<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported) November 2, 1998
-----------------------
Advance Holding Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 333-56031 54-1622754
- --------------------------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
5673 Airport Road, Roanoke, Virginia 24012
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (540) 362-4911
----------------------------
Not applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
(a) On November 2, 1998, Advance Acquisition Corporation, a Delaware
corporation ("AAC"), and an indirect wholly-owned subsidiary of the Registrant,
completed the acquisition of Western Auto Supply Company, a Delaware corporation
("Western Auto"), pursuant to the terms of an Agreement and Plan of Merger
entered into on August 17, 1998 (as amended, the "Merger Agreement") by and
among the Registrant, AAC, Advance Stores Company, Incorporated, a Virginia
corporation ("ASCI"), and a wholly-owned subsidiary of the Registrant and the
parent of AAC, Western Auto, Sears, Roebuck and Co., a New York corporation
("Sears"), Western Auto Holding Co., a Delaware corporation ("WAHC"), and a
wholly-owned subsidiary of Sears and the parent of Western Auto, and certain
shareholders of the Registrant. Pursuant to the terms of the Merger Agreement,
Western Auto merged with and into AAC, with AAC as the surviving corporation
(the "Merger"). For its shares in Western Auto, WAHC received total
consideration consisting of: (i) cash in the amount of $175.0 million; (ii)
11,474,606 shares of Class A common stock of the Registrant ("Holding Common
Stock"); and (iii) that portion of the loss sharing arrangement relating to
Western Auto's Credit Card Portfolio (as defined in the Merger Agreement), if
any, payable after the Merger following the sale of the Credit Card Portfolio,
not to exceed $10.0 million.
The acquisition was funded with (i) $175.0 million in cash and (ii)
11,474,606 shares of Holding Common Stock. The $175.0 million in cash and
transaction costs were funded through (a) the funding of approximately $90.0
million pursuant to a new deferred senior secured term loan under the Amended
and Restated Credit Facility, dated as of October 19, 1998, by and among the
Registrant, ASCI, the Lenders party thereto, The Chase Manhattan Bank, Chase
Securities Inc., DLJ Capital Funding, Inc. and First Union National Bank, (b)
$70.0 million in cash from the gross proceeds of the sale of Holding Common
Stock and (c) cash on hand.
The Western Auto purchase price was arrived at by means of arm's
length bargaining among the parties to the Agreement. Prior to the Merger,
there was no material relationship between Sears, WAHC or Western Auto
(including their officers, directors and stockholders) and the Registrant, ASCI,
or AAC or any of their affiliates, or any director or officer of the Registrant,
ASCI or AAC, or any associate of any such officer or director.
(b) Western Auto is a specialty retailer of automotive parts and
accessories and also supplies wholesale goods to independently owned and
operated Western Auto dealers. As of October 31, 1998, the closing date for
economic and accounting purposes only, Western Auto operated approximately 612
stores in the United States under the name "Parts America," and 36 stores in
Puerto Rico, two stores in the U.S. Virgin Islands and two specialty stores
under the name "Western Auto," all of which provide service and parts sales.
Western Auto also operates four distribution centers. AAC intends to convert
the majority of Parts America stores to "Advance Auto Parts" stores over time,
and to continue to run the wholesale supply operation and Puerto Rico, Virgin
Islands and specialty stores under the "Western Auto" name.
1
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The financial statements of Western Auto required to be filed as part
of this Report were filed with the Securities and Exchange Commission on October
6, 1998 as part of the Registrant's Amendment No. 2 to Registration Statement on
Form S-4 (Registration No. 333-56031), under the caption "Western Auto Supply
Company and Subsidiaries Consolidated Financial Statements" and are incorporated
herein by this reference.
(B) PRO FORMA FINANCIAL INFORMATION.
The pro forma financial information required to be filed as part of
this Report is attached hereto as Exhibit 99.1.
(C) EXHIBITS.
2.3 (1) Amendment No. 1 to Agreement and Plan of Merger dated as of
November 2, 1998 among the Registrant, Sears, WAHC, Western
Auto, ASCI, AAC and certain stockholders of the Registrant.
10.30 (2) 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 the
Registrant.
10.31 (3) Amended and Restated Credit Agreement dated as of October 19,
1998 among the Registrant, ASCI, the lenders party thereto,
The Chase Manhattan Bank ("Chase"), Chase Securities Inc.,
DLJ Capital Funding, Inc. and First Union National Bank.
10.32 (4) Pledge Agreement dated as of April 15, 1998, as amended and
restated as of November 2, 1998, among the Registrant, ASCI,
the Subsidiary Pledgors listed therein and Chase, as
collateral agent.
10.33 (5) Guarantee Agreement dated as of April 15, 1998, as amended
and restated as of November 2, 1998, among the Registrant,
the Subsidiary Guarantors listed therein and Chase, as
collateral agent.
10.34 (6) Indemnity, Subrogation and Contribution Agreement dated as of
April 15, 1998, as amended and restated as of November 2,
1998, among the Registrant, ASCI, the Guarantors listed
therein and Chase, as collateral agent.
2
<PAGE>
10.35 (7) Security Agreement dated as of April 15, 1998, as amended and
restated as of November 2, 1998, among the Registrant, ASCI,
the Subsidiary Guarantors listed therein and Chase, as
collateral agent.
23.1 Consent of Deloitte & Touche LLP.
99.1 Pro Forma Financial Information.
(1) Incorporated by reference to the exhibit designated by the same number in
the Current Report on Form 8-K filed with the Securities and Exchange
Commission by ASCI on November 17, 1998 (File No. 333-56013) (the "ASCI
Form 8-K").
(2) Incorporated by reference to the exhibit designated by as Exhibit 10.31 in
the ASCI Form 8-K.
(3) Incorporated by reference to the exhibit designated by as Exhibit 10.32 in
the ASCI Form 8-K.
(4) Incorporated by reference to the exhibit designated by as Exhibit 10.33 in
the ASCI Form 8-K.
(5) Incorporated by reference to the exhibit designated by as Exhibit 10.34 in
the ASCI Form 8-K.
(6) Incorporated by reference to the exhibit designated by as Exhibit 10.35 in
the ASCI Form 8-K.
(7) Incorporated by reference to the exhibit designated by as Exhibit 10.36 in
the ASCI Form 8-K.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: November 17, 1998
ADVANCE HOLDING CORPORATION
By: /s/ J. O'Neil Leftwich
-----------------------------------
J. O'Neil Leftwich
Senior Vice President and
Chief Financial Officer
4
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this filing of Advance Holding
Corporation on Form 8-K of our report dated July 17, 1998 (August 17, 1998 as to
Note 13) on the financial statements of Western Auto Supply Company and
Subsidiaries, appearing in Amendment No. 2 to Registration Statement No. 333-
56031 on Form S-4 of Advance Holding Corporation.
/s/ DELOITTE TOUCHE LLP
Kansas City, Missouri
November 13, 1998
<PAGE>
EXHIBIT 99.1
ADVANCE HOLDING CORPORATION
INDEX TO PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Balance Sheet...................... P-3
Notes to Unaudited Pro Forma Consolidated Balance Sheet............. P-4
Unaudited Pro Forma Statements of Operations........................ P-8
Notes to Unaudited Pro Forma Statements of Operations............... P-10
P-1
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data (the "Pro
Forma Financial Data") has been prepared by Holding's management by the
application of pro forma adjustments to the historical consolidated financial
statements of Holding and Western Auto and the notes thereto included elsewhere
in this Prospectus. The pro forma adjustments, which are based upon available
information and upon certain assumptions that management believes are
reasonable, are described in the accompanying notes. The unaudited pro forma
consolidated balance sheet as of July 18, 1998 was prepared as if the
Acquisition had occurred on such date. In connection with the Acquisition,
Holding sold $70.0 million of Common Stock to certain existing stockholders
representing 4,161,712 shares and the Company incurred $90.0 million of
borrowings under a new term loan facility. The Company received 100% of the
outstanding common stock of Western Auto in exchange for $175.0 million of cash
and 11,474,606 shares of Holding Common Stock. The unaudited pro forma
consolidated statements of operations for the fiscal year ended January 3, 1998
and the twenty-eight weeks ended July 18, 1998 reflect adjustments as if the
Recapitalization and Acquisition had been consummated and were effective as of
December 29, 1996. In connection with the Recapitalization, net proceeds of
$385.0 million from borrowings under the New Credit Facility, the issuance of
Senior Subordinated Notes, the issuance of Series A Debentures, and equity
investments of $108.5 million were used to repay notes payable and long-term
debt of $81.3 million, to make payments to the common and preferred stockholders
($351.0 million) and to pay transaction-related fees and expenses ($22.8
million). The unaudited consolidated pro forma statements of operations give
effect to the changes in interest expense that result from the issuance of new
debt and repayment of existing debt and the pro forma purchase accounting
adjustments relating to the Recapitalization and the Acquisition.
The Acquisition will be accounted for under the purchase method of
accounting. The unaudited pro forma consolidated balance sheet as of July 18,
1998 reflects a pro forma allocation of purchase price for the Acquisition to
the tangible and intangible assets and liabilities acquired. The final
allocation of such purchase price, and the resulting depreciation and
amortization expense, will differ from the estimates contained herein due to the
final allocation being based on: (a) actual amounts of assets and liabilities on
the closing date; (b) final purchase price adjustments, including reserves that
may be recognized for additional exit costs; (c) final determination of values
of property and equipment and other assets; (d) actuarial valuations of certain
liabilities; and (e) resolution of the Credit Card Liability (as defined
herein). The actual allocation of the purchase price, and the resulting effect
on income from operations may differ significantly from the pro forma amounts
included herein.
The financial effects to Holding of the Recapitalization and Acquisition as
presented in the pro forma consolidated financial data are not necessarily
indicative of Holding's or the consolidated financial position or results of
operations which would have been obtained had the Recapitalization and
Acquisition actually occurred on the dates described above, nor are they
necessarily indicative of the results of future operations. The pro forma
consolidated financial data should be read in conjunction with the notes
thereto, which are an integral part thereof, the consolidated financial
statements of Holding and Western Auto and the notes thereto.
P-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
HOLDING WESTERN AUTO
HISTORICAL HISTORICAL ACQUISITION
JULY 18, 1998 JULY 4, 1998 ADJUSTMENTS PRO FORMA
------------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........... $ 44,790 $ 27,313 $ (46,313)(3) $ 25,790
Receivables, primarily from
vendors............................ 24,372 -- -- 24,372
Trade receivables................... 5,325 82,073 (37,425)(2) 49,973
Inventories......................... 348,523 347,919 -- 696,442
Deferred income tax................. -- 45,391 (45,391)(1) --
Prepaid expenses and other
current assets..................... 5,056 17,133 -- 22,189
Refundable income taxes............. 2,185 56,858 (56,858)(1) 2,185
-------- ---------- --------- ----------
Total current assets............... 430,251 576,687 (185,987) 820,951
Property and equipment, net.......... 143,176 350,234 (116,636)(5) 376,774
Goodwill............................. -- 114,555 (114,555)(4) --
Other assets......................... 21,490 9,114 2,643 (6) 33,247
-------- ---------- --------- ----------
Total assets....................... $594,917 $1,050,590 $(414,535) $1,230,972
======== ========== ========= ==========
Liabilities and
stockholders' equity
(deficit)
Current liabilities:
Borrowings secured by trade
receivables........................ $ 5,325 $ 35,500 $ (35,500)(2) $ 5,325
Current portion of deferred
revenue............................ 3,089 -- -- 3,089
Accounts payable.................... 216,832 159,133 -- 375,965
Accrued expenses.................... 53,634 96,610 8,869 (7) 159,113
Due to Sears, net................... -- 247,880 (247,880)(1) --
Deferred income taxes............... 2,674 -- 11,000 (9) 13,674
-------- ---------- --------- ----------
Total current liabilities.......... 281,554 539,123 (263,511) 557,166
Long-term debt....................... 397,022 -- 90,000 (11) 487,022
Long-term debt--Sears................ -- 140,802 (140,802)(1) --
-------- ---------- --------- ----------
Other long-term liabilities.......... 1,638 -- -- 1,638
Post-retirement benefits............. 1,092 39,720 (18,420)(4) 22,392
Deferred income taxes................ 13,357 12,897 (26,254)(10) --
-------- ---------- --------- ----------
Total non-current
liabilities...................... 413,109 193,419 (95,476) 511,052
Stockholders' equity (deficit)....... (99,746) 318,048 (55,548)(8) 162,754
-------- ---------- --------- ----------
Total liabilities and
stockholders' equity
(deficit).......................... $594,917 $1,050,590 $(414,535) $1,230,972
======== ========== ========= ==========
</TABLE>
(Footnotes on subsequent page)
P-3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
The Unaudited Pro Forma Consolidated Balance Sheet reflects the Acquisition as
if it occurred as of July 18, 1998 (actual amounts may differ significantly from
the pro forma amounts estimated below).
(1) Per the Acquisition Agreement, all intercompany accounts between Western
Auto and Sears will be settled prior to the Acquisition. This has been
reflected as a reclassification of all intercompany accounts in Western
Auto's historical consolidated balance sheet as of July 4, 1998 to equity
as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Deferred income taxes............................. $(45,391)
Income taxes receivable - Sears................... (56,858)
Due to Sears, net................................. 247,880
Deferred income taxes - Sears (See (9) below)..... 12,897
Long-term debt - Sears............................ 140,802
--------
Impact on stockholders' equity (deficit).......... $299,330
========
</TABLE>
(2) Reflects Western Auto assets and liabilities as of July 4, 1998 that will
be retained by Sears in accordance with the Acquisition Agreement:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash(a)(See (3) below)............................ $(21,313)
Trade receivables(b).............................. (37,425)
Property and equipment, net(c)(See (5) below)..... (11,079)
Accrued expenses(d)(See (7) below)................ 4,131
Borrowings secured by trade receivables(b)........ 35,500
--------
Impact on stockholders' equity (deficit).......... $(30,186)
========
</TABLE>
______________________
(a) The Acquisition Agreement provides that Western Auto will have at least
$6,000 in cash and a minimum level of Retained Working Capital on the
closing date; any excess amount will be distributed to Sears. (See (3)
below)
(b) The Acquisition Agreement provides that Sears will retain certain
assets and liabilities related to certain private label credit card
programs, as well as associated secured borrowings.
(c) The Acquisition Agreement provides that Sears will retain all tire
store properties, which are included in the historical balance sheet of
Western Auto as of July 4, 1998 but are excluded from Western Auto's
operations to be acquired. (See (5) below)
(d) The Acquisition Agreement provides that Sears will retain all accrued
liabilities associated with the tire store properties, as well as any
accrued liabilities not associated with operations acquired from Sears.
(See (7) below)
P-4
<PAGE>
(3) Reflects increases and decreases in cash resulting from the pro forma
adjustments:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash increases:
Proceeds from issuance of 4,161,712 new shares of Holding
common stock @ $16.82 per share.......................... $ 70,000
Proceeds from issuance of long-term debt under a new term
loan facility............................................ 90,000
--------------
Total cash inflows..................................... 160,000
--------------
Cash decreases:
Cash retained by Sears (See (2) above)..................... (21,313)
Cash portion of purchase price for acquisition............. (175,000)
Estimated debt issuance costs (See (6) below).............. (6,500)
Estimated stock issuance costs (See (8) below)............. (500)
Estimated acquisition related costs (See (4) below)........ (3,000)
--------------
Total cash outflows..................................... (206,313)
--------------
Net impact on cash......................................... $ (46,313)
==============
</TABLE>
(4) The Acquisition will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." The
purchase price is being allocated first to the tangible and identifiable
intangible assets and liabilities of Western Auto based upon preliminary
estimates of their fair market values, assuming the Acquisition had
occurred on July 18, 1998, with the excess of the estimated fair market
value of the net assets acquired over the purchase price allocated to a
reduction in property and equipment for pro forma purposes, as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Components of purchase price:
Cash to Sears............................................. $ 175,000
Holding common stock to Sears (11,474,606 shares valued
@ $16.82 per share)...................................... 193,000
Estimated acquisition related costs....................... 3,000
--------------
Total purchase price.................................... 371,000
Historical book value of Western Auto's net assets......... (318,048)
Adjustment to book value of net assets acquired for
elimination of intercompany accounts between Western
Auto and Sears (See (1) above)............................ (299,330)
Adjustment to book value of net assets acquired for assets
and liabilities retained by Sears in the Acquisition (See
(2) above)................................................ 30,186
Adjustments to recognize liabilities in purchase
accounting:
Reserve for severance and relocation, net of $4,900 of
deferred income tax asset (See (9) below)................ 8,100
Net additional deferred income tax liability (See (9)
below)................................................... 1,900
</TABLE>
P-5
<PAGE>
Adjustments to reflect fair market value of net assets acquired:
<TABLE>
<S> <C>
Elimination of net book value of goodwill acquired........................ 114,555
Decrease in book value of intangible assets acquired (See
(6) below)................................................................ 4,500
Adjustments to liabilities for post-retirement costs...................... (18,420)
--------
Decrease to book value of property and equipment (See (5)
below).................................................................... $(105,557)
=========
</TABLE>
The foregoing pro forma purchase price allocation is based on available
information and certain assumptions Holding believes are reasonable. In
connection with the Acquisition Agreement, Sears has agreed to evaluate the
sale of certain private label credit card programs to a third party.buyer.
Holding has agreed to share any losses incurred as a result of the sale, or
as a result of continuing the credit card programs, up to a maximum.amount
of $10,000 (the "Credit Card Liability"). Any amounts due under the Credit
Card Liability will be reflected as additional purchase price when payment
becomes probable and the amount can be estimated. Holding is currently
evaluating certain exit costs that may be incurred in connection with the
Acquisition and may establish additional reserves, not reflected in.the
accompanying pro forma statements, based on the results of its evaluation.
Any reserves established will result in an increase in property and
equipment, resulting in additional provisions for depreciation and
amortization expense. The final purchase price allocation will be based on
the outcome of the matters referred to above, final determination of the
fair values of the net assets acquired at the date of the Acquisition as
determined by appraisal, actuarial valuation or other methods and actual
amounts of assets and liabilities on the closing date. The final purchase
price allocation may differ significantly from the pro forma allocation.
(5) Reflects the following:
<TABLE>
(DOLLARS IN
THOUSANDS)
<S> <C>
Property retained by Sears (See (2) above)................................ $ (11,079)
Purchase accounting adjustment (See (4) above)............................ (105,557)
---------
$(116,636)
=========
</TABLE>
(6) Reflects the following:
<TABLE>
(DOLLARS IN
THOUSANDS)
<S> <C>
Purchase accounting adjustment (See (4) above)............................ $ (4,500)
Deferred tax adjustment (See (9) below)................................... 643
Deferred debt issuance costs (See (3) above).............................. 6,500
---------
$ 2,643
=========
</TABLE>
(7) Reflects the following:
<TABLE>
(DOLLARS IN
THOUSANDS)
<S> <C>
Accrued expenses retained by Sears (See (2) above)........................ $ (4,131)
Reserve for severance and relocation (See (4) above)...................... 13,000
---------
$ 8,869
=========
</TABLE>
P-6
<PAGE>
(8) Reflects the following:
<TABLE>
(DOLLARS IN
THOUSANDS)
<S> <C>
Issuance of 4,161,712 shares of Holding common stock.............. $ 70,000
@ $16.82 per share, for cash (See (3) above)
Stock issued to Sears (11,474,606 shares of Holding common........ 193,000
stock valued @ $16.82 per share) (See (4) above)
Estimated stock issuance costs (See (3) above).................... (500)
Elimination of historical Western Auto stockholder's equity,
as adjusted..................................................... (318,048)
---------
$ (55,548)
=========
</TABLE>
(9) The Company anticipates that the Acquisition will be accounted for as the
purchase of assets for income tax purposes resulting in an allocation of
the purchase price to the income tax basis of the assets and liabilities
acquired. Pro forma adjustments to deferred income tax assets
(liabilities):
<TABLE>
(DOLLARS IN
THOUSANDS)
<S> <C>
Deferred tax on severance and relocation accrual (See (4)......... $ 4,900
above)
Net additional deferred tax liability(a) (See (4) above).......... (1,900)
-------
Net pro forma change in deferred taxes......................... $ 3,000
=======
</TABLE>
Components of net pro forma change in deferred taxes:
<TABLE>
<S>.............................................................. <C>
Non-current deferred tax asset (See (6) above)................... $ 643
Current deferred tax liability................................... (11,000)
Non-current deferred tax liability (See (10) below).............. 13,357
-------
$ 3,000
=======
</TABLE>
______________________
(a) Represents $4,900 deferred income tax liability related to property and
equipment, net of net deferred income tax assets of $3,000 relating to
a wholly owned subsidiary of Western Auto.
(10) Reflects the following:
<TABLE>
(DOLLARS
IN
THOUSANDS)
<S> <C>
Elimination of Western Auto's deferred tax liability to Sears....
(See (1) above)................................................ $12,897
Adjustment to non-current deferred tax liability (See (9)
above)......................................................... 13,357
-------
$26,254
=======
</TABLE>
(11) Reflects borrowings of $90,000 under a new term loan facility.
P-7
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 3, 1998
--------------------------------------------------------------------------------------
RECAPITALIZATION ACQUISITION
------------------------ ---------------------------
COMPANY WESTERN AUTO TOTAL
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales..................... $848,108 $ -- $848,108 $1,319,811 $(45,900)(3) $2,122,019
Cost of sales................. 524,586 -- 524,586 883,262 -- 1,407,848
-------- -------- -------- ---------- -------- ----------
Gross profit.................. 323,522 -- 323,522 436,549 (45,900) 714,171
Selling, general and
administrative expenses...... 281,095 -- 281,095 475,037 (64,702)(4) 691,430
Restructuring................. -- -- -- 38,441 -- 38,441
-------- -------- -------- ---------- -------- ----------
Income (loss) from
operations................... 42,427 -- 42,427 (76,929) 18,802 (15,700)
Total interest expense........ (6,086) (36,476)(1) (42,562) (15,379) 7,105 (5) (50,836)
Other income (expense),
net.......................... (321) -- (321) (6) -- (327)
-------- -------- -------- ---------- -------- ----------
Income (loss) before
provision (benefit) for
income taxes................. 36,020 (36,476) (456) (92,314) 25,907 (66,863)
Provision (benefit) for
income taxes................. 14,733 (14,331)(2) 402 (31,885) 10,363 (2) (21,120)
-------- -------- -------- ---------- -------- ----------
Net income (loss)............. $ 21,287 $(22,145) $ (858) $ (60,429) $ 15,554 $ (45,743)
======== ======== ======== ========== ======== ==========
</TABLE>
(Footnotes on subsequent page)
P-8
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 18, 1998 JULY 4, 1998
--------------------------------------- -----------------------------------------
RECAPITALIZATION ACQUISITION
------------------------ --------------------------
COMPANY WESTERN AUTO TOTAL
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales...................... $544,000 $ -- $544,000 $586,194 $(18,932)(3) $1,111,262
Cost of sales.................. 332,825 -- 332,825 380,876 -- 713,701
-------- -------- -------- -------- -------- ----------
Gross profit................... 211,175 -- 211,175 205,318 (18,932) 397,561
Selling, general and
administrative expenses....... 178,812 -- 178,812 209,017 (26,467)(4) 361,362
Costs associated with the
recapitalization.............. 14,005 -- 14,005 -- -- 14,005
-------- -------- -------- -------- -------- ----------
Income (loss) from operations.. 18,358 -- 18,358 (3,699) 7,535 22,194
Total interest expense......... (13,559) (10,288)(1) (23,847) (11,218) 6,503 (5) (28,562)
Other income (expense), net.... 317 -- 317 1 -- 318
-------- -------- -------- -------- -------- ----------
Income (loss) before
provision (benefit) for
income taxes.................. 5,116 (10,288) (5,172) (14,916) 14,038 (6,050)
Provision (benefit) for
income taxes.................. 2,543 (4,047)(2) (1,504) (5,022) 5,615 (2) (911)
-------- -------- -------- -------- -------- ----------
Net income (loss).............. $ 2,573 $ (6,241) $ (3,668) $ (9,894) $ 8,423 $ (5,139)
======== ======== ======== ======== ======== ==========
</TABLE>
(Footnotes on subsequent page)
P-9
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Pro Forma Consolidated Statements of Operations reflect the Recapitalization
and Acquisition as if they had occurred on December 29, 1996.
(1) Gives effect to the increase in estimated interest expense from the use of
borrowings to finance the Recapitalization:
<TABLE>
<CAPTION>
FISCAL YEAR TWENTY-EIGHT WEEKS
ENDED ENDED
JANUARY 3,1998 JULY 18, 1998
---------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest and commitment fees on unused borrowings related to
the New Credit Facility, Senior Subordinated Notes and
Series A Debentures(a)........................................... $39,914 $11,162
Amortization of debt issuance costs related to the New Credit
Facility, Senior Subordinated Notes and Series A
Debentures....................................................... 2,648 743
Less: Interest expense in historical statement of operations
related to debt extinguished in connection with the
Recapitalization................................................. (6,086) (1,617)
$36,476 $10,288
======= =======
</TABLE>
______________________
(a) Reflects (i) pro forma interest expense calculated using an interest rate
of 8.15% per annum on borrowings of $125,000 on the New Credit Facility,
10.25% per annum on borrowings of $200,000 on the Senior Subordinated
Notes and 12.875% per annum on borrowings of $60,000 on the Series A
Debentures and (ii) commitment fees on unused borrowings of $250,000
related to the New Credit Facility using a rate of 0.5% per annum. The
interest rates on the New Credit Facility are variable. A change in the
rates of 1/8 of 1% on these borrowings would change the pro forma interest
expense for the year ended January 3, 1998 by $200 and for the twenty-
eight weeks ended July 18, 1998 by less than $100. In September 1998, the
interest rate on the New Credit Facility declined to 7.88%, which would
reduce pro forma interest expense as presented in the unaudited pro forma
statement of operations for the Recapitalization by less than $200 for
both the year ended January 3, 1998 and the twenty-eight week period ended
July 18, 1998.
(2) Estimated income tax effects of the pro forma adjustments at a statutory
tax rate of approximately 40%.
(3) Pro forma adjustment eliminates the effect of various Western Auto private
label credit card programs retained by Sears in accordance with the
Acquisition Agreement:
<TABLE>
<CAPTION>
FISCAL YEAR TWENTY-EIGHT WEEKS
ENDED ENDED
JANUARY 3,1998 JULY 18, 1998
---------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Credit card revenues, included in net sales....................... $(45,900) $(18,932)
Credit card operating expenses, included in selling, general
and administrative expenses (See (5) below)...................... 55,536 21,368
Credit card financing fees, included in interest expense (See
(6) below)....................................................... 2,272 1,082
-------- --------
Net pre-tax loss eliminated....................................... $ 11,908 $ 3,518
======== ========
</TABLE>
(4) Pro forma adjustment reflects the following:
P-10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-EIGHT WEEKS
JANUARY 3, 1998 ENDED JULY 18, 1998
---------------- -------------------
(dollars in thousands)
<S> <C> <C>
Elimination of the credit card operating expenses (See (3)
above)............................................................. $(55,536) $(21,368)
Elimination of goodwill amortization................................ (4,455) (2,228)
Reduction in other intangibles amortization(a)...................... (146) (73)
Reduction in depreciation as a result of pro forma purchase
price allocation(b)................................................ (8,119) (4,372)
Adjustment to include the interchange fee of 1.3%(c)................ 1,700 605
Elimination of deferred gain amortization on the post
retirement benefit obligation...................................... 1,215 640
Elimination of rental income, net of depreciation expense, for
the tire store properties.......................................... 639 329
-------- --------
Net decrease in selling, general and administrative expenses........ $(64,702) $(26,467)
</TABLE>
______________________
(a) The historical balance sheet for Western Auto includes other
intangibles of $9,114 which were being depreciated over 40 years. The pro
forma adjustment above is made in conjunction with the write-down of the
intangible assets by $4,500.
(b) Reflects reduction in depreciation expense related to the pro forma
purchase price allocation based on an average useful life of 13.years.
(c) Historically, Western Auto has not been charged for the interchange fee
of 1.3% on Sears' credit card sales. Holding will enter into a.Merchant
Agreement with Sears, whereby Sears will service its credit card used at
the Parts America, Western Auto dealer stores and Western Auto Puerto Rico
stores for a specified period of time, and will charge the Company an
interchange fee of 1.3% of related credit card sales.
(5) Pro forma adjustment reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-EIGHT WEEKS
JANUARY 3, 1998 ENDED JULY 18, 1998
---------------- ------------------
<S> <C> <C>
Elimination of historical Western Auto inter-company interest
expense............................................................ $(13,107) $(10,136)
Elimination of credit card financing fees relating to credit
card program retained by Sears (See (3) above)..................... (2,272) (1,082)
Interest expense on $90,000 under a new term loan facility at
7.88% (a).......................................................... 7,092 3,818
Amortization of deferred debt issuance costs over five and
one-half years..................................................... 1,182 637
Reduction in interest income recognized on investment of
$25,000, earning interest at 4.5%.................................. -- 260
-------- --------
Net decrease in interest expense.................................... $ (7,105) $ (6,503)
======== ========
</TABLE>
_________________________
(a) The interest rates on the new credit facility are variable. A change
in the rates of 1/8 of 1% on these borrowings would change the pro forma
interest expense for the year ended January 3, 1998 by $200 and for the
twenty-eight weeks ended July 18, 1998 by $100.
P-11
