income (loss) before provision (benefit) for income taxes (6,124) (3,055) 12,678 3,499
Provision (benefit) for income taxes (7,736) (1,547) 11,170 1,887
------------- ------------------ ------------ ------------
Net income (loss) $ 1,612 $ (1,508) $ 1,508 $ 1,612
============= ================== ============ ============
F-33
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Consolidated
Advance Advance
Stores Guarantor Stores
Year Ended December 30, 2000 Company Subsidiaries (a)(b) Eliminations Company
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 94,426 $ 9,277 $ 85 $ 103,788
--------- ----------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (59,799) (10,767) - (70,566)
Proceeds from sales of property and equipment 4,397 1,229 - 5,626
--------- ----------- ---------- ----------
Net cash used in investing activities (55,402) (9,538) - (64,940)
--------- ----------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in bank overdrafts 1,931 (335) - 1,596
Net borrowings under notes payable 784 - - 784
Early extinguishment of debt (24,990) (24,990) 24,990 (24,990)
Borrowings under new credit facilities 278,100 278,100 (278,100) 278,100
Payments on credit facilities (306,100) (306,100) 306,100 (306,100)
Proceeds from issuance of Class A common stock 2,053 - - 2,053
Equity impact of debt pushdown - 53,075 (53,075) -
Other 5,141 - - 5,141
--------- ----------- ---------- ----------
Net cash used in financing activities (43,081) (250) (85) (43,416)
--------- ----------- ---------- ----------
Net decrease in cash and cash equivalents (4,057) (511) - (4,568)
Cash and cash equivalents, beginning of year 18,315 4,262 - 22,577
--------- ----------- ---------- ----------
Cash and cash equivalents, end of year $ 14,258 $ 3,751 $ - $ 18,009
========= =========== ========== ==========
Consolidated
Advance Advance
Stores Guarantor Stores
Year Ended January 1, 2000 Company Subsidiaries Eliminations Company
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities $ (55,147) $ 36,832 $ (1,005) $ (19,320)
--------- ----------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (89,416) (15,601) - (105,017)
Proceeds from sales of property and equipment 2,863 267 - 3,130
Western Merger, net of cash acquired - (13,028) - (13,028)
Other 1,091 - - 1,091
--------- ----------- ---------- ----------
Net cash used in investing activities (85,462) (28,362) - (113,824)
--------- ----------- ---------- ----------
Cash flows from financing activities:
Decrease in bank overdrafts (828) (7,240) - (8,068)
Borrowings under new credit facilities 465,000 465,000 (465,000) 465,000
Payments on credit facilities (339,500) (339,500) 339,500 (339,500)
Payment of debt issuance costs (930) (930) 930 (930)
Equity impact of debt pushdown - (125,575) 125,575 -
Other 5,525 (526) - 4,999
--------- ----------- ---------- ----------
Net cash provided by (used in) financing activities 129,267 (8,771) 1,005 121,501
--------- ----------- ---------- ----------
Net decrease in cash and cash equivalents (11,342) (301) - (11,643)
Cash and cash equivalents, beginning of year 29,657 4,563 - 34,220
--------- ----------- ---------- ----------
Cash and cash equivalents, end of year $ 18,315 $ 4,262 $ - $ 22,577
========= =========== ========== ==========
F-34
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
Consolidated
Advance Advance
Stores Guarantor Stores
Company Subsidiaries(a)(b) Eliminations Company
Year Ended January 2, 1999
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 26,972 $ 2,335 $ 8,590 $ 37,897
--------- --------- --------- ---------
Cash flows from investing activities:
Transfers of property and equipment 9,968 (9,968) - -
Purchases of property and equipment (55,435) (10,395) 40 (65,790)
Proceeds from sales of property and equipment 279 5,794 - 6,073
Payment for acquisition of Western (382,549) - 18,591 (363,958)
------- --------- --------- ---------
Net cash (used in) provided by investing activities (427,737) (14,569) 18,631 (423,675)
------- --------- --------- ---------
Cash flows from financing activities:
Increase in bank overdrafts 6,474 6,542 - 13,016
Net borrowings under notes payable 14,967 561 (15,528) -
Proceeds from issuance of long-term debt 10,198 2,926 (12,543) 581
Payments on long-term debt (97,117) (849) 849 (97,117)
Borrowings under new credit facilities 425,000 425,000 (425,000) 425,000
Payment of debt issuance costs (20,786) (21,592) 21,592 (20,786)
Contributed capital from Advance Holding Corporation 10,259 - - 10,259
Contributed capital to Advance Trucking Corporation (10,039) - 10,039 -
Dividend paid to Advance Holding Corporation (180,654) - (2,496) (183,150)
Proceeds from issuance of Class A common stock 262,425 10,050 (10,050) 262,425
Equity impact of debt pushdown - (405,916) 405,916 -
Other 2,323 - - 2,323
-------- --------- -------- ---------
Net cash provided by (used in) financing activities 423,050 16,722 (27,221) 412,551
-------- --------- -------- ---------
Net increase (decrease) in cash and cash equivalents 22,285 4,488 - 26,773
Cash and cash equivalents, beginning of year 7,372 75 - 7,447
-------- --------- --------- ---------
Cash and cash equivalents, end of year $ 29,657 $ 4,563 $ - $ 34,220
========= ========= ========= =========
(a) Reflects the push down of guaranteed debt, deferred debt issuance costs
and related interest and amortization.
(b) During fiscal 1999, certain assets, liabilities and the corresponding
activity related to the Parts America store operations and a distribution
center were transferred to Advance Stores Company through a dividend to
Advance Stores Company. Additionally, throughout fiscal 2000, the Company
transferred certain assets to Advance Stores Company related to the
Western Auto retail operations in Puerto Rico and the Virgin Islands.
F-35
Advance Stores Company, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 30, 2000, January 1, 2000 and January 2, 1999
(dollars in thousands)
25. Quarterly Financial Data (Unaudited):
The following table summarizes quarterly financial data for fiscal years 2000
and 1999:
2000 First Second Third Fourth
------------------------------------------------------------------------
Net sales $ 677,582 $ 557,650 $ 552,138 $ 500,652
Gross profit 258,975 216,533 223,903 196,484
Operating income 19,184 32,249 30,111 11,245
Net income (loss) 954 11,878 13,957 (685)
1999
------------------------------------------------------------------------
Net sales $ 670,453 $ 542,320 $ 522,846 $ 471,326
Gross profit 226,361 196,526 199,637 180,308
Operating (loss) income (17,002) 14,096 14,860 8,281
Net (loss) income (23,394) 3,569 1,530 (1,270)
F-36
ADVANCE STORES COMPANY, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Balance at Balance at
Beginning Charges to End of
Allowance for doubtful accounts receivable: of Period Expenses Deductions Other Period
------------ ---------- ------------ ------- ------------
January 2, 1999......................... $ 575 $ 1,193 $ (582) (2) $ 2,594 (1) $ 3,780
January 1, 2000......................... 3,780 3,901 (754) (2) - 6,927
December 30, 2000....................... 6,927 2,152 (4,058) (2) - 5,021
(1) Allowance for doubtful accounts receivable assumed in the Western Merger.
(2) Accounts written off during the period.
Restructuring reserves:
January 2, 1999......................... $ - $ 6,774 $ (2,026) (2) $ 33,015 (1) $ 37,763
January 1, 2000......................... 37,763 58 (18,165) (2) 1,660 (1) 21,316
December 30, 2000....................... 21,316 1,673 (11,143) (2) (1,261) (1) 10,585
(1) Restructuring reserves assumed and established in the Western Merger.
(2) Represents amounts paid for restructuring charges.
(3) Reductions to reserves assumed and established in the Western Merger
that exceeded the ultimate cost expended by the Company.
II-1
SIGNATURE
Pursuant to the requirements of the Section 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized, in Roanoke,
Commonwealth of Virginia, on March 30, 2001.
ADVANCE STORES COMPANY, INCORPORATED
By: /s/ Jimmie L. Wade
----------------------------------
Jimmie L. Wade
President and Chief Financial
Officer, Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jimmie L. Wade his true and lawful
attorney-in-fact with full power of substitution and resubstitution, for him or
her and in his or her name, place and stead, in and any all capacities, to sign
any and all amendments to this Report on Form 10-K and to file same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Lawrence P. Castellani Chief Executive Office and Director March 30, 2001
- ------------------------------- (Principal Executive Officer)
Lawrence P. Castellani
/s/ Jimmie L. Wade President and Chief Financial March 30, 2001
- ------------------------------ Officer Secretary (Principal
Jimmie L. Wade Financial & Accounting Officer)
/s/ Nicholas F. Taubman Chairman of the Board and Director March 30, 2001
- ------------------------------
Nicholas F. Taubman
/s/ Garnett E. Smith Vice Chairman of the Board and March 30, 2001
- ------------------------------ Director
Garnett E. Smith
/s/ Mark J. Doran Director March 30, 2001
- ------------------------------
Mark J. Doran
/s/ John M. Roth Director March 30, 2001
- ------------------------------
John M. Roth
/s/ Timothy C. Collins Director March 30, 2001
- ------------------------------
Timothy C. Collins
/s/ Peter M. Starrett Director March 30, 2001
- ------------------------------
Peter M. Starrett
S-1
/s/ Jeffrey N. Boyer Director March 30, 2001
- ------------------------------
Jeffrey N. Boyer
/s/ William L. Salter Director March 30, 2001
- ------------------------------
William L. Salter
/s/ Jeffrey B. Conner Director March 30, 2001
- ------------------------------
Jeffrey B. Conner
S-2
Supplemental Information to be Furnished with Reports Filed Pursuant
to Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act
Other than this Report on Form 10-K, no other annual report and no proxy
materials have been or will be furnished to the Company's security holders.