<PAGE>
As filed with the Securities and Exchange Commission on October 6, 1998
Registration No. 333-56031
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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ADVANCE HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Virginia 5531 54-1622754
(State or other jurisdiction of (Primary Standard Industrial (Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
5673 Airport Road
Roanoke, Virginia 24012
(540) 362-4911
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
J. O'Neil Leftwich
Senior Vice President and
Chief Financial Officer, Secretary and Treasurer
Advance Holding Corporation
5673 Airport Road
Roanoke, Virginia 24012
(540) 362-4911
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
COPIES TO:
Cynthia M. Dunnett, Esq.
Riordan & McKinzie
300 South Grand Avenue
29th Floor
Los Angeles, California 90071
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
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PROSPECTUS
Advance Holding Corporation
Offer to Exchange its
12.875% Series B Senior Discount Debentures due April 15, 2009,
which have been registered under the Securities Act,
for any and all of its outstanding
12.875% Series A Senior Discount Debentures due April 15, 2009
The Exchange Offer will expire at 5:00 P.M., New York City time, on
, 1998, unless extended.
--------------
Advance Holding Corporation ("Holding") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus (the "Prospectus") and
the accompanying Letter of Transmittal (the "Letter of Transmittal" and together
with this Prospectus, the "Exchange Offer"), to exchange its 12.875% Series B
Senior Discount Debentures due April 15, 2009 (the "Series B Debentures") which
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement (the "Registration
Statement") of which this Prospectus is a part, for its outstanding 12.875%
Series A Senior Discount Debentures due April 15, 2009 (the "Series A
Debentures"), of which $112.0 million principal amount at maturity is
outstanding as of the date hereof.
Holding will accept for exchange any and all validly tendered Series A
Debentures prior to 5:00 P.M., New York City time, on ,
1998, unless extended (the "Expiration Date"). Series A Debentures may be
tendered only in integral multiples of $1,000 of principal amount at maturity.
Tenders of Series A Debentures may be withdrawn at any time prior to 5:00 P.M.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Series A Debentures being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions. In the event Holding terminates the Exchange Offer and
does not accept for exchange any Series A Debentures, Holding will promptly
return the Series A Debentures to the holders thereof. Holding will not receive
any proceeds from the Exchange Offer. See "The Exchange Offer."
The Series B Debentures will be obligations of Holding evidencing the same
debt as the Series A Debentures, and will be entitled to the benefits of the
same indenture (the "Indenture"). See "Description of Series B Debentures".
The form and terms of the Series B Debentures are the same as the form and terms
of the Series A Debentures in all material respects except that the Series B
Debentures have been registered under the Securities Act and hence do not
include certain rights to registration thereunder and do not contain transfer
restrictions or terms with respect to the special interest payments applicable
to the Series A Debentures. The Series A Debentures were issued on April 15,
1998, pursuant to an offering exempt from registration under Section 4(2) of the
Securities Act. The Initial Purchasers (as defined herein) subsequently resold
the Series A Debentures in reliance on the exemption available under Rule 144A
under the Securities Act. The Series A Debentures have not been registered
under the Securities Act, are subject to certain restrictions on transfer
(including who may purchase the Series A Debentures) and may not be offered or
sold except pursuant on exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act. See "The Exchange Offer".
(Continued on following page)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF THE SERIES A DEBENTURES ON , 1998.
SEE "RISK FACTORS" ON PAGE 20 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS EXCHANGE OFFER.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
--------------
THE DATE OF THIS PROSPECTUS IS , 1998.
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(Continuation of cover page)
The Series B Debentures are being offered hereunder in order to satisfy
certain obligations of Holding under the Registration Rights Agreement, dated as
of April 15, 1998 (the "Exchange Offer Registration Rights Agreement"), by and
among Holding and the Initial Purchasers, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
Exchange Offer is intended to satisfy Holding's obligations under the Exchange
Offer Registration Rights Agreement to register the Series A Debentures under
the Securities Act. Once the Exchange Offer is consummated, Holding will have
no further obligations to register any of the Series A Debentures not tendered
by the holders of the Series A Debentures (the "Holders") for exchange. See
"Risk Factors--Consequences to Non-Tendering Holders of Series A Debentures".
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters to third
parties, Holding believes that the Series B Debentures issued pursuant to the
Exchange Offer in exchange for Series A Debentures may be offered for resale,
resold and otherwise transferred by holders thereof without compliance with the
registration and prospectus delivery provisions of the Securities Act. However,
any Holder who is an "affiliate" of Holding, any Holder who intended to
participate in the Exchange Offer for the purpose of distributing the Series B
Debentures or any broker dealer who acquired Series A Debentures directly form
Holding (i) cannot rely on the interpretation by the staff of the Commission set
forth in the above referenced no-action letters, (ii) cannot tender its Series A
Debentures in the Exchange Offer, and (iii) must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any sale or transfer of the Series A Debentures, unless such sale or transfer is
made pursuant to an exemption from such requirements. See "Risk Factors--
Consequences to Non-Tendering Holders of Series A Debentures". In addition,
each broker-dealer that receives Series B Debentures for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Debentures. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Series B Debentures received in exchange for
Series A Debentures where such Series A Debentures were acquired by such broker-
dealer as a result of market-making activities or other trading activities and
not acquired directly from Holding. Holding has agreed that for a period of 180
days after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT
BE USED FOR AN OFFER TO RESELL, RESALE OR OTHER TRANSFER OF SERIES B DEBENTURES.
Series A Debentures were initially represented by two Global Series A
Debentures (as defined herein) in fully registered form, each registered in the
name of a nominee of The Depository Trust Company ("DTC"), as depository. The
Series B Debentures exchanged for Series A Debentures represented by the Global
Series A Debentures may be initially represented by one or more global
securities ("Global Series B Debenture") in fully registered form, each
registered in the name of the nominee of DTC. The Global Series B Debenture
will be exchangeable for Series B Debentures in registered form, in
denominations of $1,000 and integral multiples thereof as described herein. The
Series B Debentures in global form will trade in The Depository Trust Company's
Same-Day Funds Settlement System, and secondary market trading activity in such
Series B Debentures will therefore settle in immediately available funds. See
"Description of Series B Debentures--Form, Denomination and Book-Entry
Procedures".
The yield and interest on the Series B Debentures is 12.875% (computed on a
semi-annual bond equivalent basis) calculated from April 15, 1998. The Series B
Debentures will accrete at a rate of 12.875% compounded semi-annually, to an
aggregate principal amount of $112.0 million by April 15, 2003. Cash interest
will not accrue on the Series B Debentures prior to April 15, 2003. Commencing
April 15, 2003, cash interest on the Series B Debentures will accrue and be
payable, at a rate of 12.875% per annum, semi-annually in arrears on each April
15 and October 15.
(Continued on following page)
i
<PAGE>
(Continuation of cover page)
The Series B Debentures will be redeemable at the option of Holding, in
whole or in part, at any time on or after April 15, 2003, in cash at the
redemption prices set forth herein, plus accrued and unpaid interest and
Liquidated Damages (as defined herein), if any, thereon to the date of
redemption. In addition, at any time prior to April 15, 2001, Holding may, at
its option, on any one or more occasions, redeem up to 35% of the aggregate
principal amount at maturity of the Series B Debentures originally issued at a
redemption price equal to 112.875% of the Accreted Value thereof, plus
Liquidated Damages, if any, with the net cash proceeds of one or more Equity
Offerings (as defined); provided that at least 65% of the original aggregate
principal amount at maturity of the Series B Debentures will remain outstanding
immediately following each such redemption. See "Description of Series B
Debentures--Optional Redemption." Upon the occurrence of a Change of Control,
each holder of Series B Debentures will have the right to require Holding to
repurchase all or any part of such holder's Series B Debentures at a price in
cash equal to 101% of the Accreted Value thereof plus Liquidated Damages, if
any, thereon in the case of any such purchase prior to April 15, 2003, or 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase in the case of any
such purchase on or after April 15, 2003. See "Description of Series B
Debentures--Repurchase at the Option of Holders--Change of Control." There can
be no assurance that, in the event of a Change of Control, Holding would have
sufficient funds to purchase all Series B Debentures tendered. See "Risk
Factors--Possible Inability to Purchase Series B Debentures upon Change of
Control."
The Series B Debentures will be senior obligations of Holding. The Series
B Debentures will rank pari passu in right of payment with all future senior
indebtedness of Holding and will rank senior in right of payment to all future
subordinated indebtedness of Holding. As of June 20, 1998, Holding had
outstanding Senior Debt (as defined herein) of $135.0 million. The Series B
Debentures will be effectively subordinated to all liabilities of Holding's
subsidiaries. As of July 18, 1998, Holding's subsidiaries had outstanding
indebtedness of $335.0 million and other liabilities of $298.0 million.
Prior to this offering, there has been no public market for the Series A
Debentures. Following completion of the Exchange Offer, Holding does not intend
to list the Series B Debentures on a national securities exchange or to seek
approval for quotation through the Nasdaq National Market. The Initial
Purchasers have informed Holding that they currently intend to make a market in
the Series B Debentures. However, the Initial Purchasers are not obligated to
do so and any such market making may be discontinued at any time without notice.
Therefore, no assurance can be given as to whether an active trading market will
develop or be maintained for the Series B Debentures. As the Series A
Debentures were issued and the Series B Debentures will be issued to a limited
number of institutions who typically hold similar securities for investment,
Holding does not expect that an active public market for the Series B Debentures
will develop. In addition, resales by certain holders of the Series A
Debentures or the Series B Debentures of a substantial percentage of the
aggregate principal amount of such debentures could constrain the ability of any
market maker to develop or maintain a market for the Series B Debentures. To
the extent that a market for the Series B Debentures should develop, the market
value of the Series B Debentures will depend on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition, performance and prospects of Holding. Such factors might cause the
Series B Debentures to trade at a discount from face value. See "Risk Factors--
Lack of a Public Market for the Series B Debentures". Holding has agreed to pay
the expenses of the Exchange Offer.
THIS PROSPECTUS DESCRIBES CERTAIN DOCUMENTS WHICH ARE NOT PRESENTED HEREIN
OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM THE CHIEF
FINANCIAL OFFICER, ADVANCE HOLDING CORPORATION, 5673 AIRPORT ROAD, ROANOKE,
VIRGINIA 24012, TELEPHONE NUMBER (540) 362-4911.
ii
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AVAILABLE INFORMATION
Holding has filed with the Commission a registration statement on Form S-4
(together with all amendments thereto, the "Registration Statement") under the
Securities Act for the registration of the Series B Debentures offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
Holding and the Series B Debentures offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith. With
respect to each contract or other document filed with the Commission as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and any statement concerning
the contents of such contract or other document shall be deemed qualified in its
entirety by such reference.
Upon consummation of the Exchange Offer, Holding will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder (the "Exchange Act") for a
period following the effectiveness of the Registration Statement. The
Registration Statement, the exhibits and schedules forming a part thereof and
the reports and other information filed by Holding with the Commission in
accordance with the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may also be obtained upon written request from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a
World Wide Web site (http://www.sec.gov) that contains reports, proxy and other
information regarding registrants that file electronically with the SEC. While
any Series A Debentures remain outstanding, Holding will make available, upon
request, to any holder and any prospective purchaser of the Series A Debentures
the information required by Rule 144A(d)(4) under the Securities Act during any
period in which Holding is not subject to Section 13 or 15(d) of the Exchange
Act. Any such request should be mailed to Advance Holding Corporation, 5673
Airport Road, Roanoke, Virginia 24012. Telephone requests may be directed to
the Chief Financial Officer at (540) 362-4911.
The Indenture provides that, at any time after the consummation of the
Exchange Offer and for so long as any of the Series B Debentures are
outstanding, Holding will file with the Commission the periodic reports required
to be filed with the Commission under the Exchange Act and make such reports
available to securities analysts and prospective investors upon their request,
whether or not required by the rules and regulations of the Commission. Holding
will also, within 15 days of filing each such report with the Commission,
provide the Trustee and the holders of the Series B Debentures with annual
reports containing the information required to be contained in Form 10-K
promulgated under the Exchange Act, quarterly reports containing the information
required to be contained in Form 10-Q promulgated under the Exchange Act, and
from time to time such other information as is required to be contained in Form
8-K promulgated under the Exchange Act. If the Commission does not accept such
reports, for so long as any Series B Debentures remain outstanding, Holding will
provide the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act to holders of the Series B Debentures and to securities
analysts and prospective investors upon their request.
iii
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information and consolidated financial statements
and the unaudited pro forma consolidated financial data of Holding, including
the notes thereto, contained elsewhere in this Prospectus. Unless the context
otherwise requires, "Holding" refers to Advance Holding Corporation and its
subsidiaries, including Advance Stores Company, Incorporated, and the "Company"
refers to Advance Stores Company, Incorporated and its subsidiaries. All
references to a fiscal year refer to a year ending on the last Saturday nearest
December 31 for a stated year (e.g., "fiscal 1997" refers to the year ended
January 3, 1998). Unless otherwise indicated, all references to non-financial
data are as of July 18, 1998.
THE COMPANY
The Company is the second largest specialty retailer (based on store count)
of automotive parts and accessories in the United States and, as of July 18,
1998, had 909 stores in 17 states operating under the "Advance Auto Parts" name.
The Company has achieved significant growth through a focused store expansion
strategy of opening stores in new contiguous and selected existing markets.
Since accelerating its store expansion plan in 1992, the Company has grown from
the eighth largest to the second largest U.S. specialty retailer of automotive
parts (based on store count), increasing its store count from 223 to 909. From
fiscal 1992 through fiscal 1997, the Company increased net sales, net income and
EBITDA, as adjusted for the Recapitalization, by a compound annual growth rate
of 29.3%, 22.2% and 28.4%, respectively. See "--The Recapitalization" and
footnote (4) to "--Summary Consolidated Historical and Pro Forma Financial Data"
for information with respect to EBITDA, as adjusted for the Recapitalization,
and "--Summary Consolidated Historical and Pro Forma Financial Data" for certain
cash flow information. In addition, the Company has aggressively implemented
its commercial delivery program to penetrate the "do-it-for me" ("DIFM") segment
of the automotive aftermarket. The Company, which it believes is the largest
automotive retailer in a majority of its markets based on store count, has
expanded from its original geographic base of North Carolina, South Carolina,
Tennessee and Virginia to also operate in Alabama, Arkansas, Delaware, Florida,
Georgia, Indiana, Kentucky, Maryland, Michigan, Mississippi, Ohio, Pennsylvania
and West Virginia. For fiscal 1997, net sales, net income and EBITDA, as
adjusted for the Recapitalization, were $848.1 million, $20.4 million and $68.2
million, respectively.
The Company believes that it has successfully established customer loyalty
in its markets by providing high levels of customer service, by offering an
extensive selection of brand name and quality private label products at
competitive prices and by creating strong name recognition, all of which are
reinforced by targeted regional advertising. In addition, the Company believes
that its size provides numerous competitive advantages over smaller retail
chains and independent operators, which make up a majority of its competition.
These advantages include: (i) greater product availability, (ii) purchasing
economies, (iii) economies of scale with respect to advertising, distribution
and warehousing, and (iv) a greater number of convenient locations with longer
store hours. The Company has expanded on these advantages by investing heavily
in employee training and information systems, which are designed to support the
Company's commitment to superior customer service.
The automotive aftermarket is a highly fragmented industry with the top 10
retail chains accounting for approximately 10% of the industry's approximately
$78.0 billion in annual sales. The Company believes that the industry is
consolidating as national and regional specialty retail chains gain market share
at the expense of smaller independent operators and less specialized mass
merchandisers. The Company primarily serves the approximately $34.0 billion
retail "do-it-yourself" ("DIY") segment of the automotive aftermarket, which the
Company believes has historically been characterized by stable, recession-
resistant demand. In addition, in 1996, the Company implemented a commercial
delivery program to capitalize on the approximately $44.0 billion commercial or
DIFM segment of the automotive aftermarket. The Company has aggressively
implemented this program in 494 stores and expects to add approximately 45
stores to the program in the remainder of 1998. The Company serves its
commercial delivery customers from its existing store base, which allows the
Company to leverage its existing fixed costs and in-store personnel with minimal
capital outlay.
1
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RECENT DEVELOPMENTS
On August 17, 1998, the Company and Holding entered into an agreement (the
"Acquisition Agreement") to acquire Western Auto Supply Company ("Western
Auto"), a Delaware corporation and wholly owned subsidiary of Sears, Roebuck and
Co. ("Sears"), for $175.0 million and approximately 40% of the Common Stock of
Holding (the "Acquisition"). The Acquisition Agreement provides that (i)
Western Auto will be merged into a subsidiary of the Company, with such
subsidiary to become the surviving corporation, (ii) the issued and outstanding
shares of Western Auto will be converted into the right to receive in the
aggregate (a) $175.0 million and (b) 11,474,606 shares of Holding's Class A
common stock, $.01 par value per share, constituting approximately 40% of the
outstanding Common Stock of Holding. FS&Co., Ripplewood, Nicholas F. Taubman
and the Taubman Trust (each as defined below) have committed to invest an
additional $70.0 million in equity to fund a portion of the cash purchase price
for Western Auto. Holding anticipates that $115.0 million of the cash purchase
price and certain transaction costs will be funded through bank debt.
Based in Kansas City, Missouri, Western Auto is a specialty retailer of
automotive parts and accessories and also maintains an extensive wholesale
dealer network. As of August 17, 1998, Western Auto operated 590 stores in the
U.S. under the "Parts America" name and 40 stores primarily in Puerto Rico under
the "Western Auto" name that provide service as well as parts sales and operated
four distribution centers.
The combined entity will operate domestic retail stores under the "Advance
Auto Parts" name in most markets. The wholesale dealer network and Puerto Rico
stores will continue to operate primarily under the "Western Auto" banner. The
Company and Western Auto together will operate over 1,500 retail stores in 37
states, Puerto Rico and the U.S. Virgin Islands and will supply through its
wholesale distribution center approximately 775 "dealer" stores in 48
states.
The Acquisition is expected to close by year end but there can be no
assurance that the Acquisition will be consummated. See "Unaudited Pro Forma
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and the
historical financial statements of Western Auto included elsewhere in this
Prospectus.
OPERATING STRATEGY
The Company's operating strategy focuses on serving its customers and
capitalizing on its position as a leading automotive aftermarket retailer. The
Company's key operating objectives are to:
Provide Superior Customer Service. The Company believes that its customers
place significant value on technical knowledge and service. Due to increased
vehicle diversity and automotive parts proliferation, customers increasingly
rely on well-trained sales associates to offer knowledgeable assistance in
product selection and use. To serve this need, Company employees participate in
continuous training programs, including formal classroom workshops, seminars and
Automotive Service Excellence ("ASE") certification to build technical,
managerial and customer service skills. In addition, the Company has customer
service measurement systems and recognition programs for division managers,
store managers, sales associates and other employees to measure and encourage
overall customer satisfaction.
Offer Broad Selection of Quality Products. The Company offers a broad
selection of brand name and quality private label automotive parts and other
products designed to cover a wide range of vehicles. At the end of fiscal 1997,
substantially all of the Company's stores offered between 15,000 to 16,000 in-
store stock keeping units ("SKUs") supplemented by approximately 36,000 SKUs
available on a next-day delivery basis to substantially all of its stores
through the Company's Parts Delivered Quickly ("PDQ(R)") system. The Company is
currently implementing an SKU expansion strategy such that, by the end of 1998,
the Company will offer to its customers on a same day basis a range of 20,000 to
21,000 SKUs in substantially all of its stores and approximately
2
<PAGE>
100,000 SKUs through its PDQ(R) system. The store SKU expansion will be
supported by (i) the roll-out of "hub" stores with approximately 4,000
additional SKUs, which will generally be available on an immediate or same day
basis to other area stores, and (ii) daily restocking of these additional SKUs.
In addition, the Company has expanded the PDQ(R) system with the opening of a
master PDQ(R) facility which provides approximately 70,000 SKUs and has the
capacity to offer up to 200,000 SKUs. The majority of the expanded SKUs will be
replacement parts which generally have higher gross margins than accessories and
other products. The Company believes that the SKU expansion program will be an
important competitive advantage, particularly with respect to the commercial
delivery program.
Capitalize on Strong Vendor Relationships and Merchandising Expertise. The
Company has consistently been able to negotiate lower product costs and improved
purchasing terms due to its ability to successfully grow its store base and
existing business. These favorable purchasing relationships enable the Company
to employ an everyday low price strategy with an emphasis on being a price
leader in replacement parts. The Company purchases from over 200 different
vendors with no single vendor accounting for 10% or more of purchases. The
Company's merchandising staff focuses on offering customers a broad selection of
products displayed in a manner designed to enhance sales. The Company
continually measures store productivity and is able to rapidly roll out sales
enhancing displays or other merchandising changes to all of its stores.
Employ Advanced Information Technology and Logistics Systems. Since 1992,
the Company has invested significantly in its information technology and
logistics systems to facilitate its rapid growth by enhancing customer service,
increasing in-stock SKUs and providing for a broad product selection with same
day or next day delivery. Use of these systems has helped to increase the
Company's average customer sale from $10.86 in fiscal 1992 to $14.28 in fiscal
1997. In addition, these systems facilitate rapid expansion of the Company's
store base by improving operating efficiencies. The Company has nearly
completed converting its distribution centers from a labor intensive system to a
technologically advanced, fully integrated system with real time software and
modern material handling equipment. With these technological enhancements and
the opening of a fourth distribution center to be completed by early 1999, the
Company will be able to service over 1,600 stores.
GROWTH STRATEGY
As the Company pursues its expansion plan, management believes it will
continue to benefit from greater purchasing economies and an increased ability
to leverage advertising and logistics expenses. The Company will continue to
focus on the following key areas in implementing its growth strategy.
Continue New Store Growth. The Company's new store growth strategy is
focused on penetrating targeted new geographic areas with multiple store
openings, while continuing to open additional stores in selected existing
territories to increase its market share. The Company believes that the highly
fragmented nature of the retail automotive aftermarket industry allows it to
quickly establish itself in new markets and to increase its market penetration
in existing markets. The Company opened 170 stores in 1997, 96 stores in 1998
and plans to open approximately 70 stores in the remainder of fiscal 1998. To
further support its growth, the Company expects to begin television advertising
on a national basis in 1999. The Company believes that its proven ability to
effectively select new markets and store locations and quickly open new stores
will allow it to substantially increase its store base in approximately five
years.
Pursue Acquisitions. To augment its store growth strategy, the Company
intends to continue to pursue growth opportunities through selected acquisitions
where such acquisitions provide a quicker and more economic alternative to new
store openings. The fragmented nature of the automotive aftermarket industry
creates significant acquisition opportunities in existing and new markets. The
Company believes it can increase revenues and profitability of acquired stores
by leveraging its established infrastructure and improving stocking levels,
merchandising and customer service. Since 1994, acquisitions have accounted for
approximately 10% of the Company's new store openings. See "--Recent
Developments" for a description of the pending Acquisition.
3
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Increase Commercial Sales. In 1996, the Company focused its marketing
efforts on expanding sales to the DIFM segment of the automotive aftermarket,
which the Company believes represents approximately 56% of the automotive
aftermarket. Since 1996, the Company has added its commercial delivery program
to 494 stores. Due to its success in rapidly building its commercial sales
program, which currently represents approximately 10% of sales, the Company will
continue to expand this program, including adding approximately 45 stores in the
remainder of 1998. The Company serves its commercial delivery customers through
its existing store base which allows the Company to effectively leverage its
store-level costs. Commercial delivery customers order parts via a telephone
call to a Company store, and orders are delivered usually in less than an hour
in a Company truck. The Company's experience and market research indicate that
its broad selection of quality parts at competitive prices, knowledgeable sales
assistance, quick, accurate delivery, and the availability of credit are
important competitive advantages in serving the commercial delivery
customer.
Grow Same Store Sales. The Company believes that it can grow its same
store sales by (i) expanding product availability at the store level and through
the Company's PDQ(R) distribution system; (ii) continuing to implement its
commercial delivery program (as described above); and (iii) increasing name
recognition. The Company believes that expanding its product offerings through
increased SKU availability will enhance sales by (a) decreasing the likelihood
of a lost sale due to not stocking an item and (b) attracting customers,
particularly commercial delivery customers, who require hard to find replacement
parts and brand names. In addition, the Company believes that its market
penetration strategy and regional advertising will continue to build broad name
recognition and increase sales.
The Company is incorporated in the Commonwealth of Virginia. Its executive
offices are located at 5673 Airport Road, Roanoke, Virginia 24012 and its
telephone number is (540) 362-4911.
4
<PAGE>
THE RECAPITALIZATION
On April 15, 1998, Holding consummated its recapitalization pursuant to an
Agreement and Plan of Merger dated as of March 4, 1998 (the "Merger Agreement").
Nicholas F. Taubman and the Taubman Trust (the "Continuing Stockholders") and
certain Taubman family members were the only stockholders of Holding prior to
the Recapitalization. The Continuing Stockholders initiated and controlled the
transaction process throughout the period prior to the Recapitalization.
Holding engaged in the Recapitalization in order to attract additional investors
while allowing the Continuing Stockholders to retain an equity interest in
Holding. The Company engaged in actions that facilitated the Recapitalization
because it is a wholly owned subsidiary of Holding. Management, other than
Nicholas F. Taubman, supported the transaction process as directed by the
Continuing Stockholders and the Board of Directors of the Company. Prior to the
Recapitalization, the Company's management had no equity stake in Holding.
Pursuant to the Merger Agreement, AHC Corporation ("AHC"), a corporation
wholly-owned by an investment fund organized by Freeman Spogli & Co.
Incorporated ("FS&Co."), merged into Holding (the "Merger"), with Holding as the
surviving corporation. In the Merger, a portion of the common stock (the
"Holding Common Stock") and all of the preferred stock of Holding held by the
Continuing Stockholders and certain Taubman family members 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. Certain shares held
by Nicholas F. Taubman and the Arthur Taubman Trust dated July 13, 1964 (the
"Taubman Trust"), having an aggregate value of approximately $17.5 million,
remained outstanding. Such shares represented approximately 14% of the
outstanding Holding Common Stock upon consummation of the Merger. Immediately
prior to the Merger, FS&Co. and Ripplewood Partners, L.P. and its affiliates
("Ripplewood") purchased approximately $80.5 million and approximately $20.0
million, respectively, of the common stock of AHC, which were converted in the
Merger into approximately 64% and approximately 16%, respectively, of the
outstanding Holding Common Stock (the investments by FS&Co. and Ripplewood are
collectively referred to herein as the "Equity Investment"). In connection with
the Merger, management of the Company purchased approximately $8.0 million, or
approximately 6.4%, of the outstanding Holding Common Stock. See "Management--
Stock Subscription Plans." The Company continued as a wholly owned subsidiary
of Holding following the Recapitalization.
On April 15, 1998, the Company entered into a new bank credit facility (the
"New Credit Facility") that provided for (i) three senior secured term loan
facilities in the aggregate amount of $250.0 million with final maturities of
April 15, 2004 for two of such facilities ($125.0 million in the aggregate) and
April 15, 2006 for the third ($125.0 million), and (ii) a secured revolving
credit facility of up to $125.0 million which terminates on April 15, 2004. At
the closing of the Merger, $125.0 million was borrowed under one of the term
loan facilities to fund the Company Distribution (as defined below). The
balance of the funds under the revolving credit facility and the term loan
facilities is available to fund the Company's expansion. The New Credit
Facility has availability for letter of credit usage, is secured by
substantially all of the assets of the Company and is guaranteed by the
Guarantors. See "Description of Other Indebtedness--The New Credit
Facility."
Substantially all of Holding's funded debt obligations existing immediately
before the consummation of the Recapitalization were repaid (the "Debt
Retirement"). In connection with the Recapitalization, the Company repaid its
intercompany obligations to Holding (approximately $91.1 million) and paid a
dividend to Holding (approximately $183.0 million)(the "Company Distribution")
which amounts were, together with the proceeds of the sale of the Series A
Debentures, sufficient to fund Holding's Recapitalization payment
obligations.
The Merger, the Debt Retirement, the Company Distribution, the borrowing by
the Company of funds under the New Credit Facility, the issuance and sale by
Holding of the Series A Debentures (the "Debentures Offering") and the offering
(the "Notes Offering") of the Company's $200.0 million principal amount 10.25%
Series A Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes")
are referred to herein collectively as the "Recapitalization." See "Description
of Other Indebtedness--Senior Subordinated Notes." The Debentures are unsecured
senior obligations of Holding and are effectively subordinated to the Notes
since the Debentures are not obligations of, or guaranteed by, the Company.
Holding has accounted for
5
<PAGE>
the Recapitalization for financial reporting purposes as the sale of common
stock, the issuance of debt, the redemption of common and preferred stock and
the repayment of notes payable and long-term debt.
The following table illustrates Holding's sources and uses of funds in the
Recapitalization on a consolidated basis.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
------------------------
<S> <C>
SOURCES:
New Credit Facility.......................................................................... $125.0
Senior Subordinated Notes.................................................................... 200.0
Debentures offered by Holding................................................................ 60.0
Equity Investment (a)........................................................................ 108.5
Total sources................................................................................ $493.5
USES:
Aggregate preferred and common stock consideration to Continuing Stockholders and
certain Taubman Family members in connection with the Merger............................. $351.0
Repayment of existing indebtedness (b)....................................................... 81.3
Transaction fees and expenses and other transaction payments (c)............................. 22.8
Loans to management investors................................................................ 2.6
Excess cash.................................................................................. 35.8
Total uses............................................................................... $493.5
</TABLE>
______________________
(a) Approximately $2.6 million of such contributions will consist of promissory
notes that were delivered to Holding by management in connection with their
purchase of Holding Common Stock.
(b) Reflects (i) an increase due to bonus payments of $11.5 million to
management and certain employees of the Company, which were paid immediately
prior to the Merger and (ii) a decrease of $2.9 million due to the sale of
an airplane to Nicholas F. Taubman for its approximate net book value (net
of $1.2 million in income taxes).
(c) Consists of (i) a $5.0 million fee paid to FS&Co. and Ripplewood, (ii)
legal, accounting and other professional fees, and (iii) fees paid and costs
incurred in connection with the New Credit Facility and other debt
issuances. See "Certain Transactions--Certain Payments."
RISK FACTORS
Holders of the Series A Debentures should consider carefully all of the
information set forth in this Prospectus, and in particular, the information set
forth on page 20 under "Risk Factors" before tendering the Series A Debentures
in exchange for the Series B Debentures.
6
<PAGE>
TERMS OF SERIES B DEBENTURES
Securities Offered......... $112.0 million in aggregate principal amount at
maturity of 12.875% Series B Senior Discount
Debentures due 2009.
Issuer..................... Advance Holding Corporation
Gross Proceeds............. $60,016,598
Maturity Date.............. April 15, 2009.
Yield and Interest......... 12.875% (computed on a semi-annual bond
equivalent basis) calculated from April 15, 1998.
The Series B Debentures will accrete at a rate of
12.875%, compounded semi-annually, to an
aggregate principal amount of $112.0 million by
April 15, 2003. Cash interest will not accrue on
the Series B Debentures prior to April 15, 2003.
Commencing April 15, 2003, cash interest on the
Series B Debentures will accrue and be payable,
at a rate of 12.875% per annum, semi-annually in
arrears on each April 15 and October 15.
Optional Redemption........ The Series B Debentures will be redeemable at the
option of Holding, in whole or in part, at any
time on or after April 15, 2003, in cash at the
redemption prices set forth herein, plus accrued
and unpaid interest and Liquidated Damages, if
any, thereon to the redemption date. In addition,
at any time prior to April 15, 2001, Holding may,
at its option, on any one or more occasions,
redeem up to 35% of the aggregate principal
amount at maturity of the Series B Debentures
originally issued at a redemption price equal to
112.875% of the Accreted Value thereof, plus
Liquidated Damages, if any, with the net cash
proceeds of one or more Equity Offerings;
provided that at least 65% of the original
aggregate principal amount at maturity of the
Series B Debentures will remain outstanding
immediately following each such redemption.
Change of Control.......... Upon the occurrence of a Change of Control, each
holder of the Series B Debentures will have the
right to require Holding to purchase Series B
Debentures at a price in cash equal to 101% of
the Accreted Value thereof plus Liquidated
Damages, if any, thereon in the case of any such
purchase prior to April 15, 2003, or 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if
any, thereon to the date of purchase in the case
of any such purchase on or after April 15, 2003.
Holding does not have, and may not in the future
have, any assets other than capital stock of the
Company (which has been pledged to secure the
Company's obligations under the New Credit
Facility). As a result, Holding's ability to
purchase all or any part of the Series B
Debentures upon the occurrence of a Change of
Control will be dependent upon the receipt of
dividends or other distributions from its direct
and indirect subsidiaries. The New Credit
Facility and the Senior Subordinated Notes
restrict the Company from paying dividends and
making any other distributions to Holding. The
Company is generally prohibited from paying
dividends or making other restricted payments
(including to Holding) under the Senior
Subordinated Notes Indenture (as defined) except
(i) to the extent of 50% of the Company's net
income earned after April 25, 1998 plus (a) $15.0
million, and (b) the proceeds, if any, of equity
issuances after the issue date and (ii) subject
to there being no event of default and the
Company being then able to incur $1.00 of
additional indebtedness under the fixed charge
coverage ratio test (the "Fixed Charge
7
<PAGE>
Ratio Test") specified in the debt incurrence
covenant contained in the Senior Subordinated
Note Indenture. However, the Company will be
permitted to pay dividends to Holding to cover
the cash interest due on the Debentures
commencing October 15, 2003, provided only that
the Company is then able to incur an additional
$1.00 of indebtedness under the Fixed Charge
Ratio Test. The Company is generally prohibited
from paying dividends (including to Holding)
under the New Credit Facility except that as long
as no event of default under the New Credit
Facility then exists, the Company will be
permitted to pay dividends to Holding in an
amount sufficient to cover the cash interest due
on the Debentures commencing October 15, 2003.
See "Description of Other Indebtedness--Senior
Subordinated Notes" and "Description of Other
Indebtedness--The New Credit Facility." If
Holding is unable to obtain dividends from the
Company sufficient to permit the purchase of the
Series B Debentures or does not refinance such
Indebtedness, Holding will likely not have the
financial resources to purchase Series B
Debentures upon the occurrence of a Change of
Control. In any event, there can be no assurance
that Holding's subsidiaries will have the
resources available to pay any such dividend or
make any such distribution. Furthermore, the New
Credit Facility will provide that certain change
in control events will constitute a default
thereunder and the Senior Subordinated Notes will
provide that, in the event of a Change of
Control, the Company will be required to offer to
purchase the Senior Subordinated Notes at the
price specified therefor. Holding's failure to
make a Change of Control Offer (as defined
herein) when required or to purchase tendered
Series B Debentures when tendered would
constitute an Event of Default under the
Indenture (as defined herein). See "Description
of Series B Debentures."
Ranking.................... The Series B Debentures will be senior
obligations of Holding. The Series B Debentures
will rank pari passu in right of payment with all
future senior indebtedness of Holding and will
rank senior in right of payment to all future
subordinated indebtedness of Holding. The Series
B Debentures will be effectively subordinated to
all liabilities of Holding's subsidiaries. As of
July 18, 1998, Holding's only indebtedness would
have consisted of the Series B Debentures and its
guarantee of the Company's obligations under the
New Credit Facility, and the Company had $633.3
million of total liabilities outstanding,
including indebtedness under the Senior
Subordinated Notes and the New Credit Facility,
trade payables and other accrued liabilities. In
addition, the Company could have incurred
additional indebtedness of up to $240.0 million
under the New Credit Facility. Holding's
guarantee of the Company's obligations under the
New Credit Facility will rank pari passu with the
Series B Debentures, and the Series B Debentures
will be effectively subordinated to all
liabilities of the Company and its subsidiaries.
Indebtedness incurred in connection with the
Acquisition will also constitute senior
indebtedness.
Original Issue Discount.... The Series A Debentures were offered at an
original issue discount for United States federal
income tax purposes. Thus, although cash interest
will not be payable on the Series A Debentures
and the Series B Debentures exchanged therefor
prior to April 15, 2003, original issue discount
will accrue from the issue date of the Series A
Debentures and will be included as interest
income periodically (including for periods ending
prior to April 15, 2003) in the gross income of
original purchasers of Series A Debentures who
exchange their Series A Debentures for Series B
Debentures pursuant to the
8
<PAGE>
Exchange Offer for United States federal income
tax purposes in advance of receipt of the cash
payments to which the income is attributable. See
"Material Federal Income Tax Considerations."
Certain Covenants.......... The Indenture contains certain covenants that,
among other things, limit the ability of Holding
and its Restricted Subsidiaries to: incur
indebtedness and issue preferred stock,
repurchase stock and certain indebtedness, engage
in transactions with affiliates, create or incur
certain liens, pay dividends or certain other
distributions, make certain investments, enter
into new businesses, sell stock of Restricted
Subsidiaries, sell assets and engage in certain
mergers and consolidations.
Form and Denomination...... The Series B Debentures initially sold by the
Initial Purchasers will be represented by Global
Series B Debentures in fully registered form,
deposited with a custodian for and registered in
the name of a nominee of the Depositary.
Beneficial interests in the Global Series B
Debentures will be shown on, and transfers
thereof will be effected through, records
maintained by the Depositary and its
participants.
Exchange Offer,
Registration Rights....... Holders of Series B Debentures are not entitled
to any exchange rights with respect to the Series
B Debentures. Holders of Series A Debentures are
entitled to certain exchange rights pursuant to
the Exchange Offer Registration Rights Agreement.
Under the Exchange Offer Registration Rights
Agreement, Holding is required to offer to
exchange the Series A Debentures for the Series B
Debentures having substantially identical terms
which have been registered under the Securities
Act. This Exchange Offer is intended to satisfy
such obligation. The form and terms of the Series
B Debentures are the same as the form and terms
of the Series A Debentures in all material
respects except that the Series B Debentures have
been registered under the Securities Act and
hence do not include certain rights to
registration thereunder and do not contain
transfer restrictions or terms with respect to
the special interest payments applicable to the
Series A Debentures. Once the Exchange Offer is
consummated, Holding will have no further
obligations to register any of the Series A
Debentures not tendered by the Holders for
exchange. See "Risk Factors--Consequences to Non-
Tendering Holders of Series A Debentures."
Use of Proceeds............ The Company will not receive any proceeds from
the Exchange Offer.
9
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer......... The Series B Debentures are being offered in
exchange for an equal principal amount of Series
A Debentures. As of the date hereof,
approximately $112.0 million in aggregate
principal amount at maturity of Series A
Debentures are outstanding. Series A Debentures
may be tendered only in integral multiples of
$1,000 of principal amount at maturity. Holding
will issue the Series B Debentures to Holders on
or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, Holding believes that Series B
Debentures issued pursuant to the Exchange Offer
in exchange for Series A Debentures may be
offered for resale, resold and otherwise
transferred by Holders thereof without compliance
with the registration and prospectus delivery
provisions of the Securities Act provided that
such Series B Debentures are acquired in the
ordinary course of such holders' business and
such holders have no arrangement with any person
to participate in the distribution of such Series
B Debentures. However, Holding does not intend to
request the Commission to consider, and the
Commission has not considered, the Exchange Offer
in a no-action letter and there can be no
assurance that the Commission would make a
similar determination with respect to the
Exchange Offer. However, any Holder who is an
"affiliate" of Holding or who intends to
participate in the Exchange Offer for the purpose
of distributing the Series B Debentures (i)
cannot rely on the interpretation by the staff of
the Commission set forth in the above referenced
no-action letters, (ii) cannot tender its Series
A Debentures in the Exchange Offer, and (iii)
must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any sale or transfer of the
Series A Debentures, unless such sale or transfer
is made pursuant to an exemption from such
requirements. See "Risk Factors--Consequences to
Non-Tendering Holders of Series A Debentures".
Each broker-dealer that receives Series B
Debentures for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such Series B Debentures. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with
resales of Series B Debentures received in
exchange for Series A Debentures where such
Series A Debentures were acquired by such broker-
dealer as a result of market-making activities or
other trading activities and not acquired
directly from Holding. Holding has agreed that
for a period of 180 days after the Expiration
Date, it will make this Prospectus available to
any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
Expiration Date............ 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer
is extended.
Yield and Interest on
the Series B Debentures... 12.875% (computed on a semi-annual bond
equivalent basis) calculated from April 15, 1998.
The Series B Debentures will accrete at a rate of
12.875%,
10
<PAGE>
compounded semi-annually, to an aggregate
principal amount of $112.0 million by April 15,
2003. Cash interest will not accrue on the Series
B Debentures prior to April 15, 2003. Commencing
April 15, 2003, cash interest on the Series B
Debentures will accrue and be payable, at a rate
of 12.875% per annum, semi-annually in arrears on
each April 15 and October 15.
Conditions to the
Series B Debentures....... The Exchange Offer is subject to certain
customary conditions. The conditions are limited
and relate in general to proceedings which have
been instituted or laws which have been adopted
that might impair the ability of Holding to
proceed with the Exchange Offer. As of September
1, 1998, none of these events had occurred, and
Holding believes their occurrence to be unlikely.
If any such conditions do exist prior to the
Expiration Date, Holding may (i) refuse to accept
any Series A Debentures and return all previously
tendered Series A Debentures, (ii) extend the
Exchange Offer or (iii) waive such conditions.
See "The Exchange Offer--Conditions."
Procedures for Tendering
Series A Debentures....... Each Holder of Series A Debentures wishing to
accept the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Series A
Debentures to be exchanged and any other required
documentation to United States Trust Company of
New York, as Exchange Agent, at the address set
forth herein and therein or effect a tender of
such Series A Debentures pursuant to the
procedures for book-entry transfer as provided
for herein. By executing the Letter of
Transmittal, each Holder will represent to
Holding that, among other things, the Series B
Debentures acquired pursuant to the Exchange
Offer are being obtained in the ordinary course
of business of the person receiving such Series B
Debentures, whether or not such person is the
Holder, that neither the Holder nor any such
other person has an arrangement or understanding
with any person to participate in the
distribution of such Series B Debentures and that
neither the Holder nor any such person is an
"affiliate," as defined in Rule 405 under the
Securities Act, of Holding. Each broker-dealer
that receives Series B Debentures for its own
account in exchange for Series A Debentures,
where such Series A Debentures were acquired by
such broker-dealer as a result of market-making
activities or other trading activities and not
acquired directly from Holding, must acknowledge
that it will deliver a prospectus in connection
with any resale of such Series B Debentures. See
"The Exchange Offer--Procedures for Tendering"
and "Plan of Distribution."
Special Procedures for
Beneficial Owners......... Any beneficial owner whose Series A Debentures
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Series A Debentures
in the Exchange Offer should contact such
registered Holder promptly and instruct such
registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering its Series A
Debentures, either make appropriate arrangements
to register ownership of the Series A Debentures
in such owner's name or obtain a properly
completed bond power from the registered Holder.
The transfer of registered ownership may take
considerable
11
<PAGE>
time and may not be able to be completed prior to
the Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery
Procedures................ Holders of Series A Debentures who wish to tender
their Series A Debentures and whose Series A
Debentures are not immediately available or who
cannot deliver their Series A Debentures, the
Letter of Transmittal or any other documents
required by the Letter of Transmittal to United
States Trust Company of New York, as Exchange
Agent, or cannot complete the procedure for book-
entry transfer, prior to the Expiration Date must
tender their Series A Debentures according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date.
Acceptance of Series A
Debentures and Delivery
of Series B Debentures.... Holding will accept for exchange any and all
Series A Debentures which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
Series B Debentures issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. Any Series A
Debentures not accepted for exchange will be
returned without expense to the tendering Holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
See "The Exchange Offer--Terms of the Exchange
Offer."
Material Tax
Considerations........... The exchange pursuant to the Exchange Offer will
not be a taxable event for Federal income tax
purposes. See "Material Federal Income Tax
Considerations."
Exchange Agent............. United States Trust Company of New York is
serving as Exchange Agent in connection with the
Exchange Offer.
GENERAL
Holding's principal executive offices are located at 5673 Airport Road,
Roanoke, Virginia 24012 and its telephone number is (540) 362-4911.
ADDITIONAL INFORMATION
For additional information regarding the Series B Debentures, see
"Description of Series B Debentures" and "Material Federal Income Tax
Considerations."
12
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary consolidated statement of
operations, balance sheet and other operating data of Holding. The summary
consolidated historical financial information of Holding for each of the five
fiscal years presented below has been derived from the audited consolidated
financial statements of Holding which have been audited by Arthur Andersen LLP.
The summary consolidated historical financial information of Holding for the
twenty-eight weeks ended July 12, 1997 and July 18, 1998 is derived from
financial statements that are unaudited and include, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the data for such periods, and are not necessarily
indicative of the results expected for a full fiscal year or for any future
period. The following summary consolidated historical and pro forma financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements of Holding and notes thereto, the Consolidated Financial Statements
of Western Auto and notes thereto, and the Unaudited Pro Forma Consolidated
Financial Data and notes thereto included elsewhere in this Prospectus.
13
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR(1)
---------------------------------------------------------
PRO
FORMA
RECAP-
ITALIZA-
TION PRO FORMA
FISCAL FISCAL
1993 1994 1995 1996 1997 1997(2) 1997(2)
--------- -------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $365,241 $482,347 $602,559 $705,983 $848,108 $848,108 $2,122,019
Gross profit................... 137,491 184,903 232,597 268,368 323,522 323,522 714,171
Selling, general and
administrative expenses....... 117,856 155,583 196,289 228,226 281,095 281,095 692,345
Expenses associated with
Recapitalization.............. - - - - - - -
Expenses associated with
restructuring................. - - - - - - 38,441
Operating income (loss)........ 19,635 29,320 36,308 40,142 42,427 42,427 (16,615)
Net income(loss)(3)............ 11,560 23,706 18,003 21,264 21,287 (858) (47,354)
OTHER DATA:
EBITDA(4)...................... $ 28,830 $ 42,568 $ 51,107 $ 57,641 $ 64,228
</TABLE>
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
--------------------------------------------------------------------
PRO FORMA
RECAP-
ITALIZA-
TION PRO FORMA
JULY 12, JULY 18, JULY 18, JULY 18,
1997 1998 1998(2) 1998(2)
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
Net sales........................ $435,880 $544,000 $544,000 $1,111,262
Gross profit..................... 167,682 211,175 211,175 397,561
Selling, general and
administrative expenses......... 145,478 178,812 178,812 361,687
Expenses associated with
Recapitalization................ - 14,005 14,005 14,005
Expenses associated with
restructuring................... - - - -
Operating income (loss).......... 22,204 18,358 18,358 21,869
Net income(loss)(3).............. 10,955 2,573 (3,668) (5,753)
OTHER DATA:
EBITDA(4)........................ $ 33,467 $ 31,866
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR(1)
---------------------------------------------------------
PRO
FORMA
RECAP-
ITALIZA-
TION PRO FORMA
FISCAL FISCAL
1993 1994 1995 1996 1997 1997(2) 1997(2)
-------- -------- -------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDAR(5)........................... 44,669 64,770 82,291 96,249 112,538
Pro forma cash interest
expense(6).......................... 31,938 40,800
Pro forma total interest
expense............................. 42,562 52,606
Capital expenditures................. 25,316 25,781 42,939 44,264 48,864
Ratio of earnings to fixed
charges(7).......................... 3.83x 4.65x 2.95x 3.00x 2.62x -
Percentage increase in
comparable store sales(8)........... 17.3% 9.5% 1.7% 1.1% 5.1%
Net cash provided by (used
in) operating activities............ 7,510 (6,715) 22,839 27,934 42,283
Net cash used in investing
activities.......................... (25,275) (14,201) (39,855) (44,121) (48,607)
Net cash provided by (used
in) financing activities............ 19,460 18,809 23,643 11,132 6,954
SELECTED STORE DATA:
New stores........................... 81 90 104 115 170
</TABLE>
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
-------------------------------------------------
PRO FORMA
RECAP-
ITALIZA-
TION PRO FORMA
JULY 12, JULY 18, JULY 18, JULY 18,
1997 1998 1998(2) 1998(2)
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
EBITDAR(5)........................... 57,983 63,142
Pro forma cash interest
expense(6).......................... 18,244 23,020
Pro forma total interest
expense............................. 23,847 29,260
Capital expenditures................. 20,464 26,028
Ratio of earnings to fixed
charges(7).......................... 2.59x 1.21 -
Percentage increase in
comparable store sales(8)........... 6.6% 6.4
Net cash provided by (used
in) operating activities............ 32,874 27,944
Net cash used in investing
activities.......................... (20,346) (21,873)
Net cash provided by (used
in) financing activities............ (12,772) 23,256
SELECTED STORE DATA:
New stores........................... 73 96
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR(1)
---------------------------------------------------------
PRO
FORMA
RECAP-
ITALIZA-
TION PRO FORMA
FISCAL FISCAL
1993 1994 1995 1996 1997 1997(2) 1997(2)
--------- ------- -------- ------ -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Number of stores (end of
period).................................. 352 437 536 649 814
Stores with commercial
delivery program
(end of period).......................... - - - 213 421
Total store square footage
(000s) (end of period)(9)................ 2,408 3,150 3,939 4,710 5,857
</TABLE>
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEKS ENDED
-----------------------------------------------------
RO FORMA
RECAP-
ITALIZA-
TION PRO FORMA
JULY 12, JULY 18, JULY 18, JULY 18,
1997 1998 1998(2) 1998(2)
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
Number of stores (end of
period).............................. 720 909
Stores with commercial
delivery program
(end of period)...................... 420 494
Total store square footage
(000s) (end of period)(9)............ 5,239 6,485
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
AT JULY 18, PRO FORMA JULY 18,
1998 1998
------------ -------------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents................. $ 44,790 $ 50,790
Net working capital(10)................... 148,697 288,785
Net working capital, as adjusted(11)...... 103,907 237,995
Total assets.............................. 594,917 1,255,972
Total long-term debt...................... 397,022 512,022
Stockholders' (deficit) equity............ (99,746) 162,754
</TABLE>
______________________
(1) Holding'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. Holding's first quarter consists
of 16 weeks and the other three quarters consist of 12 weeks.
(2) The pro forma - Recapitalization data for fiscal 1997 and the twenty-eight
weeks ended July 18, 1998 sets forth the financial data of Holding to give
effect to the pro forma adjustments relating to only the Recapitalization.
The pro forma data for fiscal 1997 and the twenty-eight weeks ended July
18, 1998 sets forth the financial data of Holding to give effect to the pro
forma adjustments relating to both the Recapitalization and the
Acquisition. See "Use of Proceeds," "Capitalization," "Unaudited Pro Forma
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(3) Fiscal 1994 amount includes a net after-tax gain of $6,700 on the
sale of equity securities of TBC Corporation, a distributor of automotive
products in which the Company held a minority equity ownership
interest.
(4) 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 generally accepted accounting
principles ("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 has
included it herein because management believes this information is useful
to investors as such measures provide additional information with respect
to Holding's ability to meet its future debt service, capital expenditure
and working capital requirements and, in addition, certain covenants in the
Indenture and New Credit Facility are based upon an EBITDA calculation.
Holding's method for calculating EBITDA may differ from similarly titled
measures reported by other companies.
EBITDA does not reflect certain adjustments which management believes (a)
will result from the Recapitalization and (b) are
17
<PAGE>
relevant to evaluating the future operating performance of the Company. The
following additional information reflects certain adjustments which management
believes would have been realized as a result of the Recapitalization if the
Recapitalization had been consummated and was effective as of December 29,
1996.
The following table reflects the effect of these items:
<TABLE>
<CAPTION>
TWENTY-EIGHT
WEEKS ENDED
FISCAL 1997 JULY 18, 1998
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
EBITDA......................................... $64,228 $31,866
Private company expenses(a)................... 3,056 845
Unusual medical claim(b)...................... 882 -
Non-recurring Recapitalization expenses(c).... - 14,005
------- -------
EBITDA, as adjusted for the Recapitalization... $68,166 $46,716
======= =======
</TABLE>
______________________
(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 unusual medical claim that exceeded the Company's stop
loss insurance coverage, net of related increased insurance
costs.
(c) Represents non-recurring management bonuses and other expenses
incurred in connection with the Recapitalization.
(5) EBITDAR represents EBITDA plus operating lease expense. Because the
proportion of stores leased versus owned varies among industry
competitors, Holding believes that EBITDAR permits a meaningful comparison
of operating performance among industry competitors. The Company leases
substantially all of its stores.
(6) Pro forma cash interest expense represents total interest expense,
excluding interest in respect to the Debentures and amortization of
deferred debt issuance costs.
(7) For purposes of computing the historical ratio of earnings to fixed
charges, earnings represents income (loss) before income taxes plus fixed
charges. Fixed charges consist of interest expense (including amortization
of deferred debt issuance costs) and one-third of lease expense, which
management believes is representative of the interest component of lease
expense. The ratio of earnings to fixed charges for the Recapitalization
has not been computed on a pro forma basis for fiscal 1997 and for the
twenty-eight weeks ended July 18, 1998, since earnings were not sufficient
to cover fixed charges. The coverage deficiency was $456 and $5,172,
respectively.
(8) Comparable store net sales data is calculated based on the change in net
sales of all stores opened as of the beginning of the preceding fiscal
year. New stores become part of the comparable store base on the first day
of their second full fiscal year in operation. Relocations are included in
comparable store net sales from the date of opening. Increases for fiscal
1997 have been adjusted to exclude the effect of the fifty-third week.
(9) Total store square footage is based on the Company's actual store formats
and includes normal selling, office, stockroom and receiving space.
(10) Net working capital represents total current assets less total current
liabilities.
(11) Net working capital, as adjusted, represents total current assets
excluding cash, cash equivalents and marketable securities, less total
current liabilities excluding bank overdrafts and notes payable and
current
18
<PAGE>
maturities of long-term debt. Management believes that net working
capital, as adjusted, is a meaningful measure of the liquidity of net
current assets relating to the Company's operating activities.
19
<PAGE>
RISK FACTORS
In evaluating the Exchange Offer, Holders of the Series A Debentures should
carefully consider the following factors in addition to the other information
contained in this Prospectus.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS; STOCKHOLDERS' DEFICIT
Holding and the Company have substantial indebtedness and debt service
obligations. Holding has entered into the Indenture and 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. In addition, the Company has entered
into the New Credit Facility to fund the Recapitalization and provide additional
working capital for the Company. As of July 18, 1998, (i) Holding had
outstanding approximately $62.0 million of indebtedness under the Series A
Debentures, excluding its secured guarantee of the Company's obligations under
the New Credit Facility, (ii) the Company and its subsidiaries had $633.3
million of total liabilities outstanding, including Indebtedness under the
Senior Subordinated Notes and the New Credit Facility, trade payables and other
accrued liabilities, and (iii) Holding had a stockholders' deficit of $99.8
million and the Company had a stockholder's deficit of $40.1 million. In
addition, the Company could have incurred additional indebtedness of up to
$240.0 million under the New Credit Facility. In connection with the
Acquisition, the Company intends to borrow an aggregate of $115.0 million,
consisting primarily of an additional term facility to be added to the New
Credit Facility, with the balance, if any, to be drawn from an existing facility
under the New Credit Facility. See "Description of Series B Debentures" and
"Description of Other Indebtedness."
The level of Holding's and the Company's indebtedness may have important
consequences to the holders of the Series B Debentures, including: (i) the
ability of Holding or 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 Holding's and the Company's cash flow
must be dedicated to debt service and will not be available for other purposes;
(iii) Holding'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 Holding's and the Company's debt instruments,
including the Indenture, limit Holding's and the Company's ability to, among
other things, borrow additional funds, dispose of assets or make investments.
In order to satisfy Holding's obligations under the Series B Debentures and
the Company's obligations under the Senior Subordinated Notes, its operating
leases, the New Credit Facility, the Development Authority of McDuffie County
Taxable Industrial Development Revenue Bonds (Advance Stores Company,
Incorporated Project), Series 1997 (the "IRB") and certain other indebtedness
presently outstanding, Holding and the Company must generate substantial
operating cash flow. The ability of Holding and the Company to meet their
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 Holding and the Company. In addition, the New
Credit Facility, the Senior Subordinated Notes and the IRB will mature prior to
the maturity of the Series B Debentures. While Holding believes that, based on
current levels of operations, it and the Company will be able to meet their
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 New Credit
Facility at the maturity of the obligations arising thereunder. Furthermore,
because the New Credit Facility bears interest at floating rates, Holding's and
the Company's financial performance and flexibility may be adversely affected by
fluctuations in interest rates. See "Unaudited Pro Forma Consolidated Financial
Data" for information regarding the operating cash flow and debt service
obligations of Holding and the Company.
LIMITATION ON ACCESS TO CASH FLOW OF SUBSIDIARIES; HOLDING COMPANY STRUCTURE
As a holding company, Holding's ability to pay principal and interest on
the Series B Debentures is dependent upon the receipt of dividends from the
Company and any other future direct and indirect subsidiaries.
20
<PAGE>
Holding does not have and may not in the future have, any material assets other
than the capital stock of the Company. The Company is a party to the New Credit
Facility, the Senior Subordinated Note Indenture, the IRB and certain other
existing indebtedness. The New Credit Facility and the Senior Subordinated Note
Indenture impose substantial restrictions on the Company's ability to pay
dividends or make loans to Holding. Any payment of dividends or making of loans
by the Company to Holding are subject to the satisfaction of certain financial
conditions set forth in the Senior Subordinated Note Indenture and the New
Credit Facility. The ability of the Company to comply with such conditions may
be affected by events that are beyond the control of Holding. The breach of any
such conditions could result in a default under the Senior Subordinated Note
Indenture and/or the New Credit Facility, and in the event of any such default,
the holders of the Senior Subordinated Notes or the lenders under the New Credit
Facility could elect to accelerate the maturity of all the Senior Subordinated
Notes or the loans under such facility. If the maturity of the Senior
Subordinated Notes or the loans under the New Credit Facility were to be
accelerated, all such outstanding debt would be, and other indebtedness of the
Company may be, required to be paid in full before the Company would be
permitted to distribute any assets or cash to Holding. In addition, indebtedness
outstanding under the New Credit Facility is secured by substantially all of the
assets of the Company and is guaranteed by Holding. Holding's guarantee of the
New Credit Facility is secured by a pledge of all of the capital stock of the
Company as well as any future subsidiaries of Holding. There can be no assurance
that the assets of Holding would be sufficient to repay all of such outstanding
debt and to meet its obligations under the Indenture. Future borrowings by the
Company can be expected to contain restrictions or prohibitions on the payment
of dividends by the Company to Holding or the making of loans or advances by the
Company to Holding. In addition, under Virginia law, a company is permitted to
make distributions including dividends on its capital stock only if, after
giving effect to such distribution, the Company is able to pay its debts as they
become due in the usual course of business and the Company's total assets are
greater than the sum of its total liabilities, plus any amounts needed, if the
Company were dissolved at the time of the distribution, to satisfy preferential
rights upon dissolution to shareholders whose preferential rights are superior
to those receiving the distribution.
As a result of the holding company structure of Holding, the holders of the
Series B Debentures will be structurally junior to all creditors of the Company
or any future subsidiary of Holding, except to the extent that Holding is itself
recognized as a creditor of the Company or such future subsidiary, in which case
the claims of Holding would still be subordinate to any security in the assets
of the Company or such future subsidiary and any indebtedness of the Company or
such future subsidiary senior to that held by Holding. In the event of
insolvency, liquidation, reorganization, dissolution or other winding-up of the
Company or any future subsidiary of Holding, Holding will not receive any funds
available to pay to creditors of the Company or any future subsidiary of
Holding. As of July 18, 1998, the aggregate amount of indebtedness and other
obligations of the Company (including trade payables and other accrued
liabilities) had $633.3 million. In addition, the Company could have had up to
$240.0 million of undrawn commitments under the New Credit Facility.
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDER'S CLAIMS
The Series A Debentures were issued at a substantial original issue
discount from their principal amount at maturity. Consequently, original
purchasers of the Series A Debentures who exchange their Series A Debentures for
Series B Debentures will be required to include amounts in gross income for
federal income tax purposes in advance of receipt of the cash payments to which
the income is attributable. See "Material Federal Income Tax Considerations"
for a more detailed discussion of the federal income tax consequences to the
Holders of the Series A Debentures who exchange their Series A Debentures for
Series B Debentures pursuant to the Exchange Offer.
Under the Indenture, in the event of an acceleration of the maturity of the
Series B Debentures upon the occurrence of an Event of Default, the Holder of
the Debentures may be entitled to recover only the amount which may be declared
due and payable pursuant to the Indenture, which will be less than the principal
amount at maturity of such Series B Debentures. See "Description of Series B
Debentures--Events of Default and Remedies."
If a bankruptcy case is commenced by or against Holding under the
Bankruptcy Code (as defined herein), the claim of a holder of Series B
Debentures with respect to the principal amount thereof may be limited to an
amount equal to the sum of (i) the issue price of the Series B Debentures as set
forth on the cover page hereof and
21
<PAGE>
(ii) that portion of the original issue discount (as determined on the basis of
such issue price) which is not deemed to constitute "unmature interest" for
purposes of the Bankruptcy Code. Accordingly, holders of the Series B Debentures
under such circumstances may, even if sufficient funds are available, receive a
lesser amount than they would be entitled to under the express terms of the
Indenture. In addition, the same rules as those used for the calculation of
original issue discount under federal income tax law and, accordingly, a holder
might be required to recognize gain or loss in the event of a distribution
related to such a bankruptcy case.
RESTRICTIONS UNDER INSTRUMENTS GOVERNING INDEBTEDNESS
The New Credit Facility and/or the Senior Subordinated Note Indenture
contain, among other things, certain financial and other covenants, including
covenants requiring the Company to maintain certain financial ratios,
restricting the ability of the Company to incur indebtedness or to create or
suffer to exist certain liens and restricting the amount of capital expenditures
which it may incur in any fiscal year. Compliance with such provisions may
limit the ability of the Company to expand its business, and the ability of the
Company to comply with such provisions and to repay or refinance the New Credit
Facility and the Senior Subordinated Note Indenture may be affected by events
beyond its control. The indebtedness under the New Credit Facility is secured
by a first priority lien on substantially all of the assets of the Company now
owned or hereafter acquired and is guaranteed by a subsidiary of the Company.
Holding has also issued a guarantee of the Company's obligations under the New
Credit Facility, which guarantee is secured by a pledge by Holding of all of the
issued and outstanding capital stock of the Company. The New Credit Facility
matures prior to the maturity of the Series B Debentures. See "Description of
Other Indebtedness." A failure to make any required payment under the New Credit
Facility or the Senior Subordinated Note Indenture or a failure to comply with
any of the financial and operating covenants included in the New Credit Facility
or the Senior Subordinated Note Indenture would result in an event of default
thereunder, permitting the lenders to elect to accelerate the maturity of the
indebtedness thereunder. Any such acceleration could also result in the
acceleration of any other indebtedness of the Company. If the lenders under the
New Credit Facility or the holders of the Senior Subordinated Notes accelerate
the maturity of the indebtedness thereunder, there can be no assurance that the
Company will have sufficient resources to satisfy its obligations under the New
Credit Facility or the Senior Subordinated Note Indenture and its other
indebtedness. As a result of the holding company structure of Holding, the
holders of the Series B Debentures will be structurally junior to all creditors
of the Company and all future subsidiaries of Holding, except to the extent that
Holding is itself recognized as a creditor of the Company or any such future
subsidiary, in which case the claims of Holding would still be subordinate to
any security in the assets of the Company or such future subsidiary and any
indebtedness of the Company or such future subsidiary senior to that held by
Holding. In the event of insolvency, liquidation, reorganization, dissolution
or other winding-up of the Company or any future subsidiary, Holding will not
receive any funds available to pay to creditors of the Company or any future
subsidiary. See "--Limitation on Access to Cash Flow of Subsidiaries; Holding
Company Structure."
UNCERTAINTY RELATING TO ABILITY TO IMPLEMENT GROWTH STRATEGY
The Company intends 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. In particular,
there can be no assurance that the Company will consummate the Acquisition or
will be successful in integrating the operations and personnel of Western Auto
into its business or in overcoming the general risks described herein or other
problems that may be encountered with the integration of Western Auto. See
"Business--Store Location and Development Strategy" and "Business -- Recent
Developments."
22
<PAGE>
COMPETITION
The retail sale of automotive parts and accessories is highly competitive.
The Company competes primarily 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. See "Business--Competition."
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.
See "Business-- Purchasing."
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
Garnett Smith, the Chief Executive Officer of the Company. See "Management--
Executive Employment Contracts."
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.
CONTROL OF COMPANY
Through ownership of Holding Common Stock and an irrevocable proxy granted
to it by Ripplewood, FS&Co. beneficially owns approximately 79.7% of the
outstanding voting securities of Holding and, after the Acquisition, will
beneficially own approximately 49.3% of the outstanding voting securities of
Holding and will have the right to designate three of Holding's nine directors.
As a result, prior to consummation of the Acquisition, FS&Co. has the ability to
control Holding's, and thus the Company's, management, policies and financing
decisions. See "Management" and "Principal Stockholders." After consummation
of the Acquisition, Sears will own 40.6% of the outstanding voting securities of
Holding and will have the right to designate three of Holding's directors.
POSSIBLE INABILITY TO PURCHASE SERIES B DEBENTURES UPON CHANGE OF CONTROL
Upon a Change of Control (as defined in the Indenture), Holding will be
required to offer to repurchase all of the outstanding Series B Debentures at
101% of the principal amount thereof plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase. There can be no
assurance that Holding will have sufficient funds available or will be permitted
by its other debt agreements to purchase the Series B Debentures upon
23
<PAGE>
the occurrence of a Change of Control. In addition, a Change of Control may
cause a default under the New Credit Facility, the Senior Subordinated Notes and
certain other indebtedness of the Company, in which case the provisions of such
debt would require payment in full of all such indebtedness of the Company
before it could make any distributions to Holding to enable Holding to purchase
the Series B Debentures. See "--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure" and "Description of Series B
Debentures--Repurchase at the Option of Holders--Change of Control." The
inability to purchase all of the tendered Series B Debentures would constitute
an event of default under the Indenture which would, in turn, constitute a
default under the New Credit Facility and the Senior Subordinated Notes and
could constitute a default under other indebtedness of the Company.
LACK OF A PUBLIC MARKET FOR THE SERIES B DEBENTURES
The Series B Debentures are being offered to the Holders of the Series A
Debentures. Prior to this Exchange Offer, there has been no public market for
the Series A Debentures. Holding does not intend to apply for listing of the
Series B Debentures on any securities exchange or for quotation through the
Nasdaq National Market. The Initial Purchasers have informed Holding that they
currently intend to make a market in the Series B Debentures. However, the
Initial Purchasers are not obligated to do so and any such market making may be
discontinued at any time without notice. Therefore, no assurance can be given
as to whether an active trading market will develop or be maintained for the
Series B Debentures. As the Series A Debentures were issued and the Series B
Debentures will be issued to a limited number of institutions who typically hold
similar securities for investment, Holding does not expect that an active public
market for the Series B Debentures will develop. In addition, resales by
certain holders of the Series A Debentures or the Series B Debentures of a
substantial percentage of the aggregate principal amount of such notes could
constrain the ability of any market maker to develop or maintain a market for
the Series B Debentures. To the extent that a market for the Series B
Debentures should develop, the market value of the Series B Debentures will
depend on prevailing interest rates, the market for similar securities and other
factors, including the financial condition, performance and prospects of
Holding. Such factors might cause the Series B Debentures to trade at a
discount from face value.
FRAUDULENT CONVEYANCE
The payments made in connection with the Recapitalization to the
stockholders of Holding, the repayment of indebtedness of the Company and
Holding and the related incurrence by Holding of indebtedness under the Series A
Debentures and the Series B Debentures may be subject to review under relevant
state and federal fraudulent conveyance laws, as well as other similar laws
regarding creditors' rights generally, if a bankruptcy case or lawsuit is
commenced by or on behalf of unpaid creditors of Holding. Under these laws, if
a court were to find that, after giving effect to the Recapitalization,
including the sale of the Series A Debentures and the application of the net
proceeds therefrom, either (a) Holding incurred such indebtedness with the
intent of hindering, delaying or defrauding creditors or contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (b) Holding received less than reasonably equivalent value or
consideration for incurring such indebtedness and (i) was insolvent or rendered
insolvent by reason of such transaction, (ii) was engaged in a business or
transaction for which the assets remaining with Holding constituted unreasonably
small capital or (iii) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they matured, such court may subordinate
such indebtedness to presently existing and future creditors of Holding, avoid
the issuance of such indebtedness and direct the repayment of any amounts paid
thereunder to Holding's other creditors or take other action detrimental to the
holders of such indebtedness. In that event, there can be no assurance that any
repayment on the Series B Debentures would ever be recovered by holders of the
Series B Debentures. There can be no assurance that a court would not
determine, regardless of whether Holding was solvent on the date the Series A
Debentures will be issued, that (i) the payments made in connection with the
Recapitalization constituted fraudulent transfers on another ground or (ii)
Holding did not receive fair consideration or reasonably equivalent value for
the incurrence of the indebtedness evidenced by the Series A Debentures and the
Series B Debentures.
The measure of insolvency for purposes of the foregoing considerations
varies depending upon the law of the jurisdiction which is being applied.
Generally, however, Holding would be considered insolvent if the sum of
24
<PAGE>
all its liabilities, including contingent liabilities, were greater than the
value of all its property at a fair valuation, or if the present fair saleable
value of Holding's assets were less than the amount required to repay its
probable liabilities on its debts, including contingent liabilities, as they
become absolute and mature.
Based upon financial and other information currently available to it,
management of Holding believes that the Series A Debentures and the Series B
Debentures are being incurred for proper purposes and in good faith and that at
the time the Series A Debentures and the Series B Debentures are issued Holding
will be (i) neither insolvent nor rendered insolvent thereby, (ii) in possession
of sufficient capital to run its business effectively and (iii) incurring debts
within its ability to pay as the same mature or become due. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." In reaching these conclusions, Holding has
relied upon various valuations and estimates of future cash flow that
necessarily involve a number of assumptions and choices of methodology. No
assurance can be given, however, that the assumptions and methodologies chosen
by Holding would be adopted by a court or that a court would concur with
Holding's conclusions.
CONSEQUENCES TO NON-TENDERING HOLDERS OF SERIES A DEBENTURES
Upon consummation of the Exchange Offer, Holding will have no further
obligation to register the Series A Debentures. Thereafter, any Holder of
Series A Debentures who does not tender its Series A Debentures in the Exchange
Offer, including any Holder which is an "affiliate" (as that term is defined in
Rule 405 of the Securities Act) of Holding which cannot tender its Series A
Debentures in the Exchange Offer, will continue to hold restricted securities
which may not be offered, sold or otherwise transferred, pledged or hypothecated
except pursuant to Rule 144 and Rule 144A under the Securities Act or pursuant
to any other exemption from registration under the Securities Act relating to
the disposition of securities, provided that an opinion of counsel is furnished
to Holding that such an exemption is available.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," "pro forma," and words of similar import, constitute
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of Holding and the Company or the retail
industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; Holding's and the Company's substantial leverage and debt service
obligations; restrictions on Holding's and the Company's ability to pursue its
business strategies imposed by restrictive loan covenants; changes in business
strategy or development plans; competition; the loss of key personnel; weather
conditions; Holding's and the Company's ability to deal with Year 2000 issues;
and other factors referenced in this Prospectus, including, without limitation,
under the captions "Summary," "Risk Factors," "Unaudited Pro Forma Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." Forward-looking statements regarding
revenues, EBITDA and EBITDAR are particularly subject to a variety of
assumptions, some or all of which may not be realized. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. Holding 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.
25
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of Holding's obligations
under the Exchange Offer Registration Rights Agreement. Holding will not
receive any cash proceeds from the issuance of the Series B Debentures offered
in the Exchange Offer. In consideration for issuing the Series B Debentures as
contemplated in this Prospectus, Holding will receive in exchange Series A
Debentures in like principal amount, the form and terms of which are the same in
all material respects as the form and terms of the Series B Debentures except
that the Series B Debentures have been registered under the Securities Act and
do not contain transfer restrictions or terms with respect to the special
interest payments applicable to the Series A Debentures. The Series A
Debentures surrendered in exchange for Series B Debentures will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Series B
Debentures will not result in any increase in the indebtedness of Holding.
Net proceeds from the Debentures Offering were approximately $60.0 million.
Such proceeds, together with borrowings of $125.0 million under the New Credit
Facility, the proceeds from the issuance of $200.0 million principal amount of
the Senior Subordinated Notes and equity investments of $108.5 million were used
to repay indebtedness ($81.3 million), to make payments to common and preferred
stockholders ($351.0 million) and to pay transaction-related fees and expenses
($22.8 million). See "Summary--The Recapitalization." In connection with the
Recapitalization, substantially all of Holding's existing funded debt
obligations were repaid. At April 15, 1998, the aggregate principal amount of
Holding's funded indebtedness under several credit agreements which was repaid
in connection with the Recapitalization was approximately $81.3 million at a
weighted interest rate of approximately 6.2% per annum, maturing between May 31,
1998 and September 1, 2004.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Holding as of July 18,
1998. This table should be read in conjunction with the consolidated financial
statements of Holding and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF
JULY 18,
1998(1)
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and cash equivalents $ 44,790 (2)
Debt:
Industrial Development Revenue Bonds $ 10,000
New Credit Facility 125,000
Notes Offering 200,000
Debentures Offering 62,022
--------
Total debt 397,022
Stockholders' deficit (99,746)
Total capitalization $297,276
</TABLE>
_____________
(1) Amounts do not reflect the Acquisition. See "Unaudited Pro Forma
Consolidated Financial Data" for financial information as adjusted for the
Acquisition.
(2) Amount reflects unused proceeds from the Recapitalization that are
available for working capital needs.
27
<PAGE>
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Series A Debentures were issued and sold by Holding on April 15, 1998
to Donaldson, Lufkin & Jenrette Securities Corporation and Chase Securities Inc.
(collectively, the "Initial Purchasers"), who subsequently resold the Series A
Debentures to (a) "qualified institutional buyers" (in reliance on Rule 144A
under the Securities Act) and (b) non-U.S. persons outside the United States in
reliance on Regulation S under the Securities Act. In connection with the
issuance and sale of the Series A Debentures, Holding and the Initial Purchasers
entered into the Exchange Offer Registration Rights Agreement pursuant to which
Holding agreed to use its best efforts to cause a registration statement with
respect to the Exchange Offer to become effective within 150 days of April 15,
1998, the date of issuance of the Series A Debentures. However, if the Exchange
Offer is not permitted by applicable law or, under certain circumstances, if the
holders shall so request, Holding will, at its own expense, (a) as promptly as
practicable, file a shelf registration statement covering resales of the Series
A Debentures (the "Shelf Registration Statement"), (b) use its best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep effective the Shelf
Registration Statement until two years or 180 days, as the case may be, after
the Issue Date.
The Exchange Offer is being made by Holding to satisfy its obligations
pursuant to the Exchange Offer Registration Rights Agreement. The form and
terms of the Series B Debentures are the same as the form and terms of the
Series A Debentures in all material respects except that the Series B Debentures
have been registered under the Securities Act and hence do not include certain
rights to registration thereunder and do not contain transfer restrictions or
terms with respect to the special interest payments applicable to the Series A
Debentures. Once the Exchange Offer is consummated, Holding will have no
further obligations to register any of the Series A Debentures not tendered by
the Holders for exchange. See "Risk Factors--Consequences to Non-Tendering
Holders of Series A Debentures". A copy of the Exchange Offer Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Based on interpretations by the staff of the Commission set forth in
several no-action letters issued to third parties, Holding believes that Series
B Debentures issued pursuant to the Exchange Offer in exchange for Series A
Debentures may be offered for resale, resold and otherwise transferred by
holders thereof without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Series B Debentures are
acquired in the ordinary course of such holders' business and such holders have
no such arrangement with any person to participate in the distribution of such
Series B Debentures. However, Holding does not intend to request the Commission
to consider, and the Commission has not considered, the Exchange Offer in a no-
action letter and there can be no assurance that the Commission would make a
similar determination with respect to the Exchange Offer. However, any Holder
who is an "affiliate" of Holding or who intends to participate in the Exchange
Offer for the purpose of distributing the Series B Debentures (i) cannot rely on
the interpretation by the staff of the Commission set forth in the above
referenced no-action letters, (ii) cannot tender its Series A Debentures in the
Exchange Offer, and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the Series A Debentures, unless such sale or transfer is made
pursuant to an exemption from such requirements. See "Risk Factors--
Consequences to Non-Tendering Holders of Series A Debentures".
In addition, each broker-dealer that receives Series B Debentures for its
own account in exchange for Series A Debentures, where such Series A Debentures
were acquired by such broker-dealer as a result of market-making activities or
other trading activities and not acquired directly from Holding, must
acknowledge that it will deliver a copy of this Prospectus in connection with
any resale of such Series B Debentures. See "Plan of Distribution".
Except as aforesaid, this Prospectus may not be used for an offer to
resell, resale or other transfer of Series B Debentures.
28
<PAGE>
TERMS OF THE EXCHANGE OFFER
General
Upon the terms and subject to the conditions of the Exchange Offer set
forth in this Prospectus and in the Letter of Transmittal, Holding will accept
any and all Series A Debentures validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. Holding will issue $1,000
principal amount at maturity of Series B Debentures in exchange for each $1,000
principal outstanding at maturity of Series A Debentures accepted in the
Exchange Offer. Series A Debentures may be tendered only in integral multiples
of $1,000 of principal amount at maturity.
As of April 15, 1998, there was approximately $112.0 million aggregate
principal amount at maturity of the Series A Debentures outstanding and one
registered Holder of Series A Debentures. This Prospectus, together with the
Letter of Transmittal, is being sent to such registered Holder as of
, 1998.
In connection with the issuance of the Series A Debentures, Holding
arranged for the Series A Debentures to be issued and transferable in book-entry
form through the facilities of DTC, acting as depository. The Series B
Debentures also will be issued and transferable in book-entry form through DTC.
See "Description of Series B Debentures--Form, Denomination and Book-Entry
Procedures."
Holding shall be deemed to have accepted validly tendered Series A
Debentures when, as and if Holding has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
Holders of Series A Debentures for the purpose of receiving the Series B
Debentures from Holding.
If any tendered Series A Debentures are not accepted for exchange because
of an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Series A Debentures will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders of Series A Debentures who tender in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Series
A Debentures pursuant to the Exchange Offer. Holding will pay the expenses,
other than certain applicable taxes, of the Exchange Offer. See "--Fees and
Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean , 1998, unless Holding
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, Holding will notify the Exchange
Agent and the record Holders of Series A Debentures of any extension by oral or
written notice, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date. Such notice may
state that Holding is extending the Exchange Offer for a specified period of
time or on a daily basis until 5:00 p.m., New York City time, on the date on
which a specified percentage of Series A Debentures are tendered.
Holding reserves the right to delay accepting any Series A Debentures, to
extend the Exchange Offer, to amend the Exchange Offer or to terminate the
Exchange Offer and not accept Series A Debentures not previously accepted if any
of the conditions set forth herein under "--Conditions" shall have occurred and
shall not have been waived by Holding by giving oral or written notice of such
delay, extension, amendment or termination to the Exchange Agent. Any such delay
in acceptance, extension, amendment or termination will be followed as promptly
as practicable by oral or written notice thereof. If the Exchange Offer is
amended in a manner determined by Holding to constitute a material change,
Holding will promptly disclose such amendment in a manner reasonably calculated
to inform the Holders of such amendment and Holding will extend the Exchange
Offer for a period of five to 10 business days, depending upon the significance
of the amendment and the manner of disclosure to Holders
29
<PAGE>
of the Series A Debentures, if the Exchange Offer would otherwise expire during
such five to 10 business day period.
Without limiting the manner in which Holding may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
Holding shall have no obligation to publish, advertise, or otherwise communicate
any such public announcement, other than by making a timely release to the Dow
Jones News Service.
YIELD AND INTEREST ON THE SERIES B DEBENTURES
The yield and interest on the Series B Debentures is 12.875% (computed on a
semi-annual bond equivalent basis) calculated from April 15, 1998. The Series B
Debentures will accrete at a rate of 12.875% compounded semi-annually, to an
aggregate principal amount of $112.0 million by April 15, 2003. Cash interest
will not accrue on the Series B Debentures prior to April 15, 2003. Commencing
April 15, 2003, cash interest on the Series B Debentures will accrue and be
payable, at a rate of 12.875% per annum, semi-annually in arrears on each April
15 and October 15.
PROCEDURES FOR TENDERING
The tender to the Company of the Series A Debentures by a Holder thereof as
set forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering Holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the Letter of
Transmittal. Except as set forth below, a Holder (which term, for purposes of
the Exchange Offer, includes any participant in the Book-Entry Transfer Facility
system whose name appears on a security position listing as a holder of such
Series A Debentures) who wishes to tender Series A Debentures for exchange
pursuant to the Exchange Offer must transmit to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date either (i) a properly completed
and duly executed Letter of Transmittal or a facsimile thereof, including all
other documents required by such Letter of Transmittal, to the Exchange Agent at
the address set forth below under "Exchange Agent" or (ii) a computer-generated
message, transmitted by means of the Book-Entry Transfer Facility's ATOP system
and received by the Exchange Agent and forming a part of a Book-Entry
Confirmation, in which such Holder acknowledges and agrees to be bound by the
terms of the Letter of Transmittal. In addition, in order to deliver Series A
Debentures (i) certificates for such Series A Debentures must be received by the
Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation
by a book-entry transfer (a "Book-Entry Confirmation") of such Series A
Debentures into the Exchange Agent's account at the Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date or (iii) the Holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF SERIES A DEBENTURES,
LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND
RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
LETTERS OF TRANSMITTAL OR SERIES A DEBENTURES SHOULD BE SENT TO THE COMPANY.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for such Holders.
ANY BENEFICIAL HOLDER WHOSE SERIES A DEBENTURES ARE REGISTERED IN THE NAME
OF ITS BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND WHO
WISHES TO TENDER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT
SUCH REGISTERED HOLDER TO CONSENT AND/OR TENDER ON ITS BEHALF. IF SUCH
BENEFICIAL HOLDER WISHES TO TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER
MUST, PRIOR TO COMPLETING AND EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING
ITS SERIES A DEBENTURES, EITHER MAKE APPROPRIATE ARRANGEMENTS TO REGISTER
OWNERSHIP OF THE SERIES A DEBENTURES IN SUCH HOLDER'S NAME OR OBTAIN A PROPERLY
COMPLETED BOND POWER FROM THE REGISTERED HOLDER. THE TRANSFER OF RECORD
OWNERSHIP MAY TAKE CONSIDERABLE TIME.
30
<PAGE>
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Series A Debentures tendered pursuant thereto are tendered (i) by a
registered Holder who has not completed the box entitled "Special Payment
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures
on a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., or a commercial bank or trust company having an office
or correspondent in the United States (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Series A Debentures listed therein, such Series A
Debentures must be endorsed or accompanied by appropriate bond powers signed as
the name of the registered Holder or Holders appears on the Series A Debentures.
If the Letter of Transmittal or any Series A Debentures or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by Holding, evidence satisfactory to Holding of their authority to
so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Series A Debentures and withdrawal of
tendered Series A Debentures will be determined by Holding in its sole
discretion, which determination will be final and binding. Holding reserves the
absolute right to reject any and all Series A Debentures not properly tendered
or any Series A Debentures Holding's acceptance of which would, in the opinion
of counsel for Holding, be unlawful. Holding also reserves the right to waive
any defects, irregularities or conditions of tender as to particular Series A
Debentures. Holding's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Series A Debentures must be cured within such time
as Holding shall determine. Neither Holding, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or irregularities
with respect to tenders of Series A Debentures, nor shall any of them incur any
liability for failure to give such notification. Tenders of Series A Debentures
will not be deemed to have been made until such irregularities have been cured
or waived. Any Series A Debentures received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders
of Series A Debentures, unless otherwise provided in the Letter of Transmittal,
as soon as practicable following the Expiration Date.
In addition, Holding reserves the right in its sole discretion to purchase
or make offers for any Series A Debentures that remain outstanding subsequent to
the Expiration Date or, as set forth under "--Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Series A
Debentures in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each Holder will represent to Holding that, among other
things, the Series B Debentures acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of such Holder's business, that such
Holder has no arrangement with any person to participate in the distribution of
such Series B Debentures, and that such Holder is not an "affiliate", as defined
under Rule 405 of the Securities Act, of Holding. If the Holder is a broker-
dealer that will receive Series B Debentures for its own account in exchange for
Series A Debentures that were acquired as a result of market-making activities
or other trading activities and not acquired directly from Holding, such Holder
by tendering will acknowledge that it will deliver a prospectus in connection
with any resale of such Series B Debentures. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Debentures and (i) whose Series A
Debentures are not immediately available, or (ii) who cannot deliver their
Series A Debentures, the Letter of Transmittal or any other required documents
to the Exchange Agent prior to the Expiration Date, may effect a tender if:
31
<PAGE>
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder of the Series A Debentures, the certificate
number or numbers of made thereby and guaranteeing that, within five New York
Stock Exchange trading days after the Expiration Date, the Letter of Transmittal
(or facsimile thereof) together with the certificate(s) representing the Series
A Debentures to be tendered in proper form for transfer (or a confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of Series A
Debentures delivered electronically) and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Series A Debentures in proper form for transfer (or confirmation of a book-entry
transfer into the Exchange Agent's account at DTC of Series A Debentures
delivered electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be sent
to Holders who wish to tender their Series A Debentures according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Series A Debentures may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. To withdraw a tender of Series A Debentures in the Exchange Offer, a
written or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify
the name of the person having deposited the Series A Debentures to be withdrawn
(the "Depositor"), (ii) identify the Series A Debentures to be withdrawn
(including the certificate number or numbers and principal amount of such Series
A Debentures), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Series A Debentures were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Series
A Debentures register the transfer of such Series A Debentures into the name of
the person withdrawing the tender, and (iv) specify the name in which any such
Series A Debentures are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by Holding, whose
determination shall be final and binding on all parties. Any Series A
Debentures so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no Series B Debentures will be issued with
respect thereto unless the Series A Debentures so withdrawn are validly
retendered. Any Series A Debentures which have been tendered but which are not
accepted for payment will be returned to the Holder thereof without cost to such
Holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Series A Debentures may
be retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Holding will not be
required to accept for exchange, or exchange Series B Debentures for, any Series
A Debentures not theretofore accepted for exchange, and may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Series A
Debentures, if any of the following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder, violates
applicable law or any applicable interpretation of the Commission; or
32
<PAGE>
(b) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the sole judgment of Holding, might impair the ability of Holding to proceed
with the Exchange Offer; or
(c) there shall have been adopted or enacted any law, statute, rule or
regulation which, in the sole judgment of Holding, might materially impair the
ability of Holding to proceed with the Exchange Offer.
If any such conditions exist, Holding may (i) refuse to accept any Series A
Debentures and return all tendered Series A Debentures to exchanging Holders,
(ii) extend the Exchange Offer and retain all Series A Debentures tendered prior
to the expiration of the Exchange Offer, subject, however, to the rights of
Holders to withdraw such Series A Debentures (see "--Withdrawal of Tenders") or
(iii) waive certain of such conditions with respect to the Exchange Offer and
accept all properly tendered Series A Debentures which have not been withdrawn
or revoked. If such waiver constitutes a material change to the Exchange Offer,
Holding will promptly disclose such waiver in a manner reasonably calculated to
inform Holders of Series A Debentures of such waiver.
The foregoing conditions are for the sole benefit of Holding and may be
asserted by Holding regardless of the circumstances giving rise to any such
condition or may be waived by Holding in whole or in part at any time and from
time to time in its sole discretion. The failure by Holding at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition to the foregoing conditions, if, because of any change in
applicable law or applicable interpretations thereof by the Commission, Holding
is not permitted to complete the Exchange Offer, then Holding shall file a Shelf
Registration Statement. Thereafter, Holding's obligation to consummate the
Exchange Offer shall be terminated.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<CAPTION>
<S> <C>
By Mail: By Overnight Courier:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 Cooper Station 770 Broadway, 13th Floor
New York, New York 10276-0844 Corporate Trust Operations Department
(registered or certified mail recommended) New York, New York 10003
By Hand: By Facsimile:
United States Trust Company of New York (212) 780-0592
111 Broadway (For Eligible Institutions Only)
Lower Level
New York, New York 10006 Confirm by telephone:
Attention: Corporate Trust Services (800) 548-6565
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Holding. The principal
solicitation is being made by mail; however, additional solicitation may be made
by telegraph, telephone or in person by officers and regular employees of
Holding and its affiliates.
Holding will not make any payments to brokers, dealers or others soliciting
acceptances of the Exchange Offer. Holding, however, will pay the Exchange Agent
reasonable and customary fees for its services and will
33
<PAGE>
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
Holding may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of the Prospectus and related documents to the beneficial owners of the
Series A Debentures, and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Holding, are estimated in the aggregate to be approximately $100,000,
and include fees and expenses of the Exchange Agent and Trustee under the
Indenture and accounting and legal fees.
Holding will pay all transfer taxes, if any, applicable to the exchange of
Series A Debentures pursuant to the Exchange Offer. If, however, certificates
representing Series B Debentures or Series A Debentures for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Series A Debentures tendered, or if tendered Series A Debentures are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Series A Debentures pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
ACCOUNTING TREATMENT
The Series B Debentures will be recorded at the same carrying value as the
Series A Debentures are reflected in Holding's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized upon consummation of the Exchange Offer. The issuance costs incurred
in connection with the Exchange Offer will be capitalized and amortized over the
term of the Series B Debentures.
34
<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 will sell $70.0 million of Common Stock to certain existing stockholders
representing 4,161,712 shares and the Company will incur up to $115.0 million of
borrowings under the New Credit Facility and a new term loan facility that will
become part of the New Credit Facility. The Company will receive 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). See "Summary--The Recapitalization" and "Summary--Recent
Developments." 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 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
35
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
HOLDING
HISTORICAL WESTERN AUTO
JULY 18, HISTORICAL ACQUISITION
1998 JULY 4, 1998 ADJUSTMENTS PRO FORMA
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Assets (dollars in thousands)
Current assets:
Cash and cash equivalents.................... $ 44,790 $ 27,313 $ (21,313)(3) $ 50,790
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 Taxes........................ -- 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 (160,987) 845,951
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 $(389,535) $1,255,972
======== ========== ========= ==========
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 -- 115,000 (11) 512,022
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 (70,476) 536,052
Stockholders' equity (deficit)................. (99,746) 318,048 (55,548)(8) 162,754
-------- ---------- --------- ----------
Total liabilities and stockholders'
equity (deficit)........................... $594,917 $1,050,590 $(389,535) $1,255,972
======== ========== ========= ==========
</TABLE>
(Footnotes on subsequent page)
36
<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)
37
<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 the New Credit Facility and a
new term loan facility that will become part of the New Credit Facility......... 115,000
---------
Total cash inflows............................................................. 185,000
---------
Cash decreases:
Cash retained by Sears (See (2) above)........................................... (21,313)
Cash portion of purchase price for acquisition................................... (175,000)
Estimated debt issuance costs(a)(See (6) below).................................. (6,500)
Estimated stock issuance costs(a)(See (8) below)................................. (500)
Estimated acquisition related costs(a)(See (4) below)............................ (3,000)
---------
Total cash outflows............................................................ (206,313)
---------
Net impact on cash............................................................... $ (21,313)
=========
</TABLE>
(a) See "Certain Transactions--Certain Payments."
(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
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
Net additional deferred income tax liability (See (9) below).............. 1,900
Adjustments to reflect fair market value of net assets acquired:
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. 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, at closing 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>
<CAPTION>
(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>
<CAPTION>
(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>
<CAPTION>
(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>
39
<PAGE>
(8) Reflects the following:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Issuance of 4,161,712 shares of Holding common stock
@ $16.82 per share, for cash (See (3) above)........................ $ 70,000
Stock issued to Sears (11,474,606 shares of Holding common
stock valued @ $16.82 per share) (See (4) above).................... 193,000
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>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Deferred tax on severance and relocation accrual (See (4)
above)............................................................... $ 4,900
Net additional deferred tax liability(a) (See (4) above).............. (1,900)
--------
Net pro forma change in deferred taxes................................ $ 3,000
========
Components of net pro forma change in deferred taxes:
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>
<CAPTION>
<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>
40
<PAGE>
(11) Reflects borrowings of $115,000 under the New Credit Facility to be
comprised of borrowings under a new term loan facility that will become
part of the New Credit Facility as well as an existing facility
thereunder.
41
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 3, 1998
-------------------------------------------------------------------------------------------
RECAPITALIZATION ACQUISITION
--------------------------- ---------------------------------
COMPANY PRO WESTERN AUTO TOTAL
HISTORICAL ADJUSTMENTS FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------- ------------ --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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 (63,787)(4) 692,345
Restructuring................... -- -- -- 38,441 -- 38,441
-------- -------- -------- --------- -------- ---------
Income (loss) from operations... 42,427 -- 42,427 (76,929) 17,887 (16,615)
Total interest expense.......... (6,086) (36,476)(1) (42,562) (15,379) 5,335(5) (52,606)
Other income (expense), net..... (321) -- (321) (6) -- (327)
-------- -------- -------- --------- -------- ---------
Income (loss) before
provision (benefit) for
income taxes................... 36,020 (36,476) (456) (92,314) 23,222 (69,548)
Provision (benefit) for
income taxes.................. 14,733 (14,331)(2) 402 (31,885) 9,289(2) (22,194)
-------- -------- -------- --------- -------- ---------
Net income (loss)............... $ 21,287 $(22,145) $ (858) $ (60,429) $ 13,933 $ (47,354)
======== ======== ======== ========= ======== =========
</TABLE>
(Footnotes on subsequent page)
42
<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
---------- ----------- --------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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 (26,142)(4) 361,687
Costs associated with the
recapitalization............... 14,005 -- 14,005 -- -- 14,005
-------- -------- -------- -------- -------- ---------
Income (loss) from operations... 18,358 -- 18,358 (3,699) 7,210 21,869
Total interest expense.......... (13,559) (10,288)(1) (23,847) (11,218) 5,805(5) (29,260)
Other income (expense), net..... 317 -- 317 1 -- 318
-------- -------- -------- -------- -------- ---------
Income (loss) before
provision (benefit) for
income taxes................... 5,116 (10,288) (5,172) (14,916) 13,015 (7,073)
Provision (benefit) for
income taxes.................. 2,543 (4,047)(2) (1,504) (5,022) 5,206(2) (1,320)
-------- -------- -------- -------- -------- ---------
Net income (loss)............... $ 2,573 $ (6,241) $ (3,668) $ (9,894) $ 7,809 $ (5,753)
======== ======== ======== ======== ======== =========
</TABLE>
(Footnotes on subsequent page)
43
<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
ENDED WEEKS 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 $60,000 on the Senior Subordinated Notes
and 12.875% per annum on borrowings of $200,000 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%.
44
<PAGE>
(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>
TWENTY-EIGHT
YEAR ENDED WEEKS 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:
45
<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 2%(c)................ 2,615 930
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...... $(63,787) $(26,142)
======== ========
</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
2% 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 2% 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
--------------- -------------------
(DOLLARS IN THOUSANDS)
<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 $40,000 under the New Credit Facility
and $75,000 under a new term loan facility that will become
part of the New Credit Facility at 7.88% (a)...................... 9,062 4,884
Amortization of deferred debt issuance costs over five and
one-half years.................................................... 1,182 637
Reduction in commitment fees on unused borrowings at a rate
of 0.5% per annum resulting from $40,000 additional
borrowings under the New Credit Facility......................... (200) (108)
-------- --------
Net decrease in interest expense................................... $ (5,335) $ (5,805)
======== ========
</TABLE>
_________________________
46
<PAGE>
(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.
47
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated statement of
operations, balance sheet and other operating data of Holding. The selected
consolidated financial data for each of the five fiscal years during the period
ended January 3, 1998 are derived from the audited financial statements of
Holding which have been audited by Arthur Andersen LLP. The selected
consolidated financial data for the twenty-eight weeks ended July 12, 1997 and
July 18, 1998 are derived from financial statements that are unaudited and
include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the data for such
periods, and are not necessarily indicative of the results expected for a full
fiscal year or for any future period. The data presented below should be read
in conjunction with the consolidated financial statements of Holding and the
notes thereto included herein, the other financial information included herein
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEAR(1) TWENTY-EIGHT WEEKS ENDED
----------------------------------------------------------- --------------------------------
1993 1994 1995 1996 1997 JULY 12, JULY 18,
1997 1998
--------- --------- --------- --------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $365,241 $482,347 $602,559 $705,983 $848,108 $435,880 $544,000
Cost of sales..................... 227,750 297,444 369,962 437,615 524,586 268,198 332,825
Selling, general and
administrative expenses(2)....... 117,856 155,583 196,289 228,226 281,095 145,478 178,812
Expenses associated with the
Recapitalization................. -- -- -- -- -- -- 14,005
Operating income (loss)........... 19,635 29,320 36,308 40,142 42,427 22,204 18,358
Interest expense.................. 1,304 2,797 5,028 4,891 6,086 (3,463) (13,559)
Other income (expense)............ 316 10,709 (1,155) 187 (321) (203) 317
Income (loss) before income
taxes............................ 18,647 37,232 30,125 35,438 36,020 18,538 5,116
Income tax expense (benefit)...... 7,087 13,526 12,122 14,174 14,733 7,583 2,543
Net income (loss) (3)............. 11,560 23,706 18,003 21,264 21,287 10,955 2,573
OTHER DATA:
EBITDA(4)......................... $ 28,830 $ 42,568 $ 51,107 $ 57,641 $ 64,228 $ 33,467 $ 31,866
EBITDAR(5)........................ 44,669 64,770 82,291 96,249 112,538 57,983 63,142
Capital expenditures.............. 25,316 25,781 42,939 44,264 48,864 20,464 26,028
Ratio of earnings to fixed
charges(6)....................... 3.83x 4.65x 2.95x 3.00x 2.62x 2.59x 1.21x
Total store square footage
(000s) (at period end)(7)........ 2,408 3,150 3,939 4,710 5,857 5,239 6,485
</TABLE>
48
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Percentage increase in
comparable store net
sales(8)........................ 17.3% 9.5% 1.7% 1.1% 5.1% 6.6% 6.4%
Net cash provided by (used
in) operating activities........ 7,510 (6,715) 22,839 27,934 42,283 32,874 27,944
Net cash used in investing
activities...................... (25,275) (14,201) (39,855) (44,121) (48,607) (20,346) (21,873)
Net cash provided by (used
in) financing activities........ 19,460 18,809 23,643 11,132 6,954 (12,772) 23,256
Stores open at end of period..... 352 437 536 649 814 720 909
BALANCE SHEET DATA:
Net working capital(9)........... $ 32,024 $ 88,966 $102,708 $110,080 $121,140 $148,697
Net working capital, as
adjusted(10).................... 54,345 84,745 97,572 112,875 114,581 103,907
Total assets..................... 196,812 237,712 295,088 394,395 461,832 594,917
Total debt (including
current maturities)............. 54,119 68,500 93,251 105,861 111,096 397,022
Stockholders' equity
(deficit)....................... 59,536 83,180 101,121 122,323 143,548 (99,746)
</TABLE>
______________________
(1) Holding'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. Holding's first fiscal quarter
consists of 16 weeks and the other three fiscal quarters consist of 12
weeks.
(2) Fiscal 1997 amount includes an unusual medical claim that exceeded
Holding's stop loss insurance coverage. Holding has 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 $900.
(3) Fiscal 1994 includes a net after-tax gain of $6,700 on the sale of
equity securities of TBC Corporation, a distributor of automotive products
in which the Company held a minority equity ownership interest.
(4) 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. Holding has included it herein because management believes this
information is useful to investors as such measure provides additional
information with respect to Holding's ability to meet its future debt
service, capital expenditure and working capital requirements and, in
addition, certain covenants in the Indenture and New Credit Facility are
based upon an EBITDA calculation. Holding's method for calculating EBITDA
may differ from similarly titled measures reported by other companies.
(5) EBITDAR represents EBITDA plus operating lease expense. Because the
proportion of stores leased versus owned varies among industry competitors,
Holding believes that EBITDAR permits a meaningful comparison of operating
performance among industry competitors. The Company leases substantially
all of its stores.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
represents income (loss) before income taxes plus fixed charges. Fixed
charges consist of interest expense (including amortization of deferred
debt issuance costs) and one-third of lease expense, which management
believes is representative of the interest component of lease expense.
(7) Total store square footage is based on the Company's actual store formats
and includes normal selling, office, stockroom and receiving space.
49
<PAGE>
(8) Comparable store net sales data is calculated based on the change in net
sales of all stores opened as of the beginning of the preceding fiscal
year. Net stores become part of the comparable store base on the first day
of their second full fiscal year in operation. Relocations are included in
comparable store net sales from the date of opening. Increases for fiscal
1997 have been adjusted to exclude the effect of the fifty-third week.
(9) Net working capital represents total current assets less total current
liabilities.
(10) Net working capital, as adjusted, represents total current assets
excluding cash, cash equivalents and marketable securities, less total
current liabilities excluding bank overdrafts, notes payable and current
maturities of long-term debt. Management believes that net working
capital, as adjusted, is a meaningful measure of the liquidity of net
current assets relating to the Company's operating activities.
50
<PAGE>
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 Holding, the notes thereto and other data and information
appearing elsewhere in this Prospectus. Holding's fiscal year ends on the
Saturday nearest December 31. As used in this section, fiscal 1997 represents
the 53 weeks ended January 3, 1998; fiscal 1996 represents the 52 weeks ended
December 28, 1996; and fiscal 1995 represents the 52 weeks ended December 30,
1995. Holding's first quarter consists of 16 weeks, and the other three
quarters consist of 12 weeks.
GENERAL
The Company is the second largest retailer of automotive parts and
accessories in the United States (based on store count) with 909 stores in 17
states as of July 18, 1998. Based on store count, the Company believes it is
the largest automotive retailer in a majority of its markets.
The Company was formed in 1929 when the Company's founders purchased three
stores from Pep Boys and was acquired by Arthur Taubman in 1932. Nicholas F.
Taubman, Arthur Taubman's son and Holding's Chairman, assumed control of the
Company in 1969. In the 1980s, the Company sharpened its marketing focus to
target sales of automotive parts to DIY customers and accelerated its growth
strategy. As part of its growth strategy, the Company commissioned new store
designs with more efficient merchandising and inventory management, thereby
rationalizing the SKU count in each store. In addition, the Company's
distribution center was refurbished and upgraded to support planned expansion.
The Company has achieved significant growth through a focused store
expansion strategy of opening stores in new contiguous and selected existing
markets. Since accelerating its store expansion plan in 1992, the Company has
grown from the eighth largest to the second largest U.S. specialty retailer of
automotive parts (based on store count), increasing its store count from 223 to
909.
In 1996, the Company made the decision to aggressively expand its sales to
the DIFM market by implementing a commercial delivery program, which is now in
place at 494 stores. Due to its success in rapidly building its commercial
delivery program, the Company will continue to expand this program, including
adding approximately 45 stores to the program in the remainder of 1998. The
Company believes it has significant competitive advantages in servicing the DIFM
segment because it has the distribution capacity and sophisticated information
systems necessary to efficiently stock, advertise and deliver a broad inventory
selection of brand name and quality private label parts.
The Company has also invested heavily in store, logistical and management
information systems. The Company has reengineered its POS system, implemented a
new store level inventory management system, installed a satellite
communications network, upgraded host systems and built additional distribution
centers. With these technological enhancements and the opening of a fourth
distribution center to be completed by early 1999, the Company will be able to
serve over 1,600 stores.
On August 17, 1998, the Company and Holding entered into the Acquisition
Agreement to acquire Western Auto from Sears for $175.0 million and
approximately 40% of the Common Stock of Holding. The Acquisition Agreement
provides that (i) Western Auto will be merged into a subsidiary of the Company,
with such subsidiary to become the surviving corporation, (ii) the issued and
outstanding shares of Western Auto will be converted into the right to receive
in the aggregate (a) $175.0 million and (b) 11,474,606 shares of Holding's Class
A common stock, $.01 par value per share, constituting approximately 40% of the
outstanding Common Stock of Holding. FS&Co., Ripplewood, Nicholas F. Taubman
and the Taubman Trust have committed to invest an additional $70.0 million in
equity to fund a portion of the cash purchase price for Western Auto. The
Company anticipates that $115.0 million of the cash purchase price and certain
transaction costs will be funded through bank debt. The Acquisition is expected
to close by year end but there can be no assurance that the Acquisition will be
consummated.
51
<PAGE>
EFFECT OF THE RECAPITALIZATION
As a result of the Recapitalization, Holding has incurred approximately
$385.0 million in long-term debt and approximately $22.8 million in fees and
expenses, a portion of which was charged to operating and administrative
expenses during the fiscal quarter in which the Recapitalization was
consummated. The Recapitalization was accounted for as the sale of common
stock, the issuance of debt, the redemption of common and preferred stock and
the repayment of notes payable and long-term debt for financial reporting
purposes.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data for Holding
expressed as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
TWENTY-EIGHT
WEEKS ENDED
FISCAL YEAR ENDED (UNAUDITED)
---------------------------------------------------------- ---------------------
DECEMBER 30, DECEMBER 28, JANUARY 3, JULY 12, JULY 18,
1995 1996 1998 1997 1998
------------- ------------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 61.4 62.0 61.9 61.5 61.2
----- ----- ----- ----- -----
Gross profit.................. 38.6 38.0 38.1 38.5 38.8
Selling, general and
administrative expenses...... 32.6 32.3 33.1 33.4 32.9
Expenses associated with
recapitalization............. - - - - 2.6
----- ----- ----- ----- -----
Operating profit.............. 6.0 5.7 5.0 5.1 3.3
Interest expense.............. 0.8 0.7 0.7 0.8 2.5
Other expense, net............ 0.2 0.0 0.0 0.1 (0.2)
Income tax expense (benefit).. 2.0 2.0 1.7 1.7 0.5
----- ----- ----- ----- -----
Income (loss)................. 3.0% 3.0% 2.5% 2.5% 0.5%
===== ===== ===== ===== =====
</TABLE>
Net sales consists primarily of comparable store net sales, last year store
net sales, and new store net sales. New stores become part of the comparable
store base on the first day of their second full fiscal year in operation.
Holding's cost of goods sold includes merchandise costs and warehouse and
distribution expenses. Gross profit as a percentage of net sales may be
affected by variations in Holding's product mix, price changes in response to
competitive factors and fluctuations in merchandise costs and vendor programs.
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, data processing,
professional expenses and other related expenses.
52
<PAGE>
Twenty-Eight Weeks Ended July 18, 1998 Compared to Twenty-Eight Weeks Ended July
12, 1997
Net sales for the twenty-eight weeks ended July 18, 1998 increased by
$108.1 million, or 24.8%, to $544.0 million as compared to $435.9 million, for
the comparable twenty-eight weeks ended July 12, 1997. This increase was due
to an increase in comparable store net sales of 6.4%, or $27.0 million, an
increase in net sales from stores opened in fiscal 1997 of $62.8 million, the
contribution of $19.1 million in net sales from stores opened in fiscal 1998,
and a decrease in miscellaneous net sales of $0.8 million. During the twenty-
eight weeks ended July 18, 1998, Holding opened 96 new stores, relocated four
stores, remodeled 25 stores, and closed one store. As of July 18, 1998, Holding
operated 909 stores as compared to 720 stores at July 12, 1997.
Gross profit for the twenty-eight weeks ended July 18, 1998 was $211.2
million, or 38.8% of net sales, compared with $167.7 million, or 38.5% of net
sales, for the twenty-eight weeks ended July 12, 1997. The increase in the
gross profit percentage was primarily due to decreased warehouse and delivery
expenses.
Selling, general and administrative expenses, for the twenty-eight weeks
ended July 18, 1998, increased by $33.3 million, as compared to the twenty-eight
weeks ended July 12, 1997, and, as a percentage of net sales, decreased from
33.4% to 32.9%. This decrease, as a percent of sales, is due to the reduction
in certain private company expenses which were eliminated after the
Recapitalization and the elimination of an unusual medical claim which occurred
in the twelve weeks ended July 12, 1997.
As part of the Recapitalization, $14.0 million in expenses were incurred
which related to the Recapitalization. This expense consisted of $11.5 million
of bonuses paid to certain employees for past performances, $0.2 million in
related employment taxes and $2.3 million for non-recurring expenses which
consisted primarily of professional fees.
Operating profit decreased from $22.2 million, or 5.1% of net sales to
$18.4 million, or 3.3% of net sales for the comparable time period due to the
expenses incurred with the Recapitalization. Excluding the $14.0 million in
transaction expenses, operating profit increased by $10.2 million, or 45.8%, to
$32.4 million, or, 5.9% of net sales, for the twenty-eight weeks ended July 18,
1998, compared to $22.2 million for the twenty-eight weeks ended July 12, 1997,
due to the factors cited above.
Interest expense, for the twenty-eight weeks ended July 18, 1998, was $13.6
million compared to $3.5 million for the twenty-eight weeks ended July 12, 1997.
The increase is due to increased debt associated with the Recapitalization and
related higher interest rates.
Income tax expense for the twenty-eight weeks ended July 18, 1998, was $2.5
million as compared to $7.6 million for the twenty-eight weeks ended July 12,
1997, with effective tax rates of 49.7% and 40.9%, respectively. This increase
is the result of increased permanent adjustments and lower pretax earnings due
to the Recapitalization.
As a result of the above factors, net income of $2.6 million, for the
twenty-eight weeks ended July 18, 1998, as compared to net income of 11.0
million, for the twenty-eight weeks ended July 12, 1997. As a percentage of
sales, net income for
53
<PAGE>
the twenty-eight weeks ended July 18, 1998, was 0.5% as compared to net income
of 2.5%, for the twenty-eight weeks ended July 12, 1997.
Fiscal Year Ended January 3, 1998 Compared to Fiscal Year Ended December 28,
1996
Net sales for fiscal 1997 increased by $142.1 million, or 20.1%, over net
sales for fiscal 1996. This increase was due to an increase in comparable store
sales (adjusted to exclude the fifty-third week of 1997 which contributed total
sales of $15.6 million) of 5.1%, or $32.6 million, an increase in net sales from
stores opened in fiscal 1996 of $54.8 million, the contribution of $44.0 million
in net sales from stores opened in fiscal 1997, and a decrease in miscellaneous
net sales of $4.9 million. Comparable store net sales were enhanced by the
commercial delivery program and by increased average sales per customer. In
fiscal 1997, Holding opened 170 stores and also relocated 15 stores and
remodeled 27 stores. By fiscal year end 1997, Holding had 814 stores, as
compared to 649 stores at the end of fiscal 1996.
Gross profit for fiscal 1997 was $323.5 million, or 38.1% of net sales,
compared with $268.4 million, or 38.0% of net sales, for fiscal 1996. The
increase in the gross profit percentage was primarily due to decreased warehouse
and delivery expenses (5.68% of net sales in fiscal 1997 compared to 5.78% of
net sales in fiscal 1996) which resulted from the implementation of the
distribution center management system ("DCMS") and more efficient material
handling equipment in certain distribution centers. In addition, Holding was
able to offset lower gross profit margins in its commercial delivery business
with improved gross profit margins in its DIY business. Holding believes that
as its store count grows, it will achieve greater operating leverage from its
distribution centers.
Selling, general and administrative expenses for fiscal 1997 increased by
$52.9 million as compared to fiscal 1996 and, as a percentage of net sales,
increased from 32.3% to 33.1%. This increase as a percentage of net sales was
primarily due to the higher operating costs as a percentage of net sales of the
greater number of new stores that were in the early stage of maturation in
fiscal 1997, particularly the 58 stores opened in the fourth quarter of 1997.
In addition, the increase was partially attributed to increases in reserves for
self-insured medical and worker compensation plans.
Interest expense for fiscal 1997 was $6.1 million compared to $4.9 million
in fiscal 1996. Interest expense was affected by higher rates and increased
borrowings in fiscal 1997.
Income tax expense for fiscal 1997 was $14.7 million as compared to $14.2
million for fiscal 1996, with effective tax rates of 40.9% and 40.0%,
respectively. This increase was primarily due to increasing tax reserves.
As a result of the above factors, net income of $21.3 million was recorded
in fiscal 1997 as compared to $21.3 million for fiscal 1996. As a percentage of
sales, net income for fiscal 1997 was 2.5% as compared to 3.0% for fiscal 1996.
Fiscal Year Ended December 28, 1996 Compared to Fiscal Year Ended December 30,
1995
Net sales for fiscal 1996 increased by $103.4 million, or 17.2%, over net
sales for fiscal 1995. This increase was due to an increase in comparable sales
of 1.1%, or $6.2 million, an increase in net sales from stores opened in fiscal
1995 of $39.1 million, the contribution of $53.9 million in net sales from
stores opened in fiscal 1996, and an increase in miscellaneous net sales of $4.2
million. Comparable store net sales were enhanced by the roll-out of Holding's
commercial delivery program in the second half of fiscal 1996. However, this
increase was negatively impacted by cannibalization of net sales of existing
stores by net sales of new Holding stores and competitive new store openings.
Holding believes that although "in market" openings cannibalize sales in
existing stores, these openings serve to increase overall market share and
leverage fixed expenses. Holding opened 115 new stores in fiscal 1996 and also
relocated three stores and remodeled 35 stores. By fiscal year end 1996,
Holding had 649 stores as compared to 536 stores at the end of fiscal 1995.
Gross profit for fiscal 1996 was $268.4 million, or 38.0% of net sales,
compared with $232.6 million, or 38.6% of net sales, during fiscal 1995. The
decrease in the gross profit percentage was primarily due to increased
54
<PAGE>
warehouse and delivery expenses (5.78% of net sales in fiscal 1996 compared to
5.25% of net sales in fiscal 1995) and volatility in the freon market. Warehouse
and delivery expenses increased due to opening a new distribution center and
increasing service levels to stores which prior to implementation of the DCMS
required significant amounts of incremental labor expense. See "Business--
Management Information Systems."
Selling, general and administrative expenses for fiscal 1996 increased by
$31.9 million as compared to fiscal 1995 and, as a percentage of net sales,
decreased from 32.6% to 32.3%. The decrease as a percentage of net sales was
primarily due to increased vendor support for advertising and marketing.
Additionally, in fiscal 1995, Holding spent considerable resources in developing
and rolling out its reengineered POS system and satellite communication network.
Interest expense for fiscal 1996 was $4.9 million compared to $5.0 million
in fiscal 1995. Interest was affected by lower interest rates in fiscal 1996,
but higher average debt balances compared to fiscal 1995.
Income tax expense for fiscal 1996 was $14.2 million as compared to $12.1
million for fiscal 1995, with effective tax rates of 40.0% and 40.2%,
respectively.
As a result of the above factors, net income of $21.3 million was recorded
in fiscal 1996 as compared to $18.0 million for fiscal 1995. As a percent of
sales, net income for fiscal 1996 was 3.0% as compared to 3.0% for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Holding'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 and the
development and implementation of proprietary information systems. From 1995 to
1997, Holding opened 389 stores, constructed a new distribution center,
completed approximately 80% of another new distribution center and expanded its
Roanoke distribution center. Holding has financed its growth through a
combination of internally generated funds and borrowings. Net cash provided by
operating activities was $27.9 million in the twenty-eight weeks ended July 18,
1998, $42.3 million in fiscal 1997, $27.9 million in fiscal 1996, and $22.8
million in fiscal 1995.
Holding's new stores require capital expenditures of approximately $120,000
per store and an inventory investment of approximately $400,000 per store. A
substantial portion of these inventories are 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.
Historically, Holding has negotiated extended payment terms from suppliers
to finance inventory growth, and Holding believes that it will be able to
continue financing much of its inventory growth through such extended payment
terms after the Recapitalization. Holding anticipates that inventory levels
will continue to increase primarily as a result of new store openings and
increased SKU levels.
In fiscal 1995, net cash provided by operating activities was $22.8
million. Of this amount, $18.0 million was due to net income. Depreciation and
amortization provided an additional $14.8 million of funds and $10.0 million was
used for working capital. Net cash used for investing activities was $39.9
million and was comprised primarily of capital expenditures. Net cash provided
by financing activities was $23.6 million and was comprised primarily of net
borrowings.
In fiscal 1996, net cash provided by operating activities was $27.9
million. Of this amount, $21.3 million was due to net income. Depreciation and
amortization provided an additional $17.5 million of funds and $10.9 million was
used for working capital. Net cash used for investing activities was $44.1
million and was comprised primarily of capital expenditures. Net cash provided
by financing activities was $11.1 million and was comprised primarily of net
borrowings.
55
<PAGE>
In fiscal 1997, net cash provided by operating activities was $42.3
million. Of this amount, $21.3 million was due to net income. Depreciation and
amortization provided an additional $21.8 million of funds and $0.8 million was
used for working capital. Net cash used for investing activities was $48.6
million and was comprised of capital expenditures. Net cash provided by
financing activities was $7.0 million and was comprised primarily of payments on
borrowings.
For the twenty-eight weeks ended July 18, 1998, net cash provided by
operating activities was $27.9 million, which consisted primarily of net working
capital of $9.0 million, depreciation and amortization of $16.3 million, and net
income of $2.6 million. Net cash used for investing activities was $21.9
million and consisted primarily of $26.0 million for capital expenditures offset
by proceeds of $4.1 million from the sale of a corporate airplane. Net cash
provided by financing activities was $23.3 million and was primarily the result
of the Recapitalization. See "Summary--The Recapitalization."
Holding intends to fund the Acquisition with the issuance to Sears of
11,474,606 shares of Holding's Class A Common Stock, additional borrowings of
$40.0 million under the delayed draw facility under the New Credit Facility and
a $75.0 million new term loan facility under the New Credit Facility, the sale
of approximately $70.0 million of Holding Common Stock to existing stockholders
of Holding, and $10.0 million of existing cash. The new term loan facility will
mature on April 15, 2004 and will have amortization of $1.0 million per year
until 2004, with amortization of $72.5 million in 2004.
Holding believes it will have sufficient liquidity to fund its debt service
obligations and implement its growth strategy over the next several years. As
of July 18, 1998, Holding and the Company had outstanding indebtedness
consisting of $62.0 million of Series A Debentures, $200.0 million of Senior
Subordinated Notes, borrowings of $135.0 million under the New Credit Facility
and the IRB. The Senior Subordinated Notes bear interest at a rate of 10.25%,
payable semiannually, and require no principal repayments until maturity. The
$10.0 million principal amount IRB bears interest at a variable rate and
requires no principal payments until maturity in November 2002. In addition to
its operating cash flow, the Company has access to a total of $250.0 million
through the New Credit Facility. The New Credit Facility provides for (i) a
$125.0 million Tranche B term loan, which was made at the closing of the
Recapitalization; (ii) a revolver with maximum borrowings of approximately
$125.0 million, a minimal amount of which was drawn (including in connection
with the replacement of outstanding letters of credit in the amount of
approximately $2.0 million) in connection with the Recapitalization; and (iii) a
$125.0 million delayed draw term loan, $40.0 million of which will be used in
connection with the Acquisition. 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 $149.0 million in 2004, $60.0 million
in 2005 and $30.0 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 loans under the New 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
revolver and delayed draw term loans are subject to a borrowing base formula
which is based on certain percentages of the Company's inventories. The Company
intends to use borrowings under the revolver and delayed draw term loans for
store expansion and funding of working capital. Borrowings under the New 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 360 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 New 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
56
<PAGE>
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.
As a holding company, Holding relies on dividends from the Company as its
primary source of liquidity. Holding does not have and in the future may not
have any assets other than the capital stock of the Company. The ability of the
Company to pay cash dividends to Holding when required is restricted by law and
the terms of the Company's debt instruments, including the New Credit Facility
and the Senior Subordinated Notes. No assurance can be made that the Company
will be able to pay cash dividends to Holding when required on the Series B
Debentures. See "Risk Factors--Limitation on Access to Cash Flow from
Subsidiaries; Holding Company Structure."
QUARTERLY RESULTS AND SEASONALITY
Holding's business is somewhat seasonal in nature, with the highest sales
occurring in the spring and summer months. In addition, Holding'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.
The following table sets forth certain quarterly unaudited operating data
of Holding for fiscal 1996 and fiscal 1997. The first quarter consists of 16
weeks and the other three quarters consist of 12 weeks. The unaudited quarterly
information includes all adjustments which management considers necessary for a
fair presentation of the information shown. The data presented below should be
read in conjunction with the consolidated financial statements, including the
related notes thereto included herein and the other financial information
included herein.
57
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<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
--------------------------------------------- --------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales.......... $191,817 $174,717 $177,274 $162,175 $239,151 $196,729 $206,409 $205,819
Gross Profit....... 75,555 65,735 63,975 63,103 92,291 75,391 77,717 78,123
Operating Income... 8,854 12,777 8,572 9,939 10,257 11,947 10,311 9,912
Net Income......... 4,380 7,084 4,520 5,280 4,822 6,133 5,335 4,997
EBITDA............. 14,315 17,051 12,772 13,503 16,552 16,915 15,376 15,385
</TABLE>
YEAR 2000 STRATEGY
A significant percentage of the software that runs most computers relies on
two-digit date codes to perform computations and decision-making functions.
Commencing on January 1, 2000, these computer programs may fail from an
inability to interpret date codes properly, misinterpreting "00" as the year
1900 rather than 2000. Holding has completed the identification of all
necessary internal software changes to ensure that it does not experience any
loss of critical business functionality due to the Year 2000 issue. Holding has
appointed an internal Year 2000 project manager and remediation team and has
adopted a four phase approach of assessment, remediation, testing, and
contingency planning. The scope of the project includes all internal software,
hardware, operating systems, and assessment of risk to the business from vendors
and other partners' Year 2000 issues. The assessment of all internal systems
has been completed, the remediation and testing phases are in progress, and
contingency planning for certain information technology systems has begun.
Holding believes that this approach of assessment (including prioritization by
business risk), remediation (including conversions to new software), testing of
necessary changes, and contingency planning will minimize the business risk of
Year 2000 from internal systems.
Holding is utilizing internal and external resources to correct, replace,
and test its software for Year 2000 compliance and plans to complete the Year
2000 project no later than June 30, 1999. The total cost of the Year 2000
project is estimated at $3.7 million. Of the total project cost, approximately
$1.0 million represents the purchase of new software and hardware which will be
capitalized. The remaining will be expensed as incurred during 1998 and 1999.
As of the end of Holding's second quarter, Holding has spent approximately $0.9
million on the Year 2000 project.
Ongoing communications have been established with almost all vendors and
other partners to monitor their progress in resolving Year 2000 issues, most of
which Holding believes, are making substantial progress. However, Holding
cannot guarantee that Year 2000 related systems issues of its business partners
will be corrected in a timely manner or that the failure of its business
partners to correct these issues would not have a material adverse effect on its
future results of operations or financial condition.
Holding has already begun to develop contingency plans in the event a
business interruption caused by Year 2000 problems should occur. For certain,
but not all, information technology systems, contingency plans are in place.
Elements of Holding's contingency plans will include: switching of vendors,
back-up systems that do not rely on computers, and the stockpiling of certain
products in the months before the Year 2000.
Western Auto has adopted a Year 2000 strategy and has retained an adequate
number of personnel to execute its strategy. Holding will enter into a number
of retention agreements to retain such key personnel. There can be no
assurance, however, that Western Auto will attain sufficient Year 2000
compliance in a timely manner.
The cost and time estimated for the Year 2000 project are based on
Holding's best estimates. There can be no guarantee that these estimates will
be achieved and that planned results will be achieved. Risks include, but are
not limited to, the retention of internal and external resources
58
<PAGE>
dedicated to the project, the timely delivery of software corrections from
external vendors, and the successful completion of key business partners' Year
2000 projects.
59
<PAGE>
BUSINESS
GENERAL
The Company is the second largest specialty retailer of automotive parts
and accessories in the United States (based on store count) and, as of July 18,
1998, had 909 stores in 17 states operating under the "Advance Auto Parts" name.
The Company has achieved significant growth through a focused store expansion
strategy of opening stores in new contiguous and selected existing markets.
Since accelerating its store expansion plan in 1992, the Company has grown from
the eighth largest to the second largest U.S. specialty retailer of automotive
parts (based on store count), increasing its store count from 223 to 909. From
fiscal 1992 through fiscal 1997, the Company increased net sales, net income and
EBITDA, as adjusted for the Recapitalization, by a compound annual growth rate
of 29.3%, 22.2% and 28.4%, respectively. See footnote (4) to "Summary--Summary
Consolidated Historical and Pro Forma Financial Data" for information with
respect to EBITDA, as adjusted for the Recapitalization, and "Summary--Summary
Consolidated Historical and Pro Forma Financial Data" for certain cash flow
information. In addition, the Company has aggressively implemented its
commercial delivery program to penetrate the DIFM segment of the automotive
aftermarket. The Company, which it believes is the largest automotive retailer
in a majority of its markets based on store count, has expanded from its
original geographic base of North Carolina, South Carolina, Tennessee and
Virginia to also operate in Alabama, Arkansas, Delaware, Florida, Georgia,
Indiana, Kentucky, Maryland, Michigan, Mississippi, Ohio, Pennsylvania and West
Virginia. For fiscal 1997, net sales, net income and EBITDA, as adjusted for
the Recapitalization, were $848.1 million, $20.4 million and $68.2 million,
respectively.
The Company believes that it has successfully established customer loyalty
in its markets by providing high levels of customer service, by offering an
extensive selection of brand name and quality private label products at
competitive prices and by creating strong name recognition, all of which are
reinforced by targeted regional advertising. In addition, the Company believes
that its size provides numerous competitive advantages over smaller retail
chains and independent operators, which make up a majority of its competitors.
These advantages include: (i) greater product availability, (ii) purchasing
economies, (iii) economies of scale with respect to advertising, distribution
and warehousing, and (iv) a greater number of convenient locations with longer
store hours. The Company has expanded on these advantages by investing heavily
in employee training and information systems, which are designed to support the
Company's commitment to superior customer service.
The automotive aftermarket is a highly fragmented industry with the top 10
retail chains accounting for approximately 10% of the industry's approximately
$78.0 billion in annual sales. The Company believes that the industry is
consolidating as national and regional specialty retail chains gain market share
at the expense of smaller independent operators and less specialized mass
merchandisers. The Company primarily serves the approximately $34.0 billion
retail DIY segment of the automotive aftermarket, which the Company believes has
historically been characterized by stable, recession-resistant demand. In
addition, in 1996, the Company implemented a commercial delivery program to
capitalize on the approximately $44.0 billion commercial or DIFM segment of the
automotive aftermarket. The Company has aggressively implemented this program
in 494 stores and expects to add approximately 45 stores to the program in 1998.
The Company serves its commercial delivery customers from its existing store
base, which allows the Company to leverage its existing fixed costs and in-store
personnel with minimal capital outlay.
RECENT DEVELOPMENTS
On August 17, 1998, the Company and Holding entered into the Acquisition
Agreement to acquire Western Auto from Sears for $175.0 million and
approximately 40% of the Common Stock of Holding. The Acquisition Agreement
provides that (i) Western Auto will be merged into a subsidiary of the Company,
with such subsidiary to become the surviving corporation, (ii) the issued and
outstanding shares of Western Auto will be converted into the right to receive
in the aggregate (a) $175.0 million and (b) 11,474,606 shares of Holding's Class
A common stock, $.01 par value per share, constituting approximately 40% of the
outstanding Common Stock of Holding. FS&Co., Ripplewood, Nicholas F. Taubman
and the Taubman Trust have committed to invest an additional $70.0 million in
equity to fund a portion of the cash purchase price for
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Western Auto. Holding anticipates that $115.0 million of the cash purchase price
and certain transaction costs will be funded through bank debt.
Based in Kansas City, Missouri, Western Auto is a specialty retailer of
automotive parts and accessories and also maintains an extensive wholesale
dealer network. As of August 17, 1998, Western Auto operated 590 stores in the
U.S. under the "Parts America" name and 40 stores primarily in Puerto Rico under
the "Western Auto" name that provide service as well as parts sales and operated
four distribution centers.
The combined entity will operate domestic retail stores under the "Advance
Auto Parts" name in most markets. The wholesale dealer network and Puerto Rico
stores will continue to operate primarily under the "Western Auto" banner. The
Company and Western Auto together will operate over 1,500 retail stores in 37
states, Puerto Rico and the U.S. Virgin Islands and will supply through its
wholesale distribution center approximately 775 "dealer" stores in 48
states.
Sears is evaluating various options with respect to the private label
credit card portfolios associated with Western Auto. The Company has agreed to
share in any losses generated by the ongoing operation of the credit card
portfolios or in any losses incurred as a result of a sale of the portfolios,
but in any case its share of such losses will not exceed $10.0 million (the
"Credit Card Liability"). The Acquisition is expected to close by year end but
there can be no assurance that the Acquisition will be consummated. See
"Unaudited Pro Forma Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and the historical financial statements of Western Auto included
elsewhere in this Prospectus.
AUTOMOTIVE AFTERMARKET INDUSTRY
The automotive aftermarket industry includes batteries, replacement parts,
accessories and chemicals for cars and trucks. According to industry estimates,
the size of the automotive aftermarket for replacement parts, maintenance items
and accessories is approximately $78.0 billion per year. The market is
generally segregated into two major segments based upon the end-user customer
base: the DIY segment and the DIFM segment. The DIY portion of this market is
estimated to be $34.0 billion per year and the DIFM segment to be $44.0 billion
per year. The Company believes that the automotive aftermarket for batteries
and replacement parts, maintenance items and accessories is growing due to
several factors, including: (i) increasing size and age of the country's
automotive fleet; (ii) increasing number of miles driven annually per vehicle;
(iii) higher cost of new cars as compared to historical costs; (iv) higher cost
of replacement parts as a result of technological changes in recent makes and
models of vehicles; (v) increasing labor costs associated with replacement
parts, installation and maintenance; (vi) increasing need for refurbishing and
tuning of vehicles primarily due to the popularity of leasing; and (vii)
proliferation of parts due to increased vehicle diversity.
The automotive aftermarket distribution channels are highly fragmented in
both the DIFM and DIY segments. However, the Company believes that the industry
is consolidating as national and regional specialty retail chains gain market
share at the expense of small independent operators and less specialized mass
merchandisers. Automotive specialty retailing chains, such as the Company,
enjoy competitive advantages in purchasing, distribution, advertising and
marketing compared to most small independent retailers, regional chains and mass
merchandisers. The increase in recent years in the variety of domestic and
imported vehicle makes and models has made it difficult for smaller independent
retailers and less specialized mass merchandise chains to maintain an inventory
selection broad enough to meet customer demands. The Company believes that
availability, convenience, quality and price continue to be the key attributes
attracting both DIY and DIFM customers. Automotive specialty retail chains,
such as the Company, are in a favorable competitive position because they have
the distribution capacity and sophisticated information systems necessary to
efficiently stock, advertise and deliver a broad selection of brand name and
quality private label products to all market segments.
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OPERATING STRATEGY
The Company's operating strategy focuses on serving its customers and
capitalizing on its position as a leading automotive aftermarket retailer. The
Company's key operating objectives are to:
Provide Superior Customer Service. The Company believes that its customers
place significant value on technical knowledge and service. Due to increased
vehicle diversity and automotive parts proliferation, customers increasingly
rely on well-trained sales associates to offer knowledgeable assistance in
product selection and use. To serve this need, Company employees participate in
continuous training programs, including formal classroom workshops, seminars and
ASE certification to build technical, managerial and customer service skills.
In addition, the Company has customer service measurement systems and
recognition programs for division managers, store managers, sales associates and
other employees to measure and encourage overall customer satisfaction.
Offer Broad Selection of Quality Products. The Company offers a broad
selection of brand name and quality private label automotive parts and other
products designed to cover a wide range of vehicles. At the end of fiscal 1997,
substantially all of the Company's stores offered between 15,000 to 16,000 in-
store SKUs supplemented by approximately 36,000 SKUs available on a next-day
delivery basis to substantially all of its stores through the Company's PDQ(R)
system. The Company is currently implementing an SKU expansion strategy such
that, by the end of 1998, the Company will offer to its customers on a same day
basis a range of 20,000 to 21,000 SKUs in substantially all of its stores and
approximately 100,000 SKUs through its PDQ(R) system. The store SKU expansion
will be supported by (i) the roll-out of "hub" stores with approximately 4,000
additional SKUs, which will generally be available on an immediate or same day
basis to other area stores, and (ii) daily restocking of these additional SKUs.
In addition, the Company has expanded the PDQ(R) system with the opening of a
master PDQ(R) facility which provides approximately 70,000 SKUs and has the
capacity to offer up to 200,000 SKUs. The majority of the expanded SKUs will be
replacement parts which generally have higher gross margins than accessories and
other products. The Company believes that the SKU expansion program will be an
important competitive advantage, particularly with respect to the commercial
delivery program.
Capitalize on Strong Vendor Relationships and Merchandising Expertise. The
Company has consistently been able to negotiate lower product costs and improved
purchasing terms due to its ability to successfully grow its store base and
existing business. These favorable purchasing relationships enable the Company
to employ an everyday low price strategy with an emphasis on being a price
leader in replacement parts. The Company purchases from over 200 different
vendors with no single vendor accounting for 10% or more of purchases. The
Company's merchandising staff focuses on offering customers a broad selection of
products displayed in a manner designed to enhance sales. The Company
continually measures store productivity and is able to rapidly roll out sales
enhancing displays or other merchandising changes to all of its stores.
Employ Advanced Information Technology and Logistics Systems. Since 1992,
the Company has invested significantly in its information technology and
logistics systems to facilitate its rapid growth by enhancing customer service,
increasing in-stock SKUs and providing for a broad product selection with same
day or next day delivery. As a result, use of these systems has helped to
increase the Company's average customer sale from $10.86 in fiscal 1992 to
$14.28 in fiscal 1997. In addition, these systems facilitate rapid expansion of
the Company's store base by improving operating efficiencies. The Company has
nearly completed converting its distribution centers from a labor intensive
system to a technologically advanced, fully integrated system with real time
software and modern material handling equipment. With these technological
enhancements and the opening of a fourth distribution center to be completed by
early 1999, the Company will be able to service over 1,600 stores.
GROWTH STRATEGY
As the Company pursues its expansion plan, management believes it will
continue to benefit from greater purchasing economies and an increased ability
to leverage advertising and logistics expenses. The Company will continue to
focus on the following key areas in implementing its growth strategy.
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Continue New Store Growth. The Company's new store growth strategy is
focused on penetrating targeted new geographic areas with multiple store
openings, while continuing to open additional stores in selected existing
territories to increase its market share. The Company believes that the highly
fragmented nature of the retail automotive aftermarket industry allows it to
quickly establish itself in new markets and to increase its market penetration
in existing markets. The Company opened 170 stores in 1997, 96 stores in 1998
and plans to open approximately 70 stores in the remainder of fiscal 1998. To
further support its growth, the Company expects to begin television advertising
on a national basis in 1999. The Company believes that its proven ability to
effectively select new markets and store locations and quickly open new stores
will allow it to substantially increase its store base in approximately five
years.
Pursue Acquisitions. To augment its store growth strategy, the Company
intends to continue to pursue growth opportunities through selected acquisitions
when such acquisitions provide a quicker and more economic alternative to new
store openings. The fragmented nature of the automotive aftermarket industry
creates significant acquisition opportunities in existing and new markets. The
Company believes it can increase revenues and profitability of acquired stores
by leveraging its established infrastructure and improving stocking levels,
merchandising and customer service. Since 1994, acquisitions have accounted for
approximately 10% of the Company's new store openings. See "-- Recent
Developments" for a description of the pending Acquisition.
Increase Commercial Sales. In 1996, the Company focused its marketing
efforts on expanding sales to the DIFM segment of the automotive aftermarket,
which the Company believes represents approximately 56% of the automotive
aftermarket. Since 1996, the Company has added its commercial delivery program
to 494 stores. Due to its success in rapidly building its commercial sales
program, which currently represents approximately 10% of sales, the Company will
continue to expand this program, including adding approximately 45 stores in the
remainder of 1998. The Company serves its commercial delivery customers through
its existing store base which allows the Company to effectively leverage its
store-level costs. Commercial delivery customers order parts via a telephone
call to a Company store, and orders are delivered usually in less than an hour
in a Company truck. The Company's experience and market research indicate that
its broad selection of quality parts at competitive prices, knowledgeable sales
assistance, quick, accurate delivery, and the availability of credit are
important competitive advantages in serving the commercial delivery
customer.
Grow Same Store Sales. The Company believes that it can grow its same
store sales by (i) expanding product availability at the store level and through
the Company's PDQ(R) distribution system; (ii) continuing to implement its
commercial delivery program (as described above); and (iii) increasing name
recognition. The Company believes that expanding its product offerings through
increased SKU availability will enhance sales by (a) decreasing the likelihood
of a lost sale due to not stocking an item and (b) attracting customers,
particularly commercial delivery customers, who require hard to find replacement
parts and brand names. In addition, the Company believes that its market
penetration strategy and regional advertising will continue to build broad name
recognition and increase sales.
STORE LOCATION AND DEVELOPMENT STRATEGY
The Company's new market expansion strategy is focused on new markets that
are contiguous to existing markets. These new markets can be efficiently served
by the Company's existing distribution and operational infrastructure and
supported by its existing managerial resources and brand recognition. The
Company conducts extensive analyses to evaluate and prioritize potential new
markets. Key criteria reviewed include the availability of quality locations
necessary to reach critical mass in a market, competitive factors, the
availability of labor and the ability to serve a market efficiently from
existing distribution centers.
As part of its store growth program, the Company has developed a
comprehensive strategy for selecting new store sites. The Company's in-house
real estate department conducts extensive market research in identifying and
evaluating, among other considerations, competition, population diversity and
income and selected automotive purchases per household. The time frame required
for developing a new store site typically ranges from six to twelve months from
the initial visit through store opening.
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In addition to opening new stores, the Company will continue to develop new
markets by making selective acquisitions which allow it to penetrate markets in
a timely and cost-effective manner without adding additional retail square
footage to such markets.
The following table illustrates the Company's store expansion program from
223 stores in 1992 to 814 stores in 1997, reflecting a 24.1% compounded annual
growth rate.
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------------------
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Beginning stores.................................................. 223 273 352 437 536 649
New stores openings............................................... 51 81 90 104 115 170
Closed stores..................................................... (1) (2) (5) (5) (2) (5)
----- ----- ----- ----- ----- -----
Ending stores..................................................... 273 352 437 536 649 814
Acquired stores (included in new store openings).................. 1 - - 16 2 22
Remodeled stores.................................................. 19 61 52 6 35 27
Relocated stores.................................................. 6 8 6 18 3 15
Percentage of new, relocated or remodeled stores within last
five years....................................................... 97%
Number of states doing business in................................ 7 8 9 9 10 14
Stores with commercial delivery program........................... - - - - 213 421
</TABLE>
MARKETING AND ADVERTISING
The Company has an extensive marketing and advertising program designed to
promote its competitive prices, broad product offerings, and commitment to
customer service. The Company uses a combination of print, radio and television
advertising and in-store promotional displays to reinforce the Company's image
and name recognition. Television advertising is targeted on a regional basis to
sports programming and radio advertising is primarily aired during peak drive
times. The Company utilizes several sports celebrities in its regional
advertising campaigns, including Lynn Swann, Bobby Allison, Hank Aaron, Archie
Griffin, Gene Stallings, Pat Dye and Sterling Marlin. The Company is a sponsor
of major sporting events and teams such as NASCAR, the Southern Conference
Basketball Tournament and the Pittsburgh Steelers.
The Company has recently implemented a proprietary credit card program for
its commercial delivery program customers. The Company believes that this
program will increase brand awareness and customer loyalty and will be an
important marketing tool and competitive advantage in the commercial delivery
business.
In addition, the Company has recently developed a new marketing program to
support store openings. This plan is customized for each store opening and
includes a minimum of 12 weeks of grand opening promotions including television,
print, radio broadcasts, giveaways and celebrity appearances and promotions.
The Company believes that this plan has been successful in accelerating
awareness and customer traffic in its new stores. The plan will continue to be
utilized for all store openings.
STORE OPERATIONS
The retail store is the focal point of the Company's operations. Although
the Company is more than 68 years old, its stores and retail presentations have
been built, relocated or remodeled, on average, within the last five years. The
Company's stores generally are located in or adjacent to good visibility, high
traffic strip shopping
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centers. Stores generally range in size from 5,000 to 10,000 square feet,
averaging approximately 7,200 square feet, and currently offer between 15,000
and 16,000 SKUs. The Company's stores are divided into six districts which are
supervised by a District Vice President or Assistant Vice President. Reporting
to district management are Division Managers who have direct responsibilities
for their stores. 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 generally are open seven days a week
from 8am to 8pm.
The Company's stores are currently located as follows:
<TABLE>
<CAPTION>
Location At July 18, 1998
- ----------------- ----------------
<S> <C>
North Carolina 155
Virginia 121
Georgia 114
Tennessee 96
South Carolina 93
Kentucky 57
Ohio 69
West Virginia 54
Alabama 51
Pennsylvania 57
Michigan 16
Indiana 10
Mississippi 7
Maryland 3
Florida 2
Arkansas 3
Delaware 1
---
Total 909
===
</TABLE>
MANAGEMENT INFORMATION SYSTEMS
In fiscal 1993, the Company began building a technology infrastructure to
support its store growth strategy. This infrastructure is composed of software
and hardware designed to integrate store, distribution and vendor services into
a seamless customer service network. Stores, host computers and distribution
centers are linked via a satellite and a leased line communications center.
STORE BASED INFORMATION SYSTEMS
The Company's store based information systems, which are designed to
improve the efficiency of its operations and enhance customer service, are
comprised of Point-of-Sale ("POS"), Electronic Parts Catalogs ("EPC") and Store
Level Inventory Management ("SLIM") systems and a satellite communications
network. These systems are tightly integrated and together provide real time,
comprehensive information to store personnel, resulting in improved customer
service levels and in-stock availability.
Point-of-Sale: The Company's POS system was originally installed in 1981,
enhanced over the years and reengineered in 1995. This system has improved
store productivity and customer service by streamlining store procedures. The
POS system gathers sales and gross profit data by SKU on a daily basis. This
information is used to formulate the Company's pricing, marketing and
merchandising strategies as well as to rapidly replenish inventory. The POS
system and automated reordering have been instrumental in increasing store in-
stock position.
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The Company believes that the automation of the reorder process has decreased
the time and labor required for store inventory management. Additionally, the
POS system maintains a customer purchase and warranty history database which is
used for targeted marketing programs.
Electronic Parts Catalog: The EPC system is a software based system that
identifies the application, location and availability of over 1.5 million parts
enabling 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 and its inventory status, and if the part is not
available at the store, its availability through PDQ(R). The EPC system also
displays related parts for sales associates to recommend to a customer, leading
to increased average customer sales. 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 the parts counter and the POS
register. Additionally, this system will allow sales associates to order parts
electronically with immediate confirmation of price, availability and delivery.
Information about a customer's automobile can be entered into a permanent
customer database that can be accessed immediately whenever the customer visits
or phones the store.
Store Level Inventory Management System: The SLIM system, which provides
real-time inventory tracking at the store level, was implemented in September
1997. 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. With this system, the
Company is able to achieve an average store level inventory in-stock position in
excess of 98%.
Satellite Communications Network: In 1995, the Company established a
satellite communications network linking all of its stores with its corporate
office. The satellite network enables the Company to efficiently obtain from
and deliver to its stores all file transfers, including price changes, sales
information and interactive transactions such as electronic parts ordering. The
system also broadcasts common files to all stores to update the EPC system.
Additionally, the satellite network significantly increases the speed of credit
card and check authorization transactions.
LOGISTICS AND PURCHASING INFORMATION SYSTEMS
The Company has installed its Distribution Center Management System
("DCMS") in the Roanoke, Virginia and Jeffersonville, Ohio distribution centers
and plans to install it in the Gadsden, Alabama and Thomson, Georgia
distribution centers. Upon full implementation, the Company will have converted
its distribution centers from a manual, labor intensive, paper-based system to a
technologically advanced, fully integrated real-time software management system.
Receiving and storage management functions are enhanced by system-directed
putaway and radio frequency technology and by advance vendor shipping notices.
This system allows merchandise to be selected through a paperless system which
utilizes "pick to light," radio frequency and carousel material handling
technology and then moves merchandise to the shipping dock via conveyor and an
automated sortation system. The DCMS, together with new material handling
equipment, significantly reduces warehouse and distribution costs while
improving efficiency. Quantifiable improvements have included an increase in
inventory fill rate from 93% to 97% with a significantly reduced inventory level
and reduction in average receipt putaway time from over 48 hours to less than 12
hours and an over 6% reduction in payroll per store serviced. Using this
technology the Company will be able to service 1,600 stores from its four
distribution centers.
The E3 Replenishment System, 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.
This system, together with DCMS and material handling equipment, allowed the
Company to decrease its average distribution backup inventory per store by 22%
in fiscal 1997.
PURCHASING
Merchandise is selected and purchased for all stores by personnel at the
Company's corporate headquarters in Roanoke, Virginia. In fiscal 1997, the
Company purchased from over 200 vendors, with no single vendor accounting for
10% or more of purchases.
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The Company's purchasing team is led by a group of five senior
professionals, with an average of over 18 years of automotive purchasing
experience. This group currently sources products throughout the world and
focuses on reducing product acquisition costs at all levels without sacrificing
quality. This purchasing team has been able to leverage freight and handling
costs through the use of efficient purchasing patterns and strong vendor
relationships. To monitor current market trends, buyers spend two days per month
visiting and working in retail stores and distribution centers.
The Company's purchasing strategy involves negotiating multi-year
agreements with certain vendors based upon its expansion plans. By negotiating
with a larger purchasing power base and with the proven credibility of meeting
growth objectives year after year, the Company is able to achieve percentage
discounts and other favorable terms on purchases.
MERCHANDISING
The Company's merchandising effort is focused on building market share by
providing a broad selection of brand name and quality private label products at
everyday low prices. The Company offers these products at conveniently located
and attractively designed stores, supported by highly trained, efficient and
courteous customer service personnel.
The Company's objective is to carry a broad selection of brand name
products, including Fram-Bendix-Autolite, Fel-Pro Incorporated, Federal-Mogul
Corporation and AC Delco, that generate customer traffic and have strong appeal
to its commercial delivery customers. In addition, 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 65% of the
Company's sales and generate higher gross profit margins than maintenance items
or general accessories. The Company believes that its percentage of sales of
replacement parts will increase in the future due primarily to an increased SKU
count in the replacement parts category and increased sales to commercial
delivery customers.
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 sales. The Company believes that it can continue to
improve store sales, gross profit margin and inventory turnover by further
tailoring individual store inventory mix based on historical sales patterns.
WAREHOUSE AND DISTRIBUTION
The Company currently operates three main distribution facilities located
in Roanoke, Virginia, Gadsden, Alabama and Jeffersonville, Ohio. A fourth
distribution center is currently under construction in Thomson, Georgia and is
expected to open in early 1999. On average, each distribution center is able to
serve approximately 400 stores.
All distribution centers are equipped with technologically advanced
material handling equipment, including carousels, "pick-to-light" systems, radio
frequency technology and automated sortation systems. The Roanoke, Virginia and
Jeffersonville, Ohio distribution centers operate with an advanced paperless
software system. These systems and equipment significantly reduce warehouse and
distribution costs, while providing the Company with sufficient capacity to meet
the requirement of its growth plans for the foreseeable future. The
distribution centers consistently maintain approximately 97% order fill on all
items and approximately 99% order fill on key items.
In addition, the Company believes it has a competitive advantage by
offering over 36,000 SKUs on a next day basis to substantially all of its stores
via its four PDQ (R) warehouses. Stores place orders to these facilities
through an on-line ordering system, and ordered parts are delivered to the store
the next day through the Company's dedicated PDQ(R) trucking fleet. The Company
has recently opened a new PDQ(R) warehouse that stocks approximately 70,000 SKUs
(expandable up to 200,000 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 the Company's stores.
67
<PAGE>
The following table sets forth certain information relating to the
Company's main distribution facilities:
<TABLE>
<CAPTION>
OPENING SIZE
DISTRIBUTION FACILITY DATE AREA SERVED (SQ. FT.)
--------------------- ------- ----------- ---------
<S> <C> <C> <C>
MAIN DISTRIBUTION CENTERS
Roanoke, Virginia 1988 Mid-Atlantic 440,000
Gadsden, Alabama 1994 South 240,000
Jeffersonville, Ohio 1996 Mid West 383,000
Thomson, Georgia (1) late 1998 Southeast 383,000
PDQ(R) WAREHOUSES
Roanoke, Virginia 1983 Mid-Atlantic 50,400
Smithfield, North Carolina 1991 Southeast 42,000
Thomson, Georgia (2) early 1999 South, 50,000
Southeast
Jeffersonville, Ohio (2) 1996 Midwest 50,000
Goodlettsville, Tennessee (3) early 1999 Central 41,900
MASTER PDQ(R) WAREHOUSE
Andersonville, Tennessee 1998 All 66,000
</TABLE>
________________
(1) The Company is currently constructing this facility and contemplates its
opening in late 1998.
(2) This facility is located within the main distribution center.
(3) The Company recently executed a lease for his facility and contemplates
its opening in early 1999.
EMPLOYEES
As of August 31, 1998, the Company employed approximately 8,100 full-time
employees and 5,400 part-time employees. Approximately 84% of the Company's
workforce is employed in store level operations, 12% in distribution and 4% in
the Company's corporate headquarters.
The Company expends substantial resources in the recruiting and training of
employees. In addition, management has established a number of empowerment
programs for employees, such as employee task forces and regular meetings, to
promote employee recognition and address customer service issues. Management
believes that these efforts have provided the Company with a well-trained, loyal
workforce which is committed to high levels of customer service. The Company is
not party to any collective bargaining agreements. The Company has never
experienced any labor disruption and believes that its labor relations are good.
68
<PAGE>
FACILITIES
The following table sets forth certain information concerning the Company's
principal facilities:
<TABLE>
<CAPTION>
SQUARE NATURE OF
PRIMARY USE LOCATION FOOTAGE OCCUPANCY
- ------------------------------------------------- ------------------------ ------- ----------
<S> <C> <C> <C>
Corporate headquarters Roanoke, Virginia 49,000 Leased (1)
Distribution center Roanoke, Virginia 440,000 Leased (2)
Distribution center Gadsden, Alabama 240,000 Owned
Distribution center and regional PDQ(R) Warehouse Jeffersonville, Ohio 383,000 Owned
Distribution center and regional PDQ(R) Warehouse Thomson, Georgia
383,000 Leased (3)
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
Master PDQ(R) Warehouse Andersonville, Tennessee 66,000 Leased
</TABLE>
____________________
(1) This facility is owned by Ki, L.C., a Virginia limited liability company
owned by two trusts for the benefit of a child of Nicholas F. Taubman. See
"Certain Transactions."
(2) This facility is owned by Nicholas F. Taubman. See "Certain Transactions."
(3) The construction of this facility was financed 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.
At July 18, 1998, all but one of the Company's 909 stores were leased. The
expiration dates (including renewal options) of the store leases are summarized
as follows:
<TABLE>
<CAPTION>
YEARS STORES (1)
------------ ---------------
<S> <C>
1998-2000 37
2001-2005 86
2006-2010 153
2011-2020 626
2021-2030 6
</TABLE>
____________________
(1) Of these stores, 26 are owned by affiliates of the Company. See "Certain
Transactions."
COMPETITION
The Company competes in both the DIY and DIFM segments of the automotive
aftermarket. Although the number of competitors and the level of competition
vary by market area, both segments are highly fragmented and generally very
competitive. The Company competes primarily with national and regional retail
automotive parts chains (such as AutoZone, Inc., Trak Auto Corporation, The Pep
Boys--Manny, Moe & Jack, Parts America,
69
<PAGE>
Western Auto Supply Company and Discount Auto Parts, Inc.), 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 Company believes that, as a result of these
advantages, national and regional chains have been gaining market share in
recent years at the expense of independent retailers and jobbers. See "Summary--
Recent Developments" for a description of the Company's pending acquisition of
Western Auto.
The principal competitive factors that affect the Company's business are
store location, customer service and product selection, availability, quality
and price. While the Company believes that it competes effectively in its
various geographic areas, certain competitors have larger sales volumes, have
greater financial and management resources and have been operating longer in
certain geographic areas.
TRADENAMES, SERVICE MARKS AND TRADEMARKS
The Company owns and has registrations for the trade name "Advance Auto
Parts" 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. However, in connection
with a decision in a recent lawsuit, the Company is restricted from opening
stores under the "Advance Auto Parts" name in Jefferson County, Kentucky. See
"--Legal Proceedings."
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, the 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 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 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 material compliance with such laws and
regulations.
70
<PAGE>
LEGAL PROCEEDINGS
On November 5, 1997, Joe C. Proffitt, Jr., on behalf of himself and all
others in the states of Alabama, California, Georgia, Kentucky, Michigan, 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 at Dandridge, alleging the sale by the
Company of used, old or out-of-warranty automotive batteries as new. The
complaint seeks compensatory and punitive damages.
An appeal has been taken in connection with the November 1996 and October
1997 decisions in a federal district court restricting the Company from opening
stores under the "Advance Auto Parts" name in a single county in Kentucky. In
addition, the court granted summary judgment in favor of the Company in
connection with various infringement and unfair competition claims brought by
the appellant. The appellant is seeking to overturn parts of the court's
decisions regarding the appellant's inability to cancel two of the Company's
trademark registrations and to obtain relief on the infringement and unfair
competition claims.
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 litigations 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, results
of operations or cash flow.
71
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND MEMBERS OF THE BOARD OF DIRECTORS
The following table sets forth certain information regarding the directors
and executive officers of Holding and the Company as of July 18, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Nicholas F. Taubman 63 Chairman of the Board and Director of Holding and the Company
Garnett E. Smith 58 President and Chief Executive Officer and Director of Holding and
the Company
Carroll R. Tilley, Jr. 48 Executive Vice President and General Manager of Holding and the
Company
J. O'Neil Leftwich 37 Senior Vice President and Chief Financial Officer, Secretary and
Treasurer of Holding and the Company
Paul W. Klasing 38 Senior Vice President, Merchandising of the Company
David R. Reid 36 Senior Vice President, Real Estate and Store Support of the Company
S. Lynn Stevens 49 Senior Vice President, Information Services of the Company
Jimmie L. Wade 44 Senior Vice President, Logistics of the Company
Anthony R. Weatherly 38 Senior Vice President, Store Operations of the Company
Kenneth A. Wirth, Jr. 39 Senior Vice President, Sales of the Company
Joe H. Vaughn, Jr. 37 Vice President, Finance of the Company and Assistant Secretary and
Assistant Treasurer of Holding and the Company
Mark J. Doran 34 Director of Holding and the Company
John M. Roth 39 Director of Holding and the Company
J. Frederick Simmons 42 Director of Holding and the Company
Ronald P. Spogli 50 Director of Holding and the Company
Timothy C. Collins 41 Director of Holding and the Company
</TABLE>
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. Taubman has served on numerous business, arts and civic boards.
Mr. Smith, President and Chief Executive Officer and a Director of Holding
and the Company, joined the Company in November 1959 and is responsible for
overall management and operations of the Company. 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 since May 1992, as Chief Operating Officer of
Holding from May 1992 to March 1998, and as Chief Executive Officer since March
1998.
Mr. Tilley, Executive Vice President and General Manager, joined the
Company in June 1984. Mr. Tilley has served as Vice President and Senior Vice
President of Purchasing, Advertising and Marketing and was promoted to his
present position in July 1997. Mr. Tilley's responsibilities include
merchandising, marketing, logistics, inventory management and store operations.
72
<PAGE>
Mr. Leftwich, Senior Vice President and Chief Financial Officer, Secretary
and Treasurer, joined the Company in September 1984. Mr. Leftwich was appointed
Chief Financial Officer of the Company in January 1994, Senior Vice President in
July 1997 and Secretary and Treasurer in February 1998. Mr. Leftwich has also
served in numerous other positions with the Company. Mr. Leftwich is
responsible for financial, human resources and loss prevention functions and is
a certified public accountant. In addition, Mr. Leftwich became Senior Vice
President and Chief Financial Officer, Secretary and Treasurer of Holding in
February 1998, prior to which he served as Assistant Secretary and Assistant
Treasurer.
Mr. Klasing, Senior Vice President, Merchandising, joined the Company in
April 1995. Mr. Klasing is responsible for purchasing, quality control and
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. Reid, Senior Vice President, Real Estate and Store Support, joined the
Company in October 1984. Mr. Reid is responsible for store real estate site
selections, store visual presentation and design and property management. 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.
Ms. Stevens, Senior Vice President, Information Services, joined the
Company in July 1979. Ms. Stevens is responsible for systems development,
computer services and technology. Ms. Stevens has held several management
positions in Information Services, most recently as Vice President, Systems
Development.
Mr. Wade, Senior Vice President, Logistics, joined the Company in February
1994. Mr. Wade is responsible for logistics, distribution, transportation and
inventory management functions. 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--Finance of American Motor Inns. Mr. Wade is a certified public
accountant.
Mr. Weatherly, Senior Vice President, Store Operations, joined the Company
in August 1981. Mr. Weatherly is responsible for district, division, and store
operations. Mr. Weatherly has held numerous other operational positions
including District Assistant Vice President, Zone Manager, Division Manager and
Store Manager.
Mr. Wirth, Senior Vice President, Sales, joined the Company in September
1982. Mr. Wirth is responsible for the Company's largest product category,
batteries, as well as new store sales coordination, commercial sales and
training. From June 1992 to January 1998, Mr. Wirth served as Senior Vice
President, Store Operations and prior to that held numerous other operational
positions including Zone Manager, Division Manager and Store Manager.
Mr. Vaughn, Vice President, Finance, Assistant Secretary and Assistant
Treasurer, joined the Company in May 1995. Mr. Vaughn was appointed Vice
President, Finance of the Company in October 1997 and Assistant Secretary and
Assistant Treasurer of Holding and the Company in April 1998. Mr. Vaughn is
responsible for accounting, treasury, and risk management functions. From 1983
to 1989, Mr. Vaughn worked for KPMG Peat Marwick, 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. Doran, Director, became a member of the Board in connection with the
Recapitalization. Mr. Doran joined FS&Co. 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. Roth, Director, became a member of the Board in connection with the
Recapitalization. Mr. Roth joined FS&Co. in March 1988 and became a principal
in March 1993. Mr. Roth is also a director of AFC Enterprises, Inc. and
EnviroSource, Inc.
Mr. Simmons, Director, became a member of the Board in connection with the
Recapitalization. Mr. Simmons joined FS&Co. in 1986 and became a principal in
January 1991. Mr. Simmons is also a director of EnviroSource, Inc. and Century
Maintenance Supply, Inc.
73
<PAGE>
Mr. Spogli, Director, is a founding principal of FS&Co., which was founded
in 1983. Mr. Spogli became a member of the Board in connection with
Recapitalization. Mr. Spogli is the Chairman of the Board and Director of
EnviroSource, Inc. Mr. Spogli is also a director of AFC Enterprises, Inc.,
Hudson Respiratory Care Inc., River Holding Corp. 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 Scotsman Industries, Inc. and Dayton Superior Corporation.
Directors of the Company 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 "--Executive Employment Contracts."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation for
fiscal 1997 of the Chief Executive Officer and the four other most highly
compensated executive officers who were serving as executive officers at the end
of the last completed fiscal year and an individual for whom disclosure would
have been provided but for the fact that the individual was not serving as an
executive officer at the end of the last completed fiscal year (collectively,
the "Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------------------
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ------------------------------------------ --------- -------- --------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Nicholas F. Taubman....................... 1997 $462,488 $2,112,172 $ -- $7,500
Chairman of the Board
Garnett E. Smith.......................... 1997 $453,580 $ 471,553 $ -- $7,500
President and Chief Executive Officer
Carroll R. Tilley, Jr..................... 1997 $219,014 $ 110,429 $ -- $7,500
Executive Vice President and General
Manager
J. O'Neil Leftwich........................ 1997 $153,825 $ 42,500 $ -- $7,500
Senior Vice President and Chief Financial
Officer, Secretary and Treasurer
Kenneth A. Wirth, Jr...................... 1997 $106,460 $ 75,900 $ -- $7,500
Senior Vice President, Store Operations
Robert R. Irby(3)......................... 1997 $195,000 $ 42,215 $ -- $7,500
</TABLE>
______________________
(1) While certain officers received perquisites, such perquisites do not exceed
the lesser of $50,000 or 10% of each officer's respective salaries and
bonuses.
(2) Consists of matching contributions under the Company's 401(k) savings plan.
(3) Mr. Irby served as Senior Vice President, Information Services from July
1993 to December 1997 when he retired from the Company.
74
<PAGE>
EXECUTIVE EMPLOYMENT CONTRACTS
Mr. Smith has entered into an employment and non-competition agreement with
the Company. The agreement has a term of three years, and renews automatically
each year thereafter unless terminated by the Company or Mr. Smith. Mr. Smith
receives a base salary of $458,000 and an annual cash bonus 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.
Messrs. Leftwich, Tilley and Wirth have entered into employment agreements
with the Company pursuant to which each Executive Officer will receive a base
salary of $162,000, $240,000 and $112,000, respectively. 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). The term of Messrs. Leftwich's,
Tilley's and Wirth's agreements is two years. 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 to not solicit customers
or suppliers of the Company for competitors.
CONSULTING AGREEMENT
Mr. Taubman has 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. 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.
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.
BENEFIT PLANS
401(k) Plan. The Company sponsors a 401(k) employee retirement savings
plan for eligible employees. Employees must be at least 21 years of age and have
completed one year of service working at least 1,000 hours to be eligible to
participate in the 401(k) plan. Employees may contribute up to 15% of their
annual compensation
75
<PAGE>
and contributions are matched by the Company on the basis of 75% of the first 5%
contributed. In addition, the Company can elect to make profit sharing
contributions, allocated among participants as a percentage of compensation.
Company contributions become fully vested after two years of service.
Contribution expense for the Company was $2,335,000, $2,779,000 and $3,196,000
for fiscal 1995, 1996 and 1997, respectively.
Postretirement Plan. The Company provides certain health care and life
insurance benefits for eligible retired employees. The accrued postretirement
benefit cost was $211,000, $456,000 and $843,000 for fiscal 1995, 1996 and 1997,
respectively.
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 803,800 shares, or approximately 6.4%, of the outstanding
Holding Common Stock at the same price as FS&Co.'s purchase of its shares, or
fair market value at the time of purchase. $2,615,000 of the purchase price for
such shares was paid by delivery of full recourse promissory notes bearing
interest at the prime rate and due five years from the Recapitalization, secured
by all of the stock each such executive owns in Holding. Messrs. Smith,
Leftwich, Tilley and Wirth purchased 250,000 shares, 50,000 shares, 150,000
shares and 20,000 shares, respectively. For these individuals, $0, $250,000,
$750,000, and $106,000 of their purchase price, respectively, was financed
through the delivery of promissory notes on the terms described above. 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 FS&Co. sells its shares to a third
party. The agreements also include an obligation to sell at the request of
FS&Co. These rights (but not the restrictions on transferability) will
terminate upon an initial public offering by Holding of its Common Stock, as
further defined in agreements entered into under the Stock Subscription Plans.
STOCK OPTION PLANS
Holding has adopted stock option plans (the "Option Plans"), under which
Holding made initial grants of approximately 6.4% of Holding Common Stock. 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 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
FS&Co. 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 will vest over a three-year period in three
equal annual installments beginning in fiscal 1999. 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.
76
<PAGE>
OPTION GRANTS IN CONNECTION WITH THE RECAPITALIZATION
The following table sets forth information concerning Options granted in
connection with the Recapitalization to each of the executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES AT BASE PRICE EXPIRATION
NAME GRANTED(#) RECAPITALIZATION ($/SH)(1) DATE
- --------------------------- ------------ ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Garnett E. Smith........... 362,500(4) 40.3 10.00 4/14/05
Carroll R. Tilley, Jr...... 145,000(5) 16.1 10.00 4/14/05
J. O'Neil Leftwich......... 72,500(6) 8.1 10.00 4/14/05
Kenneth A. Wirth, Jr....... 25,000(7) 2.8 10.00 4/14/05
</TABLE>
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION
FOR OPTION TERM
FIXED PRICE AND
PERFORMANCE OPTIONS
------------------------------------------------------
Name 0%(2) 5% ($)(3) 10% ($)(3)
- ----------------------------------- ------------------------------------------------------
<S> <C> <C> <C>
Garnett E. Smith................... -- 814,201 1,897,434
Carroll R. Tilley, Jr.............. -- 325,680 758,974
J. O'Neil Leftwich................. -- 162,840 379,487
Kenneth A. Wirth, Jr............... -- 56,994 132,820
</TABLE>
________________
(1) Represents the fair market value of the underlying shares of Common Stock
at the time of the grant. A portion of the grant consists of Variable Price
Service Options with an exercise price that increases $2.00 on each April
15 (the anniversary of the grant date).
(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. Variable Price Service
Options will have no value at the appreciation rates shown. Performance
Options are assumed to be fully vested at the end of the period. Full
vesting would require achievement of certain performance targets (as
defined in each Stock Option Agreement) by the Company for the period
beginning January 4, 1998 and ending at the end of the Company's fiscal
year 2001.
(4) Represents 37,500 Fixed Price Service Options, 162,500 Variable Price
Service Options, and 162,500 Performance Options.
(5) Represents 15,000 Fixed Price Service Options, 65,000 Variable Price
Service Options and 65,000 Performance Options.
(6) Represents 7,500 Fixed Price Service Options, 32,500 Variable Price Service
Options, and 32,500 Performance Options.
(7) Represents 3,000 Fixed Price Service Options, 11,000 Variable Price Service
Options, and 11,000 Performance Options.
OPTION EXERCISES AND YEAR-END VALUE
None of the Options issued by Holding vest until December 31, 1998, and no
Options have been issued since the Recapitalization. As a privately held
company, Holding cannot readily ascertain the fair market value of a share of
Common Stock as of the date hereof; therefore the value of in-the-money Options
(if any) cannot be determined.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company determines the compensation of the
Executive Officers. During fiscal 1997, Messrs. Taubman and Smith participated
in Board of Director deliberations regarding the compensation of the Company's
Executive Officers.
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CERTAIN TRANSACTIONS
AFFILIATED LEASES
The Company leases its Roanoke, Virginia distribution center, an
office/warehouse, a warehouse, 26 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 affiliate 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 affiliate leases are on a triple net basis. Lease
expense for leases with affiliates has been $2,735,000, $3,076,000 and
$3,171,000 for fiscal 1995, 1996 and 1997, respectively.
STOCKHOLDERS' AGREEMENT
Mr. Taubman and the Taubman Trust (the "Continuing Stockholders"), FS&Co.,
Ripplewood and Holding have entered into a Stockholders' Agreement (the
"Stockholders' Agreement"). Under the Stockholders' Agreement, FS&Co.,
Ripplewood and the Continuing Stockholders have the right to purchase their pro
rata share of certain new issuances of capital stock by Holding. In addition,
the Stockholders' Agreement provides for restrictions on the transferability of
the shares of Holding Common Stock of the Continuing Stockholders and Ripplewood
for a period of two years following consummation of the Recapitalization and,
thereafter, for the following three-year period any transfers (other than sales
pursuant to a registered public offering or pursuant to Rule 144 under the
Securities Act) are subject to a right of first offer in favor of FS&Co. or its
designee, provided that Ripplewood's obligation to make a first offer extends
indefinitely. In addition, the Stockholders' Agreement provides that upon
transfers by FS&Co. of its shares of Holding Common Stock (excluding limited
transfers in the first year following the Recapitalization or transfers to
affiliates of FS&Co.), the Continuing Stockholders and Ripplewood will have the
right to participate in such sales on a pro rata basis. If FS&Co. 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 FS&Co.
The Stockholders' Agreement further provides that FS&Co. will vote at each
annual meeting of Holding to elect Mr. Taubman or his nominee to the Board of
Directors of Holding, and the Continuing Stockholders will likewise vote to
elect nominees of FS&Co. Ripplewood has granted FS&Co. an irrevocable proxy to
vote Ripplewood's stock in Holding on all matters, expiring upon an initial
public offering by Holding of its Common Stock, but FS&Co. will nominate one
director designated by Ripplewood. This Exchange Offer is not considered
Holding's initial public offering under the Stockholders' Agreement. The
Ripplewood director will agree to vote with the FS&Co. directors on all matters
prior to an initial public offering by Holding of its Common Stock. Pursuant to
the Stockholders' Agreement, Mr. Taubman has certain approval rights with
respect to major corporate transactions. Upon the closing of the Acquisition,
the Stockholders' Agreement will be amended to add a wholly owned Sears
subsidiary as a party and to grant Sears rights to (i) designate three members
of the Board of Directors, (ii) participate on a pro rata basis in any sales of
Holding Common Stock by FS&Co., and (iii) receive a first offer on sales of
Holding Common Stock by FS&Co., Mr. Taubman, the Taubman Trust and Ripplewood.
FS&Co. will receive parallel rights of first offer on sales of Holding Common
Stock by the Sears entity, and FS&Co., Mr. Taubman, the Taubman Trust and
Ripplewood will have co-sale rights on sales by the Sears entity. In addition,
all of the current stockholders will agree to sell their shares to a third party
upon the request of the Board of Directors, which, in addition to the Sears
directors, will include three directors nominated by FS&Co., one director
nominated by Ripplewood, Mr. Taubman and Mr. Smith. Other terms of the
Stockholders' Agreement will remain as currently in force in all material
respects.
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OPTIONS GRANTED TO THE CONTINUING STOCKHOLDERS
In connection with the Merger, Holding has 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.
SALE OF AIRPLANE
In connection with the Recapitalization, Mr. Taubman has purchased an
airplane from the Company for $4.1 million, a price equal to the approximate net
book value of the airplane, which amount also equalled the approximate fair
market value of the airplane (based on estimates provided by the airplane's
manufacturer). The airplane was purchased in 1995 for $5.2 million.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Stockholders Agreement, Holding has agreed, beginning 180
days after consummation of an initial public offering by Holding of its Common
Stock, that upon the request of FS&Co. and the Stockholders it will register
under the Securities Act and applicable state securities laws the sale of
Holding Common Stock owned by FS&Co. and the Continuing Stockholders and as to
which registration has been requested. Holding has granted unlimited piggy-back
registration rights to FS&Co., Ripplewood and the Continuing Stockholders, three
demand registrations to FS&Co., and two demand registrations to the Continuing
Stockholders, and one demand registration to Ripplewood. 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. Upon the closing of the
Acquisition, Sears will be granted registration rights with respect to the
Holding Common Stock it owns.
MANAGEMENT EQUITY PLANS
See "Management--Stock Subscription Plans" and "--Stock Option Plans."
INDEMNIFICATION AGREEMENTS
In connection with the Recapitalization, the Company has entered into
indemnification agreements with each 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, FS&Co. and an affiliate
of Ripplewood, stockholders of Holding, have received collectively a $5.0
million fee for arranging the financing, performing advisory and consulting
services, and negotiating the Recapitalization, and they will receive a $3.5
million fee for performing similar services with respect to the Acquisition. In
connection with the Recapitalization, certain employees of the Company,
including the Executive Officers, have received an aggregate of approximately
$11.5 million in bonuses with Messrs. Smith, Tilley, Leftwich and Wirth
receiving $7,000,000, $1,000,000, $750,000 and $150,000, respectively.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of September 1,
1998, with respect to the beneficial ownership of Holding Common Stock by (i)
each person who beneficially owns more than 5% of such shares, (ii) each of the
Executive Officers named in the Summary Compensation Table, (iii) each member of
the Board of Directors of Holding and (iv) all Executive Officers and Directors
of Holding as a group.
<TABLE>
<CAPTION>
AMOUNT OF
BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------ ----------
<S> <C> <C>
Freeman Spogli & Co. Incorporated(1).......................... 10,050,000 79.7%
Mark J. Doran(1)............................................. -- --
John M. Roth(1).............................................. -- --
J. Frederick Simmons(1)...................................... -- --
Ronald P. Spogli(1).......................................... -- --
Ripplewood Partners, L.P. and affiliates(2)................... 2,000,000 15.9%
Timothy C. Collins(2)........................................ -- --
Nicholas F. Taubman(3)........................................ 1,250,000 9.7%
Arthur Taubman Trust dated July 13, 1964(4)................... 1,000,000 7.8%
Garnett E. Smith.............................................. 250,000 2.0%
Carroll R. Tilley, Jr......................................... 150,000 1.2%
J. O'Neil Leftwich............................................ 50,000 *
Paul W. Klasing............................................... 20,000 *
David R. Reid................................................. 20,000 *
S. Lynn Stevens............................................... 20,000 *
Jimmie L. Wade................................................ 25,000 *
Anthony R. Weatherley......................................... 20,000 *
Kenneth A. Wirth, Jr.......................................... 20,000 *
Joe H. Vaughn, Jr............................................. 10,000 *
All directors and officers as a group (16 individuals)(5)..... 11,885,000 (5) 92.5%
</TABLE>
- ---------------------
* Less than 1%
(1) 8,050,000 shares of Holding Common Stock are held of record by FS Equity
Partners IV, L.P. ("FSEP IV"). As general partner of FSEP IV, FS Capital
Partners LLC ("FS Capital") has the sole power to vote and dispose of the
shares owned by FSEP IV. Messrs. Doran, Roth, Simmons and Spogli and
Bradford M. Freeman, Todd W. Halloran, Jon D. Ralph, Charles P. Rullman and
William M. Wardlaw are the sole managing members of FS Capital, and Messrs.
Doran, Freeman, Halloran, Ralph, Roth, Rullman, Simmons, Spogli and Wardlaw
are the sole directors, officers and shareholders of Freeman Spogli & Co.
Incorporated, and as such may be deemed to be the beneficial owners of the
shares of Holding Common Stock and rights to acquire Holding Common Stock
owned by FSEP IV. FS&Co. and its named officers and directors have, in
addition, sole power to vote 2,000,000 shares of Holding Common Stock owned
of record by Ripplewood Partners, L.P. (the "Ripplewood Partners") and
Ripplewood Advance Auto Parts Employee Fund I L.L.C. (the "Ripplewood
Fund") pursuant to an irrevocable proxy delivered to FS&Co. under the terms
of the Stockholders Agreement. Such irrevocable proxy will expire upon an
initial public offering by Holding. FS&Co. neither has shared nor sole
power to dispose of shares held by Ripplewood Partners or Ripplewood Fund.
The business address of Freeman Spogli & Co. Incorporated, FSEP IV, FS
Capital, and Messrs. Freeman, Spogli, Wardlaw, Simmons, Roth, Rullman and
Doran is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California
90025.
(2) 1,911,000 shares of Holding Common Stock are held of record by Ripplewood
Partners, and 89,000 shares of Holding Common Stock are held of record by
Ripplewood Fund. Ripplewood Holdings, L.L.C. is the sole general partner
of Ripplewood Partners and the sole managing member of Ripplewood Fund and,
therefore, has the sole power to dispose of the shares owned by Ripplewood
Partners or Ripplewood Fund. Until an initial public offering by Holding,
pursuant to the Stockholders' Agreement and an irrevocable
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proxy required by the terms thereof, FS&Co. has sole voting power over
2,000,000 shares of Holding Common Stock held by Ripplewood Partners and
Ripplewood Fund. Mr. Collins is the Senior Managing Director and Chief
Executive Officer of Ripplewood Holdings L.L.C. and as such may be deemed
to be the beneficial owner of the shares of Holding Common Stock and the
rights to acquire Holding Common Stock owned by Ripplewood Partners and
Ripplewood Fund. The business address of Ripplewood Holdings L.L.C.,
Ripplewood Partners, Ripplewood Fund, and Mr. Collins is 1 Rockefeller
Plaza, 32nd Floor, New York, New York 10020.
(3) Includes 250,000 shares subject to immediately exercisable options. The
stockholder's business address is 5673 Airport Road, Roanoke, Virginia
24012.
(4) Includes 250,000 shares subject to immediately exercisable options. The
trustees of the Arthur Taubman Trust dated July 13, 1964 are Eugenia
Taubman, who is the spouse of Nicholas F. Taubman, and Grace W. Taubman,
who is his mother. The business address of the trust is 5673 Airport Road,
Roanoke, Virginia 24012.
(5) Includes 585,000 shares which have been acquired by management pursuant to
stock subscription plans, including Messrs. Smith, Tilley, Leftwich and
Wirth.
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DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes have been issued in an aggregate principal
amount of $200.0 million and will mature on April 15, 2008. The Senior
Subordinated Notes have been issued under an indenture dated as April 15, 1998
(the "Senior Subordinated Note Indenture") among the Company, as issuer,
LARALEV, INC., a subsidiary of the Company, as guarantor, and United States
Trust Company of New York, as trustee, and constitute senior subordinated
unsecured obligations of the Company. The Senior Subordinated Note Indenture
provides that the Senior Subordinated Notes will be guaranteed by any subsidiary
of the Company that in the future guaranties any Indebtedness of the Company
(including the New Credit Facility). Cash interest on the Senior Subordinated
Notes accrues at the rate of 10.25% per annum and is payable semi-annually in
arrears on each April 15 and October 15 of each year, commencing October 15,
1998, to the holders of record on the immediately preceding April 1 and October
1, respectively.
On or after April 15, 2003, the Senior Subordinated Notes may be redeemed
at the option of the Company, in whole at any time or in part from time to time,
at a redemption price equal to the applicable percentage of the principal amount
thereof set forth below, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the redemption date, if redeemed during the twelve-
month period commencing on April 15 in the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
<S> <C>
2003........................................ 105.125%
2004........................................ 103.417%
2005........................................ 101.708%
2006 and thereafter......................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to April 15, 2001,
the Company may use the net proceeds of one or more Equity Offerings (as defined
therein) to redeem up to 35% of the Senior Subordinated 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 redemption date;
provided, however, that after any such redemption the aggregate principal amount
of the Senior Subordinated Notes outstanding must equal at least 65% of the
aggregate principal amount of the Senior Subordinated Notes originally issued.
In the event of a Change of Control (as defined in the Senior Subordinated
Note Indenture), each holder of Senior Subordinated Notes has the right to
require the repurchase of such holder's Senior Subordinated Notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the purchase date. The definition of "Change of Control,"
as defined in the Senior Subordinated Note Indenture, differs from the
definition contained in the Indenture in that the former excludes from the
definition consolidations or mergers involving the Company where the beneficial
owners of the Company's direct or indirect parent continue to own, directly or
indirectly through one or more subsidiaries, not less than a majority of the
voting stock of the surviving corporation of such consolidation or merger.
The Senior Subordinated Note Indenture contains covenants that, among other
things, limit the ability of the Company to enter into certain mergers or
consolidations or incur certain liens and of the Company and its Restricted
Subsidiaries to create or incur additional indebtedness and issue preferred
stock and engage in certain transactions with affiliates. The Company is
generally prohibited from paying dividends or making other restricted payments
(including to Holding) except (i) to the extent of 50% of the Company's net
income earned after April 25, 1998 plus (a) $15.0 million, and (b) the proceeds,
if any, of equity issuances after the issue date and (ii) subject to there being
no Event of Default and the Company being then able to incur $1.00 of additional
Indebtedness under the fixed charge coverage ratio test (the "Fixed Charge Ratio
Test") specified in the debt incurrence covenant contained in the Senior
Subordinated Note Indenture. However, the Company will be permitted
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to pay dividends to Holding to cover the cash interest due on the Series B
Debentures commencing October 15, 2003, provided only that the Company is then
able to incur an additional $1.00 of Indebtedness under the Fixed Charge Ratio
Test. Under certain circumstances, the Company will be required to make an offer
to purchase Senior Subordinated Notes at a price equal to 100% of the principal
amount thereof, plus accrued interest to the date of purchase with the proceeds
of certain Asset Sales (as defined in the Senior Subordinated Note Indenture),
if the Company has not within one year of the date of sale either reinvested
such proceeds in its business or used the same to retire senior debt.
The Senior Subordinated Note Indenture contains certain customary events of
default, which include the failure to pay interest and principal, the failure to
comply with certain covenants in the Senior Subordinated Notes or such
Indenture, the acceleration of other indebtedness of the Company of $5.0 million
or more, the imposition of certain final judgments, the invalidity of a
guarantee of the Senior Subordinated Notes executed by a Significant Subsidiary
and certain events occurring under bankruptcy laws. See "Risk Factors--
Limitation on Access to Cash Flow of Subsidiaries; Holding Company Structure."
The preceding discussion of certain of the provisions of the Senior
Subordinated Notes is not intended to be exhaustive and is qualified in its
entirety by reference to the provisions of the Senior Subordinated Note
Indenture, copies of which are available as set forth under "Additional
Information."
THE NEW CREDIT FACILITY
In connection with the Recapitalization, the Company has entered into the
New Credit Facility with The Chase Manhattan Bank, as administrative agent, DLJ
Capital Funding, Inc., as syndication agent, First Union National Bank, as
documentation agent, and Chase Securities Inc., as advisor and arranger
(collectively, the "Agents"). The New Credit Facility currently provides the
Company up to $375.0 million in senior secured credit facilities, consisting of
(i) a $50.0 million senior secured delayed draw term loan facility (the "Delayed
Draw Facility I"), (ii) a $75.0 million senior secured delayed draw term loan
facility (the "Delayed Draw Facility II" and, together with the Delayed Draw
Facility I, the "Delayed Draw Facilities"), (iii) a $125.0 million Tranche B
senior secured term loan facility (the "Tranche B Facility"), and (iv) a $125.0
million senior secured revolving credit facility (the "Revolving Facility").
The Revolving Facility has a letter of credit sublimit of $25.0 million.
Amounts available under the Delayed Draw Facilities and the Revolving Facility
are subject to a borrowing base formula equal to a specified percentage of the
Company's eligible inventory. To provide funding for the Acquisition, the
Company has received a commitment from the Agents to, among other things,
consent to the Acquisition, add an additional Senior Secured Deferred Term Loan
Facility of at least $75.0 million under the New Credit Facility (the "Deferred
Term Loan Facility"), and amend certain provisions of the New Credit Facility in
light of the Acquisition.
Use of Proceeds; Maturity. The proceeds of the Tranche B Facility,
together with a portion of the net proceeds of the issuance of the Series A
Notes, were used (a) to pay the Company Distribution, (b) to repay all
principal, interest, fees and other amounts outstanding under the existing
credit agreements, (c) to repay certain other existing indebtedness, (d) to fund
loans in an aggregate principal amount not in excess of $3.0 million to existing
management of Holding or the Company and (e) to pay the fees and expenses of
Recapitalization. The Company will borrow an aggregate of $115.0 million
consisting primarily of the entire amount of the Deferred Term Loan Facility
with the balance, if any, to be drawn from the Delayed Draw Facility I to
provide the funds needed for the Acquisition. Borrowings under the Delayed Draw
Facility I and the Delayed Draw Facility II will be made during the first 18
months and first three years, respectively, after the closing of the
Recapitalization. Proceeds of the Delayed Draw Facility II, the balance of the
Delayed Draw Facility I, and the Revolving Facility (including the letters of
credit) are available for general corporate purposes. The Delayed Draw
Facilities will mature on the sixth anniversary of the closing and provide for
nominal annual amortization prior to maturity. The Tranche B Facility will
mature on the eighth anniversary of the closing. These term facilities provide
for nominal annual amortization in the first five years and amortization of
$198.0 million in the sixth anniversary year, $60.0 million in the seventh
anniversary year and $60.0 million in the eighth anniversary year. The
Revolving Facility will mature on the sixth anniversary of the closing.
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Prepayment; Reduction of Commitments. Borrowings under the New Credit
Facility are required to be prepaid, subject to certain exceptions, with (a) 50%
of 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
360 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. "Excess Cash Flow" is defined as the excess of
(A) the sum of (i) consolidated net income (excluding certain gains or losses
and restricted payments made to Holding), (ii) depreciation, amortization and
other non-cash charges, (iii) any decrease in Net Working Capital (as defined),
(iv) increases in deferred revenues, and (v) proceeds of certain indebtedness
incurred, over (B) the sum of (a) any non-cash 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). 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 New 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.
Voluntary prepayments and voluntary reductions of the unutilized portion of
the Revolving Facility commitments are permitted in whole or in part, at the
option of the Company, in minimum principal amounts to be agreed upon, without
premium or penalty, subject to reimbursement of redeployment costs incurred by
the syndicate of lenders under the New Credit Facility (the "Lenders") in the
case of prepayment of eurodollar borrowings other than on the last day of the
relevant interest period. Voluntary prepayments under the Delayed Draw
Facilities, Tranche B Facility, and the Deferred Term Loan Facility are (a)
allocated among those facilities on a pro rata basis and (b) within each such
facility, applied to the installments under the amortization schedule within the
following 12 months under such facility, and all remaining amounts are applied
in the inverse order of maturity to the remaining amortization payments under
such facility. The Lenders under the Tranche B Facility may decline any
voluntary prepayments in which case the amount declined will be applied to
increase proportionately the prepayments under the remaining Facilities.
Interest. Until the delivery to the Lenders of the Company's consolidated
financial statements for the first four fiscal quarters after the closing of the
Recapitalization, the interest rates under the Delayed Draw Facilities and the
Revolving Facility are based, at the option of the Company, on either a
eurodollar rate plus 2.25% per annum or a base rate plus 1.25% per annum. From
and after the delivery of such consolidated financial statements, the interest
rates under the Delayed Draw Facilities and the Revolving Facility will be
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. The initial margins will be 2.25% and 1.25% for eurodollar and
base rate borrowings, respectively, and can step down to 1.75% and 0.75%,
respectively, if the Company's Total Debt to EBITDA ratio is less than or equal
to 4.00 to 1.00. The interest rate under the Tranche B Facility and the
Deferred Term Loan Facility is based, at the option of the Company, on a
eurodollar rate plus 2.5% or a base rate plus 1.5%. A commitment fee of 0.50%
per annum will be charged on the unused portion of the New Credit Facility.
Collateral and Guarantees. The New Credit Facility is guaranteed by
Holding and all of its existing and future domestic subsidiaries, except one
subsidiary of the Company which owns the Company's inventory delivery vehicles.
The New Credit Facility is secured by a first priority lien on substantially
all, subject to certain exceptions, of the properties and assets of Holding, the
Company and each existing or future domestic subsidiary, and the guarantors now
owned or acquired later. Upon consummation of the Acquisition, Advance
Acquisition Corporation (the successor by merger to Western Auto) and its
subsidiaries will guaranty the New Credit Facility and grant liens on their
assets to secure the New Credit Facility.
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Covenants. The New Credit Facility contains covenants restricting the
ability of the Company and its subsidiaries to, among others, (i) redeem or
repurchase capital stock, (ii) prepay, redeem or purchase debt, (iii) incur
liens or engage in sale-leaseback transactions, (iv) make loans and investments,
(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) change the nature of the business
conducted by the Company and its subsidiaries, (x) change the passive holding
company status of Holding, and (xi) amend existing debt agreements. The Company
is required to comply with financial covenants with respect to (a) a maximum
leverage ratio, (b) a minimum interest coverage ratio, and (c) a minimum
retained cash earnings test. The Company is generally prohibited from paying
dividends (including to Holding) except that as long as no Event of Default
under the New Credit Facility then exists, the Company will be permitted to pay
dividends to Holding in an amount sufficient to cover the cash interest due on
the Series B Debentures commencing October 15, 2003.
Events of Default. Events of default under the New Credit Facility include
but are not limited to (i) the Company's failure to pay principal when due or
interest after a grace period, (ii) the Company's material breach of any
covenant, representation or warranty contained in the loan documents, (iii) any
event or condition that results in any Material Indebtedness (generally defined
as obligations of Holding, the Company or the Company's subsidiaries in an
aggregate principal amount exceeding $5.0 million) becoming due prior to its
scheduled maturity or that enables or permits (with or without the giving of
notice, the lapse of time or both) the holder or holders of any Material
Indebtedness or any trustee or agent on its or their behalf to cause any
Material Indebtedness to become due, or to require the prepayment, repurchase,
redemption or defeasance thereof, prior to its scheduled maturity; provided that
such event of default described in this clause (iii) shall not apply to secured
Indebtedness (as defined) that becomes due as a result of the voluntary sale or
transfer of the property or assets securing such Indebtedness, (iv) certain
events of bankruptcy, insolvency or dissolution of the Company or its
subsidiaries, (v) certain judgments against Holding, the Company, the Company's
subsidiaries, or their assets, (vi) the actual or asserted invalidity of
security documents or guarantees of Holding, the Company or the Company's
subsidiaries, and (vii) a Change in Control (as defined) of Holding.
The preceding discussion of certain of the provisions of the New Credit
Facility is not intended to be exhaustive and is qualified in its entirety by
reference to the provisions of the New Credit Facility, copies of which are
available as set forth under "Additional Information."
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DESCRIPTION OF SERIES B DEBENTURES
GENERAL
The Series A Debentures were, and the Series B Debentures will be, issued
under an Indenture dated as of April 15, 1998 (the "Indenture") among Holding
and United States Trust Company of New York, as trustee (the "Trustee"), a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. Upon the effectiveness of this Registration Statement
filed under the Securities Act with respect to the Series B Debentures, the
Indenture will be subject to and governed by the Trust Indenture Act of 1939, as
amended (the "TIA"). The terms of the Series B Debentures include those stated
in the Indenture and those made part of the Indenture by reference to the TIA.
The Series B Debentures are subject to all such terms, and Holders of Series B
Debentures are referred to the Indenture and the TIA for a statement thereof.
The following summary of the material provisions of the Indenture does not
purport to be complete and is qualified in its entirety by reference to the
Indenture, including the definitions therein of certain terms used below.
Copies of the Indenture and Registration Rights Agreement are available as set
forth below under "Additional Information." The definitions of certain terms
used in the following summary are set forth below under "--Certain Definitions."
For purposes of this summary, the term "Holding" refers only to Advance Holding
Corporation and not to any of its Subsidiaries.
The Series B Debentures will be general unsecured obligations of Holding
and will be pari passu in right of payment to all current and future
unsubordinated Indebtedness of Holding and senior in right of payment to all
subordinated Indebtedness of Holding. As of July 18, 1998, Holding had $62.0
million of Indebtedness (all of which would have been attributable to the Series
B Debentures) and Holding's Subsidiaries had $633.3 million of liabilities
outstanding including Indebtedness under the Senior Subordinated Notes and the
New Credit Facility and including trade payables and other accrued liabilities.
In addition, Indebtedness incurred in connection with the Acquisition will also
constitute Senior Indebtedness.
The operations of Holding are conducted entirely through its Subsidiaries
and, therefore, Holding is substantially dependent upon the cash flow of its
Subsidiaries to meet its obligations, including its obligations under the Series
B Debentures. See "Risk Factors--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure." The New Credit Facility and the Senior
Subordinated Notes will restrict the Company from paying any dividends or making
any other distributions to Holding. The ability of the Company to comply with
the conditions in the New Credit Facility and the Senior Subordinated Notes may
be affected by certain events that are beyond Holding's control. The Series B
Debentures will be effectively subordinated to all Indebtedness and other
liabilities (including, without limitation, to the Company's obligations under
the New Credit Facility and the Senior Subordinated Notes) of its Subsidiary.
Any right of Holding to receive assets of any of its Subsidiaries upon such
Subsidiary's liquidation or reorganization (and the consequent right of Holders
of the Series B Debentures to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors except to the extent
that Holding itself is recognized as a creditor of such Subsidiary, in which
case the claims of Holding would still be subordinate to the claims of such
creditors who hold security in the assets of such Subsidiary and to the claims
of such creditors who hold Indebtedness of such Subsidiary senior to that held
by Holding. See "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock."
As of the Issue Date, all of Holding's Subsidiaries will be Restricted
Subsidiaries. However, under certain circumstances, Holding will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Series B Debentures will be limited in aggregate principal to $112.0
million and will mature on April 15, 2009. The Series B Debentures will be
issued at a substantial discount from their principal amount at maturity to
generate gross proceeds of approximately $60.0 million. Until April 15, 2003,
no interest will accrue on the Series B Debentures, but the Accreted Value will
increase (representing amortization of original issue discount) between the date
of original issuance and April 15, 2003, on a semi-annual bond equivalent basis
using
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a 360-day year comprised of twelve 30-day months, such that the Accreted
Value shall be equal to the full principal amount at maturity of the Series B
Debentures on April 15, 2003. Beginning on April 15, 2003, interest on the
Series B Debentures will accrue at the rate of 12.875% per annum and will be
payable semi-annually in arrears on April 15 and October 15, commencing on
October 15, 2003, to Holders of record on the immediately preceding April 1 and
October 1, respectively. Interest on the Series B Debentures will accrue from
the most recent date to which interest has been paid or, if no interest has been
paid, from April 15, 2003.
Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Principal, premium, if any, and interest and Liquidated
Damages on the Series B Debentures will be payable at the office or agency of
Holding maintained for such purpose within the City and State of New York or, at
the option of Holding, payment of principal, premium, interest, and Liquidated
Damages may be made by check mailed to the Holders of the Series B Debentures at
their respective addresses set forth in the register of Holders of Series B
Debentures; provided that all payments of principal, premium, interest and
Liquidated Damages with respect to Series B Debentures represented by one or
more permanent Global Series B Debentures (as defined below) will be required to
be made by wire transfer of immediately available funds to the accounts of the
Depository Trust Company or any successor thereto. Until otherwise designated
by Holding, Holding's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Series B Debentures will be issued in
denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
Except as described below with the proceeds of an Equity Offering, the Series B
Debentures will not be redeemable at Holding's option prior to April 15, 2003.
Thereafter, the Series B Debentures will be subject to redemption at any time at
the option of Holding, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated Damages,
if any, thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................ 106.438%
2004........................................ 104.292%
2005........................................ 102.146%
2006 and thereafter......................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to April 15, 2001,
Holding may (but shall not have the obligation to) redeem, on one or more
occasions, up to an aggregate of 35% of the principal amount of Series B
Debentures originally issued at a redemption price equal to 112.875% of the
Accreted Value thereof, plus Liquidated Damages, if any, thereon to the
redemption date, with the net proceeds of one or more Equity Offerings; provided
that, in each case, at least 65% of the aggregate principal amount at maturity
of the Series B Debentures originally issued remains outstanding immediately
after the occurrence of such redemption; and provided further, that such
redemption shall occur within 90 days of the date of the closing of such Equity
Offering.
MANDATORY REDEMPTION
Holding is not required to make mandatory redemption or sinking fund
payments with respect to the Series B Debentures.
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REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Series B
Debentures will have the right to require Holding to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Series B
Debentures pursuant to the offer described below (the "Change of Control Offer")
at an offer 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 or, in the case of repurchases of Series B Debentures
prior to April 15, 2003 at a purchase price equal to 101% of the Accreted Value
thereof as of the date of repurchase (the "Change of Control Payment"). Within
30 days following any Change of Control, Holding will mail a notice to each
Holder describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Series B Debentures on the date specified in
such notice, which date shall be no earlier than 30 days (or such shorter time
period as may be permitted under applicable law, rules and regulations) and no
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. Holding will comply with the requirements of Rule 14e-
l under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Series B Debentures as a result of a Change of
Control. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the Indenture relating to such
Change of Control Offer, Holding will comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations
described in the Indenture by virtue thereof.
On the Change of Control Payment Date, Holding will, to the extent lawful,
(1) accept for payment all Series B Debentures or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all Series
B Debentures or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Series B Debentures so accepted together with an
Officers' Certificate stating the aggregate principal amount of Series B
Debentures or portions thereof being purchased by Holding. The Paying Agent
will promptly mail to each Holder of Series B Debentures so tendered the Change
of Control Payment for such Series B Debentures, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Series B Debenture equal in principal amount to any unpurchased portion of
the Series B Debentures surrendered, if any; provided that each such new Series
B Debenture will be in a principal amount of $1,000 or an integral multiple
thereof. Holding will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Series B Debentures to require
that Holding repurchase or redeem the Series B Debentures in the event of a
takeover, recapitalization or similar transaction.
The New Credit Facility and the Senior Subordinated Notes restrict the
Company from paying any dividends or making any other distributions to Holding.
If Holding is unable to obtain dividends from the Company sufficient to permit
the repurchase of the Series B Debentures or does not refinance such
Indebtedness, Holding will likely not have the financial resources to purchase
Series B Debentures. In any event, there can be no assurance that Holding's
Subsidiaries will have the resources available to pay any such dividend or make
any such distribution. Prior to complying with the provisions of the preceding
paragraphs, but in any event within 90 days following a Change of Control,
Holding will either repay all outstanding Indebtedness of its Subsidiaries or
obtain the requisite consents, if any, under the New Credit Facility and the
Senior Subordinated Notes to permit the repurchase of the Series B Debentures
required by this covenant. Holding will not be required to purchase any Series
B Debentures until it has complied with the preceding sentence, but Holding's
failure to make a Change of Control Offer when required or to purchase tendered
Series B Debentures when tendered would constitute an Event of Default under the
Indenture. See "Risk Factors--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure."
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Holding will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by Holding and
purchases all Series B Debentures validly tendered and not withdrawn under such
Change of Control Offer.
Asset Sales
The Indenture will provide that Holding will not, and will not permit any
of its Restricted Subsidiaries to, engage in or consummate an Asset Sale unless
(i) Holding (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined by the Board of
Directors in good faith, whose determination shall be conclusive evidence
thereof and shall be evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) (ii) at least 75% of
the consideration therefor received by Holding or such Restricted Subsidiary is
in the form of cash or Cash Equivalents other than in the case where Holding or
such Restricted Subsidiary is undertaking a Permitted Asset Swap; provided that
the amount of (x) any liabilities (as shown on Holding's or such Restricted
Subsidiary's most recent balance sheet), of Holding or any Restricted Subsidiary
(other than contingent liabilities and liabilities that are by their terms
subordinated to the Series B Debentures) that are assumed by the transferee of
any such assets pursuant to a customary agreement that releases Holding or such
Restricted Subsidiary from further liability and (y) any securities, notes or
other obligations received by Holding or any such Restricted Subsidiary from
such transferee that are converted within 15 days by Holding or such Restricted
Subsidiary into cash (to extent of the cash received) shall be deemed to be cash
for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
Holding or its Restricted Subsidiaries may, at its option, apply such Net
Proceeds (a) to repay Indebtedness of a Restricted Subsidiary of Holding, or (b)
to the investment in, or the making of a capital expenditure or the acquisition
of other property or assets in each case used or useable in a Permitted
Business, or Capital Stock of any Person primarily engaged in a Permitted
Business if, as a result of the investment in or acquisition by Holding or any
Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary, or
(c) a combination of the uses described in clauses (a) and (b). Pending the
final application of any such Net Proceeds, Holding or its Restricted
Subsidiaries may temporarily reduce Indebtedness of a Restricted Subsidiary of
Holding or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph within
the 360-day period after receipt of such Net Proceeds will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, Holding will be required to make an offer to all Holders
of Series B Debentures and, to the extent required by the terms of any Pari
Passu Indebtedness to all holders of such Pari Passu Indebtedness (an "Asset
Sale Offer"), to purchase the maximum principal amount of Series B Debentures
and any such Pari Passu Indebtedness that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase (or, in the case of repurchases of Series B
Debentures prior to April 15, 2003, at a purchase price equal to 100% of the
Accreted Value thereof plus Liquidated Damages, as of the date of repurchase),
in accordance with the procedures set forth in the Indenture or such Pari Passu
Indebtedness, as applicable. To the extent that the aggregate principal amount
at maturity of Series B Debentures (or Accreted Value, as the case may be) and
any such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer is
less than the Excess Proceeds, Holding or its Restricted Subsidiaries may use
any remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount at maturity (or Accreted Value, as the case may be) of Series B
Debentures and any such Pari Passu Indebtedness surrendered by holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Series B
Debentures to be purchased on a pro rata basis. Upon completion of such Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero. Holding's
ability to repurchase the Series B Debentures will be subject to the covenants
contained in the New Credit Facility or any additional or successor bank
facility.
The New Credit Facility and the Senior Subordinated Notes restrict the
Company from paying any dividends or making any other distributions to Holding.
If Holding is unable to obtain dividends from the Company sufficient to permit
the repurchase of the Series B Debentures or does not refinance such
Indebtedness, Holding will likely not have the financial resources to purchase
Series B Debentures. In any event, there can be no assurance
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that Holding's Subsidiaries will have the resources available to pay any such
dividend or make any such distribution. Holding's failure to make an Asset Sale
Offer when required or to purchase tendered Series B Debentures when tendered
would constitute an Event of Default under the Indenture. See "Risk Factors--
Limitation on Access to Cash Flow of Subsidiaries; Holding Company Structure."
SELECTION AND NOTICE
If less than all of the Series B Debentures are to be redeemed or
repurchased in an offer to purchase at any time, selection of Series B
Debentures for redemption or repurchase will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Series B Debentures are listed, or, if the Series B
Debentures are not so listed, on a pro rata basis, by lot or by such other
method as the Trustee deems fair and appropriate; provided that no Series B
Debentures of $1,000 or less shall be redeemed or repurchased in part. Notices
of redemption may not be conditional. Notices of redemption or repurchase shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date or repurchase date to each Holder of Series B Debentures to be
redeemed or repurchased at its registered address. If any Series B Debenture is
to be redeemed or repurchased in part only, the notice of redemption or
repurchase that relates to such Series B Debentures shall state the portion of
the principal amount thereof to be redeemed or repurchased. A new Series B
Debenture in principal amount equal to the unredeemed or unrepurchased portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Series B Debenture. On and after the redemption or repurchase
date, interest and Liquidated Damages will cease to accrue on Series B
Debentures or portions of them called for redemption or repurchase.
CERTAIN COVENANTS
Restricted Payments
The Indenture will provide that Holding will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of Holding's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any such dividend, distribution or other payment made as a payment
in connection with any merger or consolidation involving Holding), other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of Holding or dividends or distributions payable to Holding or any Wholly
Owned Subsidiary of Holding; (ii) purchase, redeem or otherwise acquire or
retire for value (including, without limitation, any such purchase, redemption
or other acquisition or retirement for value made as a payment in connection
with any merger or consolidation involving Holding) any Equity Interests of
Holding or any Restricted Subsidiary (other than any such Equity Interests owned
by Holding or any Restricted Subsidiary of Holding); (iii) make any principal
payment on or with respect to, or purchase, redeem, defease or otherwise acquire
or retire for value any Indebtedness that is subordinated to the Series B
Debentures, except a payment of principal at Stated Maturity in the applicable
amounts so required; or (iv) make any Restricted Investment (all such payments
and other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and immediately
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof; and
(b) Holding would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock;" and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Holding and its Restricted Subsidiaries after
the Issue Date (excluding Restricted Payments permitted by clauses
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(ii), (iii), (v), (vi) and (viii) of the next succeeding paragraph), is less
than the sum (without duplication) of (i) 50% of the Consolidated Net Income of
Holding for the period (taken as one accounting period) from the beginning of
the first fiscal quarter commencing after the Issue Date to the end of Holding's
most recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated Net
Income for such period is a deficit, less 100% of such deficit), plus (ii) 100%
of the aggregate net cash proceeds received by Holding from the issue or sale
subsequent to the Issue Date of Equity Interests of Holding (other than
Disqualified Stock) or of Disqualified Stock or debt securities of Holding that
have been converted into or exchanged for such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt securities) sold to
a Restricted Subsidiary of Holding and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified Stock),
plus (iii) with respect to any Restricted Investment that was made after the
Issue Date (A) to the extent that such Restricted Investment is sold for cash or
otherwise liquidated or repaid for cash, the amount of cash proceeds received
with respect to such Restricted Investments and (B), without duplication of any
amount included in Consolidated Net Income, 100% of any cash dividends or other
cash distributions received in respect of such Restricted Investment, plus (iv)
to the extent not otherwise included in clause (iii) above, 100% of the net cash
proceeds realized upon the sale of any Unrestricted Subsidiary (less the amount
of any reserve established for purchase price adjustments and less the maximum
amount of any indemnification or similar contingent obligation for the benefit
of the purchaser, any of its Affiliates or any other third party in such sale,
in each case as adjusted for any permanent reduction in any such amount on or
after the date of such sale, other than by virtue of a payment made to such
Person following the Issue Date), plus (v) upon the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary, the lesser of (x) the fair
market value of such Subsidiary or (y) the aggregate amount of all Investments
made in such Subsidiary subsequent to the Issue Date by Holding and its
Restricted Subsidiaries, plus (vi) $10.0 million.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of Holding or
any Restricted Subsidiary in exchange for, or in an amount not in excess of the
net cash proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary of Holding) of, other Equity Interests of Holding (other
than any Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement,
defeasance or other acquisition, and any Net Income resulting therefrom, shall
be excluded from clauses (c)(i) and (c)(ii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase, retirement or other
acquisition of subordinated Indebtedness in exchange for, or in an amount not in
excess of the net cash proceeds from, an incurrence of Permitted Refinancing
Indebtedness;
(iv) so long as no Default or Event of Default shall have occurred and is
continuing, the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Holding or any Restricted Subsidiary of
Holding, held by any member of Holding's (or any of its subsidiaries')
management, employees, directors or consultants pursuant to any management,
employee, director or consultant equity subscription agreement or stock option
agreement; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed the sum of (A)
$3 million and (B) the aggregate cash proceeds received by Holding from any
issuance of Equity Interests by Holding to members of management, employees,
directors or consultants of Holding and its subsidiaries (provided that the cash
proceeds referred to in this clause (B) shall be excluded from clause (c)(ii) of
the preceding paragraph); provided, further, that Management Notes may be
forgiven or returned without regard to the limitation set forth above and the
forgiveness or return thereof shall not be treated as Restricted Payments for
purposes of determining compliance with such limitation;
(v) the payment of any dividend (or the making of a similar distribution or
redemption) by a Restricted Subsidiary of Holding to the holders of its common
Equity Interests on a pro rata basis;
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(vi) payments required (A) to be made under the Tax Sharing Agreement or
(B) distributions made by Holding on the date of the Indenture, the proceeds of
which are utilized solely to consummate the Recapitalization;
(vii) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any class or
series of Disqualified Stock of Holding or any Restricted Subsidiary issued
after the date of the Indenture in accordance with the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(viii) the purchase or redemption of subordinated indebtedness pursuant to
a change of control of provision contained in the indenture or other governing
instrument relating thereto; provided, however, that (A) no offer or purchase
obligation may be triggered in respect of such Indebtedness unless a
corresponding obligation also arises for the Series B Debentures and (B) in all
events, no repurchase or redemption of such Indebtedness may be consummated
unless and until Holding shall have satisfied all repurchase obligations with
respect to any required purchase offer made with respect to the Series B
Debentures.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default or an
Event of Default. For purposes of making such determination, all outstanding
Investments by Holding and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greater of (i) the net book value of such Investments at the time
of such designation and (ii) the fair market value of such Investments at the
time of such designation. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Holding or such Restricted Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value
of any non-cash Restricted Payment shall be determined by the Board of Directors
whose resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon a fairness opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, Holding shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this covenant were computed,
together with a copy of any fairness opinion or appraisal if required by the
Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that Holding will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that Holding will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock or Disqualified Stock other than to Holding
or another Restricted Subsidiary; provided, however, that Holding or any of its
Restricted Subsidiaries may incur Indebtedness (including Acquired Debt) or
issue shares of Disqualified Stock if (i) the Fixed Charge Coverage Ratio for
Holding's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least 1.75 to 1.0 commencing on the Issue Date and at any time
thereafter, determined on a pro forma basis (including a pro forma application
of the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued or in the case of any
Restricted Subsidiary, such preferred stock had been issued, as the case may be,
at the beginning of such four-quarter period and (ii) no Default or Event of
Default will have occurred or be continuing or would occur as a consequence
thereof, provided further, that prior to the second anniversary of the Issue
Date the Company and its Restricted Subsidiaries may incur Indebtedness
permitted to be incurred pursuant to the Senior Subordinated Note Indenture.
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The Indenture will also provide that Holding will not incur any
Indebtedness that is contractually subordinated in right of payment to any other
Indebtedness of Holding unless such Indebtedness is also contractually
subordinated in right of payment to the Series B Debentures on substantially
identical terms; provided, however, that no Indebtedness of Holding shall be
deemed to be contractually subordinated in right of payment to any other
Indebtedness of Holding solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by Holding and the Restricted Subsidiaries of
Indebtedness under the Credit Facilities and any Guarantees thereof; provided
that the aggregate principal amount of all Indebtedness (with letters of credit
being deemed to have a principal amount equal to the maximum potential liability
of Holding and the Restricted Subsidiaries for reimbursement of drawings that
may be made thereunder) outstanding under all Credit Facilities after giving
effect to such incurrence, including all Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (i), does
not exceed at any time (A) with respect to the term loan portion of such Credit
Facilities, $125 million in an aggregate principal amount and (B) with respect
to the revolving credit facility and deferred term loan portion of such Credit
Facilities, an aggregate principal amount equal to the greater of fifty percent
of the amount of inventory shown on the consolidated balance sheet of Holding
for the then most recently ended fiscal quarter and $250 million less, in the
case of clause (A) or (B), the aggregate principal of all principal payments
thereunder constituting permanent reductions of such Indebtedness pursuant to
such Credit Facilities or in accordance with the covenant described under "--
Repurchase at the Option of Holders--Asset Sales;"
(ii) the incurrence by Holding of Indebtedness represented by the Series B
Debentures and the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness represented by the Senior Subordinated Notes and any guarantee
thereof;
(iii) the incurrence by Holding or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
other obligations, in each case incurred for the purpose of financing all or any
part of the acquisition cost or cost of construction, remodeling or improvements
of assets or property used in the business of Holding or any Restricted
Subsidiary, in an aggregate principal amount not to exceed $25.0 million at any
time outstanding;
(iv) other Indebtedness of Holding and its Restricted Subsidiaries
outstanding on the Issue Date;
(v) the incurrence by Holding or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the Indenture to exist or be incurred;
(vi) the incurrence by Holding or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among Holding and any of its Wholly Owned
Subsidiaries or between or among any Wholly Owned Subsidiaries; provided that
(A) any subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than a Wholly Owned Subsidiary
and (B) any sale or other transfer of any such Indebtedness to a Person that is
not either Holding or a Wholly Owned Subsidiary will be deemed, in each case, to
constitute an incurrence of such Indebtedness by Holding or such Restricted
Subsidiary, as the case may be;
(vii) the incurrence by Holding or any Restricted Subsidiary of Hedging
Obligations that are incurred for the purpose of fixing or hedging (i) interest
rate risk with respect to any floating rate Indebtedness that is permitted by
the terms of the Indenture to be outstanding or (ii) the value of foreign
currencies purchased or received by Holding or any Restricted Subsidiary in the
ordinary course of business;
(viii) Indebtedness incurred in respect of workers' compensation claims,
self-insurance obligations, performance, surety and similar bonds and completion
guarantees provided by Holding or a Restricted Subsidiary in the ordinary course
of business;
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(ix) Indebtedness arising from guarantees of Indebtedness of Holding or any
Restricted Subsidiary or the agreements of Holding or a Restricted Subsidiary
providing for indemnification, adjustment of purchase price or similar
obligations, in each case, incurred or assumed in connection with the
disposition of any business, assets or Capital Stock of a Restricted Subsidiary,
or other guarantees of Indebtedness incurred by any person acquiring all or any
portion of such business, assets or Capital Stock of a Restricted Subsidiary for
the purpose of financing such acquisition, provided that the maximum aggregate
liability in respect of all such Indebtedness shall at no time exceed 25% of the
gross proceeds (with proceeds other than cash or Cash Equivalents being valued
at the fair market value thereof as determined by the Board of Directors of
Holding in good faith) actually received by Holding and its Restricted
Subsidiaries in connection with such disposition;
(x) the guarantee by Holding or any Restricted Subsidiary of Indebtedness
of Holding or a Restricted Subsidiary that was permitted to be incurred by
another provision of this covenant;
(xi) the incurrence by Holding or any of its Restricted Subsidiaries of
Acquired Debt in an aggregate principal amount at any time outstanding not to
exceed $10.0 million;
(xii) Indebtedness incurred in connection with a Qualified Receivables
Transaction except to the extent that such Indebtedness is recourse to Holding
or any other Restricted Subsidiary of Holding; and
(xiii) the incurrence by Holding or any Restricted Subsidiary of additional
Indebtedness in an aggregate principal amount (or accreted value, as applicable)
at any time outstanding, including all Indebtedness incurred to refund,
refinance or replace any Indebtedness incurred pursuant to this clause (xiii),
not to exceed $25.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (xiii) above or is
entitled to be incurred pursuant to the first paragraph of this covenant,
Holding shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof. Accrual of interest, the accretion of accreted
value and the payment of interest in the form of additional Indebtedness will
not be deemed to be an incurrence of Indebtedness for purposes of this covenant.
Liens
The Indenture will provide that Holding will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom for purposes of securing Indebtedness, except Permitted Liens, unless
the Obligations due under the Indenture and the Series B Debentures are secured
by a Lien on such property, assets or proceeds on an equal and ratable basis (or
on a senior basis, in the case of Indebtedness subordinate in right of payment
to the Series B Debentures), with the Obligations so secured, so long as such
Obligations are secured.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture will provide that Holding will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to Holding or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any Indebtedness owed to Holding or any of
its Restricted Subsidiaries, (ii) make loans or advances to Holding or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets to
Holding or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) the New Credit Facility; (b) the
Senior Subordinated Notes and the Senior Subordinated Note Indenture under which
the same are issued, as in effect as of the date of the Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive with respect to such
dividend and other payment restrictions
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than those contained in the New Credit Facility or the Senior Subordinated
Notes, as the case may be, as in effect on the date of the Indenture, (c) the
Indenture and the Series B Debentures, (d) applicable law or any applicable
rule, regulation or order, (e) any agreement or instrument governing
Indebtedness or Capital Stock of a Person acquired by Holding or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such agreement or instrument was created or entered into in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of such Person, so
acquired, (f) by reason of customary non-assignment provisions in leases,
licenses, encumbrances, contracts or similar assets entered into or acquired in
the ordinary course of business and consistent with industry practices, (g)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (f) above on
the property so acquired, (h) Permitted Refinancing Indebtedness, provided that
the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced; (i) contracts for the
sale of assets containing customary restrictions with respect to a Restricted
Subsidiary pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary and (j) customary restrictions in security agreements or
mortgages securing Indebtedness of Holding or a Restricted Subsidiary to the
extent such restrictions restrict the transfer of the property subject to such
security agreements and mortgages.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries
The Indenture will provide that Holding will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, transfer, convey,
lease, sell or otherwise dispose of any shares (other than directors' qualifying
shares) of Capital Stock of a Restricted Subsidiary to any Person, except (i) to
Holding or a Wholly Owned Subsidiary or (ii) in a transfer, conveyance, lease,
sale or other disposition of all the Capital Stock of such Restricted Subsidiary
owned by the Company or another Restricted Subsidiary; provided, that in
connection with any such transfer, conveyance, lease, sale or other disposition
of Capital Stock Holding or any such Restricted Subsidiary complies with the
covenant described under "--Repurchase at the Option of Holders
- --Asset Sales"; provided, further that the foregoing shall not restrict (a) any
Lien on Capital Stock of a Restricted Subsidiary that is not otherwise
prohibited under the Indenture or (b) any transfer, sale or other disposition of
Capital Stock pursuant to a foreclosure of any such Lien or similar exercise of
remedies in respect thereof.
Merger, Consolidation or Sale of Assets
The Indenture will provide that Holding may not consolidate or merge with
or into (whether or not Holding is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless (i) Holding is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than Holding) or to which
such sale, assignment, transfer, lease, conveyance or other disposition shall
have been made is a corporation or limited liability company organized or
existing under the laws of the United States, any state thereof or the District
of Columbia; (ii) the Person formed by or surviving any such consolidation or
merger (if other than Holding) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of Holding under the Series B Debentures and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) immediately prior to and immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
Holding with or into a Wholly Owned Subsidiary of Holding, Holding or the entity
or Person formed by or surviving any such consolidation or merger (if other than
Holding), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock". For
purposes of this covenant, the sale, lease, conveyance, assignment, transfer, or
other disposition of all or substantially all of the properties and assets of
one or more Subsidiaries of Holding, which properties and assets, if held by
Holding instead of such Subsidiaries, would constitute all or substantially all
of the properties and assets of Holding on a consolidated basis, shall be deemed
to be the transfer of all or substantially
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all of the properties and assets of Holding. The foregoing clause (iv) will not
prohibit (a) a merger between Holding and a Wholly Owned Subsidiary of Holding
or (b) a merger between Holding and an Affiliate incorporated solely for the
purpose of reincorporating Holding in another State of United States so long as,
in the case of each clause (a) and (b), the amount of Indebtedness of Holding
and its Restricted Subsidiaries is not increased thereby.
Transactions with Affiliates
The Indenture will provide that Holding will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to or Investment in, or
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) the terms of such Affiliate Transaction are fair and
reasonable to Holding or such Restricted Subsidiary, as the case may be, and are
at least as favorable as the terms which could be obtained by Holding or such
Restricted Subsidiary, as the case may be, in a comparable transaction made on
an arm's-length basis between unaffiliated parties and (ii) Holding delivers to
the Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $2.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing; provided that the following shall not be deemed Affiliate
Transactions: (v) certain leases and other arrangements of the Company in effect
on the Issue Date and specified in a Schedule to the Indenture, (w) any
employment agreements, stock option or other compensation agreements or plans
(and the payment of amounts or the issuance of securities thereunder) and other
reasonable fees, compensation, benefits and indemnities paid or entered into by
Holding or any of its Restricted Subsidiaries in the ordinary course of business
of Holding or such Restricted Subsidiary to or with the officers, directors or
employees of Holding or its Restricted Subsidiaries, (x) transactions between or
among Holding and/or its Restricted Subsidiaries and (y) Restricted Payments
(other than Restricted Investments) that are permitted by the provisions of the
Indenture described above under the caption "--Restricted Payments" and (z)
sales of Capital Stock (other than Disqualified Stock) of Holding, when such
sales are exclusively for cash.
Business Activities
The Indenture will provide that Holding will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, engage to a substantial extent
in any business activity other than Permitted Businesses.
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Series B Debentures are outstanding, Holding will furnish to the
Holders of Series B Debentures (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if Holding were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" that describes the financial condition and results of
operations of Holding and its consolidated Subsidiaries and, with respect to the
annual information only, a report thereon by Holding's certified independent
accountants and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if Holding were required to file such reports, in
each case within the time periods set forth in the Commission's rules and
regulations. In addition, whether or not required by the rules and regulations
of the Commission, at any time after the consummation of the Exchange Offer
contemplated by the Registration Rights Agreement, Holding will file a copy of
all such information and reports with the Commission for public availability
within the time periods set forth in the Commission's rules and regulations
(unless the Commission will not accept such a filing) and make such information
available to securities analysts and prospective investors upon request. In
addition, at all times that the Commission does not accept the filings provided
for in the preceding sentence, Holding has agreed that, for so long as any
Series B Debentures remain outstanding, they will furnish to the Holders and to
securities analysts and
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prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages, if any, with respect to, the Series B Debentures; (ii)
default in payment when due of the principal of or premium, if any, on the
Series B Debentures; (iii) failure by Holding or any of its Restricted
Subsidiaries for 30 days after notice by the Trustee or by the Holders of at
least 25% in principal amount of Series B Debentures then outstanding to comply
with the provisions described under the captions "--Repurchase at the Option of
Holders--Change of Control" or "--Asset Sales," or "--Certain Covenants--
Restricted Payments" or "--Incurrence of Indebtedness and Issuance of Preferred
Stock;" (iv) failure by Holding or any of its Restricted Subsidiaries for 60
days after notice by the Trustee or by the Holders of at least 25% in principal
amount of Series B Debentures then outstanding to comply with any of its other
agreements in the Indenture or the Series B Debentures; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by Holding
or any of its Restricted Subsidiaries (or the payment of which is guaranteed by
Holding or any of its Restricted Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness at final maturity (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its stated maturity
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$20.0 million or more in the case of clause (a) or (b); (vi) failure by Holding
or any of its Restricted Subsidiaries to pay final judgments aggregating in
excess of $20.0 million (net of any amounts with respect to which a reputable
and creditworthy insurance company has acknowledged liability in writing), which
judgments are not paid, discharged or stayed for a period of 60 days; and (vii)
certain events of bankruptcy or insolvency with respect to Holding or any of its
Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Series B
Debentures may declare all the Series B Debentures to be due and payable
immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising
from certain events of bankruptcy or insolvency, with respect to Holding, all
outstanding Series B Debentures will become due and payable without further
action or notice. Upon any acceleration of maturity of the Series B Debentures,
all principal of and accrued interest and Liquidated Damages, if any, on (if on
or after April 15, 2003) or Accreted Value of and Liquidated Damages, if any, on
(if prior to April 15, 2003) the Series B Debentures shall be due and payable
immediately. Holders of the Series B Debentures may not enforce the Indenture
or the Series B Debentures except as provided in the Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Series B Debentures may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from Holders of the Series B
Debentures notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest) if
it determines that withholding notice is in their interest. In the event of a
declaration of acceleration of the Series B Debentures because an Event of
Default has occurred and is continuing as a result of the acceleration of any
Indebtedness described in clause (v) of the preceding paragraph, the declaration
of acceleration of the Series B Debentures shall be automatically annulled if
the holders of any Indebtedness described in clause (v) of the preceding
paragraph have rescinded the declaration of acceleration in respect of such
Indebtedness within 30 days of the date of such declaration and if (a) the
annulment of the acceleration of Series B Debentures would not conflict with any
judgment or decree of a court of competent jurisdiction and (b) all existing
Events of Default, except nonpayment of principal or interest on the Series B
Debentures that became due solely because of the acceleration of the Series B
Debentures, have been cured or waived.
The Holders of a majority in aggregate principal amount of the Series B
Debentures then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Series B Debentures waive any existing Default or
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Event of Default and its consequences under the Indenture except a continuing
Default or Event of Default in the payment of interest on, or the principal of,
the Series B Debentures.
Holding is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and Holding is required upon becoming
aware of any Default or Event of Default, to deliver to the Trustee a statement
specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Holding, as
such, shall have any liability for any obligations of Holding under the Series B
Debentures or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Series B
Debentures, by accepting a Series B Debenture, waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Series B Debentures. Such waiver may not be effective to waive liabilities
under the federal securities laws and it is the view of the Commission that such
a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Holding may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Series B Debentures
("Legal Defeasance") except for (i) the rights of Holders of outstanding Series
B Debentures to receive payments in respect of the principal of, premium, if
any, and interest and Liquidated Damages on such Series B Debentures when such
payments are due from the trust referred to below, (ii) Holding's obligations
with respect to the Series B Debentures concerning issuing temporary Series B
Debentures, registration of Series B Debentures, mutilated, destroyed, lost or
stolen Series B Debentures and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and Holding's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Indenture.
In addition, Holding may, at its option and at any time, elect to have the
obligations of Holding released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Series B Debentures. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "--Events of
Default and Remedies" will no longer constitute an Event of Default with respect
to the Series B Debentures.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Holding must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Series B Debentures, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal amount at maturity of or Accreted Value (as
applicable) of, premium, if any, and interest and Liquidated Damages on the
outstanding Series B Debentures on the stated maturity or on the applicable
redemption date, as the case may be, and Holding must specify whether the Series
B Debentures are being defeased to maturity or to a particular redemption date;
(ii) in the case of Legal Defeasance, Holding shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that (A) Holding has received from, or there has been
published by, the Internal Revenue Service, a ruling or (B) since the date of
the Indenture, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, subject to customary assumptions and exclusions, the Holders
of the outstanding Series B Debentures will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, Holding shall have delivered
to the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that, subject to customary assumptions and exclusions,
the Holders of the outstanding Series B Debentures will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of
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Default shall have occurred and be continuing on the date of such deposit (other
than a Default or Event of Default resulting from the financing of amounts to be
applied to such deposit) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which Holding or
any of its Subsidiaries is a party or by which Holding or any of its
Subsidiaries is bound; (vi) Holding shall have delivered to the Trustee an
opinion of counsel to the effect that, subject to customary assumptions and
exclusions (which assumptions and exclusions shall not relate to the operation
of Section 547 of the United States Bankruptcy Code or any analogous New York
State law provision), after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii)
Holding shall have delivered to the Trustee an Officers' Certificate stating
that the deposit was not made by Holding with the intent of preferring the
Holders of Series B Debentures over the other creditors of Holding with the
intent of defeating, hindering, delaying or defrauding creditors of Holding or
others; and (viii) Holding shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Series B Debentures in accordance with
the Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and Holding
may require a Holder to pay any taxes and fees required by law or permitted by
the Indenture. Holding is not required to transfer or exchange any Series B
Debentures selected for redemption. Also, Holding is not required to transfer
or exchange any Series B Debentures for a period of 15 days before a selection
of Series B Debentures to be redeemed.
The registered Holder of a Series B Debenture will be treated as the owner
of it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Series B Debentures may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount at maturity of the Series B
Debentures then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Series B
Debentures), and any existing default or compliance with any provision of the
Indenture or the Series B Debentures may be waived with the consent of the
Holders of a majority in principal amount of the then outstanding Series B
Debentures (including consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Series B Debentures).
Without the consent of each Holder affected, an amendment or waiver may not
with respect to any Series B Debentures held by a non-consenting Holder: (i)
reduce the principal amount of Series B Debentures whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Series B Debentures or alter the provisions with respect
to the redemption of the Series B Debentures (other than provisions relating to
the covenants described above under the caption "--Repurchase at the Option of
Holders") or amend or modify the calculation of the Accreted Value so as to
reduce the amount of the Accreted Value of the Series B Debentures, (iii) reduce
the rate of or change the time for payment of interest on any Series B
Debenture, (iv) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Series B Debentures (except a
rescission of acceleration of the Series B Debentures by the Holders of at least
a majority in aggregate principal amount at maturity of the Series B Debentures
and a waiver of the payment default that resulted from such acceleration), (v)
make any Series B Debenture payable in money other than that stated in the
Series B Debentures, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of Holders of Series B
Debentures to receive payments of principal of or premium, if any, or interest
on the Series B Debentures, (vii) waive a redemption payment with respect to any
Series B
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Debenture (other than a payment required by one of the covenants described above
under the caption " --Repurchase at the Option of Holders"), or (viii) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Series
B Debentures, Holding and the Trustee may amend or supplement the Indenture or
the Series B Debentures to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Series B Debentures in addition to or in place of
certificated Series B Debentures, to provide for the assumption of Holding's
obligations to Holders of Series B Debentures in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of Series B Debentures or that does not materially
adversely affect the legal rights under the Indenture of any such Holder, to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of Holding, to obtain payment of claims in certain
cases, or to realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount at maturity of the then
outstanding Series B Debentures will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the Trustee, subject to certain exceptions. The Indenture provides that in case
an Event of Default shall occur (which shall not be cured), the Trustee will be
required, in the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Series B Debentures, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
it against any loss, liability or expense.
FORM, DENOMINATION AND BOOK-ENTRY PROCEDURES
The Series B Debentures may be issued in the form of one or more global
securities (collectively, the "Global Series B Debenture"). The Global Series B
Debenture will be deposited with, or on behalf of, the DTC and registered in the
name of the DTC or its nominee. Except as set forth below, the Global Series B
Debenture may be transferred, in whole and not in part, only to the DTC or
another nominee of the DTC. Investors may hold their beneficial interests in
the Global Series B Debenture directly through the DTC if they have an account
with the DTC or indirectly through organizations which have accounts with the
DTC.
Depository Procedures
DTC has advised Holding that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between the Participants through electronic book-entry
changes in accounts of the Participants. The Participants include securities
brokers and dealers (including the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to DTC's system
is also available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and the Indirect Participants.
DTC has also advised Holding that pursuant to procedures established by it,
(i) upon deposit of the Global Series B Debentures, DTC will credit the accounts
of Participants designated by the Initial Purchasers with portions
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of the principal amount of the Global Series B Debentures and (ii) ownership of
such interests in the Global Series B Debentures will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC (with respect to the Participants) or by the Participants and the
Indirect Participants (with respect to other owners of beneficial interests in
the Global Series B Debentures).
Investors in the Global Series B Debenture may hold their interests therein
directly through DTC, if they are Participants in such system, or indirectly
through organizations (including Euroclear and CEDEL) which are Participants in
such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Series B Debenture to such persons may
be limited to that extent. Because DTC can act only on behalf of the
Participants, which in turn act on behalf of the Indirect Participants and
certain banks, the ability of a person having beneficial interests in a Global
Series B Debenture to pledge such interests to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing such
interests. For certain other restrictions on the transferability of the Series
B Debentures, see "--Exchange of Book-Entry Series B Debentures for Certificated
Series B Debentures."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL SERIES B
DEBENTURES WILL NOT HAVE SERIES B DEBENTURES REGISTERED IN THEIR NAMES, WILL NOT
RECEIVE PHYSICAL DELIVERY OF SERIES B DEBENTURES IN CERTIFICATED FORM AND WILL
NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE
FOR ANY PURPOSE.
Payments in respect of the principal of (and premium, if any) and interest
on a Global Series B Debenture registered in the name of DTC or its nominee will
be payable to DTC or its nominee in its capacity as the registered holder under
the Indenture. Under the terms of the Indenture, Holding and the Trustee will
treat the persons in whose names the Series B Debentures, including the Global
Series B Debentures, are registered as the owners thereof for the purpose of
receiving such payments and for any and all other purposes whatsoever.
Consequently, neither of Holding, the Initial Purchasers, the Trustee nor any
agent of Holding, the Initial Purchasers or the Trustee has or will have any
responsibility or liability for (i) any aspect or accuracy of DTC's records or
any Participant's or Indirect Participant's records relating to or payments made
on account of beneficial ownership interests in the Global Series B Debentures,
or for maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Series B Debentures, or (ii) any other matter
relating to the actions and practices of DTC or any of the Participants or the
Indirect Participants.
DTC has advised Holding that its current practice, upon receipt of any
payment in respect of securities such as the Series B Debentures (including
principal and interest), is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the relevant
security as shown on the records of DTC. Payments by the Participants and the
Indirect Participants to the beneficial owners of the Series B Debentures will
be governed by standing instructions and customary practices and will not be the
responsibility of DTC, the Trustee or Holding. Neither Holding nor the Trustee
will be liable for any delay by DTC or any of the Participants in identifying
the beneficial owners of the Series B Debentures, and Holding and the Trustee
may conclusively rely on and will be protected in relying on instructions from
DTC or its nominee as the registered owner of the Global Series B Debentures for
all purposes.
Interests in the Global Series B Debentures will trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such interests
will therefore settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and the Participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures and
will be settled in same-day funds.
DTC has advised Holding that it will take any action permitted to be taken
by a holder of Series B Debentures only at the direction of one or more
Participants to whose account with DTC interests in the Global Series B
Debentures are credited and only in respect of such portion of the aggregate
principal amount of the Series
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B Debentures as to which such Participant or Participants has or have given such
direction. However, if any of the events described under "--Exchange of Book
Entry Series B Debentures for Certificated Series B Debentures" occurs, DTC
reserves the right to exchange the Global Series B Debentures for legended
Series B Debentures in certificated form and to distribute such Series B
Debentures to its Participants.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that Holding believes to be reliable, but Holding
takes no responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Series B Debenture among accountholders in DTC, it is
under no obligation to perform or to continue to perform such procedures, and
such procedures may be discontinued at any time. None of Holding, the Initial
Purchasers or the Trustee nor any agent of Holding, the Initial Purchasers or
the Trustee will have any responsibility for the performance by DTC or its
participants, indirect participants or accountholders of their respective
obligations under the rules and procedures governing their respective
operations.
Exchange of Book-Entry Series B Debentures for Certificated Series B
Debentures
The Global Series B Debenture is exchangeable for definitive Series B
Debentures in registered certificated form if (i) DTC (x) notifies Holding that
it is unwilling or unable to continue as depository for the Global Series B
Debenture and Holding thereupon fails to appoint a successor depository or (y)
has ceased to be a clearing agency registered under the Series B Act, (ii)
Holding, at its option, notifies the Trustee in writing that it elects to cause
the issuance of the Series B Debentures in certificated form or (iii) there
shall have occurred and be continuing a default or an Event of Default with
respect to the Series B Debentures. In all cases, certificated Series B
Debentures delivered in exchange for any beneficial interests in the Global
Series B Debenture will be registered in the names, and issued in any approved
denominations, requested by or on behalf of DTC (in accordance with its
customary procedures).
Concerning the Trustee
United States Trust Company of New York is the Trustee under the Indenture.
Governing Law
The Indenture and the Series B Debentures will be governed by and construed
in accordance with the laws of the State of New York.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Holding at 5673
Airport Road, Roanoke, Virginia 24012, Attention: Chief Financial Officer.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accreted Value" means, as of any date of determination prior to April 15,
2003, with respect to any Series B Debenture, the sum of (a) the initial
offering price (which shall be calculated by discounting the aggregate principal
amount at maturity of such Series B Debenture at a rate of 12.875% per annum,
compounded semi-annually on each April 15 and October 15 from April 15, 2003 to
the date of issuance) of such Series B Debenture and (b) the portion of the
excess of the principal amount of such Series B Debenture over such initial
offering price
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which shall have been accreted thereon through such date, such amount to be so
accreted on a daily basis at a rate of 12.875% per annum of the initial offering
price of such Series B Debenture, compounded semi-annually on each April 15 and
October 15 from the date of issuance of the Series B Debentures through the date
of determination, computed on the basis of a 360-day year of twelve 30-day
months.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person or assumed in connection with the acquisition of any asset used or useful
in a Permitted Business acquired by such specified Person; provided that such
Indebtedness was not incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Subsidiary of such specified
Person, or such acquisition, as the case may be.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Sale" means (i) the sale, lease (other than an operating lease),
conveyance or other disposition of any assets or rights (including, without
limitation, by way of a sale and leaseback) other than in the ordinary course of
business (provided that the sale, lease (other than an operating lease),
conveyance or other disposition of all or substantially all of the assets of
Holding and its Restricted Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption "--Repurchase at
the Option of Holders--Change of Control" and/or the provisions described above
under the caption "--Certain Covenants--Merger, Consolidation or Sale of Assets"
and not by the provisions of the Asset Sales covenant), and (ii) the sale by
Holding and the issue or sale by any of the Restricted Subsidiaries of Holding
of Equity Interests of any of Holding's Restricted Subsidiaries, in the case of
either clause (i) or (ii), whether in a single transaction or a series of
related transactions that have a fair market value (as determined in good faith
by the Board of Directors) in excess of $1.0 million or for net cash proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the term Asset Sale
shall not include (i) a sale, conveyance or other disposition of assets or
rights by Holding to a Wholly Owned Subsidiary of Holding or an entity that
would become a Wholly Owned Subsidiary upon the consummation of such sale,
conveyance or other disposition or by a Wholly Owned Subsidiary of Holding to
Holding or to a Wholly Owned Subsidiary of Holding, (ii) an issuance of Equity
Interests by a Restricted Subsidiary of Holding to Holding or to a Wholly Owned
Subsidiary of Holding, (iii) a Restricted Payment that is permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments," (iv) the sale and leaseback of any assets within 270 days of the
acquisition of such assets, (v) foreclosures on assets, (vi) the clearance of
inventory, (vii) sales or dispositions of obsolete equipment or other assets in
the ordinary course of business or (viii) the sale, conveyance or other
disposition of accounts receivables and related assets customarily transferred
in connection with a Qualified Receivables Transaction will not be deemed to be
Asset Sales.
"Capital Lease Obligation" means at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participation, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) securities issued or unconditionally and fully
guaranteed or insured by the full faith and credit of the United States
government or any agency or instrumentality thereof having maturities of
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not more than one year from the date of acquisition, (ii) obligations issued or
fully guaranteed by any state of the United States of America or any political
subdivision of any such state or any public instrumentality thereof maturing
within one year from the date of acquisition thereof and, at the time of
acquisition, having one of the two highest ratings obtainable from either
Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), (iii) certificates of deposit and eurodollar time deposits with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight bank deposits,
in each case with any lender party to the New Credit Facility or with any
domestic commercial bank having capital and surplus in excess of $250.0 million,
(iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (i) and (iii), above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having one of the two of the highest
ratings obtainable from either Moody's or S&P and in each case maturing within
one year after the date of acquisition and (vi) investments in funds investing
at least 90% of its assets in investments of the types described in clauses (i)
through (v) above.
"Change of Control" means the occurrence of any of the following: (i)
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that (A) any "person" (as defined above),
other than the Principals and their Related Parties, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act), directly or indirectly, of 50% or more of the Voting Stock of Holding
(measured by voting power rather than number of shares) or (B) any "person" (as
defined above), other than the Principals and their Related Parties becomes the
"beneficial owner" (as defined above) of more than 331/3% of the Voting Stock of
Holding (measured by voting power rather than number of shares) and the
Principals and their Related Parties beneficially own, directly or indirectly,
in the aggregate a lesser percentage of the Voting Stock of Holding than such
other "person", (ii) the first day on which a majority of the members of the
Board of Directors of Holding are not Continuing Directors or (iii) Holding
consolidates with, or merges with or into, any Person, or any Person
consolidates with, or merges with or into, Holding, in any such event pursuant
to a transaction in which any of the outstanding Voting Stock of Holding is
converted into or exchanged for cash, securities or other property, other than
any such transaction where (A) the Voting Stock of Holding outstanding
immediately prior to such transaction is converted into or exchanged for Voting
Stock (other than Disqualified Stock) of the surviving or transferee Person and
(B) the "beneficial owners" (as defined above) of the Voting Stock of Holding
immediately prior to such transaction own, directly or indirectly through one or
more subsidiaries, not less than a majority of the total Voting Stock of the
surviving or transferee corporation immediately after such transaction.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with an
Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income of such Person and its Restricted Subsidiaries), plus
(ii) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such provision for
taxes was included in computing such Consolidated Net Income, plus (iii)
consolidated interest expense of such Person and its Restricted Subsidiaries for
such period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation and amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash charges (excluding any such non-cash
charge to the extent that it represents an accrual of or reserve for cash
charges in any future period or amortization of prepaid cash charge that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income, plus (v) any interest
expense on Indebtedness of another Person that is Guaranteed by such Person or
any of its Restricted Subsidiaries or secured by a Lien on assets of such Person
or any of its Restricted Subsidiaries, in each case, to the extent that such
interest expense was deducted in computing such Consolidated Net Income, plus
(vi) (a) fees and expenses incurred in connection with the Recapitalization and
deducted in the calculation of Consolidated Net Income and (b) bonuses paid to
management and other employees of Holding and its subsidiaries in connection
with, and substantially concurrently with, the Recapitalization in an amount not
to exceed in the aggregate $11.5 million,
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minus (vii) non-cash items increasing such Consolidated Net Income for such
period, in each case, on a consolidated basis and determined in accordance with
GAAP. Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash charges
of, a Restricted Subsidiary of a Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent (and in the same
proportion) that the Net Income of such Restricted Subsidiary was included in
calculating the Consolidated Net Income of such Person.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP,
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Restricted Subsidiary
thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to
the extent that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, and (iv) the cumulative effect of a change in accounting principles
shall be excluded and (v) the Net Income of, or any dividends or other
distributions from, any Unrestricted Subsidiary, to the extent otherwise
included, shall be excluded, except to the extent actually distributed to
Holding or one of its Restricted Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of Holding who (i) was a member of such Board of
Directors on the date of the Indenture immediately after consummation of the
Recapitalization or (ii) was nominated for election or elected to such Board of
Directors with the approval of a majority of the Continuing Directors who were
either members of such Board at the time of such nomination or election or are
successor Continuing Directors appointed by such Continuing Directors (or their
successors).
"Credit Facilities" means, with respect to Holding and its Restricted
Subsidiaries, one or more debt facilities (including, without limitation, the
New Credit Facility) or commercial paper facilities with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (other than a Qualified Receivables Transaction) or
letters of credit and related security and collateral agreements, in each case,
as amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder; provided that such
increase in borrowings is permitted under the covenant described under "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"
or adding Restricted Subsidiaries of Holding as additional borrowers or
guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable at the option of the holder thereof), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date on which the Series B Debentures
mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"Equity Offering" means an offering of Equity Interests (other than
Disqualified Stock) of Holding pursuant to an effective registration statement
filed with the Commission in accordance with the Securities Act, other than an
offering pursuant to Form S-8 (or any successor thereto).
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations, and (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period; provided, however, that in no event shall any
amortization of deferred financing costs incurred in connection with the
Recapitalization be included in Fixed Charges and (iii) any interest expense on
Indebtedness of another Person to the extent such Indebtedness is Guaranteed by
such Person or one of its Restricted Subsidiaries or secured by a Lien on assets
of such Person or one of its Restricted Subsidiaries (whether or not such
Guarantee or Lien is called upon) and (iv) the product of (a) (without
duplication) (1) all dividends paid or accrued in respect of Disqualified Stock
which are not treated as interest for tax purposes for such period and (2) all
cash dividend payments on any series of preferred stock of such Person or any of
its Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests (other than Disqualified Stock of Holding),
times (b) a fraction, the numerator of which is one and the denominator of which
is one minus the then current combined federal, state and local statutory tax
rate of such Person, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that Holding or any
of its Restricted Subsidiaries incurs, assumes, Guarantees, repays or redeems
any Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the Fixed
Charge Coverage Ratio is being calculated but prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee, repayment or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by Holding or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow and Fixed Charges for such reference
period shall be calculated without giving effect to clause (iii) of the proviso
set forth in the definition of Consolidated Net Income and shall reflect any pro
forma expense and cost reductions attributable to such acquisitions (as
determined in good faith by a responsible financial or accounting officer of
Holding and approved by Holding's Board of Directors), and (ii) the Consolidated
Cash Flow and Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded and Consolidated Cash Flow
shall reflect any pro forma expense or cost reductions relating to such
discontinuance or disposition (as determined in good faith by a responsible
financial or accounting officer of Holding and approved by Holding's Board of
Directors), and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture provided, however,
that all reports and other financial information provided by Holding to the
Holders, the Trustee and/or the Commission shall be prepared in accordance with
generally accepted accounting principles,
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as in effect at the date of such report or such other financial information;
provided, further, however, that if there are any differences between such
principles and GAAP Holding shall provide a written explanation thereof.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or the value of foreign currencies.
"Indebtedness" means, with respect to any Person, any Obligation of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing Indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any Indebtedness of any other Person to the extent
such Indebtedness is so Guaranteed. The amount of any Indebtedness outstanding
as of any date shall be the accreted value thereof, in the case of any
Indebtedness that does not require current payments of interest.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or indirect
loans (including guarantees of Indebtedness or other obligations), advances or
capital contributions (excluding commission, travel, relocation and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Holding or any Restricted Subsidiary of Holding sells or otherwise disposes
of any Equity Interests of any direct or indirect Restricted Subsidiary of
Holding such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted Subsidiary of Holding, Holding shall be deemed
to have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Equity Interests of such Restricted Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of the covenant described above under the caption "--Certain Covenants--
Restricted Payments."
"Issue Date" means the date on which Series B Debentures are first issued
and authenticated under the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, and any option or other agreement to sell or give a security
interest and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Management Note" means any promissory Note given by an employee of Holding
or any Affiliate thereof as part of the purchase price for Equity Interests in
Holding or in Holding.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
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"Net Proceeds" means the aggregate cash proceeds received by Holding or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness under the Credit Facilities) secured by a Lien on the
asset or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Holding nor
any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise), and (ii) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of Holding or any of its
Restricted Subsidiaries, including the stock of any Unrestricted Subsidiary.
"Obligations" means, with respect to any Indebtedness, any principal of,
premium, if any, and interest on such Indebtedness and all other amounts,
including without limitation penalties, fees, indemnifications, reimbursements,
damages and other liabilities payable under the documentation governing,
evidencing or securing any Indebtedness.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment with the Series B Debentures.
"Permitted Asset Swap" means any transfer of properties or assets by
Holding or any of its Restricted Subsidiaries in which 80% of the consideration
received by the transferor consists of properties or assets (other than cash)
that will be used in the business of such transferor; provided, that (i) the
aggregate fair market value (as determined in good faith by the Board of
Directors of Holding) of the property or assets (including cash) being
transferred by Holding or such Restricted Subsidiary, as the case may be, is not
greater than the aggregate fair market value (as determined in good faith by the
Board of Directors of Holding) of the property or assets (including cash)
received by Holding or such Restricted Subsidiary, as the case may be, in such
exchange and (ii) the aggregate fair market value (as determined in good faith
by the Board of Directors of Holding) of all property or assets transferred by
Holding and any of its Restricted Subsidiaries in connection with exchanges in
any period of twelve consecutive months shall not exceed $20 million.
"Permitted Business" means the business conducted (or proposed to be
conducted, including activities referred to as being contemplated by Holding, as
described or referred to in this Offering Memorandum) by Holding and the
Restricted Subsidiaries as of the Issue Date and any and all business that in
the good faith judgment of the Board of Directors of Holding are reasonably
related businesses, including reasonably related extensions or expansions
thereof.
"Permitted Investments" means (a) any Investment in Holding or in a
Restricted Subsidiary of Holding; (b) any Investment in Cash and Cash
Equivalents; (c) any Investment by Holding or any Restricted Subsidiary in a
Person, if as a result of such Investment (i) such Person becomes a Restricted
Subsidiary of Holding or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Holding or a Restricted Subsidiary of Holding; (d) any
Restricted Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "--Repurchase at the Option of Holders--Asset
Sales" or any transaction not constituting an Asset Sale by reason of the $1.0
million threshold contained in the definition thereof; (e) any acquisition of
assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of Holding; (f) Hedging Obligations entered into in the
ordinary course of Holding's or its Restricted Subsidiaries' Businesses and
otherwise in compliance with the Indenture; (g) loans and advances to employees
and officers of Holding and its Restricted Subsidiaries in the ordinary course
of business for bona fide business purposes not in excess of $1 million at any
one time outstanding; (h) Management Notes in an aggregate amount not to exceed
$3 million at any one time outstanding; (i) Investments received in settlement
of obligations or pursuant to any plan
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of reorganization or similar arrangement upon the bankruptcy or insolvency of
customers or other third parties; and (j) additional Investments not to exceed
$15.0 million at any one time outstanding.
"Permitted Liens" means:
(i) Liens existing as of the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date;
(ii) Liens on assets of Restricted Subsidiaries securing Indebtedness of
Restricted Subsidiaries permitted to be incurred under the Indenture;
(iii) Liens securing the Series B Debentures;
(iv) Liens in favor of Holding or a Wholly Owned Restricted Subsidiary on
assets of any Restricted Subsidiary of Holding;
(v) Liens securing Permitted Refinancing Indebtedness which is incurred to
refinance any Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions of the
Indenture, provided, however, that such Liens (A) are not materially less
favorable to the Holders and are not materially more favorable to the
lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being refinanced and (B) do not extend to or cover any property or
assets of Holding or any of its Restricted Subsidiaries not securing the
Indebtedness so refinanced;
(vi) Liens for taxes, assessments or governmental charges or claims either
(A) not delinquent or (B) contested in good faith by appropriate proceedings and
as to which Holding or its Restricted Subsidiaries shall have set aside on its
books such reserves as may be required pursuant to GAAP;
(vii) Statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or being
contested in good faith, if such reserve or other appropriate provision, if any,
as shall be required by GAAP shall have been made in respect thereof;
(viii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other types
of social security or similar obligations, including any Lien securing letters
of credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, indemnity, surety, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of borrowed
money);
(ix) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which may have
been duly initiated for the review of such judgement shall not have been finally
terminated or the period within which such proceedings may be initiated shall
not have expired;
(x) easements, rights-of-way, zoning restrictions and other similar charges
or encumbrances in respect of real property not interfering in any material
respect with the ordinary conduct of the business of Holding or any of its
Restricted Subsidiaries;
(xi) any interest or title of a lessor under any lease, whether or not
characterized as capital or operating; provided that such Liens do not extend to
any property or assets which is not leased property subject to such lease;
(xii) Liens securing Capital Lease Obligations and Indebtedness incurred in
accordance with the covenant described under "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock;" provided, however, that (A) the
Indebtedness shall not exceed the cost (including installation and delivery
charges and related sales taxes) of such property or assets being acquired,
remodeled or constructed and shall not be secured by any property or assets of
Holding or any Restricted Subsidiary of Holding other than the property or
assets of Holding
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or any Restricted Subsidiary of Holding other than the property and assets being
acquired, remodeled or constructed and (B) the Lien securing such Indebtedness
shall be created within 180 days of such acquisition or the competition of such
construction or remodeling;
(xiii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate the
purchase, shipment or storage of such inventory or other goods;
(xiv) Liens securing reimbursement obligations with respect to letters of
credit which encumber documents and other property relating to such letters of
credit and products and proceeds thereof;
(xv) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of Holding or any
of its Restricted Subsidiaries, including rights of offset and set-off;
(xvi) Liens securing Hedging Obligations which Hedging Obligations relate
to Indebtedness that is otherwise permitted under the Indenture;
(xvii) Liens securing Acquired Debt incurred in accordance with the
covenant described under "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock;" provided that (A) such Liens secured such Acquired
Debt at the time of and prior to the incurrence of such Acquired Debt by Holding
or a Restricted Subsidiary of Holding and were not granted in connection with,
or in anticipation of, the incurrence of such Acquired Debt by Holding or a
Restricted Subsidiary of Holding and (B) such Liens do not extend to or cover
any property or assets of Holding or any of its Restricted Subsidiaries other
than the property or assets that secured the Acquired Debt prior to the time
such Indebtedness became Acquired Debt of Holding or a Restricted Subsidiary of
Holding and are not more favorable to the lienholders than those securing the
Acquired Debt prior to the incurrence of such Acquired Debt by Holding or a
Restricted Subsidiary of Holding;
(xviii) leases or subleases granted to others not interfering in any
material respect with the business of Holding or its Restricted Subsidiaries;
(xix) Liens arising out of consignment or similar arrangements for the sale
of goods entered into by Holding or any Restricted Subsidiary in the ordinary
course of business;
(xx) Liens arising from filing Uniform Commercial Code financing statements
as a precautionary matter with respect to leases; and
(xxi) Liens on accounts receivable and any asset related thereto in
connection with a Qualified Receivables Transaction.
"Permitted Refinancing Indebtedness" means any Indebtedness of Holding or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, prepay, retire, renew, replace, defease
or refund Indebtedness of Holding or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest on, the Indebtedness
so extended, refinanced, renewed, prepaid, retired, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith including premiums paid, if any, to the holders thereof); (ii) such
Permitted Refinancing Indebtedness has a final maturity date at or later than
the final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded;
(iii) if the Indebtedness being extended, refinanced, renewed, prepaid, retired,
replaced, defeased or refunded is subordinated in right of payment to the Series
B Debentures, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of payment
to, the Series B Debentures on terms at least as favorable to the Holders of
Series B Debentures as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by
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Holding or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a governmental
agency or political subdivision thereof.
"Principals" means Freeman Spogli & Co. Incorporated.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by Holding or any Restricted Subsidiary
pursuant to which Holding or any Restricted Subsidiary may sell, convey or
otherwise transfer to any Person, or may grant a security interest in, any
accounts receivable (whether now existing or arising in the future) of Holding
or any Restricted Subsidiary and any asset related thereto including, without
limitation, all collateral securing such accounts receivable, all contracts and
all guarantees or other obligations in respect of such accounts receivable,
proceeds of such accounts receivable and other assets which are customarily
transferred, or in respect of which security interests are customarily granted,
in connection with asset securitization transactions involving accounts
receivable.
"Related Party" with respect to any Principal means (A) any controlling
stockholder or a majority (or more) owned Subsidiary of such Principal or, in
the case of an individual, any spouse or immediate family member of such
Principal, or (B) any fund, trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially holding a
majority (or more) controlling interest that consists of such Principal and/or
such other Persons referred to in the immediately preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of Holding other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date of the
Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness (including any scheduled sinking fund payment), and
shall not include any contingent obligations to repay, redeem or repurchase any
such interest or principal prior to the date originally scheduled for the
payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total Voting
Stock thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Tax Sharing Agreement" means, the tax sharing agreement among Holding, the
Company, and any one or more of Holding's subsidiaries, as amended from time to
time, so long as the method of calculating the amount of Holding's (or any
Restricted Subsidiary's) payments, if any, to be made thereunder is not less
favorable to Holding than as provided in such agreement as in effect on the
Issue Date, as determined in good faith by the Board of Directors of Holding.
"Unrestricted Subsidiary" means any Subsidiary of Holding that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with Holding or any Restricted Subsidiary
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to Holding or such Restricted Subsidiary than those that
might
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be obtained at the time from Persons who are not Affiliates of Holding; (c) is a
Person with respect to which neither Holding nor any of its Restricted
Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; and (d) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of Holding or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with a Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted under the Indenture. If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred
by a Restricted Subsidiary of Holding as of such date. The Board of Directors of
Holding may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness and issuance of preferred stock by a Restricted Subsidiary of
Holding of any outstanding Indebtedness or outstanding issue of preferred stock
of such Unrestricted Subsidiary and such designation shall only be permitted if
(i) such Indebtedness and preferred stock is permitted under the Indenture, and
(ii) no Default or Event of Default would exist following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Restricted Subsidiaries of such
Person or by such Person and one or more Wholly Owned Restricted Subsidiaries of
such Person.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax consequences expected to result to Holders who exchange Series A
Debentures for Series B Debentures in the Exchange Offer. This summary is based
on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), administrative pronouncements, judicial decisions and existing and
proposed Treasury Regulations, changes to any of which subsequent to the date of
this Registration Statement may affect the tax consequences described herein and
such changes may be applied retroactively in a manner that could adversely
affect holders of the Series B Debentures. This summary discusses only Series B
Debentures held as capital assets within the meaning of Section 1221 of the
Code. It does not discuss all of the tax consequences that may be relevant to a
holder in light of his particular circumstances or to holders subject to special
rules, such as certain financial institutions, insurance companies, dealers in
securities, tax-exempt organizations, subsequent purchasers, foreign persons
(except as otherwise provided below), holders who hold the Series B Debentures
as part of straddle or a hedging or conversion transaction, persons that have a
functional currency other than the U.S. dollar and investors in pass-through
entities. Holders of the Series A Debentures exchanged for Series B Debentures
should consult their tax advisors with regard to the application of the United
States federal income tax laws to their particular situations as well as any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Series
B Debenture that for United States federal income tax purposes is (i) a citizen
or resident of the United States (as defined in Section 7701(b)(1)), (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons have the authority to control all substantial
decisions of the trust or (v) a person whose worldwide income and gain is
subject to U.S. federal income tax on a net basis. The term also includes
certain former citizens or residents of the United States. A "Non-U.S. Holder"
is a holder who is not a U.S. Holder.
TAX CONSEQUENCES TO U.S. HOLDERS
Exchange Offer
The exchange of the Series A Debentures for the Series B Debentures
pursuant to the Exchange Offer will not constitute a taxable exchange. As a
result, (i) a U.S. Holder will not recognize taxable gain or loss as a result of
exchanging the Series A Debentures for the Series B Debentures pursuant to the
Exchange Offer, (ii) the holding period of the Series B Debentures will include
the holding period of the Series A Debentures exchanged therefor and (iii) the
adjusted tax basis of the Series B Debentures will be the same as the adjusted
tax basis of the Series A Debentures exchanged therefor immediately before the
exchange.
Stated Interest
Interest on Series B Debentures should be taxable to a U.S. Holder as
ordinary interest income at the time it accrues or is received in accordance
with such holder's method of accounting for U.S. federal income tax purposes.
Original Issue Discount
For purposes of the following discussion, it is assumed that the Series B
Debentures will constitute debt for federal income tax purposes. The Series A
Debentures were issued with original issue discount for federal income tax
purposes. Accordingly, each original purchaser of Series A Debentures who
exchanges Series A Debentures for Series B Debentures pursuant to the Exchange
Offer will be taxable on "original issue discount," if any, in accordance with
such holder's method of accounting used for the Series A Debentures exchanged
therefor. For this purpose, each initial purchaser of Series A Debentures
generally was required to include original issue discount with respect to the
Series A Debentures in income as it accrues under a constant yield method in
advance of cash payments attributable to such income (regardless of whether the
holder is a cash or accrual basis taxpayer).
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The amount of original issue discount with respect to a Series A Debenture
will be the excess of the stated redemption price at maturity of such Series A
Debenture over its issue price. The stated redemption price at maturity will
include all cash payments required to be made on the Series A Debentures,
whether denominated as principal or interest.
Holdings will report annually to the Internal Revenue Service ("IRS") and
to record holders of the Series B Debentures information with respect to
original issue discount accruing during the calendar year.
Each U.S. Holder of a Series B Debenture will be required to include in
gross income an amount equal to the sum of the daily portions of original issue
discount for each day during a taxable year in which the Series B Debenture is
held without regard to when the cash or other payments attributable to such
income are received. The daily portions of original issue discount will be
determined by allocating the pro rata portion of the original issue discount
that is allocable to the accrual period to each day in an accrual period. The
amount of original issue discount that is allocable to an accrual period is
generally equal to the product of the adjusted issue price of the Series B
Debentures at the beginning of the accrual period (the issue price of the Series
B Debentures determined with reference to the issue price of the Series A
Debentures, generally increased by all prior accruals of original issue discount
and reduced by any cash payments on the Series B Debentures) and the yield-to-
maturity of the Series B Debentures (the discount rate, which, when applied to
all payments under the Series B Debentures, results in a present value equal to
the issue price of the Series B Debentures). In the case of the final accrual
period, the allocable original issue discount is the difference between the
amount payable at maturity and the adjusted issue price at the beginning of the
accrual period. Each payment made under a Series B Debenture will be treated
first as a payment of any accrued original issue discount that has not been
allocated to prior payments and second as a payment of principal (which is not
includable in income).
Holdings does not intend to treat the possibility of an optional redemption
or repurchase of the Series B Debentures as giving rise to any additional
accrual of OID or recognition of ordinary income upon redemption, sale or
exchange of a Series B Debenture. Holders may wish to consider that United
States Treasury Regulations regarding the treatment of certain contingencies
were recently issued and may wish to consult their tax advisers in this regard.
The Series A Debentures will be "applicable high yield discount
obligations" ("AHYDOs"), as defined in the Code, if the yield to maturity of
such Debentures exceeds the "applicable federal rate" in effect at the time of
their issuance (the "AFR") plus five percentage points and the Debentures are
issued with significant original issue discount. If the Series A Debentures are
AHYDOS, Holding will not be entitled to deduct original issue discount that
accrues with respect to the Series A Debentures and the Series B Debentures
exchanged therefor until amounts attributable to such original issue discount
are paid. In addition, if the yield to maturity of the Series A Debentures and
the Series B Debentures exchanged therefor exceeds the sum of the relevant AFR
plus six percentage points (such excess being defined as the "Excess Yield"),
Holding's deduction for the "disqualified portion" of the original issue
discount accruing on the Series A Debentures and the Series B Debentures
exchanged therefor will be disallowed. In general, the "disqualified portion"
of the original issue discount for any accrual period will be equal to the
product of (i) the Excess Yield divided by the yield to maturity on the Series A
Debentures and Series B Debentures exchanged therefor, and (ii) the original
issue discount for the accrual period.
Subject to otherwise applicable limitations, U.S. Holders that are U.S.
corporations will be entitled to a dividends received deduction (generally at a
70% rate) with respect to any disqualified portion of the accrued original issue
discount to the extent that Holding has sufficient current or accumulated
earnings and profits. If the disqualified portion exceeds Holding's current and
accumulated earnings and profits, the excess will continue to be taxed as
ordinary original issue discount income in accordance with the OID rules
described above.
Bond Discount
U.S. Holders who exchange Series A Debentures for Series B Debentures
pursuant to the Exchange Offer will be taxable on "market discount," if any, in
accordance with such holder's treatment of "market
114
<PAGE>
discount" in connection with the Series A Debentures exchanged therefor. For
this purpose, "market discount" is the excess, if any, of the stated redemption
price at maturity over the purchase price of the Series A Debentures, subject to
a statutory de minimis exception.
Bond Premium
U.S. Holders who exchange Series A Debentures for Series B Debentures
pursuant to the Exchange Offer will amortize "bond premium," if any, in
accordance with such holder's treatment of "bond premium" in connection with the
Series A Debentures exchanged therefor. For this purpose, "bond premium" is the
excess of the adjusted tax basis of the Series A Debentures immediately after
the purchase over the sum of all amounts payable on the instrument after the
purchase date (other than qualified stated interest).
Sale, Exchange or Redemption of the Series B Debentures
Generally, any sale, redemption or other taxable disposition of a Series B
Debenture by a U.S. Holder will result in taxable capital gain or loss equal to
the difference between (i) the sum of the amount of cash and the fair market
value of other property received with respect to such taxable sale, redemption
or other distribution and (ii) the U.S. Holder's adjusted tax basis in the
Series B Debenture. A U.S. Holder's adjusted tax basis in a Series B Debenture
will equal the issue price of the Series B Debenture, increased by any accrued
original issue discount includable in such U.S. Holder's gross income and
decreased by any cash payments received by such U.S. Holder with respect to the
Series B Debenture regardless of whether such payments are denominated as
principal or interest.
Backup Withholding and Information Reporting
Certain noncorporate U.S. Holders may be subject to backup withholding at a
rate of 31% on payments received with respect to, and the proceeds of a
disposition of, a Series B Debenture. Backup withholding will apply only if the
U.S. Holder (i) fails to furnish its Taxpayer Identification Number ("TIN")
which, in the case of an individual, would be his or her Social Security number,
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it has failed
to properly report payments of interest and dividends or (iv) under certain
circumstances, fails to certify, under penalty of perjury, that it has furnished
a correct TIN and has not been notified by the IRS that it is subject to backup
withholding. U.S. Holders should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption if applicable. The amount of any backup withholding
from a payment to a U.S. Holder will be allowed as a credit against such U.S.
Holder's United States federal income tax liability and may entitle such U.S.
Holder to a refund, provided that the required information is furnished to the
IRS.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, payments of interest
(including original issue discount) on the Series B Debentures to, or on behalf
of, a Non-U.S. Holder will not generally be subject to U.S. federal income or
withholding taxes, provided that the Non-U.S. Holder meets certain eligibility
requirements and provides an appropriate certification of non-U.S. status,
unless such interest is effectively connected with a trade or business conducted
by the Non-U.S. Holder in the United States, as discussed below. If these
conditions are not met, a 30% withholding tax will apply to interest income paid
on the Series B Debentures, unless an income tax treaty reduces or eliminates
such tax.
Any capital gain realized on the sale, exchange, redemption or other
disposition of a Series B Debenture by a Non-U.S. Holder will not be subject to
United States federal income or withholding taxes unless, in the case of an
individual, such holder is present in the United States for 183 days or more in
the taxable year of the sale, exchange, redemption, or other disposition and
certain other conditions are met.
If interest with respect to the Series B Debentures or capital gain on the
sale, exchange or other disposition of the Series B Debentures is "effectively
connected" with the conduct of a trade or business in the United States by the
Non-U.S. Holder, such income will be subject to United States federal income tax
at the same rate that
115
<PAGE>
applies for United States Holders and may also be subject to a U.S. "branch
profits tax" at a 30% rate (or such lower rate as may be specified by an
applicable income tax treaty).
Payments of principal and interest in respect of Series B Debentures and
proceeds from the sale or other disposition of a Series B Debenture received by
a Non-U.S. Holder will be subject to a backup withholding of 31% and to
information reporting requirements unless, in general, the Non-U.S. Holder
furnishes satisfactory documentary evidence of its non-U.S. status to Holding or
otherwise establishes an exemption from such tax reporting requirements under
applicable provisions of the Code.
Exemption from U.S. tax for certain Non-U.S. Holders (Form W-8). Non-U.S.
Holders that are beneficial owners (other than a beneficial owner that owns
actually or constructively 10% or more of the total combined voting power of all
classes of stock of Holding entitled to vote or a controlled foreign corporation
that is related to Holding through stock ownership) can obtain a complete
exemption from withholding tax on interest income by furnishing a properly
completed Form W-8 (Certificate of Foreign Status) to Holding prior to receipt
of payment, and by periodically updating such form at the request of Holding.
Exemption for Non-U.S. Holders with effectively connected income (Form
4224). A Non-U.S. Holder, including a non-U.S. corporation or bank with a U.S.
branch, that is a beneficial owner and for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by furnishing a
properly completed Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States) to Holding prior to receipt of payment, and by periodically updating
such form at the request of Holding.
Exemption or reduced rate for Non-U.S. Holders resident in treaty countries
(Form 1001). Non-U.S. Holders that are beneficial owners that are entitled to
the benefits of an income tax treaty with the United States can obtain an
exemption or reduced tax rate on interest income (depending on the treaty terms)
by filing a properly completed Form 1001 (Ownership, Exemption or Reduced Rate
Certificate) to Holding prior to receipt of payment, and by periodically
updating such form at the request of Holding. If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the Non-U.S.
Holder alternatively furnishes Form W-8 as discussed above. Form 1001 may be
filed by the beneficial owner or the beneficial owner's agent.
The Treasury Department recently issued final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and forms and
clarify reliance standards. The final regulations will generally be effective
for payments made after December 31, 1999 subject to certain transition rules.
116
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series B Debentures for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Debentures. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Series B Debentures received in
exchange for Series A Debentures where such Series A Debentures were acquired as
a result of market-making activities or other trading activities. A broker-
dealer who acquired Series A Debentures directly from Holding may not
participate in the Exchange Offer and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of Series A Debentures, unless such sale or transfer is made
pursuant to an exemption from such requirements. Holding has agreed that for a
period of 180 days after the Expiration Date or such shorter period as will
terminate when all Series B Debentures covered by the registration statement of
which this Prospectus is a part have been sold pursuant thereto, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 1998,
all dealers effecting transactions in the Series B Debentures may be required to
deliver a prospectus.
Holding will not receive any proceeds from any sale of Series B Debentures
by broker-dealers. Series B Debentures received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Series B Debentures or a combination of
such methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or purchasers of any such Series B Debentures. Any
broker-dealer that resells Series B Debentures that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Series B Debentures may be deemed to be
an "underwriter" within the meaning of the Securities Act, and any profit on any
such resale of Series B Debentures and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, Holding will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. Holding has agreed to pay the expenses incident to the Exchange
Offer and to Holding's performance of, or compliance with, the Exchange Offer
Registration Rights Agreement (other than commissions or concessions of any
brokers or dealers) and will indemnify the Holders of the Series B Debentures
against certain liabilities, including liabilities under the Securities Act, in
connection with the Exchange Offer. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
persons controlling the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Initial Purchasers have also acted as initial purchasers in the
offering by Holding of the Debentures. DLJ is an affiliate of DLJ Capital
Funding, Inc. which is a syndication agent and a lender to Holding under the New
Credit Facility. DLJ performs various investment banking services from time to
time for FS&Co. and its affiliates, and an affiliate of DLJ is an investor in an
investment fund organized by FS&Co. Chase Securities Inc. is an affiliate of The
Chase Manhattan Bank which is the administrative agent and a lender to Holding
under the New Credit Facility. Chase Securities Inc., The Chase Manhattan Bank
and their affiliates perform various investment banking and commercial banking
services from time to time for FS&Co. and its affiliates, and an affiliate of
Chase
117
<PAGE>
Securities Inc. is a limited partner of certain investment funds organized by
FS&Co. See "Description of Other Indebtedness--The New Credit Facility."
EXPERTS
The consolidated financial statements of Holding as of January 3, 1998 and
for the three years then ended, included in this Prospectus, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of Western Auto as of January 3, 1998 and December
28, 1996 and for each of the three years in the period ended January 3, 1998
included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Series B
Debentures offered hereby will be passed upon for Holding by Riordan & McKinzie,
a Professional Corporation, Los Angeles, California. Certain principals and
employees of Riordan & McKinzie are limited partners in partnerships which are
limited partners of an FS&Co. investment fund that own a majority of Holding's
equity interests.
118
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS:
AUDITED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................................... F-2
Consolidated Balance Sheets - January 3, 1998, and December 28, 1996....................... F-3
Consolidated Statements of Income For the Years Ended January 3, 1998, December 28, 1996,
and December 30, 1995..................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity For the Years Ended January 3,
1998, December 28, 1996, and December 30, 1995............................................ F-5
Consolidated Statements of Cash Flows For the Years Ended January 3, 1998, December 28,
1996, and December 30, 1995............................................................... F-6
Notes to Consolidated Financial Statements January 3, 1998, December 28, 1996, and
December 30, 1995......................................................................... F-7
UNAUDITED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets - July 18, 1998, and January 3, 1998................. F-22
Condensed Consolidated Statements of Income for the Twelve and Twenty-Eight
Week Periods Ended July 18, 1998, and July 12, 1997....................................... F-23
Condensed Consolidated Statements of Cash Flows for the Twenty-Eight Week
Periods Ended July 18, 1998, and July 12, 1997............................................ F-24
Notes to Unaudited Condensed Consolidated Financial Statements for the Twelve and
Twenty-Eight Week Periods Ended July 18, 1998 and July 12, 1997........................... F-25
WESTERN AUTO SUPPLY COMPANY (A WHOLLY OWNED SUBSIDIARY OF SEARS, ROEBUCK AND CO.) AND
SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report................................................................... F-37
Consolidated Balance Sheets - January 3 1998 and December 28, 1996............................. F-38
Consolidated Statements of Operations for the Years (53/52 weeks) Ended January 3, 1998,
December 28, 1996, and December 30, 1995..................................................... F-39
Consolidated Statements of Stockholders' Equity For the Years (53/52 weeks) Ended January 3,
1998, December 28, 1996, and December 30, 1995........................,...................... F-40
Consolidated Statements of Cash Flows For the Years (53/52 weeks) Ended January 3, 1998,
December 28, 1996, and December 30, 1995..................................................... F-41
Notes to Consolidated Financial Statements for the Years (53/52 weeks) Ended January 3, 1998,
December 28, 1996, and December 30, 1995..................................................... F-42
UNAUDITED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - July 4, 1998 and January 3, 1998................................. F-55
Consolidated Statements of Operations for the 3 and 6 Month Periods Ended July 4, 1998 and
June 28, 1997................................................................................ F-56
Consolidated Statements of Cash Flows for the 6 Month Periods Ended July 4, 1998 and
June 28, 1997................................................................................ F-57
Notes to Consolidated Financial Statements (unaudited) for the 3 and 6 Month Periods Ended
July 4, 1998 and June 28, 1997............................................................... F-58
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advance Holding Corporation:
We have audited the accompanying consolidated balance sheets of Advance Holding
Corporation (a Virginia company) and subsidiaries (the Company), as of January
3, 1998, and December 28, 1996, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
fiscal years in the period ended January 3, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advance Holding
Corporation and subsidiaries as of January 3, 1998, and December 28, 1996, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 3, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
January 30, 1998 (except with respect to the
matters discussed in Note 13, as to which
the date is March 18, 1998 and in Note 14, as
to which the date is August 17, 1998).
F-2
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- JANUARY 3, 1998, AND DECEMBER 28, 1996
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
ASSETS 1998 1996
------ ---------- ------------
(dollars in thousands, except per share data)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,463 $ 14,833
Marketable securities 2,025 1,833
Receivables, primarily from vendors 19,108 14,394
Trade Receivables 3,359 -
Inventories 280,267 252,544
Prepaid expenses and other current assets 2,895 1,950
Refundable income taxes 1,765 -
-------- --------
Total current assets 324,882 285,554
PROPERTY AND EQUIPMENT, net 134,896 108,452
OTHER ASSETS 2,054 389
-------- --------
$461,832 $394,395
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Bank overdrafts $ 6,970 $ 14,158
Borrowings secured by trade receivables 3,359 -
Notes payable and current portion of long-term debt 3,959 5,303
Current portion of deferred revenue 1,530 1,602
Accounts payable 157,096 130,024
Accrued expenses 27,718 21,248
Deferred income taxes 3,110 3,139
-------- --------
Total current liabilities 203,742 175,474
-------- --------
LONG-TERM DEBT 100,167 86,400
-------- --------
DEFERRED REVENUE 693 426
-------- --------
DEFERRED INCOME TAXES 12,839 9,316
-------- --------
OTHER LONG-TERM LIABILITIES 843 456
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4, 8, 9, 10 and 11)
STOCKHOLDERS' EQUITY:
8% noncumulative, nonvoting preferred stock, $10 par value, redeemable
by the Company at par; liquidation value at par; 100,000 shares
authorized; 77,300 shares issued and outstanding 773 773
Common stock, Class A, voting, $.01 par value; 62,500,000 shares authorized;
2,412,500 shares issued and outstanding 19 19
Common stock, Class B, nonvoting, $.01 par value; 437,500,000 shares
authorized; 21,875,000 shares issued and outstanding 175 175
Retained earnings 142,581 121,356
-------- --------
Total stockholders' equity 143,548 122,323
-------- --------
$461,832 $394,395
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JANUARY 3, 1998,
DECEMBER 28, 1996, AND DECEMBER 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
(53 weeks) (52 weeks) (52 weeks)
(dollars in thousands)
<S> <C> <C> <C>
NET SALES $848,108 $705,983 $602,559
COST OF SALES, including purchasing and warehousing costs 524,586 437,615 369,962
-------- -------- --------
Gross profit 323,522 268,368 232,597
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 281,095 228,226 196,289
-------- -------- --------
Operating income 42,427 40,142 36,308
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (6,086) (4,891) (5,028)
Interest income 463 638 818
Losses on sales of property and equipment, net (362) (97) (1,905)
Other, net (422) (354) (68)
-------- -------- --------
Total other income (expense), net (6,407) (4,704) (6,183)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 36,020 35,438 30,125
PROVISION FOR INCOME TAXES 14,733 14,174 12,122
-------- -------- --------
NET INCOME $ 21,287 $ 21,264 $ 18,003
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
<TABLE>
<CAPTION>
COMMON COMMON TOTAL
PREFERRED STOCK STOCK RETAINED STOCKHOLDERS'
STOCK CLASS A CLASS B EARNINGS EQUITY
----------- --------- --------- ---------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $773 $19 $175 $ 82,213 $ 83,180
Net income - - - 18,003 18,003
Preferred dividend, $0.80 per share - - - (62) (62)
---- ---- ---- -------- --------
BALANCE, December 30, 1995 773 19 175 100,154 101,121
Net income - - - 21,264 21,264
Preferred dividend, $0.80 per share - - - (62) (62)
---- ---- ---- -------- --------
BALANCE, December 28, 1996 773 19 175 121,356 122,323
Net income - - - 21,287 21,287
Preferred dividend, $0.80 per share - - - (62) (62)
---- ---- ---- -------- --------
BALANCE, January 3, 1998 $773 $19 $175 $142,581 $143,548
==== ==== ==== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 3, 1998,
DECEMBER 28, 1996, AND DECEMBER 30, 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(53 weeks) (52 weeks) (52 weeks)
(dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,287 $ 21,264 $ 18,003
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation and amortization 21,801 17,499 14,799
Losses on sales of property and equipment 362 97 1,905
Provision for deferred income taxes 4,216 5,234 1,981
Net periodic postretirement benefit expense, net of payments made 387 245 211
Purchases of marketable securities (192) (84) (289)
Net (increase) decrease in:
Receivables, primarily from vendors (4,714) (5,623) (2,519)
Trade receivables (3,359) - -
Inventories (27,723) (72,645) (24,670)
Prepaid expenses and other assets (837) 515 (1,177)
Refundable income taxes (1,765) - 1,057
Net increase in:
Accounts payable 27,072 58,589 9,577
Accrued expenses 5,748 2,843 3,961
-------- -------- --------
Net cash provided by operating activities 42,283 27,934 22,839
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (48,864) (44,264) (42,939)
Proceeds from sales of property and equipment 257 143 3,084
-------- -------- --------
Net cash used in investing activities (48,607) (44,121) (39,855)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank overdrafts (7,188) 634 4,356
Net borrowings under notes payable 6 226 1,395
Proceeds from issuance of long-term debt 65,000 62,200 26,000
Principal payments on long-term debt (52,583) (50,450) (7,000)
Net borrowings secured by trade receivables 3,359 - -
Restricted escrow funds (1,773) - -
Increase (decrease) in deferred revenue 195 (1,416) (1,046)
Preferred dividends paid (62) (62) (62)
-------- -------- --------
Net cash provided by financing activities 6,954 11,132 23,643
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 630 (5,055) 6,627
CASH AND CASH EQUIVALENTS, beginning of year 14,833 19,888 13,261
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 15,463 $ 14,833 $ 19,888
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 5,867 $ 5,026 $ 5,029
Income taxes paid, net of refunds received 13,302 7,771 8,813
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
1. DESCRIPTION OF BUSINESS:
Advance Holding Corporation and subsidiaries (the Company) is a retailer of
automotive replacement parts, accessories and maintenance items, with 814, 649
and 536 stores as of January 3, 1998, December 28, 1996, and December 30, 1995,
respectively. The stores are located throughout Virginia, North Carolina, South
Carolina, Tennessee, West Virginia, Kentucky, Alabama, Georgia, Ohio,
Pennsylvania, Maryland, Michigan, Arkansas and Indiana.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ACCOUNTING PERIOD
The Company's fiscal year ends on the Saturday nearest the end of the month of
December. The consolidated financial statements reflect the results of
operations for the 53-week period ended January 3, 1998 (fiscal 1997) and the
52-week periods ended December 28, 1996 (fiscal 1996) and December 30, 1995
(fiscal 1995).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles 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 AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks and highly liquid debt
instruments, including municipal bonds with investor put options at par or
original maturities of three months or less.
F-7
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
MARKETABLE SECURITIES
Marketable securities have been categorized as trading securities and, as a
result, are stated at fair value as current assets in the accompanying
consolidated balance sheets. Unrealized holding gains and losses are recorded
as other income or expense due to the short-term nature of the investments.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for approximately 89% of inventories at
January 3, 1998, and December 28, 1996, 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 January 3, 1998, and December 28, 1996, were $16,608 and $14,217,
respectively. Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
-------- --------
<S> <C> <C>
Replacement cost $280,267 $252,544
Reserve to state inventories at LIFO 2,274 56
-------- --------
Inventories at LIFO 282,541 252,600
Other reserves (2,274) (56)
-------- --------
$280,267 $252,544
======== ========
</TABLE>
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
income.
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 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.
F-8
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," was issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. During 1996, the
Company adopted the provisions of SFAS No. 121, the effect of which was not
material to the accompanying consolidated financial statements.
ALLOWANCES
The Company receives rebates, discounts, cooperative advertising and other
incentives from vendors that are recorded as a reduction of cost of sales or
selling, general and administrative expenses when earned. Amounts collected but
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 earned within one year of the balance sheet date has been
reflected as a current liability in the accompanying consolidated balance
sheets.
ACCRUAL FOR CLOSED STORES
The Company recognizes a provision for future obligations at the time a decision
is made to close a store. The provision for closed stores includes the present
value of the remaining lease payments, reduced by the present value of estimated
revenues from subleases, and management's estimate of future insurance, property
tax and common area maintenance costs that are required under the terms of the
lease.
POSTRETIREMENT BENEFITS
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, copayment provisions and other limitations.
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.
PREOPENING EXPENSES
Preopening expenses, which consist primarily of payroll and occupancy costs, are
expensed as incurred.
F-9
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
approximately $23,274, $21,694 and $17,078 in fiscal 1997, 1996 and 1995,
respectively.
WARRANTY COSTS
Warranty costs associated with certain products sold with warranty protection
are estimated based on the Company's historical experience and recorded in the
period the product is sold. The Company's vendors are primarily responsible for
warranty claims on vendor products.
INCOME TAXES
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
tax rates applicable to the periods in which the differences are expected to
affect taxable income. The provision for income taxes includes the income tax
payable for the period and the net change during the period in deferred tax
assets and liabilities.
REVENUE RECOGNITION
The Company recognizes revenue at the point of sale to the retail customer. The
majority of sales are made for cash; however, during 1996, the Company began to
extend credit 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 generally without recourse. The Company provides for an
allowance for doubtful accounts on receivables sold on a recourse basis based
upon factors related to credit risk of specific customers, historical trends and
other information. In fiscal 1997, the Company adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," which 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 $3,359 at January 3, 1998.
FINANCIAL INSTRUMENTS
The Company has certain financial instruments which include cash and cash
equivalents, marketable securities, receivables, accounts payable, bank
overdrafts and notes payable and long-term debt. The carrying amounts of these
financial instruments approximate fair value because of their short maturities.
RECLASSIFICATIONS
Certain items in the fiscal 1996 and fiscal 1995 financial statements have been
reclassified to conform with the fiscal 1997 presentation.
F-10
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
3. INVESTMENTS:
Marketable securities classified as current assets include the following:
<TABLE>
<CAPTION>
JANUARY 3, 1998 DECEMBER 28, 1996
-------------------- -------------------
FAIR FAIR
VALUE COST VALUE COST
------- ------ ------ -------
<S> <C> <C> <C> <C>
Cash and cash equivalents-
Municipal bonds $7,996 $7,996 $7,881 $7,881
Money market funds 42 42 31 31
------ ------ ------ ------
$8,038 $8,038 $7,912 $7,912
------ ------ ------ ------
Marketable securities - Mutual fund $2,025 $1,962 $1,833 $1,830
====== ====== ====== ======
</TABLE>
The fair value of municipal bonds is considered to equal the par value because
the Company has the availability to put the bonds at par with seven days'
notice. The municipal bonds have high credit ratings and are backed by letters
of credit.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
JANUARY 3, DECEMBER 28, USEFUL
1998 1996 LIVES
---------- ------------ ---------
<S> <C> <C> <C>
Land and land improvements $ 3,316 $ 3,242 0-10 years
Buildings 10,434 10,330 40 years
Leasehold improvements 18,435 17,053 (see note 2)
Furniture, fixtures and equipment 143,069 115,263 3-12 years
Vehicles 21,979 20,368 2-10 years
Construction in progress 15,603 - -
-------- -------- ----------
212,836 166,256
Less - Accumulated depreciation and
amortization (77,940) (57,804)
-------- --------
Property and equipment, net $134,896 $108,452
======== ========
</TABLE>
Construction in progress primarily relates to the construction of a distribution
center (Note 7).
The Company capitalized $169 and $235 of interest incurred on funds used to
construct buildings and improvements during fiscal 1997 and fiscal 1996,
respectively. No interest was capitalized during fiscal 1995.
F-11
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
At January 3, 1998, the Company had contractual commitments of approximately
$4,188 to construct facilities or purchase equipment.
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------- ------------
<S> <C> <C>
Payroll and related benefits $ 7,307 $ 7,780
Sales taxes 3,439 2,674
Medical and workers' compensation claims 5,266 2,679
Other 11,706 8,115
------- -------
Total accrued expenses $27,718 $21,248
======= =======
</TABLE>
6. NOTES PAYABLE AND SHORT-TERM FINANCING AGREEMENTS:
The Company maintains short-term lines of credit with several banks with
aggregate available borrowings of $32,000 at January 3, 1998, and $42,000 at
December 28, 1996. Borrowings under the lines are unsecured and are generally
payable within 7 to 30 days and bear interest at variable rates (6.1% at January
3, 1998). The maximum short-term borrowings during fiscal 1997, fiscal 1996 and
fiscal 1995 were $22,109, $28,068 and $29,150, respectively; the average
borrowings were $7,406, $11,624, and $14,492, respectively; and the weighted
average interest rates were 6.1%, 6.0% and 6.6%, respectively. Borrowings
outstanding under the lines of credit were $2,959 at January 3, 1998, and $2,953
at December 28, 1996. The Company has no compensating balance arrangements.
The carrying value of notes payable and short-term financing agreements of the
Company approximate the fair value for loans with similar terms.
F-12
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
7. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
------------ -------------
<S> <C> <C>
Revolving credit arrangements, available borrowings of $100,000,
unsecured, interest payable monthly at variable rates (6.22% at
January 3, 1998), principal converts to a term loan on May 31,
1999, payable in 18 equal installments plus interest, from June 1,
1999, through November 30, 2000 $ 84,500 $ 81,000
Term note, unsecured, interest payable monthly at variable rates
(6.47% at January 3, 1998), payable in 96 equal installments plus
interest from October 1, 1996, through September 1, 2004 6,667 7,750
McDuffie County Authority taxable industrial development revenue
bonds, issued December 31, 1997, interest due monthly beginning
February 1, 1998, at an adjustable rate established by the
Remarketing Agent, principal due on November 1, 2002 10,000 -
-------- --------
Total long-term debt 101,167 88,750
Less - Current portion of long-term debt 1,000 2,350
-------- --------
Long-term debt, excluding current portion $100,167 $ 86,400
======== ========
</TABLE>
Aggregate borrowings under the revolving credit arrangement are from four banks.
The terms under the revolving credit arrangements with each bank are similar
with respect to interest rates, repayment terms and restrictive covenants.
Repayment of each revolving credit arrangement has been guaranteed by the
Company's wholly owned subsidiary, Advance Stores Company, Incorporated.
On December 31, 1997, the Company entered into an agreement with McDuffie County
Authority under which bond proceeds of $10,000 were issued and are being used to
construct a distribution center. Proceeds of the bond offering that have not
been expended as of January 3, 1998, of $1,773 are in a restricted escrow
account, of which $676 is included in prepaid expenses and other current assets
and $1,097 is included in other assets on the January 3, 1998, consolidated
balance sheet.
F-13
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
These industrial development revenue bonds currently bear interest at a variable
rate adjusted monthly by the Remarketing Agent, with a one time option to
convert the interest rate to a fixed rate. The bonds can be tendered by the
bondholders on any business day at 100% of the principal amount plus interest
while the bonds bear interest at a variable rate. The Tender Agent will
purchase the bonds with drawings under the related letter of credit. In the
event the bonds can not be resold by the Remarketing Agent, the Company is
obligated to redeem the bonds. These bonds are secured by a letter of credit
issued by the Bank. Under the terms of the letter of credit and as long as
there are no violations under the related bond agreement, the Bank will loan the
Company the amounts necessary to redeem any bonds that can not be sold by the
Remarketing Agent. Such loans will bear interest at a variable rate per annum
equal to the rates applicable to the bonds and are due one year from the date
the loan is made. The letter of credit expires on November 1, 2000, and is
subject to annual commission fees at the rate of .3%. The letter of credit is
automatically renewed for one year periods until the expiration date of the
bonds.
The Company has the option to redeem all or a portion of the industrial
development revenue bonds. When interest is at a variable rate, the bonds can
be redeemed for the principal amount plus accrued interest. After the bonds
have been converted to a fixed rate, the redemption price for the bonds carry a
premium of up to 3%. Such premiums decline by .5% each year after the
conversion.
The carrying value of long-term debt of the Company approximates the fair value
of loans with similar terms.
The aggregate future annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ 1,000
1999 33,778
2000 52,639
2001 1,000
2002 11,000
Thereafter 1,750
--------
$101,167
========
</TABLE>
Certain loan agreements contain various provisions, including minimum net worth
and working capital requirements, minimum fixed charges coverage and limitations
on total funded debt as a percentage of net worth and the payment of dividends.
The agreements also contain a clause that makes the borrowings immediately due
and payable in the event of a change in control of the Company, as defined in
the agreements. As of January 3, 1998, the Company was in compliance with these
covenants.
F-14
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
8. INCOME TAXES:
Provision for income taxes for fiscal 1997, fiscal 1996 and fiscal 1995 consists
of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1997-
Federal $ 9,177 $3,741 $12,918
State 1,340 475 1,815
------- ------ -------
$10,517 $4,216 $14,733
======= ====== =======
1996-
Federal $ 8,079 $4,632 $12,711
State 861 602 1,463
------- ------ -------
$ 8,940 $5,234 $14,174
======= ====== =======
1995-
Federal $ 9,093 $1,727 $10,820
State 1,048 254 1,302
------- ------ -------
$10,141 $1,981 $12,122
======= ====== =======
</TABLE>
The provision for income taxes differed from the amount computed by applying the
federal statutory income tax rate due to:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit 3.3 2.7 2.8
Other, net 2.6 2.3 2.4
------- ------ ------
Effective income tax rate 40.9% 40.0% 40.2%
======= ====== ======
</TABLE>
Deferred income taxes reflect the net income tax effect of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
for income tax reporting purposes. Net deferred income tax balances are
comprised of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
------------ ---------------
<S> <C> <C>
Deferred tax assets $ 5,728 $ 3,301
Deferred tax liabilities (21,677) (15,756)
-------- --------
Net deferred taxes $(15,949) $(12,455)
======== ========
</TABLE>
F-15
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
No valuation allowances against deferred income tax assets were recorded at
January 3, 1998, or December 28, 1996.
Temporary differences which gave rise to significant deferred income tax assets
(liabilities) were as follows:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
------------ --------------
<S> <C> <C>
Current deferred income taxes-
Inventory valuation differences $ (6,592) $(4,437)
Accrued medical and workers' compensation 1,805 908
Accrued expenses not currently deductible
for tax 1,418 320
Other, net 259 70
-------- -------
Total current deferred income taxes $ (3,110) $(3,139)
======== =======
Long-term deferred income taxes-
Property and equipment $(13,225) $(9,679)
Other 386 363
-------- -------
Total long-term deferred income taxes $(12,839) $(9,316)
======== =======
</TABLE>
The Company currently has two years that are open to audit by the Internal
Revenue Service. The Company has received notice from a certain state's
Department of Revenue asserting income tax deficiencies for 1993 through 1995.
In addition, various state income and franchise 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 and results of operations.
9. LEASE COMMITMENTS:
The Company leases store locations, distribution centers, office space,
equipment and vehicles under lease arrangements, some of which are with related
parties or trusts established for the benefit of related parties (Note 12). The
Company accounts for these leases as operating leases.
F-16
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
At January 3, 1998, future minimum lease payments due under operating leases are
as follows:
<TABLE>
<CAPTION>
RELATED
PARTIES OTHER TOTAL
--------- -------- ---------
<S> <C> <C> <C>
1998 $ 3,092 $ 51,935 $ 55,027
1999 2,844 50,739 53,583
2000 2,683 48,032 50,715
2001 2,286 44,189 46,475
2002 2,237 41,125 43,362
Thereafter 7,721 123,107 130,828
------- -------- --------
$20,863 $359,127 $379,990
======= ======== ========
</TABLE>
Total rent expense for fiscal 1997, fiscal 1996 and fiscal 1995 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Minimum facility rentals $44,707 $36,678 $29,650
Contingent facility rentals 413 357 442
Equipment rentals 1,532 1,242 1,092
Vehicle rentals 1,658 331 -
------- ------- -------
$48,310 $38,608 $31,184
======= ======= =======
</TABLE>
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 operating expenses applicable to the leased premises and include options
to renew. Certain leases contain rent escalation clauses. Management expects
that, in the normal course of business, leases that expire will be renewed or
replaced by other leases.
10. 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-17
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
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 case is in the very early stages of
discovery; however, management believes that there is no merit to the complaint,
nor to the motion for class certification and, accordingly, plans a vigorous
defense. The Company is also involved in various other claims and lawsuits
arising in the normal course of business. 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.
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. The maximum contingent liability under these employment
agreements is approximately $7,300 at January 3, 1998.
11. 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 $3,196 in fiscal 1997, $2,779 in fiscal 1996 and
$2,335 in fiscal 1995.
F-18
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
POSTRETIREMENT PLAN
The Company provides certain health care and life insurance benefits for
eligible retired employees. Financial information related to this plan was
determined by the Company's independent actuary as of January 3, 1998, and
December 28, 1996.
Net periodic postretirement benefit expense includes the following components:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Service cost $ 139 $ 155
Interest cost 195 113
Amortization of the transition obligation 58 58
Loss amortization 54 8
----- -----
$ 446 $ 334
===== =====
</TABLE>
The funded status and accrued cost for the plan is as follows:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
------------ -------------
<S> <C> <C>
Accumulated postretirement benefit obligation-
Retirees $ 1,130 $ 905
Active plan participants 2,095 1,740
------- -------
Accumulated benefit obligation 3,225 2,645
Fair value of plan assets - -
------- -------
Accumulated benefit obligation in excess of plan assets 3,225 2,645
Unrecognized transition obligation (984) (1,041)
Unrecognized loss (1,398) (1,148)
------- -------
Accrued postretirement benefit cost $ 843 $ 456
======= =======
</TABLE>
The accumulated postretirement benefit obligation was computed using an assumed
discount rate of 7.0% in 1997 and 7.5% in 1996. The health care trend rate was
assumed to be 8.5% for 1997, and was assumed to decline by approximately .5% in
each of the next seven years and then remain at 5.0% for 2004 and thereafter.
If the health care cost were increased 1% for all future years the accumulated
postretirement benefit obligation would have increased by $254 as of January 3,
1998. The effect of this change on the combined service and interest cost would
have been an increase of $18 for 1997.
F-19
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
(dollars in thousands, except per share data)
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.
12. RELATED-PARTY TRANSACTIONS:
The Company leases certain store locations, offices and a distribution center
from related parties. Rents for related-party leases may be slightly higher
than rents for nonaffiliated leases, and certain terms of the related-party
leases are more favorable to the landlord than those contained in leases with
nonaffiliates. Rental payments to related parties of approximately $3,171 in
fiscal 1997, $3,076 in fiscal 1996 and $2,735 in fiscal 1995 are included in the
total rent expense (Note 9).
In 1996, the Company entered into an agreement for the sale and leaseback of a
$2,200 addition to a distribution center. There was no gain or loss as a result
of the transaction. The lease is classified as an operating lease in accordance
with SFAS No. 13, "Accounting for Leases."
13. SUBSEQUENT EVENT - RECAPITALIZATION:
Holding entered into an agreement and plan of merger on March 4, 1998, which
provides for the recapitalization of the Company. In connection with this
transaction, (1) all common and preferred stock of Holding will be converted
into the right to receive approximately $351,000, except that 140 shares of
common stock will remain outstanding and be converted into 1,750,000 shares via
a 12,500-to-one stock split, (2) an additional 10,750,000 shares of common stock
(after the 12,500-to-one stock split) will be sold for $107,500, (3) all
existing debt except for the McDuffie County Authority taxable industrial
revenue bonds discussed in Note 7 will be repaid, (4) new notes and debentures
of $260,000 will be issued and (5) a new term loan and revolving credit facility
will be entered into with aggregate borrowing availability of $375,000. The
Company intends to account for these transactions as the sale of common stock,
the issuance of new debt, the redemption of common and preferred stock and the
repayment of existing notes payable and long term debt for financial reporting
purposes.
The effects of the 12,500-to-one stock split have been retroactively applied to
all common share information for all periods presented in these financial
statements.
F-20
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 28, 1996, AND DECEMBER 30, 1995
14. SUBSEQUENT EVENT - ACQUISITION:
On August 17, 1998, the Company entered into an agreement and plan of merger
with Sears, Roebuck and Co. (Sears) to acquire Western Auto Supply Company
(Western), a wholly owned subsidiary of Sears. Western will be acquired by a
newly formed, wholly owned subsidiary of Stores for $175,000 in cash and
11,474,606 shares of the Company's common stock. In connection with the
transaction, the Company will sell 4,161,712 shares of common stock to certain
common stockholders (after the Recapitalization) for $70,000 and Stores intends
to incur up to $115,000 in debt financing. Upon consummation of the transaction,
Sears will own approximately 40.6% of the Company's issued and outstanding
common stock. The agreement may be terminated by mutual written agreement of the
parties and is subject to certain regulatory filings and approvals.
F-21
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- JULY 18, 1998, AND JANUARY 3, 1998
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
JULY 18, JANUARY 3,
ASSETS 1998 1998
====== =========== ==========
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 44,790 $ 15,463
Marketable securities - 2,025
Receivables, primarily from vendors 24,372 19,108
Trade receivables 5,325 3,359
Inventories 348,523 280,267
Prepaid expenses and other current assets 5,056 2,895
Refundable income taxes 2,185 1,765
--------- ---------
Total current assets 430,251 324,882
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED AMORTIZATION AND DEPRECIATION OF $ 89,910 AND
$ 77,940 143,176 134,896
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION OF $ 668 AND $ 0 21,490 2,054
--------- ---------
$ 594,917 $461,832
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
==============================================
CURRENT LIABILITIES
Bank overdrafts $ - $ 6,970
Borrowings secured by trade receivables 5,325 3,359
Notes payable and current portion of long-term debt - 3,959
Current portion of deferred revenue 3,089 1,530
Accounts payable 216,832 157,096
Accrued expenses 53,634 27,718
Deferred income taxes 2,674 3,110
--------- ---------
Total current liabilities 281,554 203,742
--------- ---------
LONG-TERM DEBT 397,022 100,167
--------- ---------
DEFERRED REVENUE 1,638 693
--------- ---------
DEFERRED INCOME TAXES 13,357 12,839
--------- ---------
POST-RETIREMENT BENEFITS 1,092 843
--------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY:
8% noncumulative, nonvoting preferred stock, $10 par value, 100,000 shares authorized; 0 and
77,300 shares issued and outstanding - 773
Common stock, Class A, voting, $.01 par value, 62,500,000 shares authorized; 12,603,800 and
2,412,500 issued and outstanding 126 19
Common stock, Class B, nonvoting, $.01 par value, 437,500,000 shares authorized; 0 and
21,875,000 shares issued and outstanding - 175
Additional paid-in capital 107,654 -
Outstanding stock options 300 -
Stockholder subscription receivables (2,615) -
(Accumulated deficit) retained earnings (205,211) 142,581
--------- ---------
Total stockholders' (deficit) equity (99,746) 143,548
--------- ---------
$ 594,917 $ 461,832
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998, AND JULY 12, 1997
(dollars in thousands)
(unaudited)
TWELVE WEEK PERIOD TWENTY-EIGHT WEEK
ENDED PERIOD ENDED
--------------------------- --------------------------
JULY 18, JULY 12, JULY 18, JULY 12,
1998 1997 1998 1997
========== ========== ========== ===========
<S> <C> <C> <C> <C>
NET SALES $255,037 $196,729 $544,000 $435,880
COST OF SALES 156,448 121,338 332,825 268,198
-------- -------- -------- --------
Gross profit 98,589 75,391 211,175 167,682
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 79,632 63,444 178,812 145,478
EXPENSES ASSOCIATED WITH RECAPITALIZATION - - 14,005 -
-------- -------- -------- --------
Operating income 18,957 11,947 18,358 22,204
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (10,112) (1,467) (13,559) (3,463)
Other 321 (102) 317 (203)
-------- -------- -------- --------
Total other expense, net (9,791) (1,569) (13,242) (3,666)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 9,166 10,378 5,116 18,538
INCOME TAX EXPENSE 4,241 4,245 2,543 7,583
-------- -------- -------- --------
NET INCOME $ 4,925 $ 6,133 $ 2,573 $ 10,955
======== ======== ======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-23
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
TWENTY-EIGHT WEEK
PERIOD ENDED
==========================
JULY 18, JULY 12,
1998 1997
========== ==========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,573 $ 10,955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment 13,508 11,263
Loss on sale of property and equipment 85 178
Amortization of deferred debt issuance costs 761 -
Amortization of bond discount 2,005 -
Provision for deferred income taxes 82 1,173
Net periodic postretirement benefit expense, net of payments made 249 215
Sales of marketable securities 2,025 (86)
Net (increase) decrease in:
Receivables, primarily from vendors (5,264) 2,924
Trade receivables (1,966) -
Inventories (68,256) (27,256)
Prepaid expenses and other assets (2,760) (2,144)
Refundable income taxes (420) -
Net increase in:
Accounts payable 59,736 23,200
Accrued expenses 25,586 12,452
--------- --------
Net cash provided by operating activities 27,944 32,874
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (26,028) (20,464)
Proceeds from sale of property and equipment 4,155 118
--------- --------
Net cash used in investing activities (21,873) (20,346)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank overdrafts (6,970) (5,759)
Net (repayments) borrowings under notes payable (2,959) 2,203
Proceeds from issuance of long-term debt 11,500 23,000
Payments on long-term debt (102,667) (33,083)
Borrowings under new credit facilities 385,017 -
Payment of debt issuance costs (19,821) -
Proceeds from issuance of Class A Common Stock 105,148 -
Payment for redemption of preferred and common stock (351,000) -
Other 5,008 867
--------- --------
Net cash provided by (used in) financing activities 23,256 (12,772)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,327 (244)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,463 14,833
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,790 $ 14,589
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 4,315 $ 3,387
========= ========
Income taxes paid, net of refunds received $ 1,997 $ 4,463
========= ========
NONCASH TRANSACTIONS:
Debt issuance costs accrued $ 330 $ -
========= ========
Loans receivable related to issuance of common stock $ 2,615 $ -
========= ========
Stock options for redemption of common stock $ 300 $ -
========= ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
F-24
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
(dollars in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements include
the accounts of Advance Holding Corporation and its wholly owned subsidiaries
(the Company). All significant intercompany balances and transactions have been
eliminated in consolidation.
The condensed consolidated balance sheet as of July 18, 1998, and the condensed
consolidated statements of income for the 12-week and 28-week periods ended July
18, 1998 and July 12, 1997, and the statements of cash flows for the 28-week
periods ended July 18,1998 and July 12, 1997 have been prepared by the Company
and have not been audited. In the opinion of management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position of the Company, the results of its
operations and cash flows have been made.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's consolidated financial statements for the fiscal year ended January 3,
1998.
The results of operations for the 12-week and 28-week periods are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
F-25
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
2. INVENTORIES:
Inventories are stated at the lower of cost or market using the last-in, first-
out (LIFO) method. An actual valuation of inventory under the LIFO method can
be made only at the end of each year based on the inventory levels and costs at
that time. Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs.
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 18, 1998 JANUARY 3, 1998
------------- ---------------
<S> <C> <C>
Replacement cost $347,023 $280,267
Reserve to state inventories at LIFO 4,524 2,274
--------- --------
Inventories at LIFO 351,547 282,541
Other reserves (3,024) (2,274)
-------- --------
$348,523 $280,267
======== ========
</TABLE>
3. OTHER ASSETS:
As of July 18, 1998, other assets included deferred debt issuance costs of
$19,369, net of accumulated amortization of $668. Such costs are being
amortized over the term of the related debt (6 to 11 years).
4. STOCK OPTIONS:
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options and awards. Under APB 25,
compensation expense for stock options is measured as the excess, if any, of the
fair market value of the Company's common stock at the measurement date over the
exercise price.
F-26
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
5. RECAPITALIZATION:
On April 15, 1998, the Company consummated its recapitalization pursuant to an
Agreement and Plan of Merger dated March 4, 1998 (the Merger Agreement). In
connection with the Merger, the Company'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. The effects of the 12,500-to-one stock split have
been retroactively applied to all common share information for all periods
presented in these financial statements.
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 Company (the Merger), with the Company as the
surviving corporation. In the Merger, a portion of the common stock and all of
the preferred stock of the Company were converted into the right to receive in
the aggregate approximately $351,000 in cash and certain stock options (see
below). 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 Company'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 Company's
outstanding common stock. In connection with the Merger, management purchased
approximately $8,000, or approximately 6%, of the Company's outstanding common
stock. The purchase of common stock by management resulted in stockholder
subscription receivables. The notes provide for annual interest payments, at
the prime rate, with the entire principal amount due in five years.
On April 15, 1998, the Company entered into a new bank credit facility that
provides for (i) three senior secured term loan facilities in the aggregate
amount of $250,000 and (ii) a secured revolving credit facility of up to
$125,000. At the closing of the Merger, $125,000 was borrowed under one of the
term loan facilities. On April 15, 1998, the Company also issued $200,000 of
senior subordinated notes and approximately $60,000 of senior discount
debentures. In connection with these transactions, the Company extinguished a
substantial portion of its existing notes payable and long-term debt.
The Merger, the retirement of debt, borrowings under the new bank credit
facility, the issuance of the senior discount debentures and the issuance of the
senior subordinated notes collectively represent the "Recapitalization". The
Company has accounted for the Recapitalization for financial reporting purposes
as the sale of common stock, the issuance of debt, the redemption of common and
preferred stock and the repayment of notes payable and long-term debt.
F-27
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
The stock options received by the existing stockholders are for 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 is approximately $300 in the aggregate. The value of the
options has been reflected as additional consideration for the shares of common
stock repurchased in the Recapitalization.
Concurrent with the Recapitalization, the Company paid $11,500 in bonuses to
certain employees, including executive officers. The Company also incurred
$23,231 of Recapitalization related costs and fees, of which $19,951 has been
recorded as deferred debt issuance costs, $775 has been recorded as a reduction
of the proceeds from the sale of common stock and $2,505 has been expensed.
The employee bonuses and Recapitalization related expenses, primarily
professional service fees, are presented as expenses associated with
Recapitalization in the accompanying unaudited condensed consolidated statement
of operations for the 12-week and 28-week periods ending July 18, 1998.
As of July 18, 1998, accrued expenses include $472 of accrued liabilities
related to the Recapitalization, which include the Company's estimate of certain
unpaid professional services.
In connection with the Recapitalization, FS&Co. and an affiliate of Ripplewood
collectively received a $5,000 fee for negotiating the Recapitalization,
advisory and consulting services, arranging financing and raising equity
funding.
6. STOCKHOLDERS AGREEMENT:
The Chairman of the Board and an affiliated trust (the Existing Stockholders),
FS&Co., Ripplewood and the Company have entered into a Stockholders' Agreement
(the Stockholders' Agreement). Under the Stockholders' Agreement, FS&Co.,
Ripplewood and the Existing Stockholders have the right to purchase their pro
rata share of certain new issuances of common stock. In addition, the
Stockholders' Agreement provides for restrictions on the transferability of the
common stock of the Existing Stockholders and Ripplewood for a period of two
years following the Recapitalization and, thereafter, for the following three-
year period any transfers, with certain exceptions, are subject to a right of
first offer in favor of FS&Co., provided that Ripplewood's obligation to make a
first offer extends indefinitely. In addition, the Stockholders' Agreement
provides that upon certain transfers by FS&Co. of its shares of common stock,
the Existing Stockholders and Ripplewood will have the right to participate in
such sales on a pro rata basis. If FS&Co. sells all of its common stock,
Ripplewood and the Existing Stockholders will be obligated to sell all of their
shares of common stock at the request of FS&Co.
F-28
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
The Stockholders' Agreement further provides that FS&Co. will elect the existing
Chairman of the Board to the Board of Directors, and the Existing Stockholders
will elect nominees of FS&Co. Ripplewood has granted FS&Co. an irrevocable
proxy to vote Ripplewood's common stock on all matters, expiring upon an initial
public offering, but FS&Co. will nominate one director designated by Ripplewood.
The Ripplewood director will agree to vote with the FS&Co. directors on all
matters prior to an initial public offering. Pursuant to Stockholders'
Agreement, the existing Chairman of the Board has certain approval rights with
respect to major corporate transactions.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 18, JANUARY 3,
1998 1998
======== ==========
<S> <C> <C>
Senior Debt-
Delayed draw facilities $ - $ -
Revolving facility - -
Tranche B facility 125,000 -
Revolving credit arrangements, interest payable monthly at variable rates
(ranging from 6.1% to 6.5% in 1998), repaid in April 1998 - 84,500
Term note, interest payable monthly at variable rates (ranging from 6.4% to
6.5% in 1998), repaid in April 1998 - 6,667
McDuffie County Authority taxable industrial development revenue bonds,
interest at an adjustable rate (5.55% at July 18, 1998) 10,000 10,000
Subordinated Debt-
Subordinated notes payable, interest due semi-annually at 10.25% commencing
on October 15, 1998, due April 2008 200,000 -
Discount debentures, at 12.875%, due April 2009 (subordinate to
substantially all other liabilities)
62,022 -
--------- --------
Total long-term debt 397,022 101,167
--------- --------
Less - current portion of long-term debt - (1,000)
--------- --------
Long-term debt, excluding current portion $397,022 $100,167
========= ========
</TABLE>
F-29
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
The terms of the McDuffie County Authority taxable industrial development
revenue bonds remain unchanged from January 3, 1998, except that the letter of
credit obtained in connection with the issuance of these bonds has been
cancelled. The bonds are now secured by the letter of credit obtained in
connection with the Revolving Credit Facility.
The delayed draw facilities, new revolving facility and Tranche B facility (New
Credit Facility) are with a syndicate of banks. The New Credit Facility
provides for the Company to borrow up to $375,000 in the form of senior secured
credit facilities, consisting of (i) $50,000 senior secured delayed draw term
loan facility (the Delayed Draw Facility I), (ii) $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), (iii) a $125,000 Tranche
B senior secured term loan facility (the Tranche B Facility), and (iv) a
$125,000 senior secured revolving credit facility (the Revolving Facility). The
Revolving Facility has a letter of credit sublimit of $25,000. Amounts
available under the Delayed Draw Facilities and the Revolving Facility are
subject to a borrowing base formula based on a specified percentage of the
Company's eligible inventory.
The Delayed Draw Facilities mature April 2004. The Tranche B Facility matures
in April 2006. These term facilities provide for nominal annual amortization in
the first five years and amortization of $149.0 million in 2004, $60.0 million
in 2005 and $30.0 million in 2006. The Revolving Facility will mature in April
2004.
Borrowings under the New Credit Facility are required to be prepaid, subject to
certain exceptions, with (a) 50% of 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 Store's (i) consolidated net income (excluding certain gains or
losses and restricted payments made to its parent), (ii) depreciation,
amortization and other non-cash charges, (iii) any decrease in Net Working
Capital (as defined), (iv) increases in deferred revenues, and (v) proceeds of
certain indebtedness incurred, over (B) the sum of (a) any non-cash 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).
F-30
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
For the first four fiscal quarters after April 1998, the interest rates under
the Delayed Draw Facilities and the Revolving Facility are based, at the option
of the Company, on either a eurodollar rate plus 2.25% per annum or a base rate
plus 1.25% per annum. Thereafter, the interest rates under the Delayed Draw
Facilities and the Revolving Facility will be determined by reference to a
pricing grid that will provide for reductions in the applicable interest rate
margins based on the trailing Total Debt to EBITDA ratio, as defined, of Advance
Stores Company, Incorporated, a wholly-owned subsidiary (Stores). The initial
margins will be 2.25% and 1.25% for eurodollar and base rate borrowings,
respectively, and can step down to 1.75% and 0.75%, respectively, if Stores'
Total Debt to EBITDA ratio is less than or equal to 4.00 to 1.00. The interest
rate under the Tranche B Facility is based, at the option of the Company, on a
eurodollar rate plus 2.5% or a base rate plus 1.5% (8.2% at July 18, 1998). A
commitment fee of 0.50% per annum will be charged on the unused portion of the
New Credit Facility.
The New Credit Facility is secured by substantially all of the assets of the
Company. The New Credit Facility contains covenants restricting the ability of
Stores and its subsidiaries to, among others, (i) declare dividends or redeem or
repurchase capital stock (ii) prepay, redeem or purchase debt, (iii) incur liens
or engage in sale-leaseback transactions, (iv) make loans and investments, (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) change the nature of the business
conducted by the Company and its subsidiaries, (x) change the passive holding
company status of Advance Holding Corporation and (xi) amend existing debt
agreements. Stores is also required to comply with financial covenants with
respect to (a) a maximum leverage ratio, (b) a minimum interest coverage ratio,
and (c) a minimum retained cash earnings test.
The $200,000 Senior Subordinated Notes (the Notes) mature on April 15, 2008 and
will bear interest at the rate of 10.25% per annum, payable semi-annually on
April 15 and October 15 of each year, commencing October 15, 1998. 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 cash at the redemption prices
(as defined), plus accrued and unpaid interest and liquidated damages, if any,
thereon to the date of redemption. 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.
F-31
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
Upon the occurrence of a change of control, (as defined), 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 are guaranteed by a wholly-owned subsidiary of Stores, LARALEV, INC.,
which holds certain trademarks and tradenames and other intangible assets for
which it receives royalty income from Stores. The Notes contain certain
covenants that limit, among other things, the ability of Stores to incur
additional indebtedness, issue preferred stock, pay dividends or certain other
distributions, issue stock of subsidiaries, make certain investments, repurchase
stock and certain indebtedness, create or incur liens, engage in transactions
with affiliates, enter into new businesses and restrict Stores from engaging in
certain mergers or consolidations and selling assets.
The Senior Discount Debentures (the Debentures) are due on April 15, 2009.
Interest at 12.875% (computed on a semi-annual basis) is calculated from April
15, 1998. The Debentures will accrete at a rate of 12.875%, compounded semi-
annually, to an aggregate principal amount of $112.0 million by April 15, 2003.
Cash interest will not accrue on the Debentures prior to April 15, 2003.
Commencing April 15, 2003, cash interest on the Debentures will accrue and be
payable, at a rate of 12.875% per annum, semi-annually in arrears on each April
15 and October 15. As of July 18, 1998, the Debentures have been accreted by
$2,005, with corresponding interest expense of $231 and $1,774 recognized in the
twelve week and twenty-eight week periods ended July 18, 1998, respectively.
The Debentures are redeemable at the option of the Company, in whole or in part,
at any time on or after April 15, 2003, in cash at the redemption prices, plus
accrued and unpaid interest and liquidated damages, (as defined), if any,
thereon to the redemption date. In addition, at any time prior to April 15,
2001 the Company may, at its option, redeem up to 35% of the aggregate principal
amount at maturity of the Debentures originally issued at a redemption price
equal to 112.875% of the accredited value thereof, plus liquidated damages, if
any, with the net cash proceeds of one or more equity offerings; provide that at
least 65% of the original aggregate principal amount at maturity of the
Debentures will remain outstanding immediately following each such redemption.
F-32
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
Upon the occurrence of a change of control (as defined), each holder of the
Debentures will have the right to require the Company to purchase the Debentures
at a price in cash equal to 101% of the accreted value thereof plus liquidated
damages, if any, thereon in the case of any such purchase prior to April 15,
2003, or 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, thereon to the date of purchase in the
case of any such purchase on or after April 15, 2003. The Company may not have
any significant assets other than capital stock of the Stores (which is pledged
to secure the Company's obligations under then New Credit Facility). As a
result, the Company's ability to purchase all or any part of the Debentures upon
the occurrence of a change in control will be dependent upon the receipt of
dividends or other distributions from Stores or its subsidiaries. The New
Credit Facility and the Senior Subordinated Notes have certain restrictions for
Stores with respect to paying dividends and making any other distributions.
The Debentures are effectively subordinated to all of the Company's other
liabilities. The Debentures contain certain covenants that, among other things,
limit the ability of the Company to incur indebtedness, issue preferred stock,
repurchase stock and certain indebtedness, engage in transactions with
affiliates, create or incur certain liens, pay dividends or certain other
distributions, make certain investments, enter into new business, sell stock of
subsidiaries, sell assets and engage in certain mergers and consolidations.
F-33
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
8. STOCK OPTIONS:
The Company has adopted a senior executive stock option plan and an executive
stock option plan (the Option Plans), which provide for the granting of either
incentive stock options or non-qualified stock options to purchase shares of the
Company's common stock to officers and key employees of the Company. All
options will terminate on the seventh anniversary of the Option Agreement under
which they were granted if not exercised prior thereto.
Shares available for grant under the senior executive and the executive stock
option plans are 507,500 and 450,000, respectively as of July 18, 1998.
Three different types of options were granted pursuant to the Option Plans.
Fixed Price Service Options will vest over a three year period in three equal
installments beginning in fiscal 1999. 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.
Total options outstanding at July 18, 1998, were as follows:
<TABLE>
<CAPTION>
INITIAL
NUMBER OF EXERCISE
SHARES PRICE
----------- --------
<S> <C> <C>
Variable Price Service Options 397,085 $10
Performance Options 397,085 $10
Fixed Price Service Options 104,580 $10
Other options (Note 5) 500,000 $10
-----------
1,398,750
-----------
</TABLE>
Options exercisable at July 18, 1998, were 500,000.
The Company has elected to account for employee stock option grants under APB 25
and, at year-end, is required to provide pro forma disclosures of what net
income would have been had the Company adopted the new fair value method for
recognition purposes under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation". Under APB 25, the Company did not
recognize compensation expense on the issuance of its stock options because the
exercise price equaled the fair market value of the underlying stock on the
grant date. Fair market value is determined by the Board of Directors. The
fair market value, as determined by the Board, did not change from the grant
date to July 18, 1998.
F-34
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
9. STOCKHOLDERS' (DEFICIT) EQUITY:
Changes in stockholders' (deficit) equity for the 28-week period ended July 18,
1998 are as follows:
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK PREFERRED STOCK ADDITIONAL
-------------------- -------------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN
--------- -------- -------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 3, 1998 2,412,500 $ 19 21,875,000 $ 175 77,300 $ 773 $ -
Change in par value of common stock - 5 - 44 - - -
Redemption of stock (662,500) (7) (21,875,000) (219) (77,300) (773) -
Issuance of Class A common stock,
net of issuance costs of $775 10,853,300 109 - - - - 107,654
Stockholder subscription receivables - - - - - - -
Net income - - - - - - -
Preferred dividend, $.80 per share - - - - - - -
---------- ---- ---------- ------ ------ ------ --------
Balance, July 18, 1998 12,603,800 $126 - $ - - $ - $107,654
========== ==== ========== ====== ====== ====== ========
OUTSTANDING STOCKHOLDER RETAINED TOTAL
STOCK SUBSCRIPTION EARNINGS EQUITY
<CAPTION> OPTIONS RECEIVABLES (ACCUMULATED DEFICIT) (DEFICIT)
----------- ------------ --------------------- ---------
<S> <C> <C> <C> <C>
Balance, January 3, 1998 $ - $ - $ 142,581 $ 143,548
Change in par value of common stock - - (49) -
Redemption of stock 300 - (350,301) (351,000)
Issuance of Class A common stock, -
net of issuance costs of $775 - - 107,763
Stockholder subscription - (2,615) - (2,615)
receivables
Net income - - 2,573 2,573
Preferred dividend, $.80 per share - - (15) (15)
--------- ------- --------- ---------
Balance, July 18, 1998 $ 300 $(2,615) $(205,211) $ (99,746)
========= ======= ========= =========
</TABLE>
F-35
<PAGE>
ADVANCE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWELVE AND TWENTY-EIGHT WEEK PERIODS ENDED JULY 18, 1998 AND JULY 12, 1997
10. RELATED-PARTY TRANSACTIONS:
In April 1998, the Company sold its airplane to the Chairman of the Board, an
existing stockholder, for its net book value of approximately $4,100, which
approximated fair value.
11. CONTINGENCIES:
The employment agreements which existed at January 3, 1998 have been terminated.
The Company entered into new agreements that provide severance pay benefits
under certain circumstances.
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.
Management believes that the financial exposure is covered by insurance and,
accordingly, believes that the ultimate resolution of these matters will not
materially affect the Company's financial position or results of operations.
12. SUBSEQUENT EVENT - ACQUISITION:
On August 17, 1998, the Company entered into an agreement and plan of merger
with Sears, Roebuck and Co. (Sears) to acquire Western Auto Supply Company
(Western), a wholly owned subsidiary of Sears. Western will be acquired by a
newly formed, wholly owned subsidiary of Stores for $175,000 in cash and
11,474,606 shares of the Company's common stock. In connection with the
transaction, the Company will sell 4,161,712 shares of common stock to certain
current stockholders (after the Recapitalization) for $70,000 and Stores intends
to incur up to $115,000 in debt financing. Upon consummation of the
transaction, Sears will own approximately 40.6% of the Company's issued and
outstanding common stock. The agreement may be terminated by mutual written
agreement of the parties and is subject to certain regulatory filings and
approvals.
The Company has received a commitment letter to amend and restate the existing
credit facilities and related covenants (Note 7) for the effects of the
acquisition.
Based on the sales price per share in connection with the sale of the 4,161,712
shares referred to above, the Company estimates that it will recognize
compensation expense under its stock option plans (Note 8) of approximately
$700, in the remainder of fiscal 1998.
F-36
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Western Auto Supply Company
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of Western Auto
Supply Company (a wholly owned subsidiary of Sears, Roebuck and Co.) and
subsidiaries (the "Company") as of January 3, 1998 and December 28, 1996 and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the three years (53/52 weeks) in the period ended January 3,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of January 3, 1998
and December 28, 1996 and the results of its operations and its cash flows for
each of the three years (53/52 weeks) in the period ended January 3, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective December 29, 1996
the Company changed its method of accounting for securitized accounts receivable
as required by Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities."
Kansas City, Missouri
July 17, 1998
(August 17, 1998 as to Note 13)
F-37
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 1998 and December 28, 1996
($000, except share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 3, December 28,
ASSETS 1998 1996
<S> <C> <C>
CURRENT ASSETS:
Cash $ 23,785 $ 27,645
Receivables, net 81,047 44,628
Inventories 353,267 333,807
Deferred income taxes 54,762 53,399
Prepaid expenses and other current assets 9,274 11,888
Income taxes receivable - Parent 36,142
---------- ---------
Total current assets 558,277 471,367
PROPERTY AND EQUIPMENT 344,066 285,124
GOODWILL 116,783 121,238
OTHER ASSETS 9,259 9,539
---------- ---------
TOTAL $1,028,385 $887,268
========== =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 152,839 $227,116
Accrued expenses and other current liabilities 130,132 113,593
Due to Parent, net 196,081 65,996
Income taxes payable - Parent 17,883
Secured borrowings 36,500
---------- ---------
Total current liabilities 515,552 424,588
ACCRUED RETIREE HEALTH CARE BENEFITS 39,454 44,435
DEFERRED INCOME TAXES 5,567 2,403
LONG-TERM DEBT - Parent 140,802 140,802
COMMITMENTS AND CONTINGENCIES (See Note 9)
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value - authorized, 100,000
shares; issued and outstanding, 1,000 shares Nil Nil
Additional paid-in capital 376,821 264,422
Retained earnings (deficiency) (49,811) 10,618
---------- ---------
Total stockholder's equity 327,010 275,040
---------- ---------
TOTAL $1,028,385 $887,268
========== =========
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS (53/52 WEEKS) ENDED JANUARY 3, 1998, DECEMBER 28, 1996,
AND DECEMBER 30, 1995
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
<S> <C> <C> <C>
NET SALES AND OTHER REVENUES:
Net merchandise sales and other revenues $1,260,886 $1,349,124 $1,728,537
Net service sales 58,925 102,597 229,185
---------- ---------- ----------
Total net sales and other revenues 1,319,811 1,451,721 1,957,722
COSTS OF SALES (exclusive of depreciation and amortization
shown separately below):
Merchandise and other costs of sales 846,375 916,824 1,196,024
Service costs of sales 36,887 60,840 134,548
---------- ---------- ----------
Total costs of sales 883,262 977,664 1,330,572
---------- ---------- ----------
GROSS PROFIT 436,549 474,057 627,150
EXPENSES:
Selling, general and administrative 317,713 288,901 359,907
Buying and occupancy 82,902 95,932 100,137
Depreciation and amortization 38,885 33,275 37,439
Provision for uncollectible accounts 35,537 37,068 24,940
Restructuring 38,441 12,974 15,246
---------- ---------- ----------
Total expenses 513,478 468,150 537,669
---------- ---------- ----------
OPERATING INCOME (LOSS) (76,929) 5,907 89,481
OTHER INCOME (EXPENSE):
Interest (15,379) (15,064) (17,748)
Gain (loss) on the sale of property and equipment (6) (828) 110
---------- ---------- ----------
Total other expense, net (15,385) (15,892) (17,638)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (92,314) (9,985) 71,843
INCOME TAXES:
Current expense (benefit) (33,686) (2,676) 46,850
Deferred expense (benefit) 1,801 952 (15,313)
---------- ---------- ----------
Total income taxes (31,885) (1,724) 31,537
---------- ---------- ----------
NET INCOME (LOSS) $ (60,429) $ (8,261) $ 40,306
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS (53/52 WEEKS) ENDED JANUARY 3, 1998, DECEMBER 28, 1996,
AND DECEMBER 30, 1995
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Retained Total
Paid-in Earnings Stockholder's
Common Stock Capital (Deficiency) Equity
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 Nil $ 184,765 $ 81,901 $266,666
Contributed capital 3,281 3,281
Net income 40,306 40,306
--------- --------- -------- --------
BALANCE, DECEMBER 30, 1995 Nil 188,046 122,207 310,253
Transfer of subsidiaries to Parent (18,652) (103,328) (121,980)
Contributed capital 93,040 93,040
Income tax benefit upon exercise
of stock options 1,988 1,988
Net loss (8,261) (8,261)
--------- --------- -------- --------
BALANCE, DECEMBER 28, 1996 Nil 264,422 10,618 275,040
Contributed capital 110,732 110,732
Income tax benefit upon exercise
of stock options 1,667 1,667
Net loss (60,429) (60,429)
--------- --------- -------- --------
BALANCE, JANUARY 3, 1998 Nil $ 376,821 $(49,811) $327,010
========= ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS (53/52 WEEKS) ENDED JANUARY 3, 1998, DECEMBER 28, 1996,
AND DECEMBER 30, 1995
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(60,429) $(8,261) $ 40,306
Adjustments to reconcile net income (loss) to net cash:
Depreciation and amortization 38,885 33,275 37,439
Provision for uncollectible accounts 35,537 37,068 24,940
Deferred income taxes 1,801 952 (15,313)
Loss (gain) on sale of property and equipment 6 828 (110)
Changes in assets:
Receivables (71,956) (17,523) (28,865)
Inventories (19,460) (46,727) (39,860)
Prepaid expenses and other current assets 2,614 4,879 (15,177)
Changes in liabilities:
Accounts payable (100,469) (33,982) 23,177
Accrued expenses and other current liabilities 16,539 (24,568) 17,393
Income taxes - Parent (54,025) (15,086) 6,367
Accrued retiree health care benefits (4,981) 1,655 1,688
Income tax benefit upon exercise of stock options 1,667 1,988
Other, net (11) 407
--------- -------- --------
Net cash provided by (used in) operating activities (214,282) (65,095) 51,985
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (106,699) (69,425) (74,216)
Sales of property and equipment 13,612 3,149 954
Purchase of companies, net of cash acquired (53,398)
--------- -------- --------
Net cash used in investing activities (93,087) (66,276) (126,660)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdrafts 26,192 39,535 25,713
Borrowings on long-term debt 3,400
Payments on long-term debt (39,789)
Borrowings from Parent 130,085 56,392 47,258
Secured borrowings 36,500
Capital contributed from Parent 110,732 93,040 3,281
--------- -------- --------
Net cash provided by financing activities 303,509 149,178 79,652
--------- -------- --------
NET INCREASE (DECREASE) IN CASH (3,860) 17,807 4,977
CASH, BEGINNING OF PERIOD 27,645 9,838 4,861
--------- -------- --------
CASH, END OF PERIOD $ 23,785 $ 27,645 $ 9,838
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments made for interest to:
Parent $ 13,107 $ 15,064 $ 15,454
========= ======== ========
Other $ 2,272 $ 2,143 $ 1,244
========= ======== ========
Cash payments of income taxes - Parent $ 20,339 $ 13,557 $ 40,483
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF SEARS, ROEBUCK AND CO.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS (53/52 WEEKS) ENDED JANUARY 3, 1998, DECEMBER 28, 1996,
AND DECEMBER 30, 1995
($000)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION - Western Auto Supply
Company (the "Company" or "Western Auto") is a wholly owned subsidiary of
Sears, Roebuck and Co. ("Sears" or "Parent"). The Company is engaged
principally in the sale of automotive aftermarket products. Its principal
markets are located throughout the eastern and midwest portions of the United
States. The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Western Auto of Puerto Rico, Inc.,
Western Auto of St. Thomas, Inc., WASCO Insurance Company and Tire & Auto
Holdings. All material intercompany profits, transactions and balances have
been eliminated.
FISCAL YEAR - The Company's fiscal year ends on the Saturday closest to
December 31, resulting in fiscal years ending January 3, 1998 (53 weeks)
("fiscal year 1997"), December 28, 1996 ("fiscal year 1996") and December 30,
1995 ("fiscal year 1995").
RECEIVABLES - Receivables consist primarily of wholesale and retail trade
accounts receivable from sales of merchandise, which normally are not
assessed finance charges if paid within the trade terms.
Effective for fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange.
SFAS No. 125 requires that the Company recognize the receivables on its
Puerto Rico credit card securitizations, which do not qualify as sales under
the Statement. Additionally, the Company has recorded borrowings on the
transfer of interest in credit card receivables to a major bank. Previously,
the transfer of credit card receivables were derecognized on the consolidated
balance sheet. Adoption of SFAS No. 125 was not material to the results of
operations in fiscal year 1997.
F-42
<PAGE>
Western Auto records monthly credit card service fee income under a servicing
agreement (Note 3) as received. Amounts required by the agreement to be
reimbursed to the bank for delinquent accounts are recorded as charge-offs
against the allowance for doubtful accounts. Included in the allowance for
doubtful accounts is an estimate of the amount deemed necessary to absorb
losses on delinquent credit card balances that have been, or may have to be,
reimbursed under the agreement. The reserve is established by charges against
operations based upon management's continuing evaluation of the pertinent
factors underlying the quality of the related outstanding balances.
INVENTORIES - Inventories are stated at the lower of cost (first-in, first-
out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful asset lives ranging from 3 to 20 years. Leasehold improvements are
amortized over the shorter of the estimated useful life or the lease term of
the related asset. Maintenance and repairs are expensed as incurred.
Expenditures which significantly increase the value or extend useful asset
lives are capitalized.
GOODWILL - Goodwill represents the cost in excess of fair value of net assets
acquired and is being amortized over 20 to 40 years using the straight-line
method. Accumulated amortization was $45,007 and $40,552 at January 3, 1998
and December 28, 1996, respectively. When events and circumstances so
indicate, goodwill is assessed for recoverability based on the expectations
of future profitability of the Company, along with management's plans with
respect to operations. If the Company determines, based on such factors, that
the carrying amount is impaired, the goodwill will be written down to its
recoverable value, which is calculated as the amount of estimated future cash
flows for the remaining amortization period, with a corresponding charge to
earnings. No impairment losses have been recognized in any of the periods
presented.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets and certain identifiable
intangibles to be held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value
of the asset may not be recoverable. Long-lived assets and identified
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell.
WARRANTIES - An accrual for warranties is established by charges against
operations for anticipated costs relating to merchandise and services sold
under warranty which are not covered by manufacturers' warranties.
INCOME TAXES - Under the provisions of a tax sharing agreement, the Company
and its subsidiaries file a consolidated Federal income tax return with
Sears. Substantially all of the income taxes receivable or payable are
settled through the Due to Parent intercompany account.
Deferred income taxes result from temporary differences between the financial
statement and tax basis of the Company's assets and liabilities in accordance
with the liability method. Under the tax sharing agreement, Western Auto
recognizes the benefits and costs associated with income taxes.
REVENUE RECOGNITION - The Company recognizes merchandise revenue at the point
of sale to a retail customer and at the point of shipment to a wholesale
customer, while service revenue is recognized upon performance of such
service to a retail customer.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-43
<PAGE>
FAIR VALUES OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist principally of cash equivalents, accounts receivable, accounts
payable, intercompany balances and long-term debt. The Company has determined
that the carrying value of its long-term debt is a reasonable estimate of its
fair value based upon the terms of the debt at year end. The Company's
remaining financial instruments typically have terms such that the Company
has determined that their carrying values are a reasonable estimate of their
fair values.
EFFECTS OF NEW ACCOUNTING STANDARDS - In 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income," which requires that an enterprise report the change in its net
assets during the period from nonowner sources. Adoption of this Statement is
effective for fiscal year 1998 and will not impact the Company's consolidated
financial position, results of operations or cash flows, and will be limited
to the form and content of its disclosures.
In 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," which requires changes to disclosures
relating to pension and other postretirement benefit plans. This Statement
supercedes the disclosure requirements in SFAS No. 87, "Employers' Accounting
for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." Adoption of this Statement is effective for fiscal year 1998
and will not impact the Company's consolidated financial position, results of
operations or cash flows, and will be limited to the form and content of its
disclosures.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1996 and
1995 financial statements to conform with current year presentation.
2. REORGANIZATION AND RESTRUCTURING CHARGES
In fiscal year 1995 the Company recorded a pretax restructuring charge of
$15,246 for employee termination benefits and certain other exit costs. These
costs relate principally to the Company's decision to eliminate all employee
positions associated with credit operations, which were outsourced, and
related home office positions associated with the credit operations.
Concurrently with this reorganization, Sears announced the realignment of its
automotive group, which includes the Company, into two divisions -- tire and
auto parts. The impact of such realignment was the closing of the home office
locations for NTW, Inc. ("NTW") and Tire America, Inc. ("Tire America"), both
subsidiaries of the Company at the time. NTW and Tire America are principally
in the business of tire sales, service and installation. The fiscal year 1995
restructuring charges include the employee termination benefits, principally
severance benefits, and exit costs, principally lease termination costs,
related to the closing of these facilities. The number of employees planned
to be terminated, as a result of the above actions was approximately 320.
Actual employees terminated upon completion of the exit activities
approximated 370. Substantially all activities associated with these costs
were completed by the end of the fiscal year 1996.
F-44
<PAGE>
The ownership and operating activities of NTW and Tire America were transferred
to Sears effective the first day of fiscal year 1996. The amounts in the
following table were removed from the Company's consolidated balance sheet as of
that date.
<TABLE>
<CAPTION>
<S> <C>
Receivables $ 4,553
Inventories 56,980
Deferred income tax assets 9,474
Prepaid expenses and other current assets 1,229
Property and equipment 134,283
Goodwill 80,568
Other assets 1,187
Accounts payable (3,622)
Accrued expenses and other current liabilities (31,901)
Income taxes payable (1,147)
Current maturities of long-term debt (3,400)
Long-term debt, Sears (79,198)
Deferred income tax liabilities (2,413)
Due to Sears (44,531)
Stockholder's equity (121,980)
</TABLE>
For the year ended December 30, 1995, net sales related to NTW and Tire America
were $641,462.
Restructuring charges of $12,974 were recorded in fiscal year 1996 related to
the Company's decision to exit the service aspect of its remaining businesses
and focus operations solely on the sale of parts and accessories. This resulted
in the writedown of the related service assets, including store service bays and
related equipment that were no longer involved in the production of revenue.
Additionally in fiscal year 1996, the Company exited retail operations in two
major metropolitan markets and accrued for such related exit costs, principally
lease termination costs. Substantially all activities associated with these
costs, except for ongoing lease obligations, were completed by the end of fiscal
year 1997.
In fiscal year 1997, the Company accrued $38,441 in restructuring charges
relating to severance benefits, facility exit costs and asset write-downs. These
costs were associated with the exit from two additional major markets where the
Company operated retail stores. Additionally, the Company restructured its
distribution center operations which included the elimination of the
transportation function impacting the Company's truck fleet and the related
workforce. Home office positions supporting certain distribution center
operations exited were also eliminated. The number of employees both planned and
actually terminated, as a result of the above actions was approximately 4,000.
With the exception of lease termination costs, all activities associated with
these exit costs are anticipated to be completed by the end of fiscal year 1998.
The charges associated with the restructurings identified above were recorded in
the period in which the costs were incurred or when management of the Company
announced its intentions to employees.
F-45
<PAGE>
The following table sets forth the restructuring reserve activity from December
30, 1995 to January 3, 1998:
<TABLE>
<CAPTION>
Other
Severance Exit Costs
---------------- -----------------
<S> <C> <C>
Reserves recorded in fiscal year 1995 $ 6,731 $ 8,515
------- -------
Reserves as of December 30, 1995 6,731 8,515
------- -------
Additional reserves recorded during fiscal year 1996 12,974
Reserves used during fiscal year 1996 (2,532) (2,173)
Reserves transferred to Sears during fiscal year 1996 (2,381) (5,460)
------- -------
Reserves as of December 28, 1996 1,818 13,856
------- -------
Additional reserves recorded during fiscal year 1997 16,835 21,606
Reserves used during fiscal year 1997 (8,582) (22,040)
------- -------
Reserves as of January 3, 1998 $10,071 $13,422
======= =======
</TABLE>
3. ACQUISITIONS
The Company acquired Nationwise, Inc. ("Nationwise") on October 26, 1995.
Nationwise operated 89 stores throughout Ohio, Kentucky, Indiana, Tennessee and
West Virginia. On November 28, 1995, the Company acquired Wheels, Inc.
("Wheels"). Wheels operated 85 stores in New York and Pennsylvania.
The aggregate purchase price of these acquisitions was $53,398 in cash. The
acquisitions have been accounted for by the purchase method of accounting, and
accordingly, the purchase price has been allocated to the assets acquired and
the liabilities assumed based on the estimated fair values at the date of
acquisition. The excess of the purchase price over the estimated fair values of
the net assets acquired has been recorded as goodwill, which will be amortized
over 20 years. The estimated fair values of the net assets acquired are
summarized as follows:
<TABLE>
<S> <C>
Inventory $36,738
Other assets 9,385
Deferred tax asset 13,277
Goodwill 29,545
Accrued expenses (35,547)
-------
$53,398
=======
</TABLE>
The operating results of Nationwise and Wheels have been included in the
Company's consolidated results of operations from the dates of their
acquisition.
F-46
<PAGE>
4. RECEIVABLES
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
----------------- ----------------
<S> <C> <C>
Wholesale $ 29,240 $34,050
Retail 72,402 32,970
-------- -------
101,642 67,020
Less allowance for doubtful accounts 20,595 22,392
-------- -------
$ 81,047 $44,628
======== =======
</TABLE>
The Company has an agreement with a major bank (the "Domestic
Agreement") whereby the bank extends credit on consumer credit cards to
Company customers meeting the bank's credit criteria. Under the Domestic
Agreement, the Company services receivables ($224,987 and $272,198
outstanding at January 3, 1998 and December 28, 1996, respectively) and
receives a fee based upon outstanding receivables and prevailing
interest rates. Additionally, the Company is required to reimburse the
bank for certain delinquent accounts after which time the Company
pursues collection from the cardholder.
Under a second credit agreement with the same bank (the "Puerto Rico
Agreement"), the bank purchases an individual ownership interest in the
receivables originating on the Company's credit card in Puerto Rico.
Under the Puerto Rico Agreement, the Company services the receivables
and receives a fee based upon outstanding receivables and prevailing
interest rates. The Puerto Rico Agreement requires the Company to pay
the 30-day commercial paper rate, plus 0.37% on the portion of the
portfolio that has been secured by the bank. The weighted average
interest rate on the portfolio in fiscal year 1997 was 5.53%. Provisions
in the Puerto Rico Agreement restrict the amount of the portfolio that
the bank may secure at the lower of $44,000 or 90% of the outstanding
credit card portfolio, adjusted for charge-off experience. At January 3,
1998, the credit card receivable balances that were secured by the bank
totaled $36,500. During the fiscal year 1997, total portfolio credit
extended and collected was $43,255 and $40,951, respectively, of which
the portion secured by the bank was restricted as described herein. As
with the Domestic Agreement, the Company is required to reimburse the
bank for certain delinquent accounts. The Puerto Rico Agreement will
expire July 31, 1998 and is not expected to be renewed.
Total service charges earned by the Company on credit sales were
$51,814, $57,290 and $54,088 for fiscal years 1997, 1996 and 1995,
respectively. Such amounts are included in net sales and other revenues.
The provision for uncollectible accounts included recoveries of $6,273,
$4,203 and $3,062 for fiscal years 1997, 1996 and 1995, respectively.
The Domestic and Puerto Rico agreements contain certain restrictive
covenants regarding the maintenance of minimum net worth and require
that a letter of credit be provided for the benefit of the bank. Such
letter of credit must be from an issuer having a minimum credit rating
of A-2 from Standard and Poor's Corporation or Prime-2 from Moody's
investors Service, Inc.
F-47
<PAGE>
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------------- -----------------
<S> <C> <C>
Land $ 73,204 $ 67,321
Buildings 164,325 148,367
Equipment 191,072 171,321
Leasehold improvements 67,172 54,776
--------- ----------
495,773 441,785
Less accumulated depreciation and amortization 151,707 156,661
--------- ----------
$ 344,066 $ 285,124
========= ==========
</TABLE>
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
----------------- -----------------
<S> <C> <C>
Accrued salaries and employee benefits $ 35,685 $ 32,206
Restructuring reserves 23,493 15,674
Warranty reserves 15,239 11,894
Deferred income 2,870 5,313
Real estate and sales tax 9,244 9,725
Other 43,601 38,781
--------- ---------
$ 130,132 $ 113,593
========= =========
</TABLE>
7. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ -------------------
<S> <C> <C> <C>
Salary and related benefits expense $ 194,467 $ 197,809 $ 215,619
Advertising expense 39,936 27,989 45,811
Other 83,310 63,103 98,477
--------- --------- ---------
$ 317,713 $ 288,901 $ 359,907
========= ========= =========
</TABLE>
F-48
<PAGE>
8. INCOME TAXES
The following represents the approximate tax effect of each type of temporary
difference that gives rise to the Company's deferred income tax assets and
liabilities:
<TABLE>
<CAPTION>
January 3, 1998 December 28, 1996
------------------------------ ----------------------------------
Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Deferred income tax assets:
Nondeductible reserves and accruals $48,291 $45,273
Accrued retiree health care benefits $15,782 $17,774
Additional inventory costs
capitalized for tax purposes 1,257 1,500
Other 5,214 6,626
------- ------- ------- -------
54,762 15,782 53,399 17,774
------- ------- ------- -------
Deferred income tax liabilities:
Asset basis difference due
to purchase accounting (15,425) (16,612)
Accelerated depreciation for
tax purposes (5,924) (3,565)
------- ------- ------- -------
(21,349) (20,177)
------- ------- ------- -------
$54,762 $(5,567) $53,399 $(2,403)
======= ======= ======= =======
</TABLE>
No valuation allowance was considered necessary for fiscal years 1997 or 1996.
Income (loss) before income taxes was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ----------------- --------------
<S> <C> <C> <C>
Domestic $ (93,065) $ (14,631) $70,433
Foreign 751 4,646 1,410
--------- --------- -------
Total $ (92,314) $ (9,985) $71,843
========= ========= =======
</TABLE>
F-49
<PAGE>
Federal, state and foreign tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Federal income tax:
Current $ (32,878) $(3,936) $ 36,724
Deferred 2,347 537 (11,529)
State income tax:
Current (1,437) (517) 9,537
Deferred 77 184 (3,117)
Foreign income tax:
Current 629 1,777 589
Deferred (623) 231 (667)
--------- ------- --------
Income tax provision (benefit) $ (31,885) $(1,724) $ 31,537
========= ======= ========
</TABLE>
Deferred income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Nondeductible reserves and accruals $ (3,018) $ (227) $ (9,600)
Accrued retiree health care benefits 1,992 (662) (675)
Additional inventory costs capitalized for
tax purposes 243 384 (595)
Asset basis differences due to purchase
accounting (1,187) (1,187) (3,187)
Accelerated depreciation for tax purposes 2,359 1,405 (854)
Other 1,412 1,239 (402)
-------- ------- --------
Total deferred tax expense (benefit) $ 1,801 $ 952 $(15,313)
======== ======= ========
</TABLE>
Following is a reconciliation between income tax expense (benefit) recorded of
$(31,885), $(1,724) and $31,537 for fiscal years 1997, 1996 and 1995,
respectively, and the amount computed by multiplying earnings before income
taxes by the statutory Federal income tax rate of 35%:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- --------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at the statutory rate $(32,310) (35.0) $(3,495) (35.0) $ 25,145 35.0
State taxes net of federal benefit (1,046) (1.1) (119) (1.2) 3,320 4.6
Non-deductible goodwill amortization 1,012 1.1 1,050 10.5 1,795 2.5
Foreign taxes net of Federal benefit 231 0.3 472 4.7 911 1.3
50% meals and entertainment 315 0.3 315 3.2 365 0.5
Other (87) (0.1) 53 0.5 1
-------- ---- ------- ---- -------- ----
$(31,885) (34.5) $(1,724) (17.3) $ 31,537 43.9
======== ==== ======= ==== ======== ====
</TABLE>
F-50
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
The Company conducts its retail operations principally from facilities under
operating leases which expire at various dates through 2015. These
agreements normally provide for minimum annual rentals, rentals based on
sales volume in excess of specified minimums, and executory costs.
Management expects that, in the normal course of business, leases which
expire will be renewed or replaced by other leases or that comparable
facilities will be obtained. Total rent expense was $43,407, $52,820 and
$47,504 including $2,337, $3,197 and $3,815 based on sales volume, for
fiscal years 1997, 1996, and 1995, respectively.
At January 3, 1998 the minimum rental commitments under operating leases
that have initial or remaining noncancelable lease terms in excess of one
year are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 34,171
1999 31,839
2000 28,648
2001 23,808
2002 19,781
Thereafter 79,992
---------
Total $ 218,239
=========
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan which qualifies as a thrift plan under
Section 401(k) of the Internal Revenue Code. The plan covers all full-time
employees who have completed one year of service and have attained the age
of twenty-one years as of the first day of each calender year quarter.
Participant accounts are payable to employees upon retirement or
termination. Contributions by the Company to the profit sharing plan charged
to operations were $2,225, $2,996 and $4,631 for fiscal years 1997, 1996,
and 1995, respectively.
Certain employees of the Company participate in Sears stock option plans.
Options to purchase Sears stock have been granted to employees in fiscal
years 1997 and 1994 at prices equal to the fair market value of the stock on
the date of grant. Options are generally exercisable in not more than four
equal, annual installments beginning one year after the date of grant, and
generally expire in 10 to 12 years. At January 3, 1998 and December 28,
1996, approximately 570 common share options were outstanding to Western
Auto employees to purchase Sears common stock with weighted average exercise
prices of $23.87 and $36.59, respectively. The Company measures compensation
cost under APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
accordingly, no compensation cost has been recognized for the fixed stock
option plans. Had compensation cost for the Company's participation in its
parent stock option plans been determined consistent with the fair value
method outlined in SFAS No. 123, "Accounting for Stock-Based Compensation,"
the impact on the Company's consolidated net income (loss) would not have
been material.
The Company has a deferred compensation plan for certain key employees of
the Company and its subsidiaries. Costs of the plan charged against earnings
were $1,034, $1,471 and $1,576 for fiscal years 1997, 1996 and 1995,
respectively.
The Company also has various other profit sharing and incentive plans. Costs
of such plans charged against earnings were $7,129, $4,203 and $17,512 for
fiscal years 1997, 1996 and 1995, respectively.
F-51
<PAGE>
Employees retiring from the Company on or after attaining age 55 who have
rendered at least 10 years of service and have participated in the employee
group health insurance plan are entitled to extend their participation in the
plan and purchase postretirement health care coverage for themselves and their
dependents. The Company continues to fund these costs on a pay-as-you-go basis,
and, for fiscal years 1997, 1996 and 1995, the Company made payments totaling
$1,122, $1,248 and $1,265, respectively.
The following table sets forth the amounts recognized in the Company's
consolidated financial statements for the years ended January 3, 1998, December
28, 1996, and December 30, 1995 as it relates to accumulated postretirement
benefits.
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (15,152) $ (14,017) $ (13,082)
Fully eligible active plan participants (4,417) (5,696) (6,820)
Other active plan participants (5,738) (6,849) (11,170)
----------- ----------- -----------
(25,307) (26,562) (31,072)
Unrecognized net gain from past experience
different from that assumed and from changes
in assumption (6,752) (8,108) (8,230)
Prior service benefit from negative plan amendment
not yet recognized in net periodic postretirement
benefit cost (7,395) (9,765) (3,478)
----------- ----------- -----------
Accrued retiree health care benefits $ (39,454) $ (44,435) $ (42,780)
=========== =========== ===========
Net periodic postretirement benefit cost for fiscal years
1997, 1996 and 1995 included the following components:
Service cost $ 928 $ 1,405 $ 1,184
Interest cost 1,927 2,203 2,273
Net amortization and deferral (1,215) (704) (789)
----------- ----------- -----------
Net post-retirement benefit expense 1,640 2,904 2,668
One-time gain due to reduction in workforce (5,500)
----------- ----------- -----------
Total expense (income) $ (3,860) $ 2,904 $ 2,668
=========== =========== ===========
</TABLE>
As a result of the restructuring discussed in Note 2, a significant reduction in
the Company's workforce has occurred. Accordingly, the Company recognized a
curtailment gain of $5,500 in fiscal year 1997.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10.5%, 11.0% and 11.5% in fiscal years
1997, 1996 and 1995, respectively, gradually declining to 6.0% in the year
2007.
The year end measurement date settlement rate changed from 7.5% (time weighted)
in fiscal year 1995 to 7.75% (time weighted) in fiscal year 1996 to 7.25% (time
weighted) in fiscal year 1997, and to turnover rates were changed to reflect
Company experience.
F-52
<PAGE>
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefit obligation as of January 3, 1998
would be increased by 3.4%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 12.6%.
11. RELATED PARTY TRANSACTIONS
At January 3, 1998 and December 28, 1996, long-term debt due to Sears
consists of a $100,802 note payable due December 31, 1999 at a fixed
rate of 6.26% and a $40,000 note payable due January 15, 2004 at a fixed
rate of 6.40%. Additionally, the Company advances to and borrows funds
as needed from Sears with no set repayment terms. Intercompany interest
expense totaled approximately $13,107, $15,064 and $15,454 for fiscal
years 1997, 1996 and 1995, respectively. Such interest is settled
through the intercompany account with Sears.
During fiscal years 1997 and 1996, Sears charged the Company for certain
shared services totaling $11,072 and $845, respectively. There were no
shared services during fiscal year 1995. The following table sets forth
these amounts by department:
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Credit and corporate finance services $ 7,982 $ 607
Real estate and construction 2,853
Other 237 238
------- -----
$11,072 $ 845
======= =====
</TABLE>
Also, the Company purchases and services commercial receivables from its
former subsidiaries, NTW and Tire America, and the purchases are settled
through the Due to/from intercompany account. Any expense associated
with such servicing is charged to the respective subsidiary through the
intercompany account. As of January 3, 1998 and December 28, 1996, the
NTW and Tire America accounts included in the Company's receivables were
$7,696 and $6,634, respectively.
12. LITIGATION, CLAIMS AND ASSESSMENTS
The Company is engaged in various legal actions arising in the ordinary
course of its business. Reserves which the Company believes are
appropriate have been established, however, the Company believes that
the ultimate outcome of such litigation will not have a material adverse
effect on the Company's consolidated financial statements.
F-53
<PAGE>
The Company has been notified by the United States Environmental Protection
Agency ("EPA") that it is a potentially responsible party under superfund
legislation with respect to three different sites. For two of the sites the
EPA has issued a Record of Decision relating to its investigation and
feasibility study of the sites. Utilizing information compiled by the EPA as
part of those decisions, the Company has accrued its best estimate of its
obligation with respect to these sites. Those estimates are based primarily
on documents compiled by the EPA which estimate the total costs to remediate
the sites as well as each company's allocable share of the joint and several
remediation liability for the sites. The Company has considered the
likelihood of the contribution of other significant parties which includes
the effects of those potentially responsible parties which may not be
financially viable. The estimated amounts do not consider any benefit that
may be derived from other parties which may enter into the allocation in an
effort to settle their obligation for remediation of the sites. The estimated
liabilities accrued have not been discounted as the time frame over which the
accrued amounts may be paid out has not been determined.
In the case of the third site, the Company has agreed to enter into a
settlement with the EPA on a de minimis basis and has estimated its
obligation based on that settlement which is anticipated to be consummated by
the end of fiscal year 1998.
In addition to the EPA matters discussed above, the Company is subject to
other legal and governmental proceedings pending against the Company, many
involving routine litigation incidental to the business. Other matters
contain allegations which are nonroutine and involve compensatory and
punitive damages as well as other types of relief.
In the opinion of management after consulting with legal counsel, the
ultimate liability in excess of reserves currently recorded is not expected
to have a material effect on annual results of operations, financial
position, liquidity or capital resources of the Company.
13. SUBSEQUENT EVENT
On August 17, 1998, Sears entered into an Agreement and Plan of Merger
between the Company and Advance Stores Company, Inc. for $175 million in cash
and the retention by Sears of approximately 40% equity ownership interest in
the resulting combined company. The merger is subject to antitrust clearance.
The transaction is expected to be finalized in the fourth quarter of fiscal
year 1998.
******
F-54
<PAGE>
WESTERN AUTO SUPPLY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 4, 1998 AND JANUARY 3, 1998
($000, except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS July 4, 1998 January 3, 1998
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 27,313 $ 23,785
Receivables 82,073 81,047
Inventories 347,919 353,267
Deferred income taxes 45,391 54,762
Prepaid expenses and other current assets 17,133 9,274
Income taxes receivable - Parent 56,858 36,142
---------- ----------
Total current assets 576,687 558,277
PROPERTY AND EQUIPMENT 350,234 344,066
GOODWILL 114,555 116,783
OTHER ASSETS 9,114 9,259
---------- ----------
TOTAL $1,050,590 $1,028,385
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 159,133 $ 152,839
Accrued expenses and other current liabilities 96,610 130,132
Due to Parent, net 247,880 196,081
Secured borrowings 35,500 36,500
---------- ----------
Total current liabilities 539,123 515,552
ACCRUED RETIREE HEALTH CARE BENEFITS 39,720 39,454
DEFERRED INCOME TAXES 12,897 5,567
LONG-TERM DEBT - Parent 140,802 140,802
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value - authorized, 100,000
shares; issued and outstanding, 1,000 shares Nil Nil
Additional paid-in capital 377,753 376,821
Retained earnings (deficiency) (59,705) (49,811)
---------- ----------
Total stockholder's equity 318,048 327,010
---------- ----------
TOTAL $1,050,590 $1,028,385
---------- ----------
</TABLE>
See notes to unaudited consolidated financial statements.
F-55
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
PERIODS ENDED JULY 4, 1998 AND JUNE 28, 1997
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended
------------------------------ ------------------------------
July 4, 1998 June 28, 1997 July 4, 1998 June 28, 1997
<S> <C> <C> <C> <C>
NET SALES AND OTHER REVENUES:
Net merchandise sales and other revenues $298,971 $335,994 $574,802 $669,365
Net service sales 5,735 18,183 11,392 39,913
-------- -------- -------- --------
Total net sales and other revenues 304,706 354,177 586,194 709,278
COSTS OF SALES (exclusive of depreciation and
amortization shown separately below):
Merchandise and other costs of sales 191,798 226,323 374,588 453,011
Service costs of sales 3,198 10,655 6,288 23,419
-------- -------- -------- --------
Total costs of sales 194,996 236,978 380,876 476,430
-------- -------- -------- --------
GROSS PROFIT 109,710 117,199 205,318 232,848
EXPENSES:
Selling, general and administrative 69,257 82,045 133,321 160,195
Buying and occupancy 20,037 21,570 39,906 44,025
Depreciation and amortization 12,264 9,516 22,143 18,749
Provision for uncollectible accounts 6,238 11,179 13,647 17,760
Restructuring 7,800
-------- -------- -------- --------
Total expenses 107,796 124,310 209,017 248,529
-------- -------- -------- --------
OPERATING INCOME (LOSS) 1,914 (7,111) (3,699) (15,681)
OTHER INCOME (EXPENSE):
Interest (5,286) (2,960) (11,218) (6,844)
Gain on the sale of property and equipment 21 739 1 530
-------- -------- -------- --------
Total other expense, net (5,265) (2,221) (11,217) (6,314)
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (3,351) (9,332) (14,916) (21,995)
INCOME TAXES:
Current benefit (4,694) (6,211) (21,723) (8,473)
Deferred expense 3,900 2,818 16,701 292
-------- -------- -------- --------
Total income taxes (794) (3,393) (5,022) (8,181)
-------- -------- -------- --------
NET LOSS $ (2,557) $ (5,939) $ (9,894) $(13,814)
-------- -------- -------- --------
</TABLE>
See notes to unaudited consolidated financial statements.
F-56
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PERIODS ENDED JULY 4, 1998 AND JUNE 28, 1997
($000)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 Months Ended
-----------------------------
July 4, 1998 June 28, 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,894) $ (13,814)
Adjustments to reconcile net loss to net cash:
Depreciation and amortization 22,143 18,749
Provision for uncollectible accounts 13,647 17,760
Deferred income taxes 16,701 292
Gain on sale of property and equipment (1) (530)
Changes in assets:
Receivables (14,673) (66,993)
Inventories 5,348 (18,648)
Prepaid expenses and other current assets (7,859) 1,551
Income taxes - Parent (20,716) (28,251)
Changes in liabilities:
Accounts payable 5,580 (66,758)
Accrued expenses and other current liabilities (33,522) 8,685
Accrued retiree health care benefits 266 1,000
Income tax benefit upon exercise of stock options 932 1,000
------------ -------------
Net cash used in operating activities (22,048) (145,957)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (29,645) (30,069)
Sales of property and equipment 3,708 2,823
------------ -------------
Net cash used in investing activities (25,937) (27,246)
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdrafts 714 21,828
Borrowings from Parent 51,799 111,937
Secured borrowings (1,000) 37,000
------------ -------------
Net cash provided by financing activities 51,513 170,765
------------ -------------
NET INCREASE (DECREASE) IN CASH 3,528 (2,438)
CASH, BEGINNING OF PERIOD 23,785 27,645
------------ -------------
CASH, END OF PERIOD $ 27,313 $ 25,207
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments made for interest to:
Parent $ 10,136 $ 5,708
------------ -------------
Other $ 1,082 $ 1,136
------------ -------------
Cash payments (receipts) made for income taxes - Parent $ (19,627) $ 19,778
============ =============
</TABLE>
See notes to unaudited consolidated financial statements.
F-57
<PAGE>
WESTERN AUTO SUPPLY COMPANY
(A Wholly Owned Subsidiary of Sears, Roebuck and Co.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PERIODS ENDED JULY 4, 1998 AND JUNE 28, 1997
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The consolidated balance sheet as of July 4, 1998 and the related
consolidated statements of operations for the 13 and 26 weeks ended July 4,
1998 and June 28, 1997 and the consolidated statements of cash flows for the
26 weeks ended July 4, 1998 and June 28, 1997 of Western Auto Supply Company
(the "Company") are unaudited. The interim financial statements have been
prepared in accordance with Generally Accepted Accounting Principles ("GAAP")
and rules and regulations of the Securities and Exchange Commission and
reflect all adjustments (consisting of normal recurring accruals) which are,
in the opinion of management, necessary for the fair presentation of the
results for the interim periods presented. The consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the period ended January 3, 1998.
The results of operations for the interim periods should not be considered
indicative of results of operations to be expected for the full year.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
2. LITIGATION, CLAIMS AND ASSESSMENTS
The Company is engaged in various legal actions arising in the ordinary
course of its business. Reserves which the Company believes are appropriate
have been established, however, the Company believes that the ultimate
outcome of such litigation will not have a material adverse effect on the
Company's consolidated financial statements.
The Company has been notified by the United States Environmental Protection
Agency ("EPA") that it is a potentially responsible party under superfund
legislation with respect to three different sites. For two of the sites the
EPA has issued a Record of Decision relating to its investigation and
feasibility study of the sites. Utilizing information compiled by the EPA as
part of those decisions, the Company has accrued its best estimate of its
obligation with respect to these sites. Those estimates are based primarily
on documents compiled by the EPA which estimate the total costs to remediate
the sites as well as each companies' allocable share of the joint and several
remediation liability for the sites. The Company has considered the
likelihood of the contribution of other significant parties which includes
the effects of those potentially responsible parties which may not be
financially viable. The estimated amounts do not consider any benefit that
may be derived from other parties which may enter into the allocation in an
effort to settle their obligation for remediation of the sites. The estimated
liabilities accrued have not been discounted as the time frame over which the
accrued amounts may be paid out has not been determined.
F-58
<PAGE>
In the case of the third site, the Company has agreed to enter into a
settlement with the EPA on a de minimis basis and has estimated its
obligation based on that settlement which is anticipated to be consummated by
the end of fiscal year 1998.
In addition to the EPA matters discussed above, the Company is subject to
other legal and governmental proceedings pending against the Company, many
involving routine litigation incidental to the business. Other matters
contain allegations which are nonroutine and involve compensatory and
punitive damages as well as other types of relief.
In the opinion of management after consulting with legal counsel, the
ultimate liability in excess of reserves currently recorded is not expected
to have a material effect on annual results of operations, financial
position, liquidity or capital resources of the Company.
3. SUBSEQUENT EVENT
On August 17, 1998, Sears, Roebuck and Co. ("Sears"), the Company's Parent,
entered into an Agreement and Plan of Merger between the Company and Advance
Stores Company, Inc. for $175 million in cash and the retention by Sears of
approximately 40% equity ownership interest in the resulting combined
company. The merger is subject to antitrust clearance. The transaction is
expected to be finalized in the fourth quarter of fiscal year 1998.
F-59
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY HOLDING OR BY ANY OF THE INITIAL PURCHASERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO BUY OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................... 1
Risk Factors............................................................... 20
Use of Proceeds............................................................ 26
Capitalization............................................................. 27
The Exchange Offer......................................................... 28
Unaudited Pro Forma Consolidated Financial Data............................ 35
Selected Consolidated Financial Data....................................... 48
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 51
Business................................................................... 60
Management................................................................. 72
Certain Transactions....................................................... 78
Principal Stockholders..................................................... 80
Description of Other Indebtedness.......................................... 82
Description of Series B Debentures......................................... 86
Material Federal Income Tax Considerations................................. 113
Plan of Distribution....................................................... 117
Experts.................................................................... 118
Legal Matters.............................................................. 118
Index to Consolidated Financial Statements................................. F-1
</TABLE>
================================================================================
================================================================================
$112,000,000
ADVANCE HOLDING CORPORATION
12.875% SENIOR DISCOUNT
DEBENTURES DUE 2009
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Article 10 of the Virginia Stock Corporation Act (the "Virginia
Stock Corporation Act"), Article 5(C) of the Restated Articles of Incorporation
of the Registrant, a copy of which is filed as Exhibit 3.1 to this Registration
Statement (the "Articles of Incorporation"), provides that the Registrant may
indemnify (i) any person who was or is a party to any proceeding, including a
proceeding brought by a shareholder in the right of the Registrant or brought by
or on behalf of shareholders of the Registrant, by reason of the fact that he is
or was a director or officer of the Registrant, or (ii) any director or officer
who is or was serving at the request of the Registrant as a director, trustee,
partner or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any liability incurred by him
in connection with such proceeding unless he engaged in willful misconduct or a
knowing violation of the criminal law. A person is considered to be serving an
employee benefit plan at the Registrant's request if his duties to the
Registrant also impose duties on, or otherwise involve services by, him to the
plan or to participants in or beneficiaries of the plan.
Article 5(I) of the Articles of Incorporation permits the Registrant to
purchase and maintain insurance to indemnify it against the whole or any portion
of the liability assumed by it in accordance with such Article and may also
procure insurance in such amounts as the Board of Directors may determine on
behalf of any person who is or was a director, officer, employee, consultant,
representative or agent of the Registrant, or is or was serving at the request
of the Registrant as a director, officer, employee, consultant, representative
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or enterprise, against any liability asserted against or incurred
by him in any such capacity or arising from his status as such, whether or not
the Registrant would have power to indemnify him against such liability under
the provisions of such Article.
Pursuant to Article 10 of the Virginia Stock Corporation Act, Article 5(B)
of the Articles of Incorporation provides that no director or officer of the
Registrant shall be liable to the Registrant or its shareholders for monetary
damages with respect to any transaction, occurrence or course of conduct,
whether prior or subsequent to the effective date of such Article, except that
such Article shall not exclude liability resulting from such person's having
engaged in willful misconduct or a knowing violation of the criminal law or of
any federal or state securities law.
Reference is made to the Registration Rights Agreement (attached as Exhibit
4.2 to this Registration Statement) which provides for indemnification (i) by
the Registrant of each Holder (as defined therein), its directors, officers and
each person controlling such Holder against certain liabilities, including those
arising under the Securities Act and (ii) by each Holder of the Registrant, its
directors, officers and each person controlling the Registrant against certain
liabilities, but only with reference to information relating to such Holder
furnished to the Registrant by such Holder expressly for use in any Registration
Statement.
Reference is also made to the Stockholders Agreement (attached as Exhibit
10.1 to the Registration Statement) which provides for indemnification (i) by
the Registrant of each Selling Holder (as defined), its officers, directors and
agents, and each person controlling such Selling Holder against certain
liabilities, including those arising under the Securities Act and (ii) by each
Selling Holder of the Registrant, its officers, directors and agents and each
person controlling the Registrant against certain liabilities, but only with
reference to (i) information related to such Selling Holder furnished in writing
by such Selling Holder or on such Selling Holder's behalf expressly for use in
any registration statement or prospectus relating to the Registrable Securities
(as defined), or any amendment or supplement thereto, or any preliminary
prospectus and (ii) subject to certain exclusions.
Reference is also made to the Indemnity Agreement with Nicholas F. Taubman
(attached as Exhibit 10.26 to this Registration Statement) which provides for
indemnification by the Registrant of Mr. Taubman to the fullest extent permitted
by law. The Registrant has also entered into indemnity agreements with each
other director (the form of which is attached as Exhibit 10.24 to this
Registration Statement) which provides for indemnification to the fullest extent
permitted by law.
II-1
<PAGE>
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted with respect to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
1.1* Purchase Agreement dated as of April 7, 1998 among Advance Holding
Corporation ("Holding"), Donaldson, Lufkin & Jenrette Securities
Corporation and Chase Securities Inc. (the "Initial Purchasers").
2.1(1) Merger Agreement dated as of March 4, 1998 among AHC Corporation and
Holding with FS Equity Partners III, L.P., FS Equity Partners IV, L.P.
("FSEP IV"), and FS Equity Partners International, L.P.
2.2(2) Agreement and Plan of Merger dated as of August 16, 1998 among Sears,
Roebuck and Co., Western Auto Holding Co., Holding, the Company,
Western Auto Supply Company, Advance Acquisition Corporation and the
stockholders of Holding listed on the signature pages thereto.
3.1* Articles of Incorporation of Holding, as amended to date.
3.2* Bylaws of Holding, as amended to date.
4.1* Indenture dated as of April 15, 1998 between Holding and United States Trust Company of New
York, as Trustee, with respect to the 12.875% Senior Discount
Debentures due 2009 (including the form of 12.875% Senior Discount
Debenture due 2009).
4.2* Registration Rights Agreement dated as of April 15, 1998 among Holding
and the Initial Purchasers.
4.3(1) Stockholders' Agreement dated as of April 15, 1998 among FSEP IV,
Ripplewood Partners, L.P., Ripplewood Advance Auto Parts Employee Fund
I L.L.C., Nicholas F. Taubman, Arthur Taubman Trust dated July 13,
1964, and Holding (including the Terms of the Registration Rights of
the Common Stock).
5.1* Opinion of Riordan & McKinzie as to the legality of securities
registered hereunder.
10.1(1) Credit Agreement dated as of April 15, 1998 among Holding, Advance
Stores Company, Incorporated (the "Company"), as borrower, the lenders
party thereto, and the Chase Manhattan Bank ("Chase"), as
administrative agent.
10.2(1) Pledge Agreement dated as of April 15, 1998 among the Company,
Holding, LARALEV, Inc. ("LARALEV"), and Chase, as collateral agent .
10.3(1) Guarantee Agreement dated as of April 15, 1998 among Holding and
LARALEV, as guarantors, and Chase, as collateral agent.
10.4(1) Indemnity, Subrogation and Contribution Agreement dated as of April
15, 1998 among the Company, Holding, LARALEV and Chase, as collateral
agent.
10.5(1) Security Agreement dated as of April 15, 1998 among the Company,
Holding, LARALEV and Chase, as collateral agent.
10.6(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.
10.7(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.
10.8(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").
10.9(1) Lease Agreement dated as of December 1, 1997 between Development
Authority of McDuffie County and the Company relating to the IRB.
10.10(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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
10.11(1) Advance Holding Corporation 1998 Senior Executive Stock Option Plan.
10.12(1) Form of Advance Holding Corporation 1998 Senior Executive Stock Option
Agreement.
10.13(1) Advance Holding Corporation 1998 Executive Stock Option Plan.
10.14(1) Form of Advance Holding Corporation 1998 Stock Option Agreement.
10.15(1) Advance Holding Corporation 1998 Senior Executive Stock Subscription
Plan.
10.16(1) Form of Advance Holding Corporation Senior Executive Stock
Subscription Agreement.
10.17(1) Advance Holding Corporation 1998 Employee Stock Subscription Plan.
10.18(1) Form of Advance Holding Corporation Employee Stock Subscription
Agreement.
10.19(1) Form of Secured Promissory Note.
10.20(1) Form of Stock Pledge Agreement.
10.21(1) Form of Employment and Non-Competition Agreement between Childs, Cox,
Dickerson, Gearheart, Gerald, Gray, Gregory, Hale, Helms, Jeter,
Knighten, Kyle, Livesay, McDaniel, Miley, Quinn, Rakes, Richardson,
Smith, Turner and Williams and the Company (one-year agreement).
10.22(1) Form of Employment and Non-Competition Agreement between Tilley,
Bigoney, Buskirk, Felts, Fralin, Haan, Klasing, Leftwich, Reid,
Stevens, Vaughn, Wade, Weatherly and Wirth and the Company (two-year
agreement).
10.23(1) Form of Indemnity Agreement between each of the directors of Holding
(other than Nicholas F. Taubman) and Holding.
10.24(1) Form of Consulting and Non-Competition Agreement among Nicholas F.
Taubman, Holding and the Company.
10.25(1) Indemnity Agreement dated as of April 15, 1998 between Nicholas F.
Taubman and Holding.
10.26(1) Option 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 Arthur Taubman
Trust dated July 13, 1968 and Holding.
10.28(1) Form of Employment and Non-Competition Agreement among Garnett E.
Smith, Holding and the Company.
10.29* Form of Series B Debenture.
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1* Subsidiaries of the Company.
23.1* Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
24.1* Power of Attorney (contained in the signature pages hereof)
25.1* Form T-1 Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of United States Trust Company of New York.
27.1* Financial Data Schedule.
99.1* Form of Letter of Transmittal with respect to the Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery with respect to the Exchange
Offer.
</TABLE>
______________________
* Previously filed.
(1) Filed on June 4, 1998 as an exhibit to Registration Statement on Form S-4
(No. 333-56013) of Advance Stores Company, Incorporated.
(2) Filed on October 6, 1998 as an exhibit to Amendment No. 2 of the
Registration Statement on Form S-4 (No. 333-56013) of Advance Stores
Company, Incorporated.
II-4
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULE
No schedules have been included because the information required to be set
forth therein is not applicable.
ITEM 22. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes as follows:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration
Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
2. To provide to the underwriter at The closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
3. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
4. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
5. The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Amendment No. 2 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Roanoke, Commonwealth of Virginia, on October 6, 1998.
ADVANCE HOLDING CORPORATION
By: /s/ J. O'Neil Leftwich
----------------------
J. O'Neil Leftwich
Senior Vice President and
Chief Financial Officer,
Secretary and Treasurer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURE TITLE DATE
* President and Chief Executive Officer October 6, 1998
- ------------------------------- and Director (Principal Executive Officer)
Garnett E. Smith
/s/ J. O'Neil Leftwich Senior Vice President and Chief October 6, 1998
- ------------------------------- Financial Officer, Secretary and Treasurer
J. O'Neil Leftwich (Principal Financial and Accounting Officer)
* Chairman of the Board and Director October 6, 1998
- -------------------------------
Nicholas F. Taubman
* Director October 6, 1998
- -------------------------------
Mark J. Doran
* Director October 6, 1998
- -------------------------------
John M. Roth
* Director October 6, 1998
- -------------------------------
J. Frederick Simmons
* Director October 6, 1998
- -------------------------------
Ronald P. Spogli
* Director October 6, 1998
- -------------------------------
Timothy C. Collins
*By: /s/ J. O'Neil Leftwich
-------------------------
J. O'Neil Leftwich
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT 12.1
ADVANCE HOLDING CORPORATION
SCHEDULE OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------
Fiscal Year
--------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes $18,647 $37,232 $30,125 $35,438 $36,020
--------------------------------------------------------------
Fixed charges:
Interest expense 1,304 2,797 5,028 4,891 6,086
Interest portion of rentals 5,280 7,400 10,395 12,868 16,099
--------------------------------------------------------------
Total fixed charges 6,584 10,197 15,423 17,760 22,185
--------------------------------------------------------------
Earnings before income taxes and fixed charges $25,231 $47,429 $45,548 $53,198 $58,205
==============================================================
Ratio of earnings to fixed charges (2) 3.83 4.65 2.95 3.00 2.62
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Proforma (1)
------------------------------------------
Twenty-eight Twenty-eight
Weeks Weeks
Ended Ended
July 18, Fiscal July 18,
1998 1997 1998
------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 5,116 $ (456) $ (5,172)
------------------------------------------
Fixed charges:
Interest expense 13,559 42,562 23,847
Interest portion of rentals 10,425 16,099 10,425
------------------------------------------
Total fixed charges 23,984 58,661 34,272
------------------------------------------
Earnings before income taxes and fixed charges $29,100 $58,205 $ 29,100
==========================================
Ratio of earnings to fixed charges (2) 1.21 -- --
==========================================
</TABLE>
(1) Adjusted to reflect impact of recapitalization.
(2) Ratio of earnings to fixed charges has not been computed since earnings were
not sufficient to cover fixed charges. The coverage deficiency was $456 for
the pro forma fiscal year ending January 3, 1998 (fiscal 1997) and $5,172
for the pro forma twenty-eight weeks ended July 18, 1998.
<PAGE>
EXHIBIT 23.2
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Greensboro, North Carolina,
October 5, 1998.
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this pre-effective Amendment No. 2 to Registration
Statements No. 333-56013 and 333-56013-01 of Advance Stores Company,
Incorporated 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 the Prospectus, which is a part of such Registration Statements,
and to the reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Kansas City, Missouri
October 5, 1998
